The selected historical income statement data for the years ended December 31, 2011, 2010 and 2009 and balance sheet data as of December 31, 2011 and 2010 were derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
* We define Type 1 loans as loans that are collateralized by life insurance policies that have been in force less than two years.
** We define Type 2 loans as loans that are collateralized by life insurance policies that have been in force longer than two years.
We were founded in December 2006 as a Florida limited liability company and in connection with our initial public offering, in February 2011, Imperial Holdings, Inc. succeeded to the business of Imperial Holdings, LLC and its assets and liabilities.
In connection with the Non-Prosecution Agreement, which is described in “Legal Proceedings-Litigation-The USAO Investigation,” Imperial voluntarily terminated its premium finance business, which accounted for approximately 58.2% of its revenues for the year ended December 31, 2011. Accordingly, the periods covered in the results of operations below will likely not be comparable to future periods as the Company will no longer recognize any agency fees and, once the Company's remaining premium finance loans mature, the Company will no longer recognize revenue from interest income or origination fees. The only material revenue that the Company expects to recognize from the premium finance business in 2012 is from changes in fair value of life settlements acquired upon default and strategic sales of certain life insurance policies in its portfolio that were acquired upon default of premium finance loans. As a result, we expect our revenue in our Life Finance segment to be materially lower in 2012 than in 2011.
Additionally, the Company’s ability to generate new business in the life finance segment was limited in the fourth quarter of 2011 when the Company originated no premium finance loans and, in order to conserve capital, only purchased 7 policies through life settlement-related acquisitions. This trend has continued into 2012 with the Company only purchasing two policies through life settlement-related acquisitions during the first six months of the year. As a consequence, the Company’s portfolio of life insurance policies is smaller than previously projected, which may result in more volatility and adversely affect the portfolio’s performance.
In the structured settlements segment, during the quarter ended December 31, 2011, the Company did not finance any non-life contingent structured settlements using its dedicated facility for those receivables. However,
The Company has also expended considerable resources resolving the USAO Investigation, as well as defending itself in the SEC Investigation and related litigation, advancing indemnification costs on behalf of certain employees and in conducting an independent investigation of the facts and circumstances surrounding the USAO Investigation. As of December 31, 2011 and June 30, 2012 (unaudited), the Company’s legal and related fees in respect of these matters was $6.0 million and $16.2 million respectively. Moreover, the Company’s D&O carriers have disputed several of the claims and reserved their rights, and the Company’s primary D&O carrier filed a declaratory judgment action on June 13, 2012 seeking a judgment that the claims submitted by the Company are precluded under a prior and pending litigation exemption.
At the time of the Company’s initial public offering, the Company intended to hold the majority of the life insurance policies it acquired to maturity while strategically trading in and out of certain policies. In light of the USAO Investigation, the SEC Investigation, the related shareholder litigation and the related unbudgeted expenses incurred by the Company, the Company is re-examining its strategy and cash management objectives. We estimate that we will need to pay $24.1 million in premiums to keep our current portfolio of life insurance policies in force through 2012 and an additional $24.6 million to keep the portfolio in force through 2013. As of December 31, 2011, we had approximately $75.1 million of cash, cash equivalents, and marketable securities including $691,000 of restricted cash. As of June 30, 2012, we had approximately $51.2 million of cash and cash equivalents, and marketable securities including $1.0 million of restricted cash. Additionally, we have not yet experienced the mortalities of insureds or received the resulting death benefits from our life insurance policies (other than from policies with subrogation rights that are not reported on our balance sheet and that are considered contingent assets). We expect the lack of mortalities of insureds to continue at least through 2012.
