The Westcap Corporation, a wholly owned subsidiary of National Western, owns the Company’s principal office location in Austin, Texas and two buildings adjacent to it, totaling approximately 93,000 square feet that are leased and utilized by the Company. The Company’s affiliate, Regent Care Building, LP, owns a 65,000 square foot building in Reno, Nevada, which is leased and utilized by another of the Company’s affiliates, Regent Care Operations, LP, for use in its nursing home operations. The Company’s subsidiary, Regent Care San Marcos A-3 LP, owns a 74,000 square foot building in San Marcos, Texas, which is also used in nursing home operations. Lease costs and related operating expenses for facilities of the Company’s subsidiaries are currently not significant in relation to the Company’s Consolidated Financial Statements. The intercompany lease costs related to The Westcap Corporation and the nursing homes have been eliminated for consolidated reporting purposes.
Management’s discussion and analysis of financial condition and results of operations (“MD&A”) of National Western Life Group, Inc. (formerly National Western Life Insurance Company and subsidiaries) for the three years ended December 31, 2016 follows. This discussion should be read in conjunction with the Company’s Consolidated Financial Statements and related notes beginning on page 82 of this report.
National Western provides life insurance products on a global basis for the savings and protection needs of policyholders and annuity contracts for the asset accumulation and retirement needs of contract holders both domestically and internationally. The company accepts funds from policyholders or contract holders and establishes a liability representing future obligations to pay the policy or contract holders and their beneficiaries. To ensure the company will be able to pay these future commitments, the funds received as premium payments and deposits are invested in high quality investments, primarily fixed income securities.
The Company's business is generally aided by an economic environment experiencing growth, whether moderate or vibrant, characterized by metrics which indicate improving employment data and increases in personal income growth. The results of last Fall's election have created a degree of optimism in the marketplace. Business confidence has picked up believing that an environment fueling global demand and growth will emerge and that suffocating tax and regulatory burdens will diminish. The Conference Board recently announced that its consumer confidence index rose to its highest level since July 2001. Both consumers' assessment of current conditions and their expectations for the future improved as part of this measure.
Regulatory change will demand the attention of the industry. The Department of Labor ("DOL") fiduciary rule continues to be an intensely debated issue and the ultimate outcome, pending White House Administration deliberations and legal actions, remains uncertain. The DOL fiduciary rule imposes onerous and, what many consider to be, unworkable conditions which will serve to limit interactions of insurers and their contracted agents with existing or prospective customers who might otherwise be interested in life insurance and annuity products as solutions for their financial needs. Recently, the DOL proposed a 60-day delay in the initial compliance date in order to take additional time to examine the requirements of the rule before its required implementation. This delay was in response to a memorandum from President Trump to review and possibly rescind the rule.
Our operating strategy continues to be to maintain capital levels substantially above regulatory and rating agency requirements. Our business model is predicated upon steady growth in invested assets while managing the block of business within profitability objectives. A key premise of our financial management is maintaining a high quality investment portfolio, well matched in terms of duration with policyholder obligations, that continues to outperform the industry with respect to adverse impairment experience. This discipline enables the Company to sustain resources more than adequate to fund future growth and absorb abnormal periods of cash outflows.
Future Policy Benefits. Because of the long-term nature of insurance contracts, the Company is liable for policy benefit payments many years into the future. The liability for future policy benefits represents estimates of the present value of the Company’s expected benefit payments, net of the related present value of future net premium collections. For traditional life insurance contracts, this is determined by standard actuarial procedures, using assumptions as to mortality (life expectancy), morbidity (health expectancy), persistency, and interest rates, which are based on the Company’s experience with similar products. The assumptions used are those considered to be appropriate at the time the policies are issued. An additional provision is made on most products to allow for possible adverse deviation from the assumptions assumed. For universal life and annuity products, the Company’s liability is the amount of the contract’s account balance. Account balances are also subject to minimum liability calculations as a result of minimum guaranteed interest rates in the policies. While management and National Western actuaries have used their best judgment in determining the assumptions and in calculating the liability for future policy benefits, there is no assurance that the estimate of the liabilities reflected in the financial statements represents the Company’s ultimate obligation. In addition, significantly different assumptions could result in materially different reported amounts. A discussion of the assumptions used to calculate the liability for future policy benefits is reported in Note 1, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements.
