Edgar Filing: NATIONAL WESTERN LIFE INSURANCE CO

Contact Name

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2006

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 2-17039

NATIONAL WESTERN LIFE INSURANCE COMPANY

(Exact name of Registrant as specified in its charter)

COLORADO	84-0467208
(State of Incorporation)	(I.R.S. Employer Identification Number)

850 EAST ANDERSON LANE, AUSTIN, TEXAS 78752-1602

(Address of Principal Executive Offices)

(512) 836-1010

(Telephone Number)

Securities registered pursuant to Section 12 (b) of the Act:

None

Securities registered pursuant to Section 12 (g) of the Act:

None

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No þ

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated file” in Rule 12b-2 of the Exchange Act. (Check One)

Large accelerated filer o Accelerated filer þ Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The aggregate market value of the common stock (based upon the closing price) held by non-affiliates of the Registrant on June 30, 2006 was $540,988,546.

As of March 9, 2007, the number of shares of Registrant's common stock outstanding was: Class A - 3,420,824 and Class B - 200,000.

DOCUMENTS INCORPORATED BY REFERENCE

None

	TABLE OF CONTENTS


	PART I	Page

Item 1.	Business	4
Item 1A.	Risk Factors	9
Item 1B.	Unresolved Staff Comments	11
Item 2.	Properties	12
Item 3.	Legal Proceedings	12
Item 4.	Submission of Matters to a Vote of Security Holders	12

	PART II

Item 5.	Market for Registrant's Common Equity and Related Stockholder Matters	13
Item 6.	Selected Consolidated Financial Data	15
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	16
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	42
Item 8.	Financial Statements and Supplementary Data	42
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	42
Item 9A.	Controls and Procedures	42
Item 9B.	Other Information	45

	PART III

Item 10.	Directors and Executive Officers of the Registrant	45
Item 11.	Executive Compensation	48
Item 12.	Security Ownership of Certain Beneficial Owners and Management	65
Item 13.	Certain Relationships and Related Transactions	67
Item 14.	Principal Accountant Fees and Services	68

	PART IV

Item 15.	Exhibits and Financial Statement Schedules	68

	Signatures	129

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PART I

ITEM 1. BUSINESS

General

National Western Life Insurance Company (hereinafter referred to as "National Western", "Company", or "Registrant") is a stock life insurance company, chartered in the State of Colorado in 1956, and doing business in forty-nine states, the District of Columbia, and four U.S. territories or possessions. National Western is also licensed in Haiti, and although not otherwise licensed, accepts applications from and issues policies to residents of various countries in Central and South America, the Caribbean, the Pacific Rim, Eastern Europe and Asia. Such policies are underwritten, accepted, and issued in the United States upon applications submitted by independent contractor broker-agents. The Company provides life insurance products for the savings and protection needs of approximately 149,000 policyholders and for the asset accumulation and retirement needs of 124,000 annuity contractholders.

During 2006, the Company's total assets increased 5% to $6.7 billion at December 31, 2006 from $6.4 billion at December 31, 2005. The Company generated revenues of $521.9 million, $441.0 million, and $434.1 million in 2006, 2005, and 2004, respectively. In addition, National Western generated net income of $76.3 million, $77.3 million and $122.2 million (including $54.7 million from a change in accounting principle) in 2006, 2005, and 2004, respectively.

The Company's financial information, including information in this report filed on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to the above reports, are accessible free of charge through the Company's Internet site at www.nationalwesternlife.com or may be viewed at the United States Securities and Exchange Commission ("SEC") Public Reference Room in Washington, D.C. or at the SEC's Internet site at www.sec.gov.

Products

National Western offers a broad portfolio of individual whole life, universal life and term insurance plans, and annuities, including supplementary riders.

Life Products. The Company's life products provide protection for the life of the insured and, in some cases, allow for cash value accumulation on a tax-deferred basis. These product offerings include universal life insurance ("UL"), interest-sensitive whole life, and traditional products such as term insurance coverage. Interest sensitive products such as UL accept premiums that are applied to an account value. Deducted from the account value are cost of insurance charges which vary by age, gender, plan, and class of insurance, as well as various expense charges. Interest is credited to account values at a fixed interest rate generally determined in advance and guaranteed for a policy year at a time, subject to minimum guaranteed rates specified in the policy contract. A slight variation to this general interest crediting practice involves equity-indexed universal life ("EIUL") policies whose credited interest may be linked in part to an outside index such as the S&P 500^Ò Composite Stock Price Index ("S&P 500 Index^Ò") at the election of the policyholder. These products offer both flexible and fixed premium modes and provide policyholders with flexibility in the available coverage, the timing and amount of premium payments and the amount of the death benefit, provided there are sufficient policy funds to cover all policy charges for the coming year. Traditional products generally provide for a fixed death benefit payable in exchange for regular premium payments.

Annuity Products. Annuity products sold include flexible premium and single premium deferred annuities, equity-indexed annuities, and single premium immediate annuities. These products can be tax qualified or nonqualified annuities. A fixed single premium deferred annuity ("SPDA") provides for a single premium payment at the time of issue, an accumulation period, and an annuity payout period commencing at some future date. A flexible premium deferred annuity ("FPDA") provides the same features but allows, generally with some conditions, additional payments into the contract. Interest is credited to the account value of the annuity initially at a current rate of interest which is guaranteed for a period of time, typically the first year. After this period, the interest credited is subject to change based upon market rates and product profitability subject to a minimum guaranteed rate specified in the contract. Interest accrues during the accumulation period generally on a tax-deferred basis to the contractholder. After a number of years specified in the annuity contract, the owner may elect to have the proceeds paid as a single payment or as a series of payments over a period of time. The owner is permitted at any time during the accumulation period to withdraw all or part of the annuity account balance subject to contract provisions such as surrender charges and market value adjustments. An equity-indexed deferred annuity ("EIA") performs essentially in the same manner as SPDAs and FPDAs with the exception that, in addition to a fixed interest crediting option, the contractholder has the ability to elect an interest crediting mechanism that is linked, in part, to an outside index such as the S&P 500 Index^Ò. A single premium immediate annuity ("SPIA") foregoes the accumulation period and immediately commences an annuity payout period.

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Distributions of the Company's direct premium revenues and deposits by product type are provided below.

	Years Ended December 31,
	2006		2005		2004
	(In thousands)
Annuities:
Single premium deferred	$	8,216		10,389		8,156
Flexible premium deferred		163,415		225,941		342,509
Equity-indexed deferred		303,613		298,227		512,709
Single premium immediate		10,750		23,383		28,653

Total annuities		485,994		557,940		892,027

Universal life insurance		146,742		133,579		119,554
Traditional life and other		18,046		16,629		15,830

Total direct premiums and deposits collected	$	650,782		708,148		1,027,411

Operating Segments

The Company manages its business between Domestic Insurance Operations and International Insurance Operations. For segment reporting purposes, the Company's annuity business, which is predominantly domestic, is separately identified.

Domestic Insurance Operations. The Company is currently licensed to do business in all states and the District of Columbia, except for New York. Products marketed are annuities, universal life insurance, and traditional life insurance, which include both term and whole life products. The majority of domestic sales are the Company's annuities. National Western markets and distributes its domestic products primarily through independent national marketing organizations ("NMO"). These NMOs assist the Company in recruiting, contracting, and managing independent agents. The Company's agents are independent contractors who are compensated on a commission basis. At December 31, 2006, the Company's NMO relationships had contracted approximately 10,200 independent agents with the Company. Nearly 20% of these contracted agents submitted policy applications to the Company in the past twelve months.

International Insurance Operations. National Western's international operations focus on foreign nationals in upper socioeconomic classes. Insurance products are issued primarily to residents of countries in Central and South America, the Caribbean, the Pacific Rim, Eastern Europe, and Asia. Issuing policies to residents of countries in these different regions provides diversification that helps to minimize large fluctuations that could arise due to various economic, political, and competitive pressures that may occur from one country to another. Products issued to international residents are almost entirely universal life and traditional life insurance products. However, certain annuity and investment contracts are also available. At December 31, 2006, the Company had 68,100 international life insurance policies in force representing nearly $13.3 billion in face amount of coverage.

International applications are submitted by independent contractor broker-agents, many of whom have been submitting policy applications to National Western for 20 or more years. The Company had approximately 4,000 independent international broker-agents contracted at December 31, 2006, nearly 46% of which submitted policy applications to the Company in the past twelve months.

