The Company's domestic operations concentrate marketing efforts on federal employees, seniors, and specific employee groups in private industry, as well as individual sales. The products marketed are annuities, universal life insurance, and traditional life insurance, which includes both term and whole life products. The majority of products sold are the Company's annuities, which include single and flexible premium deferred annuities, single premium immediate annuities, and equity-indexed annuities. Most of these annuities can be sold as tax qualified or nonqualified products.
National Western markets and distributes its domestic products primarily through independent marketing organizations (IMOs). These IMOs assist the Company in recruiting, contracting, and managing agents. The Company currently has over 65 IMOs contracted for sales of life and annuity products.
International production is from independent contractor broker-agents, many of whom have been submitting policy applications to National Western for 20 or more years. The Company continues to expand the countries from which it will accept applications to include those of South American and Pacific Rim countries which have higher growth potential than others.
There are inherent risks of accepting international applications that are not present within the domestic market. The risks involved with international business are reduced substantially by the Company in several ways. As previously described, the Company accepts applications from a specific niche group, which is foreign nationals in upper socioeconomic classes who have substantial financial resources. This targeted customer base coupled with National Western's conservative, yet competitive, underwriting practices have historically resulted in claims experience similar to that in the United States. The Company also minimizes exposure to foreign currency risks, as almost all foreign policies require payment of premiums and claims in United States dollars. Finally, the Company's experience with the international products and its strong contractual agreements with its independent broker- agent relationships, which in many cases exceed 20 years, help minimize risks and problems when issuing products to foreign nationals.
Investments in debt and equity securities are classified and reported as either securities held to maturity or securities available for sale. The Company does not maintain a portfolio of trading securities. The reporting category chosen for the Company's securities investments depends on various factors including the type and quality of the particular security and how it will be incorporated into the Company's overall asset/liability management strategy. At December 31, 2000, approximately 26% of the Company's total debt and equity securities, based on fair values, were classified as securities available for sale. These holdings provide flexibility to the Company to react to market opportunities and conditions and to practice active management within the portfolio to provide adequate liquidity to meet policyholder obligations and other cash needs.
Securities that are not classified as held to maturity are reported as securities available for sale. These securities may be sold if market or other measurement factors change unexpectedly after the securities were acquired. For example, opportunities arise that allow the Company to improve the performance and credit quality of the investment portfolio by replacing an existing security with an alternative security while still maintaining an appropriate matching of expected maturities of assets and liabilities. Examples of such improvements are as follows: improving the yield earned on invested assets, improving the credit quality, changing the duration of the portfolio, and selling securities in advance of anticipated calls or other prepayments. Securities available for sale are reported in the Company's financial statements at fair value. Any unrealized gains or losses resulting from changes in the fair value of the securities are reflected in accumulated other comprehensive income or loss.
The Company maintains a diversified debt securities portfolio which consists of various types of fixed income securities including primarily corporate, mortgage-backed securities, and public utilities. Investments in mortgage-backed securities include primarily U.S. government agency pass-through securities and collateralized mortgage obligations (CMOs). As of December 31, 2000, 1999, and 1998, the Company's debt securities portfolio consisted of the following mix of securities based on amortized cost:
An important aspect of the Company's investment philosophy is managing the credit quality of its investments in debt securities. Thorough credit analysis is performed on potential corporate investments including examination of a company's credit and industry outlook, financial ratios and trends, and event risks. In the past few years, credit analysis has become one of the most critical activities of the Company's portfolio management.
National Western continues to follow its conservative investment philosophy by minimizing its holdings of below investment grade debt securities, as these securities generally have greater default risk than higher rated corporate debt. These issuers usually are more sensitive to adverse industry or economic conditions than are investment grade issuers. The Company's holdings of below investment grade debt securities, which are lower than industry averages, are summarized below.
During 2000, the Company transferred eight securities from held to maturity to securities available for sale due to significant deterioration of the issuing companies' creditworthiness. Based on the financial condition of the issuing companies, complete recovery of National Western's investments in several of the securities is not expected. As a result, the Company recorded other than temporary impairment writedowns for these securities at the time of the transfer. The writedowns were reflected as realized losses on investments for the year ended December 31, 2000. Details of the securities at the time of transfer are provided below. Additional unrealized losses totaling $11,041,000 resulting from transferring these securities to available for sale, net of the effects of taxes and deferred policy acquisition costs, were recorded as a component of accumulated other comprehensive loss.
