During the first half of 1998 the Company leased 12,150 square feet of office space in Austin, Texas, under a seven year, triple net lease. In July 2002 the Company expanded its offices in an adjacent building and increased the space it leases by 1,596 square feet. The annual base rent for the 12,150 square feet was $137,578 a year and the cost for the additional space is $19,152 per year. Effective January 1, 2004, the Company leased an additional 798 square feet in the adjacent building at a rate of $9,576 per year. The lease rate remained in affect until the term of the lease expired. The Company terminated lease payments at the end of February 2006.
BNLF leases approximately 1,400 square feet of office space in Sherwood, Arkansas at a rental of $18,120 per year. 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, 2006 are derived from the Company's consolidated financial statements. The consolidated financial statements as of December 31, 2006 and 2005, and for each of the years in the three-year period ended December 31, 2006 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 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.
The following is a summary description of the Company’s methodology for estimating its claim liabilities for its insurance policies. The Company and management believe that this discussion constitutes forward looking statements and, therefore, this discussion is given full safe-harbor.
The following discussions of claim liability methodology are separated by the Company’s product types as indicated by the section headings.
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.
The major components of operating cash flows are premiums and investment income while policy benefits are the most significant cash outflow. In 2006, BNLAC collected approximately $44.8 million of premiums and annuity deposits (gross before reinsurance) and realized $1,005,775 of net investment income. Another source of cash flow in 2006 was overwrite commissions of $1,603,767 on vision products. During the year the Company incurred $34,374,507 in policy benefits and other insurance costs.
The net cash flow for 2006 was $726,786 versus operating income of $3,082,645. The difference is primarily due to the purchase of $1,297,948 of the Company’s treasury stock, a decrease in annuity deposits of approximately $350,367, the purchase of fixed assets and leasehold improvements of $269,487 and purchase of bonds payable and equity securities totaling $294,744 .
Approximately $596,800 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 calculating the payments above, BNLAC used models of the business created for statutory asset adequacy analysis. The modeled life block was assumed to surrender for its reserve at the end of 20 years. Health blocks tested were projected using approximate means beyond 20 years. Payments on blocks not initially modeled were projected on an approximate basis. The total estimated future payments to be made relating to the Liability for Future Policy Benefits is stated as $10,679,039 which does not match the balance sheet liability total of $2,472,849 and the difference is $8,206,190. This is primarily due to the fact that the estimated future payments presented in the long term contractual obligations table for Future Policy Benefits includes consideration for future premiums, investment income 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. Assumptions for estimating future payments are made regarding such items as interest earnings, mortality, morbidity, 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 premium payments and withdrawals, mortality and morbidity improvement or deterioration, and inflation. Random fluctuation in experience could also have an effect. The determination of the amount of the future payments is 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 future payments will likely vary from that presented in the above table.
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 $5,792,954 which does not match the balance sheet liability total of $2,536,225 and the difference is $3,256,729. 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.
Premium income was $44,646,393 in 2006, $44,303,827 in 2005 and $42,451,319 in 2004. The increase in 2006 was due to new sales of group dental insurance which was offset by approximately a $1.1 million reduction in group dental premium due to the termination of an agreement between the Company and Southeast Managers, Inc. (“SEMI”). This agreement allowed SEMI to market a dental product of BNLAC’s in Tennessee and the Company received 5.0% of premium revenue with no exposure to underwriting losses. As part of the termination agreement, the block of business was transferred to another company associated with SEMI. The increase of 4% in 2005 was due to new sales of group dental insurance and increased group and individual dental renewal premiums
Net investment income was $1,191,583 in 2006, $1,003,613 in 2005 and $975,485 in 2004, an increase of 18% in 2006, and an increase of 3% in 2005. The increase in 2006 was primarily due to delinquent interest received on bonds previously in default and an increase in fixed maturities investment yield. The increase in 2005 was due to an increase in investment in fixed maturities and an increase in interest rates. Continued profitability and stable or increased interest rates in subsequent years, will permit the Company to invest its profits in fixed maturities and continue the trend of increased investment income.
