ITEM 1. Business
General
BNL Financial Corporation (the "Company" or "Registrant" or “BNLF”) is an insurance holding company incorporated in Iowa in January 1984. The Company's administrative offices are located at 7010 Hwy. 71 West, Suite 100, Austin, Texas 78735; its telephone number is (512) 383-0220.
In March 2004, BNL Equity Corporation (“BNLE”), the immediate subsidiary of the Company was dissolved and its assets, including the stock of Brokers National Life Assurance Company (“BNLAC”), were distributed to BNLF. All outstanding shares of BNLAC are now owned directly by BNLF.
The Company has three wholly owned subsidiaries, Brokers National Life Assurance Company, BNL Brokerage Corporation and Consumers Protective Association (formerly National Dental Benefit Association, Inc.). Consumers Protective Association is an inactive association that was purchased for the purpose of marketing services, including insurance products to members.
Industry Segments
The operations of the Company are conducted through BNLAC, which in 2009 marketed life and accident and health insurance. In 1987 BNLAC began selling insurance in Iowa. In 1992, BNLAC redomesticated to Arkansas and expanded its sales to other states through the acquisition of Statesman Life Insurance Company. The Company has no foreign operations.
The Company is able to offer life and accident and health insurance on an individual and group basis in 48 states and the District of Columbia.
The Company conducts business in the “life, accident and health insurers” industry segment. Most of BNLAC’s premium revenues are from sales of group dental insurance sold primarily on a payroll deduction basis. BNLAC also markets group vision insurance products that are underwritten by other insurance companies and which BNLAC does not have any exposure to underwriting (claims) losses. Financial information relating thereto is contained in the Selected Financial Data below and the Financial Statements included as Exhibits to this Report.
Sales and Marketing
The Company markets its products through independent agents and brokers. BNLAC emphasizes the marketing of specialized or "niche" life and health insurance products including: individual and group term life insurance, hospital indemnity insurance, group and individual dental insurance, short term disability insurance, accidental death and dismemberment insurance and cancer insurance. Most of these products are designed to be sold on a group or payroll deduction basis.
BNLAC also markets group vision insurance products that are underwritten (issued) by other insurance companies. BNLAC "co-brands" these products with its name and logo and markets them through its sales force. BNLAC collects overwrite commissions and/or administrative fees on these products and does not have any exposure to underwriting (claims) losses.
Statistics by line of business are as follows (gross before reinsurance):
Premiums collected by state are reflected in the following table:
The following chart shows group and individual dental insurance premiums collected for each of the past five years ended December 31.
The following chart shows group dental insurance claims paid and incurred claims ratios for each of the five years ended December 31. The incurred claims loss ratio represents the ratio of incurred claims to premiums earned.
Agents' Commissions
On December 31, 2009, BNLAC had 4,307 general agents and brokers appointed in 45 states compared to 4,681 agents and brokers on December 31, 2008.
On all of its products BNLAC believes it pays competitive commissions to agents. There is considerable competition for insurance agents and BNLAC competes with larger, well-established life insurance companies for the services of agents. BNLAC believes it is able to attract competent agents by offering competitive compensation, efficient service to agents and customers and by developing products to fill special needs within the marketplace.
Reinsurance
BNLAC reinsures with other insurance companies portions of the risks it underwrites on sales of life and accident and health insurance. Reinsurance enables BNLAC, as the “ceding company,” to reduce the amount of its risk on any particular policy and to write policies in amounts larger than it could without such agreements.
The reinsurer receives a portion of the premium on the reinsured policies. BNLAC remains directly liable to policyholders to perform all policy obligations, and bears the contingent risk of the reinsurer’s insolvency. Before submitting an application for a policy to the reinsurer, BNLAC determines whether the applicant is insurable, but BNLAC rejects any application which is not accepted by the reinsurer.
BNLAC reinsures its life insurance under agreements which are classified as either "automatic" or "facultative." Under an "automatic" treaty, the reinsurer agrees that it will assume liability automatically for the excess over the ceding company’s retention limits on any application acceptable to the ceding company. Under a "facultative" treaty, the reinsurer retains the right to accept or reject any reinsurance submitted after reviewing each application.
In 2009, BNLAC’s accidental death benefit riders were reinsured 100% through a Bulk ADB reinsurance agreement with Optimum Re. Optimum Re was rated “A-“(Excellent) by AM Best Company for 2009.
In 2009, BNLAC’s individual life insurance products in excess of $35,000 were reinsured with Optimum Re under an automatic treaty up to $175,000 and under a facultative treaty for amounts over $175,000. Optimum Re was rated “A-“(Excellent) by AM Best Company for 2009.
BNLAC entered into a quota share reinsurance agreement with Hannover Life Reassurance Company of America for its group life, group accidental death and dismemberment and accidental death and dismemberment without group life plans effective January 1, 2008 whereby Hannover accepts 90% of the risk up to a maximum of $100,000 per life on AD&D and $75,000 on group life. Hannover was rated “A” (Excellent) by AM Best Company for 2009.
BNLAC entered into a quota share reinsurance agreement with Hannover Life Reassurance Company of America for its accidental death and dismemberment plan including common carrier effective January 1, 2007. The Company retains a 10% quota share up to a maximum of $25,000 for AD&D and Common Carrier combined. Hannover will accept, on an automatic basis, 90% to 100% quota share up to a maximum of $250,000 per life depending on the Company’s retention. Hannover was rated “A (Excellent) by AM Best Company for 2009.
BNLAC’s Short Term Disability insurance is reinsured under a quota share reinsurance agreement with Union Security Insurance Company, Des Moines, Iowa, (formerly Fortis Benefits Insurance Company of Kansas City, Missouri). The reinsurer is liable for 75% of the risk on each policy. Union Security Insurance Company was rated “A-” (Excellent) by AM Best Company for 2009.
Group and individual dental is not reinsured due to the economics of the dental business and the small annual maximum liability per policy.
The following chart shows life insurance and accidental death insurance in force net of reinsurance for each of the five past years ended December 31.
Investments
BNLAC invests its available funds in certificates of deposit, U.S. Treasury Bills, short term government agency notes, U.S. government and agency bonds and corporate bonds and common stocks. The earnings from such investments represent a substantial part of BNLAC's income. For each of the five years ended December 31, BNLAC's statutory net investment income and ratio of net return on mean invested assets were as follows:
For information concerning realized and unrealized gains and losses on securities see Note 4 of the Notes to Consolidated Financial Statements on page and the table on page 17.
Special Factors Relating to Accounting and Regulatory Reporting of Insurance Companies
State insurance laws and regulations govern the accounting practices and the form of financial reports of insurance companies filed with state insurance regulatory agencies. Most states have adopted the uniform rules established by the National Association of Insurance Commissioners ("NAIC"). Reports prepared in accordance with statutory accounting practices reflect primarily the ability of an insurance company to meet its obligations to policyholders. Certain statutory accounting practices differ from generally accepted accounting principles as applied to the Company’s audited financial statements.
Life insurance company revenues are generated primarily from premiums and investment income. Commissions and other sales cost may exceed the amount of first year life premiums but are generally less in later policy years. Life insurance lapses and surrenders tend to occur more frequently in the earlier years after a policy is sold. Statutory accounting rules for life insurance companies require all life insurance policy acquisition costs be expensed immediately and not spread over the expected duration of the policies. Health insurance premiums are recorded the same for both Statutory and GAAP.
Statutory accounting practices also require that a relatively large portion of life premiums be held as reserves for the protection of policyholders. The amount of such reserves is based upon actuarial calculations and the annual increase in reserves is treated as an expense. Such calculations are based upon conservative assumptions concerning mortality costs and earnings. Life premiums are earnings only to the extent that they exceed reserve requirements and commissions. BNLAC calculates reserves using the Commissioner's Reserve Valuation Method. This method provides a lower reserve in the early years of a policy to partially offset the higher first-year costs of the policy. Although such reserves are treated as liabilities and are not available for use in operations, a company is free to invest such reserves in accordance with applicable state laws. Interest earned on invested reserves is operating income to the life insurance company to the extent that it exceeds the interest required to be added to the reserves.
The Company’s consolidated financial statements are required to be prepared in conformity with generally accepted accounting principles. The objective of these financial statements is to provide reliable financial information about economic resources and obligations of a business enterprise and changes in net resources resulting from its business activities, measured as a going concern. To the extent that the accounting practices prescribed or permitted by state regulatory authorities differ from generally accepted accounting principles, appropriate adjustments will be made to bring such financial statements into accordance with generally accepted accounting principles, including (but not limited to) the following:
a) Premiums are reported as earned over the premium paying period. Benefits and expenses are associated with earned premiums so as to result in the matching of expenses with the related premiums over the life of the contracts. This is accomplished through the provision for liabilities for future policy benefits and the deferral and amortization of acquisition costs;
b) Certain assets designated as "non-admitted assets" for statutory purposes are reinstated to the accounts;
c) The asset valuation reserve is reclassified as retained earnings rather than as a liability. The interest maintenance reserve is reclassified from a liability to investment income;
d) Premium payments received on annuities are not reported as revenue but are recorded as increases to a deposit liability account. The profits are then deferred over the life of the policy instead of being realized when the payments are received;
e) Realized gains and losses from the sale of investments are reclassified to a separate component of summary of operations. Taxes thereon are included in the tax provision; and
f) Investments in fixed maturity securities that are available for sale are carried at fair value with the unrealized appreciation (depreciation) recorded to shareholders’ equity.
The ability of BNLAC to pay dividends to the Company is restricted under Arkansas insurance laws and must be approved by the insurance commissioner of the State of Arkansas, if it exceeds the lesser of 10% of surplus or net gain from operations for the year.
Insurance Regulations
BNLAC is subject to regulation and supervision by the states in which it is admitted to transact business. Each state has an insurance department which has broad administrative and supervisory powers to grant and revoke licenses to transact business, regulate trade practices, establish guaranty associations, license agents, approve policy forms, regulate premium rates for some lines of business, establish reserve requirements, regulate competitive matters, prescribe the form and content of required financial statements and reports, determine the reasonableness and adequacy of statutory capital and surplus, and regulate the type and amount of investments permitted.
Most states have also enacted legislation which regulates insurance holding company activities, including acquisitions, extraordinary dividends, the terms of surplus notes, the terms of affiliate transactions and other related matters. The Company and BNLAC are registered as a holding company group pursuant to such legislation in Arkansas and BNLAC routinely reports to other jurisdictions as well.
The NAIC, through the member regulatory staffs, attempts to coordinate the state regulatory process and continually re-examines existing laws and regulations and their application to insurance companies. Recently, this re-examination has focused on insurance interpretations of existing law, the development of new laws and the implementation of non-statutory guidelines. The NAIC has formed committees and appointed advisory groups to study and formulate regulatory proposals on such diverse issues as the use of surplus debentures, accounting for reinsurance transactions and the adoption of risk-based capital (“RBC”) rules. In addition, in connection with its accreditation of states to conduct periodic company examinations, the NAIC has encouraged states to adopt model NAIC laws on specific topics, such as holding company regulations and the definition of extraordinary dividends. It is not possible to predict the future impact of changing state and federal regulation on the operations of BNLAC.
The NAIC has adopted model RBC requirements to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks associated with: (i) asset quality; (ii) mortality and morbidity; (iii) asset and liability matching; and (iv) other business factors. The RBC formula is designed to be used by the states as an early warning tool to identify possible weakly capitalized companies for the purpose of initiating regulatory action. In addition, the formula defines a new minimum capital standard which will supplement the prevailing system of low fixed minimum capital and surplus requirements on a state-by-state basis.