There are some inherent risks of accepting international applications which are not present within the domestic market that are reduced substantially by the Company in several ways. As previously described, the Company accepts applications from foreign nationals in upper socioeconomic classes who have substantial financial resources. This targeted customer base coupled with National Western's conservative underwriting practices have historically resulted in claims experience, due to natural causes, similar to that in the United States. The Company minimizes exposure to foreign currency risks by requiring payment of premiums and claims in United States dollars. Finally, nearly forty years of experience with the international products and the Company's longstanding independent broker-agent relationships further serve to minimize risks.

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Geographical Distribution of Business. The following table depicts the distribution of the Company's premium revenues and deposits.

	Years Ended December 31,
	2006		2005		2004
	(In thousands)

United States domestic products:
Annuities	$	475,867		548,967		882,530
Life insurance		35,780		36,594		31,501

Total domestic products		511,647		585,561		914,031

International products:
Annuities		10,127		8,973		9,497
Life insurance		129,008		113,614		103,883

Total international products		139,135		122,587		113,380

Total direct premiums and deposits collected	$	650,782		708,148		1,027,411

Although many agents sell National Western's products, the Company's annuity sales in any year typically reflect one or two NMOs whose agents sold 10% or more of the Company’s total annuity sales. In 2006, there were two such NMOs who accounted for 22.1% and 12.2% of total annuity sales, respectively. Similarly, domestic life insurance sales in any year may include one or two NMOs who accounted for 10% or more of total domestic life insurance sales. In 2006, there were two NMOs who generated 22.8% and 13.3%, respectively, of total domestic life insurance sales. These NMOs were not the same NMOs who produced more than 10% of total annuity sales. International life insurance sales are much more diversified by agency and in 2006 were geographically attributed to Latin America (75%), the Pacific Rim (13%), and Eastern Europe (12%).

Segment Financial Information. A summary of financial information for the Company's segments is as follows:

	Domestic		International
	Life		Life				All
	Insurance		Insurance		Annuities		Others		Totals
	(In thousands)
Revenues, excluding
realized gains (losses):
2006	$	43,222		106,613		350,665		18,697		519,197
2005		42,165		93,577		277,889		17,528		431,159
2004		44,116		87,850		283,827		14,847		430,640

Segment earnings: (A)
2006	$	297		12,191		56,559		5,566		74,613
2005		2,809		13,559		47,915		6,559		70,842
2004		2,522		12,133		45,473		5,066		65,194

Segment assets: (B)
2006	$	381,490		715,064		5,467,733		103,087		6,667,374
2005		366,939		631,477		5,256,146		94,064		6,348,626
2004		361,176		568,723		4,960,837		84,481		5,975,217

Notes to Table:

(A) Amounts exclude realized gains and losses on investments, net of taxes.

(B) Amounts exclude other unallocated assets.

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Additional information concerning these industry segments is included in Note 13, Segment and Other Operating Information, of the accompanying consolidated financial statements.

Competition and Ratings

National Western competes with over 400 life and health insurance company groups in the United States consisting of approximately 2,000 companies, as well as other financial intermediaries such as banks and securities firms who market insurance products. Competitive factors are primarily the breadth and quality of products offered, established positions in niche markets, pricing, relationships with distribution, commission structures, perceived stability of the insurer, quality of underwriting and customer service, and cost efficiency. Operating results of life insurers are subject to fluctuations not only from this competitive environment but also due to economic conditions, interest rate levels and changes, performance of investments, and the maintenance of strong insurance ratings from independent rating agencies.

In order to compete successfully, life insurers have turned their attention toward distribution, technology, defined end market targets, speed to the market in terms of product development, and customer relationship management as ways of gaining a competitive edge. The Company's management believes that it competes primarily on the basis of its longstanding reputation for commitment in serving international markets, its financial strength and stability, and its ability to attract and retain distribution based upon product and compensation.

Ratings with respect to financial strength are an important factor in establishing the competitive position of insurance companies. Ratings are important to maintaining public confidence and impact the ability to market products. The following summarizes the Company's financial strength ratings.

Rating Agency	Rating

Standard & Poor's	A (Strong)

A.M. Best	A- (Excellent)

A.M. Best and Standard & Poor’s ratings are a consideration of the Company’s claims paying ability and are not a rating of the Company’s investment worthiness. The rating agencies generally review the Company's rating on an annual basis during the second calendar quarter of the year. The above ratings were assigned with a stable outlook during 2006. However, there is no assurance that the Company's ratings will continue for a certain period of time or that they will not be changed. In the event the Company's ratings are downgraded, the Company's business may be negatively impacted.

Risk Management

The Company's product designs, underwriting standards and risk management techniques are utilized to protect against disintermediation risk and greater than expected mortality and morbidity risk. Disintermediation risk is limited through the use of surrender charges, certain provisions not allowing surrender of the policy, and market value adjustment features. Investment guidelines including duration targets, asset allocation tolerances and return objectives help to ensure that disintermediation risk is managed within the constraints of profitability criteria. Prudent underwriting is applied to select and price insurance risks and the Company regularly monitors mortality experience relative to its product pricing assumptions. Enforcement of disciplined claims management serves to further protect against greater than expected mortality.

A significant aspect of the Company’s business is managing the linkage of its asset characteristics with the anticipated behavior of its policy obligations and liabilities, a process commonly referred to as asset-liability matching. The Company maintains an Asset-Liability Committee (“ALCO”) consisting of senior level members of the Company who assist and advise the Company’s Board of Directors in monitoring the level of risk the Company is exposed to in managing its assets and liabilities in order to attain the risk-return profile desired. Certain members of the ALCO meet as frequently as necessary, to review and recommend for board of director ratification, current period interest crediting rates to policyholders based upon existing and anticipated investment opportunities. These rates apply to new sales and to products after an initial guaranteed period, if applicable. Rates are established after the initial guaranteed period based upon asset portfolio yields and each product’s required interest spread, taking into consideration current competitive market conditions.

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Substantially all international products contain a currency clause stating that premium and claim "dollars" refer to lawful currency of the United States. Policy applications submitted by international insurance brokers are generally associated with individuals in upper socioeconomic classes who desire the stability and inflationary hedge of dollar denominated insurance products issued by the Company. The favorable demographics of this group typically results in a higher average policy size, and persistency and claims experience (from natural causes) similar to that in the United States. By accepting applications submitted on residents outside the United States, the Company is able to further diversify its revenue, earnings, and insurance risk.

The Company follows the industry practice of reinsuring (ceding) portions of its insurance risks with a variety of reinsurance companies. The use of reinsurance allows the Company to underwrite policies larger than the risk it is willing to retain on any single life and to continue writing a larger volume of new business. The maximum amount of life insurance the Company normally retains is $250,000 on any one life subject to a minimum reinsurance session of $50,000. However, the use of reinsurance does not relieve the Company of its primary liability to pay the full amount of the insurance benefit in the event of the failure of a reinsurer to honor its contractual obligation. Consequently, the Company avoids concentrating reinsurance risk with any one reinsurer and only participates in reinsurance treaties with reputable carriers.

The Company maintains a system of disclosure controls and procedures, including internal controls designed to provide reasonable assurance that assets are safeguarded and transactions are properly authorized, executed and recorded. The Company recognizes the importance of full and open presentation of its financial position and operating results and to this end maintains a Disclosure Controls and Procedures Committee comprised of senior executives who possess comprehensive knowledge of the Company's business and operations. This Committee is responsible for evaluating disclosure controls and procedures and for the gathering, analyzing, and disclosing of information as required to be disclosed under the securities laws. It assists the Chief Executive Officer and Chief Financial Officer in their responsibilities of making the certifications required under the securities laws regarding the Company's disclosure controls and procedures. It ensures that material financial information is properly communicated up the Company's hierarchy to the appropriate person or persons and that all disclosures are made in a timely fashion. This Committee reports directly to the Audit Committee of the Company.

Regulatory and Other Issues

Regulation. The Company's insurance business is subject to comprehensive state regulation in each of the states it is licensed to conduct business. The laws enforced by the various state insurance departments provide broad administrative powers with respect to licensing to transact business, licensing and appointing agents, approving policy forms, regulating unfair trade and claims practices, establishing solvency standards, fixing minimum interest rates for the accumulation of surrender values, and regulating the type, amounts, and valuations of permitted investments, among other things. The Company is required to file detailed annual statements with each of the state insurance supervisory departments in which it does business. The Company's operations and financial records are subject to examination by these departments at regular intervals. Statutory financial statements are prepared in accordance with accounting practices prescribed or permitted by the Colorado Division of Insurance, the Company's principal insurance regulator. Prescribed statutory accounting practices are largely dictated by the Statutory Accounting Principles adopted by the National Association of Insurance Commissioners ("NAIC").