Universal life and annuity contract revenues - Revenues for universal life and annuity contract charges increased slightly in 2016 compared to 2015 primarily due to higher surrender charge revenue from terminated policies as shown below. Revenues for universal life and annuity products consist of policy charges for the cost of insurance, administration charges, and surrender charges assessed against policyholder account balances, less reinsurance premiums as depicted in the following table.
Surrender charges assessed against policyholder account balances upon withdrawal were $44.8 million in 2016 compared to $41.3 million in 2015 and $39.1 million in 2014. While the Company earns surrender charge income that is assessed upon policy terminations, the Company’s overall profitability is enhanced when policies remain in force and additional contract revenues are realized and the Company continues to make an interest rate spread equivalent to the difference it earns on its investment and the amounts that it credits to policyholders. Policy lapse rates by line of business in 2016 for domestic life insurance and annuities were generally consistent with those experienced in 2015. The higher surrender charge income recognized in 2016 over 2015 and 2014 levels reflects an increase in the international life insurance lapse rate, most noticeably in the countries from which the Company ceased accepting applications from residents in the fourth quarter of 2015. Surrender charge income recognized is also dependent upon the duration of policies at the time of surrender (i.e. later duration policy surrenders have lower surrender charges assessed and earlier policy surrenders have a higher surrender charge assessed).
The growth in domestic life insurance sales the past several years has been driven principally by the sale of single premium life insurance products. In 2013, the Company began deferring the premium load associated with these products and spreading it over future income periods. The amounts shown above as "Other charges" represent the net of current year deferrals of premium loads against previously capitalized amounts being amortized into revenue. During 2016, the amount of amortization of deferred premium loads overtook current period deferrals.
Traditional life premiums - Traditional life premiums have been level over the past three years. Traditional life insurance premiums for products such as whole life and term life are recognized as revenues over the premium-paying period. The Company’s life insurance sales focus has been primarily centered around universal life products. Universal life products, especially the Company’s equity-index universal life products, which offer the opportunity for consumers to acquire life insurance protection and receive credited interest linked in part to an outside market index such as the S&P 500 Index®, have been more popular product offerings in the Company’s markets. The majority of traditional life premiums reside in the Company's international life segment.
The Company’s new mortgage loan activity has been relatively low in recent years given the low level of rates and the higher level of risk associated with commercial properties in this economic environment. While investment income associated with mortgage loans in 2016 in the above table does not reflect it, the volume of new mortgage loan originations during 2016 increased substantially from prior year levels. Mortgage loan investment income in 2015 was at a slightly higher level due to incremental contributions from loan prepayment fees and profit participation receipts during the year. Policy loan and other invested asset balances outstanding have remained relatively stable over the past few years.
The decline in average invested asset yield, excluding derivatives, from 2014 to 2015 and to 2016 is due to the Company obtaining lower yields on newly invested cash inflows. As described above, the Company invests substantially all of its net cash flows in debt securities whose new money yields have remained below the weighted average portfolio yield. The pattern in average invested asset yield, including derivatives, incorporates increases and decreases in the fair value of index options purchased by the Company to support its fixed-index products. Fair values of the purchased call options recorded net gains in 2016 and 2014 and a net loss in 2015 corresponding to the movement in the S&P 500 Index® during these periods (the primary index the Company's fixed-index products employ). Refer to the derivatives discussion following this section for a more detailed explanation.
Gains and losses from index options are substantially due to changes in equity market conditions. Index options are intended to act as hedges to match the returns on the product’s underlying reference index and the rise or decline in the index relative to the index level at the time of the option purchase which causes option values to likewise rise or decline. As income from index options fluctuates with the underlying index, the contract interest expense to policyholder accounts for the Company’s fixed-index products also fluctuates in a similar manner and direction. During 2016 and 2014, the reference indices increased and the Company recorded each year an overall gain from index options with a corresponding increase in contract interest expense in an amount relative to the gains recorded. In 2015, the reference indices decreased and an overall loss from index options was incurred and contract interest expense similarly declined.
