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, 2015 follows. This discussion should be read in conjunction with the Company’s consolidated financial statements and related notes beginning on page 85 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. Recent macro environment factors having an impact include equity market volatility, ongoing low interest rates, uneven global demand/growth, suffocating regulatory initiatives, questionable business confidence, a declining energy sector driven by falling oil prices, and U.S. politics that come with an election year.
The life industry's profitability picture looks very different coming out of this recovery with return on equity percentages hovering in the single digits, not unexpected for a spread business having endured many years of low interest rates. The industry has increased its capital base during this period and has not deployed it due to the limited returns available and a desire to hold an appropriate cushion for the volatility inherent in some of its product lines (i.e. annuities). Even if the equity markets subject the industry to some volatility, there remains a sizable insurance coverage gap which provides opportunities to increase sales.
Other significant accounting policies, although not involving the same level of measurement uncertainties as those discussed above, but nonetheless important to an understanding of the financial statements, are described in Note 1, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements.
The Company’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). In addition, the Company regularly evaluates operating performance using non-GAAP financial measures which exclude or segregate derivative and realized investment gains and losses from operating revenues. Similar measures are commonly used in the insurance industry in order to assess profitability and results from ongoing operations. The Company believes that the presentation of these non-GAAP financial measures enhances the understanding of the Company’s results of operations by highlighting the results from ongoing operations and the underlying profitability factors of the Company’s business. The Company excludes or segregates derivative and realized investment gains and losses because such items are often the result of events which may or may not be at the Company’s discretion and the fluctuating effects of these items could distort trends in the underlying profitability of the Company’s business. Therefore, in the following sections discussing consolidated operations and segment operations, appropriate reconciliations have been included to report information management considers useful in enhancing an understanding of the Company’s operations to reportable GAAP balances reflected in the consolidated financial statements.
Universal life and annuity contract revenues - Revenues for universal life and annuity contract charges increased slightly in 2015 compared to 2014 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 $105.2 million in 2015 compared to $101.7 million in 2014 and $99.3 million in 2013. Cost of insurance charges typically trend with the size of the universal life insurance block in force and the amount of new business issued during the period. At December 31, 2015, the volume of universal life insurance in force increased to $20.5 billion from $20.1 billion as of the end of 2014. Administrative charges were $28.6 million, $27.4 million, and $28.6 million for the years ended December 31, 2015, 2014 and 2013, respectively, and correlate with new universal life insurance business sales by the number of policies placed, the amount of premiums received and the volume of insurance issued.
Traditional life premiums - Traditional life premiums increased marginally in 2015 compared to 2014. 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 Company began offering graded death benefit whole life and term products in its domestic markets in the latter part of 2014 which added incrementally to sales and premiums in 2015. The majority of traditional life premiums reside in the Company's international life segment.
The decline in average invested asset yield, excluding derivatives, from 2013 to 2014 and to 2015 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 have decreased over the past few years with net gains recorded in 2014 and 2013 and a net loss incurred 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 2013 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.
The following table identifies the effects of unlocking and true-up adjustments on DPAC balances recorded through amortization expense for 2015, 2014 and 2013.
realized and unrealized gains/(losses) included in net investment income approximate the change in contract interest associated with the corresponding embedded derivative liability change). During the third quarter of 2015, the embedded derivative liability decreased approximately $11.0 million less than the decline in the associated index option asset value resulting in a charge to pretax earnings in a like amount. The embedded derivative liability decreased at a lesser rate as a result of the market value of the index options having declined to a level such that the projected interest credits used in estimating the embedded derivative liability did not support the Company's expected collectability of asset management fees on the products (assumed asset management fees collected reduce the embedded derivative liability). In the fourth quarter of 2015, $6.6 million of the charge taken in the third quarter reversed with an improvement in the market value of the index options. The remaining deviation from the third quarter of the index option asset value with the embedded derivative liability ($4.4 million) is subject to reverse in the future in the event of further improvement in market value returns of the index options and/or decreases in asset management fees charged in lieu of other crediting rate mechanism changes. Refer to Footnote 15 Derivative Investments in the accompanying Notes to Condensed Consolidated Financial Statements for further information.
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 and 2013.