Of the four securities transferred during the first quarter of 2000, one of the securities was deemed to have had an other than temporary impairment in 1999. As a result, the Company recorded a realized loss totaling $3,492,000 related to the security for the year ended December 31, 1999. Another one of these securities continued to experience credit deterioration subsequent to this transfer in the first quarter of 2000. Accordingly, the Company determined that a complete recovery of the investment was no longer expected and, therefore, recorded a realized loss totaling $5,163,000 for this security in the fourth quarter of 2000.
The Company is closely monitoring the previously described securities as well as its other below investment grade holdings. While additional losses are not currently anticipated based on the existing status and condition of these securities, continued credit deterioration of some securities is possible, which may result in further writedowns.
Although there is loss exposure for below investment grade debt securities, the Company is firmly committed to minimizing credit risks and maintaining a high quality portfolio. This commitment is reflected in the high average credit rating of the Company's portfolio. In the table below, investments in debt securities are classified according to credit ratings by Standard and Poor's (S&P), a nationally recognized statistical rating organization (NRSRO). If securities were not rated by S&P, the equivalent rating of another NRSRO or the National Association of Insurance Commissioners was used.
As indicated above, the Company's holdings of mortgage-backed securities are also subject to prepayment risk, as well as extension risk. Both of these risks are addressed by specific portfolio management strategies. The Company has substantially reduced both prepayment and extension risks by investing primarily in collateralized mortgage obligations, which have more predictable cash flow patterns than pass-through securities. These securities, known as planned amortization class I (PAC I) CMOs, are designed to amortize in a more predictable manner than other CMO classes or pass-throughs. Using this strategy, the Company can more effectively manage and reduce prepayment and extension risks, thereby helping to maintain the appropriate matching of the Company's assets and liabilities.
The amortized cost and estimated fair values of investments in debt securities at December 31, 2000, 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.
As reflected above, changes in interest rates typically have a significant impact on the market values of the Company's debt securities. The Company would expect similar results in the future from any significant upward or downward movement in market rates. While the decrease in unrealized losses is partially due to the realization of certain losses through other than temporary impairment writedowns as previously described, the substantial decrease in unrealized losses during 2000 is due to a significant decrease in interest rates. Market interest rates of the ten-year U.S. Treasury bond declined approximately 130 basis points from year-end 1999. However, because the majority of the Company's debt securities are classified as held to maturity, which are recorded at amortized cost, changes in market values have relatively small effects on the Company's financial statements. Also, the Company has the intent and ability to hold these securities to maturity, and it is unlikely that sales of such securities would be required, which would realize market gains or losses.
Mortgage and other loans were modeled by discounting scheduled cash flows through the scheduled maturities of the loans, starting with interest rates currently being offered for similar loans to borrowers with similar credit ratings. Policy loans were modeled by discounting estimated cash flows using U.S. Treasury Bill interest rates as the base rates at December 31, 2000. The estimated cash flows include assumptions as to whether such loans will be repaid by the policyholders or settled upon payment of death or surrender benefits on the underlying insurance contracts. As a result, these assumptions incorporate both Company experience and mortality assumptions associated with such contracts.
In addition to the securities analyzed above, the Company invests in index options which are derivative financial instruments used to hedge the equity return component of the Company's equity-indexed annuities. The values of these options are primarily impacted by equity price risk, as the options' fair values are dependent on the performance of the S&P 500 Composite Stock Price Index (S&P 500 Index). However, increases or decreases in investment returns from these options are substantially offset by corresponding increases or decreases in amounts paid to equity-indexed annuity policyholders, subject to minimum guaranteed policy interest rates.