Net realized investment gains (losses) - Realized gains (losses) on investments include proceeds on bond calls and sales as well as impairment write-downs on investments in debt and equity securities and real estate. The net investment gains reported in 2016 consisted of gross gains of $13.3 million, primarily from calls of debt securities, offset by gross losses of $0.2 million, which include no other-than-temporary impairment losses.
Debt security impairments in 2014 pertain to write-downs on asset-backed securities whose cash flows and fair values did not support the amortized cost basis at which the instruments were recorded in the Consolidated Financial Statements.
Life and other policy benefits - Life and other policy benefits include death claims of $31.3 million, $38.2 million and $31.7 million for 2016, 2015 and 2014, respectively. While death claim amounts are subject to variation from period to period, the Company’s mortality experience has generally been consistent with or better than its product pricing assumptions. Mortality exposure is managed through reinsurance treaties under which the Company's retained maximum net amount at risk on any one life is capped at $500,000.
During 2016, the Company unlocked its DPAC balance multiple times. These unlocking adjustments were associated with: (1) favorable mortality in the Domestic Life insurance segment resulting in an $8.2 million increase to the DPAC balance (and decrease to amortization expense), (2) International Life insurance segment favorable mortality, increased cost of insurance charges that had been implemented, and higher lapse assumptions for policies associated with residents in "disengaged countries" (countries which the Company ceased accepting applications from residents in 2015) collectively increasing DPAC balances by $7.3 million (and decreasing amortization expense), (3) updating surrender and annuitization rates on indexed, single tier, and two tier annuities which decreased DPAC balances by $3.7 million (and increased amortization expense), and (4) updating DPAC future profit projections for universal life insurance riders which had not been previously included in software models which resulted in increasing DPAC balances by $2.1 million (and decreasing amortization expense). The fourth unlocking was done during the quarter ended December 31, 2016.
True-up adjustments are recorded quarterly and the adjustments in 2016, 2015 and 2014 relate to changes in expense ratios, partial surrender rates, mortality rates, credited interest rates and earned rates for the current year’s experience. The true-up adjustments for the life insurance lines of business were positive (decrease to amortization expenses) during these periods, whereas the true-up adjustments for the annuity line of business were negative in these same periods incrementally adding to amortization expense.
Contract interest including fixed-index products also encompasses the performance of the index options associated with the Company's fixed-index products. As previously noted, the market performance of these derivative features resulted in net realized and unrealized gains (losses) in 2016, 2015 and 2014 of $28.4 million, $(61.8) million and $68.6 million, respectively. In 2016, this figure was comprised of unrealized gains totaling $92.6 million offset by realized losses of $64.2 million.
The Company unlocked its deferred sales inducement balance in 2016 associated with its annuity segment for surrender and annuitization rate changes as noted in the discussion on deferred policy acquisition costs. The effect of the prospective unlocking was to decrease the deferred sales inducement balance by $1.7 million (increasing contract interest expense). The Company also unlocked its deferred sales inducement balance in 2015 associated with its annuity segment for future expense assumptions pertaining to product development override costs (renewal trail commission arrangements). The effect of the prospective unlocking was to decrease the deferred sales inducement balance by $1.8 million which increased contract interest expense by the same amount. No unlocking adjustments were made in 2014.
General insurance expenses include expenditures for software and amortization of previously capitalized information technology
of this system therefore commenced in 2016 and increased overall information technology depreciation and amortization expense to $8.6 million in 2016 compared to $3.3 million in 2015. The policy administrative system amortization extends over seven years.
Nursing home expenses reflect the operations of the Company's two facilities in Reno, Nevada and San Marcos, Texas. The lower expense level in 2016 compared to the prior two years corresponds with decreased revenues from lower census figures and the resultant cost containment measures undertaken.