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. In addition, the Company was the recipient of $1.1 million in lawsuit settlement proceeds further decreasing legal expenses. Recurring legal fees increased approximately $0.6 million in 2015 over the level in 2014 due services rendered on various regulatory and operational matters.
General insurance expenses also include costs associated with the Company's various employee benefit plans. This category of expense totaled $5.8 million, $5.9 million, and $5.1 million in 2015, 2014, and 2013, respectively. In addition to employee benefit plans, through 2013, the Company offered a non-qualified deferred compensation plan for qualifying agents. This program was terminated and unvested Company contributions of approximately $1.7 million were recaptured in 2014 reducing general expenses in that year.
A summary of segment earnings from continuing operations for the years ended December 31, 2015, 2014 and 2013 is provided below. The segment earnings exclude realized gains and losses on investments, net of taxes.
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 2015 was 13% higher than in 2014 and the volume of insurance issued was 9% more than that in 2014. As noted in the discussion of Consolidated Operations results, in 2013 the Company began deferring the premium load on its most popular domestic product, single pay life insurance. Amounts deferred are amortized into revenues over future periods corresponding with the duration of the policies
For liability purposes, the embedded option in the Company's policyholder obligations for this feature is bifurcated and separately reserved for. Accordingly, a comparable impact for the derivative component in fixed-index universal life products is reflected in the contract interest expense for each respective period.
As noted previously, net investment income and contract interest include period-to-period changes in fair value pertaining to call options purchased to hedge the interest crediting feature on the fixed-index universal life products. With the growth in the fixed-index universal life block of business, the period-to-period changes in fair values of the underlying options have had an increasingly greater impact on net investment income and universal life contract interest. A detail of net investment income for international life insurance operations is provided below.
As noted in the Domestic Life Insurance discussion, 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 each respective period.
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 2015, 2014 and 2013.
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. In 2015, the Company unlocked the DPAC balance for favorable mortality experience on one of its international universal life products. The effect of the prospective unlocking was to increase DPAC balances by $7.1 million (and decrease amortization expense). The unlocking adjustment in 2014 resulted from the Company implementing premium load increases on several international universal life products and unlocking its DPAC for this item. The effect of the prospective unlocking in 2014 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 2015 was 6.2%, a slight decrease from a rate of 6.6% in 2014 and 6.5% in 2013.
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 93%, 90% and 88%for the years ended December 31, 2015, 2014 and 2013, 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.
As previously described, derivatives are call options purchased to hedge the equity return component of the Company's fixed-index annuity products with any gains or losses from the sale or expiration of the options, as well as period-to-period changes in fair values, reflected in net investment income. Since the embedded derivative option in the policies is bifurcated when determining the contract reserve liability, the impact of the market value change of index options on assets values generally aligns closely with the movement of the embedded derivative liability such that the net effect upon pretax earnings is negligible (i.e. net realized and unrealized gains/(losses) included in net investment income approximate the change in contract interest associated with the corresponding embedded derivative liability change). See further discussion below regarding contract interest activity.
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 2015, 2014 and 2013.
The Company unlocked the DPAC balance associated with its annuity segment in 2015 for future expense assumptions pertaining to product development override costs (trailer commissions) which it is obligated to pay certain contracted National Marketing Organizations. The effect of the prospective unlocking was to decrease DPAC balances by $5.3 million (and increase amortization expense). No unlocking adjustments were recorded in 2014 and 2013.
The fluctuation in reported contract interest amounts for fixed-indexed annuities is driven by sales levels, the level of the business in force and the positive or negative performance of equity markets on option values on projected interest credits. As noted above in the net investment income discussion, the amounts shown for contract interest for fixed-index annuities generally align with the derivative gains/(losses) included in net investment income. In the third quarter of 2015, the embedded derivative liability decreased approximately $11.0 million less than the decline in the associated index option asset value resulting in a charge to pretax earnings in a like amount. The embedded derivative liability decreased at a lesser rate as a result of the market value index option returns having declined to a level such that the projected interest credits used in estimating the embedded derivative liability did not support the Company's expected collectability of asset management fees on fixed-index products (assumed asset management fees collected reduce the embedded derivative liability). At December 31, 2015, the market value index option returns improved resulting in the Company recovering in the fourth quarter approximately $6.6 million of the third quarter pretax earnings charge. The remaining difference ($4.4 million) of the deviation of the index option asset value with the embedded derivative liability is subject to reverse in the future in the event of further increases in market value index option returns and/or decreases in asset management fees charged in lieu of other crediting rate mechanism changes.
