National Western has historically provided life insurance products on a global basis for the savings and protection needs of policyholders and issued annuity contracts for the asset accumulation and retirement needs of contract holders, both domestic and international residents. As disclosed in the Form 10-Q filed for the quarter ended March 31, 2018, the company discontinued accepting applications for the company's international products from foreign residents in May 2018.
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 consensus view at this time is for GDP growth to moderate during 2019 as the Federal Reserve delays raising rates at least for the first half of the year in its attempt to engineer an economic soft-landing. Risk of recession over the next couple of years is elevated compared to previous outlooks. While there is minimal slack in the labor market, inflation expectations continue to be muted. Accordingly, the probability of entering a high-inflation period remains remote.
With regard to the credit market, industry analysts and observers generally agree that a sudden jump in interest rate levels, while presently a highly unlikely scenario, would be harmful to life insurers with interest-sensitive products as it could provide an impetus for abnormal levels of product surrenders and withdrawals at the same time fixed debt securities held by insurers declined in market value. The Federal Reserve has more recently tilted toward a slightly dovish policy. Their challenge continues to be calibrating the last stretch of their normalization efforts to facilitate a soft-landing while market volatility edges up and growing concerns about financial stability emerge. The baseline view call for two rate increases in 2019 with an end rate of 3.0% for short-term rates. However, the direction and at what pace interest rate movements may occur in the future is ultimately uncertain and subject to change. What impact, if any, such movements would have on the Company’s business, results of operations, cash flows or financial condition is indeterminate.
Universal life and annuity contract revenues - Revenues for universal life and annuity contract charges decreased in 2018 compared to 2017 due to lower surrender charge revenue from terminated policies and lower cost of insurance and administrative charges 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.
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 2018 amount shown above as "Other charges" represents the net of previously capitalized amounts being amortized into revenue over current year deferrals of premium loads. Sales of single premium life insurance products have been a substantial portion of the company's new business over the past several years and has generated a higher balance of premium loads being amortized as revenue.
Debt and equity securities generated approximately 93% of total investment income, excluding derivative gains and losses, in 2018 consistent with prior years. The Company’s strategy is to invest substantially all of its cash flows in fixed debt securities within its guidelines for credit quality, duration, and diversification. The Company's investable funds are derived from incremental cash flow from new business and investment income from its portfolio above its operational requirements to pay policy benefits, commissions, and expenses. The debt securities portfolio grew from $10.2 billion at December 31, 2016 to $10.3 billion at December 31, 2017, but declined to $10.2 billion at December 31, 2018 as cash balances were being built in anticipation of closing an acquisition in early 2019. Investment yields on new bond purchases in 2018 exceeded the portfolio's weighted average yield for the first time in the current decade. The portfolio weighted average yield was approximately 3.90% at December 31, 2018, while the yield on debt security purchases to fund insurance operations increased to 4.20% in 2018 from 3.57% in 2017. Although the yield on new purchases increased in 2018, bond portfolio returns continued to be impacted by higher yielding debt securities maturing or being called by borrowers with the proceeds being reinvested into lower yielding securities.
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 $17.2 million, $18.2 million and $18.2 million in 2018, 2017 and 2016, respectively. Beginning in 2017, other revenues also includes the operations of Braker P III ("BP III"), a new subsidiary created at the end of 2016 to own and manage a commercial office building it acquired (Refer to Item 2. Properties in Part I of this filing for further discussion). Revenues associated with BP III were $3.2 million and $1.5 million in December 31, 2018 and 2017, respectively, reflecting additional tenant leases executed. Other revenues also includes the annual revaluation of the fair value of the life interest in the Libbie Shearn Moody Trust.
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 2017 and 2016, 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 2018, the reference indices decreased and an overall loss from index options was incurred and contract interest expense similarly declined.
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 profitability with respect to these options is dependent upon the purchase cost of the option remaining within the financial budget for acquiring 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 generally been within the product pricing budgets.
In 2018, the company unlocked its DPAC balances associated with its Life and Annuity segments for: (1) mortality, extended death benefit reserves, and the investment yield supporting universal life policy liabilities on its Life segment which collectively increased amortization expense by $1.2 million; and (2) mortality, the election rate of the company's withdrawal benefit rider, and the investment yield supporting annuity contract accounts which collectively decreased amortization expense by $2.2 million for the Annuity segment.
