During 2011, we continued to expand our insurance services product offering and geographic reach with the acquisition of Auto Knight in January 2011, eReinsure in March 2011, and Pacific Benefits Group in October 2011 and Magna in December 2011. Each acquisition added scale and key capabilities to our Payment Protection, BPO and Brokerage segments.
During 2011, many of our brands were recognized for their significant achievements. Life of the South is now recognized as the second leading credit life provider as measured by A.M. Best and Bliss & Glennon is a top ten broker for excess and surplus lines.
In 2011, we expanded our revolving credit facility to a maximum of $85.0 million from $55.0 million to help facilitate the expansion of our growth and acquisitions. In the fourth quarter of 2011, we announced a program to buy back up to $10 million of our shares of common stock. At December 31, 2011, the Company had acquired a total of 471,554 shares at an aggregate value of $2.6 million. We view the stock buyback programs as an effective method of creating stockholder value and prudent use of available cash resources.
We periodically evaluate our estimates, which are based on historical experience and on various other assumptions that management believes to be reasonable under the circumstances. Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management's most difficult, subjective or complex judgments, as a result of the need to make estimates about the effect of matters that are inherently uncertain. If actual performance should differ
from historical experience or if the underlying assumptions were to change, our financial condition and results of operations may be materially impacted. In addition, some accounting policies require significant judgment to apply complex principles of accounting to certain transactions, such as acquisitions, in determining the most appropriate accounting treatment. We believe that the significant accounting estimates and policies described below are material to our financial reporting and are subject to a degree of subjectivity and/or complexity. We also discuss our critical accounting policies and estimates with the Audit Committee of the Board of Directors.
We regularly monitor our investment portfolio to ensure investments that may be other-than-temporarily impaired are identified in a timely fashion, properly valued, and if necessary, written down to their fair value through a charge against earnings in the proper period. The determination that a security has incurred an other-than-temporary decline in fair value requires the judgment of management. The analysis takes into account relevant factors, both quantitative and qualitative in nature. Among the factors considered are the following: the length of time and the extent to which fair value has been less than cost; issuer-specific considerations, including an issuer's short-term prospects and financial condition, recent news that may have an adverse impact on its results, and an event of missed or late payment or default; the occurrence of a significant economic event that may affect the industry in which an issuer participates; and for loan-backed and structured securities, the undiscounted estimated future cash flows as compared to the current book value. When such impairments occur, the decrease in fair value is reported in net income as a realized investment loss and a new cost basis is established.
The goodwill impairment review is highly judgmental and involves the use of significant estimates and assumptions. The estimates and assumptions have a significant impact on the amount of any impairment charge recorded. Discounted cash flow methods are dependent upon assumption of future sales trends, market conditions and cash flows of each reporting unit over several years. Actual cash flows in the future may differ significantly from those previously forecasted. Other significant assumptions include growth rates and the discount rate applicable to future cash flows.
Management assessed goodwill as of December 31, 2011, 2010 and 2009 and determined that no impairment existed as of those dates.
Unpaid claims are reserve estimates that are established in accordance with U.S. GAAP using generally accepted actuarial methods. Credit life, credit disability and accidental death and dismemberment ("AD&D") unpaid claims reserves include claims in the
course of settlement and incurred but not reported ("IBNR"). For all other product lines, unpaid claims reserves are entirely IBNR. We use a number of algorithms in establishing our unpaid claims reserves. These algorithms are used to calculate unpaid claims as a function of paid losses, earned premium, target loss ratios, in force amounts, unearned premium reserves; industry recognized morbidity tables or a combination of these factors. The factors used to develop the IBNR vary by product line. However, in general terms, the factor used to develop IBNR for credit life insurance is a function of the amount of life insurance in force. The factor can vary from $0.60 to $1.00 per $1,000 of in force coverage. The factor used to develop IBNR for credit disability is a function of the pro-rata unearned premium reserve and is typically 5% of unearned premium reserve. Finally, IBNR for AD&D policies is a function of in force coverage and is currently $0.11 per $1,000 of in force coverage.
Our unpaid claims reserves do not represent an exact calculation of exposure, but instead represent our best estimates, generally involving actuarial projections at a given time. The process used in determining our unpaid claims reserves cannot be exact since actual claim costs are dependent upon a number of complex factors such as changes in doctrines of legal liabilities and damage awards. These factors are not directly quantifiable, particularly on a prospective basis. We periodically review and update our methods of making such unpaid claims reserve estimates and establishing the related liabilities based on our actual experience. We have not made any changes to our methodologies for determining unpaid claims reserves in the periods presented. The following table provides unpaid claims reserve information by Payment Protection product line:
While our cost of claims has not varied significantly from our reserves in prior periods, if the actual level of loss frequency and severity are higher or lower than expected, our paid claims will be different than management's estimate. We believe that, based on our actuarial analysis, an aggregate change that is greater than ± 10% (or 5% for each of loss frequency and severity) is not probable. The effect of higher and lower levels of loss frequency and severity levels on our ultimate cost for claims occurring in 2011 would be as follows (dollars in thousands):
Adjustments to our unpaid claims reserves, both positive and negative, are reflected in our statement of income for the period in which such estimates are updated. Because the establishment of our unpaid claims reserves is an inherently uncertain process involving estimates of future losses, there can be no certainty that ultimate losses will not exceed existing claims reserves. Future loss development could require our reserves to be increased, which could have a material adverse effect on our earnings in the periods in which such increases are made.
Premiums written are earned over the period that coverage is provided. Unearned premiums represent the portion of premiums that will be earned in the future and are generally calculated using the pro-rata method. A premium deficiency reserve is recorded if anticipated losses, loss adjustment expenses, deferred policy acquisition costs and policy maintenance costs exceed the recorded unearned premium reserve and anticipated investment income. As of December 31, 2011, 2010 and 2009, no such reserve was recorded.
We believe it is more likely than not that our deferred tax assets will be realized in the foreseeable future. Accordingly, a valuation allowance has not been established. The detailed components of our deferred tax assets and liabilities are included in the footnote, "Income Taxes" in the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report.
We follow the requirements of the contingencies guidance, which is included within ASC Topic 450, Contingencies. This requires management to evaluate each contingent matter separately. A loss is reported if reasonably estimable and probable. We establish reserves for these contingencies at the best estimate, or, if no one estimated number within the range of possible losses is more probable than any other, we report an estimated reserve at the midpoint of the estimated range. Contingencies affecting us include litigation matters which are inherently difficult to evaluate and are subject to significant changes.
