The Westcap Corporation, a wholly owned subsidiary, 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 Insurance Company for the three years ended December 31, 2014 follows. This discussion should be read in conjunction with the Company’s consolidated financial statements and related notes beginning on page 81 of this report.
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. Conversely, an economy undergoing slow job growth and declining purchasing wherewithal by consumers could adversely impact the demand for the Company's products. The close of the 2014 year generally consisted of positive trends in the U.S. domestic economy. The U.S. stock market posted solid increases which were propelled by upward trending economic growth, consistent accretion in corporate earnings, and the Federal Reserve's accommodative intent to preserve liquidity with low interest rates. The Federal Reserve ceased its quantitative easing program of securities purchases in the fourth quarter pointing to "substantial improvement" in labor market conditions. The unemployment rate fell to 5.6% and the precipitous drop of oil prices by approximately 40% in the fourth quarter created seasonally adjusted inflation rates below zero percent. Observers generally estimate that the drop in oil prices will result in a net positive bump to U.S. GDP as consumers act on the sensation of having additional discretionary funds for purchases. Taken all together, economists generally believe that enough evidence exists to expect the U.S. economy to continue to gain momentum over the next several years.
The fixed income market, our primary investment source, is in the midst of an unprecedented period of low interest rates. Long-term U.S. Treasury rates fell in 2014 such that the Company's current reinvestment yields are lower than the Company's bond portfolio rate of return. Many market observers estimate that interest rates, especially those on the shorter duration end of the spectrum, will commence on an upward path but continue to remain below historic levels during 2015. The current interest rate environment with low yields on the investment-grade securities that the Company purchases exerts downward pressure on the Company's portfolio yield which in turn creates challenges in achieving targeted investment spreads. The Company's interest-sensitive life and annuity policies with guaranteed minimum crediting rates (floors that limit crediting rate reductions) are subject to adverse consequences by a prolonged low interest rate environment as the Company may not have the ability to reduce crediting rates sufficiently to maintain its investment spreads. For the past several years, we have intentionally managed annuity sales to lesser levels than achieved in previous years given the interest rate environment and the Company's desire to avoid adding blocks of business to its in force at historically low interest rate thresholds.
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 the Company's 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.
Universal life and annuity contract revenues - Revenues for universal life and annuity contract charges increased slightly in 2014 compared to 2013 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.
Cost of insurance charges were $101.7 million in 2014 compared to $99.3 million in 2013 and $95.3 million in 2012. Cost of insurance charges typically trend with the size of the life insurance block in force. The increasing revenue from cost of insurance charges corresponds with the growth in life insurance in force. At December 31, 2014, the volume of life insurance in force increased to $23.1 billion from $22.4 billion as of the end of 2013. Administrative charges were $27.4 million, $28.6 million, and $32.6 million for the years ended December 31, 2014, 2013 and 2012, respectively, and correlate with new life insurance business sales by the number of policies placed, the amount of premiums received and the volume of insurance issued. These levels in 2014 were down marginally in each instance. During 2013, due to the substantial increase in the Company's single premium life insurance sales, the Company began deferring the premium load associated with this product causing a decrease in administrative charge revenue compared to 2012. This reduction was largely offset by corresponding changes to deferred policy acquisition costs and death benefit reserves. Premium loads deferred during 2014 approximated the deferral level of 2013.
Traditional life and annuity premiums - Traditional life and annuity premiums increased 2% in 2014 compared to 2013. 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. However, the global financial crisis generated renewed interest in the Company's term life insurance products particularly with residents outside of the United States leading to modest increases in subsequent periods.
In order to assess underlying profitability and results from ongoing operations, net investment income performance is analyzed excluding derivative gain (loss), which is a common practice in the insurance industry. Net investment income and average invested assets shown below includes cash and cash equivalents. Net investment income performance is summarized as follows:
Other revenues - Other revenues primarily pertain to the Company’s two nursing home operations in Reno, Nevada and San Marcos, Texas. Revenues associated with these operations were $21.1 million, $23.3 million and $22.8 million in 2014, 2013 and 2012, respectively.
Gains and losses from index options are 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 2012 through 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.
The economic impact of option performance in the Company's financial statements is not generally determined solely by the option gain or loss included in net investment income as there is a corresponding amount recorded in the contract interest expense line. Rather, the Company's financial result for these options is dependent upon the purchase cost of the option remaining within the financial budget for purchasing options embedded in the product pricing. Option prices vary with interest rates, volatility, and dividend yields among other things. As option prices vary, the Company manages for the variability by making offsetting adjustments to product caps, participation rates, and management fees. For the periods shown, the Company's option costs have been within the product pricing budgets.
