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 $320,000 and $355,000 for 2008 and 2007, respectively.
BNLF leases approximately 1,400 square feet of office space in Sherwood, Arkansas at a rental of $18,750 per year. BNLAC incurs 100% of the rental expense.
In November of 2007, BNLAC terminated its lease of 288 square feet of office space in Des Moines, IA. At December 31, 2008, employees of the Des Moines office worked from their homes and there are no plans to lease additional office space in Des Moines at this time.
In the life and accident and health insurance industry, the liabilities for claims and the related expensing of those liabilities are evaluated and recorded using estimates of claim liabilities. The Company estimates its claim liabilities using the general methodology described herein.
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. In implementing the completion factor approach, a review of payment history develops the completion factors. These completion factors relate what percentage of an ultimate claim is paid based upon its duration from date of service. Such completion factors are monitored over time and have been relatively stable. The completion factors are used to estimate the liabilities for the months in which the claims are incurred where they are deemed to be credible.
Management reviews trends in loss ratios and claims per insured per month in determining its estimate for the most recent months. Generally, while fluctuations do occur, the Company’s loss ratio and claims per insured per month are stable. In estimating claim liabilities (the policy claims payable on the Company’s balance sheet), the Company consistently uses the assumptions of loss ratio and claims per insured per month which are based on actual, historical data. See, the discussion in the section herein entitled “Trends in Completion Factors, Loss Ratio, and Claims per Insured per Month”.
The Company determines its life insurance claim liabilities by recording three items: (1) actual claims due and unpaid; (2) the claims received during the 30 day period following year end (this is done by taking an inventory of claims received during the thirty day period); and (3) estimating a liability amount for claims which have been incurred but not yet reported by the end of the thirty day period.
The discussion in this paragraph relates to the months where the completion factors are deemed to be fully credible which are typically the months prior to November and December. The completion factors have been relatively stable in the recent past. In the future, there could be changes in the trend of completion factors. The Company and its independent consulting actuary review the trends in the completion factors and when necessary make judgments as to the Single Point Estimate value for these items. Such estimates are based on observable trends and would also reflect any known major changes. Professional judgments are made based on the experience of the actuary and Company’s financial personnel and management. To observe the possible sensitivity of assuming 100% reliance on completion factors for claims incurred during the months for which completion factors are believed to be fully credible, if the associated claim liabilities for those months had increased by 5%, the year-end December 31, 2008, claim liabilities would have been increased by approximately $13,000.
The discussion in this paragraph relates to the months where the completion factors are deemed to be not fully credible which are typically the months of November and December. The choice of the loss ratio assumption or claims per insured per month assumption for the most recent month of the claim was incurred may also have an impact on the liability estimate. These assumptions are monitored for trends. The Company and its consulting actuary monitor the loss ratio and claims per insured month and override the completion factor approach for the most recent months before the Company’s financial statement date where the completion factors are not fully credible, i.e. November and December. To observe the possible sensitivity of assuming 100% reliance on loss ratio or claims per insured per month factors for claims incurred during the months for which completion are believed to be not fully credible (typically November and December of a fiscal year), if the loss ratio or claims per insured per month had increased by 3% for those months (a multiple of 1.03), the associated claim liabilities for those months and the year end December 31, 2008, claim liability would have been increased by approximately $121,000.
The Company believes that its recorded claim liabilities are reasonable and adequate to satisfy its ultimate claims liability. The Company’s recorded claim liabilities are, in accordance with industry practice, estimates of such liabilities.
The reader must recognize that the completion factors, loss ratios and claims per insured per month may, and probably will, be affected by events and conditions which are or will be unknown to the Company’s financial personnel or management or the Company’s consulting actuary. The reader must also recognize that any trending of the completion factors, loss ratios or claims per insured per month may not be indicative of changes in the Company’s financial condition.
While a presentation such as described above provides some mathematical and hypothetical numerical calculations, such calculations may or may not have any relevance to the Company’s future financial condition, earnings or cash flow.