We believe we have sufficient cash and cash equivalents to pay the premiums necessary to keep the life insurance policies that we own in force and our operating expenses through at least 2012, although we will need to proactively manage our cash in advance of any liquidity shortfall. Based on our current internal forecast, we do not anticipate a liquidity shortfall prior to the third quarter of 2013. However, if we do not begin to experience mortalities and collect the related death benefits in a timely manner prior to that time, we will likely need to seek additional capital to pay the premiums, by means of debt or equity financing or the sale of some of the policies that we own. We may also seek to reduce our operating expenses in order to preserve the value of our existing portfolio of policies, and/or, under certain scenarios, lapse or sell certain of our policies or some combination of the above. The lapsing of policies, if any, would create losses as the assets would written down to zero.
Our typical premium finance loan was approximately two years in duration and was collateralized by the underlying life insurance policy. The life insurance policies that served as collateral for our premium finance
The Company takes title to life insurance policies through two separate channels. First, we acquire life insurance policies when a borrower defaults on a premium finance loan originated by us, and we foreclose on the policy. Historically, a large portion of our borrowers defaulted on their loans and relinquished ownership of their life insurance policies to us. Our loans are secured by the underlying life insurance policy and, although we generally required a personal guarantee from the insured, are usually non-recourse to the borrower. If the borrower defaults on the obligation to repay the loan, we generally have no recourse against the borrower except for the life insurance policy that collateralizes the loan. In instances where we retained policies that served as collateral for a loan that was insured, in order to retain the policy on our balance sheet, we would typically be required to pay our lender protection insurer in order for the insurer to release its subrogation rights to the policy.
Prior to and for a period after our initial public offering, the Company’s focus in our life finance segment was on our premium finance business. Following our initial public offering, however, changing market conditions made the acquisition of life insurance policies on the secondary and tertiary markets more attractive. Since 2008, the life settlement market has been distressed as a result of the general economic downturn. With the continued decrease of liquidity in the market place, re-selling policies on the tertiary market became significantly more difficult for investors. While some institutional investors have returned to the market, trading these policies remains challenging for most investors. For institutional investors with the financial capacity to hold these policies to maturity, life insurance policies remain an attractive, high-yield investment whose returns are non-correlated to the stock and bond markets. The Company suspended originating new premium finance loans and, in an effort to conserve capital, significantly reduced purchases of life insurance policies during the end of the third quarter of 2011.
Structured settlements refer to a contract between a plaintiff and defendant whereby the plaintiff agrees to settle a lawsuit (usually a personal injury, product liability or medical malpractice claim) in exchange for periodic payments over time. A defendant’s payment obligation with respect to a structured settlement is usually assumed by a casualty insurance company. This payment obligation is then satisfied by the casualty insurer through the purchase of an annuity from a highly rated life insurance company, which provides a high credit quality stream of payments to the plaintiff.
Recipients of structured settlements are permitted to sell their deferred payment streams to a structured settlement purchaser pursuant to state statutes that require certain disclosures, notice to the obligors and state
court approval. Through such sales, we purchase a certain number of fixed (life-contingent or non life-contingent), scheduled future settlement payments on a discounted basis in exchange for a single lump sum payment, thereby serving the liquidity needs of structured settlement holders.
Interest income also includes interest earned on structured settlement receivables. Until we sell our structured settlement receivables, the structured settlements are held on our balance sheet. Purchase discounts are accreted into interest income using the effective-interest method. As a result of the voluntary termination of our premium finance business, we will cease earning interest income from premium finance loans once our outstanding premium finance loans mature.
Origination fees as a percentage of the principal balance of loans originated during the periods below are as follows:
Unrealized change in fair value of Life Settlements and Structured Settlement Receivables
structured settlement receivables at fair value. Any change in fair value upon re-measurement of these investments is recorded through our unrealized change in fair value of life settlements and structured settlement receivables.
Interest expense is interest accrued monthly on credit facility borrowings that are used to fund premium finance loans and promissory notes that were used to fund operations and corporate expenses. Interest is generally compounded monthly and payable as the collateralized loans mature.