The RBC requirements provide for four different levels of regulatory attention depending on the ratio of a company’s total adjusted capital (defined as the total of its statutory capital, surplus, asset valuation reserve and 50% of apportioned dividends) to its RBC. The “Company Action Level” is triggered if a company’s total adjusted capital is less than 100% but greater than or equal to 75% of its RBC, or if total adjusted capital is less than 125% of RBC and a negative trend has occurred. The trend test calculates the greater of any decreases in the margin (i.e., the amount in dollars by which a company’s total adjusted capital exceeds its RBC) between the current year and the prior year and between the current year and the average of the past three years, and assumes that the decrease could occur again in the coming year. If a similar decrease in the margin in the coming year would result in an RBC of less than 95%, then the Company Action Level would be triggered. At the Company Action Level, a company must submit a comprehensive plan to the regulatory authority which discusses proposed corrective actions to improve its capital position. The “Regulatory Action Level” is triggered if a company’s total adjusted capital is less than 75% but greater than or equal to 50% of its RBC. At the Regulatory Action Level the regulatory authority will perform a special examination of the company and issue an order specifying corrective actions that must be followed. The “Authorized Control Level” is triggered if a company’s total adjusted capital is less than 50% but greater than or equal to 35% of its RBC, and the regulatory authority may take any action it deems necessary, including placing the company under regulatory control. The “Mandatory Control Level” is triggered if a company’s total adjusted capital is less than 35% of its RBC, and the regulatory authority is mandated to place the company under its control. Calculations using the NAIC formula at December 31, 2009 indicated that the ratios of total adjusted capital to RBC for BNLAC would have been in excess of 1,242% and, therefore, significantly above the Company Action Level.
As part of their routine regulatory process, approximately once every five years, insurance departments conduct detailed examinations of the books, records and accounts of insurance companies domiciled in their states. Such examinations are generally conducted in cooperation with the departments of other states under guidelines promulgated by the NAIC.
In September 2005, the Arkansas Insurance Department conducted its statutory examination for the period ended December 31, 2004. No adjustments were made to the financial statements of the Company as a result of the examination.
BNLAC's management is not aware of any failure to comply with any significant insurance regulatory requirement to which BNLAC is subject at this time.
Competition
The life and health insurance business is highly competitive, and BNLAC competes in many instances with individual companies and groups of affiliated companies that have substantially greater financial resources, larger sales forces and more widespread agency and brokerage relationships than BNLAC. Certain of these companies operate on a mutual basis, which may give them an advantage over BNLAC since their profits accrue to the policyholders rather than the shareholders.
BNLAC focuses its marketing efforts on sales of its products to small and medium size groups of employees, association members and others. These groups range in size from three to approximately 876 persons. BNLAC also sells its products to individuals. BNLAC is a small insurance company which has no identifiable market share. BNLAC is not ranked according to its size or volume of sales.
BNLAC competes for the services of agents and brokers in several ways. First, the Company’s dental insurance products are attractive to brokers and general agents because of their popularity in the employee benefit market. Second, BNLAC strives to provide a high level of service to agents by offering products that meet their clients’ needs and by providing individualized service in the administration of such products. Finally, BNLAC attempts to structure the levels of premiums, benefits and commissions on insurance products to compare favorably with competitors.
Personnel
At December 31, 2009 BNLAC had four executive officers and 65 full-time administrative personnel. BNLAC’s administrative staff supervises services for the agency force, policy underwriting, policy issuance and service, billing and collections, life claims, accounting and bookkeeping, preparation of reports to regulatory authorities and other matters. The Company has not experienced any work stoppages or strikes and considers its relations with its employees and agents to be excellent. The Company currently has no employees which are represented by a labor union. BNLAC uses a third party administrator to process dental claims.
ITEM 1A.
ITEM 1A. Risk Factors
The Company is not aware of any risk factors which may relate to speculative or risky circumstances to the Company’s outstanding common stock.
To the extent which any matters presented in Item 1, Business, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, or Item 7A, Quantitive and Qualitative Disclosures About Market Risk may be applicable, they are incorporated herein by reference.
ITEM 1B.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2.
ITEM 2. Properties
Neither the Company, nor any of its subsidiaries own any real estate.
During the first quarter of 2005 the Company entered into a lease for 20,337 square feet of office space in Austin, Texas, under an eight year, triple net lease. The base rent was $0 in the first year (June 1, 2005 to May 31, 2006), $157,612 in the second year and payments escalate to $264,384 in the final year of the lease. Leasehold improvements totaled approximately $872,000 ($203,000 funded by landlord) on the new lease space that was occupied in December 2005. Leasehold improvements are being amortized over the lease term. The $117,000 initial rent holiday and $203,000 of landlord-funded leasehold improvements will be amortized over the lease term and reduce lease expense. Deferred rent credits are included in other liabilities and were approximately $284,000 and $320,000 for 2009 and 2008, respectively.
BNLF leases approximately 1,400 square feet of office space in Sherwood, Arkansas at a rental of $19,500 per year and the lease will expire June 30, 2012. BNLAC incurs 100% of the rental expense.
The Company and its subsidiaries own the majority of the furniture and equipment used in the operation of its business.
ITEM 3.
ITEM 3. Legal Proceedings
In 2001, the Board of Directors of the Company and BNL Equity Corporation approved a settlement in the class action case brought by certain shareholders. The settlement, which was approved by the Pulaski County Circuit Court and the Arkansas Insurance Commissioner, was subject to various conditions, including the approvals by any other applicable regulatory authorities and conditioned upon compliance with federal and state securities laws. As of December 31, 2002, all requisite approvals were received and redemption of the stock began in 2003.
As part of the settlement agreement, the Company issued its Bonds in the principal amount of $1.50 in exchange for each share of common stock of BNL owned by the members of the Class. The balance of Bonds Payable was $1,323,388 and $1,443,282 at December 31, 2009 and 2008, respectively. The bonds are for a term of twelve years, effective December 15, 2002, with principal payable at maturity and bear interest at the rate of 6% per annum payable annually from the previous fiscal year’s earnings of BNL. The estimated annual impact to earnings per share is approximately $.006 per share. If any interest payment is not made, it will be added to the principal and paid at maturity. The Bonds are fully callable and redeemable at par at any time by BNL.
The Company has made cash offers to bond holders for the purchase of bonds. Bond purchases resulted in a reduction of Bonds Payable of $119,894, and $164,295 in 2009 and 2008; respectively. Gains from early extinguishments of the debt were $27,176, $44,370 and $10,803 in 2009, 2008 and 2007; respectively.
ITEM 4.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted for a vote during the fourth quarter of 2009.
PART II
ITEM 5.
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities
Market for Stock
During 2009 the Company purchased 123,855 shares of its common stock at the request of shareholders at $1.25 to $1.28 per share.
The stock is not traded on any established trading market.
Purchases of Common Stock During 2009
The following table sets forth the shares of the Company’s outstanding Common Stock which the Company purchased during 2009:
Note 1 to the above table: During 2009 and 2008, the Company did not have any publicly announced plan or program to repurchase its outstanding Common Stock. From time to time, some shareholders of the Company request the Company purchase their stock and the Company does, from time to time, make such repurchases but only does so in its sole and absolute discretion and the Company is under no obligation to make any such repurchases in the future.
Holders
As of December 31, 2009 there were 1,924 record holders of the Company's common stock.
Dividends
In the third quarter of 2009, the board of directors voted to pay a $.05 dividend per share to its shareholders, which required approximately $760,000 of funding. The Company's ability to declare and pay dividends in the future will be dependent upon its earnings and the cash needs for expansion. In addition, payment of dividends by BNLAC is regulated under Arkansas insurance laws.
Equity Compensation Plan Information
In 1994, the Board of Directors and Shareholders approved the 1994 Brokers and Agents’ Nonqualified Stock Option Plan. This plan was established as an incentive to sales persons of BNLAC. Initially 250,000 shares were available under the plan. The Board of Directors authorized options for an additional 1.75 million shares. The option period may not exceed a term of five years and the duration of the plan was ten years, expiring December 14, 2004.
Of the options granted through December 2004, there were no stock options outstanding at December 31, 2008. The number of options expiring or forfeited were 100,825 in 2008. There were 9,600 options exercised in 2008. All the remaining options expired in 2008.
In March 2002, the Board of Directors approved the 2002 Non-Director, Non-Executive Stock Option Plan, subject to any necessary authorizations from any regulatory authority. The plan is intended to assist the Company in attracting and retaining individuals of outstanding ability and to promote concurrence of their interests with those of the Shareholders of the Company. The Company granted options for 116,000 shares prior to 2005. No options were granted subsequent to 2004. The fair value of any options granted is estimated using a binomial method as prescribed in SFAS No. 123(R). There were 55,550 options outstanding at December 31, 2009. The estimated weighted average remaining life of the options is 3.6 years and weighted average exercise price is $.69. The options do not have a dilutive effect on earnings per share at this time, but may have such an effect in the future. See Note 1 of the financial statements.
The table below sets forth the Equity Compensation Plans as of December 31, 2009.
Transfer Agent and Registrar
BNL Financial Corporation is the Registrar and Transfer Agent for the Company's common stock.
ITEM 6.
ITEM 6. Selected Financial Data
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, 2009 is derived from the Company's consolidated financial statements. The consolidated financial statements as of December 31, 2009 and 2008, and for each of the years in the three-year period ended December 31, 2009 are included elsewhere in this Form 10-K.
*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.
ITEM 7.
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In this section, we review the consolidated financial condition of the Company at December 31, 2009, 2008 and 2007 and the consolidated results of operations for the periods ended December 31, 2009, 2008 and 2007. Please read this discussion in conjunction with the accompanying consolidated financial statements and notes.
Forward-Looking Statements
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.
Management believes the Company's current critical accounting policies are comprised of the following:
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 2009.
Claim Liability Methodology
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 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.
It should be understood that there is no assurance that anything which the Company and its management have done in the past regarding its claim liability methodology will be done in the future. The Company and its management are afforded full and complete authority and judgment in determining and implementing its claim liability methodology which includes any and all changes which may be made from time to time.
The Company’s significant insurance product types are presently dental (group and individual), life (group and individual), and annuities.
In the life and accident and health insurance industry, the liabilities for claims and the related expensing of those liabilities are evaluated and recorded using estimates of claim liabilities. The Company estimates its claim liabilities using the general methodology described herein.
The liability for claims generally consists of the following: (1) due and unpaid claims, (2) claims in the course of settlement, and (3) claims incurred but unreported. The Company records the actual liability for all claims that are due but unpaid, Item (1). But, with regard to the last Items (2) and (3), the Company must make estimates. The estimates are based on actuarial principles. The Company’s independent consulting actuary works with Company financial personnel and management in determining the estimates and the independent consulting actuary annually gives the Company a certification as to the amounts of the liabilities.
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.
It is common in the life and accident and health insurance industry for a consulting actuary to give either (A) a liability certification where the liabilities are expressed as a range of numbers for each relevant liability (the “Range Estimate”), or (B) a liability certification where the liabilities are expressed as a single number for each relevant liability (the “Single Point Estimate”).
Where the Range Estimate method is used, the management of an insurance company makes its own choice to record an amount within the range. The Company does not use the Range Estimate for any of its insurance products. Instead, for all of its insurance products, the Company uses the Single Point Estimate.
For the Company’s group and individual dental insurance, the Company’s financial personnel develop and make a Single Point Estimate for the claim liabilities which results in the Company’s Single Point Estimate for the end of each fiscal quarter and year end. The Company’s independent consulting actuary develops and makes its separate Single Point Estimate for such liabilities. The Company’s financial personnel and independent consulting actuary compare their Single Point Estimates, reconcile any differences and agree on a Single Point Estimate for such liabilities. Annually, the Company’s independent consulting actuary gives a Single Point Estimate liability certification to the Company with the agreed amount and the Company uses such certified amount without change.
