During the fourth quarter of 2013, the Company sold substantially all of its structured settlements operating assets for $12.0 million. Prior to that time, the Company operated in two reportable business segments: life finance and structured settlements. In the life finance business, the Company owns a portfolio of 612 life insurance policies and earns income from changes in the fair value and from death benefits on matured life insurance policies. In the structured settlement business, the Company purchased structured settlement receivables at a discounted rate and sells these receivables to third parties.
into loan transactions where we would lend, as a first-priority secured lender, on a “last money in-first money out” basis, meaning that proceeds from the policies pledged as collateral under a loan that we make will first be distributed, after premium payments and fees to service providers, to pay outstanding interest and principal on the loan. Our expectation is that our participation in any such loan will be conditioned on our being granted a participation in the proceeds of the death benefits from the underlying portfolios. We anticipate that this strategy will generate meaningful short term cash flows. The Company does not expect to receive meaningful distributions of proceeds from policy maturities that have been pledged under the Revolving Credit Facility (as discussed below) for up to the next five years. We have begun sourcing lending opportunities and will seek to deploy capital in 2014.
Due to these policy additions, the application of fair value accounting to amounts owing under the Revolving Credit Facility and the elimination of servicing fee income, the results of periods prior to the entry into the Termination Agreement and Revolving Credit Facility may not be comparable to the Company’s results at December 31, 2013 or in future periods.
As of July 1, 2010, we elected to adopt the fair value option, in accordance with ASC 825, Financial Instruments, to record newly-acquired structured settlements at fair value. We have the option to measure eligible financial assets, financial liabilities, and commitments at fair value on an instrument-by-instrument basis. This option is available when we first recognize a financial asset or financial liability or enter into a firm commitment. Subsequent changes in fair value of assets, liabilities, and commitments where we have elected fair value option are recorded in our consolidated statement of operations. We have made this election for our structured settlement assets because it was our intention to sell these assets within the next twelve months, and we believe it significantly reduces the disparity that exists between the GAAP carrying value of these structured settlements and our estimate of their economic value.
We have elected to account for the note payable under the Revolving Credit Facility, which includes its interest in policy proceeds to the lender, using the fair value method. The fair value of the debt is the amount the Company would have to pay to transfer the debt to a market participant in an orderly transaction. We calculated the fair value of the debt using a discounted cash flow model taking into account the stated interest rate of the credit facility and probabilistic cash flows from the pledged policies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, our estimates are not necessarily indicative of the amounts that we, or holders of the instruments, could realize in a current market exchange. The most significant assumptions are the estimates of life expectancy of the insured and the discount rate. The use of different assumptions and/or estimation methodologies could have a material effect on the estimated fair values.
We initially record investments in life settlements at the transaction price. For policies acquired upon relinquishment by our borrowers, we determined the transaction price based on fair value of the acquired policies at the date of relinquishment. The difference between the net carrying value of the loan and the transaction price is recorded as a gain (loss) on loan payoffs and settlement. For policies acquired for cash, the transaction price is the amount paid.
The resulting mortality factor represents an indication as to the degree to which the given life can be considered more or less impaired than a standard life having similar characteristics (e.g. gender, age, smoking, etc.). For example, a standard insured (the average life for the given mortality table) would carry a mortality rating of 100%. A similar but impaired life bearing a mortality rating of 200% would be considered to have twice the chance of dying earlier than the standard life.
The mortality rating is used to create a series of best estimate probabilistic cash flows. This probability represents a mathematical curve known as a mortality curve. This curve is then used to generate a series of expected cash flows over the remaining expected lifespan of the insured and the corresponding policy. A discounted present value calculation is then used to determine the value of the policy. If the insured dies earlier than expected, the return will be higher than if the insured dies when expected or later than expected.
The calculation allows for the possibility that if the insured dies earlier than expected, the premiums needed to keep the policy in force will not have to be paid. Conversely, the calculation also considers the possibility that if the insured lives longer than expected, more premium payments will be necessary. Based on these considerations, each possible outcome is assigned a probability and the range of possible outcomes is then used to create a value for the policy.