Net realized investment gains (losses) - Realized gains (losses) on investments include impairment write-downs on real estate and investments in debt and equity securities. The net investment gains reported in 2014 consisted of gross gains of $12.3 million, primarily from calls of debt securities, offset by gross losses of $0.7 million, which include other-than-temporary impairment losses described below.
Equity impairments (common stocks) represent a mark-to-market write-down on securities in which the market discount to book value was significant and had been maintained for several reporting periods. Equity securities represent 0.1% of invested assets and individual holdings have an average cost basis of approximately $43,000.
Life and other policy benefits - Life and other policy benefits include death claims of $31.7 million, $36.9 million and $31.8 million for 2014, 2013 and 2012, 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. Although not utilized previously, the Company initiated a project during 2012 to identify unreported death claims by researching the Social Security Administration master data base for deceased individuals matching with insureds under in force policies of the Company. The Company identified death claims of $2.5 million in 2012 through this initiative for deaths incurred over the past decade and prior in some cases. Going forward, new state regulations require the Company to continue this program as frequently as quarterly in order to identify unreported death claims.
Similar to deferred policy acquisition costs the Company defers sales inducements in the form of first year interest bonuses on annuity products that are directly related to the production of new business. These charges are deferred and amortized using the same methodology and assumptions used to amortize other capitalized acquisition costs and the amortization is included in contract interest. In addition, deferred sales inducement balances are also reviewed periodically to ascertain whether actual experience has deviated significantly from that assumed (unlock) and are adjusted to reflect current policy lapse or termination rates, expense levels and credited rates on policies compared to anticipated experience (true-up). These adjustments, plus or minus, are included in contract interest expense. In the years ended December 31, 2014, 2013, and 2012 the Company recorded true-ups adjustments of its deferred sales inducement balances resulting in additional contract interest expense of $1.6 million, $0.8 million and $5.5 million, respectively.
General insurance expenses include amounts provided for various legal matters and outstanding litigation. As more fully described in Item 3. Legal Proceedings of this report, the Company entered into a settlement agreement pertaining to a class action lawsuit which was approved by the U.S. District Court in February 2014. Included in general insurance expense for 2013 is an accrual of $6.5 million related to this settlement which approximated the ultimate amounts paid out during 2014. With the resolution of this matter and a lack of other significant litigation, the Company's legal expenses, excluding the class action lawsuit accrual, declined approximately $1.6 million from the amount in 2013.
General insurance expense includes amortization expense associated with capitalized system costs. The Company has been involved in major information system initiatives to enhance actuarial, accounting, policy acquisition, and policy administration processes. Costs related to these systems are capitalized during the development process and then amortized once they are placed into service and used in operations. Amortization expense in association with these system implementations was $1.4 million, $2.5 million, and $3.5 million in 2014, 2013, and 2012, respectively. During 2013, some components became fully amortized and one component was written off, increasing other operating expense by $1.0 million.
Nursing home expenses include the Company's two facilities in Reno, Nevada and San Marcos, Texas. These two entities have operationally functioned at consistent levels of residents over the past several years. Certain higher acuity resident services were discontinued at the Reno facility resulting in lower expenses.
Compensation expense includes share based compensation costs related to outstanding vested and unvested stock options and stock appreciation rights (SARs) under the Company's long-term equity incentive compensation plans. As these costs vary in tandem with the Company's Class A common share price as a result of marking the stock options and SARs to fair value under the liability method of accounting, the related expense amount varies positive or negative in any given period. For the three years shown, share based compensation expense totaled $4.4 million in 2014, $5.7 million in 2013 and $1.1 million in 2012. The expense increases in 2013 and 2014 reflect an escalation in the Company's Class A common share price from $157.74 at December 31, 2012 to $223.55 at December 31, 2013 and to $269.25 at December 31, 2014.
A summary of segment earnings from continuing operations for the years ended December 31, 2014, 2013 and 2012 is provided below. The segment earnings exclude realized gains and losses on investments, net of taxes.
Sales the past several years have been substantially weighted toward single premium policies which do not have 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. The Company launched a series of recurring premium payment whole life and term policies during 2014 which are expected to augment renewal premium levels in the future.
Life and policy benefits for a smaller block of business are subject to variation from period to period. Claim activity during 2014 was essentially flat compared to 2013 with both years consistent compared to historical trends. The Company's overall mortality experience for this segment is in line with pricing assumptions.
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 grown from $19.2 billion at December 31, 2012 to $19.6 billion at December 31, 2013 and to $20.0 billion at December 31, 2014 promoting an increasing trend in revenues. 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 2014, the number of international life policies and the volume of insurance issued both increased approximately 1% from the prior year.
The Company’s most popular international products have been its fixed-index universal life products in which the policyholder can elect to have the interest rate credited to their policy account values linked in part to the performance of the S&P 500 Index®. Included in the totals in the above table are collected premiums for fixed-index universal life products of $94.9 million, $93.4 million and $97.8 million for the years ended 2014, 2013 and 2012, respectively.