Compensation expenses include share-based compensation costs for the Company's stock option plans related to outstanding vested and nonvested stock options and stock appreciation rights (SARs). These costs move in tandem with the number of stock options and SARs outstanding as well as the market price of the Company's Class A common share, the result of marking the stock options and SARs to fair value under the liability method of accounting. Consequently, the related expense amount can vary positively or negatively in any given period. For the three years shown, share-based compensation expense totaled $7.9 million in 2016, $(0.9) million in 2015 and $4.4 million in 2014. The expense increase in 2016 reflects an increase in the Company's Class A common share price from $251.94 at December 31, 2015 to $310.80 at December 31, 2016. In addition, during 2016 there were 14,643 SARs granted to officers of National Western. No awards of stock options or SARs were granted in 2015 and 2014. The negative share-based compensation expense in 2015 reflects of decrease in the Company's Class A common share value at December 31, 2015 from the value at December 31, 2014 of $269.25.
Premium dollars collected on universal life products are not reflected as revenues in the Company's Consolidated Statements of Earnings in accordance with GAAP. Actual domestic universal life premiums collected are detailed below.
During the past several years the Company has achieved some success in growing its domestic life insurance business. Sales have been substantially weighted toward single premium policies which do not have much in the way of recurring premium payments. These products target wealth transfer strategies involving the movement of accumulated wealth in alternative investment vehicles, including annuities, into life insurance products. As a result, renewal premium levels have not been exhibiting a corresponding level of increase.
Life and policy benefits for a smaller block of business are subject to variation from period to period. Claim activity during 2016 was lower than in 2015 and compared more favorably to historical trends. While the number of incurred claims in 2016 declined 12% from the prior year, the average net claim amount increased from $22,600 to $24,800. The low face amount per claim reflects the older block of domestic life insurance policies sold which were final expense type products (i.e. purchased to cover funeral costs). The increase in the average net claim amount reflects claims from more recent policy sales (single premium wealth transfer products) which have much higher face amounts of insurance coverage per policy. The Company's overall mortality experience for this segment has been better than pricing assumptions.
As noted previously in the discussion of results from Consolidated Operations, the Company records true-up adjustments to DPAC balances each period to reflect current policy lapse or termination rates, expense levels and credited rates on policies as compared to anticipated experience with the adjustment reflected in current period amortization expense. To the extent required, the Company may also record unlocking adjustments to DPAC balances. The following table identifies the effects of unlocking and true-up adjustments on domestic life insurance DPAC balances recorded through amortization expense for 2016, 2015 and 2014.
In general, universal life revenues and operating earnings are anticipated to emerge with the amount of international life insurance in force and a steady growth in new sales. Over the past three years, the volume of insurance in force has contracted from $20.0 billion at December 31, 2014 to $19.0 billion at December 31, 2015 and to $17.9 billion at December 31, 2016. Universal life insurance revenues are also generated with the issuance of new business based upon amounts per application and percentages of the face amount (volume) of insurance issued. During 2016, the number of international life policies decreased 23% from the prior year while the volume of insurance issued decreased approximately 24% from the level in 2015. As discussed in Part 1 Item 1. (Business) the Company ceased accepting applications from residents of Brazil and certain other countries during the fourth quarter of 2015 leading to the reduced levels of new business in 2016.
Life and policy benefits primarily consist of death claims on policies. The Company’s clientele for international products are generally wealthier individuals with access to U.S. dollars and quality medical care. Consequently, the amounts of coverage purchased tend to be larger amounts than those for domestic life insurance. In the year ended December 31, 2016, the average face amount of insurance purchased was approximately $336,500, reflecting a level somewhat lower than that of immediately prior years. While life and policy benefit expense for the international life segment reflects the larger policies purchased, mortality due to natural causes is comparable to that in the United States. The Company's maximum risk exposure per insured life is capped at $500,000 through reinsurance. The number of claims reported during 2016 was approximately 4% less than the prior year, and the average net claim (after reinsurance) decreased from $168,700 to $137,900. Measured over a period of years, the Company's international life mortality experience has generally been better than product pricing assumptions.
