S-1/A 1 w7883110sv1za.htm S-1/A sv1za
As filed with the Securities and Exchange Commission on February 7, 2011
Registration No. 333-168785
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Amendment No. 10
to
Form S-1
 
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
 
 
 
IMPERIAL HOLDINGS, INC.
(to be converted from Imperial Holdings, LLC)
(Exact name of registrant as specified in its charter)
 
         
Florida   6199   77-0666377
(State or other jurisdiction of
Incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification No.)
 
701 Park of Commerce Boulevard — Suite 301
Boca Raton, Florida 33487
(561) 995-4200
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 
 
 
 
Jonathan Neuman
President and Chief Operating Officer
701 Park of Commerce Boulevard — Suite 301
Boca Raton, Florida 33487
(561) 995-4200
(Address, including zip code, and telephone number, including area code, of agent for service)
 
 
 
 
Copies to:
 
     
Michael B. Kirwan
John J. Wolfel, Jr.
Foley & Lardner LLP
One Independent Drive, Suite 1300
Jacksonville, Florida 32202
(904) 359-2000
  J. Brett Pritchard
Locke Lord Bissell & Liddell LLP
111 South Wacker Drive
Chicago, Illinois 60606
(312) 443-0700
 
 
 
 
Approximate date of commencement of proposed sale to the public:  As soon as practicable after the Registration Statement becomes effective.
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  o
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o Accelerated filer o Non-accelerated filer þ Smaller reporting company o
(Do not check if a smaller reporting company)
 
Calculation of Registration Fee
 
                                         
            Proposed
    Proposed
     
            Maximum
    Maximum
     
Title of Each Class of
    Amount to be
    Offering Price
    Aggregate
    Amount of
Securities to be Registered     Registered(1)     Per Share(2)     Offering Price(2)     Registration Fee(3)
Common Stock, $0.01 par value per share
      19,166,667 shares       $ 12.00       $ 230,000,005       $ 16,399  
                                         
(1) Includes amount attributable to shares of common stock issuable upon the exercise of the underwriters’ over-allotment option.
(2) Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(a) under the Securities Act of 1933, as amended.
(3) The registration fee was previously paid on August 11, 2010.
 
 
 
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
 


 

The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
 
SUBJECT TO COMPLETION, DATED FEBRUARY 7, 2011
 
PRELIMINARY PROSPECTUS
 
16,666,667 Shares
 
IMPERIAL HOLDINGS, INC.
 
Common Stock
 
 
 
 
We are a specialty finance company with a focus on providing premium financing for individual life insurance policies and purchasing structured settlements.
 
This is our initial public offering. We are offering 16,666,667 shares of our common stock in this firm commitment underwritten public offering. We anticipate that the initial public offering price of our common stock will be between $10.00 and $12.00 per share.
 
Prior to this offering, there has been no public market for our common stock, and our common stock is not currently listed on any national exchange or market system. We have been approved to list our common stock on the New York Stock Exchange, subject to official notice of issuance, under the symbol “IFT.”
 
Investing in our common stock involves risks. See “Risk Factors” beginning on page 13 of this prospectus to read about the risks you should consider before buying our common stock.
 
 
 
 
                 
    Per Share   Total
 
Price to public
  $                $             
Discounts and commissions to underwriters*
  $       $    
Net proceeds (before expenses) to us
  $       $  
 
 
* No discounts will be paid to underwriters with respect to shares purchased by participants in the directed share program. See “Underwriting” on page 138 of this prospectus for a description of the underwriters’ compensation.
 
We have granted the underwriters the right to purchase up to 2,500,000 additional shares of our common stock at the public offering price, less the underwriting discounts, solely to cover over-allotments, if any. The underwriters can exercise this right at any time within 30 days after the date of our underwriting agreement with them.
 
Neither the Securities and Exchange Commission nor any state securities commission or other regulatory body has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
The underwriters expect to deliver the shares of our common stock to purchasers against payment on or about          , 2011.
 
 
FBR Capital Markets  
 
JMP Securities
 
 
Wunderlich Securities
 
The date of this prospectus is          , 2011.


 

 
You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with information that is different from that contained in this prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. We and the underwriters are offering to sell and seeking offers to buy these securities only in jurisdictions where offers and sales are permitted. You should assume that the information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of common stock. Our business, financial condition, results of operations and prospects may have changed since that date.
 
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CERTAIN IMPORTANT INFORMATION
 
For your convenience we have included below definitions of terms used in this prospectus.
 
In this prospectus references to:
 
  •  “borrower” refer to the entity or individual executing the note in a premium finance transaction. In nearly all instances, the borrower is an irrevocable life insurance trust established for estate planning purposes by the insured which is both the legal owner and beneficiary of a life insurance policy serving as collateral for a premium finance loan.
 
  •  “carrying value of the loan” refer to the loan principal balance, accrued interest and accreted origination fees excluding any impairment valuation adjustment.
 
  •  “Imperial,” “Company,” “we,” “us,” or “our” refer to Imperial Holdings, LLC and its consolidated subsidiaries prior to the corporate conversion as described in this prospectus and to Imperial Holdings, Inc. and its consolidated subsidiaries after the corporate conversion, unless the context suggests otherwise. Unless otherwise stated, in this prospectus all references to us, our shares and our shareholders assume that the corporate conversion has already occurred. Our conversion from a limited liability company to a corporation is described under “Corporate Conversion.” The corporate conversion will be completed prior to the closing of this offering.
 
  •  “financing cost” refer to the aggregate cost attributable to credit facility interest, other lender charges and, where applicable, obtaining lender protection insurance on our premium finance loans.
 
  •  “net carrying value of the loan” refer to the loan principal balance, accrued interest and accreted origination fees, net of any impairment valuation adjustment.
 
  •  “principal balance of the loan” refer to the principal amount loaned by us in a premium finance transaction without including origination fees or interest.
 
  •  “premium finance” refer to a financial transaction in which a policyholder obtains a loan, predominately through an irrevocable life insurance trust established by the insured, to pay life insurance premiums, with the loan being collateralized by the underlying policy.
 
  •  “structured settlement” refer to a transaction in which the recipient of a deferred payment stream (usually obtained by a plaintiff in a personal injury, product liability or medical malpractice lawsuit in exchange for an agreement to settle the lawsuit) sells a certain number of fixed, scheduled future settlement payments on a discounted basis in exchange for a single lump sum payment.
 
Unless otherwise stated, in this prospectus all references to the number of shares of our common stock outstanding before and after this offering assume:
 
  •  an initial public offering price that is the midpoint of the price range on the cover of this prospectus;
 
  •  no exercise of the underwriters’ over-allotment option;
 
  •  the consummation of the corporate conversion, pursuant to which all outstanding common and preferred limited liability company units of Imperial Holdings, LLC (including all accrued and unpaid dividends thereon) and all principal and accrued and unpaid interest outstanding under our promissory note in favor of IMPEX Enterprises, Ltd. will be converted into 2,300,273 shares of our common stock;
 
  •  the issuance of 27,000 shares of common stock to two employees pursuant to the terms of each of their respective phantom stock agreements; and
 
  •  the conversion, immediately prior to the closing of this offering, of a $30.0 million debenture into 1,272,727 shares of our common stock as described under “Corporate Conversion.”


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PROSPECTUS SUMMARY
 
This summary highlights information contained elsewhere in this prospectus. Before making a decision to purchase our common stock, you should read the entire prospectus carefully, including the “Risk Factors” and “Forward-Looking Statements” sections and our consolidated financial statements and the notes to those financial statements. Except as otherwise noted, all information in this prospectus assumes that all of the shares of common stock offered hereby will be sold and that the underwriters will not exercise their over-allotment option.
 
Prior to the closing of the offering described in this prospectus, we will complete a reorganization in which Imperial Holdings, Inc. will succeed to the business of Imperial Holdings, LLC and the members of Imperial Holdings, LLC will become shareholders of Imperial Holdings, Inc. In this prospectus, we refer to this reorganization as the corporate conversion. Unless otherwise stated, in this prospectus all references to us, our shares and our shareholders assume that the corporate conversion has already occurred.
 
Overview
 
We are a specialty finance company founded in December 2006 with a focus on providing premium financing for individual life insurance policies issued by insurance companies generally rated “A+” or better by Standard & Poor’s or “A” or better by A.M. Best Company and purchasing structured settlements backed by annuities issued by insurance companies or their affiliates generally rated “A1” or better by Moody’s Investors Services or “A−” or better by Standard & Poor’s.
 
In our premium finance business we earn revenue from interest charged on loans, loan origination fees and fees from referring agents. We have historically relied on debt financing to operate this business. Since 2007, the United States’ capital markets have experienced extensive distress and dislocation due to the global economic downturn and credit crisis. Lenders in the premium finance market generally exited the market or increased their lending rates and required more assurances such as additional collateral support and third-party guarantees. As a result, our financing cost for a premium finance transaction increased significantly. For the nine months ended September 30, 2010, our financing cost was approximately 31.1% per annum of the principal balance of the loans compared to 14.5% per annum for the twelve months ended December 31, 2007. With the net proceeds of this offering we intend to fund our future premium finance transactions with equity financing instead of debt financing. Over time we expect that this will significantly reduce our cost of financing and help to generate higher returns for our shareholders.
 
In our structured settlement business we purchase structured settlements at a discounted rate and sell such assets to, or finance such assets with, third parties. For the nine months ended September 30, 2010 and the year ended December 31, 2009, we purchased structured settlements at weighted average discount rates of 19.3% and 16.3%, respectively. We plan to use a portion of the net proceeds of this offering to purchase structured settlements and retain such amounts on our balance sheet.
 
During the nine months ended September 30, 2010 and the year ended December 31, 2009, we had revenue of $60.4 million and $96.6 million, respectively, and a net loss of $16.4 million and $8.6 million, respectively. During the nine months ended September 30, 2010 and the year ended December 31, 2009, 88.8% and 95.9%, respectively, of our revenue was generated from our premium finance segment and 11.2% and 4.1%, respectively, of our revenue was generated from our structured settlement segment. As of September 30, 2010, we had total assets of $181.0 million.
 
Our Services and Products
 
Premium Finance Transactions
 
A premium finance transaction is a transaction in which a life insurance policyholder obtains a loan to pay insurance premiums for a fixed period of time, which allows a policyholder to maintain coverage without having to make premium payments during the term of the loan. Since our inception, we have originated premium finance transactions collateralized by life insurance policies with an aggregate death benefit in excess of $4.0 billion.
 
As of September 30, 2010, the average principal balance of the loans we have originated since inception is approximately $213,000. The life insurance policies that serve as collateral for our premium finance loans


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are predominately universal life policies that have an average death benefit of approximately $4 million and insure persons over age 65.
 
Our typical premium finance loan is approximately two years in duration and is collateralized by the underlying life insurance policy. We generate revenue from our premium finance business in the form of agency fees from referring agents, interest income and origination fees as follows:
 
  •  Agency Fees — We charge the referring agent an agency fee for services related to premium finance loans. Agency fees as a percentage of the principal balance of the loans originated during the nine months ended September 30, 2010 and year ended December 31, 2009 were 49.9% and 50.6%, respectively. These agency fees are charged when the loan is funded and collected on average within 47 days thereafter.
 
  •  Interest Income — Substantially all of the interest rates we charge on our premium finance loans are floating rates that are calculated at the one-month LIBOR rate plus an applicable margin. In addition, our premium finance loans have a floor interest rate and are capped at 16.0% per annum. For loans with floating rates, each month the interest rate is recalculated to equal one-month LIBOR plus the applicable margin, and then, if necessary, adjusted so as to remain at or above the stated floor rate and not to exceed the capped rate of 16.0% per annum. The weighted average per annum interest rate for premium finance loans outstanding as of September 30, 2010 and December 31, 2009 was 11.3% and 10.9%, respectively.
 
  •  Origination Fees — On each premium finance loan we charge a loan origination fee that is added to the loan and is due upon the date of maturity or upon repayment of the loan. Origination fees as a percentage of the principal balance of the loans originated during the nine months ended September 30, 2010 and the year ended December 31, 2009 were 41.7% and 44.7%, respectively.
 
The policyholder is not required to make any payment on the loan until maturity. At the end of the loan term, the policyholder either repays the loan in full (including all interest and origination fees) or defaults under the loan. In the event of default, subject to policy terms and conditions, the borrower typically relinquishes to us control of the policy serving as collateral for the loan, after which we may either seek to sell the policy, hold it for investment, or, if the loan is insured, we are paid a claim equal to the insured value of the policy, which may be equal to or less than the amount we are owed under the loan. As of September 30, 2010, 94.6% of our outstanding loans have collateral whose value is insured. With the net proceeds from this offering, we expect to have the option to retain for investment a number of the policies relinquished to us upon a default. When we choose to retain the policy for investment, we are responsible for all future premium payments needed to keep the policy in effect. There is a great deal of variation among the life insurance policies that collateralize our loans, especially with regard to premiums which range from fixed level premiums to premiums that typically increase over time. We have developed proprietary systems and processes that, among other things, determine the minimum monthly premium outlay required to maintain each life insurance policy in force. These required minimum premium payments typically increase over time as the insured ages. The specific premium payment schedule varies by insurance carrier and product type. These systems and processes enhance our liquidity since we pay only the minimum premium at the latest date to keep the policies in force.
 
To help protect against fraud and to seek profitable transactions, we perform extensive underwriting before entering into a transaction. We believe that our underwriting guidelines have been effective in mitigating fraud-related risks.
 
Structured Settlements
 
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 pursuant to state statutes that require certain disclosures, notice to the obligors and state court approval. Through such sales, we


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purchase a certain number of fixed, 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.
 
We use national television marketing to generate in-bound telephone and internet inquiries. As of September 30, 2010, we had a database of over 30,000 structured settlement leads. We believe our database provides a strong pipeline of purchasing opportunities. As our database has grown and we have completed more transactions, the average marketing cost per structured settlement transaction has decreased.
 
The following table shows the number of structured settlement transactions, the face value of undiscounted payments purchased, the weighted average purchase discount rate, the number of transactions sold, the weighted average discount rate at which the assets were sold and the average marketing cost per transaction (dollars in thousands):
 
                                         
        Nine Months
        Ended
    Year Ended December 31,   September 30,
    2007   2008   2009   2009   2010
 
Number of transactions
    10       276       396       275       385  
Face value of undiscounted future payments purchased
  $ 701     $ 18,295     $ 28,877     $ 20,460     $ 33,713  
Weighted average purchase discount rate
    11.0 %     12.0 %     16.3 %     16.1 %     19.3 %
Number of transactions sold
          226       439       96       291  
Weighted average sale discount rate
          10.8 %     11.5 %     11.1 %     9.1 %
Average marketing cost per transaction
  $ 205.6     $ 19.2     $ 11.3     $ 12.7     $ 9.3  
 
We believe that we have various funding alternatives for the purchase of structured settlements. In addition to available cash, on September 24, 2010 we entered into an arrangement to provide us up to $50 million to finance the purchase of structured settlements. We also have other parties to whom we have sold structured settlement assets in the past, and to whom we believe we can sell assets in the future. In the future, we will continue to evaluate alternative financing arrangements, which could include selling pools of structured settlements to third parties and securing a warehouse line of credit that would allow us to aggregate structured settlements. The majority of our revenue in this line of business currently is earned in cash from the gain on sale of structured settlements that we originate.
 
Dislocations in the Capital Markets
 
Since 2007, the United States’ capital markets have experienced extensive distress and dislocation due to the global economic downturn and credit crisis. As a result of the dislocation in the capital markets, our borrowing costs increased dramatically in our premium finance business and we were unable to access traditional sources of capital to finance the acquisition and sale of structured settlements. At certain points, we were unable to obtain any debt financing. With the net proceeds of this offering, we intend to operate our premium finance business without relying on debt financing.
 
Premium Finance.  Market conditions have forced us, and we believe many of our competitors, to pay higher interest rates on borrowed capital since the beginning of 2008. However, because we were a relatively new company with few maturing debt obligations, the credit crisis presented an opportunity for us to gain market share and create brand recognition while we believe many of our competitors experienced financial distress.
 
Every credit facility we have entered into since December 2007 for our premium finance business has required us to obtain lender protection insurance for each loan originated under such credit facility. We have obtained lender protection insurance from Lexington Insurance Company (“Lexington”), whom we also refer to as our lender protection insurer, a subsidiary of American International Group, Inc. (“AIG”). This coverage provides insurance on the value of the life insurance policy serving as collateral underlying the loan. This insured value is not directly correlated to any portion of the loan. 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. The insured value is determined at the time the premium finance loan is made and is not subject to change or adjustment during the term of the loan.


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Subject to the terms and conditions of the lender protection insurance policy, after a payment default by the borrower, our lender protection insurer has the right to direct control or take beneficial ownership of the life insurance policy serving as collateral underlying the loan and we are paid a claim equal to the insured value of such life insurance policy. For loans that matured during the nine months ended September 30, 2010 and during the year ended December 31, 2009, 97% and 85%, respectively, of such loans were not repaid in cash from the borrower at maturity and 92.5% and 48.3% of the defaulting loans during the nine months ended September 30, 2010 and during the year ended December 31, 2009, had lender protection insurance. In instances where the loan was not repaid in cash from the borrower, we typically have received the right to take control of the policy from the borrower. In order to make a claim under the lender protection insurance, the lender protection insurance policy required that we must demonstrate to Lexington that we have received the right to the life insurance policy. We have typically been able to do so within 30 days of loan maturity on all loans with lender protection insurance that have matured to date.
 
Since 2008, the cost of our lender protection insurance has ranged from 8.5% to 11% per annum of the principal balance of the loans. While lender protection insurance provides us with liquidity, it prevents us from realizing the appreciation, if any, of the underlying policy when a borrower relinquishes ownership of the policy upon default. As of January 1, 2011, we ceased originating premium finance loans with lender protection insurance. As a result, we currently have ceased originating new premium finance loans under our credit facilities.
 
We have experienced two adverse consequences from our high financing costs: reduced profitability and decreased loan originations. While the use of lender protection insurance allowed us to access debt financing to support our premium finance business, the cost of lender protection insurance substantially reduced our profitability. Additionally, coverage limitations related to our use of lender protection insurance reduced the number of otherwise viable premium finance transactions that we could originate. We believe that the net proceeds from this offering will allow us to increase the profitability and number of new premium finance loans by eliminating the cost of debt financing and lender protection insurance and the limitations on loan originations that our lender protection insurance imposed.
 
The following table shows our total financing cost per annum for funding our premium finance loans as a percentage of the principal balance of the loans originated during the following periods:
 
                                         
    Year Ended December 31,     Nine Months Ended September 30,  
    2007     2008     2009     2009     2010  
 
Lender protection insurance cost
          8.5 %     10.9 %     11.0 %     10.4 %
Interest cost and other lender funding charges under credit facilities
    14.5 %     13.7 %     18.2 %     18.5 %     20.7 %
                                         
Total financing cost
    14.5 %     22.2 %     29.1 %     29.5 %     31.1 %
 
Structured Settlements.  During 2008 and 2009, market conditions required us to offer discount rates as high as 12% in order to complete sales of structured settlements. During this period, we continued to invest heavily in our structured settlement infrastructure. This investment is benefiting us today because we have found that some structured settlement recipients sell portions of their future payment streams in multiple transactions. As our business matures and grows, our structured settlement business has been, and should continue to be, bolstered by additional transactions with existing customers and additional purchases of structured settlements with new customers. Purchases from past customers increase overall transaction volume and also decrease average transaction costs.
 
Competitive Strengths
 
We believe our competitive strengths are:
 
  •  Complementary mix of business lines.  Unlike many of our competitors who are focused on either structured settlements or premium financings, we operate in both lines of business. This diversification provides us with a complementary mix of business lines as the revenues generated by our structured settlement business are generally short-term cash receipts in comparison to the revenue from our premium financing business which is collected over time.


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  •  Scalable and cost-effective infrastructure.  We have created an efficient, cost-effective, scalable infrastructure that complements our businesses. We have developed proprietary systems and models that allow for cost-effective review of both premium finance and structured settlement transactions that utilize our underwriting standards and guidelines. Our systems allow us to efficiently process transactions while maintaining our underwriting standards. As a result of our investments in our infrastructure, we have developed a structured settlement business model that we believe has sufficient scalability to permit our structured settlement business to continue to grow efficiently.
 
  •  Barriers to entry.  We believe that there are significant barriers to entry into the premium financing and structured settlement businesses. With respect to premium finance, obtaining the requisite state licenses and developing a network of referring agents is time intensive and expensive. With respect to structured settlements, the various state regulations require special knowledge as well as a network of attorneys experienced in obtaining court approval of these transactions. Our management and key personnel from our premium finance and structured settlement businesses are experienced in these specialized businesses and, in many cases, have more than half a decade of experience working together at Imperial and at prior employers. Our management team has significant experience operating in this highly regulated industry.
 
  •  Strength and financial commitment of management team with proven track record.  Our senior management team is experienced in the premium finance and structured settlement industries. In the mid-1990s, several members of our management team worked together at Singer Asset Finance, where they were early entrants in structured settlement asset classes. After Singer was acquired in 1997 by Enhance Financial Services Group Inc., several members of our senior management team joined Peach Holdings, Inc. At Peach Holdings, they held senior positions, including Chief Operating Officer, Head of Life Finance and Head of Structured Settlements. In addition, Antony Mitchell, our chief executive officer, and Jonathan Neuman, our president and chief operating officer, each have over $7 million of their own capital invested in our company. This financial commitment aligns the interests of our principal executive officers with those of our shareholders.
 
Strategy
 
Guided by our experienced management team, with the net proceeds from this offering, we intend to pursue the following strategies in order to increase our revenues and generate net profits:
 
  •  Reduce or eliminate the use of debt financing in our premium finance business.  The capital generated by this offering will enable us to fund new premium finance loans and provide us with the option to retain investments in life insurance policies that we acquire upon relinquishment by our borrowers without the need for additional debt financing. In contrast to our existing leveraged business model that has made us reliant on third-party financing that is often unavailable or expensive, we intend to use equity capital from this offering to engage in premium finance transactions at profit margins significantly greater than what we have historically experienced. In the future, we expect to consider debt financing for our premium finance transactions and structured settlement purchases only if such financing is available on attractive terms.
 
  •  Eliminate the use of lender protection insurance.  With the proceeds of this offering, we will no longer require debt financing and lender protection insurance for new premium finance business. As a result, we expect to experience considerable cost savings, and in addition expect to be able to originate more premium finance loans because we will not be subject to coverage limitations imposed by our lender protection insurer that have reduced the number of loans that we can originate.
 
  •  Continue to develop structured settlement database.  We intend to increase our marketing budget and grow our sales staff in order to increase the number of leads in our structured settlement database and to originate more structured settlement transactions. As our database of structured settlements grows, we expect that our sales staff will be able to increase our transaction volume due in part to repeat transactions from our existing customers.
 