For the Company’s group and individual life and annuity insurance, the Company’s financial personnel make the Single Point Estimate for each such claim liability. Annually, the Company’s consulting actuary independently reviews the Single Point Estimates. If the independent consulting actuary agrees with the Single Point Estimates, he gives a certification to the Company.
The Company’s financial personnel have significant experience and knowledge in developing claim estimates for the Company’s insurance products. However, the Company’s financial personnel are not formally trained, certified or recognized as actuaries. The Company continually engages independent consulting actuaries. The Company makes extensive use of its independent consulting actuaries which includes the actuaries’ assistance in the development and creation of policy assumptions, the development and modification of reserve and claim liability methodologies and assumptions, estimations and calculations of reserves and claim liabilities, and the annual certification of the amount of the Company’s liabilities for its products.
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.
The following discussions of claim liability methodology are separated by the Company’s product types as indicated by the section headings.
Dental Insurance - Group and Individual
For the Company’s group and individual dental insurance policies, the Company and its independent consulting actuary use a completion factor approach (sometimes referred to as the development method) which provides best estimates of the factors to determine 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.
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.
Management reviews trends in loss ratios and claims per insured per month in determining its estimate for the most recent months. Generally, while fluctuations do occur, the Company’s loss ratio and claims per insured per month are stable. In estimating claim liabilities (the policy claims payable on the Company’s balance sheet), the Company consistently uses the assumptions of loss ratio and claims per insured per month which are based on actual, historical data. See, the discussion in the section herein entitled “Trends in Completion Factors, Loss Ratio, and Claims per Insured per Month”.
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, 2009, and the previous fiscal years of 2008 and 2007.
Life Insurance - Group and Individual - and Annuities
The Company reinsures a substantial portion of its life insurance and the associated risks and liabilities. See Item 1, Business, Reinsurance; and Note 8, Reinsurance, to the Company’s financial statements.
The Company determines its life insurance claim liabilities by recording three items: (1) actual claims due and unpaid; (2) the claims received during the 30 day period following year end (this is done by taking an inventory of claims received during the thirty day period); and (3) estimating a liability amount for claims which have been incurred but not yet reported by the end of the thirty day period.
The Company’s annuity policies are simple deferred annuities. The Company does not explicitly establish a claim liability for its annuities since the liability is already held in the annuity deposit liability.
Trends in Completion Factors, Loss Ratio and Claims Per Insured Per Month
Claim liabilities for the Group Dental line are the most significant part of the Company’s claim liability. As stated above, the Company uses the completion factor method for calculating the liability. Two main assumptions are made in this approach. First, for months the claims are incurred where the completion factor is credible, the Company uses that completion factor to calculate the liability associated with that month the claim occurred. Second, for the most recent months before the Company’s financial statement date where it is determined that the completion factors are not fully credible, the Company reviews loss ratios and claims per insured per month to determine the liability for those months.
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, 2009, claim liabilities would have been increased by approximately $14,000.
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, 2009, claim liability would have been increased by approximately $118,000.
The Company believes that its recorded claim liabilities are reasonable and adequate to satisfy its ultimate claims liability. The Company’s recorded claim liabilities are, in accordance with industry practice, estimates of such liabilities.
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.
While a presentation such as described above provides some mathematical and hypothetical numerical calculations, such calculations may or may not have any relevance to the Company’s future financial condition, earnings or cash flow.
Deferred Tax Asset
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.
At December 31, 2009 and 2008, respectively, the Company had gross deferred tax assets of $1,037,858 and $1,067,931 with corresponding valuation allowances of $683,058 and $701,414, and gross deferred tax liabilities of $248,800 and $269,517, 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, 2009 is $106,000 compared to a deferred tax asset of $97,000 at December 31, 2008. 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 provision for income tax is as follows:
The reconciliation of income taxes computed at the federal statutory income tax rate to total income taxes for the years ended December 31, 2009, 2008 and 2007 is as follows:
The Company has net operating loss carry forwards for income tax purposes at December 31, 2009 as follows:
Financial Condition
The statutory capital and surplus of the insurance subsidiary increased in 2009 and 2008 primarily due to income from operations.
Liquidity and Capital Resources
At December 31, 2009 the Company had liquid assets of $8,090,103 in cash, treasury bills, money market savings accounts, and money market funds. Money market funds maybe subject to withdrawal restrictions. No such restrictions were in place at December 31, 2009. All of the non-cash liquid assets can readily be converted into cash.
The major components of operating cash flows are premiums and investment income while policy benefits are the most significant cash outflow. In 2009, BNLAC collected approximately $42.0 million of premiums and annuity deposits (gross before reinsurance) and $1,122,698 of net investment income. Another source of cash flow in 2009 was overwrite commissions of $2,386,148 on vision products. During the year the Company incurred $31,805,555 in policy benefits and other insurance costs.
The Company had a net increase in cash and cash equivalents of $3,100,722 in 2009 compared to an increase of $51,398 in 2008. The increase in 2009 was primarily from cash flow from operations, the sale and maturity of investments and a decrease in the amount of fixed maturity securities purchased.
Approximately $146,720 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 are auto industry bonds. The Company may sell these bonds before they mature.
Approximately $18.4 million of the 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 table below details the unrealized gains and losses on the "Held to Maturity" bonds.
Portfolio Designated “Held to Maturity”
The Company’s investments are primarily in U.S. Government and Government Agencies ($14,617,214 amortized book value), other investment grade bonds ($3,161,936 amortized book value) and less than investment grade ($579,478 amortized book value).
The table below details the unrealized gains and losses on the bonds that are less than investment grade.
Less Than Investment Grade Bonds
In the third quarter of 2009 the Company recognized an other-than-temporary impairment on its $100,000 Cit Group Inc. bond, for a realized loss of $42,280. Cit Group Inc. filed for chapter 11 bankruptcy on November 1, 2009. On December 8, 2009 the Company received $71,952 par value Cit Group Inc. bonds and 619 shares of Cit Group Inc. stock with a book value of $17,091, all in exchange for the $100,000 CIT Group Inc. bond.
The Company does not hedge its investment income through theuse of derivatives.
The Company has a convertible debenture loan investment (“Debenture”) to EPSI Benefits, Inc. (“EBI”), originally dated July 25, 2001 (Exhibit 10.3). The loan bears interest at a rate of 14% and the maturity of the Debenture was August 15, 2015. Monthly principal payments were scheduled to begin on September 15, 2008, and the total principal amount is $1,357,407.
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 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. 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 $27,215 and $71,784 in 2009 and 2008 respectively. The agreement provided EPSI with a $200,000 line of credit maturing August, 2011. The line of credit is at 8.00% with interest and principal payable monthly to BNLAC and is current.
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 Arkansas Insurance Commissioner has reviewed and approved the settlement. 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, 2009 is $1,323,388 compared to $1,443,282 at December 31, 2008. Bond interest expense was $82,317, and $93,536 in 2009 and 2008; respectively. BNLAC will pay dividends to BNL Financial Corporation for the payment of interest to the bondholders if permissible under Arkansas insurance laws. 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 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 2009, BNLAC paid dividends totaling $800,000 to BNLF for the payment of dividends to the Company’s shareholders and for other general operating funds compared to $1,300,000 dividends paid in 2008 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, 2009.
* The notes to this long-term contractual obligations table are part of the table and are important.
** Interest payments are made only if the Company is profitable.
Notes to Long-Term Contractual Obligations Table:
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 data, information and presentation in this Long-term Contractual Obligations Table relating to the Company’s Liabilities for Future Policy Benefits, Policy Claims Payable, Annuity Deposits and Supplementary Contracts are all, separately and collectively, forward looking statements and are given full safe harbor protection.
NOTE A, Liabilities for Future Policy Benefits.
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 $8,367,699 which does not match the balance sheet liability total of $2,143,273 and the difference is $6,224,426. 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.
Future payments related to short duration contracts such as group dental are not included in the above table in the line item Liabilities for Future Policy Benefits.
NOTE B, Policy Claims Payable.
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.
NOTE C, Annuity Deposits.
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 $4,816,978 which does not match the balance sheet liability total of $2,505,778 and the difference is $2,311,200. 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.
NOTE D, Supplementary Contracts.
The total estimated future payments to be made relating to the Supplementary Contracts without life contingencies liability is stated as $31,347 which does not match the balance sheet liability total of $36,791 and the difference is $(5,444). 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.
We believe liquid assets, along with investment income, premium income and marketing fees will be sufficient to meet our long and short-term liquidity needs. We do not have any current plans to borrow money for operations.
BNLAC reports to state regulatory authorities on a statutory accounting basis that differs from the basis used herein. Due to an Arkansas regulatory requirement associated with the redomestication in 1994, BNLAC must maintain a minimum of $2,300,000 in capital and surplus. Additionally, each state in which BNLAC is licensed has statutory minimum capital requirements required for maintaining its license to sell. Minimum capital and surplus requirements vary from $300,000 to as much as $5,000,000 in the states in which BNLAC is licensed.
Results of Operations
Premium income was $41,609,604 in 2009, $43,456,024 in 2008 and $44,564,173 in 2007. The decrease in 2009 and 2008 was due to a decrease in group and individual insurance premiums. New sales of dental insurance were down in 2009 and 2008 primarily as a result of the impact of the recession on voluntary employee benefits. This is reflected in the $790,000 decrease in first year group dental premium in 2009 and a decrease of $650,000 in 2008.
Net investment income was $1,122,698 in 2009, $1,170,901 in 2008 and $1,320,614 in 2007, a decrease of 11% in 2008, and a decrease of 4% in 2009. The decrease in 2009 was due to an increase in short term investments with lower yields. 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 in accordance with a marketing agreement entered into in 2001. The Company received marketing fees of $25,000 in 2009, $0 in 2008 and $198,843 in 2007. Receipt of marketing fees resumed in 2009. By mutual agreement, EPSI ceased paying the Company marketing fees in 2008 due to the termination of one of its largest customers.
BNLAC markets group 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 $2,386,148, $2,263,529 and $1,979,359 in 2009, 2008 and 2007, respectively. The vision income increased by 5% and 14% in 2009 and 2008, respectively, primarily due to the addition of group voluntary vision plans that require lower participation rates.
The Company had a realized gain on debt extinguishments of $27,176 in 2009, $44,370 in 2008 and $10,803 in 2007 due to the purchase of debentures payable at less than par value. The Company purchased fewer debentures in 2009 and 2007 than it did in 2008, which resulted in less realized gain in debt extinguishments.
Realized capital gains and (losses) on investments were $58,512 in 2009, ($479,717) in 2008 and $11,128 in 2007. In 2009 the Company wrote down CIT Group Inc. bonds by $42,280 which was offset by a $20,000 gain on the maturity of General Motors Acceptance Corporation bonds and $79,905 gain on the sale of U.S. Treasury bonds. In 2008 the Company wrote down Washington Mutual bonds from $126,000 to $0 to reflect their status as worthless. In 2008 management determined Ford Motor Company and General Motors Acceptance Corporation bonds were other than temporarily impaired and wrote down Ford Motor Company from $187,864 to $42,000 and General Motors Corporation from $100,000 to $80,000. The aggregate realized loss on the bonds in 2008 was $291,864.
The Company has a $1,357,407 convertible debenture loan investment (“Debenture”) at 14% to EPSI Benefits, Inc. (“EBI”) that was scheduled to mature August 15, 2015. Monthly principal payments were scheduled to begin on September 15, 2008, however 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. Because of the extension of the commencement of principal payments and maturity of the Debenture, the Company was required to establish an allowance for credit losses in the amount of $204,582, which is part of the realized loss in 2008.