The NAIC, as well as state regulators, continually evaluates existing laws and regulations pertaining to the operations of life insurers. To the extent that initiatives result as a part of this process, they may be adopted in the various states in which the Company is licensed to do business. It is not possible to predict the ultimate content and timing of new statutes and regulations adopted by state insurance departments and the related impact upon the Company's operations although it is conceivable that they may be more restrictive.

Although the federal government does not directly regulate the life insurance industry, federal measures previously considered or enacted by Congress, if revisited, could affect the insurance industry and the Company's business. These measures include the tax treatment of life insurance companies and life insurance products, as well as changes in individual income tax structures and rates. Even though the ultimate impact of any of these changes, if implemented, is uncertain, the persistency of the Company's existing products and the ability to sell products could be materially affected.

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Risk-Based Capital Requirements. The NAIC established risk-based capital ("RBC") requirements to help state regulators monitor the financial strength and stability of life insurers by identifying those companies that may be inadequately capitalized. Under the NAIC's requirements, each insurer must maintain its total capital above a calculated threshold or take corrective measures to achieve the threshold. The threshold of adequate capital is based on a formula that takes into account the amount of risk each company faces on its products and investments. The RBC formula takes into consideration four major areas of risk which are: (i) asset risk which primarily focuses on the quality of investments; (ii) insurance risk which encompasses mortality and morbidity risk; (iii) interest rate risk which involves asset-liability matching issues; and (iv) other business risks. For each category, the RBC requirements are determined by applying specified factors to various assets, premiums, reserves, and other items, with the factor being higher for items with greater underlying risk and lower for items with less risk. The Company's statutory capital and surplus at December 31, 2006, was significantly in excess of the threshold RBC requirements.

Effects of Inflation. The rate of inflation as measured by the change in the average consumer price index has not had a material effect on the revenues or operating results of the Company during the three most recent fiscal years.

Employees. The Company had approximately 273 employees as of December 31, 2006 substantially all of which worked in the Company’s home office in Austin, Texas.

ITEM 1A. RISK FACTORS

Company performance is subject to varying risk factors. If any of the following risks manifests into actual occurrences, the Company’s operations, financial position or financial performance could be negatively impacted.

We are subject to changing interest rates, market volatility, and general economic conditions which may affect the risk and returns on both our investment portfolio and our products.

We are exposed to significant capital market risk related to changes in interest rates. Substantial and sustained changes, up or down, in market interest rate levels can materially affect the profitability of our products, the market value of our investments, and ultimately the reported amount of stockholders’ equity.

A rise in interest rates will increase the net unrealized loss position of our investment portfolio and may subject the Company to disintermediation risk. Disintermediation risk is the risk that policyholders may surrender their contracts in a rising interest rate environment, requiring the Company to liquidate investments in an unrealized loss position (i.e. the market value less than the carrying value of the investments). With respect to fixed income security investments the Company maintains in an “Available for Sale” category, rising interest rates will cause declines in the market value of these securities. These declines are reported in our financial statements as an unrealized investment loss and a reduction of stockholders’ equity.

A decline in interest rates could expose the Company to reduced profitability due to minimum interest rate guarantees that are required in our products by regulation. A key component of profitability is investment spread, or the difference between the yield on our investments and the rates we credit to policyholders on our products. A narrowing of investment spreads could negatively affect operating results. Although the Company has the ability to adjust the rates credited on products in order to maintain our required investment spread, a significant decline in interest rate levels could affect investment yields to the point where the investment spread is compromised due to minimum interest rate guarantees. In addition, the potential for increased policy surrenders and cash withdrawals, competitor activities, and other factors could further limit the Company’s ability to maintain crediting rates on its products at levels necessary to avoid sacrificing investment spread.

We are subject to general domestic and international economic conditions that may be less favorable than currently exists or is anticipated.

The demand for financial and insurance products is subject to factors such as consumer sentiment and behavior, business investment and government spending, the volatility and strength of capital markets, inflation, and overall economic climate. Further, since we accept applications from residents in North America, Latin America, Eastern Europe and the Pacific Rim, we are exposed to economic conditions in multiple geographic locations. Economic downturns in any of these geographic locations characterized by political, social or economic instability, higher unemployment, lower family income or consumer spending could negatively affect the demand for the Company’s products. Accordingly, the Company’s overall success depends, in part, upon the ability to succeed despite these differing and dynamic conditions.

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Our investment portfolio is subject to credit quality risks which may lessen the value of invested assets and the Company’s book value per share.

The Company substantially invests monies received in investment grade, fixed income investment securities in order to meet its obligations to policyholders and provide a return on its deployed capital. Consequently, we are subject to the risk that issuers of these securities may default on principal and interest payments, particularly in the event of a major downturn in economic and/or business climate. At December 31, 2006, approximately 2.7% of the Company’s $5.5 billion fixed income securities portfolio was comprised of issuers who were investment grade at the time the Company acquired them but were subsequently downgraded for various reasons. A substantial increase in defaults from these or other issuers could negatively impact the Company’s financial position and results.

For the Company’s equity-indexed products, over the counter derivative instruments are purchased from a number of highly rated counterparties to fund the equity-index credit to policyholders. In the event that any of these counterparties fails to meet their contractual obligations under these derivative instruments, the Company would be financially at risk for providing the credits due that the counterparty reneged on. The failure of the counterparty to perform could negatively impact the Company’s financial position and results.

We are subject to incurring difficulties in marketing and distributing our products through our current and future distribution channels.

The Company distributes its life and annuity products through independent broker-agents. There is substantial competition, particularly in the Company’s domestic market, for independent broker-agents with the demonstrated ability to market and sell insurance products. Competition for these individuals or organizations typically centers on products, compensation, home office support and the insurer’s financial strength ratings. The Company’s future sales and financial condition are dependent upon avoiding significant interruptions in attracting and retaining independent broker-agents.

We are subject to a downgrade in our financial strength ratings which may negatively effect our ability to attract and retain independent distributors, make our products less attractive to consumers, and may have an adverse effect on our operations.

Financial strength ratings have grown to become an important criteria in establishing the competitive position of insurers. Ratings generally reflect the rating agencies’ view of a particular company’s financial strength, operating performance, and ability to meet its obligations to policyholders. However, some of the rating factors often relate to the particular views of the rating agency, their independent economic modeling, the general economic climate, and other circumstances outside of the insurer’s control. Accordingly, we cannot predict with any certainty what actions rating agencies may take. A downgrade in our financial strength rating, or an announced potential downgrade, could affect our competitive position and make it more difficult to market our products vis-à-vis competitors with higher financial strength ratings. In extreme situations, a significant downgrade action by one or more rating agency could induce existing policyholders to cancel their policies and withdraw funds from the Company. These events could have a material adverse effect on our financial position and liquidity.

We are subject to competition from new sources as well as companies having substantially greater financial resources which could have an adverse impact upon our business levels and profitability.

In recent years, there has been considerable consolidation among companies in the insurance and financial sectors resulting in large, well-capitalized entities that offer products comparable to the Company. Frequently, these larger organizations are not domiciled in the United States or are financial services entities attempting to establish a position in the insurance industry. These larger competitors often enjoy economies of scale which produce lower operating costs and the wherewithal to absorb greater risk allowing them to price products more competitively and, in turn, attract independent distributors. Consequently, the Company may encounter additional product pricing pressures and be challenged to maintain profit margin targets and profitability criteria. Because of these competitive presences, the Company may not be able to effectively compete without negative affects on our financial position and results.

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We are subject to regulation and changes to existing laws that may affect our profitability or means of operations.

The Company is subject to extensive laws and regulations which are complex and subject to change. In addition, these laws and regulations are enforced by a number of different authorities including, but not limited to, state insurance regulators, the Securities and Exchange Commission, state attorney generals, and the U.S. Department of Justice. Compliance with these laws and regulations is time consuming and any changes may materially increase our compliance costs and other expenses of doing business. The regulatory framework at the state and, increasingly, federal level pertaining to insurance products and practices is advancing and could affect not only the design of our products but our ability to continue to sell certain products.

Life insurer products generally offer tax advantages to policyholders via the deferral of income tax on policy earnings during the accumulation phase of the product, be it an annuity or a life insurance product. Periodically, Congress has considered legislation that would reduce or eliminate this tax deferral advantage inherent to the life insurance industry and subject the industry’s products to treatment more equivalent with other investments. In the event that the tax-deferred status of life insurance products is revised or reduced by Congress all life insurers would be adversely impacted.