Life and policy benefits primarily consist of death claims on policies. The Company’s clientele for international products are generally wealthy 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, 2014, the average face amount of insurance purchased was approximately $383,000, reflecting a consistent level with that of the previous year. 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. During 2013, the Company incurred a higher than normal volume of international life claims which increased the related benefit expense during this period relative to 2014 and 2012. The Company's maximum risk exposure per insured life is capped at $500,000. Measured over a period of years, the Company's international life mortality experience has generally been better than product pricing assumptions.
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 as well as unlocking adjustments as necessary. The following table identifies the effects of unlocking and true-up adjustments on international life insurance DPAC balances recorded through amortization expense for 2014, 2013 and 2012.
Similar to domestic life results, the true-up adjustments recorded for the periods shown increased the DPAC balance which conversely reduced amortization expense by a like amount for the year. The unlocking adjustment in 2014 came about as the Company implemented premium load increases on several international universal life products. The effect of the prospective unlocking was to increase DPAC balances by $1.4 million (and decrease amortization expense).
Premiums and contract charges primarily consist of surrender charge income recognized on terminated policies. The amount of surrender charge income recognized is determined by the volume of surrendered contracts as well as the duration of each contract at the time of surrender given the pattern of declining surrender charge rates over time that is common to most annuity contracts. The Company's lapse rate for annuity contracts during 2014 was 6.6%, a slight increase from a rate of 6.5% in 2013 and 6.1% in 2012.
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 90%, 88% and 79%for the years ended December 31, 2014, 2013 and 2012, respectively. The increasing percentage of fixed-index products to total annuity deposits reflects the low interest rate environment and the current bull market in equities.
As a selling inducement, some of the deferred products, as well as the fixed-index annuity products, include a first year interest bonus ranging from 1% to 7% depending upon the product, in addition to the base first year interest rate. Other products include a premium bonus ranging from 2% to 10% which is credited to the account balance when premiums are applied. These bonus rates are deferred in conjunction with other capitalized policy acquisition costs. The amount deferred to be amortized over future periods amounted to approximately $18.4 million, $26.2 million and $31.8 million for the years ended December 31, 2014, 2013 and 2012, respectively. Amortization of deferred sales inducements is included as a component of annuity contract interest as described later in this discussion of annuity operations.
A detail of net investment income for annuity operations is provided below.
Consistent with the domestic and international life segments, 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 as well as unlocking adjustments as necessary. The following table identifies the effects of unlocking and true-up adjustments on annuity DPAC balances recorded through amortization expense for 2014, 2013 and 2012.
As the true-up adjustments in each period decreased DPAC balances a corresponding increase in DPAC amortization expense was recorded. The true-up adjustments in 2014, 2013 and 2012 relate to policy lapse or termination rates, renewal trail commissions, expense levels, investment yields and interest credited rates compared to anticipated experience. There was no unlocking for the years ended December 31, 2014, 2013 and 2012.
True-up adjustments for the deferred sales inducement balance are done each period similar to that done with respect to DPAC balances. For the years ended December 31, 2014, 2013, and 2012 deferred sales inducement balances were reduced by $1.6 million, $0.8 million and $5.5 million, respectively, with a corresponding increase to bonus interest amortization.
The Company's overall conservative investment philosophy is reflected in the allocation of its investments, which is detailed below as of December 31, 2014 and 2013. The Company emphasizes investment grade debt securities, with smaller holdings in mortgage loans and policy loans, and purchases index call options to support its fixed-index policyholder contract obligations.
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 balance sheet at fair value in accordance with GAAP. The unrealized gain position of options held at December 31, 2014 of $40.3 million was $67.6 million lower than the unrealized gain position at December 31, 2013 of $107.9 million as a result of equity markets increasing at a lesser rate during 2014 as compared to 2013.
Rating agencies generally view mortgage-backed securities as having additional risk for insurers holding interest sensitive product liabilities given a potential asset/liability disintermediation. Consequently, the Company holds predominantly agency mortgage-backed securities. Because mortgage-backed securities are subject to prepayment and extension risk, the Company has substantially reduced these risks by investing in collateralized mortgage obligations ("CMO"), which have more predictable cash flow patterns than pass-through securities. These securities, known as planned amortization class I ("PAC I"), very accurately defined maturity ("VADM") and sequential tranches are designed to amortize in a more predictable manner than other CMO classes or pass-throughs. The Company does not purchase tranches, such as PAC II and support tranches, that subject the portfolio to greater than average prepayment risk. 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 Company's percentage of below investment grade securities compared to total invested assets at December 31, 2014 decreased from year-end 2013 due mostly to upgrades of securities to investment grade and disposals of below-investment grade securities during the year. 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, 2014 are summarized below, including 2014 and 2013 fair values for comparison. The Company continually monitors developments in these industries for issues that may affect security valuation.