Historically, the Company has obtained the majority of its life expectancy reports from two life expectancy report providers and only used AVS Underwriting LLC (“AVS”) life expectancy reports for valuation purposes. Beginning in the quarter ended September 30, 2012, the Company began utilizing life expectancy reports from 21st Services, LLC (“21st Services”) for valuation purposes and began averaging or “blending,” the results of the two life expectancy reports to establish a composite mortality factor.
As of December 31, 2013, the Company received 226 updated life expectancy reports from 21st Services, of which 183 were used to calculate life expectancy extension. These life expectancies reported an average lengthening of life expectancies of 14.67% and based on this sample, for the year ended December 31, 2013, the Company increased the life expectancies furnished by 21st Services by 14.67% on the rest of its portfolio of life settlements prior to blending them with the life expectancy reports furnished by AVS.
Future changes in the life expectancies could have a material effect on the fair value of our investment in life settlements, which could have a material adverse effect on our business, financial condition and results of operations.
The Company historically used a 15%-17% range of discount rates to value its life insurance policies. In the third quarter of 2011 and in the immediate aftermath of becoming aware of the USAO investigation, the Company substantially increased the discount rates inputted into its fair value model as it believed that the USAO Investigation, along with certain unfavorable court decisions unrelated to the Company contributed to a contraction in the marketplace. Since that time, the Company has been re-evaluating its discount rates at the end of every reporting period in order to reflect the estimated discount rates that could reasonably be used in a market transaction involving the Company’s portfolio of life insurance policies. In doing so, the Company relies on management insight, evaluates the credit worthiness of the insurance carriers, engages third party consultants to corroborate its assessment, engages in discussions with other market participants and potential financing sources and extrapolates the discount rate underlying actual sales of policies.
As of December 31, 2013, the Company owned 612 policies with an aggregate investment in fair value of life settlements of $303.0 million. Of these 612 policies, 569 were previously premium financed and are valued using discount rates that range from 16.80% to 26.80%. The remaining 43 policies which are non-premium financed are valued using discount rates that range from 14.80% to 20.80%. As of December 31, 2013, the weighted average discount rate calculated based on death benefit used in valuing the policies in our life settlement portfolio was 19.14%.
Future changes in the discount rates we use to value life insurance policies could have a material effect on our yield on life settlement transactions, which could have a material adverse effect on our business, financial condition and results of our operations.
If all of the insured lives underlying the policies pledged by White Eagle as collateral under the Revolving Credit Facility live six months shorter or longer than the life expectancies used to calculate the estimated fair value of the note payable, the change in estimated fair value at December 31, 2013 would be as follows (dollars in thousands):
Future changes in the life expectancies could have a material effect on the fair value of our note payable, which could have a material adverse effect on our business, financial condition and results of operations.
At December 31, 2013, the fair value of the debt was $123.8 million and the outstanding principal was approximately $133.2 million. See Note 13, “Fair Value Measurements.”
Servicing Income-We received income from servicing life insurance policies controlled by a third party in 2012 and 2011. These services included verifying premiums are paid and correctly applied and updating files for medical history and ongoing premiums.
Prior to our initial public offering in 2011, we converted from a Florida limited liability company to a Florida corporation (the “Conversion”). Prior to the Conversion we were treated as a partnership for federal and state income tax purposes. As a partnership our taxable income and losses were attributed to our members, and accordingly, no provision or liability for income taxes was reflected in the accompanying consolidated financial statements for periods prior to the Conversion.
At December 31, 2013 and 2012, due to the large losses and the uncertainties that resulted from the USAO Investigation, SEC investigation, Non-Prosecution Agreement and class action lawsuits, we recorded a full valuation allowance against our net deferred tax asset of $2.6 million and $27.8 million, respectively, as it is more likely than not that the net deferred tax asset is not realizable. As a result of these increases in the valuation allowance, we recorded no income tax benefit for 2013 and 2012.
In February of 2013, the Company was notified by the Internal Revenue Service of its intention to examine the Company’s partnership return for the year ended December 31, 2010. Subsequently, the Company was notified that the IRS has elected not to pursue this examination and as a result the audit notification was revoked.