We may be subject to unfavorable judicial developments, including the time and expense of litigation, which potentially could affect our financial position and results.

In the ordinary course of business, we are involved in various legal actions common to the life insurance industry, some of which may occasionally assert claims for large amounts. These actions, for example, could include allegations of improper sales practices in connection with the sale of life insurance or bad faith in the handling of insurance claims. While we are not a party to any lawsuit that we believe will have a material adverse effect on our financial position or operations, given the inherent unpredictability of litigation, there can be no assurance that such litigation, current or in the future, will not have such a material adverse effect on the Company’s results of operation or cash flows in any particular reporting period.

We are subject to policy claims experience which can fluctuate from period to period and vary from past results or expectations.

The Company’s earnings are significantly influenced by policy claims received and will vary from period to period depending upon the amount of claims incurred. In any given quarter or year, there is very limited predictability of claims experience. The liability established for future policy benefits is based upon a number of different factors. In the event our future claim experience does not match our past results or pricing assumptions, our operating results could be materially and adversely affected.

We are subject to assumption inaccuracies regarding future mortality, persistency, and interest rates used in determining deferred policy acquisition costs.

Deferred policy acquisition costs (and deferred sales inducement amounts) are calculated using a number of assumptions related to policy persistency, mortality and interest rates. Actual results could differ significantly from the related assumptions which could have a material and adverse impact on the Company’s operating results.

We are dependent upon managing ever-evolving technology initiatives for effectively managing the Company’s business.

The Company’s business operations are technology dependent for maintaining accurate records, administering complex contract provisions, and complying with increasingly demanding regulation. While systems developments can streamline many processes and in the long term reduce the cost of doing business, these initiatives can present short-term cost and implementation risks. Projections of expenses, implementation time frames and the ultimate enhancement values may be different from expectations and escalate over time. The Company also faces rising costs and time constraints in meeting data security compliance requirements of new and proposed regulations. The increasing volume and sophistication of computer viruses, hackers and other external threats may increase the vulnerability of the Company’s systems to data breaches. These increased risks and expanding requirements expose the Company to potential data loss and damages and significant increases in compliance and litigation costs.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

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ITEM 2. PROPERTIES

The Company leases approximately 72,000 square feet of office space in Austin, Texas. This lease expires in 2010 and specifies lease payments that gradually increase over the term of the lease. Currently, lease payments are $0.6 million per year plus taxes, insurance, maintenance, and other operating costs. Additionally, the Company’s wholly-owned subsidiary, The Westcap Corporation, owns two buildings adjacent to the Company’s principal office space totaling approximately 21,000 square feet that are leased and utilized by the Company. The Company’s affiliate, Regent Care Building, Limited Partnership, 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, Limited Partnership, for use in its 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 home have been eliminated for consolidated reporting purposes.

ITEM 3. LEGAL PROCEEDINGS

In the course of an audit of a charitable tax-exempt foundation, the Internal Revenue Service (“IRS”) raised an issue under the special provisions of the Internal Revenue Code (“IRC”) governing tax-exempt private foundations as to certain interest-bearing loans from the Company to another corporation in which the tax-exempt foundation owns stock. The issue is whether such transactions constitute indirect self-dealing by the foundation, the result of which would be excise taxes on the Company by virtue of its participation in such transactions. By letter to the Company dated August 21, 2003, the IRS proposed an initial excise tax liability in the total amount approximating one million dollars as a result of such transactions. The Company disagrees with the IRS analysis. The Company is contesting the matter and expects to prevail on the merits. On October 14, 2003, in response to the IRS letter, the Company requested that this issue instead be referred to the IRS National Office for technical advice. The IRS audit team agreed and the matter was referred in November of 2003 to the IRS National Office. Such technical advice when issued by the IRS National Office will be in the form of a memorandum analyzing the issue which will be binding on the IRS audit team.

The Company is a defendant in three class action lawsuits, and one class has been certified regarding an alleged violation of section 17200 of the California Business and Professions Code. Management believes that the Company has good and meritorious defenses and intends to continue to vigorously defend itself against these claims.

The Company is involved or may become involved in various other legal actions, in the normal course of business, in which claims for alleged economic and punitive damages have been or may be asserted, some for substantial amounts. Although there can be no assurances, at the present time, the Company does not anticipate that the ultimate liability arising from potential, pending, or threatened legal actions, will have a material adverse effect on the financial condition or operating results of the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE

OF SECURITY HOLDERS

No matters were submitted to a vote of the Company’s security holders during the fourth quarter of 2006.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY

AND RELATED STOCKHOLDER MATTERS

Market Information

The principal market on which the Class A common stock of the Company trades is The NASDAQ Stock Market^® under the symbol “NWLIA”. The high and low sales prices for the Class A common stock for each quarter during the last two years are shown in the following table.

			High	Low

2006:	First Quarter	$	232.29	200.00
	Second Quarter		239.65	209.00
	Third Quarter		237.36	222.59
	Fourth Quarter		243.00	224.05

2005:	First Quarter	$	175.85	166.63
	Second Quarter		197.99	160.00
	Third Quarter		213.70	194.69
	Fourth Quarter		220.00	181.95

Equity Security Holders

The number of stockholders of record on March 9, 2007 was as follows:

	Class A Common Stock		4,635
	Class B Common Stock		2

Dividends

During 2006, the Company paid cash dividends on its Class A and Class B common stock in the amounts of $1,231,497 and $36,000, respectively. During 2005, the Company paid cash dividends on its Class A and Class B common stock in the amounts of $1,160,017 and $34,000, respectively. Payment of dividends is within the discretion of the Company’s Board of Directors. The Company’s general policy is to reinvest earnings internally to finance the development of new business.

Securities Authorized For Issuance Under Equity Compensation Plans

The Company has one equity compensation plan that was approved by security holders. Under the plan, 128,465 shares of the Company’s Class A common stock may be issued upon exercise of the outstanding options at December 31, 2006. The weighted average exercise price of the outstanding options is $123.00 per option. Excluding the outstanding options, 26,477 shares of the common stock remain available for future issuance under the plan at December 31, 2006. The Company has no equity compensation plans that have not been approved by security holders.

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Performance Graph

The following graph compares the change in the Company's cumulative total stockholder return on its common stock with the NASDAQ - U.S. Companies Index and the NASDAQ Insurance Stock Index. The graph assumes that the value of the Company's common stock and each index was $100 at December 31, 2001, and that all dividends were reinvested.

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following five-year financial summary includes comparative amounts derived from the audited consolidated financial statements.

	Years Ended December 31,
	2006		2005		2004		2003			2002
	(In thousands except per share amounts)
Earnings Information:
Revenues:
Life and annuity premiums	$	15,805		14,602		14,025		13,916			13,918
Universal life and annuity contract
revenues		106,320		96,765		89,513		80,964			76,173
Net investment income		379,768		310,213		315,843		298,974			236,714
Other income		17,304		9,579		11,259		7,061			6,726
Realized gains (losses) on
investments		2,662		9,884		3,506		(1,647	)		(16,144	)
Total revenues		521,859		441,043		434,146		399,268			317,387
Benefits and expenses:
Life and other policy benefits		35,241		39,162		34,613		37,180			31,299
Amortization of deferred policy
acquisition costs		90,358		87,955		88,733		53,829			35,799
Universal life and investment
annuity contract interest		213,736		150,692		173,315		176,374			150,479
Other operating expenses		65,709		46,349		35,441		48,776			36,938
Total expenses		405,044		324,158		332,102		316,159			254,515
Earnings before Federal income taxes
and cumulative effect of change in
accounting principle		116,815		116,885		102,044		83,109			62,872
Federal income taxes		40,472		39,618		34,572		27,327			20,806
Earnings before cumulative effect of
change in accounting principle		76,343		77,267		67,472		55,782			42,066
Cumulative effect or change in
accounting principle, net of tax		-		-		54,697		-			-
Net earnings	$	76,343		77,267		122,169		55,782			42,066


Diluted Earnings Per Share:
Earnings from operations	$	20.88		21.24		18.73		15.64			11.84
Cumulative effect of change in
accounting principle		-		-		15.18		-			-
Net earnings	$	20.88		21.24		33.91		15.64			11.84

Balance Sheet Information:

Total assets	$	6,693,443		6,369,008		5,991,685		5,297,720			4,137,247

Total liabilities	$	5,760,459		5,495,000		5,183,013		4,617,862			3,530,041

Stockholders’ equity	$	932,984		874,008		808,672		679,858			607,206

Book value per common share	$	257.67		241.89		225.62		191.69			172.26

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Certain information contained herein or in other written or oral statements made by or on behalf of National Western Life Insurance Company or its subsidiaries are or may be viewed as forward-looking. Although the Company has taken appropriate care in developing any such information, forward-looking information involves risks and uncertainties that could significantly impact actual results. These risks and uncertainties include, but are not limited to, matters described in the Company’s SEC filings such as exposure to market risks, anticipated cash flows or operating performance, future capital needs, and statutory or regulatory related issues. However, National Western, as a matter of policy, does not make any specific projections as to future earnings, nor does it endorse any projections regarding future performance that may be made by others. Whether or not actual results differ materially from forward-looking statements may depend on numerous foreseeable and unforeseeable events or developments. Also, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future developments, or otherwise.