The Company's market risk liabilities, which include policy liabilities for investment annuity and supplemental contracts, are managed for interest rate risk through cash flow testing as previously described. As part of this cash flow testing, the Company has analyzed the potential impact on net earnings of both a 100 basis point increase and decrease in the U.S. Treasury yield curve as of December 31, 2000. A 100 basis point interest rate decline would decrease net earnings for 2001 by approximately $325,000, based on the Company's projections. A 100 basis point increase in interest rates would increase net earnings by approximately $275,000, based on the Company's projections. These estimated impacts to earnings are net of tax effects determined at a tax rate of 35% and are also net of the estimated effects of deferred policy acquisition costs.
The Company seeks to minimize the credit and default risk in its mortgage loan portfolio through strict underwriting guidelines and diversification of underlying property types and geographic locations. In addition to being secured by the property, mortgage loans with leases on the underlying property are often guaranteed by the lessee, in which case the Company approves the loan based on the credit strength of the lessee. This approach has proven to result in higher quality mortgage loans with fewer defaults.
The Company's direct investments in real estate are not a significant portion of its total investment portfolio. Many of these investments were acquired through mortgage loan foreclosures. However, the Company also participates in several real estate joint ventures and limited partnerships. The joint ventures and partnerships invest primarily in income-producing retail properties. These investments have typically enhanced the Company's investment portfolio returns.
The Company held net investments in mortgage loans totaling $195,665,000 and $183,902,000, or 6.1% and 5.7% of total invested assets, at December 31, 2000 and 1999, respectively. The loans are real estate mortgages, substantially all of which are related to commercial properties and developments and have fixed interest rates.
The diversification of the mortgage loan portfolio by geographic region of the United States and by property type as of December 31, 2000 and 1999, was as follows:
The Company currently places all loans past due three months or more on nonaccrual status, thus recognizing no interest income on the loans. At December 31, 2000 and 1999, the Company had mortgage loan principal balances on nonaccrual status of $2,983,000 and $3,014,000, respectively. Also, the Company will at times restructure mortgage loans under certain conditions which may involve changes in interest rates, payment terms, or other modifications. The Company had mortgage loan principal balances with restructured terms totaling $7,749,000 and $8,572,000 at December 31, 2000 and 1999, respectively. For the years ended December 31, 2000 and 1999, the reductions in interest income due to nonaccrual and restructured mortgage loans totaled approximately $309,000 and $273,000, respectively.
The contractual maturities of mortgage loan principal balances at December 31, 2000, are as follows:
The Company owns real estate that was acquired through foreclosure and through direct investment totaling approximately $14,683,000 and $11,388,000 at December 31, 2000 and 1999, respectively. This small concentration of properties represents less than one percent of the Company's entire investment portfolio. The real estate holdings consist primarily of income-producing properties which are being operated by the Company. The Company recognized operating income on these properties of approximately $1,063,000 and $1,037,000 for the years ended December 31, 2000 and 1999, respectively. The Company does not anticipate significant changes in overall operating results in 2001. Exclusive of the operating results, sales of properties produced realized gains on investments totaling $255,000 and $1,419,000 in 2000 and 1999, respectively.
Consolidated Operating Results: For the year ended December 31, 2000, the Company recorded net earnings of $28,540,000 compared to net earnings of $59,225,000 and $34,893,000 for 1999 and 1998, respectively. Consolidated net earnings for 2000 were significantly lower than 1999 and 1998 due to realized investment losses and the Company's equity-indexed annuity business. The Company recorded realized losses on investments, net of taxes, totaling $12,508,000 for the year ended December 31, 2000. Of the total realized investment losses, $9,536,000 of the losses were due to other than temporary impairment writedowns for debt securities. The majority of the remaining losses were from sales of investments in debt securities. The losses on the sales were realized primarily for tax planning purposes. The decline in the Company's 2000 net earnings was also largely a result of deteriorating stock market conditions during the year, which impacted the Company's equity-indexed annuity business. Because of the declines in the S&P 500 Index during 2000, the Company recorded significant decreases in investment income resulting from realized and unrealized losses on index options, which are used to hedge the equity return component of equity-indexed annuities. The S&P 500 Index decline also resulted in lower interest credited to equity-indexed annuity contracts. However, primarily because of policy liabilities related to minimum guaranteed interest rates, the reduction in annuity contract interest expense was much less than the decline in investment income. In addition to the above items, the Company also experienced higher life insurance benefit claims during 2000 than in the previous two years. Benefit claims were approximately 20% higher in 2000 than 1999. The combination of these results contributed to the lower earnings for 2000.