We specifically evaluate all loans for impairment, on a monthly basis, based on the fair value of the underlying life insurance policies as collectability is primarily collateral dependent. The fair value of the life insurance policy is determined using our valuation model, which is a Level 3 fair value measurement. For loans with lender protection insurance, the insured value is also considered when determining the fair value of the life insurance policy. The insured value is not directly correlated to any portion of the loan, such as principal, accrued interest, accreted origination income, or other fees which may be charged or incurred on these types of loans. The insured value is the amount we would receive in the event that we filed a lender protection insurance claim. The lender protection insurer limits the insured value to an amount equal to or less than its determination of the value of the life insurance policy underlying our premium finance loan based on its own models and assumptions, which may be equal to or less than the carrying value of the loan receivable. For all loans, the amount of loan impairment, if any, is calculated as the difference in the fair value of the life insurance policy and the carrying value of the loan receivable. Loan impairments are charged to the provision for losses on loans receivable in our consolidated and combined statement of operations.
For loans that matured and were not repaid at maturity, the borrower typically relinquishes ownership of the policy to us in exchange for our release of the debt (or we enforce our security interests in the beneficial interests in the trust that owns the policy). For loans that have lender protection insurance, we make a claim against the lender protection insurance policy and, subject to policy terms and conditions, the insurer has the right to direct control or take beneficial ownership of the policy upon payment of our claim.
The $7.3 million impact on net income is due to 28 policies on which we decided to continue to fund the premiums after ABRG elected not to continue to fund the premiums. With respect to the associated loans, we received a gain on forgiveness of debt with no offsetting loss on loan payoffs and settlements, net.
The preparation of the financial statements requires us to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our judgments, estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions and conditions. We evaluate our judgments, estimates and assumptions on a regular basis and make changes accordingly. We believe that the judgments, estimates and assumptions involved in the accounting for the loan impairment valuation, allowance for doubtful accounts, income taxes, valuation of structured settlements and the valuation of investments in life settlements have the greatest potential impact on our financial statements and
In order to originate premium finance transactions our lenders required that we procure lender protection insurance. This lender protection insurance mitigates our exposure to losses which may be caused by declines in the fair value of the underlying policies. At the end of each reporting period, for loans that have lender protection insurance, a loan impairment valuation is established if the carrying value of the loan receivable exceeds the amount of coverage. The lender protection insurance program was terminated as of December 31, 2010, and all loans originated after December 31, 2010, do not carry lender protection insurance coverage. Thus, for all loans originated in 2011 and beyond, a loan impairment valuation is established if the carrying value of a loan receivable exceeds the fair value of the underlying collateral. The provision for losses on loans receivable has increased during the year ended December 31, 2011 as a result of the decline in the estimated fair value of the collateral due to the higher discount rate applied in the fair value model. See Notes 10, 15 and 16 to the accompanying consolidated and combined financial statements.
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 the fair value of assets, liabilities, and commitments where we have elected the fair value option are recorded in our consolidated and combined statement of operations. We have made this election for our structured settlement assets because it is 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 initially record investments in life settlements at the transaction price. For policies acquired upon relinquishment by our borrowers, we determine 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.
which is based on the review of historical and current medical records. The medical underwriting assesses the characteristics and health risks of the insured in order to quantify the health into a mortality rating that represents their life expectancy.
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 (i.e. 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 range of possible outcomes for the given life and assign a probability that each of the possible outcomes might occur. 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. An internal rate of return calculation is then used to determine the price 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.
were not. The Company viewed these adjustments as appropriate in the immediate aftermath of the execution of the search warrant at the Company’s headquarters in connection with the USAO Investigation, the associated negative press, as well as adverse court decisions unrelated to the Company and a generally perceived softening in the market for life insurance policies generally and for premium financed policies specifically.