Payment Protection administrative service revenue is recognized consistent with the earnings recognition pattern of the underlying insurance policy or debt cancellation contract being administered. For example, if the credit instrument is 36 months in duration, the credit insurance policy or debt cancellation contract is also 36 months. Because we provide administrative services over the life of the policy or debt cancellation contract, we recognize service and administrative fees over the life of the insurance policy or debt cancellation contract. Accordingly, if there is a pre-term cancellation, no funds would be due to our customer. As a result,
we have had no significant changes in earnings patterns, resulting in no prior period adjustments to total revenues or net income.
BPO service fee revenue is recognized as the services are performed. These services include fulfillment, BPO software development and claims handling for our customers. Collateral tracking fee income is recognized when the service is performed and billed. Asset recovery service revenue is recognized upon the location of a recovered unit. Management reviews the financial results under each significant BPO contract on a monthly basis. Any losses that may occur due to a specific contract would be recognized in the period in which the loss occurs. For the periods presented, we have not incurred a loss with respect to a specific significant BPO contract.
For a discussion on recently issued accounting standards please see Note 3 of the Notes to the Consolidated Financial Statements of this Annual Report.
Payment Protection. Our Payment Protection products are sold as complementary products to consumer retail and credit transactions and are thus subject to the volatility of volume of consumer purchase and credit activities. We receive service and administrative fees for administering Payment Protection products that are sold by our clients, such as credit insurance, debt protection, motor club and warranty solutions. We earn administrative fees for administering debt cancellation plans, facilitating the distribution and administration of warranty or extended service contracts, providing motor club membership benefits and providing related services for our clients. For credit insurance products, our clients typically retain the risk associated with credit insurance products that they sell to their customers through economic arrangements with us. Our Payment Protection revenue includes revenue earned from reinsurance arrangements with producer owned reinsurance companies owned by our clients. Our clients own producer owned reinsurance companies ("PORCs") that assume the credit insurance premiums and associated risk that they originate in exchange for fees paid to us for ceding the premiums. In addition, our Payment Protection revenue includes administrative fees charged by us under retrospective commission arrangements with producers, where the commissions paid are adjusted based on actual losses incurred compared to premium earned after a specified net allowance retained by us. Under these arrangements, our insurance companies receive the insurance premiums and administer the policies that are distributed by our clients. The producer of the credit insurance policies receives a retrospective commission if the premium generated by that producer in the accounting period exceeds the costs associated with those polices, which includes our administrative fees, incurred claims, reserves and premium taxes. If the net result is negative, we either offset that negative amount against future retrospective commission payments, reduce the producer's up-front commission on a prospective basis to increase the likelihood that it will return to a positive position or request payment of the negative amount from the producer. Revenues in our Payment Protection business may fluctuate seasonally based on consumer spending trends, where consumer spending has historically been higher in September and December, corresponding to back-to-school and the holiday season. Accordingly, our Payment Protection revenues may reflect higher third and fourth quarters than in the first half of the year.
BPO. Our BPO revenues consist primarily of service and administrative fees for providing a broad set of administrative services tailored to insurance and other financial services companies including ongoing sales and marketing support, premium billing and collections, policy administration, claims adjudication, call center management services and the development of
web-hosted applications for the reinsurance market. In addition, our BPO segment markets and sells health, accident, critical illness and life insurance policies to customers in the U.S. Our BPO revenues are based on the volume of business that we manage on behalf of our clients. Our BPO segment typically charges fees on a per-unit of service basis as a percentage of our client's insurance premiums.
Brokerage commissions and fees are generally affected by fluctuations in the amount of premium charged by insurance carriers. The premiums charged fluctuate based on, among other factors, the amount of capital available in the insurance marketplace, the type of risk being insured, the nature of the insured party and the terms of the insurance purchased. If premiums increase or decrease, our revenues are typically affected in a corresponding fashion. In a declining premium rate environment, the resulting decline in our revenue may be offset, in whole or in part, by an increase in commission rates from insurance carriers and by an increased likelihood that insured parties may use the savings generated by the reduction in premium rates to purchase greater coverage. In an increasing pricing environment, the resulting increase in our revenue may be offset, in whole or in part, by a decrease in commission rates by insurance carriers and by an increased likelihood that insured parties may determine to reduce the amount of coverage they purchase. The market for P&C insurance products is cyclical from a capacity and pricing perspective. We refer to a period of reduced capacity and rising premium rates as a "hard" market and a period of increased capacity and declining premium rates as a "soft" market.
Ceding Commissions. Ceding commission earned under coinsurance agreements are based on contractual formulas that take into account, in part, underwriting performance and investment returns experienced by assuming companies. As experience changes, adjustments to the ceding commissions are reflected in the period incurred.
We elect to cede to reinsurers under coinsurance arrangements a significant portion of the credit insurance that we distribute on behalf of our clients. We continue to provide all policy administration for credit insurance that we cede to reinsurers. Ceding commissions consist of commissions paid to us by our reinsurers to reimburse us for costs related to the acquisition, administration and servicing of policies and premium that we cede to reinsurers. In addition, a portion of the ceding commission is determined based on the underwriting profits of the ceded credit insurance. The credit insurance that we distribute has historically generated attractive underwriting profits. Furthermore, some reinsurers pay to us a portion or all of the investment income earned on reserves that are maintained in trust accounts.
The principal factors affecting earned premiums are: (i) the proportion of the risk assumed by the reinsurer as defined in the reinsurance treaty; (ii) increases and decreases in written premium; (iii) increases and decreases in policy cancellation rates; (iv) the average duration of the policies written; and (v) changes in regulation that would modify the earning patterns for the policies underwritten and administered.
Other Income. Other income primarily consists of miscellaneous fees generated by our Brokerage and Payment Protection segments.
Actual claims paid are claims payments made to the policyholder or beneficiary during the accounting period. The change in unpaid claim reserve is an increase or reduction to the unpaid claim reserve in the accounting period to maintain the unpaid claim reserve at the levels evaluated by our actuaries.