We have adopted ASC 718, Compensation-Stock Compensation. ASC 718 addresses accounting for share-based awards, including stock options and warrants, with compensation expense measured using fair value and recorded over the requisite service or performance period of the award. The fair value of equity instruments awarded upon or after the closing of our initial public offering will be determined based on a valuation using an option pricing model which takes into account various assumptions that are subjective. Key assumptions used in the valuation will include the expected term of the equity award taking into account both the contractual term of the award, the effects of expected exercise and post-vesting termination behavior, expected volatility, expected dividends and the risk-free interest rate for the expected term of the award.
Net income from continuing operations for the year ended December 31, 2013 was $51.8 million as compared to a net loss of $42.0 million for the year ended December 31, 2012, an improvement of $93.8 million. Total income from continuing operations was $89.1 million for the year ended December 31, 2013, an increase of $84.0 million over total income from continuing operations of $5.1 million during the same period in 2012. Total expenses from continuing operations were $37.2 million for the year ended December 31, 2013 compared to total expenses from continuing operations of $47.1 million incurred during the same period in 2012, a decrease of $9.9 million, or 21%.
Of these 612 policies owned as of December 31, 2013, 569 were previously premium financed and are valued using discount rates that range from 16.80% - 26.80%. The remaining 43 policies are valued using discount rates that range from 14.80% - 20.80%. See Note 13, “Fair Value Measurements,” to the accompanying consolidated financial statements.
Gain on maturities of life settlements with subrogation rights, net. In the third quarter of 2011, two individuals covered under policies which were subject to subrogation claims unexpectedly passed away. The Company collected the death benefit on one of these policies in the amount of $3.2 million net of subrogation expense during the third quarter of 2011. In the year ended December 31, 2012, the Company negotiated a settlement in respect of the larger policy and collected approximately $6.1 million, net of subrogation expenses, and reported a gain in accordance with ASC 450, Contingencies in its consolidated statement of operations for the year ended December 31, 2012 as all contingencies were resolved. There were no such gains for the year ended December 31, 2013. As a result of the Termination Agreement, the Company no longer holds life settlements with subrogation rights.
Interest expense. Interest expense increased to $13.7 million during the year ended December 31, 2013, compared to $1.3 million during the same period in 2012, an increase of $12.4 million, as the principal on the note payable increased to $133.2 million as of December 31, 2013. During the year ended December 31, 2012, we repaid all outstanding notes associated with our Cedar Lane financing facility. The estimated fair value of $123.8 million note payable at December 31, 2013 relates to the Revolving Credit Facility entered into on April 29, 2013 that is collateralized by the life insurance policies owned by White Eagle. Of the interest expense of $13.7 million, approximately $10.3 million represents loan origination costs incurred under the Revolving Credit Facility that were not capitalized as a result of electing the fair value option for valuing this debt and interest paid of $2.8 million. Interest expense also includes $4,000, $35,000 and $510,000 representing loan closing costs, amortization of note discount and interest paid, respectively, on the Bridge Facility entered into during the quarter ended March 31, 2013. We expect interest expense on the Revolving Credit Facility to increase in 2014 as we continue to borrow funds under this facility.
(Gain)/Loss on Loan Payoffs and Settlements, net. Gain on loan payoffs and settlements, net, was $65,000 for the year ended December 31, 2013 compared to a loss of $125,000 in 2012.
Legal expenses for 2013 were $11.7 million compared to $24.0 million for 2012. Of the legal expense, approximately $4.5 million is mainly associated with the USAO Investigation for 2013, compared to $14.3 million for the year ended December 31, 2012. Legal expense also includes approximately $2.3 million and $5.1 million associated with the class action litigation and derivative action for the years ended December 31, 2013 and 2012, respectively.
Approximately $749,000 was included in legal expenses for the year ended December 31, 2012, which represents a reserve established for the Insurance Coverage Declaratory Relief Complaint. Based on the class action settlement, this amount was reversed during the year ended December 31, 2013 and is offset against legal fees, see Note 15, “Commitments and Contingencies,” to the accompanying consolidated financial statements.