Recent Developments
 
Based on information currently available, we estimate that our income for the fourth quarter and year ended December 31, 2010 will be in the range of $14.5 million to $16.5 million, and $74.9 million to


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$76.9 million, respectively. We estimate net income (loss) for the fourth quarter and year ended December 31, 2010 will be in the range of $(100,000) to $700,000, and $(15.7) million to $(16.5) million, respectively. In our premium finance segment, we funded only 11 new premium finance loans during the fourth quarter of 2010 due to stricter coverage limitations imposed by our lender protection insurer. For our premium finance segment, we estimate income and segment operating income for the fourth quarter will be in the range of $12.4 million to $13.5 million, and $5.1 million to $5.7 million, respectively. In our structured settlement segment, we originated 180 new structured settlements during the fourth quarter of 2010, a 30% increase over the number of structured settlements originated in the third quarter of 2010. For our structured settlement segment, we estimate income and segment operating income (loss) for the fourth quarter will be in the range of $2.6 million to $3.0 million, and $(700,000) to $(1.1) million, respectively. The estimates above represent the most current information available to management and our normal financial closing and financial statement preparation process is in its preliminary stages. As a result, our actual financial results could be different and those differences could be material. The audit of the fiscal year 2010 consolidated financial statements by our independent registered public accounting firm has just commenced. As such, the estimates above are subject to change, including, without limitation, year-end adjustments.
 
As of January 1, 2011, we have ceased originating new premium finance loans. Once we receive the net proceeds from this offering, we will resume originating premium finance loans.
 
Our Organization and Corporate Conversion
 
Imperial Holdings, LLC was organized on December 15, 2006. Our principal executive offices are located at 701 Park of Commerce Boulevard, Suite 301, Boca Raton, Florida 33487 and our telephone number is (561) 995-4200. Our website address is www.imprl.com. The information on or accessible through our website is not part of this prospectus.
 
In connection with this offering, on February 3, 2011, Imperial Holdings, LLC converted from a Florida limited liability company to a Florida corporation. In connection with the corporate conversion, each class of limited liability company interest (including all accrued and unpaid dividends thereon) of Imperial Holdings, LLC and all principal and accrued and unpaid interest outstanding under our promissory note in favor of IMPEX Enterprises, Ltd. will be converted into shares of common stock of Imperial Holdings, Inc. Immediately prior to the closing of this offering, a $30.0 million debenture will be converted into shares of our common stock. See “Corporate Conversion” on page 35 for further information regarding the corporate conversion.
 
The principal subsidiaries that comprise our corporate structure, giving effect to the corporate conversion, are as follows:
 
(FLOW CHART)
 
  •  Imperial Premium Finance, LLC is a licensed insurance premium financer that originates and services our premium finance transactions.
 
  •  Imperial Life and Annuity Services, LLC is a licensed insurance agency that receives agency fees from referring life insurance agents in connection with our premium finance transactions.
 
  •  Imperial Life Settlements, LLC is a licensed life/viatical settlement provider.
 
  •  Imperial Finance & Trading, LLC employs all of our staff and provides services to each of our other operating subsidiaries.
 
  •  Washington Square Financial, LLC originates and services our structured settlement transactions.


6


 

The Offering
 
Shares of common stock offered by us 16,666,667 shares.
 
Over-allotment shares of common stock offered by us
2,500,000 shares.
 
Shares of common stock to be outstanding after the offering
20,266,667 shares.
 
Use of proceeds
We estimate that our net proceeds from this offering will be approximately $168.1 million, after deducting the estimated underwriting discounts and commissions and our estimated offering expenses, and, if the underwriters exercise their over-allotment in-full, we estimate that our net proceeds will be approximately $194.0 million. We intend to use approximately $130.0 million of the net proceeds to support our premium finance transactions, up to $20.0 million of the net proceeds to support our structured settlement activities and any remaining proceeds for general corporate purposes. See “Use of Proceeds.”
 
Dividend policy
We do not expect to pay any cash dividends on our common stock for the foreseeable future. We currently intend to retain any future earnings to finance our operations and growth. Any future determination to pay cash dividends on our common stock will be at the discretion of our board of directors and will be dependent on our earnings, financial condition, operating results, capital requirements, any contractual, regulatory and other restrictions on the payment of dividends by us or by our subsidiaries to us, and other factors that our board of directors deems relevant.
 
Exchange listing
We have been approved to list our common stock on the New York Stock Exchange, subject to official notice of issuance, under the symbol “IFT.”
 
The number of shares of our common stock outstanding after this offering:
 
  •  reflects the consummation of the corporate conversion, pursuant to which all outstanding common and preferred limited liability company units (including all accrued and unpaid dividends thereon) and all principal and accrued and unpaid interest outstanding under our promissory note in favor of IMPEX Enterprises, Ltd. will be converted into 2,300,273 shares of our common stock;
 
  •  reflects the conversion, immediately prior to the closing of this offering, of a $30.0 million debenture into 1,272,727 shares of our common stock as described under “Corporate Conversion;”
 
  •  reflects the issuance of 27,000 shares of common stock to two of our employees pursuant to the terms of each of their respective phantom stock agreements;
 
  •  excludes up to 2,500,000 shares of common stock that may be issued pursuant to the underwriters’ over-allotment option;
 
  •  excludes 4,053,333 shares of common stock issuable upon the exercise of warrants that will be issued to our existing shareholders prior to the closing of this offering and 500,000 shares of common stock issuable upon the exercise of warrants that will be issued to our existing stockholders in connection with the closing of the underwriters’ over-allotment option as described in “Description of Capital Stock — Warrants”; and
 
  •  excludes 1,200,000 additional shares of common stock available for future issuance under our 2010 Omnibus Incentive Plan (the “Omnibus Plan”).


7


 

Summary Historical and Unaudited
Pro Forma Consolidated and Combined Financial and Operating Data
 
The following tables set forth summary historical and unaudited pro forma consolidated and combined financial and operating data of Imperial Holdings, LLC (to be converted into Imperial Holdings, Inc. prior to the closing of this offering) on or as of the dates and for the periods indicated. The summary unaudited pro forma financial data for the year ended December 31, 2009 and the nine-month period ended September 30, 2010 give pro forma effect to the corporate conversion and conversion of promissory notes as if they had occurred on the first day of the periods presented. The summary unaudited pro forma financial and operating data set forth below are presented for information purposes only, should not be considered indicative of actual results of operations that would have been achieved had the corporate conversion been consummated on the dates indicated, and do not purport to be indicative of balance sheet data or income statement data as of any future date or future period. The summary historical and unaudited pro forma consolidated financial and operating data presented below should be read together with the other information contained in this prospectus, including “Selected Historical and Unaudited Pro Forma Consolidated and Combined Financial and Operating Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated and combined financial statements, including notes to those consolidated and combined financial statements appearing elsewhere in this prospectus.
 
We have derived the summary historical financial data as of December 31, 2009, 2008 and 2007, from the historical audited consolidated and combined financial statements of Imperial Holdings, LLC included elsewhere in this prospectus. The summary historical financial data for the nine-month periods ended September 30, 2010 and 2009 were derived from the unaudited consolidated and combined financial statements of Imperial Holdings, LLC included elsewhere in this prospectus. The historical results for Imperial Holdings, LLC for any prior period are not necessarily indicative of the results to be expected in any future period.
 


8


 

                                                         
    Historical     Pro Forma  
                      Nine
 
                Year
    Months
 
          Nine Months Ended
    Ended
    Ended
 
    Years Ended December 31,     September 30,     Dec. 31,     September 30,  
    2007     2008     2009     2009     2010     2009     2010  
                      (Unaudited)     (Unaudited)  
    (In thousands, except share data)  
 
Income
                                                       
Agency fee income
  $ 24,515     $ 48,004     $ 26,114     $ 20,216     $ 9,099     $ 26,114     $ 9,099  
Interest income
    4,888       11,914       21,483       15,843       15,795       21,483       15,795  
Origination fee income
    526       9,399       29,853       21,865       16,728       29,853       16,728  
Gain on sale of structured settlements
          443       2,684       499       4,848       2,684       4,848  
Gain on forgiveness of debt
                16,410       14,886       6,968       16,410       6,968  
Gain on sale of life settlements
                            1,954             1,954  
Change in fair value of life settlements and structured settlement receivables
                            4,805             4,805  
Other income
    2       47       71       53       195       71       195  
                                                         
Total income
    29,931       69,807       96,615       73,362       60,392       96,615       60,392  
                                                         
Expenses
                                                       
Interest expense(3)
    1,343       12,752       33,755       24,710       24,244       30,479 (1)     21,787 (1)
Provision for losses on loans receivable
    2,332       10,768       9,830       6,705       3,514       9,830       3,514  
Loss (gain) on loan payoffs and settlements, net
    (225 )     2,738       12,058       11,279       4,320       12,058       4,320  
Amortization of deferred costs
    126       7,569       18,339       13,101       22,601       18,339       22,601  
Selling, general and administrative expenses(3)
    24,335       41,566       31,269       22,997       22,118       31,269       22,118  
Provision for income taxes
                                  (2)     (2)
                                                         
Total expenses
    27,911       75,393       105,251       78,792       76,797       101,975       74,340  
                                                         
Net income (loss)
  $ 2,020     $ (5,586 )   $ (8,636 )   $ (5,430 )   $ (16,405 )   $ (5,360 )   $ (13,948 )
                                                         
Earnings per Share
                                                       
Basic and diluted
                                          $ (1.49 )   $ (3.87 )
                                                         
Weighted Average Common Shares Outstanding
                                                       
Basic and diluted
                                            3,600,000       3,600,000  
                                                         
 
 
(1) Reflects a reduction of interest expense of $3.3 million for the year ended December 31, 2009 and $2.5 million for the nine months ended September 30, 2010, due to the conversion of our promissory note in favor of IMPEX Enterprises, Ltd. into shares of our common stock, which will occur prior to the closing of this offering, and the conversion of our promissory note in favor of Branch Office of Skarbonka Sp. z o.o into a $30.0 million debenture, and the conversion of that $30.0 million debenture into shares of our common stock, which will occur immediately prior to the closing of this offering.
 
(2) The results of the Company being treated for the pro forma presentation as a “C” corporation resulted in no impact to the consolidated and combined balance sheet or statements of operations for the pro forma periods presented. The primary reasons for this are that the losses produce no current benefit and any net operating losses generated and other deferred tax assets (net of deferred tax liabilities) would be fully reserved due to historical operating losses. The Company, therefore, has not recorded any pro forma tax provision.
 
(3) Includes amounts for related parties. Refer to our consolidated and combined financial statements for detail.
 

9


 

                                 
    As of
       
    December 31, 2009     As of September 30, 2010  
                      Pro Forma As
 
    Actual     Actual     Pro Forma     Adjusted(3)  
          (Unaudited)        
    (In thousands, except share data)  
 
Assets:
                               
Cash and cash equivalents
  $ 15,891     $ 3,685     $ 8,685 (1)   $ 178,753 (3)
Restricted cash
          643       643       643  
Certificate of deposit — restricted
    670       877       877       877  
Agency fees receivable, net of allowance for doubtful accounts
    2,165       736       736       736  
Deferred costs, net
    26,323       11,455       11,455       9,532  
Interest receivable, net
    21,034       17,175       17,175       17,175  
Loans receivable, net
    189,111       121,564       121,564       121,564  
Structured settlements receivables, net
    152       10,554       10,554       10,554  
Investment in life settlements, at estimated fair value
    4,306       8,846       8,846       8,846  
Investment in life settlement fund
    542       1,270       1,270       1,270  
Prepaid expenses and other assets
    3,526       4,163       4,163       4,163  
                                 
Total assets
  $ 263,720     $ 180,968     $ 185,968     $ 354,113  
                                 
Liabilities:
                               
Accounts payable and accrued expenses(4)
  $ 3,170     $ 4,210     $ 4,210     $ 4,210  
Payable for purchase of structured settlements
          7,094       7,094       7,094  
Lender protection insurance claim received in advance
            60,645       60,645       60,645  
Interest payable(4)
    12,627       16,172       12,811 (2)     12,811  
Notes payable(4)
    231,064       82,393       62,539 (2)     62,539  
                                 
Total liabilities
  $ 246,861     $ 170,514     $ 147,299     $ 147,299  
Member units — preferred (500,000 authorized in the aggregate)
                               
Member units — Series A preferred (90,796 issued and outstanding, actual; 0 issued and outstanding, pro forma and pro forma as adjusted)
    4,035       4,035       (1)      
Member units — Series B preferred (50,000 issued and outstanding, actual; 0 issued and outstanding, pro forma and pro forma as adjusted)
    5,000       5,000       (1)      
Member units — Series C preferred (70,000 issued and outstanding, actual; 0 issued and outstanding, pro forma and pro forma as adjusted)
          7,000       (1)      
Member units — Series D preferred (7,000 issued and outstanding, actual; 0 issued and outstanding, pro forma and pro forma as adjusted)
          700       (1)      
Member units — Series E preferred (73,000 issued and outstanding, actual; 0 issued and outstanding, pro forma and pro forma as adjusted)
            7,300       (1)      
Subscription receivable
          (5,000 )     (1)      
Member units — common (500,000 authorized; 450,000 issued and outstanding, actual; 0 issued and outstanding, pro forma and pro forma as adjusted)
    19,924       19,924       (1)      
Common stock
                36 (1)(2)     203 (3)
Paid-in capital
                67,138 (1)(2)     235,116 (3)
Retained earnings (accumulated deficit)
    (12,100 )     (28,505 )     (28,505 )     (28,505 )
                                 
Total members’/stockholders’ equity
    16,859       10,454       38,669       206,814  
                                 
Total liabilities and members’/stockholders’ equity
  $ 263,720     $ 180,968     $ 185,968       354,113  
                                 
 
 
(1) Reflects the conversion of all common and preferred limited liability company units of Imperial Holdings, LLC into shares of our common stock. Also reflects the cash received in October, 2010 of $5.0 million related to a subscription receivable for the September 2010 sale of 50,000 Series E preferred units, which will be converted into shares of our common stock as a result of the corporate conversion. Does not reflect the sale of 110,000 Series F preferred units effective December 31, 2010, which were issued in exchange for a promissory note, and therefore have no effect on stockholders’ equity.
 
(2) Reflects the issuance and conversion of a $30.0 million debenture into shares of our common stock immediately prior to the closing of this offering. Also reflects the conversion of all principal and accrued interest outstanding under our promissory note in favor of IMPEX Enterprises, Ltd. into shares of common stock of Imperial Holdings, Inc. as a result of the corporate conversion.
 
(3) Reflects our sale of 16,666,667 shares of common stock at an initial public offering price of $11.00 per share, which is the midpoint of the price range on the cover of this prospectus, after the deduction of the underwriting discounts and commissions and the estimated offering expenses payable by us.
 
(4) Includes amounts payable to related parties. Refer to our consolidated and combined financial statements for detail.

10


 

Premium Finance Segment — Selected Operating Data (dollars in thousands):
 
                                                         
        Three Months Ended
  Nine Months Ended
    Year Ended December 31,   September 30,   September 30,
    2007   2008   2009   2009   2010   2009   2010
 
Period Originations:
                                                       
Number of loans originated
    196       499       194       23       15       145       86  
Principal balance of loans originated
  $ 44,501     $ 97,559     $ 51,573     $ 7,385     $ 2,788     $ 39,030     $ 18,245  
Aggregate death benefit of policies underlying loans originated
  $ 794,517     $ 2,283,223     $ 942,312     $ 130,600     $ 62,500     $ 708,910     $ 417,275  
Selling general and administrative expenses
  $ 15,082     $ 21,744     $ 13,742     $ 2,623     $ 2,495     $ 11,165     $ 7,234  
Average Per Origination During Period:
                                                       
Age of insured at origination
    75.5       74.9       74.9       74.1       75.0       74.7       74.0  
Life expectancy of insured (years)
    12.9       13.2       13.2       13.2       14.1       13.4       14.1  
Monthly premium (year after origination)
  $ 14.0     $ 14.9     $ 16.0     $ 18.8     $ 13.1     $ 16.3     $ 13.9  
Death benefit of policies underlying loans originated
  $ 4,053.7     $ 4,575.6     $ 4,857.3     $ 5,678.3     $ 4,166.7     $ 4,889.0     $ 4,852.0  
Principal balance of the loan
  $ 227.0     $ 195.5     $ 265.8     $ 321.1     $ 185.8     $ 269.2     $ 212.1  
Interest rate charged
    10.5 %     10.8 %     11.4 %     11.5 %     11.5 %     11.5 %     11.5 %
Agency fee
  $ 125.1     $ 96.2     $ 134.6     $ 153.4     $ 92.1     $ 139.4     $ 105.8  
Agency fee as % of principal balance
    55.1 %     49.2 %     50.6 %     47.8 %     49.6 %     51.8 %     49.9 %
Origination fee
  $ 45.8     $ 77.9     $ 118.9     $ 138.4     $ 76.5     $ 114.7     $ 88.5  
Origination fee as % of principal balance
    20.2 %     39.9 %     44.7 %     43.1 %     41.1 %     42.6 %     41.7 %
End of Period Loan Portfolio
                                                       
Loans receivable, net
  $ 43,650     $ 148,744     $ 189,111     $ 187,330     $ 121,564     $ 187,330     $ 121,564  
Number of policies underlying loans receivable
    265       702       692       706       426       706       426  
Aggregate death benefit of policies underlying loans receivable
  $ 1,065,870     $ 2,895,780     $ 3,091,099     $ 3,296,937     $ 2,120,587     $ 3,296,937     $ 2,120,587  
Number of loans with insurance protection
          494       631       613       403       613       403  
Loans receivable, net (insured loans only)
  $     $ 118,864     $ 177,137     $ 169,455     $ 116,115     $ 169,455     $ 116,115  
Average Per Loan:
                                                       
Age of insured in loans receivable
    76.3       75.3       75.4       75.5       74.3       75.5       74.3  
Life expectancy of insured (years)
    12.4       13.9       14.5       14.2       15.1       14.2       15.1  
Monthly premium
  $ 7.7     $ 9.1     $ 8.5     $ 8.3     $ 6.7     $ 8.3     $ 6.7  
Loan receivable, net
  $ 181.9     $ 211.9     $ 273.3     $ 265.3     $ 285.4     $ 265.3     $ 285.4  
Interest rate
    10.2 %     10.4 %     10.9 %     10.7 %     11.3 %     11.2 %     11.3 %
End of Period — Policies Owned
                                                       
Number of policies owned
                27       20       31       20       31  
Aggregate fair value
  $     $     $ 4,306     $ 1,711     $ 8,846     $ 1,711     $ 8,846  
Monthly premium — average per policy
  $     $     $ 2.8     $ 2.2     $ 5.2     $ 2.2     $ 5.2  


11


 

Structured Settlements Segment — Selected Operating Data (dollars in thousands):
 
                                                         
          Three Months Ended
    Nine Months Ended
 
    Year Ended December 31,     September 30,     September 30,  
    2007     2008     2009     2009     2010     2009     2010  
 
Period Originations:
                                                       
Number of transactions
    10       276       396       102       138       275       385  
Number of transactions from repeat customers
          23       52       10       48       32       96  
Weighted average purchase discount rate
    11.0 %     12.0 %     16.3 %     17.1 %     20.1 %     16.1 %     19.3 %
Face value of undiscounted future payments purchased
  $ 701     $ 18,295     $ 28,877     $ 8,094     $ 13,458     $ 20,460     $ 33,713  
Amount paid for settlements purchased
  $ 369     $ 8,010     $ 10,947     $ 2,908     $ 2,959     $ 7,894     $ 9,099  
Marketing costs
  $ 2,056     $ 5,295     $ 4,460     $ 1,087     $ 1,168     $ 3,479     $ 3,561  
Selling, general and administrative (excluding marketing costs)
  $ 666     $ 4,475     $ 5,015     $ 1,298     $ 1,957     $ 3,257     $ 5,294  
Average Per Origination During Period:
                                                       
Face value of undiscounted future payments purchased
  $ 70.1     $ 66.3     $ 72.9     $ 79.4     $ 97.5     $ 74.4     $ 87.6  
Amount paid for settlement purchased
  $ 36.9     $ 29.0     $ 27.6     $ 28.5     $ 21.4     $ 28.7     $ 23.6  
Time from funding to maturity (months)
    80.3       113.8       109.7       113.4       147.3       109.2       134.3  
Marketing cost per transaction
  $ 205.6     $ 19.2     $ 11.3     $ 10.7     $ 8.5     $ 12.7     $ 9.2  
Segment selling, general and administrative (excluding marketing costs) per transaction
  $ 66.6     $ 16.2     $ 12.7     $ 12.7     $ 14.2     $ 11.8     $ 13.8  
Period Sales:
                                                       
Number of transactions sold
          226       439             72       96       291  
Gain on sale of structured settlements
  $     $ 443     $ 2,684     $ 24     $ 1,585     $ 499     $ 4,848  
Average sale discount rate
          10.8 %     11.5 %           9.6 %     11.1 %     9.1 %


12


 

 
RISK FACTORS
 
An investment in our common stock involves a number of risks. Before making a decision to purchase our common stock, you should carefully consider the following information about these risks, together with the other information contained in this prospectus. Many factors, including the risks described below, could result in a significant or material adverse effect on our business, financial condition and results of operations. If this were to happen, the price of our common stock could decline significantly and you could lose all or part of your investment.
 
Risk Factor Relating to the Dislocations in the Capital Markets
 
Difficult conditions in the credit and equity markets have adversely affected and may continue to adversely affect the growth of our business, our financial condition and results of operations.
 
Since 2007, the United States’ capital markets have experienced extensive distress and dislocation due to the global economic downturn and credit crisis. As a result of this dislocation in the capital markets, our borrowing costs increased dramatically in our premium finance business, and we were unable to access traditional sources of capital to finance the acquisition and sale of structured settlements. At certain points, we were unable to obtain any debt financing. Furthermore, such market conditions forced us to obtain lender protection insurance for our premium finance loans. The cost of this insurance, together with our credit facility interest rate costs, has resulted in total average financing costs of approximately 31.1% per annum of the principal balance of the loans as of September 30, 2010. Our ability to grow depends, in part, on our ability to increase transaction volume in each of our businesses, while successfully managing our growth, and on our ability to access sufficient capital or enter into financing arrangements on favorable terms. With the net proceeds from this offering, we expect to rely on equity financing and our existing debt financing arrangements to fund our business going forward. However, should additional financing be needed in the future, continued or future dislocations in the capital markets may adversely affect our ability to obtain debt or equity financing. In addition, the future availability of lender protection insurance may affect our ability to obtain debt financing for our premium finance business should additional debt financing be needed. Our provider of lender protection insurance ceased providing us with lender protection insurance on December 31, 2010. This decision by our provider of lender protection insurance only addresses future loans and does not impact our existing premium finance loans. Lender protection insurance on our existing loans will continue for the life of such loans. If we are unable to access sufficient capital or enter into financing arrangements on favorable terms in the future, the growth of our business, our financial condition and results of operations may be materially adversely affected.
 
Risk Factors Related to Premium Finance Transactions
 
Uncertainty in valuing the life insurance policies collateralizing our premium finance loans can affect the fair value of the collateral and if the fair value of the collateral decreases, we will incur losses.
 
We evaluate all of our premium finance loans for impairment, on a monthly basis, based on the fair value of the underlying life insurance policies, as the collectability is primarily dependent on the fair value of the policy serving as collateral. For loans without lender protection insurance, the fair value of the policy is determined using our valuation model, which is a Level 3 fair value measurement. See “Management’s Discussion and Analysis — Critical Accounting Policies — Fair Value Measurement Guidance.” For loans with lender protection insurance, the insured value is also considered when determining the fair value of the life insurance policy. The lender protection insurer limits the amount of coverage 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 the lender protection insurer’s own models and assumptions. For all loans, the amount of impairment, if any, is calculated as the difference in the fair value of the life insurance policy and the carrying value of the loan. A loan impairment valuation is established as losses on our loans are estimated and charged to the provision for losses on loans receivable, and the provision is charged to earnings. Once established, the loan impairment valuation cannot be reversed to earnings.