In 2017, the Company unlocked its DPAC balance for: (1) International life favorable mortality, better than expected persistency from disengaged countries, and enforcement of an interest rate clawback on certain universal life policies which collectively reduced amortization expense by $28.0 million; (2) Annuity surrender/annuitization assumptions and tighter crediting rate spreads which increased amortization by $15.1 million; and (3) Domestic and International life crediting rate spreads on certain equity-indexed universal life products which increased amortization expense by $1.1 million.
As the DPAC balance is an asset on the Company's Consolidated Balance Sheets, GAAP provides for an earned interest return on the unamortized balance each period. The earned interest serves to increase the DPAC balance and reduce other amortization component expense. The rate at which the DPAC balance earns interest is the average credited interest rate on the company's universal life and annuity policies in force, including credited interest on equity-indexed policies. The amount of earned interest on DPAC balances recorded was $29.1 million, $33.5 million, and $10.5 million in 2018, 2017, and 2016, respectively, decreasing other amortization component expense.
Contract interest reported in financial statements also encompasses the performance of the index options associated with the Company's fixed-index products. As previously noted, the market value changes of these derivative features resulted in net realized and unrealized gains (losses) in 2018, 2017 and 2016 of $(80.0) million, $222.9 million and $28.4 million, respectively. In 2018, this figure was comprised of unrealized losses totaling $(191.7) million offset by realized gains of $111.7 million. These returns similarly increased/(decreased) the computed average credited rates for the periods shown. Policyholders of equity-indexed products cannot receive an interest credit below 0% according to the policy contract terms.
Contract interest expense also includes reserve changes for immediate annuities, two tier annuities, excess death benefit reserves, excess annuitizations, and amortization of deferred sales inducement balances. These items are offset by policy charges assessed for policies having the withdrawal benefit rider. As changes in these items collectively impact contract interest expense, financial statement interest spread is also affected. For the years ended December 31, 2018, 2017, and 2016 the changes in these items increased contract interest expense by $22.8 million, $38.1 million, and $46.9 million, respectively.
Similar to deferred policy acquisition costs, the company defers sales inducements in the form of first year credited interest bonuses on annuity products that are directly related to the production of new business. These bonus interest 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. As part of the DPAC balance unlockings for the Annuity segment previously discussed for 2018, 2017, and 2016, the Company also unlocked its deferred sales inducement balance. The effect of the prospective unlocking was to increase the deferred sales inducement balance by $1.3 million in 2018 (and decrease contract interest expense), and to decrease the deferred sales inducement balance by $4.3 million, and $1.7 million, in 2017, and 2016, respectively, and thereby increasing contract interest expense by a related amount for each period.
Nursing home expenses reflect the operations of the Company's two facilities in Reno, Nevada and San Marcos, Texas. The lower expense level in 2018 compared to the prior two years corresponds with decreased revenues from lower census figures and the resultant cost containment measures undertaken to manage profitability.
Compensation expenses include share-based compensation costs related to outstanding vested and nonvested stock options and stock appreciation rights ("SARs"), restricted stock units ("RSUs"), and performance share units ("PSUs"). The related share-based compensation costs move in tandem not only with the number of awards outstanding but also with the movement in the market price of the Company's Class A common stock as a result of marking the stock options, SARs, and RSUs to fair value under the liability method of accounting. Consequently, the related expense amount varies positive or negative in any given period. In the amounts shown above, share-based compensation expense totaled $1.4 million in 2018, $5.0 million in 2017 and $7.9 million in 2016. These expense levels reflect a change in the Company's Class A common share price from $251.94 at December 31, 2015 to $310.80 at December 31, 2016 to $331.02 at December 31, 2017 and to $300.70 at December 31, 2018. In addition to the changes in price of the Company's Class A common shares, there were 12,590; 22,184; and 14,643 SARs granted to officers of National Western in 2018, 2017 and 2016, respectively.
Real estate expenses pertain to the commercial building operated by Braker P III. The building was acquired at year-end 2016 and the company relocated to this facility during the fourth quarter of 2017. The higher operating expenses for 2018 relative to 2017 reflects the company's occupancy as well as other third party tenants added during 2018.