The appointed actuaries conduct their actuarial analysis on a basis gross of reinsurance. The same estimates used as a basis in calculating the gross unpaid claims reserves are then used as the basis for calculating the net unpaid claims reserves, which take into account the impact of reinsurance. Anticipated future loss development patterns form a key assumption underlying these analyses. Our claims are generally reported and settled quickly, resulting in a consistent historical loss development pattern. From the anticipated loss development patterns, a variety of actuarial loss projection techniques are employed, such as the chain ladder method, the Bornhuetter-Ferguson method and expected loss ratio method.
Amortization of Intangibles. Amortization of intangibles is an expense recorded to allocate the cost of intangible assets, such as purchased customer accounts and non-compete agreements acquired as part of our business acquisitions, over their estimated useful lives.
Income Taxes. Income taxes are comprised of federal and state taxes based on income in multiple jurisdictions and changes in uncertain tax positions, if any.
Service and administrative fees for the year ended December 31, 2011 increased $4.1 million, or 11.9%, to $38.2 million from $34.1 million for the year ended December 31, 2010. The increase resulted primarily from a $7.5 million increase in administrative fees in our Payment Protection segment, including the benefit of a $6.9 million increase in administrative fees from our 2011 acquisition of Auto Knight, the full benefit of our 2010 car club acquisitions, which mostly occurred in the latter part of 2010, and growth in our core business of $0.6 million. These increases were partially offset by a $1.5 million reduction in our BPO segment revenues and $1.9 million of lower debt collection and collection recovery fees.
administration of premium finance contracts. These increases of $5.2 million were partially offset by a $2.6 million reduction in revenues in our BPO segment.
Net investment income for the year ended December 31, 2011 was $3.4 million and $4.1 million for the year ended December 31, 2010. The decrease was principally due to lower income earned on fixed income securities and to a lesser extent a lower amount of income earned on cash. Yields on the investment portfolio decreased 134 basis points to 2.88% for the year ended December 31, 2011 from 4.22% for the year ended December 31, 2010.
Commissions for the year ended December 31, 2011increased $3.2 million, or 4.5%, to $74.2 million, from $71.0 million for the year ended December 31, 2010. The increase in commission expense resulted from a $4.5 million increase in net commissions due to growth in net written premiums. Retrospective commission expense increased $1.3 million due to favorable underwriting results and a decrease of $2.6 million in deferred policy acquisition cost amortization.
Commissions for the year ended December 31, 2010 increased $0.6 million, or 0.8%, to $71.0 million from $70.4 million for the year ended December 31, 2009. The increase in commission expense resulted from a $0.5 million increase in commissions paid for the increase in production of credit insurance policy premiums. Retrospective commission expense decreased $0.7 million due to unfavorable underwriting results. This decrease was offset in part by a $0.8 million increase in deferred policy acquisition cost amortization.
Personnel costs for the year ended December 31, 2011 increased $8.2 million, or 22.5%, to $44.5 million from $36.4 million for the year ended December 31, 2010. The majority of the increase resulted from our 2011 and 2010 acquisitions, which increased personnel costs by $5.7 million, and $1.1 million associated with being a public company. Total employees at December 31, 2011 increased to 545 compared to 460 at December 31, 2010. For the year ended December 31, 2011 we recorded total stock based compensation expense of $0.6 million compared to $0.2 million the year ended December 31, 2010.
Other operating expenses for the year ended December 31, 2011 increased $7.5 million, or 32.7%, to $30.4 million from $22.9 million for the year ended December 31, 2010. The additional increase in other operating expenses is primarily due to $1.9 million in non-recurring charges, which included $1.0 million in costs related to contemplated acquisitions, $0.2 million in costs for corporate governance matters, $0.2 million for office relocation expenses, and $0.1 million in non-recurring statutory audits related to expanded licensing activities. In addition, $1.5 million of the increase is attributable to public company costs, including increased auditing and professional fees, corporate insurance and director fees. Also, our 2011 and 2010 acquisitions increased other operating expenses by $3.2 million.
Depreciation expense for the year ended December 31, 2010 increased $0.6 million, or 74.3%, to $1.4 million from $0.8 million for the year ended December 31, 2009. Higher depreciation expense in 2010 was due primarily to growth in our depreciable software assets.
Interest expense for the year ended December 31, 2011 decreased $0.8 million, or 9.7%, to $7.6 million from $8.5 million for the year ended December 31, 2010. Interest expense for the year ended December 31, 2011 included the write off of $0.3 million during the first quarter of 2011 for capitalized issuance costs associated with the redemption of preferred stock. Interest expense for the year ended December 31, 2011 was positively impacted by the use of proceeds of our IPO funds to eliminate higher rate debt late in 2010 and to a lesser extent the changing of our base rate for our revolving line of credit to a EURO Dollar Funding thereby reducing our interest rate from 6.00% to 4.10% on $53.0 million in outstanding during the latter part of 2011. The reduction in higher rate borrowings was partially offset by the addition of approximately $41.8 million on our credit facility to fund the Auto Knight and eReinsure acquisitions in the first quarter of 2011 and to a lesser extent an additional $7.0 million borrowed to fund the PBG acquisition in the fourth quarter of 2011.
Interest expense for the year ended December 31, 2010 increased $0.7 million, or 8.5%, to $8.5 million from $7.8 million for the year ended December 31, 2009. This increase in 2010 was attributable to the increased borrowings associated with our acquisition of Continental, United and South Bay and higher rates on our indebtedness.
We conduct our business through three business segments: (i) Payment Protection; (ii) BPO; and (iii) Brokerage. The revenue for each segment is presented to reflect the operating characteristics of the segment. We do allocate certain revenues and costs to our segments. These items primarily consist of corporate-related income, transaction related costs, executive stock compensation and other overhead expenses. We measure the profitability of our business segments with the allocation of Corporate income and
Operating expenses for the year ended December 31, 2010 decreased $0.2 million, or 1.0%, to $23.6 million from $23.8 million for the year ended December 31, 2009. The year over year decrease in operating expenses resulted primarily from a $1.6 million decrease in salary and benefits in our Payment Protection business. In addition, our Payment Protection segment incurred operating expenses of $1.4 million associated with the 2010 acquisitions of Continental and United.
EBITDA for the year ended December 31, 2011 increased $0.5 million, or 2.0%, to $27.8 million from $27.3 million for the year ended December 31, 2010. As a result, EBITDA margin for the year ended December 31, 2011 was 45.9% compared with 53.6% for the year ended December 31, 2010.