At December 31, 2011, the Company considered the discount rate based on information that was then available and further adjusted the discount rates, resulting in a weighted average discount rate of 24.31%. In addition to a continuing softening in the market perceived by the Company and corroborated by third party consultants engaged by the Company, the Company viewed a further adjustment to its discount rates as necessary because of the perceived risk premium that an investor would require to transact in a policy associated with the Company. Since the onset of the credit crisis in 2007, capital has generally been limited and credit has generally been costly for the purchase of life insurance policies in the secondary and tertiary markets. At December 31, 2011, in light of the USAO Investigation and publicly available information about the Company and the investigation at that time, when given the choice to invest in a policy that was associated with the Company’s premium finance business and a similar policy without such an association, all else being equal, the Company believes that an investor would have generally opted to invest in the policy that was not associated with the Company’s premium finance business. In fact, the Company did not attempt to sell any life insurance policies in the fourth quarter of 2011. Since that time, however, market participants have transacted with the Company and the Company believes that investors will require less of a risk premium to transact in policies associated with the Company since our entering into the Non-Prosecution Agreement.
Unrealized Change in Fair Value of Life Settlements-The Company acquires certain life insurance policies through purchases in the secondary and tertiary markets and others as a result of certain of the
related loan using the effective interest method and are classified as amortization of deferred costs in the accompanying consolidated and combined statement of operations.
At December 31, 2011, due to the large losses generated in 2011 and the uncertainties that resulted from the USAO Investigation, we recorded a full valuation allowance against our net deferred tax asset of $11.1 million as it is more likely than not that the net deferred tax asset is not realizable. As a result of this increase in the valuation allowance, we recorded no income tax benefit for the current year.
We have adopted ASC 718, Compensation-Stock Compensation. ASC 718 addresses accounting for share-based awards, including stock options, with compensation expense measured using fair value and recorded over
Every credit facility entered into by subsidiaries of the Company between December 2007 and December 2010 to finance the premium finance lending business required lender protection insurance for each loan originated under such credit facility. Generally, when the Company exercises its right to foreclose on collateral the Company’s lender protection insurer has the right to direct control or take beneficial ownership of the life insurance policy, subject to the terms and conditions of the lender protection insurance policy, including notice and timing requirements. Otherwise, the lender protection insurer maintains its salvage collection and subrogation rights. The lender protection insurer’s salvage collection and subrogation rights generally provide a remedy by which the insurer can seek to recover the amount of the lender protection claim paid plus premiums paid by it, expenses and interest thereon.
Net loss for the year ended December 31, 2011 was $39.2 million as compared to a net loss of $15.7 million for the year ended December 31, 2010, a decrease of $23.5 million. Total income was $44.2 million for the year ended December 31, 2011, a 43% decrease over total income of $76.9 million during the year ended in 2010. Total expenses were $83.4 million for the period compared to total expenses of $92.6 million incurred during the year ended December 31, 2010, a reduction of $9.2 million, or 10%.
In our life finance segment which includes our premium finance business, segment operating loss increased by $6.2 million to $7.5 million, primarily driven by decreases in agency fee income, origination income and interest income totaling $30.6 million. Life finance segment expenses were $38.9 million during the year ended December 31, 2011 compared to $68.6 million during the year ended December 31, 2010, a decline of $29.7 million, or 43%. These declines were driven primarily by a $16.2 million reduction in interest expense a decline in amortization of deferred costs of $18.4 million, and a decline of $1.1 million in loss on loan payoffs and settlements, net offset by an increase of $3.1 million in provision for losses on loan receivables and an increase of $2.9 million in selling, general and administrative expenses.
For the period 2011, the unallocated expenses for the year ended December 31, 2011 were $22.5 million as compared to $10.9 million for the year ended December 31, 2010 an increase of $ 11.6 million. This increase was primarily due to the USAO Investigation whereby the company paid a penalty of $8.0 million coupled with legal fees of $ 6.0 million offset by a decrease in interest expense of $3.5 million.
