Neither the Company, nor any of its subsidiaries own any real estate.
During the first quarter of 2005 the Company entered into a lease for 20,337 square feet of office space in Austin, Texas, under an eight year, triple net lease. The base rent was $0 in the first year (June 1, 2005 to May 31, 2006), $157,612 in the second year and payments escalate to $264,384 in the final year of the lease. Leasehold improvements totaled approximately $872,000 ($203,000 funded by landlord) on the new lease space that was occupied in December 2005. Leasehold improvements are being amortized over the lease term. The $117,000 initial rent holiday and $203,000 of landlord-funded leasehold improvements will be amortized over the lease term and reduce lease expense. Deferred rent credits are included in other liabilities and were approximately $225,000 and $284,000 for 2010 and 2009, respectively.
BNLF leases approximately 1,400 square feet of office space in Sherwood, Arkansas at a rental of $19,800 per year and the lease will expire June 30, 2012. BNLAC incurs 100% of the rental expense.
The selected consolidated financial data presented below as of the end of and for each of the years in the five-year period ended December 31, 2010 is derived from the Company's consolidated financial statements. The consolidated financial statements as of December 31, 2010 and 2009, and for each of the years in the three-year period ended December 31, 2010 are included elsewhere in this Form 10-K.
All statement, trend analyses and other information contained in this report and elsewhere (such as in filings by us with the Securities and Exchange Commission, press releases, presentations by us or our management or oral statements) relative to markets for our products and trends in our operations or financial results, as well as other statements including words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” and other similar expressions, constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause actual results to be materially different from those contemplated by the forward-looking statements. Such factors include, among other things: (i) general economic conditions and other factors, including prevailing interest rate levels and stock and credit market performance which may affect (among other things) our ability to sell our products, our ability to access capital resources and the costs associated therewith, the market value of our investments and the lapse rate and profitability of policies; (ii) world conflict, including but not limited to the war in Afghanistan which may affect consumers spending trends and priorities (iii) customer response to new products and marketing initiatives: (iv) mortality, morbidity and other factors which may affect the profitability of our products (v) changes in the federal income tax laws and regulations which may affect the relative income tax advantages of our products (vi) regulatory changes or actions, including those relating to regulation of financial services affecting (among other things) bank sales and underwriting of insurance products and regulation of the sale, underwriting and pricing of products (vii) the risk factors or uncertainties listed from time to time in our filings with the Securities and Exchange Commission (viii) the Affordable Health Care for America Act passed in 2010.
Liabilities for unpaid policy claims are a sensitive accounting estimate unique to the insurance industry. Management uses an independent actuary to formulate this estimate. Differences in the estimates and actual results may result in revised claims expense which is recognized in the period in which the difference is determined. See Note 1, 7 and 11 to our financial statements for the effect on the year 2010.
The Company’s significant insurance product types are presently dental (group and individual), life (group and individual), and annuities.
It is common in the life and accident and health insurance industry for a consulting actuary to give either (A) a liability certification where the liabilities are expressed as a range of numbers for each relevant liability (the “Range Estimate”), or (B) a
liability certification where the liabilities are expressed as a single number for each relevant liability (the “Single Point Estimate”).
For the Company’s group and individual dental insurance policies, the Company and its independent consulting actuary use a completion factor approach (sometimes referred to as the development method) which provides best estimates of the factors to determine claim liabilities.
Trends in Completion Factors, Loss Ratio and Claims Per Insured Per Month
The valuation allowance against deferred taxes is a sensitive accounting estimate. The Company follows Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes,” which prescribes the liability method of accounting for deferred income taxes. Under the liability method, companies establish a deferred tax liability or asset for the future tax effects of temporary differences between book and tax basis of assets and liabilities.
The Company has net operating loss carry forwards for income tax purposes at December 31, 2010 as follows:
At December 31, 2010 the Company had liquid assets of $8,632,371 in cash, treasury bills, money market savings accounts, and money market funds. Money market funds may be subject to withdrawal restrictions. No such restrictions were in place at December 31, 2010. All of the non-cash liquid assets can readily be converted into cash.
The major components of operating cash flows are premiums and investment income while policy benefits are the most significant cash outflow. In 2010, BNLAC collected approximately $39.9 million of premiums and annuity deposits (gross before reinsurance) and $951,019 of net investment income. Another source of cash flow in 2010 was overwrite commissions of $2,409,860 on vision products. During the year the Company incurred $30,704,368 in policy benefits and other insurance costs.
The Company had a net increase in cash and cash equivalents of $542,268 in 2010 compared to an increase of $3,100,722 in 2009. The increase in 2010 was primarily from cash flow from operations, the sale and maturity of investments and a decrease in the amount of fixed maturity securities purchased.