Taxes, licenses and fees include premium taxes and licensing fees paid to state insurance departments, guaranty fund assessments, the company portion of social security and Medicare taxes, real estate taxes, state income taxes, and other state and municipal taxes. State income taxes are generally determined by apportioning the company's federal taxable income based upon premium generated from a particular state as a percentage of total premiums. Federal taxable income is derived from the company's statutory financial results. State income tax expense was $0.8 million, $2.5 million, and $0.7 million in 2018, 2017, and 2016, respectively. Premium tax expenses for the years ended December 31, 2018, 2017, and 2016 were $3.4 million, $4.0 million, and $2.6 million, respectively. The 2017 expense also includes withholding tax liabilities for international policy distributions not previously withheld on.
A summary of segment earnings from continuing operations for the years ended December 31, 2018, 2017 and 2016 is provided below. The segment earnings exclude realized gains and losses on investments, net of taxes.
The Company’s domestic life insurance in force, in terms of policy counts, has been declining for some time. The pace of new policies issued has lagged the number of policies terminating from death or surrender by roughly a two-to-one rate over the past several years causing a declining level of insurance in force from which contract revenue is received. Consequently, the number of domestic life insurance policies in force has declined from 51,600 at December 31, 2016 to 50,200 at December 31, 2017 and to 49,000 at December 31, 2018. Policy lapse rates in 2018 increased to 6.5% from 6.0% in 2017 but were less than the rate in 2016 of 7.5%.
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. The number of domestic policies issued during 2018 was 28% higher than in 2017 and the volume of insurance issued was 36% more than that in 2017.
During the past several years the company has achieved some success in growing dollar amount of sales of its domestic life insurance new business. Sales have been substantially weighted toward single premium policies which do not have much in the way of recurring premium payments. These products are targeting 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.
The company unlocked the DPAC balances associated with its Domestic Life segment for favorable mortality, extended death benefit reserves, and the investment portfolio yield supporting universal life policy liabilities in 2018. The effect of the prospective unlocking was to decrease DPAC balances by $1.0 million (and increase amortization expense). During 2017, the company unlocked the interest crediting rate spread on certain equity-indexed universal life products which increased amortization expense by $0.8 million. During 2016 the Company unlocked its DPAC balance for favorable mortality and for future profit projections related to universal life insurance riders which had not been previously included in DPAC actuarial software models. These unlockings decreased DPAC amortization expense.
Although not an unlocking, during the fourth quarter of 2018 the company successfully converted its reserve modeling for excess death benefit reserves on UL riders to its existing actuarial software platform. The implementation refined the company's estimate increasing reserves and included an adjustment decreasing the Domestic Life DPAC balance (increasing amortization expense). The amount of the amortization expense increase was $0.8 million.
A third component of international universal life revenues include surrender charges assessed upon surrender of contracts by policyholders. In 2015, termination activity levels increased in conjunction with the company's decision to cease accepting applications from residents in Brazil and certain other countries resulting in additional surrender charge fee revenues. This activity continued into 2016 and 2017 but subsided in 2018. The following table illustrates National Western's recent international life termination experience.
The higher incidence of terminations that occurred in the 2015 through 2017 time period related to policies with residents of the countries from which the company discontinued accepting applications in late 2015. As a result of the higher termination incidence, the company unlocked its DPAC balances for this segment of the business during 2016 to incorporate a greater lapse assumption, among other things.
Life and policy benefits primarily consist of death claims on policies. National Western’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 have historically tended to be larger amounts. In the year ended December 31, 2018, the average face amount of insurance purchased was approximately $297,100, reflecting a level somewhat lower than that of immediately prior years reflecting the company's decision to disengage from certain markets and ultimately to cease accepting applications for international life products from international residents. Life and policy benefit expense for the international life segment reflects the larger policies historically purchased, however 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 average international life net claim amount (after reinsurance) in 2018 increased to $205,200 from $152,200 while the number of claims incurred declined 18% during 2018. Measured over a period of years, the Company's international life mortality experience has generally been better than product pricing assumptions.
Contract interest expense includes the fluctuations that are the result of the effect upon the embedded derivative for the performance of the underlying equity indices associated with fixed-indexed universal life products. For liability purposes, the embedded option in the Company's policyholder obligations for this feature is bifurcated and reserved for separately. Accordingly, the impact for the embedded derivative component in the equity-index universal life product is reflected in the contract interest expense for approximately the same amounts as in net investment income for each respective period. As part of the 2018 unlockings discussed above, the company increased its excess benefit reserve by $14.1 million which served to increase contract interest expense by a like amount. 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.