BNLAC markets group and individual vision insurance products that are underwritten by other insurance companies, on which BNLAC does not have any exposure to underwriting (claims) losses. The Company had vision insurance income of $1,603,767, $1,051,720 and $695,046 in 2006, 2005 and 2004, respectively. The vision income increased by 49% and 51% in 2006 and 2005, respectively, primarily due to the addition of group voluntary vision plans.
Realized capital gains and (losses) on investments were $25,547 in 2006, $37,816 in and $124,078 in 2004. The realized gain in 2006 and 2005 was primarily from the sale of equity securities. The realized gain in 2004 is primarily from the sale of U.S. Treasury bonds.
Increases in liability for future policy benefits were ($123,066), $308,563 and $687,619 in 2006, 2005 and 2004, respectively. The decrease in future policy benefits in 2006 was primarily due to the decrease in future policy benefits liability as a result of the terminated agreement between the Company and SEMI mentioned above. As part of the termination agreement, the block of business was transferred to another company associated with SEMI and the liability for future policy benefits was reduced by $95,000. The decrease in expense was also due to a reduction in life liabilities from an increase in surrenders on a seasoned block of life policies. The $308,563 in 2005 is comprised primarily of an increase in unearned premium liabilities on group and individual dental business.
In 2004, a future policy benefit reserve amount of $611,410 was booked for individual dental policies then in force. This amount included additional reserves for the individual dental policies issued in 2001, 2002 and 2003, which remained in force (not terminated) in 2004 and also included reserves for individual dental policies issued in 2004. The Company began issuing individual dental policies in 2001 as a new product. The Company’s calculations indicate that in 2004 the Company recorded individual dental policy cumulative gross benefit reserves for policies issued prior to 2004 in the amount of $280,292 and the combined after-tax charge for those policies was $181,699 ($.01 per share of Common Stock) which was accounted for as a change in estimate. For the year ended December 31, 2004, the after-tax effect of recording the liabilities, including the cumulative change in estimate, was calculated to have been a decrease in net income of approximately $378,000 ($.02 per share of Common Stock).
Operating expenses were $8,759,605 in 2006, $8,558,205 in 2005 and $7,957,447 in 2004. The increase for 2006 is primarily due to an increase in payroll expense associated with the issuance of policies, customer service and information systems. The increase in expenses in 2005 was due primarily to an increase in payroll expense, claims administration expense and office lease expense due to the increase in the number of group and individual policies in force. The increase in 2005 operating expenses was also due to an increase in professional fees, including actuarial, independent public accounting fees and legal fees incurred to assist management in replying to the Securities and Exchange Commission comments on the Company’s 2004 10K.
In 2006, the consolidated net income from operations before taxes was $3,082,645 compared to $2,830,130 in 2005 and $3,120,686 in 2004. The increase in 2006 was primarily due to the increase in vision insurance income and investment income. The decrease in 2005 was primarily due to the decrease in realized gains from debt extinguishments.
Earnings per share was $.16, $.13, and $.14 in 2006, 2005 and 2004, respectively. The effect of the treasury shares acquired in 2006 and 2005 (see Market for Stock) increased earnings per share by $.01 and $.02, respectively.
The provision for income taxes was $518,402 in 2006, $527,041 in 2005 and $468,183 in 2004. For the periods ended December 31, 2006, 2005 and 2004, the Company had $514,377, $448,040 and $355,183 of current tax expense and $4,025,
For the year ended December 31, 2006, other comprehensive income was $57,735 compared to ($79,542) in 2005 and ($87,603) or the same period in 2004. The increase in comprehensive income for the period ended December 31, 2006 was primarily due to an increase in the market value of equity securities in 2006. The comprehensive losses in 2005 and 2004 were due to an increase in interest rates that decreased the market value of the Company’s bond portfolio.
BNLAC plans to apply for authority to market insurance products in additional states in the upcoming year. In 2006 we received a certificate of authority in California and Wisconsin and in the first part of 2007 we received a certificate of authority in Virginia and North Carolina.