*This information should be read in conjunction with the disclosure concerning the Management's Discussion and Analysis of Financial Condition and the audited Financial Statements and Notes thereto set forth elsewhere in this Form 10-K.
The Company, through its wholly owned subsidiary, BNLAC, has a single line of business which is life and accident and health insurance. The Company’s SIC code is 6311 which is a standard industrial classification used by the United States Securities and Exchange Commission (“SEC”). Using such SIC code, an interested person can research the internet website of the SEC, www.sec.gov, to find and review business and financial information of other companies which are in the same line of business.
The Company calculates and maintains claim liabilities for the estimated future payments on claims incurred before the statement date. These calculations are based on actuarial principles in accordance with industry standards and applicable GAAP requirements. Development of such liabilities is done with Company financial personnel and management working with the Company’s independent consulting actuary. These liabilities involve many considerations including but not limited to economic and social conditions, inflation, and healthcare costs. The claim liabilities developed include significant estimates and assumptions based on management’s review of historical experience in consultation with its independent actuary. The extent to which future payments match the claims liabilities is dependent on how well actual future experience matches the assumptions management makes regarding the future experience. The Company’s liabilities are estimates that require significant judgment and, therefore, are inherently uncertain.
Of all the assumptions made by the Company’s financial personnel and management and the Company’s independent consulting actuary, the loss ratio and the claims per insured per month for the most recent months are the most sensitive ones for liability estimation. If the loss ratios and claims per insured per month increase, claim liabilities will likely increase by some amount. If the loss ratios and claims per insured per month decrease, claim liabilities will likely decrease by some amount.
As to the consistency of the Company’s estimation of its claim liabilities (the policy claims payable on the Company’s balance sheet), you may reference Notes 7 and 11 to the Company’s Financial Statements. Notes 7 and 11 present data indicating the actual claims paid in a subsequent fiscal year for a prior fiscal year; actual claims incurred in a subsequent year for a prior fiscal year; and the claim liabilities for the prior fiscal year. Notes 7 and 11 are limited to the most recent fiscal year being reported, December 31, 2010, and the previous fiscal years of 2009 and 2008.
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, 2010, claim liabilities would have been increased by approximately $11,000.
At December 31, 2010 and 2009, respectively, the Company had gross deferred tax assets of $983,702 and $1,037,858 with corresponding valuation allowances of $714,058 and $683,058, and gross deferred tax liabilities of $229,370 and $248,800, 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, 2010 is $40,274 compared to a deferred tax asset of $106,000 at December 31, 2009. 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.
The statutory capital and surplus of the insurance subsidiary decreased in 2010 primarily due to $5,400,000 of dividends paid to the Company. In 2009 the statutory capital and surplus increased primarily due to income from operations.
All of the Company’s $14.7 million 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.
The Company’s investments are primarily in U.S. Government and Government Agencies ($11,407,735 amortized book value), Canadian Government ($478,623 amortized book value) other investment grade bonds ($2,208,185 amortized book value) and less than investment grade ($611,896 amortized book value).
The table below details the unrealized gains and losses on the bonds that are less than investment grade.
The Company does not hedge its investment income through the use of derivatives.
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. 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 in 2008 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.
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 reanalyzed discounted expected future cash flows and increased its allowance for credit losses in the amount of $98,407, resulting in a book value of $1,054,418 at December 31, 2010. 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 $0 and $27,215 in 2010 and 2009 respectively. The agreement provided EPSI with a $200,000 line of credit maturing August, 2010. The line of credit was at 8.00% with interest and principal paid monthly to BNLAC.
In 2010, BNLAC paid dividends totaling $5,400,000 to BNLF for the payment of dividends to the Company’s shareholders and for other general operating funds compared to $800,000 dividends paid in 2009 for the payment of dividends to the Company’s shareholders and for other general operating funds.
The following table reflects all long-term contractual obligations of the Company as of December 31, 2010.
Special Note Relating to Notes A, B, C and D and the information and presentation for liabilities for future policy benefits, policy claims payable, annuity deposits and supplementary contracts.
The total estimated future payments to be made relating to Policy Claims Payable do match the balance sheet liability total. The estimated future payments are estimates of future occurrences based on many significant assumptions and are forward looking statements which are to be given the full protection of safe harbor. In developing the Policy Claims Payable, assumptions are made regarding such items as loss ratios, claims per insured or certificate holder per month, completion factors, morbidity trends, speed at which incurred claims are submitted, and speed at which they are processed. It is likely that the actual experience will deviate from these assumptions - sometimes materially. Random fluctuation is likely. The determination of the liability amounts is based upon estimates and the timing of payments is not always reasonably fixed and determinable. Because of the above considerations, the amounts and timing of 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 $4,428,215 which does not match the balance sheet liability total of $2,384,264 and the difference is $2,043,951. 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 $30,099 which does not match the balance sheet liability total of $41,932 and the difference is $(11,833). 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 $39,868,611 in 2010, $41,609,604 in 2009 and $43,456,024 in 2008. The decreases in 2010 and 2009 were due to a decrease in new sales of dental insurance primarily as a result of the impact of the recession on voluntary employee benefits.
The Company receives marketing fees from EBI in accordance with a marketing agreement entered into in 2001. The Company received marketing fees of $0 in 2010, $25,000 in 2009 and $0 in 2008. By mutual agreement, EPSI ceased paying the Company marketing fees in 2008 and 2010 due to reductions in working capital.
Decreases in liability for future policy benefits were ($90,098), ($66,596) and ($39,268) in 2010, 2009 and 2008, respectively. The decrease for all three years was primarily due to the decrease in the amount of life insurance in force.
Policy benefits and other insurance costs decreased from $32,978,610 in 2008, to $31,805,555 in 2009 and to $30,704,368 in 2010. The decrease in 2010 was primarily due to an approximately $802,000 decrease in claims expense, which was off set by $73,000 of which resulted from an overestimation of claims payable at December 31, 2009. The decrease in 2009 was primarily due to an approximately $882,000 decrease in claims expense, $146,000 of which resulted from an overestimation of claims payable at December 31, 2008. The claims ratio on group dental insurance, which represents the ratio of claims incurred to premium earned, was 62.8% in 2010, 62.2% in 2009 and 61.9% in 2008.
Operating expenses were $8,457,312 in 2010, $8,716,583 in 2009 and $9,055,261 in 2008. In 2010 operating expenses continued to decrease due to a reduction in payroll expense and claims administration expense which is directly related to the decrease in business in force. The decrease of approximately $338,678 in 2009 was primarily due to a decrease in executive incentive bonuses, claims administrative expense and printing and stationary expense. The decrease in the expense lines was primarily due to the decrease in the number of policies in force.
In 2010, the consolidated income from operations before taxes was $2,781,796 compared to $3,415,226 in 2009 and $2,961,311 in 2008. The 2010 decrease was due to the lower premium and investment income and the increased loss ratio. The increase in 2009 was primarily due to the increase in realized gains and decrease in operating expenses.
The provision for income taxes was $547,080 in 2010, $597,381 in 2009 and $594,839 in 2008. For the periods ended December 31, 2010, 2009 and 2008, the Company had $480,080, $647,381 and $663,441 of current tax expense and $67,000 of deferred tax expense in 2010 and $50,000 and $68,602 of deferred tax credit in 2010 and 2009. 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.