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In the ordinary course of business, a large portion of our borrowers may default by not paying off the loan and relinquish beneficial ownership of the life insurance policy to us in exchange for our release of the underlying loan. When this occurs, we record the investment in the policy at fair value. At the end of each reporting period, we re-value the life insurance policies we own. If the calculation results in an adjustment to the fair value of the policy, we record this as a change in fair value of our investment in life insurance policies.
 
This evaluation of the fair value of life insurance policies is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Using our valuation model, we determine the fair value of life insurance policies using a discounted cash flow basis, incorporating current life expectancy assumptions. The discount rate incorporates current information about market interest rates, the credit exposure to the insurance company that issued the life insurance policy and our estimate of the risk margin an investor in the policy would require. To determine the life expectancy of an insured, we utilize medical reviews from four different medical underwriters. The health of the insured is summarized by the medical underwriters into a life assessment which is based on the review of historical and current medical records. The medical underwriter 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 probability of mortality for an insured is then calculated by applying the life expectancy estimate to an actuarial table.
 
Insurable interest concerns regarding a life insurance policy can also adversely impact its fair value. A claim or the perceived potential for a claim for rescission by an insurance company or by persons with an insurable interest in the insured of a portion of or all of the policy death benefit can negatively impact the fair value of a life insurance policy.
 
If the calculation of fair value results in a decrease in value, we record this reduction as a loss. As and when loan impairment valuations are established due to the decline in the fair value of the policies collateralizing our loans, our net income will be reduced by the amount of such impairment valuations in the period in which the valuations are established, and as a result our business, financial condition and results of operations may be materially adversely affected.
 
Our success in operating our premium finance business will be dependent upon using equity financing rather than debt financing and lender protection insurance, and making accurate assumptions about life expectancies so that we may maintain adequate cash balances to pay premiums.
 
With the net proceeds of this offering, we intend to fund our new premium finance business with equity financing instead of relying on debt financing and lender protection insurance. Without lender protection insurance on our loans, we expect to have the option to retain a number of life insurance policies that we expect borrowers will relinquish to us in the event of default, instead of taking the direction of our lender protection insurer with respect to the disposition of such life insurance policies. If we retain a life insurance policy, we will be responsible for paying all premiums necessary to keep the policy in force. Therefore, our cash flows and the required amount of our cash reserves to pay premiums will become dependent on our assumptions about life expectancies being accurate. By using cash reserves to pay premiums for retained life insurance policies, we will have less cash available for making new premium finance loans as well as less cash available for other business purposes. Adverse changes in fair value of retained life insurance policies will negatively impact our financial statements.
 
Life expectancies are estimates of the expected longevity or mortality of an insured and are inherently uncertain. A life expectancy obtained on an insured for a life insurance policy may not be predictive of the future longevity or mortality of the insured. Inaccurate forecasting of an insured’s life expectancy could result from, among other things: (i) advances in medical treatment (e.g., new cancer treatments) resulting in deaths occurring later than forecasted; (ii) inaccurate diagnosis or prognosis; (iii) changes to life style habits or the individual’s ability to fight disease, resulting in improved health; (iv) reliance on outdated or incomplete age or health information about the insured, or on information that is inaccurate (whether or not due to fraud or misrepresentation by the insured); or (v) improper or flawed methodology or assumptions in terms of modeling or crediting of medical conditions. In forecasting estimated life expectancies, we utilize third party medical underwriters to evaluate the medical condition and life expectancy of each insured. The firms that provide


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health assessments and life expectancy information may depend on, among other things, actuarial tables and model inputs for insureds and third-party information from independent physicians who, in turn, may not have personally performed a physical examination of any of the insureds and may have relied solely on reports provided to them by attending physicians with whom they were authorized to communicate. The accuracy of this information has not been and will not be independently verified by us or our service providers.
 
If these life expectancy valuations underestimate the longevity of the insureds, the actual maturity date of the life insurance policies may therefore be longer than projected. Consequently, we may not have sufficient reserves for payment of insurance premiums and we may allow the policies to lapse, resulting in a loss of our investment in those policies, or if we continue to fund premium payments, the time period within which we could expect to receive a return of our investment in such life insurance policies may be extended, either of which could have a material adverse effect on our business, financial condition and results of operation.
 
The premium finance business is highly regulated; changes in regulation could materially adversely affect our ability to conduct our business.
 
The making, enforcement and collection of premium finance loans is extensively regulated by the laws and regulations of many states and other applicable jurisdictions. These laws and regulations vary widely, but often:
 
  •  require that premium finance lenders be licensed by the applicable jurisdiction;
 
  •  require certain disclosure agreements and strictly govern the content thereof;
 
  •  regulate the amount of late fees and finance charges that may be charged if a borrower is delinquent on its payments; and/or
 
  •  allow imposition of potentially significant penalties on lenders for violations of such jurisdiction’s applicable insurance premium finance laws.
 
In addition, our premium finance transactions are subject to state usury laws, which limit the interest rate that can be charged. While we attempt to structure these transactions to avoid being deemed in violation of usury laws, we cannot assure you that we will be successful in doing so. Loans found to be at usurious interest rates may be voided, which would mean the loss of our principal and interest.
 
To the extent that more restrictive regulations or more stringent interpretations of existing regulations are adopted in the future, the future costs of compliance with such changes in regulations could be significant and our ability to conduct our business may be materially adversely affected. There is additional regulatory risk with respect to the acquisition of a life insurance policy in the event of a payment default when we are otherwise unable to sell the policy collateralizing our premium finance loan. For example, if a state insurance regulator were to take the position that our premium finance loans or the acquisition of life insurance policies serving as collateral for such loans should be characterized as life settlement transactions subject to applicable regulations, we could be issued a cease and desist order effectively requiring us to suspend premium finance transactions for an indefinite period, and be subject to fines and other penalties.
 
Our success in our premium finance business depends on maintaining relationships within our referral networks.
 
We rely primarily upon agents and brokers to refer potential premium finance customers to us. These relationships are essential to our operations and we must maintain these relationships to be successful. We do not have fixed contractual arrangements with the referring agents and brokers and they are free to do business with our competitors. Our ability to build and maintain relationships with our agents and brokers depends upon the amount of agency fees we charge and the value of the services we provide. For the nine months ended September 30, 2010, our top ten agents and brokers referred to us approximately 33.9% and 50.1%, respectively, of our premium finance business, based upon the loan maturity balances of the loans originated during such period. The loss of any of our top-referring agents and brokers could have a material adverse effect on our business, financial condition and results of operations.


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If a regulator or court decides that trusts that are formed to own many of the life insurance policies that serve as collateral for our premium finance loans do not have an insurable interest in the life of the insured, such determination could have a material adverse effect on our business, financial condition and results of operations.
 
All states require that the initial purchaser of a new life insurance policy insuring the life of an individual have an insurable interest in such individual’s life at the time of original issuance of the policy. Whether an insurable interest exists in the context of the purchase of a life insurance policy is critical because, in the absence of a valid insurable interest, life insurance policies are unenforceable under most states’ laws. Where a life insurance policy has been issued to a policyholder without an insurable interest in the life of the individual who is insured, the life insurance company may be able to void or rescind the policy, but must repay to the owner of the policy all premium payments, usually without interest. Even if the insurance company cannot void or rescind the policy, however, the insurable interest laws of a number of states provide that persons with an insurable interest on the life of the insured may have the right to recover a portion or all of the death benefit payable under a policy from a person who has no insurable interest on the life of the insured. These claims can generally only be brought if the policy was originally issued to a person without an insurable interest in the life of the insured. However, some states may require that this insurable interest not only exist at the time that a life insurance policy was issued, but also at any later time that the policy is transferred.
 
Generally, there are two forms of insurable interests in the life of an individual, familial and financial. Additionally, an individual is deemed to have an insurable interest in his or her own life. It is also a common practice for an individual, as a grantor or settlor, to form an irrevocable trust to purchase and own a life insurance policy insuring the life of the grantor or settlor, where the beneficiaries of the trust are persons who themselves, by virtue of certain familial relationships with the grantor or settlor, also have an insurable interest in the life of the insured. In the event of a payment default on our premium finance loans when we are otherwise unable to sell the underlying policy, we will acquire life insurance policies owned by trusts (or the beneficial interests in the trust itself) that we believe had an insurable interest in the life of the related insureds. However, a state insurance regulatory authority or a court may determine that the trust does not have an insurable interest in the life of the insured. Any such determination could result in our being unable to receive the proceeds of the life insurance policy, which could lead to a total loss of all amounts loaned in the premium finance transaction. Any such loss or losses could have a material adverse effect on our business, financial condition and results of operations.
 
Premium finance loan originations are susceptible to practices which can invalidate the underlying life insurance policy and subject us to material fines or license suspension or revocation.
 
Many states in which we do business have laws which define and prohibit stranger-originated life insurance (“STOLI”) practices, which in general involve the issuance of life insurance policies as part of or in connection with a practice or plan to initiate life insurance policies for the benefit of a third party investor who, at the time of the policy issuance, lacked a valid insurable interest in the life of the insured. Most of these statutes expressly provide that premium finance loans that only advance life insurance premiums and certain permissible expenses are not STOLI practices or transactions. Under these statutes, a premium finance loan, as well as any life insurance policy collateralizing such loan, must meet certain criteria or such policy can be invalidated, or deemed unenforceable, in its entirety. We cannot control whether a state regulator or borrower will assert that any of our loans should be treated as STOLI transactions or that the loans do not meet the criteria required under the statutes.
 
The legality and merit of “investor-initiated” leveraged life insurance products have been questioned by members of the industry, certain life insurance providers and certain regulators. As an illustration, the New York Department of Insurance issued a General Counsel’s opinion in 2005 concluding that arrangements intended to facilitate the procurement of life insurance policies for resale violated New York’s insurable interest statute and may also constitute a violation of New York state’s prohibition against premium rebates/free insurance.
 
The premium finance industry has been tainted by lawsuits based on allegations of fraud and misconduct. These lawsuits involve allegations of fraud, breaches of fiduciary duty and other misconduct by industry


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participants. Some of these cases are brought by life insurance companies attacking the original issuance of the policies on insurable interest and fraud grounds. Notwithstanding the litigation in this industry, there is a lack of judicial certainty in the legal standards used to determine the validity of insurable interest supporting a life insurance policy or the existence of STOLI practices. Lawsuits sometimes focus on transfers of equity interests of the policyholder (e.g., beneficial interests of an irrevocable trust holding a policy) that occur very shortly after or contemporaneously with the issuance of the policy or arrangements whereby the premium finance lender, the life insurance agent and the insured agree to transfer the policy to the premium finance lender or another third party shortly after the policy issuance or the “contestability period.” The “contestability period” is a period of time, usually two years, after which the policy cannot be contested by the issuing life insurance company under the terms of the policy other than for the nonpayment of premiums. Some states have adopted exceptions to such limitation for fraud or other similar malfeasance by the policyholder.
 
While our loan underwriting guidelines are designed to lessen the risks of our participation in STOLI or other business that originates life insurance policies not supported by a valid insurable interest, a regulator’s or carrier’s assertion to the contrary and subsequent successful enforcement could have a material adverse effect on the fair value of the policies collateralizing our premium finance loans and our ability to originate business going forward. In particular, the closer the origination date of a premium finance loan transaction is to the life insurance policy issuance date, there is increasing risk that a life insurance policy may be subject to contest or rescission on the basis that such policy was issued on the basis of a misrepresentation regarding premium financing, as part of STOLI practices or was not supported by a valid insurable interest. As of September 30, 2010, 10.4%, 52.5%, 80.7%, 96.2%, and 99.6%, respectively, of our premium finance loans outstanding were originated within one month, three months, six months, one year and two years, respectively, of the issuance of the underlying life insurance policy. Regulatory, legislative or judicial changes in these areas could materially and adversely affect our ability to participate in the premium finance business and could significantly increase the costs of compliance, resulting in lower revenue or a complete cessation of our premium finance business. In addition, in this arena, regulatory action for statutory or regulatory infractions could involve fines or license suspension or revocation. We may be unable to obtain or maintain the licenses necessary for us to conduct our premium finance business.
 
The life insurance policies that we own or that secure our premium finance loans may be subject to contest, rescission and/or non-cooperation by the issuing life insurance company, which may have a material adverse effect on our business, financial condition and results of operations.
 
Our premium finance loans are secured by the underlying life insurance policy. If the underlying policy is subject to contest or rescission, the fair value of the collateral could be reduced to zero. Life insurance policies may generally be contested or rescinded by the issuing life insurance company within the contestability period and sometimes beyond the contestability period, depending on the grounds for rescission and applicable law. Misrepresentations, fraud, omissions or lack of insurable interest can, in some instances, form the basis of loss of right to payment under a life insurance policy for many years beyond the contestability period. Whether or not there exists a reasonable legal basis for a contest or rescission, it can result in a cloud on the title or collectability of the policy. Contestation can be based upon any material misrepresentation or omission made in the life insurance policy application, even if unintentional. Misleading or incomplete answers by the insured to any questions asked by the insurance carrier regarding the financing of premiums, the policyholder’s net worth or the insured’s health and medical history and condition as well as to any other questions on a life insurance policy application, can lead to claims that a material misrepresentation or omission was made and may give rise to the insurance carrier’s right to void, contest or rescind the policy. Lack of a valid insurable interest of the life insurance policy owner in the insured also may give rise to the insurance carrier’s right to void, contest or rescind the policy. Although we obtain representations and warranties from the insured, policyholders and referring agents, we may not know whether the applicants for any of our policies have made any material misrepresentations or omissions on the policy applications, or whether the policy owner has a valid insurable interest in the insured, and as such, the policies securing our loans are subject to the risk of contestability or rescission. In addition, some insurance carriers have contested policies as STOLI arrangements, specifically citing the existence of certain nonrecourse premium financing arrangements as a basis to challenge the validity of the policies used to collateralize the financing. A policy may be voided or rescinded


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by the insurance carrier if found to be a STOLI policy where a valid insurable interest did not exist in the insured at policy inception. From time to time, an insurance carrier has challenged the validity of a policy securing one of our premium finance loans, but the impact on our business from these challenges has not been significant to date. Future challenges to the policies that we own or hold as collateral for our premium finance loans may have a material adverse effect on our business, financial condition and results of operations.
 
If the insurance company successfully contests or rescinds a policy, the policy will be declared void, and in such event, the insurance company’s liability would be limited to a refund of all the insurance premiums paid for the policy without any accrued interest. While defending an action to contest or rescind a policy, premium payments may have to continue to be made to the life insurance company. Furthermore, a life insurance company may refuse to refund any of the premiums paid and seek to retain them as an offset to damages it claims to have suffered in connection with the issuance of the life insurance policy. Additionally, the issuing insurance company may refuse to cooperate with us by not providing information, processing notices and/or paperwork required to document the transaction. Hence, in the case of a contest or rescission, premiums paid to the carrier (including those paid during the pendency of a contest or rescission action) may not be refunded. If they are not, we may suffer a complete loss with respect to this portion of the loan amount which may adversely affect our business, financial condition and results of operations.
 
Premium financed life insurance policies are susceptible to a higher risk of fraud and misrepresentation in life insurance applications.
 
While fraud and misrepresentation by applicants and potential insureds in completing life insurance applications (especially with respect to the health and medical history and condition of the potential insured as well as the applicant’s net worth) exist generally in the life insurance industry, such risk of fraud and misrepresentation is heightened in connection with life insurance policies for which the premiums are financed through premium finance loans. In particular, there is a significant risk that applicants and potential insureds may not answer truthfully or completely to any questions related to whether the life insurance policy premiums will be financed through a premium finance loan or otherwise, the applicants’ purpose for purchasing the policy or the applicants’ intention regarding the future sale or transfer of the life insurance policy. Such risk may be further increased to the extent life insurance agents communicate to applicants and potential insureds regarding potential premium finance arrangements or transfer of life insurance policies through payment defaults under premium finance loans. In the ordinary course of business, our sales team receives inquiries from life insurance agents and brokers regarding the availability of premium finance loans for their clients. However, any communication between the life insurance agent and the potential policyholder or insured is beyond our control and we may not know whether a life insurance agent discussed with the potential policyholder or the insured the possibility of a premium finance loan by us or the subsequent transfer of the life insurance policy in the event of a payment default under the loan. Consequently, notwithstanding the representations and certifications we obtain from the policyholders, insureds and the life insurance agents, there is a risk that we may finance premiums for policies subject to contest or rescission by the insurance carrier based on fraud or misrepresentation in any information provided to the life insurance company, including the life insurance application.
 
Our liquidity depends upon a secondary market for life insurance policies.
 
With respect to a potential sale of a life insurance policy owned by us, the fair value depends significantly on an active secondary market for life insurance, which may contract or disappear depending on the impact of potential government regulation, future economic conditions and/or other market variables. Many investors who invest in life insurance policies are foreign investors who are attracted by potential investment returns from life insurance policies issued by United States life insurers with high ratings and financial strength as well as by the view that such investments are non-correlated assets — meaning changes in the equity or debt markets should not affect returns on such investments. Changes in the value of the United States dollar as well as changes to the ratings of United States life insurers can cause foreign investors to suffer a reduction in the value of their United States dollar denominated investments and reduce their demand for such products. Any


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of the above factors may result in us selling a policy for less than its fair value, resulting in a loss of profitability.
 
Delays in payment and non-payment of life insurance policy proceeds may have a material adverse effect on our business, financial condition and results of operations.
 
A number of arguments may be made by former beneficiaries (including but not limited to spouses, ex-spouses and descendants of the insured) under a life insurance policy, by the beneficiaries of the trust holding the policy, by the estate or legal heirs of the insured or by the insurance company issuing such policy, to deny or delay payment of proceeds following the death of an insured, including arguments related to lack of mental capacity of the insured, contestability or suicide provisions in a policy. In addition, the insurable interest and life settlement laws of certain states may prevent or delay the liquidation of the life insurance policy serving as collateral for a loan. Furthermore, if the death of an insured cannot be verified and no death certificate can be produced, the related insurance company may not pay the proceeds of the life insurance policy until the passage of a statutory period (usually five to seven years) for the presumption of death without proof. Such delays in payment or non-payment of policy proceeds may have a material adverse effect on our business, financial condition and results of operations.
 
Bankruptcy of the insured, a beneficiary of the trust owning the life insurance policy or the trust itself could prevent a claim under our lender protection insurance policy.
 
In many instances, individuals establish an irrevocable trust to hold and own their life insurance policy for estate planning reasons. In our premium finance business, the majority of the premium finance borrowers are trusts owning life insurance policies. A bankruptcy of the insured, a bankruptcy of a beneficiary of a trust owning the life insurance policy or a bankruptcy of the trust itself could prevent us from acquiring the life insurance policy following an event of default under the related premium finance loan unless consent of the applicable bankruptcy court is obtained or it is determined that the automatic stay generally arising following a bankruptcy filing is not applicable. A failure to promptly obtain any required bankruptcy court consent within one hundred twenty (120) days following the maturity date of the related premium finance loan could delay or prevent us from making a claim under the lender protection insurance policy for any loss sustained following a default under the premium finance loan. Lender protection insurance insures us against certain risks of loss associated with our premium finance loans, including payment default by the borrower. If a premium finance loan is not repaid, the lender protection insurer, subject to the lender protection insurance policy’s terms and conditions, has the right to direct control or take beneficial ownership of the underlying life insurance policy and we are paid a claim equal to the insured value of the life insurance policy. If we are delayed or otherwise prevented from making a claim under the lender protection insurance policy for any loss sustained following a default under the premium finance loan, additional premium payments will need to be made to keep the life insurance policy in force. As a result, we may be forced to expend additional funds, or borrow funds at unfavorable rates if such financing is even available, in order to fund the premiums or, if we are unable to obtain the necessary funds, we may be forced to allow the policy to lapse, resulting in the loss of the premiums we financed in the transaction. Such events could have a material adverse effect on our business, financial condition and results of operations.
 
Our lender protection insurance policies have significant exclusions and limitations.
 
Coverage under our lender protection insurance policies is not comprehensive and each of these policies is subject to significant exclusions, limitations and coverage gaps. In the event that any of the exclusions or limitations to coverage set forth in the lender protection insurance policies are applicable or there is a coverage gap, there will be no coverage for any losses we may suffer, which would have a material adverse effect on our business, financial condition and results of operations. The coverage exclusions include, but are not limited to:
 
  •  the lapse of the related life insurance policy due to the failure to pay sufficient premiums during the term of the applicable premium finance loan;


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  •  certain losses relating to situations where the life insured has died and there has been a bankruptcy or insolvency of the life insurance company that issued the applicable policy;
 
  •  any loss caused by our fraudulent, illegal, criminal, malicious or grossly negligent acts;
 
  •  a surrender of the related life insurance policy to the issuing life insurance carrier or the sale of such policy or the beneficial interest therein, in each case without the prior written consent of the lender protection insurer;
 
  •  our failure to timely obtain necessary rights, free and clear of any lien or encumbrance, with respect to the applicable life insurance policy as required under the lender protection insurance policy;
 
  •  our failure to timely submit a properly completed proof of loss certificate to the lender protection insurance policy insurer;
 
  •  our failure to timely notify the lender protection insurance policy insurer of:
 
  •  the occurrence of certain prohibited acts, as described in the lender protection insurance policy, or
 
  •  material non-compliance of the related loan with applicable laws, in each case after obtaining actual knowledge of such events;
 
  •  our making of a claim under the lender protection insurance policy knowing the same to be fraudulent; or
 
  •  the related life insurance policy being contested prior to the effective date of the related coverage certificate issued under the lender protection insurance policy and we have actual knowledge of such contest.
 
Failure to perfect a security interest in the underlying life insurance policy or the beneficial interests therein could result in our interest being subordinated to other creditors.
 
Payment by the related premium finance loan borrower of amounts owed pursuant to each loan is secured by the underlying life insurance policy or by the beneficial interests in a trust established to hold the insurance policy. If we fail to perfect a security interest in such policy or beneficial interests, our interest in such policy or beneficial interests may be subordinated to those of other parties, including, in the event of a bankruptcy or insolvency, a bankruptcy trustee, receiver or conservator.
 
Some life insurance companies are opposed to the financing of life insurance policies.
 
Some United States life insurance companies and their trade associations have voiced concerns about the life settlement and premium finance industries generally and the transfer of life insurance policies to investors. These life insurance companies may oppose the transfer of a policy to, or honoring of a life insurance policy held by, third parties unrelated to the original insured/owner, especially when they may believe the initial premiums for such life insurance policies might have been financed, directly or indirectly, by investors that lacked an insurable interest in the continuing life of the insured. If the life insurance companies seek to contest or rescind life insurance policies acquired by us based on such aversion to the financing of life insurance policies, we may experience a substantial loss with respect to the related premium finance loans and the underlying life insurance policies, which could have a material adverse effect on our business, financial condition and results of operations. These life insurance companies and their trade associations may also seek additional state and federal regulation of the life settlement and premium finance industries. If such additional regulations were adopted, we may experience material adverse effects on our business, financial condition and results of operations.