Decreases in liability for future policy benefits were ($66,596), ($39,268) and ($213,867) in 2009, 2008 and 2007, respectively. The decrease for all three years was primarily due to the amount of insurance in force.
Policy benefits and other insurance costs decreased from $33,496,995 in 2007, to $32,978,610 in 2008 and to $31,805,555 in 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 and the decrease of policies in force. 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 claims ratio on group dental insurance, which represents the ratio of claims incurred to premium earned, was 62.2% in 2009, 61.9% in 2008 and 61.8% in 2007.
Amortization of deferred policy acquisition costs was $30,308 in 2009, $40,564 in 2008 and $16,060 in 2007. 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 $8,716,583 in 2009, $9,055,261 in 2008 and $9,012,950 in 2007. 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. The 4.7% increase for 2008 is primarily due to increased labor and other costs.
Taxes other than on income were $1,328,062 in 2009, $1,458,629 in 2008 and $1,509,780 for 2007. The decrease for 2009 and 2008 is primarily due to a decrease in premium taxes on fewer premiums collected.
In 2009, the consolidated income from operations before taxes was $3,415,226 compared to $2,961,311 in 2008 and $4,263,002 in 2007. The increase in 2009 was primarily due to the increase in realized gains and decrease in operating expenses. The decrease in 2008 was primarily due to the decrease in premium income and investment income and the increase in realized losses on fixed maturities.
Earnings per share were $.19, $.16, and $.22 in 2009, 2008 and 2007, respectively. The effect of the treasury shares acquired in 2009, 2008 and 2007 (see Market for Stock) increased earnings per share by $.00, $.00 and $.01, respectively.
The provision for income taxes was $597,381 in 2009, $594,839 in 2008 and $813,634 in 2007. For the periods ended December 31, 2009, 2008 and 2007, the Company had $647,381, $663,441 and $773,033 of current tax expense and $50,000 and $68,602 of deferred tax credit in 2009 and 2008 and $40,601 of deferred tax expense for 2007. 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, 2009, other comprehensive income (losses) was $196,976 compared to ($283,566) in 2008 and $54,274 or the same period in 2007. Comprehensive income for 2009 was primarily due to an increase in the market value of available for sale fixed maturities and equity securities. The comprehensive loss in 2008 was due to the decrease in the market value of equity securities. Comprehensive income for 2007 was primarily due to an increase in the market value of equity securities.
Future Marketing Plans
In 2010 we continue to focus on recruiting new brokers, marketing in states where we have little or no premium income and expanding our product portfolios.
ITEM 7A.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
Market risk represents the potential loss resulting from adverse changes in the value of financial instruments, either derivative or non-derivative, caused by fluctuations in interest rates, foreign exchange rates, commodity prices, and equity security prices. We handle market risks in accordance with our established policies. The Company’s conservative investment philosophies minimize market risk and risk of default by investing in high quality debt instruments, with staggered maturity dates. We did not have financial instruments to manage and reduce the impact of changes in interest rates at December 31, 2009 and December 31, 2008. We held various financial instruments at December 31, 2009 and 2008, consisting of financial assets reported in our Consolidated Balance Sheets (refer to Note 4). See page 17 for information on less than investment grade bonds held by the Company.
Interest Rate Risk - We are subject to interest rate risk through the investment in fixed maturity securities, such as U.S. Government and Government Agency securities and other investment grade bonds. The fair market value of long-term, fixed-interest rate debt is subject to interest rate risk. Generally, the fair value of fixed-interest rate debt will increase as interest rates fall and will decrease as interest rates rise. The estimated fair value of our fixed maturity securities at December 31, 2009 and December 31, 2008 was $18,570,332 and $19,937,398 respectively.
A one percentage point increase in prevailing interest rates would result in a decrease in the estimated fair value of fixed maturity securities held at December 31, 2009 of approximately $562,000. Initial fair values were determined using the current rates at which we could enter into comparable financial instruments with similar remaining maturities. The estimated earnings and cash flows impact for the twelve months of 2009, resulting from a one percentage point increase in interest rates, would be immaterial, holding other variables constant.
Foreign-Exchange Rate Risk - We currently have no exposure to foreign exchange rate risk because all of our financial instruments are denominated in U.S. dollars and because we do not currently engage in any operations outside of the United States.
Commodity Price Risk - We have no financial instruments subject to commodity price risk.
Equity Security Price Risk - Fair value of equity securities at December 31, 2009 totaled $674,671, or only 2.3% of total investments and cash on a consolidated basis. We do not hedge our equity price risk. As of December 31, 2009 a 20% adverse change in equity prices would result in an approximate $159,000 decrease in the fair value of our equity securities.
The preceding discussion of estimated fair value of our financial instruments and the sensitivity analyses resulting from hypothetical changes in interest rates are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements reflect our current expectations and involve uncertainties. These forward-looking market risk disclosures are selective in nature and only address the potential impact from financial instruments. They do not include other potential effects which could impact our business as a result of changes in interest rates, foreign-exchange rates, commodity prices, or equity security prices.
ITEM 8.
ITEM 8. Financial Statements and Supplementary Data
The information in response to this Item 8 is set forth on pages through attached to this Report which pages are hereby incorporated by reference.
ITEM 9.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
ITEM 9A(T).
ITEM 9A(T). Internal Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We have carried out an evaluation under the supervision and with the participation of our management, including our Principal Executive Officer and our Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, these officers have concluded that, as of December 31, 2009, the disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports we file and submit under the Securities and Exchange Act of 1934 in recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms.
Management's Annual Report on Internal Control over Financial Reporting
Our management, including our Principal Executive Officer and our Principal Financial Officer, is responsible for establishing and maintaining an adequate system of internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles. This included policies and procedures that (a) pertain to the maintenance of records in reasonable detail which accurately and fairly reflect the transactions and dispositions of our assets; (b) provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and our receipts and expenditures are being made in accordance with authorizations of our management or directors, as applicable; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets which could have a material effect on our financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2009. In making its assessment, management has used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Management concluded that based on its assessment, our internal control over financial reporting was effective as of December 31, 2009. This annual report does not include an attestation report of our independent registered public firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
In addition, during our last fiscal quarter for 2009, no change occurred in our internal control over financial reporting which was identified by management’s evaluation that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
This Management Report on Internal Control over Financial Reporting is deemed to be “furnished” and not “filed” under Section 18 of the Exchange Act or otherwise subject to the liabilities of that section and it is not incorporated by reference into any filing under the Securities Act or the Exchange Act.
ITEM 9B.
ITEM 9B. Other Information
The Company did not file reports on Form 8-K for the fourth quarter of the year covered by this report.
PART III
ITEM 10.
ITEM 10. Directors, Executive Officers and Corporate Governance of the Registrant
The directors and executive officers of the Company are as follows:
The term of office of each director expires at the annual meeting of shareholders upon the election and qualification of such director's successor. The Company's executive officers serve at the pleasure of the Board of Directors. The above officers and directors serve in the same capacity with BNLAC.
Identification of Certain Significant Employees
Not applicable.
Family Relationships
No family relationship exists between any director and executive officer of the Company.
Business Experience
The following is a brief description of the business experience during the past five years of the directors and executive officers of the Company.
Wayne E. Ahart has served as Chairman of the Board of BNL since 1984 and BNLAC since 1986. He served as Chairman of the Board of BNLE from 1988 to 2004 and as Chairman of the Board of United Arkansas Life from 1990 to 1994. Prior to that time, Mr. Ahart served as Board Chairman of: Investors Trust, Inc. ("ITI") and its subsidiary, Investors Trust Assurance Company ("ITAC"), both of Indianapolis, Indiana (1973-1987); Liberty American Corporation ("LAC")(President since 1981) and its subsidiary Liberty American Assurance Company ("LAAC"), both of Lincoln, Nebraska (1975-1987); and (President) American Investors Corporation ("AIC") and its subsidiary, Future Security Life Insurance Company ("FSL"), both of Austin, Texas (1980-1987). Mr. Ahart has been owner and Chairman of the Board of Lone Star Pizza Garden Inc. from 1986 to the present.
C. Don Byrd has been Vice Chairman of the Board of BNL, BNLE and BNLAC since August 1, 1994. Mr. Byrd was President and a Director of BNL and BNLAC since 1984 and 1986, respectively. Mr. Byrd was Agency Director of FSL from 1983 to 1984 and Regional Director of AIC 1981 to 1983. He was an agent and Regional Director of ITI and ITAC from 1974 to 1981.
Kenneth Tobey has been President and Director of BNLAC and BNL since August 1, 1994. Mr. Tobey has served as President of BNLE since 1988 and served as President of United Arkansas Life from 1990 to 1994. He served as Assistant to the President and Training Director of BNLAC from 1986 to 1988. From 1981 to 1986, Mr. Tobey served in various capacities for AIC and FSL, including Agent, Regional Manager, Executive Sales Director and Assistant to the President.
Barry N. Shamas has served as Executive Vice President, Secretary and Treasurer of BNLE since 1988 and United Arkansas Life from 1990 to 1994. Since 1984 and 1986, respectively, he has served as Executive Vice President and Director of BNL and BNLAC, which positions he presently holds. He was named Chief Financial Officer and Chief Operating Officer of BNL and BNLAC in 2006. He served in various capacities for ITI and ITAC, including Executive Vice President, Senior Vice President, Treasurer and Financial Vice President beginning in 1976 through 1987. Mr. Shamas served as Executive Vice President, Secretary/Treasurer and as Director of AIC and FSL from 1980 and 1983, respectively, until 1987. From 1978 through 1987, Mr. Shamas served as a Director and a member of the Executive Committee of LAC and LAAC. Mr. Shamas has been a Director of the Arkansas Life and Health Insurance Guaranty Association since July 2007.
Cecil L. Alexander retired Vice President of Public Affairs for Arkansas Power & Light Company, where he has been employed since 1980. Prior to joining the AP&L Executive Staff, Mr. Alexander served for 16 years in the Arkansas General Assembly, and during 1975-76, was Speaker of the House of Representatives. From 1971 - 1980 Mr. Alexander was involved in the real estate business as a partner in Heber Springs Realty. He is a past president of the Cleburne County Board of Realtors and has served on the governmental affairs committee of the Arkansas Association of Realtors. Alexander is currently on the Advisory Board of Directors of V.E. Bank of Heber Springs, the Board of Directors of the Arkansas Tourism Development Foundation, and the Board of Directors of the Baptist Foundation.
Richard L. Barclay, a Certified Public Accountant, retired as Director of Arkansas Department of Finance and Administration and as the state's Chief Fiscal Officer. He has returned to private practice with Beall, Barclay & Co., Certified Public Accountants in Rogers, Arkansas. He was an advisory Director of Regions Bank of Rogers from 1998 to December 2006. He joined United Bank, January 2007. He served as President and Board member of the Arkansas Society of Certified Public Accountants and is a member of the American Institute of Certified Public Accountants. He was a member of the Arkansas House of Representatives from 1977 until 1992.
Eugene A. Cernan has been President and Chairman of the Board of The Cernan Corporation since 1981. Captain Cernan retired from the U. S. Navy in 1976 after serving 20 years as a naval aviator, 13 of which were dedicated to direct involvement with the U. S. Space Program as a NASA Astronaut. Captain Cernan was the pilot on the Gemini 9 mission and the second American to walk in space; lunar module pilot of Apollo 10; and Spacecraft Commander of Apollo 17, which resulted in the distinction of being the last man to have left his footprints on the surface of the moon. In 1973, he served as a Senior United States Negotiator in discussions with USSR on the Apollo-Soyuz Mission. Mr. Cernan served as Executive Consultant of Aerospace and Government of Digital Equipment Corporation from 1986 to 1992, and he was a Director and Vice President-International of Coral Petroleum, Inc., Houston, Texas from 1976 to 1981. Captain Cernan is presently a Director of National Air and Space Museum and Smithsonian Educational Foundation. Captain Cernan is also a member of the Board of Trustees of the U. S. Naval Aviation Museum, NFL Alumni and Major League Baseball Players Alumni Association. In addition, Captain Cernan has served as a consultant commentator to ABC News.