At December 31, 2008 and 2007, respectively, the Company had gross deferred tax assets of $1,067,931 and $1,129,371 with corresponding valuation allowances of $701,414 and $812,466, and gross deferred tax liabilities of $269,517 and $346,506, resulting from net operating loss carryovers and temporary differences primarily related to the life insurance subsidiary. The valuation allowance is primarily due to statutory limitations on the use of net operating losses and uncertainty as to usage of AMT credit carryover. The resulting net deferred tax asset at December 31, 2008 is $97,000 compared to a deferred tax liability of $29,601 at December 31, 2007. Realization of the deferred tax asset is dependent on generating sufficient taxable income prior to expiration of the loss carry forward. Although realization is not assured, management believes it is more likely than not that all of the net deferred tax asset will be realized. However, the amount of the deferred tax asset considered realizable could be reduced in the near term if estimates of future taxable income during the carry forward period are reduced.
At December 31, 2008 the Company had liquid assets of $4,989,381 in cash, short term government agency notes, money market savings accounts, JP Morgan Chase Liquid Assets Fund, Regions Morgan Keegan Government Agency Fund, Goldman Sachs Trust Financial Square Fund, Evergreen Institutional Treasury Money Market Fund, First American Treasury Obligation Funds and short-term certificates of deposit. Money market funds maybe subject to withdrawal restrictions. No such restrictions were in place at December 31, 2008. All of the non-cash liquid assets can readily be converted into cash.
Approximately $19.6 million of the bond portfolio is classified as Held to Maturity and is carried on the Balance Sheet at amortized cost. This classification reflects management's ability and intent to hold the bonds until maturity. No adjustments to surplus are made as bond values change unless declines in market value are deemed to be other than temporary.
On July 14, 2008, the Company and EBI, amended the Debenture (Exhibit 10.9) whereby the monthly principal payments will start on September 15, 2013 with the maturity date extended to August 15, 2020. For various business reasons management of both companies deemed the amendment to be advantageous. Under the agreement, BNL has the right to convert the Debenture into a 51% ownership in EBI. Such conversion right will continue during the extended maturity of the Debenture.
Because of the extension of the commencement of principal payments and maturity of the Debenture, the Company analyzed discounted expected future cash flows in accordance with applicable generally accepted accounting principles and established an allowance for credit losses in the amount of $204,582 at the time the agreement was amended, resulting in a net book value of $1,152,825. Interest on the debentures is and has been current.
Other long-term investments also include an operating line of credit agreement in the amount of $71,784 and $112,647 in 2008 and 2007 respectively. The agreement provided EPSI with a $200,000 line of credit maturing August, 2011. The line of credit is at 8.00% with interest and principal payable monthly to BNLAC.
** Interest payments are made only if the Company is profitable.
In calculating the payments above, BNLAC used models of the business created for statutory asset adequacy analysis. The modeled annuity block was assumed to surrender for its reserve at the end of 20 years. The total estimated future payments to be made relating to the Annuity Deposits liability is stated as $5,397,256 which does not match the balance sheet liability total of $2,523,185 and the difference is $2,874,071. The balance sheet Annuity Deposit liability represents such items as deposits, premiums, investment income, expenses, and withdrawals which have already occurred while the total estimated future payments presented in this long term contractual obligations table are estimated using assumptions for future occurrences of such factors and other factors. The estimated future payments are based on many significant assumptions regarding future occurrences such as future premium payments, interest earnings, mortality, and persistency. It is likely that the actual experience will deviate from these assumptions - sometimes materially. A number of factors can have an effect such as economic conditions, changes in policyholder actions regarding annuity deposits and withdrawals, mortality improvement or deterioration, and inflation. Random fluctuation in experience could also have an effect. The determination of the Annuity Deposit estimated future payments is based upon estimates and the timing and amount of estimated future payments is not always reasonably fixed and determinable. Because of the above considerations, the amounts and timing of estimated future payments will likely vary from that presented in the above table.