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, 2006 follows. This discussion should be read in conjunction with the Company’s consolidated financial statements and related notes beginning on page 74 of this report.

Overview

The Company provides life insurance products on a global basis for the savings and protection needs of policyholders and annuity contracts for the asset accumulation and retirement needs of contractholders both domestically and internationally. The Company accepts funds from policyholders or contractholders 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.

Due to the business of accepting funds to pay future obligations in later years, the underlying economics and relevant factors affecting the life insurance industry include the following:

Ÿ	level of premium revenues collected

Ÿ	persistency of policies and contracts

Ÿ	returns on investments

Ÿ	investment credit quality

Ÿ	levels of policy benefits and costs to acquire business

Ÿ	effect of interest rate changes on revenues and investments including asset and liability matching

Ÿ	adequate levels of capital and surplus

The Company monitors these factors continually as key business indicators. The discussion below includes these indicators and presents information useful to an overall understanding of the Company’s business performance in 2006, incorporating required disclosures in accordance with the rules and regulations of the Securities and Exchange Commission.

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Critical Accounting Policies

Accounting policies discussed below are those considered critical to an understanding of the Company’s financial statements.

Impairment of Investment Securities. The Company’s accounting policy requires that a decline in the value of a security below its amortized cost basis be evaluated to determine if the decline is other-than-temporary. The primary factors considered in evaluating whether a decline in value for fixed income and equity securities is other-than-temporary include: (a) the length of time and the extent to which the fair value has been less than cost, (b) the financial conditions and near-term prospects of the issuer, (c) whether the debtor is current on contractually obligated principal and interest payments, and (d) the intent and ability of the Company to retain the investment for a period of time sufficient to allow for any anticipated recovery. In addition, certain securitized financial assets with contractual cash flows are evaluated periodically by the Company to update the estimated cash flows over the life of the security. If the Company determines that the fair value of the securitized financial asset is less than its carrying amount and there has been a decrease in the present value of the estimated cash flows since the previous estimate, then an other-than-temporary impairment charge is recognized. When a security is deemed to be impaired a charge is recorded as net realized losses equal to the difference between the fair value and amortized cost basis of the security. Once an impairment charge has been recorded, the fair value of the impaired investment becomes its new cost basis and the Company continues to review the other-than-temporarily impaired security for appropriate valuation on an ongoing basis. Under U.S. generally accepted accounting principles, the Company is not permitted to increase the basis of impaired securities for subsequent recoveries in value.

Deferred Acquisition Costs (“DAC”). The Company is required to defer certain policy acquisition costs and amortize them over future periods. These costs include commissions and certain other expenses that vary with and are primarily associated with acquiring new business. The deferred costs are recorded as an asset commonly referred to as deferred policy acquisition costs. The DAC asset balance is subsequently charged to income over the lives of the underlying contracts in relation to the anticipated emergence of revenue or profits. Actual revenue or profits can vary from Company estimates resulting in increases or decreases in the rate of amortization. The Company regularly evaluates to determine if actual experience or other evidence suggests that earlier estimates should be revised. Assumptions considered significant include surrender and lapse rates, mortality, expense levels, investment performance, and estimated interest spread. Should actual experience dictate that the Company change its assumptions regarding the emergence of future revenues or profits (commonly referred to as “unlocking”), the Company would record a charge or credit to bring its DAC balance to the level it would have been if using the new assumptions from the inception date of each policy.

DAC is also subject to periodic recoverability and loss recognition testing. These tests ensure that the present value of future contract-related cash flows will support the capitalized DAC balance to be amortized in the future. The present value of these cash flows, less the benefit reserve, is compared with the unamortized DAC balance and if the DAC balance is greater, the deficiency is charged to expense as a component of amortization and the asset balance is reduced to the recoverable amount. For more information about accounting for DAC see Note 1, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements.

Deferred Sales Inducements. Costs related to sales inducements offered on sales to new customers, principally on investment type contracts and primarily in the form of additional credits to the customer’s account value or enhancements to interest credited for a specified period, which are beyond amounts currently being credited to existing contracts, are deferred and recorded as other assets. All other sales inducements are expensed as incurred and included in interest credited to contract holders’ funds. Deferred sales inducements are amortized to income using the same methodology and assumptions as DAC, and are included in interest credited to contract holders’ funds. Deferred sales inducements are periodically reviewed for recoverability.

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Future Policy Benefits. Because of the long-term nature of insurance contracts, the Company is liable for policy benefit payments many years into the future. The liability for future policy benefits represents estimates of the present value of the Company’s expected benefit payments, net of the related present value of future net premium collections. For traditional life insurance contracts, this is determined by standard actuarial procedures, using assumptions as to mortality (life expectancy), morbidity (health expectancy), persistency, and interest rates, which are based on the Company’s experience with similar products. The assumptions used are those considered to be appropriate at the time the policies are issued. An additional provision is made on most products to allow for possible adverse deviation from the assumptions assumed. For universal life and annuity products, the Company’s liability is the amount of the contract’s account balance. Account balances are also subject to minimum liability calculations as a result of minimum guaranteed interest rates in the policies. While management and Company actuaries have used their best judgment in determining the assumptions and in calculating the liability for future policy benefits, there is no assurance that the estimate of the liabilities reflected in the financial statements represents the Company’s ultimate obligation. In addition, significantly different assumptions could result in materially different reported amounts. A discussion of the assumptions used to calculate the liability for future policy benefits is reported in Note 1, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements.

Revenue Recognition. Premium income for the Company’s traditional life insurance contracts is generally recognized as the premium becomes due from policyholders. For annuity and universal life contracts, the amounts collected from policyholders are considered deposits and are not included in revenue. For these contracts, fee income consists of policy charges for policy administration, cost of insurance charges and surrender charges assessed against policyholders’ account balances which are recognized in the period the services are provided.

Investment activities of the Company are integral to its insurance operations. Since life insurance benefits may not be paid until many years into the future, the accumulation of cash flows from premium receipts are invested with income reported as revenue when earned. Anticipated yields on investments are reflected in premium rates, contract liabilities, and other product contract features. These anticipated yields are implied in the interest required on the Company’s net insurance liabilities (future policy benefits less deferred acquisition costs) and contractual interest obligations in its insurance and annuity products. The Company benefits to the extent actual net investment income exceeds the required interest on net insurance liabilities and manages the rates it credits on its products to maintain the targeted excess or “spread” of investment earnings over interest credited. The Company will continue to be required to provide for future contractual obligations in the event of a decline in investment yield. For more information concerning revenue recognition, investment accounting, and interest sensitivity, please refer to Note 1, Summary of Significant Accounting Policies, and Note 3, Investments, in the Notes to Consolidated Financial Statements and the discussions under Investments in Item 7 of this report.

Pension Plans and Other Postretirement Benefits. The Company sponsors a qualified defined benefit pension plan covering substantially all employees and three nonqualified defined benefit plans covering certain senior officers. In addition, the Company also has postretirement health care benefits for certain senior officers. In accordance with prescribed accounting standards, the Company annually reviews plan assumptions.

The Company annually reviews its pension benefit plan assumptions which include the discount rate, the expected long-term rate of return on plan assets, and the compensation increase rate. The assumed discount rate is set based on the rates of return on high quality long-term fixed income investments currently available and expected to be available during the period to maturity of the pension benefits. The assumed long-term rate of return on plan assets is generally set at the rate expected to be earned based on long-term investment policy of the plans and the various classes of the invested funds, based on the input of the plan’s investment advisors and consulting actuary and the plan’s historic rate of return. The compensation rate increase assumption is generally set at a rate consistent with current and expected long-term compensation and salary policy, including inflation. These assumptions involve uncertainties and judgment and therefore actual performance may not be reflective of the assumptions.