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We are dependent on the creditworthiness of the life insurance companies that issue the policies serving as collateral for our premium finance loans. If a life insurance company defaults on its obligation to pay death benefits on a policy we own, we would experience a loss of our investment, which would have a material adverse effect on our business, financial condition and results of operations.
 
We are dependent on the creditworthiness of the life insurance companies that issue the policies serving as collateral for our premium finance loans. We assume the credit risk associated with life insurance policies issued by various life insurance companies. Furthermore, there is a concentration of life insurance companies that issue the policies that serve as collateral for our premium finance loans. Over 50% of our premium finance loans outstanding as of September 30, 2010 are secured by life insurance policies issued by four life insurance companies. The failure or bankruptcy of any such life insurance company or annuity company could have a material adverse impact on our ability to achieve our investment objectives. A life insurance company’s business tends to track general economic and market conditions that are beyond its control, including extended economic recessions or interest rate changes. Changes in investor perceptions regarding the strength of insurers generally and the policies or annuities they offer can adversely affect our ability to sell or finance our assets. Adverse economic factors and volatility in the financial markets may have a material adverse effect on a life insurance company’s business and credit rating, financial condition and operating results, and an issuing life insurance company may default on its obligation to pay death benefits on the life insurance policies we acquired following a payment default on our premium finance loans when we are otherwise unable to sell the underlying policy. In such event, we would experience a loss of our investment in such life insurance policies which would have a material adverse effect on our business, financial condition and results of operations.
 
If a life insurance company is able to increase the premiums due on life insurance policies that we own or finance, it will adversely affect our returns on such life insurance policies.
 
For any life insurance policies that we own or finance, we will be responsible for paying insurance premiums due. If a life insurance company is able to increase the cost of insurance charged for any of the life insurance policies that we own or finance, the amounts required to be paid for insurance premiums due for these life insurance policies may increase, requiring us to incur additional costs for the life insurance policies, which may adversely affect returns on such life insurance policies and consequently reduce the secondary market value of such life insurance policies. Failure to pay premiums on the life insurance policies when due will result in termination or “lapse” of the life insurance policies. The insurer may in a “lapse” situation view reinstatement of a life insurance policy as tantamount to the issuance of a new life insurance policy and may require the current owner to have an insurable interest in the life of the insured as of the date of the reinstatement. In such event, we would experience a loss of our investment in such life insurance policy.
 
If an insured reaches age 95 or 100, the policy may terminate.
 
Some life insurance policies terminate if the insured lives to the age of 100, or in some cases at age 95. Thus if the insured under a policy acquired by us lives beyond that age, we would receive nothing on such life insurance policy as the insurer is relieved of its obligations thereunder. Such termination of a life insurance policy would result in a loss of investment return on such life insurance policy and eliminate any potential proceeds realizable by us from the sale or the maturation of such life insurance policy.
 
Failure to protect our premium finance transaction clients’ confidential information and privacy could adversely affect our business.
 
Our premium finance business is subject to privacy regulations and to confidentiality obligations. For example, the collection and use of medical data is subject to national and state legislation, including the Health Insurance Portability and Accountability Act of 1996, or HIPAA. The actions we take to protect such confidential information include, among other things:
 
  •  training and educating our employees regarding our obligations relating to confidential information;
 
  •  actively monitoring our record retention plans and any changes in state or federal privacy and compliance requirements;


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  •  maintaining secure storage facilities for tangible records; and
 
  •  limiting access to electronic information.
 
However, if we do not properly comply with privacy regulations and protect confidential information, we could experience adverse consequences, including regulatory sanctions, such as penalties, fines and loss of licenses, as well as loss of reputation and possible litigation.
 
Risk Factors Related to Structured Settlements
 
We are dependent on third parties to purchase our structured settlements. Any inability to sell structured settlements or, in the alternative, to access additional capital to purchase structured settlements, may have a material adverse effect on our ability to grow our business, our financial condition and results of operations.
 
We are dependent on third parties to purchase our structured settlements. Our ability to grow our business depends upon our ability to sell our structured settlements at favorable discount rates and to establish alternative financing arrangements. Third party purchasers or other financing may not be available to us in the future on favorable terms or at all. If such other third party purchasers or other financing are not available, then we may be required to seek additional equity financing, if available, which would dilute the interests of shareholders who purchase common stock in this offering.
 
We may not be able to continue to sell our structured settlements to third parties at favorable discount rates or obtain financing through borrowings or other means on acceptable terms to satisfy our cash requirements, either of which could have a material adverse effect on our ability to grow our business.
 
Any change in current tax law could have a material adverse effect on our business, financial condition and results of operations.
 
The use of structured settlements is largely the result of the favorable federal income tax treatment of such transactions. In 1979, the Internal Revenue Service issued revenue rulings that the income tax exclusion of personal injury settlements applied to related periodic payments. Thus, claimants receiving installment payments as compensation for a personal injury were exempt from all federal income taxation, provided certain conditions were met. This ruling, and its subsequent codification into federal tax law in 1982, resulted in the proliferation of structured settlements as a means of settling personal injury lawsuits. Changes to tax policies that eliminate this exemption of structured settlements from federal taxation could have a material adverse effect on our future profitability. If the tax treatment for structured settlements were changed adversely by a statutory change or a change in interpretation, the dollar volume of structured settlements could be reduced significantly which would also reduce the level of our structured settlement business. In addition, if there were a change in the federal tax code that would result in adverse tax consequences for the assignment or transfer of structured settlements, such change could have a material adverse effect on our business, financial condition and results of operations.
 
Fluctuations in discount rates or interest rates may decrease our yield on structured settlement transactions.
 
Our profitability is directly affected by levels of and fluctuations in interest rates. Such profitability is largely determined by the difference, or “spread,” between the discount rate at which we purchase the structured settlements and the discount rate at which we can resell these assets or the interest rate at which we can finance those assets. We may not be able to continue to purchase structured settlements at current or historical discount rates. Structured settlements are purchased at effective yields which are fixed, while rates at which structured settlements are sold, with the exception of forward purchase arrangements, are generally a function of the prevailing market rates for short-term borrowings. As a result, decreases in the discount rate at which we purchase structured settlements or increases in prevailing market interest rates after structured settlements are acquired could have a material adverse effect on our yield on structured settlement transactions, which could have a material adverse effect on our business, financial condition and results of operations.


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The insolvency of a holder of a structured settlement could have an adverse effect on our business, financial condition and results of operations.
 
Our rights to scheduled payments in structured settlement transactions will be adversely affected if any holder of a structured settlement, the special purpose vehicle to which an insurance company assigns its obligations to make payments under the settlement (the “Assumption Party”) or the annuity provider becomes insolvent and/or becomes a debtor in a case under the Bankruptcy Code.
 
If a holder of a structured settlement were to become a debtor in a case under the Bankruptcy Code, a court could hold that the scheduled payments transferred by the holder under the applicable settlement purchase agreement would not constitute property of the estate of the claimant under the Bankruptcy Code. If, however, a trustee in bankruptcy or other receiver were to assert a contrary position, such as by requiring us (or any securitization vehicle) to establish our right to those payments under federal bankruptcy law or by persuading courts to recharacterize the transaction as secured loans, such result could have a material adverse effect on our business. If the rights to receive the scheduled payments are deemed to be property of the bankruptcy estate of the claimant, the trustee may be able to avoid assignment of the receivable to us.
 
Furthermore, a general creditor or representative of the creditors (such as a trustee in bankruptcy) of an Assumption Party could make the argument that the payments due from the annuity provider are the property of the estate of such Assumption Party (as the named owner thereof). To the extent that a court would accept this argument, the resulting delays or reductions in payments on our receivables could have a material adverse effect on our business, financial condition and results of operations.
 
If the identities of structured settlement holders become readily available, it could have an adverse effect on our structured settlement business, financial condition and results of operations.
 
We do not believe that there are any readily available lists of holders of structured settlements, which makes brand awareness critical to growing market share. We use national television marketing to generate in-bound telephone and internet inquiries and we have built a proprietary database of clients and prospective clients. As of September 30, 2010, we had a database of over 30,000 structured settlement leads. If the identities of structured settlement holders were to become readily available to our competitors or to the general public, we could face increased competition and the value of our proprietary database would be diminished, which would have a negative effect on our structured settlement business, financial condition and results of operations.
 
Adverse judicial developments could have an adverse effect on our business, financial condition and results of operations.
 
Adverse judicial developments have occasionally occurred in the structured settlement industry, especially with regard to anti-assignment concerns and issues associated with non-disclosure of material facts and associated misconduct. For example, in the 2008 case of 321 Henderson Receivables, LLC v. Tomahawk, the California County Superior Court (Fresno County, Case No. 08CECG00797 — July 2008 Order (unreported)) ruled that (i) certain structured settlement sales were barred by anti-assignment provisions in the settlement documents, (ii) the transfers were loans, not sales, that violated California’s usury laws and (iii) for similar reasons numerous other court-approved structured settlement sales may be void. Although the Tomahawk decision was subsequently reversed by the California Court of Appeal, the Superior Court decision had a negative effect on the structured settlement industry by casting doubt on the ability of a structured settlement recipient to sell portions of the payment streams. Any similar adverse judicial developments calling into doubt such laws and regulations could materially and adversely affect our investments in structured settlements


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Risk Factors Relating to Our General Business
 
Changes to statutory, licensing and regulatory regimes governing premium financing or structured settlements, including the means by which we conduct such business, could have a material adverse effect on our activities and revenues.
 
Changes to statutory, licensing and regulatory regimes could result in the enforcement of stricter compliance measures or adoption of additional measures on us or on the insurance companies or annuity providers that stand behind the insurance policies that collateralize our premium finance loans and the structured settlements that we purchase, either of which could have a material adverse impact on our business activities and revenues. Any change to the regulatory regime covering the resale of any of these asset classes, including any change specifically applicable to our activities or to investor eligibility, could restrict our ability to finance, acquire or sell these assets or could lead to significantly increased compliance costs.
 
Traditionally, the U.S. federal government has not directly regulated the insurance business. Congress recently passed and the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, which we refer to in this prospectus as the “Dodd-Frank Act”, providing for the enhanced federal supervision of financial institutions, including insurance companies in certain circumstances, and financial activities that represent a systemic risk to financial stability or the U.S. economy. Under the Dodd-Frank Act, the Federal Insurance Office will be established within the U.S. Treasury Department to monitor all aspects of the insurance industry. Notwithstanding the creation of the Federal Insurance Office, the Dodd-Frank Act provides that state insurance regulators will remain the primary regulatory authority over insurance and expressly withholds from the Federal Insurance Office and the U.S. Treasury Department general supervisory or regulatory authority over the business of insurance. At this time, we cannot assess whether any other proposed legislation or regulatory changes will be adopted, or what impact, if any, the Dodd-Frank Act or any other legislation or changes could have on our results of operations, financial condition or liquidity.
 
In addition, we are subject to various federal and state regulations regarding the solicitation of customers. The Federal Communications Commission and Federal Trade Commission have issued rules that provide for a national “do not call” registry. Under these rules, companies are prohibited from contacting any individual who requests to have his or her phone number added to the registry, except in certain limited instances. We are required to continually review the national “do not call” registry to ensure that we do not contact anyone on that registry. In February 2009, we received a citation for violating these rules. In the event we violate these rules in the future, we could be subject to a fine of up to $16,000 per violation or each day of a continuing violation, which could have a material adverse effect on our business, financial condition and results of operations.
 
Regulation of life settlement transactions as securities under the federal securities laws could lead to increased compliance costs and could adversely affect our ability to acquire or sell life insurance policies.
 
The Securities and Exchange Commission, or the SEC, recently issued a report recommending that sales of life insurance policies in life settlement transactions be regulated as securities for purposes of the federal securities laws. Although to date we have never purchased a policy directly from a policy owner, any legislation implementing such regulatory change or a change in the transactions that are characterized as life settlement transactions could lead to increased compliance costs and adversely affect our ability to acquire or sell life insurance policies in the future, which could have an adverse effect on our business, financial condition and results of operations.
 
Negative press from media or consumer advocacy groups and as a result of litigation involving industry participants could have a material adverse effect on our business, financial condition and results of operations.
 
The premium finance and structured settlement industries periodically receive negative press from the media and consumer advocacy groups and as a result of litigation involving industry participants. A sustained campaign of negative press resulting from media or consumer advocacy groups, industry litigation or other factors could adversely affect the public’s perception of these industries as a whole, and lead to reluctance to sell assets to us or to provide us with third party financing. We also have received negative press from


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competitors. Any such negative press could have a material adverse effect on our business, financial condition and results of operations.
 
We have limited operating experience.
 
Our business operations began in December 2006. Consequently, while certain of our management are very experienced in the premium finance and structured settlement businesses, we have limited operating history in both of our business segments. With the net proceeds of this offering, we expect to have the option to retain a number of life insurance policies that we expect borrowers will relinquish to us in the event of default, instead of taking the direction of our lender protection insurer with respect to the disposition of such life insurance policies. However, since our inception, we have had limited experience managing and dealing in life insurance policies owned by us. Therefore, the historical performance of our operations may be of limited relevance in predicting future performance.
 
The loss of any of our key personnel could have a material adverse effect on our business, financial condition and results of operations.
 
Our success depends to a significant degree upon the continuing contributions of our key executive officers including Antony Mitchell, our chief executive officer, and Jonathan Neuman, our president and chief operating officer. These officers have significant experience operating businesses in structured settlements and premium finance transactions, which are highly regulated industries. In connection with this offering, we have entered into employment agreements with each of these executive officers. We do not maintain key man life insurance with respect to any of our executives.
 
Mr. Mitchell is a citizen of the United Kingdom who is working in the United States as a lawful permanent resident on a conditional basis. In order to retain his lawful permanent residency, Mr. Mitchell will need to apply to have the conditions on his permanent resident status removed prior to March 31, 2011. Although Mr. Mitchell intends to apply to have the conditions on his lawful permanent residency removed, he may not satisfy the requirements to have the conditions removed, or his application to do so may not be approved. The failure to remove the conditions on his permanent residency could result in Mr. Mitchell having to leave the United States or cause him to seek an alternative immigration status in the United States.
 
The loss of Mr. Mitchell or Mr. Neuman or other executive officers or key personnel could have a material adverse effect on our business, financial condition and results of operations.
 
We compete with a number of other finance companies and may encounter additional competition.
 
There are a number of finance companies that compete with us. Many are significantly larger and possess considerably greater financial, marketing, management and other resources than we do. The premium finance business and structured settlement business could also prove attractive to new entrants. As a consequence, competition in these sectors may increase. In addition, existing competitors may increase their market penetration and purchasing activities in one or more of the sectors in which we participate. The availability of the type of insurance policies that meet our actuarial and underwriting standards for our premium finance transactions is limited and sought by many of our competitors. Also, we rely on life insurance agents and brokers to refer premium finance transactions to us, and our competitors may offer better terms and conditions to such life insurance agents and brokers. Increased competition could result in reduced origination volume, reduced discount rates and/or other fees, each of which could materially adversely affect our revenue, which would have a material adverse effect on our business, financial condition and results of operations.
 
Risks Related to Our Common Stock and This Offering
 
There has been no prior public market for our common stock, and, therefore, you cannot be certain that an active trading market or a specific share price will be established.
 
Currently, there is no public trading market for our common stock, and it is possible that an active trading market will not develop upon completion of this offering or that the market price of our common stock will


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decline below the initial public offering price. We have been approved to list our common stock on the New York Stock Exchange, subject to official notice of issuance, under the symbol “IFT.” The initial public offering price per share will be determined by negotiation among us and the underwriters and may not be indicative of the market price of our common stock after completion of this offering.
 
The trading price of our common stock may decline after this offering.
 
The trading price of our common stock may decline after this offering for many reasons, some of which are beyond our control, including, among others:
 
  •  our results of operations;
 
  •  changes in expectations as to our future results of operations, including financial estimates and projections by securities analysts and investors;
 
  •  changes in laws and regulations applicable to structured settlements or premium finance transactions;
 
  •  increased competition for premium finance lending or the acquisition of structured settlements;
 
  •  our ability to secure credit facilities on favorable terms or at all;
 
  •  results of operations that vary from those expected by securities analysts and investors;
 
  •  future sales of our common stock;
 
  •  fluctuations in interest rates, inflationary pressures and other changes in the investment environment that affect returns on invested assets; and
 
  •  volatile and unpredictable developments, including man-made, weather-related and other natural catastrophes or terrorist attacks.
 
In addition, the stock market in general has experienced significant volatility that often has been unrelated to the operating performance of companies whose shares are traded. These market fluctuations could adversely affect the trading price of our common stock, regardless of our actual operating performance. As a result, the trading price of our common stock may be less than the initial public offering price, and you may not be able to sell your shares at or above the price you pay to purchase them.
 
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.
 
The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. Additionally, since we do not believe that there are other similar public companies involved in both the premium finance business and the structured settlement business as we are, the risk that we may never obtain research coverage by securities and industry analysts is heightened. If no securities or industry analysts commence coverage of us, the trading price for our stock would be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.
 
Public investors will suffer immediate and substantial dilution as a result of this offering.
 
The initial public offering price per share is significantly higher than our pro forma net tangible book value per share of our common stock. Accordingly, if you purchase shares in this offering, you will suffer immediate and substantial dilution of your investment. Based upon the issuance and sale of 16,666,667 shares of our common stock at an assumed initial offering price of $11.00 per share, which is the midpoint of the price range on the cover of this prospectus, less an amount equal to the underwriting discounts and


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commissions, you will incur immediate dilution of approximately $0.80 in the pro forma net tangible book value per share if you purchase common stock in this offering. In addition, investors in this offering will:
 
  •  pay a price per share that substantially exceeds the pro forma net tangible book value of our assets after subtracting liabilities; and
 
  •  contribute 74.5% of the total amount invested to date to fund us based on an assumed initial offering price to the public of $11.00 per share, which is the midpoint of the price range on the cover of this prospectus, and will own 82.2% of the shares of common stock outstanding after completion of this offering.
 
Future sales of our common stock may affect the trading price of our common stock and the future exercise of options may lower the price of our common stock.
 
We cannot predict what effect, if any, future sales of our common stock, or the availability of shares for future sale, will have on the trading price of our common stock. Sales of a substantial number of shares of our common stock in the public market after completion of this offering, or the perception that such sales could occur, may adversely affect the trading price of our common stock and may make it more difficult for you to sell your shares at a time and price that you determine appropriate. Upon completion of this offering, after giving effect to (i) the corporate conversion, pursuant to which all outstanding common and preferred limited liability company units of Imperial Holdings, LLC (including all accrued and unpaid dividends thereon) and all principal and accrued and unpaid interest outstanding under our promissory note in favor of IMPEX Enterprises, Ltd. will be converted into 2,300,273 shares of our common stock; (ii) the issuance of 27,000 shares of common stock to two of our employees pursuant to the terms of each of their respective phantom stock agreements; (iii) the conversion of a $30.0 million debenture into 1,272,727 shares of our common stock as described under “Corporate Conversion;” and (iv) the sale of 16,666,667 shares in this offering, there will be 20,266,667 shares of our common stock outstanding. Up to an additional 4,053,333 shares of common stock will be issuable upon the exercise of warrants issued to our existing members prior to the completion of this offering and if the underwriters’ over-allotment is exercised, our existing members will receive an aggregate of 500,000 additional warrants. Moreover, 1,200,000 additional shares of our common stock are available for future issuance under our Omnibus Plan. Following completion of this offering, we intend to register all of the 1,200,000 shares issuable or reserved for issuance under the Omnibus Plan. See “Description of Capital Stock” and “Executive Compensation.” We and our current directors, executive officers, shareholders and debenture holder have entered into 180-day lock-up agreements. The lock-up agreements are described in “Shares Eligible for Future Sale — Lock-Up Agreements.” An aggregate of 3,600,000 shares of our common stock will be subject to these lock-up agreements upon completion of this offering, plus any shares purchased by our officers, directors, employees and shareholders and their respective affiliates in the directed share program other than shares purchased by Pine Trading, Ltd. and its affiliates.
 
Being a public company will increase our expenses and administrative workload and will expose us to risks relating to evaluation of our internal controls over financial reporting required by Section 404 of the Sarbanes-Oxley Act of 2002.
 
As a public company, we will need to comply with additional laws and regulations, including the Sarbanes-Oxley Act of 2002, the Dodd-Frank Act, and related rules of the SEC and requirements of the New York Stock Exchange. We were not required to comply with these laws and requirements as a private company. Complying with these laws and regulations will require the time and attention of our board of directors and management and will increase our expenses. Among other things, we will need to: design, establish, evaluate and maintain a system of internal controls over financial reporting in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act and the related rules and regulations of the SEC and the Public Company Accounting Oversight Board; prepare and distribute periodic reports in compliance with our obligations under the federal securities laws; establish new internal policies, principally those relating to disclosure controls and procedures and corporate governance; institute a more comprehensive compliance function; and involve to a greater degree our outside legal counsel and accountants in the above activities.
 
In addition, we also expect that being a public company will make it more expensive for us to obtain director and officer liability insurance. We may be required to accept reduced coverage or incur substantially


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higher costs to obtain this coverage. These factors could also make it more difficult for us to attract and retain qualified executives and members of our board of directors, particularly directors willing to serve on our audit committee.
 
We are in the process of evaluating our internal control systems to allow management to report on, and our independent auditors to assess, our internal controls over financial reporting. We plan to perform the system and process evaluation and testing (and any necessary remediation) required to comply with the management certification and auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. We are required to comply with Section 404 in our annual report for the year ending December 31, 2011.
 
However, we cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or the impact of the same on our operations. Furthermore, upon completion of this process, we may identify control deficiencies of varying degrees of severity under applicable SEC and Public Company Accounting Oversight Board rules and regulations that remain unremediated.
 
If we fail to implement the requirements of Section 404 in a timely manner, we might be subject to sanctions or investigation by regulatory agencies such as the SEC. In addition, failure to comply with Section 404 or the report by us of a material weakness may cause investors to lose confidence in our financial statements or the trading price of our common stock to decline. If we fail to remediate any material weakness, our financial statements may be inaccurate, our access to the capital markets may be restricted and the trading price of our common stock may decline.
 
As a public company, we will be required to report, among other things, control deficiencies that constitute a “material weakness” or changes in internal controls that materially affect, or are reasonably likely to materially affect, internal controls over financial reporting. A “control deficiency” exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A “significant deficiency” is a control deficiency, or combination of control deficiencies, that adversely affects the ability to initiate, authorize, record, process or report financial data reliably in accordance with generally accepted accounting principles that results in more than a remote likelihood that a misstatement of financial statements that is more than inconsequential will not be prevented or detected. A “material weakness” is a significant deficiency, or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.
 
Our independent registered public accounting firm has in the past identified certain deficiencies in our internal controls that it considered to be control deficiencies and material weaknesses. If we fail to remediate these internal control deficiencies and material weaknesses and maintain an effective system of internal controls over financial reporting, we may not be able to accurately report our financial results.
 