As indicated in the discussion concerning net investment income, contract interest expense includes fluctuations that are the result of the effect upon the embedded derivative for the performance of underlying equity indices associated with fixed-index universal life products. The amounts realized on purchased call options approximate the amounts the Company credits to policyholders. In addition, as part of the unlocking adjustments made during 2016, the Company's benefit reserves for the International Life segment were decreased by $6.2 million. The effect of this decrease was to correspondingly decrease contract interest for the year by a like amount.
Fixed-index products are more attractive for consumers when interest rate levels remain low and equity markets produce positive returns. Since the Company does not offer variable products or mutual funds, fixed-index products provide an important alternative to the Company's existing fixed interest rate annuity products. Fixed-index annuity deposits as a percentage of total annuity deposits were 94%, 93% and 90% for the years ended December 31, 2016, 2015 and 2014, respectively. The increasing percentage of fixed-index products to total annuity deposits reflects the low interest rate environment and the ongoing bull market in equities.
The Company also unlocked its deferred sales inducement balance during 2016 for surrender and annuitization rates. The effect of the prospective unlocking was to decrease the deferred sales inducement balance by $1.7 million which increased contract interest expense by a like amount. This same unlocking, in addition to impacting the DPAC and deferred sales inducement balances, also increased the Company's benefit reserves by $12.2 million for the two-tiered deferred annuity block of business which also increased contract interest expense. The Company also unlocked its deferred sales inducement balance in 2015 for future expense assumptions pertaining to product development override costs as previously discussed in the Consolidated Operations section of this report. The effect of the prospective unlocking was to decrease the deferred sales inducement balance by $1.8 million which increased contract interest expense by the same amount. No unlocking adjustments were made in 2014.
The Company’s investment portfolio increased 3% to $10.6 billion at December 31, 2016 compared to $10.3 billion at December 31, 2015 due to positive cash flows from operating and financing activities. The primary driver of the increase was investable funds generated from single premium life insurance and annuity sales and cash flow from the investment portfolio. Annuity production was again managed within a targeted range given the low interest rate environment and approximately $730.7 million in annuity deposits were collected in 2016.A portion of the Company’s securities are designated in the available for sale portfolio, which is reported at fair market value. Unrealized gains associated with this part of the portfolio increased from $32.2 million at December 31, 2015 to $69.3 million at December 31, 2016 incrementally adding to the total portfolio balance.
Derivatives, index options, are call options purchased to hedge the interest crediting mechanism associated with the Company's fixed-index universal life and annuity policies. These options are reported on the Consolidated Balance Sheets at fair value in accordance with GAAP. The unrealized position of options held at December 31, 2016 of a $44.8 million gain was $92.6 million higher than the unrealized position at December 31, 2015 of a $47.8 million loss due to market indice levels at the time of option purchases and a higher equity index level at the end of 2016.
In addition to diversification, an important aspect of the Company's investment approach 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. This emphasis is reflected in the high average credit rating of the Company's debt securities portfolio with 98.2% held in investment grade securities. In the table below, investments in debt securities are classified according to credit ratings by nationally recognized statistical rating organizations.
The Company's percentage of below investment grade securities compared to total invested assets at December 31, 2016 increased marginally from year-end 2015 due to downgrades of several securities, primarily energy-related entities. The Company's holdings of below investment grade securities are relatively small and as a percentage of total invested assets low compared to industry averages.
Holdings in below investment grade securities by category as of December 31, 2016 are summarized below, including the comparable fair value as of December 31, 2015 for those debt securities rated below investment grade at December 31, 2016.. The Company continually monitors developments in these industries for issues that may affect security valuation.
In the energy sector, oil prices incurred a precipitous drop over the past several years. While it appears that prices have bottomed and come off of their lows, this downturn affected the credit quality of individual companies. At December 31, 2016, the Company's aggregate holdings in this sector approximated $951 million representing 8.9% of the Company's invested assets. These holdings represented debt securities issued by 40 companies in the oil and gas industry comprising in excess of one hundred bond positions. The Company's oil and gas debt securities were 96.6% investment grade as of the balance sheet date and had an average overall rating of BBB+. Further mitigating the risk of holdings in this sector are ample diversification by subsector (integrated, independent, pipeline, servicer, and equipment). At December 31, 2015, amounts invested in this sector were approximately $939 million, issued by 43 companies, which were 97.9% investment grade.
