"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 Iraq, 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.
Reserves 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 may result in revised claims expense which is recognized in the period in which the difference is determined. See Note 11 to our financial statements for the effect on the year 2004.
The reconciliation of income taxes computed at the federal statutory income tax rate to total income taxes for the years ended December 31, 2004, 2003 and 2002 is as follows:
2005 $ 38,024 2006 545,898 2007 286,096 2008 202,779 2009 162,019 2010 185,160 2011 65,880 2012 192,537 2018 254,814 2019 130,716 2020 65,199 2023 73,260 2024 28,624 ----------------
The major components of operating cash flows are premiums and investment income while policy benefits are the most significant cash outflow. In 2004, BNLAC collected approximately $42.8 million of premiums and annuity deposits (gross before reinsurance) and $975,485 of investment income. Another source of cash flow in 2004 was overwrite commissions of $461,443 on vision products. At the same time the Company paid $31,766,217 in policy benefits and other insurance costs.
Approximately $664,488 of the bond portfolio is classified as Available for Sale and carried on the Balance Sheet at market value with the unrealized gain or loss recorded in the surplus section of the Balance Sheet. The bonds include; automobile bonds, government agencies and U. S. Treasury Bonds that have unrealized profits. The Company may sell these bonds before they mature.
In the third quarter of 2004, BNLAC received notification from the Arkansas Insurance Department that its bond portfolio exceeded the 20% investment limitation for certain federal agencies as they relate to its investment in Federal Home Loan Bank bonds. The Company immediately sold $900,000, par value, of its Federal Home Loan Bank bonds for a loss of $4,490 to initiate compliance with the Arkansas statute. For GAAP purposes the bonds were classified as held to maturity. Further discussions with the Arkansas Insurance Department revealed the Department's intent was not to have the Company dispose of any of its block of Federal Home Loan Bank bonds, but instead request permission to exceed the 20% investment limitation. The Company then requested and was granted permission by the Arkansas Insurance Department to exceed the 20% investment limitation. The Company has determined its held to maturity fixed securities portfolio was not tainted since the bond sales were due to an unusual and isolated occurrence that could not be reasonably foreseen. BNLAC held Federal Home Loan Bank Bonds totaling 27% of statutory assets at December 31, 2004.
The Company's investments are primarily in U.S. Government and Government Agencies ($14,803,740 amortized book value) and other investment grade bonds ($2,287,058 amortized book value). The Company does not hedge its investment income through the use of derivatives.
In 2004, BNLAC paid dividends totaling $1,150,000 to BNLF for the purchase of Company stock and bonds and for other general operating funds compared to $857,734 dividends paid in 2003. In 2005, the Company has negotiated with Universal Guaranty Life Insurance Company to purchase 2,216,776 shares of BNL Financial Corporation's common stock for $2,300,000. The transaction is pending regulatory approval. BNLAC will use short term investments to fund the dividends it will pay to the Company to purchase the stock.
Increase in liability for future policy benefits was $687,619 in 2004, $34,377 in 2003 and $93,518 in 2002. The increase in 2004 was primarily due to a $611,410 increase in additional contract reserves on the individual dental policies. Beginning in 2004, new reserve rules prescribed by most state insurance departments require additional reserves be established to more properly match premiums and benefits for this product. The Company was also required to set up deferred acquisition costs on the individual dental plans that reduced general and administrative expenses by $155,410. The decrease in 2003 was due to a slight decrease in the number of whole life insurance policies in force.
Operating expenses were $7,957,447 in 2004, $7,664,081 in 2003 and $7,249,662 in 2002. The 4% increase in expenses in 2004 was primarily due to an increase in payroll expenses, employee benefits and actuarial expense which increased due to an increase in business in force, new plans of insurance available for sale and increased state filings. The increase in expenses in 2003 was due to an increase in executive bonus incentive plan expenses, which increase with profits, payroll expense and marketing expense associated with increased product and sales promotion.
Taxes other than on income were $1,344,723 in 2004, $1,326,826 in 2003 and $1,331,528 for 2002. The increase in 2004 was due to premium taxes on the increase in collected premiums. The decrease in 2003 was due to a decrease in premium taxes on fewer premiums collected.
For 2004, the consolidated net income from operations before taxes was $3,120,686 compared to $3,341,340 in 2003 and $2,876,727 in 2002. The decrease in 2004 was primarily due to the increase in additional contract reserves on the individual dental plan. The increase in 2003 was due to a decrease in claims on group dental business and an increase in realized gains.
Looking Forward BNLAC plans to apply for authority to market insurance products in additional states in the upcoming year. In 2004 we received approval to market insurance in New Mexico and we currently have an application pending for a certificate of authority in Wisconsin.
minimize market risk and risk of default by investing in high quality debt instruments, with staggered maturity dates. We did not have financial instruments to manage and reduce the impact of changes in interest rates at December 31, 2004 and December 31, 2003. We held various financial instruments at December 31, 2004 and 2003, consisting of financial assets reported in our Consolidated Balance Sheets (refer to Note 4).
Interest Rate Risk - We are subject to interest rate risk through the investment in fixed maturity securities, such as U.S. Government and Government Agency securities and other investment grade bonds. The fair market value of long-term, fixed-interest rate debt is subject to interest rate risk. Generally, the fair value of fixed-interest rate debt will increase as interest rates fall and will decrease as interest rates rise. The estimated fair value of our fixed maturity securities at December 31, 2004 and December 31, 2003 was $17,622,189 and $16,631,478, respectively.
A one percentage point increase in prevailing interest rates would result in a decrease in the estimated fair value of fixed maturity securities held at December 31, 2004 of approximately $504,000. Initial fair values were determined using the current rates at which we could enter into comparable financial instruments with similar remaining maturities. The estimated earnings and cash flows impact for the twelve months of 2004, resulting from a one percentage point increase in interest rates, would be immaterial, holding other variables constant.
Commodity Price Risk - We have no financial instruments subject to commodity price risk.
The preceding discussion of estimated fair value of our financial instruments and the sensitivity analyses resulting from hypothetical changes in interest rates are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements reflect our current expectations and involve uncertainties. These forward-looking market risk disclosures are selective in nature and only address the potential impact from financial instruments. They do not include other potential effects which could impact our business as a result of changes in interest rates, foreign-exchange rates, commodity prices, or equity security prices.