The Company operates in two reportable business segments: life finance (formerly referred to as premium finance) and structured settlements. In the life finance business, the Company earns revenue/income from interest charged on loans, loan origination fees, agency fees from referring agents, servicing income, change in the fair value of life settlements the Company acquires and receipt of death benefits with respect to matured life insurance policies it owns. In the structured settlement business, the Company purchases structured settlements at a discounted rate and sells such assets to third parties.
We entered into a settlement agreement with Acorn Capital Group, or Acorn, as discussed below in “-Losses on Settlements and Loan Payoffs, Net”, whereby our borrowings under the Acorn credit facility were cancelled, resulting in a gain on forgiveness of debt. A gain on forgiveness of debt is recorded at the time at which we are legally released from our borrowing obligations. We do not expect to recognize any material revenue from the Acorn facility in 2012.
Historically, the Company has used discount rates of 15 - 17.5% in its fair value model for investments in life settlements. At the end of the third quarter of 2011, however, the Company increased its discount rates by 500 basis points for all policies that were previously premium financed and by 75 basis points for all policies that
As of December 31, 2011, the Company owned 190 policies with an aggregate investment in life settlements of $90.9 million. Of these 190 policies, 145 were previously premium financed and are valued using discount rates that range from 18.65% - 32.25%. The remaining 45 policies are valued using a discount rate of 16.65%. See Note 26, Subsequent Events, to the accompanying consolidated and combined financial statements.
Deferred costs include costs incurred in connection with acquiring and maintaining credit facilities and costs incurred in connection with securing lender protection insurance. These costs are amortized over the life of the
Upon the implementation of ASC 740, 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 net operating loss carryovers (“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.
Interest Income. Interest income was $18.3 million for the year ended December 31, 2010 compared to $20.3 million for the year ended December 31 2009, a decrease of $2 million or 10%. Interest income declined as the average balance of loans receivable, net decreased. The balance of loans receivable, net, decreased from $189.1 million to $90.5 million during the year ended December 31, 2010. There were no significant changes in interest rates. The weighted average per annum interest rate for premium finance loans outstanding as of December 31, 2010 and 2009 was 11.9% and 10.9%, respectively.
Unrealized Change in Fair Value of Life Settlements. Unrealized change in fair value of life settlements was $10.2 million for the year ended December 31, 2010 compared to $0 for the year ended December 31, 2009. During the period, we acquired life insurance policies that were relinquished to us upon default of loans secured by such policies. We also acquired life insurance policies directly from third parties. We initially record these investments at the transaction price, which is the fair value of the policy for those acquired upon relinquishment or the amount paid for policies acquired for cash. We recorded unrealized change in fair value gains of approximately $10.2 million for the year ended December 31, 2010 due primarily to the evaluation of the fair value of these policies at the end of the reporting period. In several instances there were increases in fair value due to declines in life expectancies of the insured.
Interest Income. Interest income was $553,000 for year ended December 31, 2011 compared to $334,000 for the year ended December 31, 2010, an increase of $219,000.
8.39% Fixed Rate Asset Backed Variable Funding Notes. We formed Imperial Settlements Funding (“ISF”) as a subsidiary of Washington Square Financial, LLC (“WSF”) to serve as a special purpose financing
entity to allow us to borrow against certain of our structured settlements and assignable annuities, which we refer to as receivables, to provide us liquidity. On September 24, 2010, we entered into an arrangement to provide us up to $50 million in financing. Under this arrangement, a subsidiary of Partner Re, Ltd., or the noteholder, became the initial holder of ISF 2010’s 8.39% Fixed Rate Asset Backed Variable Funding Notes issued under a master trust indenture and related indenture supplement, or the indenture, pursuant to which the noteholder has committed to advance up to $50 million upon the terms and conditions set forth in the indenture. The note is secured by the receivables that ISF 2010 acquires from Washington Square from time to time. The note is due and payable on or before January 1, 2057, but principal and interest must be repaid pursuant to a schedule of fixed payments from the receivables that secure the notes. The arrangement generally has a concentration limit of 15% for the providers of the receivables that secure the notes. Wilmington Trust is the collateral trustee.
As described above in “-Critical Accounting Policies-Gain on Maturities of Life Settlements with Subrogation Rights, Net,” the Company considers policies that it acquired as a result of borrower default as contingent assets and does not include those policies in the amount of life settlement policies on its consolidated and combined balance sheet. In the third quarter of 2011, two individuals covered under policies which were subject to subrogation claims passed away. The Company collected the death benefit on one of these policies in the amount of $3.5 million during the third quarter. The other was the result of an accidental death and the $10.0 million face value of the policy was larger than average. The Company had not collected the $10.0 million death benefit under this policy as of December 31, 2011. The Company accounted for the maturities of each of these polices as contingent gains in accordance with ASC 450, Contingencies and recognized the collection of the $3.5 million death benefit net of subrogation expenses of $312,000 in its consolidated and combined statement of operations during the third quarter of 2011. In accordance with ASC 450, the Company will recognize death benefits, net of subrogation expenses on the larger policy in the second quarter of 2012. The Company believes these contingent gains to be unpredictable because the lender protection insurer can discontinue paying the premiums necessary to keep policies subject to subrogation and salvage claims in force at any time and the amount of the lender protection insurer’s subrogation and salvage claim on any individual life insurance policy could equal the cash flow received by the Company with respect to any such policy. No expectations for similar gains in the future should be inferred from the events occurring in the third quarter of 2011.