Agency Fee Income. Agency fee income was zero for the year ended December 31, 2012 compared to $6.5 million for 2011, a decrease of $6.5 million. Agency fee income was earned solely as a function of originating loans. We did not fund any loans during the year ended December 31, 2012, compared to the 55 loans funded during 2011. As a result of the voluntary termination of our premium finance business, we did not receive any income from agency fees in 2012 and will not in the future.
Gain on Forgiveness of Debt. Gain on forgiveness of debt was zero for the year ended December 31, 2012 compared to $5.0 million in 2011. These gains arise out of a settlement agreement with Acorn Capital in 2011. Zero loans out of 119 loans financed in the Acorn facility remained outstanding as of December 31, 2012. The gains were largely offset by a loss on loan payoffs, net related to Acorn loans of $4.1 million during 2011.
As of December 31, 2012, the Company owned 214 policies with an estimated fair value of $113.4 million compared to $90.9 million at December 31, 2011, an increase of $22.5 million or 25%. During the year ended December 31, 2012, the Company acquired 31 life insurance policies compared to 151 policies during the year ended December 31, 2011. Total aggregate death benefit of polices acquired was $166.0 million and $774.3 million for the years ended December 31, 2012 and December 31, 2011, respectively. Of the 31 policies acquired during 2012, 29 were as a result of certain of the Company’s borrowers defaulting on premium finance loans and
Of these 214 policies owned as of December 31, 2012, 171 were previously premium financed and were valued using discount rates that ranged from 16.80% - 33.80%. The remaining 43 policies were valued using discount rates that ranged from 14.80% - 21.30%. See Note 13, “Fair Value Measurements,” to the accompanying consolidated financial statements.
Servicing Fee Income. Servicing income was $1.2 million for the year ended December 31, 2012 compared to $1.8 million for 2011, a decrease of $631,000 or 35%. Servicing fee income was earned in providing asset servicing for third parties, which we began providing during the fourth quarter of 2010. This decrease was primarily due to a reduction in the number of policies serviced.
Amortization of Deferred Costs. Amortization of deferred costs was $1.9 million during the year ended December 31, 2012 as compared to $6.1 million for 2011, a decrease of $4.2 million, or 69%. Lender protection insurance related costs accounted for $1.5 million and $4.9 million of total amortization of deferred costs during the years ended December 31, 2012 and 2011, respectively. As described previously, the lender protection insurance program was terminated as of December 31, 2010 and loans with lender protection insurance remained outstanding as of December 31, 2012. Only $7,000 of lender protection insurance related costs remained to be amortized.
Selling, General and Administrative Expenses. SG&A expenses were $43.4 million for the year ended December 31, 2012 compared to $40.0 million for 2011. This was due primarily to an increase in legal expenses of $14.1 million, an increase in professional fees of $889,000 and an increase in D&O insurance expense of $1.6 million. These increases were offset by a decrease of $8.0 million associated with the Non-Prosecution Agreement, a decrease in personnel costs of $3.5 million and a decrease in other SG&A of $1.8 million.
Due to the USAO Investigation, SEC investigation, Non-Prosecution Agreement and the class action lawsuits and the effect that they and related matters have had on our business, the Company determined that it was more likely than not that the net deferred tax asset at December 31, 2012 and 2011 was not realizable and accordingly, established a 100 percent valuation allowance against its net deferred tax asset at December 31, 2012 and 2011. As a consequence, the Company had no income tax provision or benefit for the years ended December 31, 2012 and 2011.
Net income from our discontinued structured settlement operations for the year ended December 31, 2013 was $13.5 million as compared to a loss of $2.6 million for the year ended December 31, 2012, an improvement of $16.1 million. Total income from our discontinued structured settlement operations was $22.6 million for the year ended December 31, 2013 compared to $14.0 million in 2012, an increase of $8.6 million. This increase is mainly associated with an $11.3 million gain as a result of the disposal of the structured settlement operations. During the year ended December 31, 2013, our discontinued structured settlement operations sold 529 structured settlements for a gain of $9.6 million compared to 1,235 structured settlements sold for a gain of $11.5 million during the same period in 2012, a reduction of $1.9 million or 16%. Unrealized change in fair value of structured settlements receivable was $1.2 million for the year ended December 31, 2013 compared to $1.8 million in for the year ended December 31, 2012.