Other postretirement benefit assumptions include future events affecting retirement age, mortality, dependency status, per capita claims costs by age, health care trend rates, and discount rates. Per capita claims cost by age is the current cost of providing postretirement health care benefits for one year at each age from the youngest age to the oldest age at which plan participants are expected to receive benefits under the plan. Health care trend rates involve assumptions about the annual rate(s) of change in the cost of health care benefits currently provided by the plan, due to factors other than changes in the composition of the plan population by age and dependency status. These rates implicitly consider estimates of health care inflation, changes in utilization, technological advances and changes in health status of the participants. These assumptions involve uncertainties and judgment, and therefore actual performance may not be reflective of the assumptions.

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Share-Based Payments. Liability awards under a share-based payment arrangement have been measured based on the award's fair value at the reporting date. The Black-Scholes valuation method has been used to estimate the fair value of the options. This fair value calculation of the options include assumptions relative to the following:

Ÿ	exercise price

Ÿ	expected term based on contractual term and perceived future behavior relative to exercise

Ÿ	current price

Ÿ	expected volatility

Ÿ	risk-free interest rates

These assumptions are continually reviewed by the Company and adjustments may be made based upon current facts and circumstances.

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.

RESULTS OF OPERATIONS

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 and earnings. 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.

Consolidated Operations

Revenues. The following details Company revenues.

	Years Ended December 31,
	2006		2005			2004
	(In thousands)

Universal life and annuity contract revenues	$	106,320		96,765			89,513
Traditional life and annuity premiums		15,805		14,602			14,025
Net investment income (excluding derivatives)		336,489		321,201			303,855
Other income		17,304		9,579			11,259

Operating revenues		475,918		442,147			418,652
Derivative income (loss)		43,279		(10,988	)		11,988
Realized gains on investments		2,662		9,884			3,506

Total revenues	$	521,859		441,043			434,146

Universal life and annuity contract revenues - 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. The Company has experienced modest growth in its life block of businesses. This growth contributes to higher revenues in the form of cost of insurance charges which were $67.7 million in 2006 compared to $63.3 million in 2005, and $60.1 million in 2004. Administrative charges were $17.1 million, $15.0 million, and $13.0 million for the years ended December 31, 2006, 2005, and 2004, respectively. Surrender charges assessed against policyholder account balances upon withdrawal were $28.7 million in 2006 compared to $25.1 million in 2005 and $23.4 million in 2004.

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Traditional life and annuity premiums - Traditional life insurance premiums for products such as whole life and term life are recognized as revenues over the premium-paying period. These are product lines that the Company has not put as much emphasis on relative to interest sensitive products, particularly in its international life insurance operations.

Net investment income - A detail of net investment income is provided below.

	Years Ended December 31,
	2006		2005			2004
	(In thousands)
Gross investment income:
Debt securities	$	306,129		293,502			276,624
Mortgage loans		8,480		9,676			12,510
Policy loans		6,354		6,409			6,483
Other investment income		18,407		13,975			10,351

Total investment income		339,370		323,562			305,968
Investment expenses		2,881		2,361			2,113

Net investment income
(excluding derivatives)		336,489		321,201			303,855

Derivative income (loss)		43,279		(10,988	)		11,988

Net investment income	$	379,768		310,213			315,843

Investment grade debt securities generated approximately 91.0% of total investment income, excluding derivatives in 2006. The mortgage loan investment balance has been steadily declining over the past several years due to the low interest rate environment, which has resulted in loan pre-payments and a decrease of new loan fundings. Other investment income for 2006 includes $1.2 million related to income received on various profit participation arrangements compared to $2.8 million recorded in 2005 and $1.5 million recorded in 2004. In addition, proceeds of $4.3 million were received in 2006 from a class action settlement on a disposed debt security.

Net investment income performance is analyzed excluding derivative income (loss), which is a common practice in the insurance industry, in order to assess underlying profitability and results from ongoing operations. Net investment income performance is summarized as follows:

	Years Ended December 31,
	2006			2005			2004
	(In thousands except percentages)
Excluding derivatives:
Net investment income	$	336,489			321,201			303,855
Average invested assets, at amortized cost	$	5,514,196			5,205,983			4,693,661
Yield on average invested assets		6.10	%		6.17	%		6.47	%

Including derivatives:
Net investment income	$	379,768			310,213			315,843
Average invested assets, at amortized cost	$	5,548,266			5,252,259			4,731,169
Yield on average invested assets		6.84	%		5.91	%		6.68	%

The average invested asset decline in yield is due to the overall interest rate level decline and the Company obtaining lower yields on newly invested funds. In addition, prepayments, calls, and maturities of higher yielding debt securities have added to the yield decrease as these funds are reinvested at lower rates. Refer to the Derivatives discussion following this section for a more detailed explanation.

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Derivatives income (loss) - Index options are derivative financial instruments used to fully hedge the equity return component of the Company’s equity-indexed products, which were first introduced for sale in 1997. In 2002, the Company began selling an equity-indexed universal life product in addition to its equity-indexed annuities. Any income or loss from the sale or expiration of the options, as well as period-to-period changes in fair values, are reflected as a component of net investment income. However, increases or decreases in income from these options are substantially offset by corresponding increases or decreases in amounts credited to equity-indexed annuity and life policyholders.

Income and losses from index options are due to market conditions. Index options are intended to act as hedges to match the returns on the S&P 500 Index^® and the rise or decline in this index causes index option values to likewise rise or decline. While income from index options fluctuates with the index, the contract interest expense to policyholder accounts for the Company’s equity-indexed products also fluctuates in a similar manner and direction. In 2006 and 2004, the S&P 500 Index^® increased and the Company recorded income from index options and likewise increased contract interest expenses. In 2005, the S&P 500 Index^® decreased resulting in index option losses and a reduction in contract interest expenses.

Derivative components included in net investment income and the corresponding contract interest amounts are detailed below for each date presented.

	Years Ended December 31,
	2006		2005			2004
	(In thousands)
Derivatives:
Unrealized income (loss)	$	27,108		(9,579	)		(13,262	)
Realized income (loss)		16,171		(1,409	)		25,250

Total income (loss) included in net investment income	$	43,279		(10,988	)		11,988

Total contract interest	$	213,736		150,962			173,315

Other income - Other income revenues consists primarily of gross income associated with nursing home operations of $11.2 million, $8.9 million, and $8.3 million in 2006, 2005, and 2004, respectively. In addition, the Company received $5.5 million related to lawsuit settlements during 2006. In 2004, a lawsuit settlement of $2.2 million was awarded to the Company relating to an investment previously owned and is also included in other income.

Realized gains on investments - The net gains reported in 2006 of $2.7 million consisted of gross gains of $5.3 million primarily from calls and sales of debt securities, sale of real estate during the year, offset by gross losses of $2.6 million, which includes the impairments highlighted in the table below, and from calls and sales of debt and equity securities.

In past years, the realized losses on investments have primarily resulted from impairment writedowns on investments in debt securities and valuation allowances recorded on mortgage loans. The Company records impairment writedowns when a decline in value is considered other-than-temporary and full recovery of the investment is not expected. Impairment writedowns are summarized in the following table.

	Years Ended December 31,
	2006		2005		2004
	(In thousands)
Impairment or valuation writedowns:
Bonds	$	99		1,926		3,647
Mortgage loans		2,100		-		632

The mortgage loan valuation writedown in 2006 involves a New Orleans property whose value was negatively impacted by Hurricane Katrina.

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Benefits and Expenses. The following details benefits and expenses.

	Years Ended December 31,
	2006		2005		2004
	(In thousands)

Life and other policy benefits	$	35,241		39,162		34,613
Amortization of deferred policy acquisition costs		90,358		87,955		88,733
Universal life and annuity contract interest		213,736		150,692		173,315
Other operating expenses		65,709		46,349		35,441

Totals	$	405,044		324,158		332,102

Life and other policy benefits - Life and other policy benefits reflect death claims of $26.2 million, $30.0 million, and $24.7 million for 2006, 2005, and 2004, respectively. The Company's mortality experience over the past three years has generally been consistent with its product pricing assumptions.

Amortization of deferred policy acquisition costs - Life insurance companies are required to defer certain expenses associated with acquiring new business. The majority of these acquisition expenses consist of commissions paid to agents, underwriting costs, and certain marketing expenses and sales inducements. The Company defers sales inducements in the form of first year interest bonuses on annuity and universal life 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. Recognition of these deferred policy acquisition costs in the consolidated financial statements is to occur over future periods in relation to the expected emergence of profits priced into the products sold. This emergence of profits is based upon assumptions regarding premium payment patterns, mortality, persistency, investment performance, and expense patterns. Companies are required to review these assumptions periodically to ascertain whether actual experience has deviated significantly from that assumed. If it is determined that a significant deviation has occurred, the emergence of profit patterns is to be "unlocked" and reset based upon the actual experience.