Hayden Fry was Head Football Coach at the University of Iowa from 1979 to 1998, now retired. He was Head Football Coach at North Texas State University from 1973 to 1978 and at Southern Methodist University from 1962 to 1972. He was named Football Coach of the Year in the Big Ten (1981, 1990, 1991), the Missouri Valley Conference (1973), and the Southwest Conference (1962, 1966 and 1968). He was on the Board of Advisors of Wilson Sporting Goods; the Board of Trustees of Pop Warner Football; and the American Football Coaches Association and was the 1993 President of the AFCA. He was President of Hawkeye Marketing Group from 1979 - 1984. He is a member of the Board of Directors of Berthel Fisher Co and was a member of the Board of Directors of the PPI Group. He was elected into the College Football Hall of Fame in 2003.
John Greig has been President of Greig and Co. from 1967 - 2007. He is a Director of Northstar Bank, NW., Estherville, Iowa. He has been President of the Iowa Cattlemen's Association (1975-1976) and a member of the Executive Committee of the National Cattlemen's Association (1975-1976). He was a member of the Iowa Board of Regents from 1985 to 1991. He was elected as an Iowa State Representative from 1993 to 1999.
Roy E. Ledbetter is retired as President and Chief Executive Officer of Highland Industrial Park, a division of Highland Resources, Inc. in East Camden, Arkansas. He holds a Bachelor of Science Degree in Education from Southern Arkansas University at Magnolia, a Masters Degree in Education from Henderson State University at Arkadelphia and an AMP from Harvard Business School at Boston. In 1966, Mr. Ledbetter joined Highland Resources, Inc. and coordinated organization of Southern Arkansas University Technical Branch; was promoted to Division Manager (1972), Vice President and Division Manager (1975), Senior Vice President (1980), and President in 1984. He is past President of the Camden Chamber of Commerce; was 1977 Camden Jaycee's Man of the Year; was awarded first annual Camden Area Chamber of Commerce Community Service Award in 1983; served on Education Standards Committee of the State of Arkansas.
C. James McCormick is former Chairman of the Board of McCormick, Inc., Best Way Express, Inc., and President of JAMAC Corporation, all of Vincennes, Indiana. He is the owner of CJ Leasing, LLC. Mr. McCormick is former Chairman of the Board of Directors and CEO of First Bancorp, Vincennes, Indiana; former Chairman of the Vincennes University board of trustees and a Life Director of the Indiana Chamber of Commerce; and a former member of the Young President's Organization. He is a former Chairman of the Board of the American Trucking Associations. Mr. McCormick is a Past Chairman of the National Board of Trustees of The Fellowship of Christian Athletes.
John E. Miller was a member of the State of Arkansas House of Representatives from 1959 to 2000. He has been self-employed in the insurance, abstract, real estate, heavy construction and farming business for more than 20 years. He has served on the Board of Directors of Calico Rock Medical Center, Easy K Foundation, National Conference of Christians and Jews, State Advocacy Services, Lions World Services for the Blind, State Board of Easter Seals, Williams Baptist College Board of Trustees and Izard County Chapter of the American Red Cross.
Robert R. Rigler has been Chairman of the Board of Security State Bank, New Hampton, Iowa since 1989; he served as its President and CEO from 1968 to 1989. Mr. Rigler was Iowa Superintendent of Banking from 1989 to 1991. He was a member of the Iowa Transportation Commission from 1971 to 1986 and served as its Chairman from 1973 to 1986. He was a member of the Iowa State Senate from 1955 to 1971 and served as a Majority and Minority Floor Leader.
L. Stanley Schoelerman was President and a Partner of Petersen Sheep & Cattle Co., Spencer, Iowa from 1964 to 2001. He was a
Director of Home Federal Savings & Loan, Spencer, Iowa, from 1969 to 1988; and Honeybee Manufacturing, Everly, Iowa, from 1974 to 1986. He was President of Topsoil-Schoenewe, Everly, Iowa, from 1974 to 1986. Mr. Schoelerman was Commissioner of the Iowa Department of Transportation from 1974 to 1978 and was a member of the National Motor Carrier Advisory Board of the Federal Highway Administration from 1981 to 1985.
Audit Committee
The Company’s audit committee consists of three members of the board of directors, Richard Barclay, Robert Rigler and John Greig. Mr. Barclay, a Certified Public Accountant, is the committee’s financial expert and is independent of management. See description of board members for additional information.
Compensation Committee
The Company’s compensation committee consists of three members of the board of directors, C. James McCormick, Roy Ledbetter and Hayden Fry. C. James McCormick is Chairman of the committee. See description of board members for additional information.
Code of Ethics
The Company has a code of ethics that applies to all employees of the Company. To receive a copy of the Company’s code of ethics without charge, contact:
Ms. Pam Randolph
BNL Financial Corporation
7530 Hwy.
Sherwood, Arkansas 72120
Additional information required by this item is incorporated by reference from the Company’s 2010 Proxy Statement for its annual meeting of shareholders scheduled for May 27, 2010 and the sections therein entitled “Beneficial Ownership of Common Stock,” “Corporate Governance,” “Audit Committee Charter and Report,” “Compensation Committee Charter,” “Purposes and Processes and Report,” “Compensation of Executive Officers,” and “Compensation of Directors.”
ITEM 11.
ITEM 11. Executive Compensation
The information required by this item is incorporated by reference from the Company’s 2010 Proxy Statement for its annual meeting of shareholders scheduled for May 27, 2010 and the sections therein entitled “Beneficial Ownership of Common Stock,” “Corporate Governance,” “Audit Committee Charter and Report,” “Compensation Committee Charter,” “Purposes and Processes and Report,” “Compensation of Executive Officers,” and “Compensation of Directors.”
ITEM 12.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Security Ownership of Certain Beneficial Owners
The following table reflects the persons known to the Company to be the beneficial owners of 5% or more of the Company's voting securities as of December 31,
(1) To the Company's knowledge, all shares are beneficially owned by, and the sole voting and investment power is held by the persons named, except as otherwise indicated.
(2) This includes 133,290 shares owned directly by Wayne Ahart and Wayne Ahart’s indirect ownership of 1,200,000 shares which are owned by National Iowa Corporation and 686,037 shares which are owned by Arkansas National Corporation. Wayne Ahart controls both National Iowa Corporation and Arkansas National Corporation and votes the shares of the Company’s common stock owned by both corporations. LeRene Ahart, as a shareholder in National Iowa Corporation and Arkansas National Corporation, has an indirect pecuniary interest in 1,200,000 shares of the Company’s common stock owned by National Iowa Corporation and 649,363 shares of the Company’s common stock owned by Arkansas National Corporation. Wayne Ahart has voting control of all 2,400,000 shares of the Company’s common stock owned by National Iowa Corporation and all 2,178,926 shares of the Company’s common stock owned by Arkansas National Corporation plus the 133,290 shares which are owned directly by Wayne Ahart. Consequently, Wayne Ahart has voting control of 4,712,216 (31.16%) shares of the Company’s common stock.
(3) Includes 1,400,000 shares held in the name of Life Industries of Iowa, Inc., and 1,335,171 shares held in the name of Arkansas Industries Corporation, both of which are controlled by Mr. Shamas.
(4) All of Mr. Byrd's shares are subject to a right of first refusal of the Company to acquire said shares on the same terms and conditions as any proposed sale or other transfer by Mr. Byrd.
Security Ownership of Management
The following table sets forth, as of December 31, 2009, certain information concerning the beneficial ownership of the Company's Common Stock by each director of the Company and by all directors and officers as a group:
(1) To the Company's knowledge all shares are beneficially owned by the persons named, except as otherwise indicated, and they hold the sole voting and investment power.
(2) This includes 133,290 shares owned directly by Wayne Ahart and Wayne Ahart’s indirect ownership of 1,200,000 shares which are owned by National Iowa Corporation and 686,037 shares which are owned by Arkansas National Corporation. Wayne Ahart controls both National Iowa Corporation and Arkansas National Corporation and votes the shares of the Company’s common stock owned by both corporations. LeRene Ahart, as a shareholder in National Iowa Corporation and Arkansas National Corporation, has an indirect pecuniary interest in 1,200,000 shares of the Company’s common stock owned by National Iowa Corporation and 649,363 shares of the Company’s common stock owned by Arkansas National Corporation. Wayne Ahart has voting control of all 2,400,000 shares of the Company’s common stock owned by National Iowa Corporation and all 2,178,926 shares of the Company’s common stock owned by Arkansas National Corporation plus the 133,290 shares which are owned directly by Wayne Ahart. Consequently, Wayne Ahart has voting control of 4,712,216 (30.99%) shares of the Company’s common stock.
(3) All of Mr. Byrd's shares are subject to a right of first refusal of the Company to acquire said shares on the same terms and conditions as any proposed sale or other transfer by Mr. Byrd.
(4) Includes 1,400,000 shares held in the name of Life Industries of Iowa, Inc., and 1,335,171 shares held in the name of Arkansas Industries Corporation, both of which are controlled by Mr. Shamas.
ITEM 13.
ITEM 13. Certain Relationships and Related Transactions and Directors Independence
None
ITEM 14.
ITEM 14. Principal Accountant Fees and Services
The information required under this item is incorporated by reference from the Company’s 2010 Proxy Statement for its annual meeting of shareholders scheduled for May 27, 2010.
PART IV
ITEM 15.
ITEM 15. Exhibits, Financial Statement Schedules
(a) 1. Financial Statements
The information required by this section is set forth on pages to of this Report which is incorporated herein by reference.
2. The following financial statement schedule required to be filed by Paragraph (d) of Item 15 of Form 10-K is submitted as a separate section of this report.
Schedule II - Condensed Financial Information of Registrant to.
Schedules I and IV have been omitted as all required data are included in the Notes to Consolidated Financial Statements.
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
3. Exhibits
No.
Description
Page or Method of Filing
3.1
Articles of Incorporation of BNL Financial Corporation, dated January 27, 1984 and Amendment to Articles of Incorporation of BNL Financial Corporation, dated November 13, 1987.
Incorporated by reference to Exhibit 3.1 of the Company's Annual Report on Form 10-K for the period ending December 31, 1993.
3.2
By-laws of BNL Financial Corporation.
Incorporated by reference to Exhibit 3.2 of the Company’s Registration Statement No. 33-70318.
4.1
Instruments defining the rights of security holders, including indentures.
Incorporated by reference to Exhibit 4 of the Company's Registration Statement No. 2-94538 and Exhibits 3.5 and 4 of Post-Effective Amendment No. 3 thereto.
4.2
Articles of Incorporation of BNL Financial Corporation, dated January 27, 1984 and Amendment to Articles of Incorporation on BNL Financial Corporation, dated November 13, 1987.
Incorporated by reference to Exhibits 4.2 of the Company's Annual Report on Form 10-KSB for the period ending December 31, 1998.
10.1
Form of Agreement between Commonwealth Industries Corporation, American Investors Corporation and Wayne E. Ahart regarding rights to purchase shares of the Company.
Incorporated by reference to Exhibit I of the Company's Quarterly Report on 10-QSB for the period ended September 30, 1994.