Total expenses from our discontinued structured settlement operations were $16.6 million for the year ended December 31, 2012 compared to $17.4 million incurred during the same period in 2011, a decrease of $747,000, or 4%. This reduction was mainly attributable to a $1.1 million decrease in advertising, $163,000 decrease in legal fees and a $477,000 decrease in other SG&A expenses. These reductions were offset by an increase in personnel costs of $608,000 and professional fees of $361,000.
The Company has expended considerable resources responding to and resolving the USAO Investigation with regard to the Company, as well as responding to the SEC Investigation and related litigation, advancing indemnification costs on behalf of current and former employees and in conducting an independent investigation of the facts and circumstances surrounding the USAO Investigation. As of December 31, 2013, the Company’s cumulative legal and related fees in respect of these matters were $34.7 million, including $4.5 million incurred during the year ended December 31, 2013. We believe we will continue to spend significant amounts on legal matters related to the SEC Investigation and the USAO Investigation, as well as for general litigation and judicial proceedings over the next year, and possibly beyond. In addition, under the class action and derivative litigation settlements, the Company has undertaken to advance legal fees and indemnify certain individuals covered under the director and officer liability insurance policies. The remaining obligation to advance and indemnify on behalf of these individuals, while currently unquantifiable, may be substantial and could have an adverse effect on the Company’s financial position and results of operations.
We expect to meet our liquidity needs for the next year primarily through our cash resources. While the liquidity risk associated with the policies that have been pledged as collateral under the Revolving Credit Facility has been mitigated, any available proceeds under the facility’s waterfall provisions will generally be directed to pay outstanding interest and principal on the loan unless the lenders determine otherwise. Accordingly, there can be no assurance as to when the proceeds from maturities of the policies pledged as collateral under the Revolving Credit Facility will be distributed to the Company. The Company must proactively manage its cash in order to effectively run its businesses, maintain the policies that have not been pledged under the Revolving Credit Facility and opportunistically grow its assets. The Company may in the future pledge and/or borrow against certain or all of the 155 policies that have not been pledged under the Revolving Credit Facility, the majority of which had historically been maintained by the LPIC Provider. It may also determine to sell all or a portion of these policies and, under certain circumstances, lapse certain of these policies as its portfolio management strategy and liquidity needs dictate. We may also seek to reduce our operating expenses in order to preserve the value of our existing portfolio of policies. The lapsing of policies, if any, would create losses as such assets would be written down to zero.
As of December 31, 2013, we had approximately $22.7 million of cash and cash equivalents, and restricted cash of $13.5 million. Restricted cash includes $12.5 million received from the Company’s D&O Carrier and $1.0 million that was contributed by the Company. Restricted cash in respect of the final settlement of the class action and derivative litigation and related matters was released from escrow and paid out in the first quarter of 2014.
General & Security. The Revolving Credit Facility provides for an asset-based revolving credit facility backed by White Eagle’s portfolio of life insurance policies with an initial aggregate lender commitment of up to $300.0 million, subject to borrowing base availability. White Eagle owns a portfolio of 457 life insurance policies with an aggregate death benefit of approximately $2.3 billion and an estimated fair value of approximately $254.5 million at December 31, 2013, which has been pledged as collateral under the Revolving Credit Facility. In addition, the Company’s equity interests in White Eagle have been pledged under the Revolving Credit Facility.