During the year ended December 31, 2014, the Company recorded minimal other-than-temporary impairment ("OTTI") credit related write-downs on debt securities and a separate $0.1 million on equity securities. The only debt security impairment during 2014 pertained to one asset-backed security whose fair value and present value of future cash flows fell below the amortized cost of the security. See Note 3, Investments Debt and Equity Securities, of the accompanying consolidated financial statements for further discussion.
The Company is required to classify its investments in debt and equity securities into one of three categories: (a) trading securities; (b) securities available for sale; or (c) securities held to maturity. The Company purchases securities with the intent to hold to maturity and accordingly does not maintain a portfolio of trading securities. Of the remaining two categories, available for sale and held to maturity, the Company makes a determination on categorization based 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. As shown in the table below, at December 31, 2014, approximately 27.6% of the Company's total debt and equity securities, based on fair values, were classified as securities available for sale. These holdings in available for sale 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.
During the second quarter of 2014, the Company sold its one remaining Alt-A security. The Alt-A sector is a sub-sector of the jumbo prime MBS sector. The Company’s exposure to the subprime sector is limited to investments in the senior tranches of subprime residential mortgage loans. The subprime sector is generally categorized under the asset-backed sector. This sector lends to borrowers who do not qualify for prime interest rates due to poor or insufficient credit history. Subprime borrowers generally have FICO scores of 660 or below. The slowing housing market, rising interest rates, and relaxed underwriting standards for loans originated after 2005 resulted in higher delinquency rates and losses beginning in 2007. These events caused illiquidity in the market and volatility in the market prices of subprime securities. With the government intervention initiatives in 2009, the housing market began to stabilize. There was an improvement in the prices of subprime securities as the bond market also became more liquid. All of the loans classified as subprime in the Company’s portfolio as of December 31, 2014 were underwritten prior to 2005 as noted in the table below.
As of December 31, 2014, 2 of the subprime securities were rated AA, 4 were rated BBB, 1 was rated B, 2 were rated CC, and 1was 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 proven 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 requires a minimum specified yield on mortgage loan investments. During the past several years, the low interest rate environment has resulted in fewer loan opportunities being available that meet the Company's required rate of return. Mortgage loans originated by the Company totaled $37.1 million and $34.1 million for the years 2014 and 2013, respectively.
The Company recognized valuation losses of $0 million, $0 million and $0.65 million for the years ended December 31, 2014, 2013 and 2012, respectively. The mortgage loan valuation write-down in 2012 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, 2014 and 2013:
The fair value of derivative instruments presented in the Company’s consolidated financial statements totaling $114.3 million at December 31, 2014 and $169.3 million at December 31, 2013 pertain to notional policyholder account values of $3.2 billion and $2.6 billion at December 31, 2014 and 2013, respectively, electing interest credits based upon applicable market index performance.
Debt securities held to maturity are recorded at their amortized cost basis. Accordingly, the unrealized gain amounts shown in the table above are not incorporated into the Company's consolidated financial statements at December 31, 2014 and 2013, respectively.
The following table profiles the Company’s insurance liabilities at December 31, 2014 for annuities, deposit-type contracts and supplementary contracts with life contingencies by surrender and discretionary withdrawal characteristics.
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, 2014 and 2013.
The Company has never incurred a loss on index options due to counterparty default.
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 $2.5 billion in deposits over the past three years. Individual life insurance policies are less susceptible to withdrawal than annuity reserves and deposit liabilities because policyholders may incur surrender charges and undergo a new underwriting process in order to obtain a new insurance policy. 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 $313.3 million, $253.6 million, and $290.3 million in 2014, 2013, and 2012, respectively. The Company also has significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments. These cash flows totaled $0.8 billion, $1.5 billion, and $1.8 billion in 2014, 2013, and 2012, 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. 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 $104.3 million, $106.6 million, and $144.2 million in 2014, 2013, and 2012, respectively.
During February 2013, the Financial Accounting Standards Board ("FASB") issued new guidance related to the presentation of amounts reclassified out of accumulated other comprehensive income. The new guidance requires disclosure on the statement of income amounts reclassified. As the Company already reports reclassifications on its Consolidated Statements of Earnings and Consolidated Statements of Comprehensive Income (Loss), the new guidance did not have a significant impact on the Company's consolidated financial statements.
In July 2013, the FASB issued guidance to amend the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The new guidance states that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as reduction to deferred tax assets for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. This guidance is effective for annual reporting periods beginning on or after December 15, 2013 and interim periods within those annual periods. The Company adopted this guidance as of January 1, 2014 and the adoption did not have an effect on the deferred tax asset or liability classification on the Company's balance sheet and did not result in any additional disclosures to the financial statements.