While earnings for 1999 were significantly higher, earnings for 1998 were abnormally low due to several nonrecurring items, the most significant of which was the bankruptcy settlement of the Company's wholly owned subsidiary, The Westcap Corporation, totaling $14,125,000. This settlement was reflected as a loss from discontinued brokerage operations in 1998. The other nonrecurring items affecting earnings for 1998 include a lawsuit settlement and a pension plan related transaction. Parties involved in the Diffie, et al vs. National Western Life Insurance Company and National Annuity Programs, Inc. class action litigation filed a joint motion in District Court for preliminary approval of a settlement agreement among the parties. This settlement was approved by the Court in January, 1999, and, as a result, the Company paid $5,000,000 to settle the litigation. This amount was accrued in the Company's financial statements in 1998, thereby reducing earnings $3,250,000, after taxes. Also during 1998, the Company transferred pension obligations and administrative responsibilities of its nonqualified defined benefit plan to a pension administration firm. The financial effects of the transaction resulted in additional pension expense in 1998 totaling $1,653,000, net of taxes, as the amount paid upon transfer exceeded the recorded pension liabilities as required for financial reporting purposes. However, as a result of the transfer, substantially all future pension and administrative liabilities and expenses under the plan are now the responsibility of the new firm.
As indicated by the table above, net investment income increased in 1999 from 1998 levels, but then declined substantially in 2000. The large decrease in 2000 is due to declines in fair values of index options totaling $32,268,000 compared to income from these investments totaling $10,719,000 and $8,057,000 in 1999 and 1998, respectively. Index options are derivative financial instruments used to hedge the equity return component of the Company's equity- indexed annuity products, which were first introduced for sale in 1997. Any gains or losses from the sale or expiration of the options, as well as period- to-period changes in fair values, are reflected as net investment income. However, increases or decreases in income from these options are substantially offset by corresponding increases or decreases in amounts paid to equity- indexed annuity policyholders, subject to minimum guaranteed policy interest rates.
The reduction to investment income from index options was due to poor stock market conditions during 2000, more specifically the performance of the S&P 500 Index. Index options are intended to act as hedges to match closely the returns on the S&P 500 Index. With the decline in this index in 2000, the index option values likewise declined. While income from index options was lower, the contract interest expense for the Company's equity-indexed annuities was also substantially lower.
Although income from index options declined, the Company experienced significant growth in income from debt securities, mortgage loans, and other investments. While debt security balances at year-end 2000 and 1999 were comparable, average balances were significantly higher in 2000 than the previous year. This was the primary contributor to the growth in debt securities investment income during 2000. In fact, net cash flow from operations continues to be invested primarily in high quality debt securities as in previous years. However, the Company has increased its investments in mortgage loans over the past two years resulting in additional income from these investments. Mortgage loans totaled $174.9 million at December 31, 1998, and now total over $195 million at year-end 2000. This has helped enhance the Company's overall investment yield while increasing mortgage loan investment income to $18,395,000 for the year ended December 31, 2000, compared to $16,262,000 and $16,943,000 for 1999 and 1998, respectively.
Other investment income was also higher for 2000, totaling $9,253,000 compared to income of $7,501,000 and $7,783,000 for 1999 and 1998, respectively. The majority of this increase is due to profit participation earnings related to other equity-type loans on income producing real estate properties. Although the Company has minimal holdings in these type loans, these investments have been profitable, are related to high quality properties, and are supported by strong borrower guarantees.
Detailed below is the Company's investment performance for 2000, 1999, and 1998. This analysis excludes index options, as these derivative financial instruments are used solely for hedging purposes for the Company's equity- indexed annuity products. Income from the options is intended to offset interest credited to policyholders for the equity return component on these products.
Realized Gains and Losses on Investments: The Company recorded realized losses of $19.2 million in 2000 compared to realized gains of $4.5 million and $2.4 million in 1999 and 1998, respectively. The losses in 2000 consist primarily of other than temporary impairment writedowns for investments in debt securities totaling $14,671,000. The Company records impairment writedowns when a decline in value is considered other than temporary and full recovery of the investment is not expected. Sales of debt securities during 2000, primarily for tax planning purposes, also resulted in realized losses totaling $4,394,000. Additionally, the Company recorded a $420,000 realized loss during 2000 for the writedown in value of a real estate investment property.