10.2
Agreement dated December 21, 1990 between Registrant and C. Donald Byrd granting Registrant right of first refusal as to future transfers of Mr. Byrd's shares of the Company's common stock.
Incorporated by reference to Exhibit I of the Company's Quarterly Report on 10-QSB for the period ended March 31, 1996.
10.3
Convertible Debenture Agreement dated July 25, 2001 between BNL Equity Corporation and EPSI Benefits Inc.
Incorporated by reference to Exhibit 10.9 of the Company's Annual Report on 10-K for the period ended December 31, 2005.
10.4
Claims Service Agreement dated June 1, 1999 between Brokers National Life Assurance Company and Employer Plan Services Inc.
Incorporated by reference to Exhibit 10.5 of the Company's Annual Report on 10-K for the period ended December 31, 2005.
10.5
Office lease agreement dated January 21, 2006, between Brokers National Life Assurance Company and KIMCO for premises in Austin.
Incorporated by reference to Exhibit 10.6 of the Company's Annual Report on 10-K for the period ended December 31, 2005.
10.6
Line of Credit Agreement dated October 15, 2004 between Brokers National Life Assurance Company and Employer Plan Services Inc.
Incorporated by reference to Exhibit 10.7 of the Company's Annual Report on 10-K for the period ended December 31, 2005.
10.7
Marketing Agreement dated July 25, 2001 between BNL Equity Corporation and Employer Plan Services Inc. and EPSI Benefits Inc.
Incorporated by reference to Exhibit 10.8 of the Company's Annual Report on 10-K for the period ended December 31, 2005.
10.8
Outsourcing Agreement dated May 1, 2007 between Brokers National Life Assurance Company and Virtual Item Processing Systems, Inc.
Incorporated by reference to Exhibit 10.9 of the Company's Annual Report on 10-K for the period ended December 31, 2006.
10.9
Amended Convertible Debenture Date July 14, 2008 between BNL Financial Corporation and EPSI Benefits Inc.
Incorporated by reference to Exhibit 1 of the Company’s periodic Report on Form 8-K dated July 14, 2008.
Statement Re computation of per share earnings.
Reference is made to the explanation of the computation of per share earnings as shown in Note 1 to the Notes to Consolidated Financial Statements filed herewith under Item 14(a)(1) above which clearly describes the same.
Statements re computation of ratios.
Not applicable.
Letter Re Change in Certifying Accountant.
Incorporated by reference to Exhibit I of the Company's periodic Report on Form 8-K dated September 14, 1995.
Subsidiaries of Registrant.
Filed herewith.
31.1
Certification of Chief Executive Officer Section
Filed herewith - E1
31.2
Certification of Chief Financial Officer Section
Filed herewith - E2
Certification of Chief Executive Officer and Chief Financial Officer Section 906
Attached hereto - E3
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 30th day of March 2009.
BNL FINANCIAL CORPORATION
/S/ Wayne E. Ahart
By: Wayne E. Ahart, Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURE
TITLE
DATE
/s/ Wayne E. Ahart
03/25/2010
Wayne E. Ahart
Chairman of the Board, Director (Principal Executive Officer)
/s/ C. Donald Byrd
03/25/2010
C. Donald Byrd
Vice Chairman of the Board and Director
/s/ Kenneth Tobey
03/25/2010
Kenneth Tobey
President and Director
/s/ Barry N. Shamas
03/25/2010
Barry N. Shamas
Executive Vice President, Treasurer, Chief Operating Officer, Chief Financial Officer and Director (Principal Financial and Accounting Officer)
/s/ Hayden Fry
03/25/2010
Hayden Fry
Director
/s/ John Greig
03/25/2010
John Greig
Director
/s/ C. James McCormick
03/25/2010
C. James McCormick
Director
/s/ Robert R. Rigler
03/25/2010
Robert R. Rigler
Director
/s/ Stanley Schoelerman
03/25/2010
Stanley Schoelerman
Director
/s/ Cecil Alexander
03/25/2010
Cecil Alexander
Director
/s/ Richard Barclay
03/25/2010
Richard Barclay
Director
/s/ Eugene A. Cernan
03/25/2010
Eugene A. Cernan
Director
/s/ Roy Ledbetter
03/25/2010
Roy Ledbetter
Director
/s/ John E. Miller
03/25/2010
John E. Miller
Director
ANNUAL REPORT ON FORM 10-K
ITEM 15 (a) AND 15 (d)
FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2009
BNL FINANCIAL CORPORATION AND SUBSIDIARIES
DES MOINES, IOWA
Item 15(a) Financial Statements
Page Number of 2009
Form 10-K
Report of Independent Accountants on Financial Statements
Consolidated Balance Sheet, December 31, 2009 and
Consolidated Statement of Operations and Comprehensive Income for the years ended December 31, 2009, 2008 and
Consolidated Statement of Changes in Shareholders' Equity for the years ended December 31, 2009, 2008 and 2007
Consolidated Statement of Cash Flows for the years ended December 31, 2009, 2008 and 2007
Notes to Consolidated Financial Statements
Item 15(d) - Schedule II, Condensed Financial Information of Registrant
BNL Financial Corporation and Subsidiaries
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
BNL Financial Corporation and Subsidiaries
We have audited the consolidated financial statements of BNL Financial Corporation and Subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States.) Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of BNL Financial Corporation and Subsidiaries as of December 31, 2009 and 2008, and the consolidated results of its operations and its consolidated cash flows for each of the years ended December 31, 2009, 2008 and 2007 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information required to be set forth therein.
Oklahoma City, Oklahoma SMITH, CARNEY & CO., p.c.
March 30, /s/ Smith, Carney & Co., p.c.
BNL Financial Corporation and Subsidiaries
Consolidated Balance Sheets
December 31, 2009 and 2008
The accompanying notes are an integral part of the consolidated financial statements.
BNL Financial Corporation and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income
For the years ended December 31, 2009, 2008 and 2007
The accompanying notes are an integral part of the consolidated financial statements.
BNL Financial Corporation and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
For the years ended December 31, 2009, 2008 and 2007
The accompanying notes are an integral part of the consolidated financial statements.
BNL Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the years ended December 31, 2009, 2008 and 2007
The accompanying notes are an integral part of the consolidated financial statements.
1. Summary of Significant Accounting Policies
The consolidated financial statements include the accounts of BNL Financial Corporation (“BNLF”) and its wholly owned subsidiaries, Brokers National Life Assurance Company (BNLAC), BNL Brokerage Corporation and Consumers Protective Association, Inc. All significant intercompany balances have been eliminated.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The Company’s principal activity is the sale of individual and group life and accident and health insurance within the United States. The most significant income component is sales of dental insurance for which the maximum annual risk per policy is $2,000. See Note 10. The Company is licensed to sell in 48 states and the District of Columbia as of December 31, 2009. See Note 2. Substantially all of the Company's life insurance in force is nonparticipating business.
Premiums from group accident and health insurance are reported as earned when due since these policies are short duration contracts.
Individual dental and individual life insurance policies are long duration contracts. Benefits and expenses are associated with earned premiums so as to result in recognition over the life of the policy. Such recognition is accomplished by means of the provision for future policy benefits and amortization of deferred policy acquisition costs.
Costs of acquiring new business and certain expenses of policy issuance and underwriting have been deferred; these deferred policy acquisition costs are being amortized over the premium-paying period of the policies (maximum of 30 years) in proportion to the ratio of annual premium revenue to total premium revenue anticipated.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss and credit carry-forwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. See Note 3.
Liability for future policy benefits for traditional and limited-payment contracts has been determined primarily by the net level premium method using the 1975 through 1980 Select and Ultimate Mortality Table, interest assumptions starting at 7% graded to 5% at the end of the sixteenth year and estimated future withdrawals based upon Linton Tables B or C.
For annuity contracts without mortality risk, net premium deposits and benefit payments are recorded as increases or decreases in a liability account rather than as revenue and expense. Expenses incurred and fees charged upon issuance are deferred and recognized in relationship to the amount of funds held. This deferred annuity profit is being amortized based on lapse and mortality assumptions (maximum of 30 years) which are revised periodically to reflect actual experience. Increases in the liability account for interest credited to contracts are charged to expense. The interest rate assumptions ranged from 4.0% to 5.0% during 2009 and 2008.
The liability for policy claims payable is composed of claims reported but not paid and claims incurred but not reported. The Company has developed a procedure for calculating incurred but not reported dental claims based on prior years’ claims using dates incurred, reported to the insurance company and subsequently paid. Differences in estimates may result in revised claims expense which is recognized in the period in which the difference is determined.
The Company has divided its fixed maturity investments into two classes, “available for sale” and “held to maturity” in accordance with management’s intent in regard to these investments. Investments available for sale may be sold prior to maturity due to changes that might occur in market interest rates, changes in the security’s prepayment risk, the Company’s liquidity needs, and similar factors, including the Company’s asset/liability management strategy. Investments available for sale are carried at fair value. Unrealized gains and losses resulting from changes in the valuation of fixed maturity securities classified as available for sale are recorded as a component of comprehensive income.
1. Summary of Significant Accounting Policies (continued)
The “held to maturity” classification reflects management's intent and ability to hold this block of securities to their maturity. Investments designated by management as part of the held to maturity portfolio are presented on the financial statements at amortized book value and, therefore, unlike the available for sale portfolio, no adjustments to surplus are made as bond values change unless declines in market value are deemed to be other than temporary.
Realized gains or losses on sale of all investments are determined on a specific identification basis. Investments in equity securities are carried at fair value.
Cash equivalents are carried at amortized cost, which approximates fair value. Cash equivalents represent other short-term securities. For purposes of the Statement of Cash Flows, the Company considers all highly liquid short-term investments to be cash equivalents. Cash equivalents include money market funds that may be subject to withdrawal restrictions. No such restrictions were in place at December 31, 2009. The Company made debenture interest payments of $82,317, $97,424 and $78,331 in 2009, 2008 and 2007; respectively. The Company made cash payments for income taxes of $630,000, $550,000 and $670,000 in 2009, 2008 and 2007, respectively.
Leasehold improvements and furniture and equipment are recorded at cost. Maintenance and repairs are charged to expense as incurred. Provision for depreciation is made on the basis of estimated useful lives of 3 to 10 years utilizing the straight-line method. Leasehold improvements are amortized over the lease term. Accumulated depreciation and amortization totaled $1,353,056 and $1,163,242 at December 31, 2009 and 2008, respectively. Depreciation and amortization expense was $304,624, $284,324, and $381,064, for the years ended December 31, 2009, 2008 and 2007, respectively.
Other assets include agents’ balances of $66,240 and $59,005 at December 31, 2009 and 2008, respectively, after reduction for allowance of doubtful accounts. The allowance account had a credit recorded of $2,386, $5,615 and $4,400 in 2009, 2008 and 2007, respectively.
Intangible 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. These assets must be periodically tested for impairment of their market value and written off immediately to the extent the value is found to be impaired. 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. No impairment expense was recognized in 2009, 2008 or 2007. Amortization expense of approximately $5,815 was recorded for each of the years ended December 31, 2009, 2008 and 2007, respectively.
The Company accounts for the 1994 Brokers and Agents Stock Option Plan and the 2002 Nondirector, Nonexecutive Stock Option Plan using the fair value method as required by SFAS No. 123(R). Under this method the fair value of the options granted is recorded as expense at the date of grant for fully vested instruments. See Note 9.
In February 2007 the FASB issued SFAS No. 159 (now ASC 820) “The Fair Value Option for Financial Assets and Financial Liabilities.” ASC 820 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. ASC 820 is effective for fiscal years beginning after November 15, 2007. Management adopted but did not elect to apply ASC 820 treatment to its financial assets and financial liabilities. The adoption of ASC 820 did not have a material impact on the consolidated financial position, results from operations or cash flows of the Company.
