Monday, May 19, 2014

No. 49: Imperial Holdings and a Recent Note Offering

Imperial Holdings, Inc. (NYSE:IFT), based in Boca Raton, Florida, was founded in 2006. It became a major source of premium financing for stranger-originated life insurance (STOLI) policies. Recently Imperial took preliminary steps toward a rights offering to shareholders, later completed an offering of notes, and then withdrew the proposed rights offering.

In September 2011, the existence of a criminal investigation became publicly known when federal agents raided Imperial's headquarters. In February 2012, the company disclosed it was also under investigation by the Securities and Exchange Commission (SEC); that investigation remains ongoing. In April 2012, the company and the Office of the U.S. Attorney in New Hampshire (USAO) entered into a non-prosecution agreement under which the company paid an $8 million fine, terminated its life insurance premium finance business, and agreed to other terms. (See the May 2012 and July 2012 issues of The Insurance Forum.)

In February 2013, the USAO entered into plea agreements with three individuals who were associated with Imperial and charged with criminal wrongdoing. Sentencing was scheduled for March 24, 2014, but is now scheduled for December 15, 2014. (See the October 2013 issue of The Insurance Forum.)

The Proposed Rights Offering
On August 30, 2013, Imperial filed with the SEC a preliminary registration statement covering a proposal to offer subscription rights to its shareholders to purchase up to $60 million of senior unsecured notes. In the filing was a preliminary prospectus containing few details about the proposed notes and saying the purpose of the proposed notes was to "raise funds to make selective investments in the life settlement asset class, to pay the premiums on certain life insurance policies that we own and for general corporate purposes, including working capital."

The Notes Offering
On February 11, 2014, in an 8-K (material event) report filed with the SEC, and in a press release, Imperial said it had commenced a private offering of $70 million of five-year senior unsecured convertible notes to be sold to qualified institutional buyers and accredited investors. The company said:
The purpose of this offering is to raise funds to make selective investments in the life settlement asset class including by making senior secured loans collateralized by portfolios of life insurance policies that we believe have attractive underwriting and cash flow characteristics and by strategically acquiring life insurance policies in the secondary and tertiary markets. We also expect to use a portion of the proceeds to pay the premiums on certain life insurance policies that we own and for general corporate purposes, including working capital.
Imperial expressed the belief that "our loans will be used to make premium payments to bridge a period where the investors need a cost effective alternative to fund premium payments on their policies to retain potential future death benefits." The company also said "substantial demand exists in the market for us to make these types of loans," for three reasons. First, many banks and traditional lenders are reluctant to lend to owners of life settlements. Second, many owners of life settlements have struggled with redemptions and "under-funded premium reserves since the onset of the financial crisis." Third, owners of many existing portfolios want to maintain ownership of them while limiting their cash outlay, and borrowing "allows them to retain much of their investment upside while stopping their cash outlays for ongoing premiums."

Private offerings are made through confidential offering memoranda. In this case, Imperial disclosed, in an attachment to the 8-K, excerpts from the preliminary offering memorandum. Among those excerpts are 26 "risks related to our business." The discussion of each risk consists of a boldface title followed by an explanation. These 12 are among the 26 risk titles:
(4) Our success in operating our life finance business is dependent on making accurate assumptions about life expectancies and maintaining adequate cash balances to pay premiums.
(5) Contractions in the market for life insurance policies could make it more difficult for us to opportunistically sell policies that we own and may make it more difficult to borrow under the Revolving Credit Facility.
(7) The life insurance policies that we own 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.
(8) Premium financed life insurance policies are susceptible to a higher risk of fraud and misrepresentation on life insurance applications, which increases the risk of contest, rescission or non-cooperation by issuing life insurance carriers.
(9) Delays in payment and non-payment of life insurance policy proceeds can occur for many reasons and any such delays may have a material adverse effect on our business, financial condition and results of operations.
(13) The SEC Investigation could materially and adversely affect our business, our financial condition and results of operations.
(14) Negative press and reputational concerns have had and continue to have a material adverse effect on our business, financial condition and results of operations.
(16) The secondary market is highly regulated; changes in regulation, the USAO Investigation and the SEC Investigation could materially affect our ability to conduct our business.
(17) If a regulator or court decides that trusts that were formed to own life insurance policies that once served 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.
(19) If a life insurance company is able to increase the premiums due on life insurance policies that we own, it will adversely affect our returns on such life insurance policies.
(21) Uncooperative co-trustees may impair our ability to service its life insurance policies.
(22) Changes to statutory, licensing and regulatory regimes governing premium financing or life settlements could have a material adverse effect on our activities and revenues.
Details on the Notes
On February 12, 2014, in an 8-K report and a press release, Imperial provided further details on the note offering. The company said it entered into a purchase agreement with FBR Capital Markets & Co. (FBR), the notes will pay interest semiannually at an annual rate of 8.5 percent, and FBR will have a 30-day option to purchase up to an additional $14 million of notes. The company also described the terms under which note holders can convert the notes into common stock of the company, and the procedure to be followed should the company decide to redeem the notes prior to maturity.