Universal Life and Investment Annuity Contract Interest: The Company closely monitors its credited interest rates, taking into consideration such factors as profitability goals, policyholder benefits, product marketability, and economic market conditions. Rates are established or adjusted after careful consideration and evaluation of these factors against established objectives. Average credited rates, calculated based on policy reserves for the Company's universal life and investment annuity business, have generally declined since 1997, which is consistent with declines in market interest rates. However, as previously described for net investment income, market interest rates rose in 1999 and then began to decline again in 2000. As market interest rates fluctuate, the Company's credited interest rates are often adjusted accordingly, while also taking into consideration other factors as described above. Raising policy credited rates can typically have an impact sooner than higher market rates on the Company's investment portfolio yield, making it more difficult to maintain the current interest spread. The difference between yields earned over policy credited rates is often referred to as the interest spread.
Contract interest totaled $137.7 million, $162.3 million, and $158.9 million in 2000, 1999, and 1998, respectively. The increase in 1999 is primarily attributable to interest totaling $20,480,000 and $12,980,000 in 1999 and 1998, respectively, for the Company's equity-indexed annuity products. The substantial decrease in 2000 is related to negative contract interest of $2.9 million, also due to equity-indexed annuities. The decline in the S&P 500 Index during 2000 resulted in the reversal of contract interest previously recognized as the equity-return component of these annuities declined substantially, reducing the amount to be paid to policyholders. As previously described, the Company purchases index options to hedge interest to be credited on these products. The income provided by the index options substantially offsets the interest credited to the policyholders, subject to minimum guaranteed policy interest rates. However, during periods of decline by the S&P 500 Index, index options may produce reductions in investment income, but contract interest expense is also reduced during these periods. Because of the volatility in the equity-indexed annuities and the related hedging program, the Company separately analyzes average credited rates on its other products. Excluding the Company's equity-indexed annuity products, average credited rates for 2000, 1999, and 1998, were 5.47%, 5.51%, and 5.67%, respectively. The Company's interest rate spread has been approximately 2% in recent years, although this spread fluctuates for the reasons previously described above.
Federal Income Taxes: Federal income taxes on earnings from continuing operations for 2000, 1999, and 1998 reflect effective tax rates of 32.9%, 34.1%, and 26.1%, respectively, which are lower than the expected Federal rate of 35%. The 2000 effective tax rate decreased from 1999 and is lower than the Federal rate of 35% primarily due to tax-exempt investment income related to municipal securities and dividends-received deductions on income from stocks. The 1998 effective tax rate is significantly lower due to tax benefits totaling $4,944,000, resulting from the Company's subsidiary brokerage losses. Correspondingly, losses on discontinued operations for 1998 totaling $14,125,000 do not include any tax benefits relating to the brokerage subsidiary. This tax reporting treatment is in accordance with the Company's tax allocation agreement with its subsidiaries. On a consolidated basis, Federal income taxes reflect consistent effective tax rates of 32.9%, 34.1%, and 33.2% for 2000, 1999, and 1998, respectively.
The Company's domestic life insurance operations concentrate marketing efforts on Federal employees, seniors, and specific employee groups in private industry, as well as individual sales. The products marketed are universal life insurance and traditional life insurance, which include both term and whole life products. National Western markets and distributes its domestic products primarily through independent agents and brokers and independent marketing organizations (IMOs). The IMOs also assist the Company in recruiting, contracting, and managing agents as well as providing additional financial resources for product marketing. Geographically, the domestic life insurance operations market products in most of the United States, which encompasses 43 states and the District of Columbia. The states in which the Company does not conduct business are primarily in the northeast and include Connecticut, Delaware, Massachusetts, New Hampshire, New Jersey, New York, and Vermont.