During their audit of our financial statements for the years ended December 31, 2008 and 2007, Grant Thornton LLP, our independent registered public accounting firm, identified certain deficiencies in our internal controls, including deficiencies that they considered to be significant deficiencies and material weaknesses. Specifically, in their audit of our financial statements for the year ended December 31, 2008, our independent auditors identified a material weakness relating to the number of adjustments recorded to reconcile differences and to correct accounts improperly booked relating to the year-end closing and reporting process. In their audit of our financial statements for the year ended December 31, 2007, our independent auditors identified material weaknesses relating to (i) the incorrect recordation of agency fees, (ii) a reversal of capital contributions entry due to inaccuracies in the timing of the payments and (iii) inaccuracies in the input of maturity dates of loans. Additionally, the audit identified a significant control deficiency with respect to the number of adjusting journal entries as a result of us having a limited accounting staff.
 
In response, we initiated corrective actions to remediate these control deficiencies and material weaknesses. Although no material deficiencies were identified during the audit of our financial statements for the period ended December 31, 2009, it is possible that we or our independent auditors may identify significant deficiencies or material weaknesses in our internal control over financial reporting in the future. Any failure or difficulties in implementing and maintaining these controls could cause us to fail to meet the periodic reporting obligations


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that we will become subject to after this offering or result in material misstatements in our financial statements. The existence of a material weakness could result in errors to our financial statements requiring a restatement of our financial statements, cause us to fail to meet our reporting obligations and cause investors to lose confidence in our reported financial information, which could lead to a decline in our stock price.
 
Due to the concentration of our capital stock ownership with certain of our executive officers, they may be able to influence shareholder decisions, which may conflict with your interests as a shareholder.
 
Immediately upon completion of this offering Antony Mitchell, our chief executive officer, and Jonathan Neuman, our chief operating officer, directly and through corporations that they control, will each beneficially own shares representing approximately 1.8% of the voting power of our common stock. As a result, these executive officers may have the ability to significantly influence matters requiring shareholder approval, including, without limitation, the election or removal of directors, mergers, acquisitions, changes of control of our company and sales of all or substantially all of our assets. Your interests as a shareholder may conflict with their interests, and the trading price of shares of our common stock could be adversely affected.
 
We have agreed to indemnify Slate Capital LLC and Lexington for any liability incurred in connection with the registration statement of which this prospectus is a part.
 
In connection with our arrangements with Slate Capital LLC (“Slate”) and Lexington as described in the registration statement of which this prospectus is a part, we have agreed to indemnify Slate and Lexington and each of their respective affiliates against any and all liability, loss, damage or expense incurred by such entities in connection with any investigation, inquiry, action, suit, demand or claim for sums of money brought or made against any such entity relating to the registration statement or any amendment or supplement thereto, for any actual or alleged violations of state or federal securities laws with respect to any untrue statement or alleged untrue statement of a material fact contained in the registration statement or any supplement or amendment thereto or any omission or alleged omission to state therein a material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. Any indemnification claim that we are required to pay to such entities could have a material adverse effect on our business, financial condition and results of operations.
 
Provisions in our executive officers’ employment agreements could impede an attempt to replace or remove our directors or otherwise effect a change of control, which could diminish the price of our common stock.
 
We have entered into employment agreements with our executive officers as described in the section titled “Executive Compensation — Employment Agreements.” The agreements for our Chief Executive Officer and President provide for substantial payments in the event of a material change in the geographic location where such officers perform their duties or upon a material diminution of their base salaries or responsibilities. For Messrs. Mitchell and Neuman, these payments are equal to three times the sum of base salary and the average of the three years’ annual cash bonus, unless the triggering event occurs during the first three years of their respective employment agreements, in which case the payments are equal to six times base salary. These payments may deter any transaction that would result in a change in control, which could diminish the price of our common stock.
 
We have received a claim by our former general counsel.
 
We are involved in a dispute with our former general counsel whom we terminated on November 8, 2010. On December 30, 2010, she filed a demand for mediation and arbitration with the American Arbitration Association. She has asserted claims against the Company and against Antony Mitchell, our Chief Executive Officer, and Jonathan Neuman, our President and Chief Operating Officer, individually. She alleges that she was fraudulently induced by the Company, and Messrs. Neuman and Mitchell, to leave her former position based on promises made to her in regard to a proposed equity option grant referenced in her offer letter. She further alleges that she was subject to unequal and discriminatory treatment based on her gender under Title VII of the federal Civil Rights Act and other statutes, and received unequal compensation compared with


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the Company’s male Chief Financial Officer. She has asserted that she is entitled to recover compensatory damages in excess of $2.16 million, punitive damages and attorneys’ fees. See “Business — Legal Proceedings.” While it is difficult to ascertain the outcome of this matter, we believe that it is without merit, and intend to vigorously defend the action. We are currently unable to estimate the amount of potential damages, if any, we could incur as a result of this claim and have not established a reserve for this litigation. Despite our beliefs about the merit of the claim, if an arbitrator, court or government agency were to issue an award in favor of our former general counsel, such award could substantially diminish our available cash or diminish the amount of stock options that are expected to be available for current employees following this offering, or otherwise have a material adverse effect on the Company.
 
Provisions in our articles of incorporation and bylaws could impede an attempt to replace or remove our directors or otherwise effect a change of control, which could diminish the price of our common stock.
 
Our articles of incorporation and bylaws contain provisions that may entrench directors and make it more difficult for shareholders to replace directors even if the shareholders consider it beneficial to do so. In particular, shareholders are required to provide us with advance notice of shareholder nominations and proposals to be brought before any annual meeting of shareholders, which could discourage or deter a third party from conducting a solicitation of proxies to elect its own slate of directors or to introduce a proposal. In addition, our articles of incorporation eliminate our shareholders’ ability to act without a meeting and require the holders of not less than 50% of the voting power of our common stock to call a special meeting of shareholders.
 
These provisions could delay or prevent a change of control that a shareholder might consider favorable. For example, these provisions may prevent a shareholder from receiving the benefit from any premium over the market price of our common stock offered by a bidder in a potential takeover. Even in the absence of an attempt to effect a change in management or a takeover attempt, these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging changes in management and takeover attempts in the future. Furthermore, our articles of incorporation and our bylaws provide that the number of directors shall be fixed from time to time by our board of directors, provided that the board shall consist of at least three and no more than fifteen members.
 
Certain laws of the State of Florida could impede an attempt to replace or remove our directors or otherwise effect a change of control, which could diminish the price of our common stock.
 
As a Florida corporation, we are subject to the Florida Business Corporation Act, which provides that a person who acquires shares in an “issuing public corporation,” as defined in the statute, in excess of certain specified thresholds generally will not have any voting rights with respect to such shares unless such voting rights are approved by the holders of a majority of the votes of each class of securities entitled to vote separately, excluding shares held or controlled by the acquiring person. The Florida Business Corporation Act also contains a statute which provides that an affiliated transaction with an interested shareholder generally must be approved by (i) the affirmative vote of the holders of two-thirds of our voting shares, other than the shares beneficially owned by the interested shareholder, or (ii) a majority of the disinterested directors.
 
Additionally, one of our subsidiaries, Imperial Life Settlements, LLC, a Delaware limited liability company, is licensed as a viatical settlement provider and is regulated by the Florida Office of Insurance Regulation. As a Florida viatical settlement provider, Imperial Life Settlements, LLC is subject to regulation as a specialty insurer under certain provisions of the Florida Insurance Code. Under applicable Florida law, no person can finally acquire, directly or indirectly, 10% or more of the voting securities of a viatical settlement provider or its controlling company without the written approval of the Florida Office of Insurance Regulation. Accordingly, any person who acquires beneficial ownership of 10% or more of our voting securities will be required by law to notify the Florida Office of Insurance Regulation no later than five days after any form of tender offer or exchange offer is proposed, or no later than five days after the acquisition of securities or ownership interest if no tender offer or exchange offer is involved. Such person will also be required to file with the Florida Office of Insurance Regulation an application for approval of the acquisition no later than 30 days after the same date that triggers the 5-day notice requirement.


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The Florida Office of Insurance Regulation may disapprove the acquisition of 10% or more of our voting securities by any person who refuses to apply for and obtain regulatory approval of such acquisition. In addition, if the Florida Office of Insurance Regulation determines that any person has acquired 10% or more of our voting securities without obtaining its regulatory approval, it may order that person to cease the acquisition and divest itself of any shares of our voting securities which may have been acquired in violation of the applicable Florida law. Due to the requirement to file an application with and obtain approval from the Florida Office of Insurance Regulation, purchasers of 10% or more of our voting securities may incur additional expenses in connection with preparing, filing and obtaining approval of the application, and the effectiveness of the acquisition will be delayed pending receipt of approval from the Florida Office of Insurance Regulation.
 
The Florida Office of Insurance Regulation may also take disciplinary action against Imperial Life Settlements, LLC’s license if it finds that an acquisition of our voting securities is made in violation of the applicable Florida law and would render the further transaction of business hazardous to our customers, creditors, shareholders or the public.


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FORWARD-LOOKING STATEMENTS
 
Some of the statements under the captions “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” and elsewhere in this prospectus may include forward-looking statements. These statements reflect the current views of our management with respect to future events and our financial performance. These statements include forward-looking statements with respect to our business and the insurance industry in general. Statements that include the words “expect,” “intend,” “plan,” “believe,” “project,” “estimate,” “may,” “should,” “anticipate” and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the federal securities laws or otherwise.
 
Forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. We believe that these factors include, but are not limited to, the following:
 
  •  our results of operations;
 
  •  our ability to continue to grow our businesses;
 
  •  our ability to obtain financing on favorable terms or at all;
 
  •  changes in laws and regulations applicable to premium finance transactions or structured settlements;
 
  •  changes in mortality rates and the accuracy of our assumptions about life expectancies;
 
  •  increased competition for premium finance lending or for the acquisition of structured settlements;
 
  •  adverse developments in capital markets;
 
  •  loss of the services of any of our executive officers;
 
  •  the effects of United States involvement in hostilities with other countries and large-scale acts of terrorism, or the threat of hostilities or terrorist acts; and
 
  •  changes in general economic conditions, including inflation, changes in interest rates and other factors.
 
The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this prospectus, including in particular the risks described under “Risk Factors” beginning on page 13 of this prospectus. If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Any forward-looking statements you read in this prospectus reflect our views as of the date of this prospectus with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. Before making a decision to purchase our common stock, you should carefully consider all of the factors identified in this prospectus that could cause actual results to differ.


32


 

 
USE OF PROCEEDS
 
We estimate that our net proceeds from this offering, based on the sale of 16,666,667 shares of our common stock at an assumed initial public offering price of $11.00 per share, which is the midpoint of the price range set forth on the cover of this prospectus, after deducting the underwriting discounts and commissions and our estimated offering expenses, will be approximately $168.1 million. We estimate that our net proceeds from this offering will be $194.0 million if the underwriters exercise their over-allotment option in full.
 
We intend to use approximately $130.0 million of the net proceeds in our premium financing lending activities and up to $20.0 million in our structured settlement activities. We intend to use any remaining proceeds for general corporate purposes.
 
Each $1.00 increase (decrease) in the assumed initial public offering price of $11.00 per share, which is the midpoint of the price range on the cover of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately $15.7 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated expenses payable by us.
 
Pending the use of the net proceeds from this offering, we may invest some of the proceeds in short-term investment-grade instruments.


33


 

 
DIVIDEND POLICY
 
We do not expect to pay any cash dividends on our common stock for the foreseeable future. We currently intend to retain any future earnings to finance our operations and growth. Any future determination to pay cash dividends on our common stock will be at the discretion of our board of directors and will be dependent on our earnings, financial condition, operating results, capital requirements, any contractual, regulatory and other restrictions on the payment of dividends by us or by our subsidiaries to us, and other factors that our board of directors deems relevant.
 
Imperial is a holding company and has no direct operations. Our ability to pay dividends in the future depends on the ability of our operating subsidiaries to pay dividends to us. Our existing debt facilities restrict the ability of certain of our special purpose subsidiaries to pay dividends. In addition, future debt arrangements may contain certain prohibitions or limitations on the payment of dividends.


34


 

 
CORPORATE CONVERSION
 
In connection with this offering, we will complete a reorganization in which Imperial Holdings, Inc., a Florida corporation, will succeed to the business of Imperial Holdings, LLC, a Florida limited liability company, and the members of Imperial Holdings, LLC will become shareholders of Imperial Holdings, Inc. We refer to this reorganization as the corporate conversion. In order to consummate the corporate conversion, a certificate of conversion was filed with the Florida Secretary of State and became effective on February 3, 2011. In connection with the corporate conversion, all of our outstanding common and preferred limited liability company units will be converted into shares of common stock of Imperial Holdings, Inc.
 
As part of our corporate conversion, we entered into a plan of conversion with our shareholders on January 12, 2011, as amended on February 3, 2011. The plan of conversion, which describes the corporate conversion as well as other transactions and agreements by the parties with an interest in our equity, reflects an agreement among our shareholders as to the allocation of the shares of common stock to be issued to our shareholders in the corporate conversion. Thus, there is no formula that may be used to describe the conversion of a common unit or a Series A, B, C, D and E preferred unit into common stock.
 
On November 1, 2010, Premium Funding, Inc. and Branch Office of Skarbonka Sp. z o.o. (“Skarbonka”) agreed to exchange the 112,500 common units and the 25,000 preferred units owned by Premium Funding, Inc. and the promissory note issued to Skarbonka for a $30.0 million debenture that matures October 4, 2011. The debenture was issued to Skarbonka as holder and agent for Premium Funding. Premium Funding and Skarbonka are related parties. Following the corporate conversion and immediately prior to the closing of this offering, Skarbonka’s $30.0 million debenture will convert into 1,272,727 shares of our common stock.
 
We valued the components of the $30 million debenture as follows:
 
  •  $8.0 million of the debenture was attributed to the repurchase of 112,500 shares of common units. These common units were originally issued on December 15, 2006 for $5.0 million in cash. The value attributed to the common units reflects an agreement between us and our shareholders and equates to a return on investment of approximately 15% per annum for the period they have been outstanding (approximately 4 years).
 
  •  $19.0 million of the debenture was attributed to (i) the repayment of $18.3 million ($16.1 million of principal and $2.2 million of accrued interest) due as of November 1, 2010 on the promissory note in favor of Skarbonka and (ii) an agreement between us and our shareholders to contribute an additional $700,000 in value to imputed interest on the debenture until the expected repayment date.
 
  •  $3.0 million of value was attributed to the repurchase of 25,000 shares of Series B preferred units. The Series B preferred units were originally issued on December 30, 2009 for $2.5 million. As of November 1, 2010 (issuance of debenture), these units had an unpaid preferred return of $333,000.
 
Pursuant to the plan of conversion, all of our outstanding common units and Series A, B, C, D and E preferred units and all principal and accrued and unpaid interest outstanding under our promissory note in favor of IMPEX Enterprises, Ltd. will be converted into 2,300,273 shares of our common stock. The Series F preferred units and the $11,000,000 promissory note will be extinguished as a result of the corporate conversion.
 
Immediately after the corporate conversion and prior to the conversion of the Skarbonka debenture and the closing of this offering, our shareholders will consist of two Florida corporations and one Florida limited liability company. These three shareholders will reorganize so that their beneficial owners who are listed under “Principal Shareholders,” including Messrs. Mitchell and Neuman, will receive the same number of shares of common stock of Imperial Holdings, Inc. issuable to the members of Imperial Holdings, LLC in the corporate conversion. We do not expect any of the prior losses which the members of Imperial Holdings, LLC have accumulated to carry forward into Imperial Holdings, Inc. as a result of the corporate conversion.


35


 

 
We have phantom stock agreements with two employees. After the corporate conversion and prior to the closing of this offering, these phantom stock agreements will terminate and the two employees will receive an aggregate of 27,000 shares of common stock. We expect to incur stock compensation expense of approximately $300,000 related to the issuance of common stock to our two employees with phantom stock agreements.
 
In addition, following the corporate conversion and upon the closing of this offering, our three current shareholders will receive warrants that may be exercised for up to a total of 4,053,333 shares of common stock. In addition, our three current shareholders will receive warrants that may be exercised for up to 500,000 shares if the underwriters exercise their over-allotment option. See “Warrants” in the section titled “Description of Capital Stock.”


36


 

 
CAPITALIZATION
 
The following table sets forth our capitalization as of September 30, 2010:
 
  •  on an actual basis;
 
  •  on a pro forma basis to give effect to (i) the consummation of the corporate conversion, pursuant to which all outstanding common and preferred limited liability company units (including all accrued and unpaid dividends thereon) and all principal and accrued and unpaid interest outstanding under our promissory note in favor of IMPEX Enterprises, Ltd. will be converted into 2,300,273 shares of our common stock; (ii) the issuance of 27,000 shares of common stock to two of our employees pursuant to the terms of each of their respective phantom stock agreements; and (iii) the issuance and conversion of a $30.0 million debenture into 1,272,727 shares of our common stock, as described under “Corporate Conversion;” and
 
  •  on a pro forma as adjusted basis to give effect to the above and our sale of 16,666,667 shares of common stock at an assumed initial public offering price of $11.00 per share, which is the midpoint of the price range on the cover of this prospectus, after the deduction of the underwriting discounts and commissions and the estimated offering expenses payable by us.
 
You should read this table in conjunction with the “Use of Proceeds,” “Selected Historical and Unaudited Pro Forma Consolidated and Combined Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of this prospectus and our financial statements and related notes included in the back of this prospectus.
 
                         
    As of September 30, 2010  
                Pro Forma As
 
    Actual     Pro Forma     Adjusted  
    (In thousands)  
 
Debt Outstanding:
                       
Notes payable
  $ 82,393     $ 62,539     $ 62,539  
                         
Total liabilities
  $ 82,393     $ 62,539     $ 62,539  
                         
Members’ equity:
                       
Member units — preferred (500,000 authorized in the aggregate)
                       
Member units — Series A preferred (90,769 issued and outstanding, actual; 0 issued and outstanding, pro forma and pro forma as adjusted)
    4,035              
Member units — Series B preferred (50,000 issued and outstanding, actual; 0 issued and outstanding, pro forma and pro forma as adjusted)
    5,000              
Member units — Series C preferred (70,000 issued and outstanding, actual; 0 issued and outstanding, pro forma and pro forma as adjusted)
    7,000              
Member units — Series D preferred (7,000 issued and outstanding, actual; 0 issued and outstanding, pro forma and pro forma as adjusted)
    700              
Member units — Series E preferred (73,000 issued and outstanding, actual; 0 issued and outstanding, pro forma and pro forma as adjusted)
    7,300              
Subscription receivable
    (5,000 )            
Member units — common (500,000 authorized; 450,000 issued and outstanding, actual; 0 issued and outstanding, pro forma and pro forma as adjusted)
    19,924              
Accumulated deficit
    (28,505 )            
                         
Total Members’ equity
  $ 10,454     $     $  
                         


37


 

                         
    As of September 30, 2010  
                Pro Forma As
 
    Actual     Pro Forma     Adjusted  
    (In thousands)  
 
Shareholders’ equity:
                       
Common stock, par value $0.01 per share; 80,000,000 shares authorized, no shares issued and outstanding, actual; 3,600,000 shares issued and outstanding, pro forma; and 20,266,667 shares issued and outstanding, pro forma as adjusted
          36       203  
Additional paid in capital
          67,138       235,116  
Accumulated deficit
          (28,505 )     (28,505 )
                         
Total shareholders’ equity
          38,669       206,814  
                         
Total capitalization
  $ 92,847     $ 101,208     $ 269,353  
                         
 
The number of shares of common stock shown to be outstanding upon the completion of this offering excludes:
 
  •  up to 2,500,000 shares of common stock that may be issued pursuant to the underwriters’ over-allotment option;
 
  •  4,053,333 shares of common stock issuable upon the exercise of warrants that will be issued to our existing shareholders prior to the closing of this offering and 500,000 shares of common stock issuable upon the exercise of warrants that will be issued to our existing stockholders in connection with the closing of the underwriters’ over-allotment option; and
 
  •  1,200,000 additional shares available for future issuance under our Omnibus Plan.

38


 

 
DILUTION
 
Our net tangible book value as of September 30, 2010, on a pro forma basis, was approximately $36.7 million, or $10.74 per share of our common stock. Pro forma net tangible book value per share represents our total tangible assets reduced by our total liabilities and divided by the number of shares of common stock outstanding after giving effect to:
 
  •  the consummation of the corporate conversion, pursuant to which all of our outstanding common and preferred limited liability company units (including all accrued and unpaid dividends thereon) and all principal and accrued and unpaid interest outstanding under our promissory note in favor of IMPEX Enterprises, Ltd. will be converted into 2,300,273 shares of our common stock;
 
  •  the issuance of 27,000 shares of common stock to two of our employees pursuant to the terms of each of their respective phantom stock agreements; and
 
  •  the issuance and conversion of a $30.0 million debenture into 1,272,727 shares of our common stock, as described under “Corporate Conversion.”
 
Dilution in pro forma net tangible book value per share represents the difference between the amount per share that you will pay in this offering and the net tangible book value per share immediately after this offering.
 
After giving effect to our receipt of approximately $168.1 million of estimated net proceeds (after deducting underwriting discounts and commissions and estimated offering expenses payable by us) from our sale of common stock in this offering based on an assumed initial public offering price of $11.00 per share, which is the midpoint of the price range on the cover of this prospectus, our pro forma net tangible book value as of September 30, 2010 would have been approximately $206.8 million, or $10.20 per share of common stock. This amount represents an immediate decrease in pro forma net tangible book value of $0.54 per share of our common stock to existing shareholders and an immediate dilution of $0.80 per share of our common stock to new investors purchasing shares of common stock in this offering at the assumed initial public offering price. The following table illustrates the dilution:
 
                 
Assumed initial public offering price per share
          $ 11.00  
Pro forma net tangible book value per share as of September 30, 2010
  $ 10.74          
Decrease in pro forma net tangible book value per share attributable to this offering
    0.54          
Pro forma net tangible book value per share after this offering
            10.20  
Dilution per share to new investors
          $ 0.80  
 
If the underwriters exercise their over-allotment option in full, the pro forma net tangible book value per share after giving effect to the offering would be $10.21 per share. This represents a decrease in pro forma net tangible book value of $0.53 per share to existing shareholders and dilution in pro forma net tangible book value of $0.79 per share to new investors.


39


 

 
The following table summarizes, as of September 30, 2010, the differences between the number of shares issued to, the total consideration paid, and the average price per share paid by existing shareholders and by new investors in this offering, after giving effect to (i) the issuance of 2,300,273 shares of our common stock to our shareholders in connection with the corporate conversion, (ii) the issuance of 27,000 shares of common stock to two of our employees pursuant to the terms of each of their respective phantom stock agreements; (iii) the conversion of a $30.0 million debenture into 1,272,727 shares of our common stock, as described under “Corporate Conversion;” and (iv) the issuance of 16,666,667 shares of common stock in this offering at the assumed initial public offering price of $11.00 per share, which is the midpoint of the price range on the cover of this prospectus, and excluding underwriter discounts and commissions and estimated offering expenses payable by us. The table below assumes an initial public offering price of $11.00 per share, which is the midpoint of the price range on the cover of this prospectus, for shares purchased in this offering and excludes underwriting discounts and commissions and estimated offering expenses payable by us:
 
                                         
    Shares Issued   Total Consideration   Average Price
    Number   Percent   Amount   Percent   per Share
 
Existing shareholders
    3,600,000       17.8 %   $ 62,602,000       25.5 %   $ 17.39  
New investors
    16,666,667       82.2 %   $ 183,333,337       74.5 %   $ 11.00  
Total
    20,266,667       100.0 %   $ 245,935,337       100.0 %   $ 12.13  
 
This table does not give effect to:
 
  •  up to 2,500,000 shares of common stock that may be issued pursuant to the underwriters’ over-allotment option;
 
  •  4,053,333 shares of common stock issuable upon the exercise of warrants that will be issued to our existing shareholders prior to the closing of this offering and 500,000 shares of common stock issuable upon the exercise of warrants that will be issued to our existing stockholders in connection with the closing of the underwriters’ over-allotment option; and
 
  •  1,200,000 additional shares available for future issuance under our Omnibus Plan.