Certain European countries have experienced varying degrees of financial stress over the past five to ten years. Risks, while not as highly publicized recently, could continue to disrupt financial markets and have a detrimental impact on global conditions as well as on sovereign and non-sovereign obligations. The Company has no exposure to the sovereign debt of Portugal, Ireland, Italy, Greece or Spain. These countries in particular had been experiencing the more significant economic, fiscal and political strains that increase the likelihood of default for sovereign countries. Additionally, the Company has no exposure to the debt of financial institutions domiciled in these countries.
As of December 31, 2016, the Company held nine subprime issues of which one was rated AAA, two were rated AA, one was rated BBB, one was rated B, two were rated CCC and one was rated D and one was not rated.
In general, the Company originates loans on high quality, income-producing properties such as shopping centers, freestanding retail stores, office buildings, industrial, sales or service facilities, selected apartment buildings, motels, and health care facilities. The location of these properties is typically in major metropolitan areas that offer a potential for property value appreciation. Credit and default risk is minimized 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 lease payments and also by the borrower. This approach has proved over time to result in quality mortgage loans with few defaults. Mortgage loan interest income is recognized on an accrual basis with any premium or discount amortized over the life of the loan. Prepayment and late fees are recorded on the date of collection.
The Company's direct investments in real estate are not a significant portion of its total investment portfolio as most of these investments were acquired through mortgage loan foreclosures. For the years ended December 31, 2016 and 2015, there were no real estate properties acquired through mortgage loan foreclosure. The Company also participates in several real estate joint ventures and limited partnerships that invest primarily in income-producing retail properties.
The greater than 90% category is related to loans made with a long standing borrower which are backed by the investment property, contracted leases and the guarantee of the borrower.
Mortgage loans are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. When it is determined that a loan is impaired, a loss is recognized for the difference between the carrying amount of the mortgage loan and the estimated value reduced by the cost to sell. Estimated value is typically based on the loan’s observable market price or the fair value of the collateral less cost to sell. Impairments and changes in the valuation allowance are reported in net realized capital gains (losses) in the Consolidated Statements of Earnings.
The Company recognized no valuation losses for the years ended December 31, 2016, 2015 and 2014, respectively. The current mortgage loan valuation allowance represents a general valuation allowance established for the Company's mortgage loan portfolio based upon the Company's loss experience for more than ten years and is not specifically identified to individual loans.
The following table represents the mortgage loan allowance for the years ended December 31, 2016 and 2015:
The following table profiles the Company’s insurance liabilities at December 31, 2016 for annuities, deposit-type contracts and supplementary contracts with life contingencies by surrender and discretionary withdrawal characteristics.
The following table illustrates the market risk sensitivity of the Company's interest rate sensitive assets. The table shows the effect of a change in interest rates on the fair value of the portfolio using models that measure the change in fair value arising from an immediate and sustained change in interest rates in increments of 100 basis points.
The above described scenarios produce estimated changes in cash flows as well as cash flow reinvestment projections. Estimated cash flows in the Company's model assume cash flow reinvestments, which are representative of the Company's current investment strategy. Calls and prepayments include scheduled maturities and those expected to occur which would benefit the security issuers. Assumed policy surrenders consider differences and relationships between credited interest rates and market interest rates as well as surrender charges on individual policies. The impact to earnings also includes the expected effects on amortization of deferred policy acquisition costs. The model considers only annuity and supplemental contracts in force at December 31, 2016, and does not consider new product sales or the possible impact of interest rate changes on sales.
The Company’s net exposure to loss due to credit risk if the option counterparties failed to completely perform according to the terms of the one-year contracts is as follows at December 31, 2016 and 2015.