Upon the implementation of ASC 740 in 2011, we recorded a one-time deferred tax liability of approximately $4.6 million for the federal and state tax effects of cumulative differences between financial and tax reporting which existed at the time of the Conversion. Pursuant to ASC 740 these deferred taxes were recorded in income tax expense, In addition, following the Conversion and prior to the initial public offering, one of our founding members entered into a reorganization that allowed us to assume the corporate shareholder’s tax attributes. These tax attributes include approximately $11.2 million of NOLs. Accordingly, in the second quarter we recorded a one-time deferred tax asset of approximately $4.3 million related to these tax attributes and this amount was recorded as an income tax benefit.
Following the conversion and prior to the initial public offering, one of the founding members entered into a reorganization that allowed the Company to assume the corporate shareholder’s tax attributes. These tax attributes include approximately $11.2 million of NOLs. During the second quarter of 2011, the Company completed an evaluation of this transaction and determined that the Company was entitled to assume the NOLs of this founding member. Accordingly, in the second quarter of 2011, the Company has recorded a one-time deferred tax asset of approximately $4.3 million related to these tax attributes.
Due to the USAO Investigation and the effect that it 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, 2011 was not realizable and accordingly, established a 100 percent valuation allowance against it net deferred tax asset. As a consequence, the Company had no income tax provision or benefit for the year ended December 31, 2011.
Net loss for the year ended December 31, 2010 was $15.7 million as compared to $8.6 million for the year ended December 31, 2009. Our life finance segment operating income decreased $11.5 million, primarily caused by decreased agency fee income and origination fee income. These declines were directly related to a reduction in the number of otherwise viable premium finance transactions that we could complete as we funded only 97 loans during the year ended December 31, 2010, a 50% decrease compared to the 194 funded during the year ended 2009. This reduction in the number of loans originated was caused by increased financing costs and stricter coverage limitations provided by our lender protection insurer. As a result, we experienced a decrease in agency fee income of $16.0 million, or 61%, and a decrease in origination fee income of $9.9 million, or 33%. These decreases were partially offset by an increase in the unrealized change in fair value of investments of $10.2 million, a decrease in interest expense of $5.6 million and a decrease in SG&A expense of $753,000.
Our results of operations for the year ended December 31, 2010 have been impacted by the execution of a settlement claims agreement, which resulted in a one-time transaction charge of $6.4 million (see below). On September 8, 2010, the lender protection insurance related to our credit facility with Ableco Finance, LLC (“Ableco”) was terminated and settled pursuant to a claims settlement agreement, resulting in our receipt of an insurance claims settlement of approximately $96.9 million. We used approximately $64.0 million of the settlement proceeds to pay off the credit facility with Ableco in full and the remainder was used to pay off almost all of the amounts borrowed under the grid promissory note in favor of CTL Holdings, LLC. As a result of this settlement transaction, our subsidiary, Imperial PFC Financing, LLC, a special purpose entity, agreed to reimburse the lender protection insurer for certain loss payments and related expenses by remitting to the lender protection insurer all amounts received in the future in connection with the related premium finance loans issued through the Ableco credit facility and the life insurance policies collateralizing those loans until such time as the lender protection insurer has been reimbursed in full in respect of its loss payments and related expenses.
Unrealized Change in Fair Value of Life Settlements. Unrealized change in fair value of life settlements was a gain of approximately $570,000 for the year ended December 31, 2011 compared to $10.2 million for the year ended December 31, 2010. The change in fair value is included in unrealized change in fair value of life settlements in the accompanying consolidated and combined statement of operations. At December 31, 2011, the Company considered the discount rate based on information that was then available and further adjusted discount rates, resulting in a weighted average discount rate of 24.31%.
Servicing Fee Income. Servicing income was $1.8 million for the year ended December 31, 2011 compared to $403,000 for the year ended December 31, 2010. Servicing fee income is earned in providing asset servicing for third parties, which we began providing during the fourth quarter of 2010.