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, $1.6 million and $2.1 million of operating earnings in 2015, 2014, and 2013, respectively. The remaining earnings in Other Operations of $19.6 million, $13.6 million, and $13.0 million for the years ended December 31, 2015, 2014, 2013, respectively, represent 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 Libby Shearn Moody Trust which is an asset held in NWLSM, Inc. Pretax distributions from this trust were $7.0 million, $6.0 million, and $5.4 million in 2015, 2014, and 2013, respectively. In addition to pretax distributions, the 2015 amount also includes additional revenue recorded associated with revaluing the actuarial life interest in the Libbie Shearn Moody Trust.
The Company's overall conservative investment philosophy is reflected in the allocation of its investments, which is detailed below as of December 31, 2015 and 2014. 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.
The Company’s investment portfolio increased 4% to $10.3 billion at December 31, 2015 compared to $9.9 billion at December 31, 2014 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. Annuity production was again managed within a targeted range given the low interest rate environment and approximately $775.0 million in annuity deposits were collected in 2015. Partially offsetting the increase in the portfolio balance from investable cash flows was a reduction in the unrealized gain position of the Company’s securities available for sale portfolio, which is reported at fair market value. Unrealized gains decreased from $138.6 million at December 31, 2014 to $32.2 million at December 31, 2015 due to the increase in interest rates during 2015 (which serves to decrease market values).
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 sheet at fair value in accordance with GAAP. The unrealized loss position of options held at December 31, 2015 of $(47.8) million was $88.1 million lower than the unrealized gain position at December 31, 2014 of $40.3 million due to market indice levels at the time of option purchases and a lower equity index level at the end of 2015.
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 98.4% held in investment grade securities. In the table below, investments in debt securities are classified according to credit ratings by Standard and Poor's ("S&P®"), or other nationally recognized statistical rating organizations if securities were not rated by S&P®.
Holdings in below investment grade securities by category as of December 31, 2015 are summarized below, including 2015 and 2014 fair values for comparison. The Company continually monitors developments in these industries for issues that may affect security valuation.
In the energy sector, oil prices have witnessed a precipitous drop in prices over the past two years. Prior to 2015, oil prices maintained price levels over $100 per barrel. More recently, prices have dropped below $30 per barrel which has helped to produce losses among individual companies in the oil and gas industry. This severe downturn, driven by oversupply and global economic and political uncertainty, has affected the credit quality of individual companies. At December 31, 2015, the Company's aggregate holdings in this sector approximated $939 million representing 9.1% of the Company's invested assets. These holdings represented debt securities issued by 43 companies in the oil and gas industry comprising in excess of one hundred bond positions. The Company's oil and gas debt securities were 97.9% 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 was ample diversification by subsector (integrated, independent, pipeline, servicer, and equipment). At December 31, 2014, amounts invested in this sector were approximately $802 million issued by 42 companies.
However, the Company does have holdings of the debt of non-financial companies in certain of these countries. The following table shows bond holdings at December 31, 2015 of non-financial companies that are domiciled in Portugal, Ireland, Italy or Spain held in the available for sale and held to maturity debt security portfolios.
During the year ended December 31, 2015, the Company recorded no other-than-temporary impairment ("OTTI") credit related write-downs on debt securities and $0.3 million in write-downs on equity securities. There was only one debt security impairment during 2014 which pertained to an 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 requires a minimum specified yield on mortgage loan investments determined by reference to currently available debt security instrument yields. 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 $38.5 million and $37.1 million for the years 2015 and 2014, respectively.
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, 2015 and 2014, 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 Company held net investments in mortgage loans, after allowances for possible losses, totaling $108.3 million and $149.5 million at December 31, 2015 and 2014, respectively. The diversification of the portfolio by geographic region, property type, and loan-to-value ratio was as follows:
The Company's real estate investments total approximately $16.3 million at December 31, 2015 and $16.7 million at December 31, 2014, 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 $1.8 million, $1.7 million and $1.7 million for the years ended December 31, 2015, 2014 and 2013, 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 $0.0 million, $1.0 million and $0.3 million associated with these properties in the years ended December 31, 2015, 2014 and 2013, respectively.