Revenues from domestic life insurance operations include life insurance premiums on traditional type products and revenues from universal life insurance. The Company's current marketing efforts focus more on universal life insurance, and, as a result, revenues from these products continue to increase over traditional products. In fact, traditional life insurance premiums have declined from $10,069,000 in 1998 to $9,460,000 and $8,519,000 in 1999 and 2000, respectively. Because of the Company's emphasis on universal life insurance products, this trend is likely to continue. Revenues from traditional products are simply premiums collected, while revenues from universal life insurance consist of policy charges for the cost of insurance, policy administration fees, and surrender charges assessed during the period. A comparative detail of premiums and contract revenues is provided below:
Other income for 2000, 1999, and 1998 totaled $30,000, $40,000, and $750,000, respectively. The significantly higher income in 1998 was primarily due to proceeds totaling $444,000 received from the U.S. government in 1998 related to previous litigation involving a failed savings and loan institution. The litigation involved the Company's previous investment in bonds of the financial institution and subsequent losses incurred upon its failure. The financial institution had also purchased life insurance from National Western, the cash values of which served as collateral for the bonds.
Amortization of deferred policy acquisition costs totaled $4.3 million, $3.4 million, and $3.0 million for 2000, 1999, and 1998, respectively. These expenses represent the amortization of the costs of acquiring or producing new business, which consist primarily of agents' commissions. The majority of such costs are amortized in direct relation to the anticipated future gross profits of the applicable blocks of business. Amortization is also impacted by the level of policy surrenders.
Other operating expenses were significantly higher in 1998, totaling $10.8 million compared to $9.2 million and $8.6 million in 2000 and 1999, respectively. The higher 1998 expenses are due to increased pension expenses from the transfer of the Company's nonqualified defined benefit plan as previously described and other increases primarily in salaries, agent conventions, and marketing related expenses such as travel and printing costs.
Earnings for the international life insurance operating segment were $6,719,000, $6,798,000, and $6,397,000 for 2000, 1999, and 1998, respectively. Earnings for 2000 and 1999 were relatively comparable, while somewhat higher than 1998 results. Although the Company experienced increases in universal life insurance contract revenues in 2000 and 1999, the higher revenues were tempered by higher policy benefits and universal life insurance contract interest. Although other operating expenses were lower in 2000, amortization of deferred policy acquisition costs increased to a level comparable to 1998. A comparative analysis of results of operations for the Company's international life insurance segment is detailed below:
Policy benefits, which consist primarily of life insurance death claims, were abnormally high in 2000 at $17.5 million compared to $16.5 million and $14.1 million for 1999 and 1998, respectively. As previously described for domestic life insurance operations, mortality claims fluctuate from period to period. These deviations, which can at times be significant, are not uncommon in the life insurance industry. However, as the international block of life insurance in force grows, life insurance death claims will naturally trend higher. Additionally, the Company utilizes reinsurance to help minimize its exposure to adverse mortality experience. The Company's general policy is to reinsure amounts in excess of $200,000 on the life of any one individual.
Other operating expenses totaled $8.3 million, $9.4 million, and $9.6 million in 2000, 1999, and 1998, respectively. The higher 1998 expenses are attributable to the same reasons as previously described for domestic life insurance operations. Additionally, expenses for 2000 were lower, which were impacted partially due to a new cost allocation study between segments and investment related activities.
Earnings for the annuity operating segment were $25,059,000, $38,068,000, and $27,508,000 for 2000, 1999, and 1998, respectively. Earnings for 2000 were significantly lower due to the Company's equity-indexed annuity business. As described in more detail later in this section, segment earnings for annuity operations declined largely as a result of deteriorating stock market conditions during 2000 and the corresponding impact on equity-indexed annuity products and index options used to hedge the equity return component of these annuities. Earnings were reduced approximately $5 million due to this block of business. Earnings for 1999 were significantly higher than 2000 and 1998 primarily due to income resulting from a lawsuit settlement totaling $5,513,000, net of taxes. Earnings for 1999 were also enhanced from increases in net investment income over annuity contract interest. Additionally, 1998 earnings were negatively impacted by a class action lawsuit settlement totaling $3,250,000, net of taxes. A comparative analysis of results of operations for the Company's annuity segment is detailed below:
Other income was relatively insignificant in 2000 and 1998, totaling $317,000 and $270,000, respectively. However, other income for 1999 totaled $8,863,000, which includes $8.5 million in income relating to litigation involving an independent marketing organization. As more fully described in Note 9, Commitments and Contingencies, in the accompanying financial statements, National Western Life Insurance Company, National Annuity Programs, Inc. (NAP), and others executed a settlement agreement for a pending declaratory judgment lawsuit. NAP was an independent marketing general agency under contract with the Company that hired and supervised agents marketing annuity products on behalf of the Company. The contract was entered into in 1983 and amended in 1994. The Company alleged that during the course of the contract NAP violated its terms and conditions, among other things. By the settlement, each party dismisses with prejudice all claims asserted by them in the lawsuit. The Company was also released from any claims for any funds and other rights arising under the contract. Additionally, the Company paid in 1999 all valid claims for unpaid commissions to sub-agents of NAP who wrote business for the Company under the contract.