Amortization of Deferred Costs. Amortization of deferred costs was $6.1 million during the year ended December 31, 2011 as compared to $24.5 million for the year ended December 31, 2010, a decrease of $18.4 million, or 75%. Lender protection insurance related costs accounted for $4.9 million and $20.7 million of total amortization of deferred costs during the years ended December 31, 2011 and 2010, respectively. As described previously, the lender protection insurance program was terminated as of December 31, 2010 and 91 loans with lender protection insurance remained outstanding as of December 31, 2011. Only $1.1 million of lender protection insurance related costs remain to be amortized.
Agency Fee Income. Agency fee income was $10.1 million for the year ended December 31, 2010 compared to $26.1 million for the same period in 2009, a decrease of $16.0 million, or 61%. Agency fee income is earned solely as a function of originating loans. We funded only 97 loans during the year ended December 31, 2010, a 50% decrease compared to the 194 loans funded during the same period of 2009. This reduction in the number of loans originated was caused by increased financing costs and stricter coverage limitations provided by our lender protection insurer.
Origination Fee Income. Origination fee income was $19.9 million for the year ended December 31, 2010 compared to $29.9 million for December 31, 2009, a decrease of $10 million, or 33%. Origination fee income decreased due to a decline in new loans originated in 2010 as well as a decline in the average balance of loans receivable, net, as noted above. Origination fees as a percentage of the principal balance of the loans originated was 41.5% during the year ended December 31, 2010 compared to 44.7% for the year ended December 31, 2009.
Provision for Losses on Loans Receivable. Provision for losses on loans receivable was $4.5 million for the year ended December 31, 2010 compared to $9.8 million for the year ended December 31, 2009, a decrease of $5.3 million, or 54%. The decrease in the provision for the year ended December 31, 2010 as compared to the year ended December 31, 2009 was due to less loan impairments recorded on existing loans in order to adjust the carrying value of the loan receivable to the fair value of the underlying policy and a decrease in loan impairment related to new loans originated, as there were fewer new loans originated for the year ended December 31, 2010 as compared to the year ended December 31, 2009.
Loss on Loan Payoffs and Settlements, Net. Loss on loan payoffs and settlements, net, was $5.0 million for the year ended December 31, 2010 compared to $12.1 million for the year ended December 31, 2009, a decrease of $7.1 million, or 59%. The decline in loss on loan payoffs and settlements, net, was due to the reduction of loans written off in the first half of 2010 as a result of the Acorn settlement. In the year ended December 31, 2010, we wrote off only 22 loans compared to 87 loans written off in the year ended December 31, 2009. Excluding the impact of the Acorn settlements, we had a gain on loan payoffs and settlements, net, of $500,000 for the year ended December 31, 2010 and a loss on loan payoffs and settlements, net, of $1.9 million for the year ended December 31, 2009.
Amortization of Deferred Costs. Amortization of deferred costs was $24.5 million for the year ended December 31, 2010 as compared to $18.3 million for the year ended December 31, 2009, an increase of
$6.2 million, or 34%. In connection with the full payoff of the Ableco credit facility, we accelerated the expensing of the remaining $5.4 million of associated deferred lender protection insurance costs. We also accelerated the expensing of approximately $980,000 of deferred costs related to fees incurred in connection with the creation of the Ableco facility. In total, lender protection insurance related costs accounted for $20.7 million and $16.0 million of total amortization of deferred costs for the year ended December 31, 2010 and 2009, respectively.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were $10.3 million for the year ended December 31, 2010 compared to $13.7 million for the year ended December 31, 2009, a decrease of $3.4 million, or 25%. Bad debt decreased by $1.2 million, legal fees decreased by $538,000, life expectancy evaluation expenses decreased by $498,000 and other operating expenses decreased by $1.2 million.