The Company offers fixed-index universal life and annuity products that guarantee the return of principal to policyholders and, at the policyholder’s election, credit interest based on a percentage gain in a specified market index, typically the S&P 500 Index® (policyholders may alternatively elect a fixed interest rate). Premiums and deposits received on these products are predominantly invested in investment grade fixed income securities with a portion used to purchase derivatives consisting of call options on the applicable market index to fund the index credits due to fixed-index policyholders. The call options purchased are one year over-the-counter option contracts coinciding with the initial issuance of the policy and annual renewal periods in order to match the Company’s funding requirements for the underlying policies. On the respective anniversary dates of the index policies, the index used to compute the annual index credit is reset and a new one-year call option is purchased to fund the next annual index credit.
Changes in interest rates typically have a sizable effect on the fair values of the Company's debt securities. During 2015, market interest rates of the ten-year U.S. Treasury bond increased roughly 10 basis points from year end 2014. Therefore, the decrease in unrealized gains of $279.0 million was primarily the result of the increase in interest rates. The Company would expect similar results in the future from a significant upward or downward movement in market rates. 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 relatively small effects on the Company's financial results.
The Company has the ability to adjust interest rates, participation rates, and asset 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 offered on competing products offered by other insurance companies and financial service entities. The Company designs its products with features encouraging policy persistency. Interest sensitive life and annuity products have surrender and withdrawal penalty provisions. Depending on the products, surrender charge rates on annuity contracts sold or in force range up to 25% and surrender charge periods up to 15 years. Typically, surrender charge rates gradually decrease each year the contract is in force.
Mortgage and other loans were modeled by discounting scheduled cash flows through the scheduled maturities of the loans, starting with interest rates currently being offered for similar loans to borrowers with similar credit ratings. Policy loans were modeled by discounting estimated cash flows using U.S. Treasury Bill interest rates as the base rates at December 31, 2015. 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, 2015, and does not consider new product sales or the possible impact of interest rate changes on sales.
In connection with the Company’s use of call options to hedge the equity return component of its fixed-indexed annuity and life products, the Company is exposed to the risk that a counterparty fails to perform under terms of the option contract. The Company purchases one-year option contracts from multiple counterparties and evaluates the creditworthiness of all counterparties prior to the purchase of the contracts. For consideration in contracting with a counterparty the rating required by the Company is a Standard & Poor’s credit rating of “A” or higher and a Moody’s rating of “A2” or higher. Accordingly, all options are purchased from nationally recognized financial institutions with a demonstrated performance for honoring their financial obligations and possessing substantial financial capacity. In addition, each counterparty is required to execute a credit support agreement obligating the counterparty to provide collateral to the Company when the fair value of the Company’s exposure to the counterparty exceeds specified amounts. The amount of collateral to be provided is based upon a sliding scale tied to the credit rating of the counterparty. As of December 31, 2015 the counterparty thresholds ranged from $0 to $5 million. Counterparty credit ratings and credit exposure are monitored continuously by the Company’s Investment department with adjustments to collateral levels managed under the terms of the credit support agreements.
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, 2015.
Cash flows from the Company's insurance operations have historically been sufficient to meet current needs. Cash flows from operating activities were $346.2 million, $313.3 million, and $253.6 million in 2015, 2014, and 2013, respectively. The Company also has significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments. These cash flows totaled $0.7 billion, $0.8 billion, and $1.5 billion in 2015, 2014, and 2013, 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 $8.2 million, $104.3 million, and $106.6 million in 2015, 2014, and 2013, respectively.
The National Association of Insurance Commissioners ("NAIC") has established risk-based capital ("RBC") standards for U.S. life insurers as well as a risk-based capital model act ("RBC Model Act"). The RBC Model Act requires that life insurers annually submit a report to state regulators regarding their RBC based upon four categories of risk (asset risk, insurance risk, interest rate risk, and business risk). The capital requirement for each is determined by applying factors that vary based upon the degree of risk to various asset, premium and policy benefit reserve items. The formula is an early warning tool to identify potential weakly capitalized companies for purposes of initiating further regulatory action. Independent rating agencies utilize proprietary versions similar to the NAIC RBC model incorporating additional risk factors identified in their rating methodology. At December 31, 2015, National Western maintained statutory capital substantially in excess of applicable statutory requirements.