BNLE leases office space in Sherwood, Arkansas at a rental of $15,600 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, 2002 are derived from the Company's consolidated financial statements. The consolidated financial statements as of December 31, 2002 and 2001, and for each of the years in the three-year period ended December 31, 2002 are included elsewhere in this Form 10-K.
Reserves for unpaid policy claims is 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 2002.
The valuation allowance against deferred taxes is a sensitive accounting estimate. The Company follows Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," which prescribes the liability method of accounting for deferred income taxes. Under the liability method, companies establish a deferred tax liability or asset for the future tax effects of temporary differences between book and tax basis of assets and liabilities.
Liquidity and Capital Resources At December 31, 2002 the Company had liquid assets of $5,660,879 in cash, U.S. Treasury Bills, money market savings accounts, and short-term certificates of deposit. All of the non-cash liquid assets can readily be converted into cash.
Approximately $2.52 million of the bond portfolio remains classified as Available for Sale. The bonds include; telecommunication, utilities, automobile bonds and U. S. Treasury Bonds that have large unrealized profits. The Company may sell these bonds before they mature.
The Company's investments are primarily in U.S. Government and Government Agencies ($8,643,817 amortized book value) and other investment grade bonds ($3,421,353 amortized book value). The Company does not hedge its investment income through the use of derivatives.
The Company adopted Statement #142 of the Financial Accounting Standards Board in the first quarter of 2002, as is required. The adoption had no material effect on the financial statements of the Company. The new accounting rule changes the methods of accounting for intangible assets, which generally were amortized over 40 years under previous rules. The new standard requires that intangible assets be separately presented on the face of the Balance Sheet and be periodically tested for impairment of their market value and written off immediately to the extent the value is found to be impaired. As indicated on the face of the Balance Sheet, the Company has intangible assets of $168,052. These assets include the cost of 26 state licenses acquired in 1991 as part of the Statesmen Life Insurance Company acquisition and certain loan acquisition costs. Amortization expense of approximately $5,800, $7,100, and $3,109 was recorded for each of the years ended December 31, 2002, 2001 and 2000, respectively. The Company tested its intangible assets for impairment by evaluating the future benefit of the underlying investments or rights acquired in association with these assets.
Another term of the settlement is 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 the bonds is approximately $4,269,404 and the annual interest expense will be $256,000. We expect 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 2002, the Board of Directors approved a dividend of $1,138,400 to be paid by BNLAC to the Company to be used for redemption of company stock and/or bonds on terms to be determined by the Board of Directors in the future. In the first quarter of 2003, BNLAC received approval for the $1,000,000 dividend from the Arkansas Insurance Commissioner.
The Company conducts its insurance operations through its wholly owned subsidiary, BNLAC. At December 31, 2002, BNLAC had statutory capital and surplus of $10,716,560. BNLAC is required to maintain minimum levels of statutory
capital and surplus, which differ from state to state, as a condition to conducting business in those states in which it is licensed. The State of Arkansas, which is the legal domicile of BNLAC, requires a minimum of $2,300,000 in capital and surplus. The highest requirement in any state in which BNLAC is licensed is $5,000,000. Some states in which BNLAC is licensed have increased these requirements to as much as $5,000,000; but, in general, BNLAC may continue to operate under the lower minimum requirements in effect when it first became licensed in the applicable state. BNLAC voluntarily withdrew its Certificate of Authority in the state of Washington due to an increased minimum capital requirement in that state of $2,400,000. During 2001 BNLAC increased its common capital stock from $2,000,000 to $2,500,000, to comply with Washington's capital requirements. BNLAC has received its Certificate of Authority from the state of Washington. Management monitors these developments to maintain compliance with the requirements of each state.
In September 2001 the Company started receiving marketing fees from EBI per the agreement mentioned above. The Company earned $143,619 in 2002 and $60,589 in 2001.
Increase (decrease) in liability for future policy benefits was $93,518 in 2002, $56,063 in 2001, and ($85,852) for the same period in 2000. The increase in 2002 and 2001 was due to increases in life insurance in force. The decrease in 2000 was due to an increase in the number of surrendered life policies during that year.
Operating expenses were $7,249,662 in 2002, $6,525,350 in 2001, and $5,726,013 in 2000. The increase in expenses in 2002 was due to an increase in payroll expense, employee insurance expense and depreciation expense. Expenses increased in 2001 due to legal fees, settlement costs, executive bonus incentive plan expenses and payroll expense.
For 2002, the consolidated net income from operations before taxes was $2,876,727 compared to $1,579,471 in 2001 and $2,734,483 in 2000. The increase in 2002 was due to a decrease in the dental loss ratio, an increase in premium
Looking Forward The Company has plans to continue expansion into more states in the upcoming year. In March 2003 we received approval to market insurance in West Virginia and Alaska and we currently have applications pending for certificates of authority in Wisconsin and New Mexico. In 2003, the Company plans to increase advertising in trade publications to attract more independent agents to market our products. In addition, a recruiting bonus plan has been put into affect that will provide for an increase in first year and/or renewal commissions on business written by new agents. The Company expects the increased advertising and bonus commission will increase its agency force and business in force.