In 2010 the Company sold its bond investment that was Available for Sale.
On November 5, 2001 the Company’s Board of Directors approved a settlement of the class action lawsuit (see "Legal Proceedings"). One term of the settlement was the issuance of Company bonds in the principal amount of $1.50 in exchange for each share of the Company’s common stock owned by the members of the class. The Arkansas Insurance Commissioner has reviewed and approved the settlement. The bonds have a 12-year term and bear interest at the rate of 6% per annum, effective December 15, 2002 payable annually from the previous fiscal year’s earnings. The total principal amount of bonds payable at December 31, 2010 is $1,300,708 compared to $1,323,388 at December 31, 2009. Bond interest expense was $77,633, and $82,317 in 2010 and 2009; respectively. BNLAC will pay dividends to BNL Financial Corporation for the payment of interest to the bondholders if permissible under Arkansas insurance laws. The maximum amount of dividends which can be paid by Arkansas domiciled insurance companies to shareholders without prior approval of the insurance commissioner is subject to restrictions relating to statutory surplus. The Company does not expect the dividend restrictions to impact its ability to meet its cash needs. The Company has no plan to start a sinking fund for payment of the principal at maturity.
* The notes to this long-term contractual obligations table are part of the table and are important.
Net investment income was $951,019 in 2010, $1,122,698 in 2009 and $1,170,901 in 2008, a decrease of 4% in 2009, and a decrease of 15% in 2010. The decrease in 2010 was primarily due to the reduction in fixed maturities and the increase in short term investments with lower yields. The decrease in 2009 was due to an increase in short term investments with lower yields.
The Company had a realized gain on debt extinguishments of $4,536 in 2010, $27,176 in 2009 and $44,370 in 2008 due to the purchase of debentures payable at less than par value. The Company purchased fewer debentures in 2010 and 2009 than it did in 2008, which resulted in less realized gain in debt extinguishments.
Realized gains (losses) on sale or maturities of investments were $139,605 in 2010, $100,792 in 2009 and $16,729 in 2008. The realized gains in 2010 were primarily due to the $154,000 gain on the sale of Ford Motor Company bonds that were written down by $145,864 in 2008. In 2009 the Company had a $20,000 gain on the maturity of General Motors Acceptance Corporation bonds and $79,905 gain on the sale of U.S. Treasury bonds. The gain in 2008 was primarily due to gains on government agency bonds that were called.
Realized losses on other than temporary impairments were ($146,170) in 2010, $(42,280) in 2009 and ($496,446) in 2008. The impairments in 2010 were due to the write down of Treaty Oak Bank common stock in the amount of $47,763 and the write down of a loan to EPSI Benefits Inc. in the amount of $98,407. The Company has a $1,357,407 convertible debenture loan investment (“Debenture”) at 14% to EPSI Benefits, Inc. (“EBI”) that is scheduled to mature August 15, 2020. Monthly principal payments were scheduled to begin on September 15, 2008, however on July 14, 2008, the Company and EBI, amended the Debenture whereby the monthly principal payments will start on September 15, 2013. Due to the extension of the commencement of principal payments and maturity of the Debenture noted above, the Company was required to establish an allowance for credit losses in the amount of $204,582 in 2008. In 2010 one of the two original EBI shareholders agreed to sell her ownership in EBI to the other shareholder and pursue employment elsewhere. Due to this change in ownership, the Company increased its allowance for credit losses in the amount of $98,407. In 2009 the Company wrote down CIT Group Inc. bonds by $42,280. In 2008 the Company wrote down Washington Mutual bonds from $126,000 to $0 to reflect their status as worthless. In 2008 management determined Ford Motor Company and General Motors Acceptance Corporation bonds were other than temporarily impaired and wrote down Ford Motor Company from $187,864 to $42,000 and General Motors Corporation from $100,000 to $80,000. The aggregate realized loss on the bonds in 2008 was $291,864
Earnings per share were $0.15, $0.19, and $0.16 in 2010, 2009 and 2008, respectively. The effect of the treasury shares acquired in 2010, 2009 and 2008 (see Market for Stock) had no affect on earnings per share.
For the year ended December 31, 2010, other comprehensive income (losses) was $9,539 compared to $196,976 in 2009 and $(283,566) for the same period in 2008. In 2010 comprehensive income was due to an increase in the market value of equity securities. Comprehensive income for 2009 was primarily due to an increase in the market value of available for sale fixed maturities and equity securities. The comprehensive loss in 2008 was due to the decrease in the market value of equity securities.
In 2011 we continue to focus on recruiting new brokers, marketing in states where we have little or no premium income and expanding our product portfolios.