Liquidity requirements are met primarily by funds provided from operations. Premium deposits and annuity considerations, investment income, and investment maturities and prepayments are the primary sources of funds while investment purchases, policy benefits in the form of claims, and payments to policyholders and contract holders in connection with surrenders and withdrawals as well as operating expenses are the primary uses of funds. To ensure the Company will be able to pay future commitments, the funds received as premium payments and deposits are invested in high quality investments, primarily fixed income securities. Funds are invested with the intent that the income from investments, plus proceeds from maturities, will meet the ongoing cash flow needs of the Company. The approach of matching asset and liability durations and yields requires an appropriate mix of investments. Although the Company historically has not been put in the position of having to liquidate invested assets to provide cash flow, its investments consist primarily of marketable debt securities that could be readily converted to cash for liquidity needs. The Company (National Western) may also borrow up to $40 million on its bank line of credit for short-term cash needs. There were no borrowings outstanding under the line of credit at December 31, 2016.
A primary liquidity concern for life insurers is the risk of an extraordinary level of early policyholder withdrawals, particularly with respect to annuity products whose funds tend to move more rapidly with interest rate changes. The Company includes provisions within its annuity and universal life insurance policies, such as surrender and market value adjustments, that help limit and discourage early withdrawals.
The above contractual withdrawals, as well as the level of surrenders experienced, were generally consistent with the Company's assumptions in asset-liability management, and the associated cash outflows did not have an adverse impact on overall liquidity. The nominal increase in annuity dollar outflows coincides with a growing block of business which added approximately $2.3 billion in deposits over the past three years as well as the maturation of policies within the block of business (i.e. moving into durations having no surrender charges or minimal surrender charges). Individual life insurance policies are less susceptible to withdrawal than annuity reserves and deposit liabilities because policyholders may need to undergo a new underwriting process in order to obtain a new insurance policy elsewhere. Cash flow projections and tests under various market interest rate scenarios are also performed to assist in evaluating liquidity needs and adequacy. The Company currently expects available liquidity sources and future cash flows to be more than adequate to meet the demand for funds.
Cash flows from the Company's insurance operations have historically been sufficient to meet current needs. Cash flows from operating activities were $309.1 million, $346.2 million, and $313.3 million in 2016, 2015, and 2014, respectively. The Company also has significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments. These cash flows totaled $0.6 billion, $0.7 billion, and $0.8 billion in 2016, 2015, and 2014, respectively. Cash flows from security maturities, redemptions, and prepayments coincide primarily with scheduled maturity dates of securities given the Company buy and hold investment philosophy but may become amplified during periods of significant declines in interest rates due to prepayments and bond calls. Conversely, these cash flow items could experience reduced levels of activity if interest rates rise in the future. Net cash flows from the Company's universal life and annuity deposit product operations totaled $(52.8) million, $8.2 million, and $104.3 million in 2016, 2015, and 2014, respectively.
The Company relies on retained earnings for its capital resources as there is no long-term debt outstanding and the Company does not anticipate the need for any long-term debt in the near future. As of December 31, 2016, the Company had no commitments beyond its normal operating and investment activities. The Company has declared and paid an annual dividend on its common shares since 2005 although its practice remains to substantially reinvest earnings internally to finance the development of new business. Despite the fact the Company's market price of its Class A common shares has been trading at a discount to the book value per share for several years, there are no imminent plans for the Company to repurchase its shares as the Board of Directors has adopted a strategic policy of building a strong capital base to maintain its high financial strength ratings and the ability to take competitive advantages and acquisitions as they arise. The capacity of National Western to pay dividends to NWLGI is limited by law in the state of Colorado to earned profits (statutory unassigned surplus). At December 31, 2016, the maximum amount legally available for distribution without further regulatory approval is $125.0 million.
(3) Other long-term liabilities include estimated life and annuity obligations related to death claims, policy surrenders, policy withdrawals, maturities and annuity payments based on mortality, lapse, annuitization, and withdrawal assumptions consistent with the Company’s historical experience. These estimated life and annuity obligations are undiscounted projected cash outflows that assume interest crediting and market growth consistent with assumptions used in amortizing deferred acquisition costs. They do not include any offsets for future premiums or deposits. Other long-term liabilities also include determinable payout patterns related to immediate annuities. Due to the significance of the assumptions used, the actual cash outflows will differ both in amount and timing, possibly materially, from these estimates.