EBITDA for the year ended December 31, 2010 increased $8.3 million, or 43.5%, to $27.3 million from $19.0 million for the year ended December 31, 2009. As a result, EBITDA margin for our Payment Protection segment was 53.6%% for the year ended December 31, 2010 compared with 44.4% for the year ended December 31, 2009.
was offset by an increase in service and administrative fees of $0.1 million on debt cancellation programs of credit card companies and $0.9 million of additional revenue from our 2011 fourth quarter acquisition of PBG.
Revenues for the year ended December 31, 2010 decreased $1.7 million or 9.1%, to $17.1 million from $18.8 million for the year ended December 31, 2009. The decrease was driven by lower service and administrative fees on debt cancellation programs of credit card companies of $2.6 million due to macro economic conditions offset by an increase in service and administrative fees for our insurance company clients.
Operating expenses for the year ended December 31, 2011 increased $1.6 million or 16.0%, to $11.6 million from $10.0 million for the year ended December 31, 2010. This primarily resulted from additional expenses of $0.9 million from our 2011 acquisition of Pacific Benefits Group and higher expenses related to being a public company which was offset by lower personnel costs and variable costs for processing and fulfillment associated with the decline in revenue.
Operating expenses for the year ended December 31, 2010 increased $0.1 million or 1.0%, to $10.0 million from $9.9 million for the year ended December 31, 2009.
The Brokerage segment includes the results of the eReinsure acquisition from March 3, 2011 and six months of results from CIRG, which was sold in July 2011. We acquired our Brokerage segment in April 2009, and therefore, 2010 to 2009 comparisons are not meaningful.
Revenues were $21.6 million for the year ended December 31, 2009 and were comprised of $20.7 million of standard commission and $0.3 million of profit commission revenue. In addition, we recorded a reserve reversal of $0.5 million in 2009 for canceled policy commission reserves that were deemed excessive.
Operating expenses for the year ended December 31, 2009 were $16.7 million with the majority of the expense attributable to personnel costs.
EBITDA, excluding the loss on the sale of subsidiary of $0.5 million, for the year ended December 31, 2011 was $8.2 million compared to $5.8 million for the year ended December 31, 2010. As a result, EBITDA margin for the Brokerage segment was 22.2% and 19.8% for 2011 and 2010, respectively.
EBITDA for years ended December 31, 2010 and 2009 was $5.8 million and $3.9 million, respectively. As a result, EBITDA margin for the Brokerage segment was 19.8% and 22.4% for the year ended December 31, 2010 and 2009, respectively.
During 2011, we determined the final valuations for Continental, United and Auto Knight and reduced the amount of goodwill associated with these acquisitions by $6.4 million, $3.9 million and $1.1 million, respectively, to reflect the final valuation of goodwill acquired. Also, in July 2011, we sold CIRG, which reduced goodwill in the BPO segment by approximately $1.3 million.
Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business operations, including working capital needs, capital expenditures, debt service, acquisitions and other commitments and contractual obligations. We historically have derived our liquidity from our invested assets, cash flow from operations, ordinary and extraordinary dividend capacity from our subsidiary insurance companies, revolving credit facility and equity investments. When considering our liquidity, it is important to note that we hold cash in a fiduciary capacity as a result of premiums received from insured parties that have not yet been paid to insurance carriers. The fiduciary cash is recorded as an asset on our Consolidated Balance Sheets with a corresponding liability, net of our commissions, to insurance carriers.
Our primary sources of liquidity are our total investments, cash and cash equivalent balances, availability under our revolving credit facility and dividends and other distributions from our subsidiaries. At December 31, 2011, we had total investments of $95.8 million, cash and cash equivalents of $31.3 million and $12.0 million of available capacity on our revolving credit facility. At December 31, 2010, we had total investments of $88.9 million, cash and cash equivalents of $43.4 million and $18.3 million of available capacity on our revolving credit facilities. Our total indebtedness was $108.0 million at December 31, 2011 compared to $82.8 million at December 31, 2010. During the year ended December 31, 2011, we paid off the entire $11.0 million of redeemable preferred stock outstanding thereby reducing a high rate funding source.
During the fourth quarter of 2011, our Board of Directors approved a share repurchase plan. The share repurchase plan allows us to purchase up to $10.0 million of our common stock to be purchased from time to time through open market or private transactions. The plan provides for shares to be repurchased for general corporate purposes, which may include serving as a subsequent resource for funding potential acquisitions and employee benefit plans. The timing, price and quantity of purchases are at our discretion, and the plan may be discontinued or suspended at any time. In 2011, we repurchased a total of 471,554 shares at an average price of $5.41 per share at a total cost of $2.6 million. For additional information, see ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
On March 1, 2011, Wells Fargo Bank, N.A., entered into a joinder agreement (the "Wells Fargo Joinder") to the Facility to become a new lender under the Facility with a revolving commitment of $30.0 million, thereby increasing the size of the Facility from $55.0 million to $85.0 million.
In connection with the Summit Partners Transactions, our subsidiary, LOTS Intermediate Co. issued $35.0 million of fixed/floating rate preferred trust securities due 2037. The preferred trust securities bear interest at a rate of 9.61% per annum until the June 2012 interest payment date. Thereafter, interest on the preferred trust securities will be at a rate of 3-month LIBOR plus 4.10% for each interest rate period. We are not permitted to redeem the preferred trust securities until after the June 2012 interest payment date. After such date, we may redeem the preferred trust securities, in whole or in part, at a price equal to 100% of the principal amount of such preferred trust securities outstanding plus accrued and unpaid interest. Interest is payable quarterly. On April 21, 2011, we entered into a forward interest rate swap with Wells Fargo Bank, N.A., pursuant to which we swapped the floating rate portion of our $35.0 million in outstanding preferred trust securities to a fixed rate of 3.47% per annum payable quarterly resulting in an effective rate of 7.57% after adding the applicable margin of 4.10%. The swap has a term of five years, commencing when the interest rate on the underlying preferred trust securities will begin to float in June 2012 and terminating in June 2017.
