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, 2008 is derived from the Company's consolidated financial statements. The consolidated financial statements as of December 31, 2008 and 2007, and for each of the years in the three-year period ended December 31, 2008 are included elsewhere in this Form 10-K.
In this section, we review the consolidated financial condition of the Company at December 31, 2008, 2007 and 2006 and the consolidated results of operations for the periods ended December 31, 2008, 2007 and 2006. Please read this discussion in conjunction with the accompanying consolidated financial statements and notes.
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 2008.
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, 2008, and the previous fiscal years of 2007 and 2006.
The reconciliation of income taxes computed at the federal statutory income tax rate to total income taxes for the years ended December 31, 2008, 2007 and 2006 is as follows:
The Company has net operating loss carry forwards for income tax purposes at December 31, 2008 as follows:
The statutory capital and surplus of the insurance subsidiary increased in 2008 and 2007 primarily due to income from operations.
The major components of operating cash flows are premiums and investment income while policy benefits are the most significant cash outflow. In 2008, BNLAC collected approximately $44.0 million of premiums and annuity deposits (gross before reinsurance) and $1,170,901 of net investment income. Another source of cash flow in 2008 was overwrite commissions of $2,263,529 on vision products. During the year the Company incurred $32,978,610 in policy benefits and other insurance costs.
The net cash flow for 2008 was $51,398 versus operating income of $2,961,311. The difference is primarily due to dividends paid to shareholders of $760,356, the increase in fixed assets, equity securities and fixed maturities of approximately $1.1 million and the decrease in advanced and unallocated premium of $1.2 million.
Approximately $544,000 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 auto industry bonds, government agencies and U. S. Treasury Bonds that have unrealized profits. The Company may sell these bonds before they mature.
The Company’s investments are primarily in U.S. Government and Government Agencies ($15,879,057 amortized book value), other investment grade bonds ($3,870,427 amortized book value) and less than investment grade ($459,478 amortized book value).
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 are other than temporarily impaired and wrote down Ford Motor Company from $187,864 to $42,000 and General Motors Acceptance Corporation from $100,000 to $80,000. The aggregate realized loss on the bonds was $291,864.
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 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, 2008 is $1,443,282 compared to $1,607,576 at December 31, 2007. Bond interest expense was $93,536, and $112,322 in 2008 and 2007; respectively. BNLAC will pay dividends to BNL Financial Corporation for the payment of interest to the bondholders. 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 Arkansas Insurance Commissioner has reviewed and approved the settlement. 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.
In 2008, BNLAC paid dividends totaling $1,300,000 to BNLF for the payment of dividends to the Company’s shareholders and for other general operating funds compared to $1,000,000 dividends paid in 2007 for operating funds and to purchase common stock.
The following table reflects all long-term contractual obligations of the Company as of December 31, 2008.
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 $9,218,352 which does not match the balance sheet liability total of $2,208,948 and the difference is $7,009,404. 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.
Net investment income was $1,170,901 in 2008, $1,320,614 in 2007 and $1,191,583 in 2006, an increase of 11% in 2007, and a decrease of 11% in 2008. The increase in 2007 was due to an increase in investment in fixed maturities and an increase in interest rates. The decrease in 2008 was primarily due to the sharp decline in interest rates throughout 2008 and an increase in short term investments with lower yields. The decrease in interest rates and the challenged financial markets has made it difficult to purchase investment grade bonds with yields equivalent to bonds purchased over the last few years.
The Company receives marketing fees from EBI per the marketing agreement mentioned above. The Company received marketing fees of $0 in 2008, $198,843 in 2007 and $143,315 in 2006. By mutual agreement, EPSI ceased paying the Company marketing fees in 2008 due to the termination of one of its largest customers. The increase in marketing fees in 2007 was due to additional funds available at EPSI from higher profits during the year.
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 $2,263,529, $1,979,359 and $1,603,767 in 2008, 2007 and 2006, respectively. The vision income increased by 14% and 23% in 2008 and 2007, respectively, primarily due to the addition of group voluntary vision plans that require lower participation rates.
Decreases in liability for future policy benefits were ($39,268), ($213,867) and ($123,066) in 2008, 2007 and 2006, respectively. The increase in 2008 was primarily due to a decrease in the amount of life policies surrendered. The decrease in 2007 was primarily due to a decrease in additional contract reserves on individual dental policies. The number of individual dental policies in force decreased in 2008 and 2007.
Policy benefits and other insurance costs decreased from $34,374,507 in 2006, to $33,496,995 in 2007 and to $32,978,610 in 2008. The decrease in 2008 was primarily due to an approximately $454,000 decrease in claims expense, $390,000 of which resulted from an overestimation of claims payable at December 31, 2007. The decrease in 2007 was primarily due to an approximately $1.2 million decrease in claims expense, $450,000 of which resulted from an overestimation of claims payable at December 31, 2006. The claims ratio on group dental insurance, which represents the ratio of claims incurred to premium earned, was 61.9% in 2008, 61.8% in 2007 and 64.1% in 2006.
Amortization of deferred policy acquisition costs was $40,564 in 2008, $16,060 in 2007 and $26,219 in 2006. Amortization of deferred policy acquisition costs are primarily costs associated with a seasoned block of business written between 1988 and 1990. Amortization expense per year may vary in relation to lapses or surrenders of the existing block of business.
Operating expenses were $9,055,261 in 2008, $9,012,950 in 2007 and $8,759,605 in 2006. The 4.7% increase for 2008 is primarily due to increased labor and other costs. The increase in expenses in 2007 was due primarily to an increase in payroll expense, executive incentive bonuses, agent recruiting bonuses and independent accounting fees. Payroll expense increased due to an increase in the variety of products available and an increase in the number of states in which we are authorized to operate.
Taxes other than on income were $1,458,629 in 2008, $1,509,780 in 2007 and $1,526,427 for 2006. The decrease for 2008 is primarily due to a decrease in premium taxes on fewer premiums collected. The decrease in 2007 was due to a decrease in property taxes from a prior year accrual adjustment.
Earnings per share were $.16, $.22, and $.16 in 2008, 2007 and 2006, respectively. The effect of the treasury shares acquired in 2008, 2007 and 2006 (see Market for Stock) increased earnings per share by $.01, $.01 and $.01, respectively.