40


 

 
SELECTED HISTORICAL AND UNAUDITED
 
PRO FORMA CONSOLIDATED AND COMBINED FINANCIAL AND OPERATING DATA
 
The following table sets forth selected historical and unaudited pro forma consolidated financial and operating data of Imperial Holdings, LLC (to be converted into Imperial Holdings, Inc. in connection with this offering) as of such dates and for such periods indicated below. The selected unaudited pro forma condensed consolidated financial data for the nine months ended September 30, 2010 and the twelve months ended December 31, 2009 give pro forma effect to the corporate conversion and conversion of promissory notes as if they had occurred on the first day of the periods presented. The selected unaudited pro forma financial and operating data set forth below are presented for information purposes only, should not be considered indicative or actual results of operations that would have been achieved had the corporate conversion been consummated on the dates indicated, and do not purport to be indicative of balance sheet data or income statement data as of any future date or future period. These selected historical and unaudited pro forma consolidated results are not necessarily indicative of results to be expected in any future period. You should read the following financial information together with the other information contained in this prospectus, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes.
 
We have derived the selected historical income statement data for the nine months ended September 30, 2010 and 2009 and balance sheet data as of September 30, 2010 from our unaudited consolidated financial statements included elsewhere in this prospectus. Such unaudited financial statements include, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, which we consider necessary for a fair presentation of our financial position and results of operations. The selected historical income statement data for the years ended December 31, 2009, 2008 and 2007 and balance sheet data as of December 31, 2009 and 2008 were derived from our audited consolidated financial statements included elsewhere in this prospectus. The income statement data for the period from December 15, 2006 through December 31, 2006 and balance sheet data for December 31, 2007 and 2006 were derived from our audited consolidated financial statements that are not included in this prospectus.


41


 

                                                                 
    Historical     Pro Forma  
                            Nine Months
             
    Period from
                      Ended
          Nine Months
 
    Dec. 15, 2006 -
    Years Ended December 31,     September 30,     Year Ended
    Ended
 
    Dec. 31, 2006     2007     2008     2009     2009     2010     Dec. 31, 2009     September 30, 2010  
                            (Unaudited)     (Unaudited)  
    (In thousands, except share data)  
 
Income
                                                               
Agency fee income
  $ 678     $ 24,515     $ 48,004     $ 26,114     $ 20,216     $ 9,099     $ 26,114     $ 9,099  
Interest income
    316       4,888       11,914       21,483       15,843       15,795       21,483       15,795  
Origination fee income
          526       9,399       29,853       21,865       16,728       29,853       16,728  
Gain on sale of structured settlements
                443       2,684       499       4,848       2,684       4,848  
Gain on forgiveness of debt
                      16,410       14,886       6,968       16,410       6,968  
Gain on sale of life settlements
                                  1,954             1,954  
Change in fair value of life settlements and structured settlement receivables
                                  4,805             4,805  
Other income
          2       47       71       53       195       71       195  
                                                                 
Total income
    994       29,931       69,807       96,615       73,362       60,392       96,615       60,392  
                                                                 
Expenses
                                                               
Interest expense (3)
          1,343       12,752       33,755       24,710       24,244       30,479 (1)     21,787 (1)
Provision for losses on loans receivable
          2,332       10,768       9,830       6,705       3,514       9,830       3,514  
Loss (gain) on loan payoffs and settlements, net
          (225 )     2,738       12,058       11,279       4,320       12,058       4,320  
Amortization of deferred costs
          126       7,569       18,339       13,101       22,601       18,339       22,601  
Selling, general and administrative expenses (3)
    891       24,335       41,566       31,269       22,997       22,118       31,269       22,118  
Provision for income taxes
                                        (2)     (2)
                                                                 
Total expenses
    891       27,911       75,393       105,251       78,792       76,797     $ 101,975       74,340  
                                                                 
Net Income (loss)
  $ 103     $ 2,020     $ (5,586 )   $ (8,636 )   $ (5,430 )   $ (16,405 )   $ (5,360 )   $ (13,948 )
                                                                 
Earnings per Share
                                                               
Basic and diluted
                                                  $ (1.49 )   $ (3.87 )
                                                                 
Weighted Average Common Shares Outstanding
                                                               
Basic and diluted
                                                    3,600,000       3,600,000  
                                                                 
 
 
(1) Reflects a reduction of interest expense of $3.3 million for the year ended December 31, 2009 and $2.5 million for the nine months ended September 30, 2010, due to the conversion of our promissory note in favor of IMPEX Enterprises, Ltd. into shares of our common stock, which will occur prior to the closing of this offering, and the conversion of our promissory note in favor of Branch Office of Skarbonka Sp. z o.o into a $30.0 million debenture, and the conversion of that $30.0 million debenture into shares of our common stock, which will occur immediately prior to the closing of this offering.
 
(2) The results of the Company being treated for the pro forma presentation as a “C” corporation resulted in no impact to the consolidated and combined balance sheet or statements of operations for the pro forma periods presented. The primary reasons for this are that the losses produce no current benefit and any net operating losses generated and other deferred assets (net of liabilities) would be fully reserved due to historical operating losses. The Company, therefore, has not recorded any pro forma tax provision.
 
(3) Includes amounts for related parties. Refer to our consolidated and combined financial statements for detail.
 


42


 

                                                         
    Historical     Pro Forma  
    December 31,     September 30,     September 30,
 
    2006     2007     2008     2009     2009     2010     2010  
                            (Unaudited)     (Unaudited)  
    (In thousands, except share data)  
 
Assets:
                                                       
Cash and cash equivalents
    5,351     $ 1,495     $ 7,644     $ 15,891     $ 466     $ 3,685     $ 8,685 (1)
Restricted cash
          1,675       2,221                   643       643  
Certificate of deposit — restricted
          562       659       670       666       877       877  
Agency fees receivable, net of allowance for doubtful accounts
    136       5,718       8,871       2,165       1,816       736       736  
Deferred costs, net
          672       26,650       26,323       26,963       11,455       11,455  
Interest receivable, net
    244       2,972       8,604       21,034       18,909       17,175       17,175  
Loans receivable, net
    3,909       43,650       148,744       189,111       187,330       121,564       121,564  
Structured settlements receivables, net
          377       1,141       152       6,969       10,554       10,554  
Receivables from sales of structured Settlements
                      320             528       528  
Investment in life settlements, at estimated fair value
                      4,306       1,711       8,846       8,846  
Investment in life settlement fund
          1,714             542             1,270       1,270  
Fixed assets, net
    756       1,875       1,850       1,337       1,514       919       919  
Prepaid expenses and other assets
    30       835       4,180       887       503       2,017       2,017  
Deposits
    37       456       476       982       487       699       699  
                                                         
Total assets
  $ 10,463     $ 62,001     $ 211,040     $ 263,720     $ 247,334     $ 180,968     $ 185,968  
                                                         
Liabilities:
                                                       
Accounts payable and accrued expenses (3)
  $ 505     $ 3,437     $ 5,533     $ 3,170     $ 2,981     $ 4,210     $ 4,210  
Payable for purchase of structured settlements
                                            7,094       7,094  
Lender protection insurance claims received in advance
                                            60,645       60,645  
Interest payable (3)
          882       5,563       12,627       14,552       16,172       12,811 (2)
Notes payable (3)
          35,559       183,462       231,064       214,737       82,393       62,539 (2)
                                                         
Total liabilities
  $ 505     $ 39,878     $ 194,558     $ 246,861     $ 232,270     $ 170,514     $ 147,299  
                                                         
Member units — preferred (500,000 authorized in the aggregate)
                                                       
Member units — Series A preferred (90,796 issued and outstanding, actual; 0 issued and outstanding, pro forma)
                      4,035       4,035       4,035       (1)
Member units — Series B preferred (50,000 issued and outstanding, actual; 0 issued and outstanding, pro forma)
                      5,000             5,000       (1)
Member units — Series C preferred (70,000 issued and outstanding, actual; 0 issued and outstanding, pro forma)
                                  7,000       (1)
Member units — Series D preferred (7,000 issued and outstanding, actual; 0 issued and outstanding, pro forma)
                                  700       (1)
Member units — Series E preferred (73,000 issued and outstanding, actual; 0 issued and outstanding, pro forma and pro forma as adjusted)
                                  7,300       (1)
Subscription receivable
                                  (5,000 )      
Member units — common (500,000 authorized; 450,000 issued and outstanding, actual; 0 issued and outstanding, pro forma)
    9,855       20,000       19,945       19,924       19,924       19,924       (1)
Common stock
                                        36 (1)(2)
Paid-in capital
                                        67,138 (1)(2)
Retained earnings (accumulated deficit)
    103       2,123       (3,463 )     (12,100 )     (8,895 )     (28,505 )     (28,505 )
                                                         
Total members’ equity
    9,958       22,123       16,482       16,859       15,064       10,454       38,669  
                                                         
Total liabilities and members’ equity
  $ 10,463     $ 62,001     $ 211,040     $ 263,720     $ 247,334     $ 180,968     $ 185,968  
                                                         
 
(1) Reflects the conversion of all common and preferred limited liability company units of Imperial Holdings, LLC into shares of our common stock. Also reflects the cash received in October, 2010 of $5.0 million related to a subscription receivable for the September 2010 sale of 50,000 Series E preferred units, which will also be converted into shares of our common stock as a result of the corporate conversion. Does not reflect the sale of 110,000 Series F preferred units effective December 31, 2010, which were issued in exchange for a promissory note, and therefore have no effect on stockholders’ equity.
 
(2) Reflects the issuance and conversion of a $30.0 million debenture into shares of our common stock immediately prior to the closing of this offering. Also reflects the conversion of all principal and accrued interest outstanding under our promissory note in favor of IMPEX Enterprises, Ltd. into shares of common stock of Imperial Holdings, Inc. as a result of the corporate conversion.
 
(3) Includes amounts payable to related parties. Refer to our consolidated and combined financial statements for details.

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Premium Finance Segment — Selected Operating Data (dollars in thousands):
 
                                                         
        Three Months Ended
  Nine Months Ended
    Year Ended December 31,   September 30,   September 30,
    2007   2008   2009   2009   2010   2009   2010
 
Period Originations:
                                                       
Number of loans originated
    196       499       194       23       15       145       86  
Principal balance of loans originated
  $ 44,501     $ 97,559     $ 51,573     $ 7,385     $ 2,788     $ 39,030     $ 18,245  
Aggregate death benefit of policies underlying loans originated
  $ 794,517     $ 2,283,223     $ 942,312     $ 130,600     $ 62,500     $ 708,910     $ 417,275  
Selling general and administrative expenses
  $ 15,082     $ 21,744     $ 13,742     $ 2,623     $ 2,495     $ 11,165     $ 7,234  
Average Per Origination During Period:
                                                       
Age of insured at origination
    75.5       74.9       74.9       74.1       75.0       74.7       74.0  
Life expectancy of insured (years)
    12.9       13.2       13.2       13.2       14.1       13.4       14.1  
Monthly premium (year after origination)
  $ 14.0     $ 14.9     $ 16.0     $ 18.8     $ 13.1     $ 16.3     $ 13.9  
Death benefit of policies underlying loans originated
  $ 4,053.7     $ 4,575.6     $ 4,857.3     $ 5,678.3     $ 4,166.7     $ 4,889.0     $ 4,852.0  
Principal balance of the loan
  $ 227.0     $ 195.5     $ 265.8     $ 321.1     $ 185.8     $ 269.2     $ 212.1  
Interest rate charged
    10.5 %     10.8 %     11.4 %     11.5 %     11.5 %     11.5 %     11.5 %
Agency fee
  $ 125.1     $ 96.2     $ 134.6     $ 153.4     $ 92.1     $ 139.4     $ 105.8  
Agency fee as % of principal balance
    55.1 %     49.2 %     50.6 %     47.8 %     49.6 %     51.8 %     49.9 %
Origination fee
  $ 45.8     $ 77.9     $ 118.9     $ 138.4     $ 76.5     $ 114.7     $ 88.5  
Origination fee as % of principal balance
    20.2 %     39.9 %     44.7 %     43.1 %     41.1 %     42.6 %     41.7 %
End of Period Loan Portfolio
                                                       
Loans receivable, net
  $ 43,650     $ 148,744     $ 189,111     $ 187,330     $ 121,564     $ 187,330     $ 121,564  
Number of policies underlying loans receivable
    265       702       692       706       426       706       426  
Aggregate death benefit of policies underlying loans receivable
  $ 1,065,870     $ 2,895,780     $ 3,091,099     $ 3,296,937     $ 2,120,587     $ 3,296,937     $ 2,120,587  
Number of loans with insurance protection
          494       631       613       403       613       403  
Loans receivable, net (insured loans only)
  $     $ 118,864     $ 177,137     $ 169,455     $ 116,115     $ 169,455     $ 116,115  
Average Per Loan:
                                                       
Age of insured in loans receivable
    76.3       75.3       75.4       75.5       74.3       75.5       74.3  
Life expectancy of insured (years)
    12.4       13.9       14.5       14.2       15.1       14.2       15.1  
Monthly premium
  $ 7.7     $ 9.1     $ 8.5     $ 8.3     $ 6.7     $ 8.3     $ 6.7  
Loan receivable, net
  $ 181.9     $ 211.9     $ 273.3     $ 265.3     $ 285.4     $ 265.3     $ 285.4  
Interest rate
    10.2 %     10.4 %     10.9 %     10.7 %     11.3 %     11.2 %     11.3 %
End of Period — Policies Owned
                                                       
Number of policies owned
                27       20       31       20       31  
Aggregate fair value
  $     $     $ 4,306     $ 1,711     $ 8,846     $ 1,711     $ 8,846  
Monthly premium — average per policy
  $     $     $ 2.8     $ 2.2     $ 5.2     $ 2.2     $ 5.2  


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Structured Settlements Segment — Selected Operating Data (dollars in thousands):
 
                                                         
        Three Months Ended
  Nine Months Ended
    Year Ended December 31,   September 30,   September 30,
    2007   2008   2009   2009   2010   2009   2010
 
Period Originations:
                                                       
Number of transactions
    10       276       396       102       138       275       385  
Number of transactions from repeat customers
          23       52       10       48       32       96  
Weighted average purchase discount rate
    11.0 %     12.0 %     16.3 %     17.1 %     20.1 %     16.1 %     19.3 %
Face value of undiscounted future payments purchased
  $ 701     $ 18,295     $ 28,877     $ 8,094     $ 13,458     $ 20,460     $ 33,713  
Amount paid for settlements purchased
  $ 369     $ 8,010     $ 10,947     $ 2,908     $ 2,959     $ 7,894     $ 9,099  
Marketing costs
  $ 2,056     $ 5,295     $ 4,460     $ 1,087     $ 1,168     $ 3,479     $ 3,561  
Selling, general and administrative (excluding marketing costs)
  $ 666     $ 4,475     $ 5,015     $ 1,298     $ 1,957     $ 3,257     $ 5,294  
Average Per Origination During Period:
                                                       
Face value of undiscounted future payments purchased
  $ 70.1     $ 66.3     $ 72.9     $ 79.4     $ 97.5     $ 74.4     $ 87.6  
Amount paid for settlement purchased
  $ 36.9     $ 29.0     $ 27.6     $ 28.5     $ 21.4     $ 28.7     $ 23.6  
Time from funding to maturity (months)
    80.3       113.8       109.7       113.4       147.3       109.2       134.3  
Marketing cost per transaction
  $ 205.6     $ 19.2     $ 11.3     $ 10.7     $ 8.5     $ 12.7     $ 9.2  
Segment selling, general and administrative (excluding marketing costs) per transaction
  $ 66.6     $ 16.2     $ 12.7     $ 12.7     $ 14.2     $ 11.8     $ 13.8  
Period Sales:
                                                       
Number of transactions sold
          226       439             72       96       291  
Gain on sale of structured settlements
  $     $ 443     $ 2,684     $ 24     $ 1,585     $ 499     $ 4,848  
Average sale discount rate
          10.8 %     11.5 %           9.6 %     11.1 %     9.1 %


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
You should read the following discussion in conjunction with the consolidated and combined financial statements and accompanying notes and the information contained in other sections of this prospectus, particularly under the headings “Risk Factors,” “Selected Historical and Unaudited Pro Forma Consolidated and Combined Financial Information” and “Business.” This discussion and analysis is based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. The statements in this discussion and analysis concerning expectations regarding our future performance, liquidity and capital resources, as well as other non-historical statements in this discussion and analysis, are forward-looking statements. See “Forward-Looking Statements.” These forward-looking statements are subject to numerous risks and uncertainties, including those described under “Risk Factors.” Our actual results could differ materially from those suggested or implied by any forward-looking statements.
 
Business Overview
 
We are a specialty finance company with a focus on providing premium financing for individual life insurance policies and purchasing structured settlements. We manage these operations through two business segments: premium finance and structured settlements. In our premium finance business we earn revenue from interest charged on loans, loan origination fees and agency fees from referring agents. In our structured settlement business, we purchase structured settlements at a discounted rate and sell such assets to, or finance such assets with, third parties.
 
Since 2007, the United States’ capital markets have experienced extensive distress and dislocation due to the global economic downturn and credit crisis. As a result of the dislocation in the capital markets, our borrowing costs increased dramatically in our premium finance business and we were unable to access traditional sources of capital to finance the acquisition and sale of structured settlements. At certain points, we were unable to obtain any debt financing.
 
We expect that the net proceeds from this offering will be used to finance and grow our premium finance and structured settlement businesses. We intend to originate new premium finance loans without relying on debt financing. We intend to use a portion of the net proceeds from this offering, together with debt financing, to continue to finance the acquisition and sale of structured settlements.
 
Premium Finance Business
 
A premium finance transaction is a transaction in which a life insurance policyholder obtains a loan to pay insurance premiums for a fixed period of time, which allows a policyholder to maintain coverage without additional out-of-pocket costs. Our typical premium finance loan is approximately two years in duration and is collateralized by the underlying life insurance policy. The life insurance policies that serve as collateral for our premium finance loans are predominately universal life policies that have an average death benefit of approximately $4 million and insure persons over age 65.
 
We expect that, in the ordinary course of business, a large portion of our borrowers may default on their loans and relinquish beneficial ownership of their life insurance policy to us. Our loans are secured by the underlying life insurance policy and are usually non-recourse to the borrower. If the borrower defaults on the obligation to repay the loan, we generally have no recourse against any assets except for the life insurance policy that collateralizes the loan.
 
Dislocations in the capital markets have forced us to pay higher interest rates on borrowed capital since the beginning of 2008. Every credit facility we have entered into since December 2007 for our premium finance business has required us to obtain lender protection insurance for each loan originated under such credit facility. This coverage provides insurance on the value of the life insurance policy serving as collateral underlying the loan should our borrower default. After a payment default by the borrower, subject to the terms and conditions of the lender protection insurance policy, our lender protection insurer has the right to direct control or take beneficial ownership of the life insurance policy, and we are paid a claim equal to the insured


46


 

value of the policy. While lender protection insurance provides us with liquidity, it prevents us from realizing the appreciation, if any, of the underlying policy when a borrower relinquishes ownership of the policy upon default. As of September 30, 2010, 94.6% of our outstanding premium finance loans have collateral whose value is insured. As of January 1, 2011, we ceased originating premium finance loans with lender protection insurance. As a result, we currently have ceased originating new premium finance loans under our credit facilities.
 
We have experienced two adverse consequences from our high financing costs: reduced profitability and decreased loan originations. While the use of lender protection insurance allowed us to access debt financing to support our premium finance business, the cost of lender protection insurance substantially reduced the earnings from our premium finance segment. Additionally, coverage limitations related to our use of lender protection insurance reduced the number of otherwise viable premium finance transactions that we could complete. During the nine months ended September 30, 2010, these coverage limitations became even stricter and further reduced the number of loans we could originate. We believe that the net proceeds from this offering will allow us to increase the profitability and number of new premium finance loans by eliminating the cost of debt financing and lender protection insurance and the limitations on loan originations that our lender protection insurance imposed.
 
The following table shows our total financing cost per annum for funding premium finance loans as a percentage of the principal balance of the loans originated during the following periods:
 
                                         
          Nine Months
 
    Year Ended December 31,     Ended September 30,  
    2007     2008     2009     2009     2010  
 
Lender protection insurance cost
          8.5 %     10.9 %     11.0 %     10.4 %
Interest cost and other lender funding charges under credit facilities
    14.5 %     13.7 %     18.2 %     18.5 %     20.7 %
                                         
Total financing cost
    14.5 %     22.2 %     29.1 %     29.5 %     31.1 %
 
In response to the large increase in our financing costs, in 2008 we implemented a policy to charge origination fees on all premium finance loans and we increased the origination fees that we charged.
 
We charge a referring insurance agent an agency fee for services related to premium finance loans. Agency fees and origination fee income have helped us to mitigate the cost of lender protection insurance and our credit facilities. While origination fee income and interest are earned over the life of our premium finance loans, our agency fees are earned at the time of funding. This results in our premium finance business generating significant income during periods of high loan originations but experiencing lower income during periods when there are fewer loan originations.
 
Despite the use of lender protection insurance, we found it very difficult to secure financing for our premium finance lending business segment during 2008 and 2009. Traditional capital providers such as commercial banks, investment banks, conduit programs, hedge funds and private equity funds reduced their lending commitments and raised their lending rates. There were periods during 2008 and 2009 when our premium finance segment was unable to originate loans due to our inability to access capital. We were without credit and therefore unable to originate premium finance loans for a total of 9 weeks in 2008 and for a total of 35 weeks in 2009. As a result, we experienced a significant decline in premium finance loan originations from 499 loans originated in 2008 to 194 loans originated in 2009, a decrease of 61%. This also led to a significant reduction in agency fees from $48.0 million in 2008 to $26.1 million in 2009.
 
The amount of losses on loan payoffs and settlements, net, and the amount of gains on the forgiveness of debt that we have recorded since inception within our premium finance business segment have been impacted as a result of financial difficulties experienced by one of our lenders, Acorn Capital Group (“Acorn”). Beginning in July, 2008, Acorn stopped funding under its credit facility with us without any advance notice. Therefore, we did not have access to funds necessary to pay the ongoing premiums on the policies serving as collateral for our borrower’s loans that were financed under the Acorn facility. We did not incur liability with our borrowers because the terms of the Acorn loans provide that we are only required to fund future premiums


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if our lender provides us with funds. Through September 30, 2010, a total of 101 policies financed under the Acorn facility incurred losses primarily due to non-payment of premiums.
 