Net cash provided by financing activities was $22.6 million for the year ended December 31, 2011 and $30.1 million for the year ended December 31, 2010. For the year ended December 31, 2011, net cash provided by financing activities primarily reflected borrowings under our lines of credit of $110.6 million, of which approximately $51.6 million was used to complete the acquisitions of Auto Knight, eReinsure and PBG, which was partially offset by $74.3 million used to pay-down our credit facilities and $11.0 million used for the redemption of our redeemable preferred stock. During 2011 we also used $2.6 million to repurchase 471,554 shares of our common stock under our stock repurchase plan. For the year ended December 31, 2010, net cash provided by financing activities primarily reflected proceeds of our IPO totaling $43.6 million less IPO related costs of $3.3 million and borrowings under our lines of credit of $25.2 million, partially offset by the redemption of $20.0 million in subordinated debentures and payment of the liquidation preference of $14.1 million paid to Class A stockholders. For the year ended December 31, 2009, net cash provided by financing activities reflected additional borrowings under our lines of credit and the issuance of common and treasury stock.
We have obligations and commitments to third parties as a result of our operations. These obligations and commitments, as of December 31, 2011, are detailed in the table below by maturity date as of the dates indicated:
As described in Management's Annual Report on Internal Control over Financial Reporting, the Company has excluded eReinsure.com, Inc. ("eRe") from its assessment of internal control over financial reporting as of December 31, 2011, because eRe was acquired by the Company during 2011. Accordingly, our audit of internal control over financial reporting did not include eRe. The total assets and revenues of eRe represents approximately 6.6% of total assets as of December 31, 2011 and approximately 3.9% of total revenues and approximately 7.4% of net income for the year then ended.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Fortegra Financial Corporation and subsidiaries as of December 31, 2011 and 2010, and the results of its consolidated operations and its cash flows for each of the years in the three-year period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, such financial statement schedule, when considered in relation to the basic financial statements as a whole, present fairly, in all material respects, the information set forth therein. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Fortegra Financial Corporation (NYSE:FRF) including its subsidiaries ("Fortegra" or the "Company") is a diversified insurance services company that provides distribution and administration services on a wholesale basis to insurance companies, insurance brokers and agents and other financial services companies primarily in the United States. In 2008, the Company changed its name from Life of the South Corporation to Fortegra Financial Corporation. Most of the Company's business is generated through networks of small to mid-sized community and regional banks, small loan companies and automobile dealerships. The Consolidated Financial Statements include the Company and its majority-owned and controlled subsidiaries, including:
These Consolidated Financial Statements reflect the consolidated financial statements of Fortegra Financial Corporation and its subsidiaries. The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America ("U.S. GAAP") promulgated by the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC" or "the guidance").
Prior to 2011, third parties held a 52% ownership of the preferred stock of CRC Reassurance Company, Ltd. which were redeemed during the year ended December 31, 2010. Income (loss) attributable to these minority shareholders has been reflected on the Consolidated Statements of Income and Comprehensive Income (Loss) as income attributable to non-controlling interests for the years ended December 31, 2010 and 2009.
Preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
On January 1, 2008, the Company adopted accounting guidance for reporting fair values in accordance with ASC 820-10 - Fair Value Measurements, which established a three-level hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities
Brokerage Commissions and Fees - The Company earns brokerage commission and fee income by providing wholesale brokerage services to retail insurance brokers and agents and insurance companies and is primarily recognized when the underlying insurance policies are issued. A portion of the brokerage commission income is derived from profit commission agreements with insurance carriers. These commissions are received from carriers based upon the underlying underwriting profitability of the business that the Company places with those carriers. Profit commission income is generally recognized as revenue on the receipt of cash based on the terms of the respective carrier contracts. In certain instances, profit commission income may be recognized in advance of cash receipt where the profit commission income due to be received has been calculated or has been confirmed by the insurance carrier.
Net Investment Income - The Company earns net investment income from interest and dividends received from the investment portfolio, less portfolio management expenses and interest earned on cash accounts and notes receivable. Investment income also includes any amortization of premiums and accretion of discounts on securities acquired at other than par value.
Net Earned Premium - Net earned premium is from direct and assumed earned premium consisting of revenue generated from the direct sale of Payment Protection insurance policies by the Company's distributors or premiums written for Payment Protection insurance policies by another carrier and assumed by the Company. Whether direct or assumed, the premium is earned over the life of the respective policy. Direct and assumed earned premium are offset by premiums ceded to the Company's reinsurers, including producer owned reinsurance companies ("PORCs"). The amount ceded is proportional to the amount of risk assumed by the reinsurer.
Net losses and loss adjustment expenses include actual claims paid and the change in unpaid claim reserves.
When, in the opinion of management, a decline in the estimated fair value of an investment is considered to be other-than-temporary or management intends to sell or is required to sell the investment prior to the recovery of cost, the investment is written down to its estimated fair value with the impairment loss included in net realized gains (losses) in the Consolidated Statements of Income. OTTI losses related to the credit component of the impairment on fixed maturity securities and equity securities are recorded in the Consolidated Statements of Income as realized losses on investments and result in a permanent reduction of the cost basis of the underlying investment. Losses relating to the non-credit component of OTTI losses on fixed maturity securities are recorded in accumulated other comprehensive income in the Consolidated Balance Sheets. The determination of OTTI is a subjective process, and different judgments and assumptions could affect the fair value determination and the timing of loss realization.
Cash and cash equivalents consist primarily of highly liquid investments, with original maturities of three months or less when purchased. At various times throughout the year, the Company may have cash deposited with financial institutions that exceed the federally insured deposit amount. Management reviews the financial viability of these financial institutions on a periodic basis and does not anticipate nonperformance by the financial institutions. The Company had $9.0 million and $31.8 million of cash at December 31, 2011 and 2010, respectively, that exceeded the FDIC insurance limits of $250,000.
Other receivables consist primarily of advance commissions and agents' balances in course of collection and billed but not collected policy premium. For policy premiums that have been billed but not collected, the Company records a receivable on its balance sheet for the full amount of the premium billed, with a corresponding liability, net of its commission, to insurance carriers. The Company earns interest on the premium cash during the period of time between receipt of the funds and payment of these funds to insurance carriers.
The Company capitalizes internally developed software costs on a project-by-project basis in accordance with ASC 350-40, Intangibles - Goodwill and Other: Internal-Use Software. All costs to establish the technological feasibility of computer software development are expensed to operations when incurred. Internally developed software development costs are carried at the lower of unamortized cost or net realizable value and are amortized based on the current and estimated useful life of the software. Amortization over the estimated useful life of five years begins when the software is ready for its intended use.