Annuity contract interest for 2000, 1999, and 1998 totaled $112.4 million, $138.6 million, and $135.5 million, respectively. While general increases in contract interest are expected due to the growth in the size of the annuity block of business, fluctuations in interest are due to equity-indexed annuities in force and the higher or lower credited rates that may be paid on these policies. Increases in 1999 and 1998 are largely due to increases in annuities in force from sales of equity-indexed annuities and higher credited interest that were paid on these policies. Contract interest on equity- indexed annuities totaled $20,480,000 and $12,980,000 in 1999 and 1998, respectively. However, contract interest on equity-indexed annuities in 2000 was actually a negative $2.9 million due to the decline in the S&P 500 Index during the year. This decline resulted in the reversal of contract interest previously recognized as the equity-return component of these annuities decreased substantially, reducing the amount to be paid to policyholders.
The impact of these equity-indexed annuity issues decreased annuity operations earnings for 2000 by approximately $5 million, net of taxes. While results for 2000 were reduced by this block of business, the Company's equity-indexed annuity products are long-term policies with contractual periods of either nine or fifteen years. The Company routinely analyzes the profitability of its equity-indexed annuity products under numerous economic scenarios, including both positive and negative equity market conditions. Although earnings may not be level or constant from period to period for this product due to timing of market conditions and policy liability reserving methods, the Company anticipates the equity-indexed annuities will be profitable over the long-term contractual periods of the policies.
Amortization of deferred policy acquisition costs represents the amortization of the costs of acquiring or producing new business, primarily agents' commissions, the majority of which are amortized in direct relation to the anticipated future gross profits of the applicable blocks of business. Amortization is also impacted by the level of policy surrenders. Amortization for 2000, 1999, and 1998 totaled $28.2 million, $21.1 million, and $21.6 million, respectively. The increase in amortization in 2000 is related to increases in single-tier annuity surrenders as previously described. Although slowing in the fourth quarter, the Company experienced significantly higher policy surrenders for certain products in 2000. As a result, amortization of deferred policy acquisition costs was higher for 2000 due to effects from the Company's periodic refinements to its actuarial assumptions. The higher amortization also tempered the impact of higher surrender charge revenues produced by the increased policy surrenders.
National Western's primary business encompasses its domestic and international life insurance operations and its annuity operations. However, National Western also has small real estate, nursing home, and other investment operations through the following wholly owned subsidiaries: NWL Investments, Inc., NWL Properties, Inc., NWL 806 Main, Inc., NWL Services, Inc., and NWL Financial, Inc. Also, during January, 1999, the Company's wholly owned subsidiary, The Westcap Corporation, completed its Chapter 11 bankruptcy reorganization. With the reorganization complete, National Western transferred its investment real estate holdings to Westcap, and the subsidiary is now operating as a real estate management company. Earnings for these other operations totaled $3,146,000, $3,238,000, and $2,224,000 for 2000, 1999, and 1998, respectively. Earnings increased beginning in 1999 primarily due to income from the real estate properties that were transferred from National Western to Westcap.