The total estimated future payments to be made relating to the Supplementary Contracts without life contingencies liability is stated as $32,601 which does not match the balance sheet liability total of $2,782 and the difference is $29,819. This is primarily due to the fact that the estimated future payments in this long term contractual obligations table for Supplementary Contracts includes consideration of future investment income, withdrawals (if permitted) and maintenance expenses and such assumptions, and perhaps other assumptions, may differ from the assumptions initially used to establish the balance sheet liability. The estimated future payments presented in the long term contractual obligations table are based on current assumptions while the balance sheet liability is based on assumptions locked in at the date the policy was approved for issue. The estimated future payments are based on many significant assumptions regarding future occurrences such as interest earnings, mortality, and persistency. It is likely that the actual experience will deviate from these assumptions - sometimes materially. A number of factors can have an effect such as economic conditions, changes in policyholder actions regarding withdrawals (if allowed), and mortality improvement or deterioration. Random fluctuation in experience could also have an effect. The Supplementary Contracts estimated future payments are based upon estimates and the timing and amount of future payments is not always reasonably fixed and determinable. Because of the above considerations, the amounts and timing of estimated future payments will likely vary from that presented in the above table.
Premium income was $43,456,024 in 2008, $44,564,173 in 2007 and $44,646,393 in 2006. The decrease in 2008 was due to a decrease in group and individual insurance premiums. New sales of dental insurance were down in 2008 and 2007 primarily due to increased competition from additional companies marketing dental insurance and the turbulent economic climate that reduced consumers spending. This is reflected in the $650,000 decrease in first year group dental premium in 2008 and a decrease of $352,674 in 2007.
The Company had a realized gain on debt extinguishments of $44,370 in 2008, $10,803 in 2007 and $35,732 in 2006 due to the purchase of debentures payable at less than par value. The Company purchased fewer debentures in 2007 than it did in 2008 and 2006, which resulted in less realized gain in debt extinguishments.
Realized capital gains and (losses) on investments were ($479,717) in 2008, $11,128 in 2007 and $25,547 in 2006. In 2008 the Company wrote down Washington Mutual bonds from $126,000 to $0 to reflect their status as worthless. 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 was $291,864.
The Company has a $1,357,407 convertible debenture loan investment (“Debenture”) at 14% to EPSI Benefits, Inc. (“EBI”) that was scheduled to mature August 15, 2015. 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 with the maturity date extended to August 15, 2020. Because of the extension of the commencement of principal payments and maturity of the Debenture, the Company was required to establish an allowance for credit losses in the amount of $204,582, which is part of the realized losses for the year.
The realized gain in 2007 and 2006 was primarily from the sale of equity securities.
Executive incentive bonuses increased due to a 2% increase in the amount of the bonus and an increase in profit. The Company implemented agent bonus programs in 2007 to increase the number of agents marketing its products.
In 2008, the consolidated income from operations before taxes was $2,961,311 compared to $4,263,002 in 2007 and $3,082,645 in 2006. The decrease in 2008 was primarily due to the decrease in premium income and investment income and the increase in realized losses on fixed maturities. The increase in income from operations for 2007 was primarily due to the decrease in the group dental claims ratio and change in 2007 claims payable estimate, which added approximately $1.2 million to income.
The provision for income taxes was $594,839 in 2008, $813,634 in 2007 and $518,402 in 2006. For the periods ended December 31, 2008, 2007 and 2006, the Company had $663,441, $773,033 and $514,377 of current tax expense and $68,602 of deferred tax credit in 2008 and $40,601 and $ 4,025 of deferred tax expense for 2007 and 2006; respectively. Fluctuations in tax expense are primarily due to changes in taxable income, limitations on net operating losses utilized and adjustments in estimates for income taxes in prior years.
For the year ended December 31, 2008, other comprehensive income (losses) was ($283,566) compared to $54,274 in 2007 and $57,735 or the same period in 2006. The comprehensive loss in 2008 was due to the decrease in the market value of equity securities. Comprehensive income for 2007 and 2006 was primarily due to an increase in the market value of equity securities in both years.
In 2008, BNLAC was granted a certificate of authority in Connecticut, Hawaii, Massachusetts, and New Jersey. This makes 48 states and the District of Columbia the Company is able to offer life and accident and health insurance on an individual and group basis.