Goodwill represents the excess cost of an acquisition over the fair value of the net assets acquired in a business combination and is carried as an asset on the Consolidated Balance Sheets. The Company's goodwill is not amortized but is reviewed annually in the fourth quarter for impairment or more frequently if certain indicators arise. The Company's reporting units for impairment testing purposes are identical to its operating segments. In 2011, the Company early adopted Accounting Standards Update ("ASU") 2011-08, Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment. ASU 2011-08 allows for the goodwill impairment analysis to start with an assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the qualitative factors, management determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the Company performs the two-part quantitative impairment test under Topic 350. If the carrying amount of the goodwill of the reporting unit exceeds the implied fair value, an impairment charge is recorded equal to the excess.
Actual cash flows in the future may differ significantly from those previously forecasted. Other significant assumptions include growth rates and the discount rate applicable to future cash flows.
Other intangible assets include trademarks, customer related and contract based assets representing primarily client lists and non−compete arrangements and acquired software. These intangible assets, with the exception of trademarks, are amortized over periods ranging from 1 to 15 years. Trademarks are not amortized since these assets have been determined to have indefinite useful lives. Intangible assets are tested at least annually, or whenever events or circumstances indicate that their carrying amount may not be recoverable using an analysis of expected future cash flows.
Premiums written are earned over the period that coverage is provided. Unearned premiums represent the portion of premiums that will be earned in the future and are generally calculated using the pro-rata method. A premium deficiency reserve is recorded if anticipated losses, loss adjustment expenses, deferred policy acquisition costs and policy maintenance costs exceed the recorded unearned premium reserve and anticipated investment income. As of December 31, 2011, and 2010, no reserve was recorded.
Commissions include the commissions paid to distributors selling credit insurance policies. Commission rates, in many instances, are set by state regulators and are also impacted by market conditions. In certain instances, commissions are subject to retrospective adjustment based on the profitability of the related policies. Under these retrospective commission arrangements, the producer of the credit insurance policies receives a retrospective commission if the premium generated by that producer in the accounting period exceeds the costs associated with those policies, which includes the Company's administrative fees, claims, reserves, and premium taxes. The Company analyzes the retrospective commission calculation on a monthly basis for each producer and, based on the analysis associated with each such producer, the Company records a liability for any positive net retrospective commission earned and due to the producer or, conversely, records a receivable amount due from such producer for instances where the net result of the retrospective commission calculation is negative.
The settlement of net positive retrospective commission with the producer in a subsequent period (usually the following month), is made through a cash payment to the producer. If the net result is negative, the Company offsets the receivable amount due from the producer by:
Deferred revenues represent unearned fee revenues primarily attributable to motor clubs, and are earned over the period that coverage is provided. Deferred revenues represent the portion of income that will be earned in the future, and are generally calculated using either the pro rata or sum-of-the-digits method.
The Company uses interest rate swaps to manage interest rate risk and cash flow risk that may arise in connection with variable interest rate provisions of certain of the Company's debt obligations. The fair values of the derivative instruments are recorded in other assets or other liabilities. To the extent a derivative is an effective hedge of the cash flow risk of the hedged debt obligation, any change in the derivative's fair value is recorded in accumulated other comprehensive income, net of income tax. To the extent the derivative is an ineffective hedge, that portion of the change in fair value is recorded in other operating expenses or interest expense as appropriate.
ASC subtopic 740-10, Income Taxes-Overall ("ASC 740-10") prescribes a comprehensive model for the financial statement recognition, measurement, classification, and disclosure of uncertain tax positions. ASC 740-10 contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, based on the technical merits of the position. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. The Company accounts for penalties and interest related to uncertain tax positions as part of its provision for federal and state income taxes.
In June 2011, the FASB issued changes to the presentation of comprehensive income. These changes give an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements; the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity was eliminated. These changes become effective for the Company on January 1, 2012. Early adoption is permitted. Management is currently evaluating these changes to determine which option will be chosen for the presentation of comprehensive income. The adoption of this pronouncement is not expected to have a material impact on the Company's Consolidated Financial Statements.
In May 2011, the FASB issued an accounting pronouncement which amends the fair value measurement and disclosure requirements to achieve common disclosure requirements between U.S. GAAP and International Financial Reporting Standards ("IFRS"). The accounting pronouncement requires certain disclosures about transfers between Level 1 and Level 2 of the fair value hierarchy, sensitivity of fair value measurements categorized within Level 3 of the fair value hierarchy, and categorization by level of items that are reported at cost but are required to be disclosed at fair value. The disclosures are to be applied prospectively effective in the first interim and annual periods beginning after December 15, 2011. The adoption of this pronouncement is not expected to have a material impact on the Company's consolidated financial statements.
In October 2010, the FASB issued new guidance concerning the accounting for costs associated with acquiring or renewing insurance contracts. Under the new guidance, only direct incremental costs associated with successful insurance contract acquisitions or renewals would be deferrable. The guidance also states that advertising costs and indirect costs should be expensed as incurred. Although this guidance states that certain advertising costs that meet current accounting guidance could be deferred and treated as deferred acquisition costs ("DAC"), the Company does not currently record any new advertising costs in DAC. This guidance will be effective for fiscal years beginning after December 15, 2011 with earlier adoption permitted as of the first day of a company's fiscal year. The Company is currently evaluating the requirements of the pronouncement and the potential impact, if any, on the Company's financial position and results of operations.
In January 2011, the Company acquired 100% of the outstanding stock ownership of Auto Knight Motor Club, Inc. ("Auto Knight"), of Palm Springs, CA. Auto Knight provides motor club memberships, vehicle service plans and tire and wheel programs, which are offered by automobile and truck dealerships and retailers in the United States and Canada. The acquisition expands the Company's geographic reach to Canada, where Auto Knight offers its products through retailers as a subscription benefit.
Effective December 29, 2011, the Company acquired Magna from Hancock Holding Company. Magna does not have any ongoing insurance business, but does have twelve State Certificates of Authority, which are redundant with certificates held by other Fortegra subsidiaries.
The Company did not issue any shares of its common stock in connection with the acquisitions completed during the year ended December 31, 2011.
The financial results of all 2011 acquisitions have been included in the Company's results as of their respective acquisition dates. Revenue and net income for all 2011 acquisitions included in the Company's Consolidated Statement of Income for the year ended December 31, 2011 is as follows:
with the funding necessary to complete the acquisition and any amortization of intangibles that would have been charged to operations assuming the intangible assets would have existed on January 1, 2011 and 2010, excluding the transaction costs and the consequential tax effect.