In May 2009, we entered a settlement agreement with Acorn whereby all obligations under the credit agreement were terminated. Acorn subsequently assigned its rights under the settlement agreement to Asset Based Resource Group, LLC (“ABRG”), an entity that is not related to us. As part of the settlement agreement, we continue to service the original loans and ABRG determines whether or not it will continue to fund the loans. We believe that ABRG will elect to fund the loan only if it believes there is value in the policy serving as collateral for the loan. If ABRG chooses not to continue funding a loan, we have the option to fund the loan or try to sell the loan or related policy to another party. We elect to fund the loan only if we believe there is value in the policy serving as collateral for the loan after considering the costs of keeping the policy in force. Regardless of whether we fund the loan or sell the loan or related policy to another party, our debt under the Acorn facility is forgiven and we record a gain on the forgiveness of debt. If we fund the loan, it remains as an asset on our balance sheet, otherwise it is written off and we record the amount written off as a loss on loan payoffs and settlements, net.
 
On the notes that were cancelled under the Acorn facility, we had debt forgiven totaling $7.0 million and $16.4 million for the nine months ended September 30, 2010 and for the year ended December 31, 2009, respectively. We recorded these amounts as gain on forgiveness of debt. Partially offsetting these gains, we had loan losses totaling $5.2 million, $10.2 million and $1.9 million during the nine months ended September 30, 2010 and the years ended December 31, 2009 and 2008, respectively. We recorded these amounts as loss on loan payoffs and settlements, net. As of September 30, 2010, only 18 loans out of 119 loans originally financed in the Acorn facility remained outstanding.
 
The following table highlights the number of loans impacted by the Acorn settlement during the periods indicated below (dollars in thousands):
 
                                                 
    Acorn Capital Facility
        Nine Months
   
    Year Ended December 31,   Ended September 30,    
    2007   2008   2009   2009   2010   Total
 
Number of loans held at end of period
    90       112       49       60       18       N/A  
Loans receivable, net, balance at end of period
  $ 15,468     $ 21,073     $ 9,601     $ 12,330     $ 4,416       N/A  
Number of loans impacted during period
          7       63       52       31       101  
 
The following table highlights the impact of the Acorn settlement on our financial statements during the periods indicated below (dollars in thousands):
 
                                                 
    Acorn Capital Facility  
          Nine Months
       
    Year Ended December 31,     Ended September 30,        
    2007     2008     2009     2009     2010     Total  
 
Gain on forgiveness of debt
  $     $     $ 16,410     $ 14,886     $ 6,968     $ 23,378  
Loss on loan payoffs and settlements, net
          (1,868 )     (10,182 )     (8,442 )     (5,181 )     (17,231 )
                                                 
Impact on net income
  $     $ (1,868 )   $ 6,228     $ 6,444     $ 1,787     $ 6,147 *
 
 
* The $6.1 million impact on net income is due to 26 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.
 
Structured Settlements
 
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. Recipients of structured settlements are permitted to sell their deferred payment


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streams 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, 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. During nine months ended September 30, 2009 and 2010, this purchase discount produced a yield that averaged 16.1% and 19.3%, respectively. We generally sell our structured settlement assets to institutional investors for cash and recognize a gain on the sale.
 
Structured settlements are an attractive asset class for institutional investors for several reasons. The majority of the insurance companies that issue the structured settlements we purchase carry financial strength ratings of “A1” or better by Moody’s Investors Services or “A−” or better by Standard & Poor’s. The periodic payments that make up structured settlements can extend for 20 years or more. This long average life coupled with no risk of prepayment and little credit risk result in a relatively liquid financial asset that can be sold directly to institutional investors such as insurance companies and pension funds.
 
We believe that we have various funding alternatives for the purchase of structured settlements. In addition to available cash, on September 24, 2010, we entered into an arrangement to provide us up to $50 million to finance the purchase of structured settlements. We also have other parties to whom we have sold settlement assets in the past, and to whom we believe we can sell assets in the future. We will continue to evaluate alternative financing arrangements, which could include selling pools of structured settlements to third parties and securing a warehouse line of credit that would allow us to aggregate structured settlements.
 
During the capital markets dislocation in 2008 and 2009, in order to sell portfolios of structured settlements to strategic buyers, we were required to offer discount rates as high as approximately 12.0%. During 2010, the discount rate for our sale of structured settlements has decreased. During the nine months ended September 30, 2010, our weighted average sale discount rate for sales of structured settlements was 9.1%, which includes the sale of both guaranteed (non life-contingent) and life-contingent structured settlements. Life-contingent structured settlements are deferred payment streams that terminate upon the death of the structured settlement recipient. Guaranteed (non life-contingent) structured settlements terminate on a pre-determined date and do not cease upon the recipient’s death.
 
During this period of dislocation, we continued to invest in our structured settlements business. We did this with the expectation that expenses would continue to exceed revenue while we made investments in building the business and increasing our capacity to originate new transactions. We originated 385 transactions during the nine months ended September 30, 2010 as compared to 275 transactions during the same period in 2009, an increase of 40%, and 396 transactions during 2009 as compared to 276 transactions in 2008, an increase of 43%. We incurred total expenses of $8.9 million during the nine months ended September 30, 2010 as compared to $6.7 million during the same period in 2009 and $9.5 million during 2009 compared to $9.8 million in 2008. We believe that as a result of our investments, we currently have a structured settlements business model in place that has sufficient scalability to permit our structured settlement business to continue to grow efficiently. Accordingly, the historical operating results of our structured settlement segment reflect our investment in the start up costs and the initial growth of our structured settlement operations.
 
Our Outlook
 
Reduced or Eliminated Financing Costs; Option to Retain Policies
 
We intend to use the net proceeds from this offering to fund new premium finance business, thereby over time reducing or eliminating our debt financing and lender protection insurance costs. We expect that the net proceeds of this offering and the elimination of the use of lender protection insurance will provide us the option to retain for investment a number of policies relinquished to us upon default. If we retain a life insurance policy that is relinquished to us upon default, we will be responsible for paying all premiums necessary to keep the policy in force.


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Corporate Conversion
 
In connection with this offering, on February 3, 2011, we converted from a Florida limited liability company to a Florida corporation. As a limited liability company, we were treated as a partnership for United States federal and state income tax purposes and, as such, we were not subject to taxation. For all periods subsequent to such conversion, we will be subject to corporate-level United States federal and state income taxes. See “Corporate Conversion.”
 
Public Company Expenses
 
Upon consummation of our initial public offering, we will become a public company. As a result, we will need to comply with laws, regulations and requirements with which we did not need to comply as a private company, including certain provisions of the Sarbanes-Oxley Act of 2002, related SEC regulations, and the requirements of the New York Stock Exchange. Compliance with the requirements of being a public company will require us to increase our general and administrative expenses in order to pay our employees, legal counsel, accountants, and other advisors to assist us in, among other things, external reporting, instituting and maintaining internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, and preparing and distributing periodic public reports in compliance with our obligations under the federal securities laws. In addition, being a public company will make it more expensive for us to obtain director and officer liability insurance.
 
Stock-Based and Other Executive Compensation
 
We expect to incur stock compensation expense of approximately $300,000 at the closing of this offering related to the issuance of common stock to our two employees with phantom stock agreements.
 
We have established an equity compensation plan for our current and future employees and directors. We have reserved an aggregate of 1,200,000 shares of common stock for issuance under our Omnibus Plan, of which 592,576 shares are expected to be granted in the form of stock options or restricted stock to our executive officers, directors and employees immediately following the pricing of this offering as described under “Omnibus Plan — Imperial Holdings 2010 Omnibus Incentive Plan.” We expect to incur non-cash, stock-based compensation expenses in connection with these awards. At an assumed initial public offering price equal to the midpoint of the price range on the cover of this prospectus, we expect to incur stock compensation expense related to these awards of approximately $1.0 million to $2.0 million per year. See “Description of Capital Stock.”
 
Principal Revenue and Expense Items
 
Components of Revenue
 
Agency Fee Income
 
In connection with our premium finance business, we earn agency fees that are paid by the referring life insurance agents. Because agency fees are not paid by the borrower, such fees do not accrue over the term of the loan. We typically charge and receive agency fees from the referring agent within approximately 47 days of our funding the loan. Referring insurance agents pay the agency fees to our subsidiary, Imperial Life and Annuity Services, LLC, a licensed insurance agency, for the due diligence performed in underwriting the premium finance transaction. The amount of the agency fee paid by a referring life insurance agent is negotiated with the referring agents based on a number of factors, including the size of the policy and the amount of premiums on the policy. Agency fees as a percentage of the principal balance of loans originated during the periods below are as follows:
 
                                         
    Year Ended December 31,   Nine Months Ended September 30,
    2007   2008   2009   2009   2010
 
Agency fees as a percentage of the principal balance of the loans originated
    55.1 %     49.2 %     50.6 %     51.8 %     49.9 %


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Interest Income
 
We receive interest income that accrues over the life of the premium finance loan and is due upon the date of maturity or upon repayment of the loan. Substantially all of the interest rates we charge on our premium finance loans are floating rates that are calculated at the one-month LIBOR rate plus an applicable margin. In addition, our premium finance loans have a floor interest rate and are capped at 16.0% per annum. For loans with floating rates, each month the interest rate is recalculated to equal one-month LIBOR plus the applicable margin, and then, if necessary, adjusted so as to remain at or above the stated floor rate and at or below the capped rate of 16.0% per annum.
 
The weighted average per annum interest rate for premium finance loans outstanding as of the dates below is as follows:
 
                                         
    December 31,   September 30,
    2007   2008   2009   2009   2010
 
Weighted average per annum interest rate
    10.2 %     10.4 %     10.9 %     11.2 %     11.3 %
 
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.
 
Origination Fee Income
 
We charge our borrowers an origination fee as part of the premium finance loan origination process. It is a one-time fee that is added to the loan amount and is due upon the date of maturity or upon repayment of the loan. Origination fees are recognized on an effective-interest method over the term of the loan.
 
Origination fees as a percentage of the principal balance of loans originated during the periods below are as follows:
 
                                         
    Years Ended December 31,   Nine Months Ended September 30,
    2007   2008   2009   2009   2010
 
Origination fees as a percentage of the principal balance of the loans
    20.2 %     39.9 %     44.7 %     42.6 %     41.7 %
Origination fees per annum as a percentage of the principal balance of the loans
    5.2 %     15.4 %     19.2 %     18.5 %     21.0 %
 
Gain on Sale of Structured Settlements
 
We purchase a certain number of fixed, scheduled future settlement payments on a discounted basis in exchange for a single lump sum payment. We negotiate a purchase price that is calculated as the present value of the future payments to be purchased, discounted at a rate equal to our required investment yield. From time to time, we sell portfolios of structured settlements to institutional investors. The sale price is calculated as the present value of the future payments to be sold, discounted at a negotiated yield. We record any amounts of sale proceeds in excess of our carrying value as a gain on sale.
 
Gain on the Forgiveness of Debt
 
We entered into a settlement agreement with Acorn, as described previously, 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.
 
Change in Fair Value of Life Settlements and Structured Settlement Receivables.
 
We have elected to carry our investments in life settlements at fair value. As of July 1, 2010, we elected to adopt the fair value option, in accordance with ASC 825, Financial Instruments, to record certain newly-


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acquired structured settlement receivables at fair value. Any change in fair value upon re-measurement of these investments is recorded through our change in fair value of life settlement and structured settlement receivables.
 
Gain on Sale of Life Settlements
 
Gain on sale of life settlements includes gain from company-owned life settlements and gains from sales on behalf of third parties.
 
Components of Expenses
 
Interest Expense
 
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.
 
Our weighted average interest rate for our credit facilities and promissory notes outstanding as of the dates indicated below is as follows:
 
                                         
    December 31,   September 30,
    2007   2008   2009   2009   2010
 
Weighted average interest rate under credit facilities
    14.5 %     13.9 %     15.6 %     15.5 %     18.0 %
Weighted average interest rate under promissory notes
    16.2 %     15.9 %     16.5 %     16.5 %     16.5 %
Total weighted average interest rate
    15.5 %     14.2 %     15.7 %     14.9 %     17.6 %
 
Provision for Losses on Loans Receivable
 
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.
 
In some instances, we make a loan to an insured whereby we immediately record a loan impairment valuation adjustment against the principal of the loan. Loans that experience an immediate impairment are made when the transaction components that are not included in the loan, such as agency fees, offset or exceed the amount of the impairment.
 
For loans that matured during the nine months ended September 30, 2010 and during the year ended December 31, 2009, 97% and 85%, respectively, of such loans were not repaid at maturity. In such events of default, the borrower typically relinquishes beneficial 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.
 
For loans that had lender protection insurance and matured during the nine months ended September 30, 2010 and during the year ended December 31, 2009, 320 and 56 loans were not repaid at maturity, respectively.


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Of these loans, 320 and 56 were submitted to our lender protection insurer. The net carrying value of the loans (which includes principal, accrued interest income, and accrued origination fees, net of impairment) at the time of payoff during the nine months ended September 30, 2010 and the year ended December 31, 2009 was $111.8 million and $23.8 million, respectively. The amount of cash received by us for those loans was $112.8 million and $24.6 million, respectively. This resulted in a gain during the nine months ended September 30, 2010 and the year ended December 31, 2009 of $741,000 and $955,000, respectively. This gain was primarily attributable to the insurance amount at the time of payoff exceeding the contractual amounts due under the terms of the loan agreement. Therefore, the amount of claims paid by the lender protection insurer was in excess of 100% of the net carrying value of the loans. The following table provides information on the insured loans that were not repaid at maturity for the periods indicated below (dollars in thousands):
 
                 
    Year Ended
    Nine Months Ended
 
    December 31, 2009     September 30, 2010  
 
Number of loans impaired at maturity
    32       179  
Loans not repaid at maturity
    56       320  
Claims submitted to lender protection insurer
    56       320  
Claims paid by lender protection insurer
    56       320  
Amount of claims paid
  $ 24,555     $ 112,784  
Net carrying value of loans at payoffs
  $ 23,814     $ 111,829  
Gain on LPIC payoffs (all loans)
  $ 741     $ 955  
Gain on LPIC payoffs (impaired loans)
  $ 304     $ (54 )
Percent of claims paid by lender protection insurer
    100 %     100 %
 
The following table shows the percentage of the total number of loans outstanding with lender protection insurance and the percentage of our total loans receivable balance covered by lender protection insurance as of the dates indicated below:
 
                                         
    December 31,   September 30,
    2007   2008   2009   2009   2010
 
Percentage of total number of loans outstanding with lender protection insurance
          70.4 %     91.2 %     86.8 %     94.6 %
Percentage of total loans receivable, net balance covered by lender protection insurance
          79.9 %     93.7 %     90.5 %     95.5 %
 
We use a method to determine the loan impairment valuation adjustment which assumes the “worst case” scenario for the fair value of the collateral based on the insured coverage amount. At the time of loan origination, we will record impairment even though no loans are considered non-performing as no payments are due by the borrower. Loans with insured collateral represented 91.2% and 94.6% of our loans as of December 31, 2009 and September 30, 2010, respectively. We believe that the amount of impairments recorded over the past 18 months is higher than normal due to the state of the credit markets which negatively affected the fair value of the collateral for the loans. During the past 18 months, the insured value of the collateral has often been its highest value. The higher amount of impairment experienced in the latter part of 2009 and during 2010 reflects the realization of less than the contractual amounts due under the terms of the loans receivable. We believe that if the market for life insurance policies improves, our realization rates for the contractual amounts of interest income and origination income should improve as well.


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The following table shows the amount of impairment recorded on loans outstanding with and without lender protection insurance during each period (dollars in thousands):
 
                 
    Year Ended December 31,
    Nine Months Ended
 
    2009     September 30, 2010  
 
Provision for losses on loans receivable with lender protection insurance
  $ 7,008     $ 4,026  
Provision (recoveries) for losses on loans receivable without lender protection insurance
    2,822       (512 )
                 
Total provision for losses on loans receivable
  $ 9,830     $ 3,514  
 
Loss on Loan Payoffs and Settlements, Net
 
When a premium finance loan matures, we record the difference between the net carrying value of the loan receivable (which includes the loan principal balance, accrued interest and accreted origination fees, net of any impairment valuation adjustment) and the cash received, or the fair value of the life insurance policy that is obtained if there is a default and the policy is relinquished, as a gain or loss on loan payoffs and settlements, net. This account was significantly impacted by the Acorn settlement, as discussed above, whereby we recorded a loss on loan payoffs and settlements, net, of $5.2 million, $10.2 million and $1.9 million during the nine months ended September 30, 2010 and the years ended December 31, 2009 and 2008, respectively, under the direct write-off method, as opposed to charging our provision for losses on loan receivables.
 
Amortization of Deferred Costs
 
Deferred costs include premium payments made by us to our lender protection insurer. These expenses are deferred and recognized over the life of the note using the effective interest method. Deferred costs also include credit facility closing costs such as legal and professional fees associated with the establishment of our credit facilities, which deferred costs are recognized over the life of the debt. We expect our deferred costs to decline over time as our portfolio of loans with lender protection insurance matures.
 
Selling, General and Administrative Expenses
 
Selling, general, and administrative expenses include salaries and benefits, professional and consulting fees, marketing, depreciation and amortization, bad debt expense, and other related expenses to support our ongoing businesses.
 
Critical Accounting Policies
 
Critical Accountings Estimates
 
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, and the valuation of investments in life settlements (life insurance policies) have the greatest potential impact on our financial statements and accordingly believe these to be our critical accounting estimates. Below we discuss the critical accounting policies associated with the estimates as well as selected other critical accounting policies. For further information on our critical accounting policies, see the discussion in Note 2 to our audited consolidated financial statements.


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Premium Finance Loans Receivable
 
We report loans receivable acquired or originated by us at cost, adjusted for any deferred fees or costs in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 310-20, Receivables — Nonrefundable Fees and Other Costs, discounts, and loan impairment valuation. All loans are collateralized by life insurance policies. Interest income is accrued on the unpaid principal balance on a monthly basis based on the applicable rate of interest on the loans.
 
In accordance with ASC 310, Receivables, we specifically evaluate all loans for impairment based on the fair value of the underlying policies as collectability is primarily collateral dependent. The loans are considered to be collateral dependent as the repayment of the loans is expected to be provided by the underlying insurance policies. In the event of default, the borrower typically relinquishes beneficial 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 terms and conditions of the lender protection insurance policy, our lender protection insurer has the right to direct control or take beneficial ownership of the policy upon payment of our claim. For loans without lender protection insurance, we have the option of selling the policy or maintaining it on our balance sheet for investment.
 
We evaluate the loan impairment valuation on a monthly basis based on our periodic review of the estimated value of the underlying collateral. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The loan impairment valuation is established as losses on loans are estimated and the provision is charged to earnings. Once established, the loan impairment valuation cannot be reversed to earnings.
 
In order to originate premium finance transactions during the recent dislocation in the capital markets, we procured 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.
 
Ownership of Life Insurance Policies
 
In the ordinary course of business, a large portion of our borrowers may default by not paying off the loan and relinquish beneficial ownership of the life insurance policy to us in exchange for our release of the obligation to pay amounts due. We account for life insurance policies we acquire upon relinquishment by our borrowers as investments in life settlements (life insurance policies) in accordance with ASC 325-30, Investments in Insurance Contracts, which requires us to use either the investment method or the fair value method. The election is made on an instrument-by-instrument basis and is irrevocable. Thus far, we have elected to account for these life insurance policies as investments using the fair value method.
 
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.
 
The fair value of the investment in insurance policies is evaluated at the end of each reporting period. Changes in the fair value of the investment based on evaluations are recorded as change in fair value of life settlements in our consolidated and combined statement of operations. The fair value is determined on a discounted cash flow basis that incorporates current life expectancy assumptions. The discount rate incorporates current information about market interest rates, the credit exposure to the insurance company that issued the life insurance policy and our estimate of the risk premium an investor in the policy would require. The discount rate at September 30, 2010 was 15% to 17% and the fair value of our investment in life insurance policies was $8.8 million.


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Following this offering, our investment in life settlements (life insurance policies) may increase over time as we begin to make loans without lender protection insurance, as a result of which we expect to have the option to retain a number of the life insurance policies relinquished to us by our borrowers upon default under those loans. Since the term of our premium finance loans is typically 26 months, it will be at least 26 months from the closing of this offering before we are likely to retain any appreciable number of policies relinquished to us by our borrowers upon default.
 
Valuation of Insurance Policies
 
Our valuation of insurance policies is a critical component of our estimate for the loan impairment valuation and the fair value of our investments in life settlements (life insurance policies). We currently use a probabilistic method of valuing life insurance policies, which we believe to be the preferred valuation method in the industry. The most significant assumptions which we estimate are the life expectancy of the insured and the discount rate.
 
In determining the life expectancy estimate, we use medical reviews from four different medical underwriters. The health of the insured is summarized by the medical underwriters into a life assessment 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 probability of mortality for an insured is then calculated by applying the life expectancy estimate to a mortality table. The mortality table is created based on the rates of death among groups categorized by gender, age, and smoking status. By measuring how many deaths occur before the start of each year, the table allows for a calculation of the probability of death in a given year for each category of insured people. The probability of mortality for an insured is found by applying their mortality rating from the life expectancy assessment to the probability found in the actuarial table for the insured’s age, sex and smoking status.
 
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.
 
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 price for the policy.
 
At the end of each reporting period we re-value the life insurance policies using our valuation model in order to update our loan impairment valuation for loans receivable and our estimate of fair value for investments in policies held on our balance sheet. This includes reviewing our assumptions for discount rates and life expectancies as well as incorporating current information for premium payments and the passage of time.
 
Fair Value Measurement Guidance
 
We follow ASC 820, Fair Value Measurements and Disclosures, which defines fair value as an exit price representing the amount that would be received if an asset were sold or that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an


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asset or liability. As a basis for considering such assumptions the guidance establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. Level 1 relates to quoted prices in active markets for identical assets or liabilities. Level 2 relates to observable inputs other than quoted prices included in Level 1. Level 3 relates to unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Our investments in life insurance policies and structured settlements are considered Level 3 assets as there is currently no active market where we are able to observe quoted prices for identical assets and our valuation model incorporates significant inputs that are not observable. Our impaired loans are measured at fair value on a non-recurring basis, as the carrying value is based on the fair value of the underlying collateral. The method used to estimate the fair value of impaired collateral-dependent loans depends on the nature of the collateral. For collateral that has lender protection insurance coverage, the fair value measurement is considered to be Level 2 as the insured value is an observable input and there are no material unobservable inputs. For collateral that does not have lender protection insurance coverage, the fair value measurement is considered to be Level 3 as the estimated fair value is based on a model whose significant inputs are the life expectancy of the insured and the discount rate, which are not observable. Although collateral without lender protection insurance is a Level 3 asset, we believe that the fair value is predictable based on the fixed contractual terms of the life insurance policy and its premium schedule and death benefit, as well as the ability to predict the insured’s age at the time of loan maturity, which are some of the key factors in determining the fair market value of a life insurance policy.
 
Fair Value Option
 
As of July 1, 2010, we elected to adopt the fair value option, in accordance with ASC 825, Financial Instruments, to record certain 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 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.
 
Revenue Recognition
 
Our primary sources of revenue are in the form of agency fees, interest income, origination fee income and gains on sales of structured settlements. Our revenue recognition policies for these sources of revenue are as follows:
 
  •  Agency Fees — Agency fees are paid by the referring life insurance agents based on negotiations between the parties and are recognized at the time a premium finance loan is funded. Because agency fees are not paid by the borrower, such fees do not accrue over the term of the loan. We typically charge and receive agency fees from the referring agent within approximately 47 days of our funding the loan. A separate origination fee is charged to the borrower which is amortized into income over the life of the loan.
 
