In November of 2007, BNLAC terminated its lease of 288 square feet of office space in Des Moines, IA. At December 31, 2007, 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.
While claim liabilities are estimated as an inherent part of the insurance industry, management of the Company believes that it follows standard industry practices in estimating 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.
However, with respect to claims incurred in the most recent months, the completion factors may not be fully credible (the payment history is not complete). So, as is common in the industry, a review is made of developing claims per insured by month and loss ratios by month for the most recent months. The Company’s financial personnel and management and the Company’s independent consulting actuary make a Single Point Estimate based upon their determination of the loss ratios and claims per insured for the most recent months.
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, 2007, and the previous fiscal years of 2006 and 2005.
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, 2007, claim liability would have been increased by approximately $127,000.
The reconciliation of income taxes computed at the federal statutory income tax rate to total income taxes for the years ended December 31, 2007, 2006 and 2005 is as follows:
The statutory capital and surplus of the insurance subsidiary increased in 2007 and 2006 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 2007, BNLAC collected approximately $44.2 million of premiums and annuity deposits (gross before reinsurance) and $1,150,335 of net investment income. Another source of cash flow in 2007 was overwrite commissions of $1,979,359 on vision products. During the year the Company incurred $33,496,995 in policy benefits and other insurance costs.
The Company’s investments are primarily in U.S. Government and Government Agencies ($15,646,157 amortized book value), other investment grade bonds ($2,886,306 amortized book value) and less than investment grade ($422,343 amortized book value).
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, 2007 is $1,607,576 compared to $1,639,948 at December 31, 2006. Bond interest expense was $112,322, and $86,700 in 2007 and 2006; respectively. BNLAC will pay dividends to BNL
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 $5,430,377 which does not match the balance sheet liability total of $2,463,546 and the difference is $2,966,831. 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 $33,874 which does not match the balance sheet liability total of $5,905 and the difference is $27,969. 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 $44,564,173 in 2007, $44,646,393 in 2006 and $44,303,827 in 2005. The decrease in 2007 was due to a decrease in first year group and individual insurance premiums. New sales of dental insurance were down in 2007 primarily due to increased competition from additional companies marketing dental insurance 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.
Realized capital gains and (losses) on investments were $11,128 in 2007, $25,547 in 2006 and $37,816 in 2005. The realized gain in 2007, 2006 and 2005 was primarily from the sale of equity securities.
Policy benefits and other insurance costs increased from $33,317,136 in 2005, to $34,374,507 in 2006 and decreased to $33,496,995 in 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 increase in 2006 was due to an increase in claims of approximately $740,000 and a $344,000 increase in commissions resulting from the increase in group dental premium collected. The claims ratio on group dental insurance, which represents the ratio of claims incurred to premium earned, was 61.8% in 2007, 64.1% in 2006 and 63.1% in 2005.
Taxes other than on income were $1,509,780 in 2007, $1,526,427 in 2006 and $1,577,775 for 2005. The decrease in 2007 was due to a decrease in property taxes from a prior year accrual adjustment. The decrease for 2006 is due to an over accrual in 2005 for state taxes.
In 2007, the consolidated income from operations before taxes was $4,263,002 compared to $3,082,645 in 2006 and $2,830,130 in 2005. The increase in income from operations for 2007 was primarily due to the decrease in the group dental claims ratio and change in 2006 claims payable estimate, which added approximately $1.2 million to income. The increase in 2006 was primarily due to the increase in vision insurance income and investment income.
Earnings per share was $.22, $.16, and $.13 in 2007, 2006 and 2005, respectively. The effect of the treasury shares acquired in 2007, 2006 and 2005 (see Market for Stock) increased earnings per share by $.01, $.01 and $.02, respectively.
The provision for income taxes was $813,634 in 2007, $518,402 in 2006 and $527,041 in 2005. For the periods ended December 31, 2007, 2006 and 2005, the Company had $773,033, $514,377 and $448,040 of current tax expense and $40,601, $4,025 and $79,001 of deferred tax expense; 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, 2007, other comprehensive income (losses) was $54,274 compared to $57,735 in 2006 and ($79,542) or the same period in 2005. Comprehensive income for 2007 and 2006 was primarily due to an increase in the market value of equity securities in both years. The comprehensive losses in 2005 were due to an increase in interest rates that decreased the market value of the Company’s bond portfolio.