An analysis of the changes in the allowance for doubtful accounts for past due agency fees during the year ended December 31, 2010 and 2009 is as follows (dollars in thousands):
The allowance for doubtful accounts for past due agency fees as of December 31, 2010 was $205,000 as compared to $120,000 as of December 31, 2009. Throughout 2010, we continued to evaluate the collectability of agency fee receivables and recorded approximately $85,000 in bad debt expense during the year ended December 31, 2010. We made improvements to our collection process and in our selection of agents with whom we work and our allowance and bad debt expense have returned to what we consider normal levels in 2010.
Our results of operations for our structured settlement business segment for the periods indicated are as follows (in thousands):
Selling, General and Administrative Expenses. Selling, general and administrative expenses $22.0 million for the year ended December 31, 2011 compared to $13.1 million for the year ended December 31, 2010, an increase $8.9 million or 68%. This increase was due in part to an increase in personnel expenses of 5.8 million due to due to hiring additional employees throughout 2011 and stock-based compensation and employee bonuses in connection with our IPO in 2011. In addition, we recorded additional indirect variable expenses associated with the increase in the number of structured settlements originated during the period, including an increase in
Interest Income. Interest income was $334,000 for the year ended December 31, 2010 compared to $1.2 million for the year ended December 31, 2009, a decrease of $877,000, or 72%. The decrease was due to a lower average balance of structured settlements held on our balance sheet during the year ended December 31, 2010, as we were able to sell our structured settlements at a faster rate in 2010 than in 2009.
Unrealized change in fair value of Structured Settlement Receivables. Unrealized change in fair value of investments and structured receivables was $2.5 million for the year ended December 31, 2010 compared to $0 for the year ended December 31, 2009. 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. For the six months ended December 31, 2010, changes in the fair value of structured settlements resulted in income of $2.5 million.
We anticipate that our liquidity needs for years 2012 and 2013 will be in excess of the amounts previously budgeted by the Company as a result of the USAO Investigation, the SEC Investigation and related shareholder litigation. In particular, we believe we will continue to spend significant amounts on legal matters related to the SEC investigation, shareholder litigation and other potential claims over the next year, and possibly beyond. These costs in the aggregate are likely to exceed the limits of our insurance coverage for such matters, which coverage is currently being contested by our primary D&O carrier. We expect to meet our liquidity needs for the next year primarily through cash and other short term cash on hand and, to a lesser extent, through cash flows from sales and financings of structured settlements. We intend to reduce our purchases of life settlements in an effort to conserve capital and may also seek additional debt or equity financing and/or opportunistically sell certain life insurance policies in our portfolio from time to time. In addition, in connection with the Non-Prosecution Agreement, we have ceased originating new premium finance loans. We expect debt maturities to be covered by cash receipts from LPIC claims as discussed further below, and we do not currently have any material planned capital expenditures.
We had the following debt outstanding as of December 31, 2011, which includes both the credit facilities used in our life finance segment as well as the promissory notes which are general corporate debt (in thousands):
We expect the lender protection insurance, subject to its terms and conditions, to ensure liquidity at the time of loan maturity and, therefore, we do not anticipate significant, if any, additional cash outflows at the time of debt maturities in excess of the amounts to be received by the loan payoffs or lender protection insurance claims.
Cedar Lane Capital LLC Facility. On March 12, 2010, Imperial PFC Financing II, LLC, a special purpose entity and wholly-owned subsidiary, entered into an amended and restated financing agreement with Cedar Lane Capital, LLC, to enable Imperial PFC Financing II, LLC to purchase premium finance loans originated by us or participation interests therein. The financing agreement provides for a $15.0 million multi-draw term loan commitment. The term loan commitment is for a 1-year term and the borrowings bear an annual interest rate of 14.0%, 15.0% or 16.0%, depending on the tranche of loans as designated by Cedar Lane Capital, LLC and are compounded monthly. All of the assets of Imperial PFC Financing II, LLC serve as collateral under this credit facility. In addition, the obligations of Imperial PFC Financing II, LLC have been guaranteed by Imperial Premium Finance, LLC; however, except for certain expenses, the obligations are generally non-recourse to us except to the extent of Imperial Premium Finance, LLC’s equity interest in Imperial PFC Financing II, LLC. Our lender protection insurer ceased providing us with lender protection insurance under this credit facility on December 31, 2010. As a result, we ceased borrowing under the Cedar Lane facility after December 31, 2010.