Borrowing Base. Borrowing availability under the Revolving Credit Facility is subject to a borrowing base, which at any time is equal to the lesser of (A) the sum of all of the following amounts that have been funded or are to be funded through the next distribution date (i) the initial advance and all additional advances to acquire additional pledged policies or that are not for ongoing maintenance advances, plus (ii) 100% of the sum of the ongoing maintenance costs, plus (iii) 100% of accrued and unpaid interest on borrowings (excluding the rate floor portion described below), plus (iv) 100% of any other fees and expenses funded and to be funded as approved by the required lenders, less (v) any required payments of principal and interest previously distributed and to be distributed through the next distribution date; (B) 75% of the valuation of the policies pledged as collateral as determined by the lenders; (C) 50% of the aggregate face amount of the policies pledged as collateral (excluding certain specified life insurance policies); and (D) the then applicable facility limit. As of December 31, 2013, the borrowing base was approximately $135.4 million and borrowings under the facility were $133.2 million.
Amortization & Distributions. Proceeds from the policies pledged as collateral under the Revolving Credit Facility will be distributed pursuant to a contractual waterfall governing priority of payments. Absent an event of default, after premium payments and fees to service providers, 100% of the remaining proceeds will be directed to pay outstanding interest and principal on the loan, unless the lenders determine otherwise. Generally, after payment of interest and principal, collections from policy proceeds are to be paid to White Eagle up to $76.1 million, then 50% of the remaining proceeds are to be directed to the lenders with the remainder paid to White Eagle and for any unpaid fees to service providers. With respect to approximately 25% of the face amount of policies pledged as collateral under the Revolving Credit Facility, White Eagle has agreed that if policy proceeds that are otherwise due are not paid by an insurance carrier, the foregoing distributions will be altered such that the lenders will receive any “catch-up” payments in respect of amounts that they would have received in the waterfall prior to distributions being made to White Eagle. During the continuance of events of default or unmatured events of default, the amounts from collections of policy proceeds that might otherwise be paid to White Eagle will instead be held in a designated account controlled by the lenders and may be applied to fund operating and third party expenses, interest and principal, “catch-up” payments or percentage payments that would go to the lenders as described above.
Use of Proceeds. Generally, ongoing advances may be made for paying premiums on the life insurance policies pledged as collateral, to pay debt service (other than a “rate floor” component equal to the greater of LIBOR (or the applicable base rate) and 1.5%), and to pay the fees of service providers. Subsequent advances in respect of newly pledged policies are at the discretion of the lenders and the use of proceeds from those advances are at the discretion of the lenders.
Remedies. The Revolving Credit Facility and ancillary transaction documents afford the lenders a high degree of discretion in their selection of and implementation of remedies in relation to any event of default, including a high degree of discretion in determining whether to foreclose upon and liquidate all or any pledged policies, the Company’s interests in White Eagle, and the manner of any such liquidation. White Eagle has limited ability to cure events of default through the sale of policies or the procurement of replacement financing.
The maturity date of the Notes is February 15, 2019. The Notes accrue interest at the rate of 8.50% per annum on the principal amount of the Notes, payable semi-annually in arrears on August 15 and February 15 of each year with the first interest payment on August 15, 2014.
Except as described below, the Notes are convertible into shares of common stock at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date, except that, prior to the earlier of the date on which the Company obtains the approval of its shareholders to issue shares of common stock upon conversion of the Notes in an amount that exceeds 19.99% of its outstanding common stock on the date the Notes are initially issued in accordance with the listing standards of the New York Stock Exchange, the date on which such shareholder approval is no longer required, or, August 15, 2018, holders may only convert their Notes upon the satisfaction of certain conditions.
The Notes may be converted into shares of common stock initially at a conversion rate of 147.9290 shares of common stock per $1,000 principal amount of Notes (equivalent to a conversion price of $6.76 per share of common stock), subject to adjustment; provided, however, unless and until the Company obtains the shareholder approval referenced above or such shareholder approval is no longer required under the listing standards of the NYSE, the number of shares of common stock received upon conversion will be subject to a “conversion share cap” (equivalent to the pro rata portion of such 19.99% limit represented by the Notes to be converted). Holders who are either affiliated with the Company’s directors or executive officers or are owners of 5% or more of the Company’s common stock will be subject to additional limitations on the number of shares of common stock that may be delivered to them with respect to a conversion of Notes they own prior to shareholder approval. In addition, unless and until such shareholder approval is obtained or is no longer required under the listing standards of the NYSE, the Company will, unless the Company elects otherwise, elect “combination settlement” with a specified dollar amount per $1,000 principal amount of Notes of at least $1,000 for all Notes submitted for exchange, which means the Company will be obligated to settle conversion obligation by paying up to the specified dollar amount with respect to such Notes in cash and delivering shares of common stock for any conversion value in excess of such specified dollar amount, subject to the conversion share cap. Any conversion value above the conversion share cap will be paid in cash.
