Industry analysts and observers generally agree that a sudden jump in interest rate levels, while presently inconceivable, would be harmful to life insurers with interest-sensitive products as it could provide an impetus for abnormal product surrenders and withdrawals at the same time fixed debt securities held by insurers declined in market value. Currently, signals coming from Federal Reserve members, including those viewed as dovish, are that the U.S. economy is in a position to absorb a series of interest rate hikes without impeding ongoing economic growth. It is principally held that a progression of carefully measured increases in interest rate levels would be beneficial to financial service institutions, including life insurance companies. It is uncertain what direction and at what pace interest rate movements may occur in the future and what impact, if any, such movements would have on the Company’s business, results of operations, cash flows or financial condition.
For liability purposes, the embedded option in the Company's policyholder obligations for this feature is bifurcated and reserved for separately. 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.
The Company unlocked the DPAC balance for this segment during 2016 for (1) favorable mortality, (2) higher cost of insurance charges which had been implemented, (3) increased lapse rates for disengaged countries, and (4) for future profit projections related to universal life insurance riders which had not been previously included in DPAC actuarial software models. This final unlocking adjustment increased DPAC balances by $1.2 million and was recorded during the fourth quarter of 2016. 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).
Since the Company's adoption of the GAAP guidance and accounting for other-than-temporary impairments due to credit loss versus non-credit loss, the Company has recognized a total of $2.0 million of other-than-temporary impairments of which $1.4 million were deemed credit related and recognized as realized investment losses in earnings, and $0.6 million that was deemed non-credit related impairments and recognized in other comprehensive income.
The fair value of derivative instruments presented in the Company’s Consolidated Financial Statements totaling $120.6 million at December 31, 2016 and $38.4 million at December 31, 2015 pertain to notional policyholder account values of $2.9 billion and $3.3 billion at December 31, 2016 and 2015, respectively, electing interest credits based upon applicable market index performance.
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 amounts 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 respective rating methodology. At December 31, 2016, National Western maintained statutory capital substantially in excess of applicable statutory requirements.