The IRS Investigation
On February 19, 2014, in an 8-K report, Imperial said that, although the offering was scheduled to close on February 19, the offering was postponed. The company said:
The offering of the Notes has been postponed due to the Company's receipt on February 19, 2014 of a summons from the Internal Revenue Service Criminal Investigations division and the Company's determination that this information should be disclosed to investors in the Notes. The summons requires the Company to produce information about the Company and its former structured settlement business from 2010 to the present. Although the Company has confirmed that the investigation relates to the Company, it is not aware of what allegations, if any, the IRS intends to investigate. The Company believes that the investigation is in a preliminary stage and is not aware of when such investigation will be concluded. The Company is unable to predict what action, if any, might be taken in the future by the IRS as a result of the matters that are the subject of the summons or what impact, if any, the cost of responding to the summons might have on the Company's financial position, results of operations, or cash flows.
Subject to reconfirming orders from investors, the Company expects to close the offering no later than February 21, 2014.
The Closing
On February 21, 2014, in an 8-K report, Imperial said it completed the offering. FBR partially exercised its option for $743,000 of additional notes and may exercise the remainder of its option later. The company received net proceeds of about $67 million after FBR's discount, placement fees, and offering expenses. The notes were issued under an indenture dated February 21 between Imperial and U.S. Bank National Association as trustee, registrar, paying agent, and conversion agent. The company attached the indenture to the 8-K as an exhibit.

The Withdrawn Registration
On February 24, 2014, Imperial filed with the SEC a request to withdraw the August 30, 2013 preliminary registration of a proposed rights offering to its shareholders. The company said it does not intend to pursue the proposed rights offering at this time, and asked that all fees paid to the SEC in connection with the filing of the registration of the proposed rights offering "be credited for future use by the Company."

The Latest Financial Statement
On May 8, 2014, Imperial filed with the SEC the 10-Q report for the quarter ended March 31, 2014, filed an 8-K report, and issued a press release. As of March 31, the company owned 601 policies with a total face value of $2.9 billion and a total estimated fair value of $315.5 million. In estimating fair value, the company blended the results of life expectancy reports from AVS Underwriting and 21st Services.

Of the 601 policies, 558 were previously premium financed, and 19 were issued by two companies with below-investment-grade financial strength ratings. Of the $2.9 billion of face value, 20.6 percent was issued by Lincoln National Life, 20.5 percent by Transamerica Occidental Life, and 11.2 percent by AXA Equitable Life. Antony Mitchell is Imperial's chief executive officer. In the May 8 press release, he is quoted as saying: "With the recent capital raise behind us, we are focused on sourcing accretive lending and investment opportunities within the life finance space. Our current pipeline looks encouraging and we expect to deploy capital later this year."

General Observations
Prior to the raid on Imperial's Boca Raton headquarters by federal agents in September 2011, the company was known as a major premium finance lender in the creation of STOLI policies. After the company shut down its premium financing business pursuant to the non-prosecution agreement with the USAO, a question was how the company would expand its business. Now it appears the company wants to increase its activities as a secondary market intermediary through the purchase and sale of existing secondary market portfolios, and through loans against existing secondary market portfolios.

Whether Imperial will be successful in the face of what it calls "contractions" in the secondary market, and in what might be called a "game of musical chairs" in that shrinking market, remains to be seen. Also, developments in the SEC and IRS investigations bear watching.