The Company intends to seek shareholder approval at its 2014 Annual Shareholder Meeting to issue shares of common stock upon conversion in excess of the conversion share cap and other limitations imposed by Section 312 of the NYSE Listed Company Manual that require shareholder approval (i) in order for the Notes to be convertible into a number of shares of common stock that exceeds 1.0% of the number of shares of common stock or voting power outstanding before the issuance where those shares are issuable to a director, officer or “substantial security holder” of the Company or an affiliate of such person, and (ii) in order for the Notes to be convertible into a number of shares of Common Stock that exceeds 5% of the number of shares of Common Stock or voting power outstanding before the issuance where those shares are issuable to a substantial security holder.
The following table summarizes our cash flows, which includes both continuing and discontinued operations, from operating, investing and financing activities for the years ended December 31, 2013, 2012 and 2011 (in thousands):
Net cash used in operating activities for the year ended December 31, 2013 was $24.4 million. Our net income of $65.3 million was adjusted for; loan origination costs of $10.3 million which were incurred to obtain our revolving credit facility and expensed during 2013; loan financing costs of $2.0 million which represent interest expense associated with the Revolving Credit Facility, which amount is a non-cash item as it was withheld by the lender and added to the outstanding loan balance; loss on extinguishment of $4.0 million for deferred financing costs recognized because the Bridge Facility was repaid before the maturity date; change in fair value of life settlement gains of $88.7 million which is mainly attributable to the significant purchase of a portion of our portfolio during the second quarter of 2013; change in fair value of credit facility gains of $9.4 million which resulted from the Company adopting the fair value option for its Revolving Credit Facility; gain from business disposition of $11.3 million which resulted from the sale of the structured settlement operations; and, a net positive change in the components of operating assets and liabilities of $1.2 million. This $1.2 million change in operating assets and liabilities is partially attributable to a $12.8 million decrease in prepaid expenses due to collections of insurance recoveries from our D&O Carrier associated with the class action litigation and derivative settlement and a $13.5 million increase in restricted cash which holds the amount collected from the D&O Carrier.
Net cash used in investing activities for the year ended December 31, 2013 was $29.0 million and includes $12.1 million in proceeds received from sale of investment securities available for sale which was a result of the Company’s disposing of its available for sale investment portfolio, $12.0 million from maturity of life settlements that was associated with three deaths occurred during the year, $5.8 million from sale of investments in life settlements that were associated with the sale of eight policies during 2013, $11.4 million from business disposition which related to the sale of the structured settlement operations. These were offset by $65.1 million for premiums paid on investments in life settlements which resulted from an increase in the number of polices held and payments made on these policies to ensure they are on a quarterly payment schedule and $7.0 million for purchase of investment in life settlement through the Termination Agreement.
Net cash provided by financing activities for the year ended December 31, 2013 was $69.2 million and includes $41.4 million in proceeds from the bridge facility that was obtained in March 2013, and $78.3 million from our new credit facility that was obtained in April 2013. These were offset by repayment of the bridge facility of $45.0 million in April 2013 and payment of loan origination cost of $6.7 million associated with the Bridge Facility and Revolving Credit Facility.
(1) Collectability from policy maturities pledged under the Revolving Credit Facility will generally be used to pay down the Note payable. Please see Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Financing Arrangement Summary-Revolving Credit Facility-Amortization & Distributions.
(2) Represents cash settlement portion of the class action settlement and legal fee reimbursement for the derivative settlement. These amounts were paid in the first quarter of 2014.