In June 2007, the FASB issued Interpretation (“FIN”) No. 48, (now ASC 740) “Accounting for Uncertainty in Income Taxes,” an interpretation of FASB Statement No. 109, “Accounting for Income Taxes,” which clarifies accounting for and disclosure of uncertainty in tax positions. ASC 740 prescribes a recognition threshold and measurement attribute for the financial recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation is effective for fiscal years beginning after December 15, 2007. Management has evaluated the impact of adopting ASC 740 on the consolidated financial statements, and the adoption of ASC 740 did not have a material effect on the consolidated financial position, cash flows and results of operations.
In September 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162.” This Standard establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by entities in the preparation of financial statements in conformity with US GAAP. This guidance is effective for financial statements issued for periods ending after September 15, 2009. The adoption of this Standard did not have a material impact on our financial statements. References to GAAP in these footnotes are to the FASB Accounting Standards Codification (ASC).
1. Summary of Significant Accounting Policies (continued)
On April 1, 2009 management adopted FSP FAS 157-4, (now ASC 820), “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”; FSP Nos. FAS 115-2 and FAS 124-2, (now ASC 320), “Recognition and Presentation of Other-Than-Temporary Impairments”; and FSP No. FAS 107-1 and APB 28-1, (now ASC 825), “Interim Disclosures about Fair Value of Financial Instruments.” These staff positions provided guidance on fair value measurements, impairments, and disclosures. Adoption of these staff positions did not have a material impact on the financial statements. See Note 4 for a discussion of fair value measurements.
In May 2009, the FASB issued SFAS No. 165, (now ASC 855), “Subsequent Events,” which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Management adopted this guidance during the second quarter of 2009. The adoption of this Standard did not have a material impact on the financial statements.
Net gain per share is based on net gain divided by the weighted average number of shares.
2. Shareholders' Equity
In 2009 the Company purchased 123,855 shares of its common stock for $155,352 and in 2008 the Company purchased 16,686 shares of its common stock for $20,858 from its shareholders. During 2007, the Company made cash offers to shareholders for the purchase of stock. This offering resulted in stock purchases amounting to $789,214 for 611,214 shares. In order to purchase company common stock, the Company was required to file a Schedule TO in 2007 with the Securities and Exchange Commission. Included in the cost of the Treasury Stock purchased in 2007 is $35,000, which represents a portion of the cost to complete the TO filings. The Company retired 1,749,205 treasury shares during the fourth quarter of 2007.
At December 31, 2009 and 2008, shareholders' equity includes approximately $20,580,513 and $18,323,659, respectively, of BNLAC net assets. The ability of BNLAC to pay dividends to the Company is restricted under Arkansas insurance laws and must be approved by the insurance commissioner if it exceeds the lesser of 10% of surplus or net gain from operations for the year. In 2009 BNLAC paid the Company $800,000 of ordinary dividends which were used to pay dividends to the Company’s shareholders. BNLAC paid the Company $1,300,000 of ordinary dividends in 2008, of which approximately $760,000 was used to pay dividends to the Company’s shareholders and the balance for operating expenses. In 2007 BNLAC paid the Company $1,000,000 in ordinary dividends which were used to purchase the Company’s common stock and for operating expenses. BNLAC paid dividends of $800,000, $1,300,000 and $1,000,000 to the Company in 2009, 2008 and 2007, respectively.
BNLAC reports to state regulatory authorities on a statutory accounting basis that differs from the basis used herein. Due to an Arkansas regulatory requirement associated with the redomestication in 1994, BNLAC must maintain a minimum of $2,300,000 in capital and surplus. Additionally, each state in which BNLAC is licensed has statutory minimum capital requirements required for maintaining its license to sell. Minimum capital and surplus requirements vary from $300,000 to as much as $5,000,000 in the states in which BNLAC is licensed.
The states periodically increase minimum capital requirements, often allowing companies with existing Certificates of Authority to continue doing business in the state under the previous existing requirements (grandfathering). States in which BNLAC is licensed to do business have increased minimum requirements to as much as $5,000,000. Management actively monitors these developments to maintain compliance with the requirements of each state.
Capital and surplus and net income of BNLAC as reported on a statutory basis are as follows:
The following is a reconciliation of consolidated net income and shareholders’ equity per the financial statements included herein to BNLAC unconsolidated net income and capital and surplus on a statutory basis:
2. Shareholders' Equity (continued)
3. Income Taxes
The Company follows Statement of Financial Accounting Standards (SFAS) No. 109 (now ASC 740), “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. Changes in future tax rates will result in immediate adjustments to deferred taxes. The Company and its Subsidiaries file consolidated income tax returns.
At December 31, 2009 and 2008, respectively, the Company had gross deferred tax assets of $1,037,858 and $1,067,931 with corresponding valuation allowances of $683,058 and $701,414, and gross deferred tax liabilities of $248,800 and $269,517, 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, 2009 is $106,000 compared to a deferred tax asset of $97,000 at December 31, 2008. 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 provision for income tax is as follows:
The reconciliation of income taxes computed at the federal statutory income tax rate to total income taxes for the years ended December 31, 2009, 2008 and 2007 is as follows:
3. Income Taxes (continued)
The Company has net operating loss carry forwards for income tax purposes at December 31, 2009 as follows:
4. Investments
The amortized cost and estimated market value of investments in fixed maturity securities are as follows:
4. Investments (continued)
The amortized cost and estimated fair value of investments in fixed maturity securities at December 31, 2009 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties and because most mortgage-backed securities provide for periodic payments throughout their life.
Proceeds from sales and maturities of investments in fixed maturity securities and equity securities for the years ended December 31, 2009, 2008 and 2007 were $13,823,097, $12,002,977, and $5,774,799 respectively. Gross gains were $103,828, $10,863 and $13,677 and gross losses were $0, $0 and $0 as of December 31, 2009, 2008 and 2007, respectively.
Included on the balance sheet in Accumulated Other Comprehensive Income are gross unrealized gains of $238,141, $101,449 and $240,686 and gross unrealized losses of $170,665, $432,245 and $70,437 as on December 31, 2009, 2008 and 2007, respectively. No other than temporary impairments of “Held to Maturity” investments are recognized in accumulated other comprehensive income.
4. Investments (continued)
Investment in equity securities at December 31, 2009 and 2008 represents common and preferred stock investments as follows:
Net investment income for the years ended December 31, 2009, 2008 and 2007 is as follows:
Net realized gains and losses are summarized below:
Other long-term investments of $1,180,041 and $1,224,609 in 2009 and 2008 respectively, consists of, in part, a convertible debenture loan investment (“Debenture”) to EPSI Benefits, Inc. (“EBI”), originally dated July 25, 2001. The loan bears interest at a rate of 14% and the maturity of the Debenture was August 15, 2015. Monthly principal payments were scheduled to begin on September 15, 2008, and the total principal amount is $1,357,407.
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 as 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 established an allowance for credit losses in the amount of $204,582 as of December 31, 2008, resulting in a net book value of $1,152,825.
In the third quarter of 2009, the Company recognized an other than temporary impairment on its $100,000 Cit Group Inc. bond, for a realized loss of $42,280. Cit Group, Inc. filed for chapter 11 bankruptcy on November 1, 2009. CIT Group, Inc. redeemed this bond for other bonds and equity securities prior to December 31, 2009.
4. Investments (continued)
The Company’s policy for recognizing interest income on the impaired debenture is to recognize interest under the stated loan terms. Interest on the debentures is and has been current.
The average recorded investment on impaired debenture during the period ended December 31, 2009 was $1,152,825. Interest income recognized in 2009 on the impaired debenture was $190,037.
Activity in the allowance for credit losses is as follows:
There was no other than temporary impairment recognized in 2009 other than the credit losses recognized above and therefore no other than temporary impairment included in accumulated other comprehensive income.
Other long-term investments also include an operating line of credit agreement in the amount of $27,215 and $71,784 in 2009 and 2008, respectively. The agreement provided EPSI with a $200,000 line of credit maturing August, 2011. The line of credit is at 8.00% with interest and principal payable monthly to BNLAC.
Regulatory authorities require certain Company investments to be deposited or pledged for the benefits of policyholders as a condition of doing business in certain states. The carrying values of these investment deposits are approximately $4,601,528 and $4,738,000 as of December 31, 2009 and 2008, respectively.
The Company’s conservative investment philosophies minimize market risk and risk of default by investing in high quality debt instruments with staggered maturity dates. The Company does not hedge investment risk through the use of derivative financial instruments. The market value of the Company’s investments in debt instruments varies with changes in interest rates. A significant increase in interest rates could cause decreases in the market values of investments and have a negative effect on comprehensive income and capital.
The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other than temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2009.
4. Investments (continued)
U.S. Treasury and U.S. Government Agency Obligations
The unrealized losses on the Company's investments in U.S. Treasury and U. S. Government Agency obligations were caused by unprecedented circumstances in the economy and problems at government agencies which required a federal bailout. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the Company has the ability and intent to hold those investments until a recovery of fair value, which may be maturity or until they are called, the Company does not consider those investments to be other than temporarily impaired at December 31, 2009.
Federal Agency Mortgage-Backed Securities
The unrealized losses on the Company's investment in federal agency mortgage-backed securities were caused by unprecedented circumstances in the economy and problems at government agencies which required a federal bailout. The contractual cash flows of those investments are guaranteed by an agency of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company's investment. Because the decline in market value is attributable to factors other than credit quality, and because the Company has the ability and intent to hold those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2009.
Corporate Bonds
The table below discloses the unrealized losses on corporate bonds with significant unrealized losses.
The corporate bonds with unrealized losses in the table are primarily insurance and financial corporations that have had their fair value reduced due to the significant economic problems world wide. The Company currently does not believe it is probable that it will be unable to collect all amounts due according to the contractual terms of the investments. Therefore, it is expected that the debentures would not be settled at a price less than the amortized cost of the investment. Because the Company has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, it does not consider the investments to be other than temporarily impaired at December 31, 2009.
In the third quarter of 2009 the Company wrote down its $100,000 CIT Group, Inc. bond to $57,720, for a realized loss of $42,280. The $57,720 was the market value of the bonds at September 30, 2009 as determined by BOSC, the Company’s investment banker. Cit Group, Inc. filed for chapter 11 bankruptcy on November 1, 2009.
4. Investments (continued)
Marketable Equity Securities.
The table below discloses the Company’s unrealized losses on marketable equity securities.
The Company's marketable equity securities include a variety of industries. Garmin LTD has the largest unrealized loss of $112,872, which is approximately a 51% decrease in value. Garmin manufactures communication and navigational products, and they are the leader in personal navigational devices. Garmin remains profitable in 2009, and the decrease in the stock’s fair value was due to the challenging economic environment in 2008 and 2009. Treaty Oak Bank is a small local bank that has not been in business long. The banks stock price decreased due to problem commercial loans. Regions Financial Corporation has suffered from the recession and the reduced demand for loans. The Company evaluated the near-term prospects of the issuers in relation to the severity and duration of the impairment. Based on that evaluation and the Company's ability and intent to hold those investments for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider those investments to be other than temporarily impaired at December 31, 2009.