The unaudited pro forma results in the table above were prepared for comparative purposes only and do not purport to be indicative of the results of operations which may have actually resulted had the acquisitions occurred at January 1, 2011 and 2010, respectively, nor is it indicative of future operating results of the Company.
The following table presents assets acquired, liabilities assumed and goodwill recorded for acquisitions made during the years ended December 31, 2011, and 2010 based on their fair values as of the respective acquisition date and includes the effect of the measurement period adjustments recorded in 2011, as discussed below for Continental, United, and Auto Knight:
In conjunction with the Auto Knight acquisition in 2011, the Company initially recorded goodwill of $4.3 million. During 2011, the Company determined the final valuation for Auto Knight, and accordingly reduced the amount of goodwill by $1.1 million and increased deferred tax liabilities by $0.7 million and increased other intangible assets by $1.8 million to reflect the final valuation of goodwill acquired. The measurement period adjustment was recorded based on information obtained subsequent to the acquisition related to the earnout, trademark, dealer relationships and non-compete agreements at the acquisition date.
In conjunction with the PBG and Magna acquisitions in 2011, the Company recorded $6.7 million and $0 of goodwill, respectively. The Company will determine the final valuations for these acquisitions in 2012.
In 2011, the Company acquired Auto Knight, eReinsure, PBG, and Magna, increasing goodwill by a total of $36.1 million. The Company sold CIRG, decreasing goodwill by $1.3 million.
In 2011, the Company recorded other intangible assets of $4.7 million, $3.3 million, and $4.0 million for customer and agent relationships, tradenames, and software, respectively, in conjunction with the Auto Knight, eReinsure, and PBG acquisitions.
Pursuant to certain reinsurance agreements and statutory licensing requirements, the Company has deposited invested assets in custody accounts or insurance department safekeeping accounts. The Company is not permitted to remove invested assets from these accounts without prior approval of the contractual party or regulatory authority.
The amortized cost and fair value of fixed maturity securities by contractual maturity are shown below. Expected maturities will differ from contractual maturities as borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
The following table provides information on unrealized losses on investment securities that have been in an unrealized loss position for less than twelve months and twelve months or more as of:
As of December 31, 2011, there were 35 fixed maturity and 5 equity securities in unrealized loss positions. The Company does not intend to sell these investments and it is more likely than not that the Company will be able to hold these securities until full recovery of their amortized cost basis for fixed maturity securities or cost for equity securities. For the year ended December 31, 2011 the Company deemed that 10 equity securities were other than temporarily impaired and recorded an impairment charge of $0.2 million. As of December 31, 2010, there were 21 fixed maturity and 13 equity securities in unrealized loss positions. During 2010, based on its quarterly review, management deemed 8 equity securities to be other-than-temporarily impaired and recorded an impairment charge of $0.1 million.
The following table summarizes the proceeds from the sale of available-for-sale investment securities, the gross realized gains and gross realized losses for both fixed maturity and equity securities and realized losses for other-than-temporary impairments:
Reinsurance receivables include amounts related to paid benefits, unpaid benefits and prepaid reinsurance premiums. Reinsurance receivables are based upon estimates and are reported on the Consolidated Balance Sheets separately as assets, as reinsurance does not relieve the Company of its legal liability to policyholders. The Company is required to pay losses even if a reinsurer fails to meet its obligations under the applicable reinsurance agreement. Management continually monitors the financial condition and agency ratings of the Company's reinsurers and believes that the reinsurance receivables accrued are collectible. Included in reinsurance receivables at December 31, 2011 and December 31, 2010 are $124.2 million and $121.2 million recoverable from three unrelated reinsurers. The three unrelated reinsurers are: Munich American Reassurance Company (A. M. Best Rating-A+); London Life Reinsurance Company (A. M. Best Rating-A); and London Life International Reinsurance Corporation (A. M. Best Rating-NR-3). Since London Life International Reinsurance Corporation does not maintain an A.M. Best rating, the related receivables are collateralized by assets held in trust and letters of credit. At December 31, 2011, the Company does not believe there is a risk of loss as a result of the concentration of credit risk in the reinsurance program.
The Company leases certain office space and equipment under operating leases. The future minimum lease payments under operating leases with initial or remaining non-cancelable lease terms in excess of one year at December 31, 2011 are as follows:
On November 30, 2010, Columbus Bank & Trust, a division of Synovus Bank, entered into a joinder agreement to the revolving credit facility and became a new lender under the revolving credit facility with a revolving commitment of $20.0 million, which increased the Facility to $55.0 million.
At December 31, 2011, the Company is in compliance with the above covenants on its line of credit.
On April 21, 2011, the Company entered into a forward interest rate swap (the "Swap") with Wells Fargo Bank, N.A., pursuant to which the Company swapped the floating rate portion of its $35.0 million in outstanding preferred trust securities to a fixed rate of 3.47% per annum payable quarterly for an effective rate of 7.57% after adding the applicable margin on the trust preferred securities of 4.10%. The Swap, which has been designated a cash flow hedge, has a term of five years, commencing when the interest rate on the underlying trust preferred securities begins to float in June 2012 and expiring in June 2017. As of December 31, 2011, the Company recorded a $2.3 million unrealized loss, net of tax, on the fair value of the Swap in accumulated other comprehensive income and recorded $3.6 million in other liabilities and $1.3 million in deferred taxes.
At December 31, 2011, Fortegra had an active share repurchase plan which allows the Company to purchase up to $10.0 million of the Company's common stock to be purchased from time to time through open market or private transactions. The plan was approved by the Board of Directors in November 2011 and provides for shares to be repurchased for general corporate purposes, which may include serving as a resource for funding potential acquisitions and employee benefit plans. The timing, price and quantity of purchases are at the discretion of Fortegra. The plan may be discontinued or suspended at any time and has no expiration date. For the year ended December 31, 2011, the Company repurchased a total of 471,554 shares of its common stock at a total cost of $2.6 million and an average price of $5.41 per share.
From January 1, 2012 through February 29, 2012, the Company repurchased 127,681 shares of its common stock at a total cost of $0.9 million and an average price of $6.84 per share. All repurchased shares are recorded as treasury stock and are accounted for under the cost method. None of the repurchased shares have been retired.
Cash and cash equivalents: The estimated fair value of the Company's cash and cash equivalents approximates their carrying value.