Amortization of deferred policy acquisition costs increased to $90.4 million for the year ended December 31, 2006 compared to $88.0 million and $88.7 million reported in 2005 and 2004. Amortization for 2006 includes a true-up adjustment relative to partial surrenders, mortality assumptions, annuitizations, credited rates and earned rates which increased amortization in the current year by approximately $4.3 million. There were similar adjustments in 2005 and 2004 relative to amortization assumptions that resulted in increased amortization for those years.

Universal life and annuity contract interest - The Company closely monitors its credited interest rates on interest sensitive policies, taking into consideration such factors as profitability goals, policyholder benefits, product marketability, and economic market conditions. As long-term interest rates change, the Company's credited interest rates are often adjusted accordingly, taking into consideration the factors described above. The difference between yields earned on investments over policy credited rates is often referred to as the "interest spread". Raising policy credited rates can typically have an impact sooner than higher market rates on the Company's investment portfolio yield, making it more difficult to maintain the current interest spread.

The Company's approximated average credited rates are as follows:

	December 31,									December 31,
	2006			2005			2004			2006			2005			2004
	(Excluding equity-indexed products)									(Including equity-indexed products)

Annuity		3.39	%		3.59	%		3.91	%		3.86	%		2.86	%		3.60	%
Interest sensitive life		4.30	%		4.94	%		4.75	%		5.41	%		4.63	%		4.97	%

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Contract interest also includes the performance of the derivative component of the Company's equity-indexed products. As previously noted, the recent market performance of these derivative features decreased contract interest expense in 2005, while also decreasing the Company's investment income given the hedge nature of the options. During 2006 and 2004, the reverse was noted, as the S&P 500 Index^® performance was up resulting in higher investment income and contract interest expense. With these credited rates, the Company generally realized its targeted interest spread on its products.

Other operating expenses - Other operating expenses consist of general administrative expenses, licenses and fees, commissions not subject to deferral, and expenses of nursing home operations. Nursing home expenses amounted to $10.2 million, $7.6 million, and $7.2 million in 2006, 2005, and 2004, respectively. In 2006, $13.1 million was recorded related to increased compensation costs resulting from a change in liability classification for the Company’s stock option plan. Compensation costs reported in 2005 and 2004 totaled $0.9 million in both years. A reduction in expenses of $6.5 million due to the final accounting related to a lawsuit settlement is reflected in 2004 amounts. In addition, contractholder account balances were increased $2.3 million in 2004 based on this final settlement.

Federal Income Taxes. Federal income taxes on earnings from continuing operations for 2006, 2005, and 2004 reflect effective tax rates of 34.6%, 33.9%, and 33.9%, respectively, which are lower than the expected Federal rate of 35% primarily due to tax-exempt investment income related to investments in municipal securities and dividends-received deductions on income from stock investments.

Segment Operations

Summary of Segment Earnings

A summary of segment earnings from continuing operations for the years ended December 31, 2006, 2005, and 2004 is provided below. The segment earnings exclude realized gains and losses on investments, net of taxes.

	Domestic Life Insurance		International Life Insurance		Annuities		All Others		Totals
	(In thousands)
Segment earnings:

2006	$	297		12,191		56,559		5,566		74,613
2005		2,809		13,559		47,915		6,559		70,842
2004		2,522		12,133		45,473		5,066		65,194

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Domestic Life Insurance Operations

A comparative analysis of results of operations for the Company's domestic life insurance segment is detailed below.

	Years Ended December 31,
	2006		2005		2004
	(In thousands)
Premiums and other revenue:
Premiums and contract revenues	$	22,731		22,172		23,324
Net investment income		20,462		19,958		20,283
Other income		29		35		509

Total premiums and other revenue		43,222		42,165		44,116

Benefits and expenses:
Life and other policy benefits		13,656		14,932		15,141
Amortization of deferred policy acquisition costs		7,313		5,798		9,098
Universal life insurance contract interest		9,168		8,842		8,585
Other operating expenses		12,630		8,349		7,479

Total benefits and expenses		42,767		37,921		40,303

Segment earnings before Federal income taxes		455		4,244		3,813

Federal income taxes		158		1,435		1,291

Segment earnings	$	297		2,809		2,522

Revenues from domestic life insurance operations include life insurance premiums on traditional type products and revenues from universal life insurance. Revenues from traditional products are simply premiums collected, while revenues from universal life insurance consist of policy charges for the cost of insurance, policy administration fees, and surrender charges assessed during the period. A comparative detail of premiums and contract revenues is provided below.

	Years Ended December 31,
	2006			2005			2004
	(In thousands)

Universal life insurance revenues	$	18,286			16,322			16,807
Traditional life insurance premiums		6,906			7,392			7,638
Reinsurance premiums		(2,461	)		(1,542	)		(1,121	)

Totals	$	22,731			22,172			23,324

In accordance with generally accepted accounting principles, premiums collected on universal life products are not reflected as revenues in the Company's consolidated statements of earnings. Actual domestic universal life premiums are detailed below.

	Years Ended December 31,
	2006		2005		2004
	(In thousands)

Universal life insurance:
First year and single premiums	$	14,640		14,973		9,382
Renewal premiums		14,118		14,199		14,510

Totals	$	28,758		29,172		23,892

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The Company's U.S. operations have typically emphasized annuity product sales over life product sales but recent efforts have been made to attract new independent agents and to promote life products to improve domestic sales. It is the Company's goal to increase domestic life product sales through increased recruiting of new distribution and the development of new life insurance products. The Company had approximately 10,200 contracted agents as of December 31, 2006.

Policy benefits totaled $13.7 million, $14.9 million, and $15.1 million in 2006, 2005, and 2004, respectively, which are consistent with Company expectations. Net investment income remained consistent with $20.5 million, $20.0 million, and $20.3 million for 2006, 2005, and 2004, respectively. Other operating expenses increased significantly in 2006 due to an increase in compensation costs resulting from the change in liability classification for the Company’s stock option plan. Compensation costs totaled $3.0 million, $0.2 million, and $0.2 million in 2006, 2005, and 2004, respectively.

International Life Insurance Operations

A comparative analysis of results of operations for the Company's international life insurance segment is detailed below.

	Years Ended December 31,
	2006		2005		2004
	(In thousands)
Premiums and other revenue:
Premiums and contract revenues	$	78,005		70,379		64,239
Net investment income		28,530		23,123		22,821
Other income		78		75		790

Total premiums and other revenue		106,613		93,577		87,850

Benefits and expenses:
Life and other policy benefits		18,161		21,232		16,626
Amortization of deferred policy acquisition costs		23,075		20,389		21,837
Universal life insurance contract interest		25,675		18,118		18,631
Other operating expense		21,051		13,359		12,418

Total benefits and expenses		87,962		73,098		69,512

Segment earnings before Federal income taxes		18,651		20,479		18,338

Federal income taxes		6,460		6,920		6,205

Segment earnings	$	12,191		13,559		12,133

As with domestic operations, revenues from the international life insurance segment include both premiums on traditional type products and revenues from universal life insurance. A comparative detail of premiums and contract revenues is provided below.

	Years Ended December 31,
	2006			2005			2004
	(In thousands)

Universal life insurance revenues	$	78,008			72,010			67,059
Traditional life insurance premiums		11,027			9,201			8,228
Reinsurance premiums		(11,030	)		(10,832	)		(11,048	)

Totals	$	78,005			70,379			64,239

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International operations have emphasized universal life policies over traditional life insurance products. In accordance with generally accepted accounting principles, premiums collected on universal life products are not reflected as revenues in the Company's consolidated statements of earnings. Actual international universal life premiums collected are detailed below.

	Years Ended December 31,
	2006		2005		2004
	(In thousands)
Universal life insurance
First year and single premiums	$	36,758		35,575		35,681
Renewal premiums		81,226		68,832		59,981

Totals	$	117,984		104,407		95,662

The Company's international life operations have been a significant contributor to the Company's overall growth and represent a market niche where the Company believes it has a competitive advantage. A productive agency force has been developed given the Company's longstanding reputation for supporting its international life products coupled with the instability of competing companies in international markets. In particular, the Company has experienced sizable growth with its equity-indexed universal life products and has collected premiums of $60.5 million, $48.2 million, and $37.2 million for the years ended 2006, 2005, and 2004, respectively.