  •  Interest Income — Interest income on premium finance loans is recognized when it is realizable and earned, in accordance with ASC 605, Revenue Recognition. Discounts on structured settlement receivables are accreted over the life of the settlement using the effective interest method.
 
  •  Origination Fee Income — Loans often include origination fees which are fees payable to us on the date the loan matures. The fees are negotiated at the inception of the loan on a transaction by transaction basis. The fees are accreted into income over the term of the loan using the effective interest method.
 
  •  Gains on Sales of Structured Settlements — Gains on sales of structured settlements are recorded when the structured settlements have been transferred to a third party and we no longer have continuing involvement, in accordance with ASC 860, Transfers and Servicing.


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Interest and origination income on impaired loans is recognized when it is realizable and earned in accordance with ASC 605, Revenue Recognition. Persuasive evidence of an arrangement exists through a loan agreement which is signed by a borrower prior to funding and sets forth the agreed upon terms of the interest and origination fees. Interest income and origination income are earned over the term of the loan and are accreted using the effective interest method. The interest and origination fees are fixed and determinable based on the loan agreement. For impaired loans, we do not recognize interest and origination income which we believe is uncollectible. At the end of the reporting period, we review the accrued interest and accrued origination fees in conjunction with our loan impairment analysis to determine our best estimate of uncollectible income that is then reversed. We continually reassess whether the interest and origination income are collectible as the fair value of the collateral typically increases over the term of the loan. Since our loans are due upon maturity, we cannot determine whether a loan is performing or non-performing until maturity. For impaired loans, our estimate of proceeds to be received upon maturity of the loan is generally correlated to our current estimate of fair value of the collateral, but also incorporates expected increases in fair value of the collateral over the term of the loan, trends in the market, sales activity for life insurance policies, and our experience with loans payoffs.
 
Deferred Costs
 
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 related loan using the effective interest method and are classified as amortization of deferred costs in the accompanying consolidated and combined statement of operations.
 
Loss in Loan Payoffs and Settlements, Net
 
When a premium finance loan matures, we record the difference between the net carrying value of the loan and the cash received, or the fair value of the life insurance policy that is obtained in the event of payment default, as a gain or loss on loan payoffs and settlements, net. This account was significantly impacted by the Acorn settlement, as discussed above, whereby we recorded a loss on loan payoffs and settlements, net, of $5.2 million, $10.2 million and $1.9 million during the nine months ended September 30, 2010 and the years ended December 31, 2009 and 2008, respectively, under the direct write-off method, as opposed to charging our provision for losses on loan receivables.
 
Income Taxes
 
We account for income taxes in accordance with ASC 740, Income Taxes (“ASC 740”). Prior to the closing of this offering, we will convert from a Florida limited liability company to a Florida corporation. See also “Corporate Conversion.” Under ASC 740, deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of enacted tax laws. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. In providing for deferred taxes, we consider tax regulations of the jurisdictions in which we operate, estimates of future taxable income and available tax planning strategies. If tax regulations, operating results or the ability to implement tax-planning strategies varies adjustments to the carrying value of the deferred tax assets and liabilities may be required. Valuation allowances are based on the “more likely than not” criteria of ASC 740.
 
The accounting for uncertain tax positions guidance under ASC 740 requires that we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. We recognize interest and penalties (if any) on uncertain tax positions as a component of income tax expense.
 
Stock-Based Compensation
 
We have adopted ASC 718, Compensation — Stock Compensation (“ASC 718”). ASC 718 addresses accounting for share-based awards, including stock options, with compensation expense measured using fair value


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and recorded over the requisite service or performance period of the award. The fair value of equity instruments to be issued upon or after the closing of this 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.
 
Recent Accounting Pronouncements
 
In July 2010, the FASB issued ASU No. 2010-20,Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” (“ASU 2010-20”). This guidance will require companies to provide additional disclosures relating to the credit quality of their financing receivables and the credit reserves held against them, including the aging of past-due receivables, credit quality indicators, and modifications of financing receivables. For public companies, the disclosure requirements as of the end of a reporting period are effective for periods ending on or after December 15, 2010. The disclosure requirements for activity occurring during a reporting period are effective for periods beginning on or after December 15, 2010. We are currently evaluating the possible effects of this guidance on our financial statement disclosures.


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Results of Operations
 
The following is our analysis of the results of operations for the periods indicated below. This analysis should be read in conjunction with our financial statements, including the related notes to the financial statements. Our results of operations are discussed below in two parts: (i) our consolidated results of operations and (ii) our results of operations by segment.
 
Consolidated Results of Operations (in thousands)
 
                                         
    Year Ended December 31,     Nine Months Ended September 30,  
    2007     2008     2009     2009     2010  
                      (Unaudited)  
 
Income
                                       
Agency fee income
  $ 24,515     $ 48,004     $ 26,114     $ 20,216     $ 9,099  
Interest income
    4,888       11,914       21,483       15,843       15,795  
Origination fee income
    526       9,399       29,853       21,865       16,728  
Gain on sale of structured settlements
          443       2,684       499       4,848  
Gain on forgiveness of debt
                16,410       14,886       6,968  
Gain on sale of life settlements
                            1,954  
Change in fair value of life settlements and structured receivables
                            4,805  
Other income
    2       47       71       53       195  
                                         
Total income
    29,931       69,807       96,615       73,362       60,392  
Expenses
                                       
Interest expense
    1,343       12,752       33,755       24,710       24,244  
Provision for losses on loans receivable
    2,332       10,768       9,830       6,705       3,514  
Loss (gain) on loan payoffs and settlements, net
    (225 )     2,738       12,058       11,279       4,320  
Amortization of deferred costs
    126       7,569       18,339       13,101       22,601  
Selling, general and administrative expenses
    24,335       41,566       31,269       22,997       22,118  
                                         
Total expenses
    27,911       75,393       105,251       78,792       76,797  
                                         
Net income (loss)
  $ 2,020     $ (5,586 )   $ (8,636 )   $ (5,430 )   $ (16,405 )
                                         
 
Premium Finance Segment Results (in thousands)
 
                                         
    Year Ended December 31,     Nine Months Ended September 30,  
    2007     2008     2009     2009     2010  
                      (Unaudited)  
 
Income
  $ 29,921     $ 68,743     $ 92,648     $ 72,393     $ 53,643  
Expenses
    18,092       52,733       82,435       63,118       59,098  
                                         
Segment operating income (loss)
  $ 11,829     $ 16,010     $ 10,213     $ 9,275     $ (5,455 )
                                         


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Structured Settlement Segment Results (in thousands)
 
                                         
    Year Ended December 31,     Nine Months Ended September 30,  
    2007     2008     2009     2009     2010  
                      (Unaudited)  
 
Income
  $ 10     $ 1,064     $ 3,967     $ 969     $ 6,749  
Expenses
    2,722       9,770       9,475       6,736       8,855  
                                         
Segment operating loss
  $ (2,712 )   $ (8,706 )   $ (5,508 )   $ (5,767 )   $ (2,106 )
                                         
 
Reconciliation of Segment Results to Consolidated Results (in thousands)
 
                                         
    Year Ended December 31,     Nine Months Ended September 30,  
    2007     2008     2009     2009     2010  
                      (Unaudited)  
 
Segment operating (loss) income
  $ 9,117     $ 7,304     $ 4,705     $ 3,508     $ (7,561 )
Unallocated expenses:
                                       
SG&A expenses
    6,531       10,052       8,052       5,097       5,950  
Interest expense
    566       2,838       5,289       3,841       2,894  
                                         
Net income (loss)
  $ 2,020     $ (5,586 )   $ (8,636 )   $ (5,430 )   $ (16,405 )
                                         
 
Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009
 
Our results of operations for the nine months ended September 30, 2010 have been impacted by the execution of a settlement claims agreement. 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. Those loss payments and related expenses include the $96.9 million insurance claims settlement described above, $77.0 million for loss payments previously made, any additional advances made by the lender protection insurer to or for the benefit of Imperial PFC Financing, LLC and interest on such amounts. The reimbursement obligation is generally non-recourse to us and our other subsidiaries except to the extent of our equity interest in Imperial PFC Financing, LLC. Messrs. Mitchell and Neuman each guaranteed the obligations of Imperial PFC Financing, LLC for matters other than financial performance. These guaranties are not unconditional sources of credit support but are intended to protect against acts of fraud, willful misconduct or a bankruptcy filing by Imperial PFC Financing, LLC or Imperial Premium Finance, LLC. To the extent recourse is sought against Messrs. Mitchell and Neuman for such non-financial performance reasons, then our indemnification obligations to Messrs. Mitchell and Neuman may require us to indemnify them for losses they may incur under these guaranties.
 
Under the lender protection program, we pay lender protection insurance premiums at or about the time the coverage for a particular loan becomes effective. We record this amount as a deferred cost on our balance sheet, and then expense the premiums over the life of the underlying premium finance loans using the effective interest method. As of September 8, 2010, the deferred premium costs associated with the Ableco facility totaled $5.4 million. Since these insurance claims have been prepaid and Ableco has been repaid in full, we have accelerated the expensing of these deferred costs and recorded this $5.4 million expense as Amortization of Deferred Costs. Also in connection with the termination of the Ableco facility, we have accelerated the expensing of approximately $980,000 of deferred costs which resulted from professional fees related to the


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creation of the Ableco facility. We recorded these charges as Amortized Deferred Costs. In the aggregate, we accelerated the expensing of $6.4 million in deferred costs as a result of this one-time transaction.
 
The insurance claims settlement of $96.9 million was recorded as lender protection insurance claims paid in advance on our consolidated and combined balance sheet. As the premium finance loans mature and in the event of default, the insurance claim is applied against the premium finance loan. As of September 30, 2010, we have approximately $60.6 million remaining of lender protection insurance claims paid in advance related to premium finance loans which have not yet matured. The remaining premium finance loans will mature by August 5, 2011.
 
Net loss for the nine months ended September 30, 2010 was $16.4 million as compared to $5.4 million for the same period in 2009. Of this $11.0 million net change, $14.7 million occurred in our premium finance segment, offset by improvements in our structured settlements segment of $3.7 million. The change in the premium finance segment was 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 86 loans during the nine months ended September 30, 2010, a 41% decrease compared to the 145 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. As a result, we experienced a decrease in agency fee income of $11.1 million, or 55% and a decrease in origination fee income of $5.1 million, or 23%. These decreases were partially offset by an increase in gain on sale of structured settlements of $4.3 million and an increase in the change in fair value of investments of $4.8 million.
 
Amortization of deferred costs increased to $22.6 million during the nine months ended September 30, 2010 as compared to $13.1 million for the same period in 2009, an increase of $9.5 million, or 73%. 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 $19.4 million and $10.9 million of total amortization of deferred costs during the nine months ended September 30, 2010 and 2009, respectively.
 
Gain on forgiveness of debt decreased to $7.0 million during the nine months ended September 30, 2010 compared to $14.9 million for the same period in 2009, a decrease of $7.9 million, or 53%. The reduced gain on forgiveness of debt was offset by a reduction in loss on loan settlement and payoffs, net of $7.0 million as a result of our writing off of fewer loans that were originated under the Acorn facility.
 
Gain on sale of structured settlements was $4.8 million during the nine months ended September 30, 2010 compared to $499,000 for the same period in 2009.
 
2009 Compared to 2008
 
Net loss for 2009 was $8.6 million compared to $5.6 million in 2008. We were without funding and, therefore, unable to originate premium finance loans for a total of 35 weeks in 2009 compared to a total of 9 weeks in 2008. As a result, we experienced a significant decline in premium finance loan originations from 499 loans originated in 2008 to 194 loans originated in 2009, a decrease of 61%. As agency fee income is earned solely as a function of originating loans, we also experienced a decrease in agency fee income to $26.1 million in 2009 from $48.0 million in 2008, a decrease of $21.9 million, or 46%.
 
The reduction in agency fees was largely offset by an increase in origination fee income to $29.9 million in 2009 compared to $9.4 million in 2008, an increase of $20.5 million, or 218%, primarily due to the increase in the aggregate principal amount of the loans receivable and an increase in origination fees charged. Additionally, our selling, general and administrative expenses decreased to $31.3 million in 2009 compared to $41.6 million in 2008, a decrease of $10.3 million, or 25%. Given the difficult economic environment, we made staff reductions which resulted in a $2.4 million decrease in payroll expenses. We also reduced our


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television and radio expenditures in our structured settlement segment which led to an $835,000 decrease in marketing expenses. Additionally, we incurred $2.6 million less in professional fees.
 
Interest income was $21.5 million in 2009 compared to $11.9 million in 2008, an increase of $9.6 million, or 81%, primarily due to the increase in the aggregate principal amount of the loans receivable and the compounding of interest on the loan receivable balance that continues to grow until the loan matures.
 
Interest expense was $33.8 million in 2009 compared to $12.8 million in 2008, an increase of $21.0 million, or 165%, primarily due to higher note payable balances as well as higher interest rates. Amortization of deferred costs was $18.3 million in 2009 compared to $7.6 million in 2008, an increase of $10.7 million, or 141%. Lender protection insurance related costs accounted for $16.0 million and $6.2 million of total amortization of deferred costs during 2009 and 2008, respectively.
 
During 2009, we continued to invest in our structured settlements business. We did this with the expectation that expenses would continue to exceed revenue while we made investments in building the business and increasing our capacity to purchase new transactions. We originated 396 transactions with an undiscounted face value of $28.9 million during 2009 as compared to 276 transactions with an undiscounted face value of $18.3 million in 2008, an increase in the number of transactions of 43% and an increase in the undiscounted face value of 58%. We incurred selling, general and administrative expenses in our structured settlements segment of $9.5 million during 2009 compared to $9.8 million in 2008, a decrease of $295,000, or 3%. Gain on sale of structured settlements was $2.7 million in 2009 compared to $443,000 in 2008, an increase of $2.3 million, or 506%. The increase in gain on sale was a result of more sales of structured settlements and a higher percentage of gain on the sales.
 
2008 Compared to 2007
 
Net loss for 2008 was $5.6 million compared to net income of $2.0 million in 2007. We experienced difficulty obtaining financing in 2008 due to the dislocations in the capital markets. In July, 2008, Acorn stopped funding under its credit facility with us. We were without funding and, therefore, unable to originate premium finance loans for a total of 9 weeks in 2008. In order to originate premium finance business during 2008, we commenced the lender protection insurance program resulting in increased financing costs. We also incurred increased overhead expenses in 2008 as we continued to invest in our businesses.
 
Agency fee income was $48.0 million in 2008 compared to $24.5 million in 2007, an increase of $23.5 million, or 96%. The increase in agency fee income was due to the 155% increase in the number of loans originated compared to 2007. Additionally, in order to offset our increased financing costs, we began charging origination fees on all premium finance loans. Origination fee income was $9.4 million in 2008 compared to $526,000 in 2007, an increase of $8.9 million, or 1,692%.
 
Interest expense was $12.8 million in 2008 compared to $1.3 million in 2007, an increase of $11.5 million, or 885%, primarily due to higher note payable balances. We had a notes payable balance of $183.5 million at December 31, 2008 compared to $35.6 million at December 31, 2007, an increase of $147.9 million, or 415%, as a result of increased borrowings to fund premium finance loans. Amortization of deferred costs was $7.6 million in 2008 compared to $126,000 in 2007, an increase of $7.5 million, or 5,952%. Lender protection insurance related costs accounted for $6.2 million and $0 of total amortization of deferred costs during 2008 and 2007, respectively.
 
Selling, general and administrative expenses increased from $24.3 million in 2007 to $41.6 million in 2008, an increase of $17.3 million, or 71%. The increase was primarily due to the increase in costs relating to the increase in the total number of our employees from 16 at the beginning of 2007 to 106 at the end of 2008 as we continued to make investments in our business which exceeded our revenue growth. We also spent an additional $3.2 million on marketing to grow our structured settlement business and $3.2 million on professional fees primarily related to our effort to obtain credit facilities. Beginning in July 2007 and continuing through the year ended December 31, 2008, we began making significant investments in our structured settlements business and increased the number of full-time employees in this business unit from 3 to 20.


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Segment Information
 
We operate our business through two reportable segments: premium finance and structured settlements. Our segment data discussed below may not be indicative of our future operations.
 
Premium Finance Business
 
Our results of operations for our premium finance segment for the periods indicated are as follows (in thousands):
 
                                         
    Year Ended December 31,     Nine Months Ended September 30,  
    2007     2008     2009     2009     2010  
                      (Unaudited)  
 
Income
                                       
Agency fee income
  $ 24,515     $ 48,004     $ 26,114     $ 20,216     $ 9,099  
Interest income
    4,880       11,340       20,271       15,426       15,482  
Origination fee income
    526       9,399       29,853       21,865       16,728  
Gain on forgiveness of debt
                16,410       14,886       6,968  
Change in fair value of life settlements
                                  3,300  
Other
                            2,066  
                                         
      29,921       68,743       92,648       72,393       53,643  
Direct segment expenses
                                       
Interest expense
    777       9,914       28,466       20,869       21,350  
Provision for losses
    2,332       10,768       9,830       6,705       3,514  
Loss (gain) on loan payoff and settlements, net
    (225 )     2,738       12,058       11,278       4,320  
Amortization of deferred costs
    126       7,569       18,339       13,101       22,601  
SG&A expense
    15,082       21,744       13,742       11,165       7,313  
                                         
      18,092       52,733       82,435       63,118       59,098  
                                         
Segment operating income (loss)
  $ 11,829     $ 16,010     $ 10,213     $ 9,275     $ (5,455 )
                                         
 
Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009
 
Income
 
Agency Fee Income.  Agency fee income was $9.1 million for the nine months ended September 30, 2010 compared to $20.2 million for the same period in 2009, a decrease of $11.1 million, or 55%. Agency fee income is earned solely as a function of originating loans. We funded only 86 loans during the nine months ended September 30, 2010, a 41% decrease compared to the 145 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.
 
Agency fees as a percentage of the principal balance of the loans originated during each period was as follows (dollars in thousands):
 
                 
    Nine Months Ended September 30,
    2009   2010
 
Principal balance of loans originated
    39,030       18,245  
Number of transactions originated
    145       86  
Agency fees
    20,216       9,099  
Agency fees as a percentage of the principal balance of loans originated
    51.8 %     49.9 %


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Interest Income.  Interest income was $15.5 million for the nine months ended September 30, 2010 compared to $15.4 million for the same period in 2009, an increase of $56,000 or 0.3%. Interest income was comparable due to a decline in interest income as the average balance of loans receivable, net decreased, partially offset by additional interest received on loans that matured during the period but continued to accrue interest past the maturity date until the lender protection insurance claim was received. The balance of loans receivable, net, increased from $148.7 million to $187.3 million during the nine months ended September 30, 2009, as we originated a significant number of new loans. The balance of loans receivable, net, decreased from $189.1 million to $121.6 million during the nine months ended September 30, 2010 due to significant loan maturities. There were no significant changes in interest rates. The weighted average per annum interest rate for premium finance loans outstanding as of September 30, 2010 and 2009 was 11.3% and 11.2%, respectively.
 
Origination Fee Income.  Origination fee income was $16.7 million for the nine months ended September 30, 2010 compared to $21.9 million for the same period in 2009, a decrease of $5.2 million, or 23%. Origination fee income decreased due to 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 41.7% during the nine months ended September 30, 2010 compared to 42.6% for the same period in 2009.
 
Gain on Forgiveness of Debt.  Gain on forgiveness of debt was $7.0 million for the nine months ended September 30, 2010 compared to $14.9 million for the same period in 2009, a decrease of $7.9 million, or 53%. These gains arise out of the Acorn settlement as described previously and include $1.9 million related to loans written off in December 2008, but the corresponding gain on forgiveness of debt was not recognized until 2009 at the time the Acorn settlement was finalized. Only 18 loans out of 119 loans financed in this facility remained outstanding as of September 30, 2010. The gains were substantially offset by a loss on loan payoffs of the associated loans of $5.2 million and $8.4 million during the nine months ended September 30, 2010, and 2009, respectively.
 
Change in Fair Value of Life Settlements.  Change in fair value of life settlements was $3.3 million for the nine months ended September 30, 2010 compared to $0 for the same period in 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 change in fair value gains of approximately $3.3 million during the nine months ended September 30, 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.
 
Other.  Other income was $2.1 million for the nine months ended September 30, 2010 compared to $0 for the same period in 2009. Other income arose primarily from gain on sales of life settlements. This included sales of life settlements for our own account as well as fees earned on life settlements sold on behalf of others. We had no such sales of life settlements during the nine months ended September 30, 2009.
 
Expenses
 
Interest Expense.  Interest expense was $21.3 million for the nine months ended September 30, 2010 compared to $20.9 million for the same period in 2009, an increase of $481,000, or 2%. The increase in interest expense is due to the accruing of interest on the loans payable balance that continues to grow until the loans mature.
 
Provision for Losses on Loans Receivable.  Provision for losses on loans receivable was $3.5 million for the nine months ended September 30, 2010 compared to $6.7 million for the same period in 2009, a decrease of $3.2 million, or 48%. The decrease in the provision during the nine months ended September 30, 2010 as compared to the nine months ended September 30, 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 during the nine months ended September 30, 2010 as compared to the same period in 2009. The loan impairment valuation was 5.8% and 5.3% of the carrying value of the loan receivables as of September 30, 2010 and 2009, respectively.


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Loss on Loan Payoffs and Settlements, Net.  Loss on loan payoffs and settlements, net, was $4.3 million for the nine months ended September 30, 2010 compared to $11.3 million for the same period in 2009, a decrease of $7.0 million, or 62%. 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 first nine months of 2010, we wrote off only 31 loans compared to 52 loans written off in the first nine months of 2009. Excluding the impact of the Acorn settlements, we had a gain on loan payoffs and settlements, net, of $2.5 million and gain on loan payoffs and settlements, net, of $1.7 million for the nine months ended September 30, 2010, and 2009, respectively.
 
Amortization of Deferred Costs.  Amortization of deferred costs was $22.6 million during the nine months ended September 30, 2010 as compared to $13.1 million for the same period in 2009, an increase of $9.5 million, or 73%. 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 $19.4 million and $10.9 million of total amortization of deferred costs during the nine months ended September 30, 2010 and 2009, respectively.
 
Selling, General and Administrative Expenses.  Selling, general and administrative expenses were $7.3 million for the nine months ended September 30, 2010 compared to $11.2 million for the same period in 2009, a decrease of $3.9 million, or 35%. Bad debt decreased by $890,000, legal fees decreased by $780,000, life expectancy evaluation expenses decreased by $533,000 and other operating expenses decreased by $479,000.
 
Adjustments to our allowance for doubtful accounts for past due agency fees are charged to bad debt expense. Our determination of the allowance is based on an evaluation of the agency fee receivable, prior collection history, current economic conditions and other inherent risks. We review agency fees receivable aging on a regular basis to determine if any of the receivables are past due. We write off all uncollectible agency fee receivable balances against our allowance. The aging of our agency fees receivable as of the dates below is as follows (in thousands):
 
                 
    Nine Months Ended September 30,  
    2009