Similar to the Domestic Life segment, operating expenses are allocated to lines of business based upon a functional cost analysis of the business activity giving rise to incurred expenses. As discussed in the Domestic Life segment, a greater proportion of the Company's overall operating expenses were allocated toward the Domestic Life segment and away from the International Life and Annuity segments due to decreased activity in the latter two segments. In 2017, the potential and contingent legal liability provisions discussed in the Consolidated Operations section were primarily allocated to the International Life segment.
Premiums and contract charges primarily consist of surrender charge income recognized on terminated policies. The amount of the 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 2018 was 7.5%, an increase from a rate of 6.0% in 2017 and the 6.5% rate experienced in 2016. Annuity contracts with fixed interest rates are more prone to terminate during periods of rising interest rates as was the situation during 2018.
Life and policy benefits for the Annuity segment include death claims and benefits associated with the company's withdrawal benefit rider. As part of the unlockings performed in 2018, the company unlocked its policy benefits reserves associated with the assumption regarding policyholder utilization of the withdrawal benefit rider provisions attached to annuity contracts. The assumptions were updated for actual utilization experience which was lower than that previously assumed. The effect of this prospective unlocking was to decrease policy reserves by $15.7 million and to decrease life and policy benefits expense.
The Company's primary business encompasses its domestic and international life insurance operations and its annuity operations. However, the Company also has small real estate, nursing home, and other investment operations through its wholly owned subsidiaries. Nursing home operations generated $1.3 million, $1.4 million and $0.3 million of pre-tax earnings in 2018, 2017, and 2016, respectively. Amounts for these periods also include the results of BP III which commenced operations at the beginning of the year. BP III incurred pre-tax losses of $(1.9) and $(1.5) million in 2018 and 2017, respectively.
The remaining pre-tax earnings in Other Operations of $26.8 million, $27.8 million, and $23.0 million for the years ended December 31, 2018, 2017, and 2016, respectively, represents investment income from real estate, municipal bonds, and common and preferred equities held in subsidiary company portfolios principally for tax-advantage purposes. Included in these amounts are semi-annual distributions from a life interest in the Libbie Shearn Moody Trust which is an asset held in NWLSM, Inc. Pretax distributions from this trust were $7.5 million, $6.1 million, and $6.0 million in 2018, 2017, and 2016, respectively. In addition to pretax distributions, these amounts also include additional revenue recorded for annually revaluing the actuarial life interest in the Libbie Shearn Moody Trust.
Long-term debt securities purchased to fund insurance company operations are summarized below.
The investments held in debt securities that are below investment grade are the result of subsequent downgrades of the securities. These holdings are further summarized below.
Holdings in below investment grade securities by category as of December 31, 2018 are summarized in the following table including the comparable fair value as of December 31, 2017 for those debt securities rated below investment grade at December 31, 2018. The Company continually monitors developments in these industries for issues that may affect security valuation.
Generally accepted accounting principles require that investments in debt securities be written down to fair value when declines in value are judged to be other-than-temporary. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price methodology). Refer to Note (14) Fair Values of Financial Instruments of the accompanying Consolidated Financial Statements for further discussion.
During the year ended December 31, 2018, the Company recorded no other-than-temporary impairment ("OTTI") credit related write-downs on debt securities. See Note (3) Investments of the accompanying Consolidated Financial Statements for further discussion.
The Company holds approximately $10.1 million in asset-backed securities as of December 31, 2018. This portfolio includes $0.7 million of manufactured housing bonds and $9.4 million of home equity loans (also referred to as subprime securities). These holdings have declined from the levels held at December 31, 2017 of $1.0 million and $12.5 million, respectively. The Company does not have any holdings in collaterized bond obligations (“CBO”s), collateralized debt obligations (“CDO”s), or collateralized loan obligations (“CLO”s). Principal risks in holding asset-backed securities are structural, credit, and capital market risks. Structural risks include the securities’ priority in the issuer’s capital structure, the adequacy of and ability to realize proceeds from collateral and the potential for prepayments. Credit risks include corporate credit risks or consumer credit risks for financing such as subprime mortgages. Capital market risks include the general level of interest rates and the liquidity for these securities in the marketplace.