Notes payable, preferred trust securities, and redeemable preferred stock: The carrying amounts approximate fair value because the applicable interest rates approximate current rates offered to the Company for similar instruments.
The 2005 Plan, established on October 18, 2005, permits awards of (i) Incentive Stock Options, (ii) Non-qualified Stock Options, (iii) Stock Appreciation Rights, (iv) Restricted Stock and (v) Restricted Stock Units. The Company was permitted to issue up to 1,312,500 shares under the 2005 Plan. Each option granted under the 2005 Plan has a maximum contractual term of 10 years. As of December 31, 2011, there were 1,273,125 options outstanding under the 2005 Plan.
(2) The Company's current policy is to issue new shares upon the exercise of stock options.
The following table summarizes the weighted average assumptions used to estimate the fair values of stock option awards granted during the periods presented:
* The Company did not grant stock option awards for this period.
* The Company did not grant restricted stock awards for this period.
In July 2011, the Company began open enrollment for its Employee Stock Purchase Plan ("ESPP") which was authorized in connection with the Company's IPO under the 2010 Plan. The ESPP does not have performance criteria and allows the Company to issue up to 1,000,000 shares of common stock to all eligible employees, including the Company's named executive officers, under the same offering and eligibility terms. The ESPP qualifies under Section 423 of the Internal Revenue Code and allows eligible employees to contribute, at their discretion, between 1% and 10% of their payroll, up to $25,000 per year, to purchase up to a maximum of 3,500 shares of the Company's common stock per offering period. The purchase price of Fortegra's common stock is equal to 85% of the lesser of the fair market value of the closing stock price of Fortegra's common stock on either the first day of the offering period or the last day of the offering period. Each offering period is six months long and begins on January 1st and July 1st of each year.
For the year ended December 31, 2011, a total of 10,167 shares of common stock were purchased under the ESPP at a weighted-average purchase price per share of $5.68. The total cash proceeds received from the issuance of these shares under the ESPP was $0.1 million. The Company recognized $15 thousand of expense associated with the issuance of shares under the ESPP for the year ended December 31, 2011.
The Company has a nonqualified deferred compensation plan for certain officers. Provision has been made for the compensation which is payable upon their retirement or death. The deferred compensation is to be paid to the individual or their beneficiaries over a period of ten years commencing with the first year following retirement or death. As of December 31, 2011, there were no further payments required under the plan.
pay extraordinary dividends of $0.8 million, and paid that amount to the Company during 2011. All dividends from subsidiaries were eliminated in the Consolidated Financial Statements.
Under the National Association of Insurance Commissioners ("NAIC") Risk-Based Capital Act of 1995, a company's risk-based capital ("RBC") is calculated by applying certain risk factors to various asset, claims and reserve items. If a company's adjusted surplus falls below calculated RBC thresholds, regulatory intervention or oversight is required. The insurance companies' RBC levels as calculated in accordance with the NAIC's RBC instructions exceeded all RBC thresholds as of December 31, 2011 and December 31, 2010.
In the Payment Protection business segment, the Company is currently a defendant in lawsuits that relate to marketing and/or pricing issues that involve claims for punitive, exemplary or extra-contractual damages in amounts substantially in excess of the covered claim. Such litigation includes Lawson v. Life of the South Insurance Co., which was filed on March 13, 2006, in the Superior Court of Muscogee County, Georgia, and later moved to the United States District Court for the Middle District of Georgia, Columbus Division. The action is brought by the plaintiff, individually and on behalf of a class of all persons similarly situated. The allegations involve the Company's alleged duty to refund unearned premiums on credit insurance policies, even when the Company has not been informed of the payoff of the underlying finance contract. The action seeks an injunction requiring remedial action, as well as a variety of damages, including punitive damages, and attorney fees and costs. To date, a class has not been certified in this action. A discovery stay was lifted on November 15, 2011.
The Company considers such litigation customary in its lines of business. In Management's opinion, based on information available at this time, the ultimate resolution of such litigation, which it is vigorously defending, should not be materially adverse to the financial position, results of operations or cash flows of the Company. It should be noted that large punitive damage awards, bearing little relation to actual damages sustained by plaintiffs, have been awarded in certain states against other companies in the credit insurance business. Loss contingencies may be taken as developments warrant, although such amounts are not reasonably estimable at this time.
The Company conducts business through three business segments: (i) Payment Protection; (ii) BPO; and (iii) Brokerage. The revenue for each segment is presented to reflect the operating characteristics of the segment. The Company allocates certain revenues and costs to the segments. These items primarily consist of corporate-related income, transaction related costs, executive stock compensation and other overhead expenses. The Company measures the profitability of its business segments with the allocation of Corporate income and expenses and without taking into account amortization, depreciation, interest expense and income taxes. The Company refers to these performance measures as segment EBITDA (earnings before interest, taxes, depreciation and amortization) and segment EBITDA margin (segment EBITDA divided by segment net revenues).
(All Amounts in Thousands Except Share Amounts, Per Share Amounts or Unless Otherwise Noted)
million in revenues and $3.8 million in expenses being moved from the BPO segment into the Brokerage segment for the year ended December 31, 2009 in order to conform to the presentation for the year ended December 31, 2011.
The following table reconciles segment information to the Company's consolidated results of operations and provides a summary of other key financial information for each of the Company's segments:
In connection with the Summit Partners acquisition of the Company on June 20, 2007, $20.0 million of subordinated debentures were issued to affiliates of Summit Partners, a related party, and reported in the notes payable line of the Consolidated Balance
Sheets. The subordinated debentures had an original maturity of June 20, 2012, which was subsequently amended to mature in June 2013, and bore interest at 14% per annum on the principal amount of such subordinated debentures, payable quarterly. In December 2010, the Company utilized a portion of the proceeds received from its IPO to pay off the entire $20.0 million of outstanding subordinated debentures for $20.6 million, which included accrued but unpaid interest to the redemption date.
During 2011, the Company entered into an information technology consulting agreement (the "IT Agreement") with a company in which a member serving on the Company's Board of Directors also serves on the board of the company receiving the consulting services. The IT Agreement has no set term and calls for a total of $0.3 million plus reimbursement of expenses to be received by the Company over the duration of the agreement. For the year ended December 31, 2011, the Company recorded $0.1 million of income for services provided under this IT Agreement. As of December 31, 2011, the Company has outstanding accounts receivable balances of $0.1 million related to the IT Agreement.