During the first quarter of 2000, the Company acquired a nursing home facility through an affiliated limited partnership. The acquisition, which totaled approximately $6.6 million, was made by a newly formed limited partnership, the partners of which are downstream subsidiaries of National Western. The nursing home facility, which opened in late July, 2000, is operated by an affiliated limited partnership, and the financial operating results are consolidated with those of the Company. Daily operations and management of the nursing home are performed by an experienced management company through a contract with the limited partnership. Operating losses, before taxes, from nursing home operations and related activities totaled approximately $850,000 for the period from inception to December 31, 2000. These losses were not unexpected given initial start-up costs and issues during the first year of operations. The Company expects profitable operations in 2001.
A primary liquidity concern for the Company's insurance operations is the risk of early policyholder withdrawals. Consequently, the Company closely evaluates and manages the risk of early surrenders or withdrawals. The Company includes provisions within annuity and universal life insurance policies, such as surrender charges, that help limit early withdrawals. The Company also prepares cash flow projections and performs cash flow tests under various market interest rate scenarios to assist in evaluating liquidity needs and adequacy. The Company currently expects available liquidity sources and future cash flows to be adequate to meet the demand for funds.
In the past, cash flows from the Company's insurance operations have been more than adequate to meet current needs. Cash flows from operating activities were $139 million, $118 million, and $131 million in 2000, 1999, and 1998, respectively. The lower cash flow in 1999 is largely a result of lawsuit and bankruptcy settlement payments as described in detail in Note 9, Commitments and Contingencies, in the accompanying financial statements. Net cash flows from the Company's deposit product operations, which include universal life and investment annuity products, totaled $47 million in 1999 and $113 million in 1998. However, these operations incurred net cash outflows in 2000 totaling $98 million. The negative cash flow in the Company's deposit product operations is primarily due to abnormally high annuity surrenders during 2000. While increased surrenders may continue, this high rate of surrenders has slowed significantly during the fourth quarter of 2000. Premium deposits were also lower in 2000 due to lower equity-indexed annuity sales, which have been affected by the volatility and poor performance of the stock market. The Company primarily used cash generated from operations and some short-term borrowings to manage this negative cash flow.
Stockholders' equity totaled $500.1 million at December 31, 2000, reflecting an increase of $24.6 million from 1999. The increase in capital is primarily from net earnings of $28.5 million, reduced by net unrealized losses on investment securities totaling $4.9 million. The decline in values of investment securities is a result of lower market values of the Company's holdings in its securities available for sale portfolio. Book value per share at December 31, 2000, was $142.71, reflecting a 5.1% increase for the year.
In June, 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." In June, 1999, SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," was issued deferring SFAS No. 133, which will now be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The statement defines several designations of derivatives based on the instrument's intended use and specifies the appropriate accounting treatment for changes in the fair value of the derivative based on its resulting designation. In June, 2000, the FASB also issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," which amends SFAS No. 133 for certain specifically identified derivative instruments and hedging activities. This statement is to be adopted concurrently with SFAS No. 133.
As part of the implementation of SFAS No. 133, companies may reconsider the appropriateness of classifications of debt securities in the following categories: held to maturity, available for sale, and trading. Companies may need to reallocate security holdings in light of the new accounting requirements. Therefore, at the date of adoption of SFAS No. 133, an entity may transfer securities held to maturity into the available for sale category or the trading category. Such transfers from the held to maturity category at the date of initial adoption will not call into question a company's intent to hold other debt securities to maturity in the future. National Western has reviewed its current classification of securities and made the decision to transfer $294 million of debt securities at amortized cost from securities held to maturity to securities available for sale. The net unrealized holding losses on the transferred securities totaled $5.1 million, after effects of deferred taxes and deferred policy acquisition costs. This adjustment will be reflected in the Company's financial statements in other comprehensive income as a cumulative effect of a change in accounting principle as of January 1, 2001.
The Company also made the determination to transfer debt securities with fair values totaling $112 million from securities available for sale to securities held to maturity as of January 1, 2001. The transfers were recorded at fair values, and the unrealized holding loss totaling $647,000 at the date of transfer will continue to be reported in accumulated other comprehensive income or loss but will be amortized to interest income over the remaining life of the security. The unrealized loss is net of effects of deferred taxes and deferred policy acquisition costs. The transfer of securities from available for sale to held to maturity will have no effect on the net earnings of the Company.