Loans in foreclosure, loans considered impaired or loans past due 90 days or more are placed on a non-accrual status. If a mortgage loan is determined to be on non-accrual status, the mortgage loan does not accrue any income into the Consolidated Statements of Earnings. The loan is independently monitored and evaluated as to potential impairment or foreclosure. If delinquent payments are made and the loan is brought current, then the Company returns the loan to active status and accrues income accordingly. The Company has no loans past due 90 days which are accruing interest.
The Company recognized no impairment losses for the years ended December 31, 2018, 2017 and 2016, 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, 2018 and 2017:
The contractual maturities of mortgage loan principal balances at December 31, 2018 and 2017 were as follows:
The Company's direct investments in real estate total approximately $35.7 million at December 31, 2018 and $37.4 million at December 31, 2017, and consist primarily of income-producing properties which are being operated by a wholly owned subsidiary of National Western. The Company recognized operating income on these properties of approximately $2.2 million, $2.9 million and $2.6 million for the years ended December 31, 2018, 2017 and 2016, respectively. The Company monitors the conditions and market values of these properties on a regular basis and makes repairs and capital improvements to keep the properties in good condition. The Company recorded net realized investment gains of $1.8 million, $2.7 million and $2.9 million associated with real estate investments in the years ended December 31, 2018, 2017 and 2016, respectively.
The Company's unrealized gain (loss) balance for debt securities held at December 31, 2018 and 2017 is shown in the following table.
Debt securities held to maturity are recorded at their amortized cost basis. Accordingly, the unrealized amounts shown in the table above for Debt securities held to maturity are not incorporated into the Company's Consolidated Financial Statements at December 31, 2018 and 2017, respectively.
Changes in interest rates typically have a sizable effect on the fair values of the Company's debt securities. During 2018, the market interest rate of the ten-year U.S. Treasury bond increased roughly 28 basis points from 2.41% at year-end 2017 to 2.69% at year-end 2018. Therefore, the increase in unrealized losses was primarily the result of the increase in interest rate levels. However, since the majority of the Company's debt securities are classified as held to maturity, which are recorded at amortized cost, changes in fair values have a lesser effect on the Company's financial results.
The Company has the ability to adjust interest rates, participation rates, and asset management fees and caps, as applicable, in response to changes in investment portfolio yields for a substantial portion of its business in force. The ability to adjust these rates is subject to competitive forces in the market for the Company’s products. Surrender rates could increase and new sales could be negatively affected if crediting rates are not competitive with the rates on competing products offered by other insurance companies and financial service entities. The Company designs its products with features encouraging persistency. Interest sensitive life and annuity products have surrender and withdrawal penalty provisions. Typically, surrender charge rates gradually decrease each year the contract is in force.
The following table profiles the Company’s insurance liabilities at December 31, 2018 for annuities, deposit-type contracts and supplementary contracts with life contingencies by surrender and discretionary withdrawal characteristics.
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 base rates at December 31, 2018. 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 and incorporate both Company experience and mortality assumptions associated with such contracts.
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, 2018, 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 option counterparties failed to completely perform according to the terms of their one-year contracts is as follows at December 31, 2018 and 2017.
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 $75 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, 2018.
The following table sets forth withdrawal characteristics of National Western's annuity reserves and deposit liabilities (based on statutory reporting liability values) as of the dates indicated.
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. 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. The Company's disengagement from several international markets in 2015 initially influenced higher withdrawals from these areas but this level of activity has subsequently subsided. Annuity dollar outflows are generally more sensitive to economic conditions and interest rate levels. In addition, the maturation of policies within the annuity block of business (i.e. moving into durations having no surrender charges or minimal surrender charges), has been gradual as evidenced by the previous table depicting withdrawal characteristics of the in force reserves. During 2018, interest rate levels marginally increased coinciding with policy decisions of the Federal Reserve and this upward movement in rates did prompt a higher incidence annuity dollar outflows. Cash flow projections and tests under various market interest rate scenarios and assumptions are 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.
It is Company practice to not enter into off-balance sheet arrangements or to issue guarantees to third parties, other than in the normal course of issuing insurance contracts. Commitments related to insurance products sold are reflected as liabilities for future policy benefits. Insurance contracts guarantee certain performances by National Western.