5. Fair Value of Financial Instruments
Effective January 1, 2008, the Company adopted ASC 820, which, among other things, requires enhanced disclosures about assets and liabilities carried at fair value. ASC 820 establishes a hierarchal disclosure framework associated with the level of observable pricing to be utilized in measuring assets and liabilities at fair value. The three broad levels defined by ASC 820 hierarchy are as follows:
Level 1 - Fair value is based on unadjusted quoted prices in active markets that are accessible to the Company for identical assets or liabilities. These generally provide the most reliable evidence and are used to measure fair value whenever available. The Company’s level 1 assets and liabilities primarily include equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2 - Fair value is based on significant inputs, other than Level 1 inputs, that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets and liabilities, quoted market prices in markets that are not active for identical or similar assets or liabilities and other observable inputs. The Company’s Level 2 assets and liabilities include: fixed maturities (corporate public, most government securities, certain asset-backed and mortgage-backed securities, etc.), certain equity securities, short-term investments and cash equivalents (primarily money market funds). Valuations are generally obtained from third party pricing services for identical or comparable assets or liabilities.
Level 3 - Fair value is based on significant unobservable inputs for the asset or liability. These inputs reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability. The Company’s Level 3 assets and liabilities primarily include certain private fixed maturities. Valuations are determined using valuation methodologies such as discounted cash flow models and other similar techniques.
5. Fair Value of Financial Instruments (continued)
The table below presents the balances of assets measured at fair value on a recurring basis, as of December 31, 2009.
The following tables provide a summary of the changes in fair value of Level 3 assets and liabilities for the period January 1, 2009 to December 31, 2009, as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to those assets and liabilities still held at December 31, 2008.
Unrealized losses for the period relating to those Level 3 assets that were held by the Company at the end of the period were $430,377.
(a) The indicated assets and liabilities are carried at book value, which approximates fair value.
(b) Fair value of investments is based on methods prescribed in ASC 820 as described here-in.
6. Commitments and Contingencies
The balance of Bonds Payable was $1,323,388 and $1,443,282 at December 31, 2009 and 2008 respectively. The bonds were issued in conjunction with a settlement with certain shareholders in 2001. The Bonds are for a term of twelve years, effective December 15, 2002, with principal payable at maturity and bear interest at the rate of 6% per annum payable annually from the previous fiscal year’s earnings of BNL. If any interest payment is not made, it will be added to the principal and paid at maturity. The Bonds are fully callable and redeemable at par at any time by BNL.
In 2009, 2008 and 2007, the Company made cash offers to bond holders for the purchase of bonds. Bond purchases resulted in a reduction of Bonds Payable of $119,894, $164,294 and $32,408 in 2009, 2008 and 2007; respectively. Gains from early extinguishments of the debt were $27,176, $44,370 and $10,803 in 2009, 2008 and 2007; respectively.
In 2003 and 2004, the Company became a third party indemnitor by entering into a series of bond indemnity and guarantee agreements with various terms totaling approximately $545,000 in conjunction with a marketing agreement with third parties, EPSI Benefits Inc. (EBI) and Employer Plan Services Inc. (EPSI). The purpose of these agreements is to assist EPSI in becoming licensed in additional states. The Company received personal guarantees from the owners of EPSI to effectively limit potential liability under the guarantee agreements. With regard to the bond indemnity, the Company will be obligated only if EPSI, EPSI’s parent and its shareholders, who are the primary obligors, were all to become insolvent. Management considers the likelihood of the Company realizing a liability under these agreements to be remote.
The Company has entered into noncancelable operating leases for office space and equipment. Future minimum payments under the leases are as follows:
During the first quarter of 2005 the Company entered into a lease for 20,337 square feet of office space in Austin, Texas, under an eight year, triple net lease. The base rent was $0 in the first year (June 1, 2005 to May 31, 2006), $157,612 in the second year and payments escalate to $264,384 in the final year of the lease. Leasehold improvements totaled approximately $872,000 ($203,000 funded by landlord) on the new lease space that was occupied in December 2005. Leasehold improvements are being amortized over the lease term. The $117,000 initial rent holiday and $203,000 of landlord-funded leasehold improvements are being amortized over the lease term and reduce lease expense. Deferred rent credits are included in other liabilities and were approximately $284,000 for 2009 and $317,000 in 2008.
Related lease cost incurred for the years ended December 31, 2009, 2008 and 2007 was $337,000, $358,000, and $389,000. respectively.
The Company's wholly owned insurance subsidiary may be subject to losses related to guaranty fund assessments. Such assessments result from liquidation of troubled insurers by state regulators. The assessment to BNLAC, if any, is not reasonably estimable, nor expected to have a material effect on the financial statements.
Periodically in the ordinary course of business the Company exceeds federally insured limits in its operating accounts. Cash deposits in excess of federally insured limits are approximately $794,000 at December 31, 2009.
See Note 2 for information regarding minimum capital requirements to maintain a license to sell in various states.
7. Liability for Unpaid Claims
Activity in the liability for accident and health unpaid claims net of reinsurance is summarized as follows.
The activity summary in the liability for unpaid accident and health claims net of reinsurance shows that claims liabilities were overstated by $223,847, $510,993 and $571,329 for the years ended December 31, 2008, 2007 and 2006, respectively. Such liability adjustments, which affected current operations during 2009, 2008 and 2007 respectively, resulted in part from developed claims for prior years being different than were anticipated when the liabilities for unpaid accident and health claims were originally estimated. These trends have been considered in establishing the current year liability for unpaid accident and health claims. Included in the unpaid accident and health claims are an estimate of claim adjustment expenses of $78,335, $118,763 and $121,491 in 2008, 2007 and 2006, respectively. Netting out claim adjustment expenses would make accident and health liabilities overstated in 2009, 2008 and 2007 by $145,512, $392,230 and $449,838; respectively.
8. Reinsurance
Liability for future policy benefits is reported before the effects of reinsurance. Reinsurance receivable (including amounts related to insurance liabilities) is reported as an asset. Estimated reinsurance receivable is recognized in a manner consistent with the liabilities related to the underlying reinsurance contracts. Such amounts have been presented in accordance with Statement of Financial Standards No. 113, “Accounting and Reporting for Reinsurance of Short Duration and Long Duration Contracts.” The Company is liable if the reinsuring companies are unable to meet their obligations under the reinsurance agreements.
In 2009 and 2008, BNLAC’s accidental death benefit riders were reinsured 100% through a Bulk ADB reinsurance agreement with Optimum Re. Optimum Re was rated “A-“(Excellent) by AM Best Company for 2009.
In 2009 and 2008, BNLAC’s individual life insurance products in excess of $35,000 were reinsured with Optimum Re under an automatic treaty up to $175,000 and under a facultative treaty for amounts over $175,000. Optimum Re was rated “A-“ (Excellent) by AM Best Company for 2009.
BNLAC entered into a quota share reinsurance agreement with Hannover Life Reassurance Company of America for its group life, group accidental death and dismemberment and accidental death and dismemberment without group life plans effective January 1, 2008 whereby Hannover accepts 90% of the risk up to a maximum of $100,000 per life on AD&D and $75,000 on group life. Hannover was rated “A” (Excellent) by AM Best Company for 2009.
8. Reinsurance (continued)
BNLAC entered into a quota share reinsurance agreement with Hannover Life Reassurance Company of America for its accidental death and dismemberment plan including common carrier effective January 1, 2007. The Company retains a 10% quota share up to a maximum of $25,000 for AD&D and Common Carrier combined. Hannover will accept, on an automatic basis, 90% to 100% quota share up to a maximum of $250,000 per life depending on the Company’s retention. Hannover was rated “A” (Excellent) by AM Best .
BNLAC’s Short Term Disability insurance is reinsured under a quota share reinsurance agreement with Union Security Insurance Company, Des Moines, Iowa, (formerly Fortis Benefits Insurance Company of Kansas City, Missouri). The reinsurer is liable for 75% of the risk on each policy. Union Security Insurance Company was rated “A-“ (Excellent) by AM Best Company for 2009.
Group and individual dental is not reinsured due to the economics of the dental insurance business and the small annual maximum liability per policy.
Following is a summary of reinsurance for December 31, 2009, 2008 and 2007:
9. Benefit Plans for Certain Brokers/Agents and Employees
In 1994, the Board of Directors and Shareholders approved the 1994 Brokers and Agents’ Nonqualified Stock Option Plan. This plan was established as an incentive to sales persons of BNLAC. Initially 250,000 shares were available under the plan. The Board of Directors authorized options for an additional 1.75 million shares. The option period may not exceed a term of five years and the duration of the plan was ten years, expiring December 14, 2004.
Of the options granted through December 2004, there were no stock options outstanding at December 31, 2008. The number of options expiring or forfeited were 100,825 and 122,675 in 2008 and 2007, respectively. There were 9,600 options exercised in 2008 and 12,475 options exercised in 2007. The remaining options expired in 2008. The options do not have a dilutive effect on earnings per share.
9. Benefit Plans for Certain Brokers/Agents and Employees (continued)
In March 2002, the Board of Directors approved the 2002 Non-Director, Non-Executive Stock Option Plan, subject to any necessary authorizations from any regulatory authority. The plan is intended to assist the Company in attracting and retaining individuals of outstanding ability and to promote concurrence of their interests with those of the Shareholders of the Company. The Company granted options for 116,000 shares prior to 2005. No options were granted in 2009, 2008 and 2007. The fair value of any options granted is estimated using a binomial method as prescribed in ASC 205. There were 55,550 options outstanding at December 31, 2009. The estimated weighted average remaining life of the options is 3.6 years and weighted average exercise price is $.69. The options do not have a dilutive effect on earnings per share at this time, but may have such an effect in the future. See Note 1 of the financial statements.
In 2001, the Board of Directors approved the 2001 Incentive Bonus Plan for the benefit of certain Officers of the Company. The plan provides for monthly payment of cash bonuses based on 12% of consolidated pre-tax operating income. Bonus expense was $409,828, $355,359 and $511,562 under this plan for 2009, 2008 and 2007, respectively.
The Company has an Employee Pension Plan that is a qualified retirement plan under the Internal Revenue Code. All employees who have attained age 21 and have completed one year of service are eligible to contribute. Employer contributions are discretionary. The Company contributed $66,566, $65,896 and $64,795 in 2009, 2008 and 2007, respectively.
10. Concentrations
The majority of the Company’s premium income and gross income continues to be generated by the dental insurance products. This concentration makes the Company increasingly dependent upon the success of this block of business and any economic factors and risks unique to dental insurance. See Note 1. The Company has no distinctly reportable business segments.
11. Change in Accounting Estimate
Based on claims experience in 2009 and 2008, the estimate of claims liability at December 31, 2008 was overstated by approximately $146,000 and $390,000 at December 2007 as described in Note 7. The change in estimate of this liability has contributed a corresponding decrease in claims expense in 2009 and 2008.
12. Subsequent Events
In the second quarter of 2009 management adopted ASC 855 and has evaluated subsequent events through March 30, 2010, the date of issuance of the 10-K. In the first quarter of 2010, the board of directors voted to pay a $.10 dividend per share to its shareholders of record as of January 29, 2010, which required approximately $1,513,000 of funding.
On March 23, 2010, the President signed into law the Patient Protection and Affordable Care Act and on March 30, 2010, the President signed into law the Health Care and Education Reconciliation Act of 2010. Management anticipates that these laws and the regulations to be promulgated thereunder will have an impact, possibly adverse, on the Company and its financial condition. Management is and will continually be evaluating any such impact.
13. Unaudited Quarterly Results of Operations
The summary unaudited quarterly results of operations were as follows:
Item 15(d) - Schedule II, Condensed Financial Information of Registrant
BNL Financial Corporation (Parent Company)
Balance Sheets
Item 15(d) - Schedule II, Condensed Financial Information of Registrant
BNL Financial Corporation (Parent Company)
Statement of Operations
Item 15(d) - Schedule II, Condensed Financial Information of Registrant
BNL Financial Corporation (Parent Company)
Statements of Cash Flows