The Life-contingent Structured Settlement Facility. On April 12, 2011, the Company entered into a financing arrangement for the acquisition of life-contingent structured settlement receivables. The Company’s direct wholly-owned subsidiary, WSF, entered into a purchase agreement to sell up to $40.0 million of structured settlement receivables to its wholly owned special purpose vehicle, Contingent Settlements I, LLC (“CSI”). Through a trust agreement, CSI agreed to sell the life-contingent structured settlement receivables sold to it under the purchase agreement with WSF into a statutory trust that would issue a Class A Note and a residual interest certificate to Beacon Annuity Fund (“Beacon”) and CSI, respectively. Beacon agreed, subject to certain customary funding conditions, to advance up to $40.0 million under its Class A Note, which would entitle Beacon to, among other things, the first 17 years of payments under the life-contingent structured settlement receivables, from the date such receivables are sold into the trust. Beacon committed to purchase the receivables and make advances under the Class A Note for one year absent the occurrence of certain events of default. In the fourth quarter of 2011, the Company ceased financing life-contingent structured settlement receivables under this facility and, on December 30, 2011, entered into an Omnibus Termination Agreement with Beacon and certain other parties to terminate the facility.
The following table summarizes our cash flows from operating, investing and financing activities for the years ended December 31, 2011, and 2010 (in thousands):
Net cash used in operating activities for the year ended December 31, 2011 was $46.4 million, an increase of $18.6 million from $27.8 million of cash used in operation activities in 2010. The increase was primarily due to a decrease of a $3.1 million in the collection of agency fees, an increase of $3.6 million in payroll and related costs and an $11.9 million increase in legal fees due to the USAO Investigation and other expenses during the period.
Net cash used in operating activities for the year ended December 31, 2010 was $27.8 million, an increase of $15.2 million from $12.6 million of cash used in operation activities in 2009. The increase was primarily due to a $16.0 million decrease in agency fee income and a decrease of $1.0 million in the change in agency fees receivable due to lower collections of receivables during the period.
Net cash used in investing activities for the year ended December 31, 2011 was $92.5 million, an increase of $195.5 million from $103.0 million of cash provided in investing activities for the year ended December 31, 2010. The increase was primarily due to a $128.0 million increase in purchases of investment securities
available-for-sale, a $77.1 million decrease in cash proceeds from loan payoffs and lender protection insurance claims received in advance, a $49.2 million increase in purchases of life insurance policies, and a $15.6 million increase in premiums paid on investments in life settlements, offset by a $69.5 million increase in proceeds from the sale and repayment of investment securities available-for-sale and a decrease of $6.0 million in originations of loans receivable during the period.
Net cash provided by investing activities for the year ended December 31, 2010 was $103.0 million, an increase of $132.3 million from $29.3 million of cash used in investing activities for the year ended December 31, 2009. The increase was primarily due to a $92.7 million increase in proceeds from loan payoffs and a $39.4 million decrease in cash used to purchase notes receivables.
Net cash provided by financing activities in 2009 was $50.2 million, a decrease of $60.9 million from $111.1 million of cash provided by financing activities in 2008. The decrease was primarily due to a decrease of $73.1 million in borrowing from credit facilities and affiliates, net of repayments, partially offset by a decrease of $5.4 million in payment of financing fees and an increase of $4.7 million in member contributions.
(1) Credit facilities include principal outstanding related to facilities that were used to fund premium finance loans.