A detail of net investment income for international life insurance operations is provided below.

	Years Ended December 31,
	2006		2005			2004
	(In thousands)

Net investment income
(excluding derivatives)	$	25,893		23,896			23,260
Derivative income (loss)		2,637		(773	)		(439	)

Net investment income	$	28,530		23,123			22,821

Derivative income and losses fluctuate from period to period based on the S&P 500 Index^® performance.

Life and other policy benefits totaled $18.2 million in 2006, $21.2 million in 2005, and $16.6 million in 2004, which are consistent with Company expectations. Amortization of deferred policy acquisition costs was $23.1 million, $20.4 million, and $21.8 million for 2006, 2005, and 2004, respectively. In the first quarter of 2006, a true-up of amortization assumptions resulted in increased amortization of $1.0 million. Contract interest expense was $25.7 million, $18.1 million, and $18.6 million, in 2006, 2005, and 2004, respectively. The universal life contract interest fluctuations are primarily the result of the S&P 500 Index^® performance relative to the equity-indexed universal life products and the associated stock market gains and losses which increased or decreased the amounts the Company credited to policyholders.

International sales during 2006 reflect Brazil, Taiwan, and Argentina as the top three international countries based on premiums and contract revenues recorded. As the international life insurance in force continues to grow, the Company anticipates operating earnings to similarly increase. The amount of international life insurance in force has grown from $11.3 billion at December 31, 2004 to $12.2 billion at December 31, 2005, and to $13.3 billion at December 31, 2006.

Other operating expenses reported in 2006 were $21.1 million compared to $13.4 million and $12.4 million in 2005 and 2004. The significant increase in 2006 is due to an increase in compensation costs resulting from the change in liability classification for the Company’s stock option plan. Compensation costs totaled $5.1 million, $0.4 million, and $0.4 million in 2006, 2005, and 2004, respectively.

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Annuity Operations

The Company's annuity operations are almost exclusively in the United States. Although some of the Company's investment contracts are available to international residents, current sales are small relative to total annuity sales. A comparative analysis of results of operations for the Company's annuity segment is detailed below.

	Years Ended December 31,
	2006		2005		2004
	(In thousands)

Premiums and other revenue:
Premiums and contract revenues	$	21,389		18,816		15,975
Net investment income		323,326		258,485		266,151
Other income		5,950		588		1,701

Total premiums and other revenue		350,665		277,889		283,827

Benefits and expenses:
Life and other policy benefits		3,424		2,998		2,846
Amortization of deferred policy acquisition costs		59,970		61,768		57,798
Annuity contract interest		178,893		123,732		146,099
Other operating expenses		21,847		17,019		8,353

Total benefits and expenses		264,134		205,517		215,096

Segment earnings before Federal income taxes		86,531		72,372		68,731

Federal income taxes		29,972		24,457		23,258

Segment earnings	$	56,559		47,915		45,473

Revenues from annuity operations include primarily surrender charges and recognition of deferred revenues relating to immediate or payout annuities. A comparative detail of the components of premiums and annuity contract revenues is provided below.

	Years Ended December 31,
	2006		2005		2004
	(In thousands)

Surrender charges	$	17,260		15,271		13,031
Payout annuity and other revenues		4,098		3,511		2,906
Traditional annuity premiums		31		34		38

Totals	$	21,389		18,816		15,975

As previously noted, the Company's earnings are dependent upon annuity contracts persisting or remaining in force. While revenues decline with a reduction in surrender charges, the Company's earnings benefit. A mandated change in accounting for two-tier annuities in 2004 had the effect of eliminating payout annuity revenues pertaining to this product.

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In accordance with generally accepted accounting principles, deposits collected on annuity contracts are not reflected as revenues in the Company's consolidated statements of earnings. Actual annuity deposits collected are detailed below.

	Years Ended December 31,
	2006		2005		2004
	(In thousands)

Equity-indexed annuities	$	303,613		298,227		512,709
Other deferred annuities		171,631		236,330		350,665
Immediate annuities		10,750		23,383		28,653

Totals	$	485,994		557,940		892,027

The Company experienced a substantial increase in sales relating to equity-indexed annuities as the stock market rebounded in 2003 and 2004. These indexed products are more attractive for consumers when interest rate levels remain low as has been the market environment the past few years. Equity-indexed annuity deposits as a percentage of total annuity deposits recorded were 62.5%, 53.5%, and 57.5% for the years ended December 31, 2006, 2005, and 2004, respectively. Since the Company does not offer variable products or mutual funds, equity-indexed products provide an important alternative to the Company's existing fixed interest rate annuity products.

Other deferred annuity deposits decreased in 2006 compared to 2005 with $171.6 million recorded in collected deposits compared to $236.3 million, respectively. As a selling inducement, many fixed-rate annuity products include a first year premium or interest rate bonus in addition to the base first year deposit interest rate. These bonuses are credited to the policyholder account but are deferred by the Company and amortized over future periods. The amount deferred was approximately $19.7 million, $21.2 million, and $27.5 million for the years ended December 31, 2006, 2005, and 2004, respectively.

A detail of net investment income for annuity operations is provided below.

	Years Ended December 31,
	2006		2005			2004
	(In thousands)

Net investment income
(excluding derivatives)	$	282,684		268,700			253,724
Derivative income (loss)		40,642		(10,215	)		12,427

Net investment income	$	323,326		258,485			266,151

Derivative income and losses fluctuate from period to period based on the S&P 500 Index^® performance.

As previously described, derivatives are used to hedge the equity return component of the Company's equity-indexed 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. The increase in net investment income, excluding derivatives from 2004 to 2006, is due to the increase in the overall size of the asset portfolio as a result of higher sales volume.

A true-up of assumptions in the first quarter of 2006 resulted in increased amortization of deferred policy acquisition costs of $3.1 million. Amortization of deferred policy acquisition costs in 2005 of $61.8 million includes an unlocking adjustment of $1.3 million. Adjustments were made in the assumptions relative to the future spreads on certain equity-index annuity products; modified surrender charges on certain annuities to reflect continuing lower new money rates; and reduced ultimate valuation rates for pay out on annuitization under all annuities. These adjustments resulted in a decrease to the deferred asset balance and an increase in amortization.

The Company is required to periodically adjust for actual experience that varies from that assumed. While management does not currently anticipate any impact from unlocking in 2007, facts and circumstances may arise in the future which require that the factors be reexamined.

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Annuity contract interest includes the equity component return associated with the Company's equity-indexed annuities. The detail of equity-indexed annuity contract interest compared to contract interest for all other annuities is as follows:

	Years Ended December 31,
	2006			2005			2004
	(In thousands)

Equity-indexed annuities	$	88,094			28,224			38,942
All other annuities		101,619			110,165			129,392

Gross contract interest		189,713			138,389			168,334
Bonus interest deferred and capitalized		(19,700	)		(21,200	)		(27,491	)
Bonus interest amortization		8,880			6,543			5,256

Total contract interest	$	178,893			123,732			146,099

In comparison by year, the fluctuation in reported contract interest amounts for equity-indexed annuities is due to sales and the effect of the positive or negative performance of the stock market on option values as noted previously. In addition, the 2004 contract interest figures include an increase of $2.3 million for certain contractholder account balances as part of a lawsuit settlement.

Other operating expenses totaled $21.8 million in 2006 which reflects an increase of $5.0 million due to increased compensation costs resulting from the change in liability classification for the Company’s stock option plan. Compensation costs were $0.4 million in 2005 and 2004. Expenses for 2004 reflect a reduction of $6.5 million for a charge recorded in the prior year. A $9.7 million charge was initially recorded in 2003 relating to a litigation claim which involved certain annuity products, and actual settlement payments made were $3.2 million during 2004.

Other Operations

National Western'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. Most of the income from the Company's subsidiaries is from a life interest in a trust. Gross income distributions from the trust totaled $4.5 million, pre-tax, in 2006 and $3.9 million and $3.7 million in 2005 and 2004, respectively.

The Company acquired a nursing home facility, which opened in late July, 2000 and is operated by an affiliated limited partnership, whose financial operating results are consolidated with those of the Company. Daily operations and management of the nursing home are performed by an experienced management company through a contract with the limited partnership. Nursing home operations generated $1.0 million, $1.3 million, and $1.1 million of operating earnings in 2006, 2005, and 2004, respectively.

INVESTMENTS

General

The Company's investment philosophy emphasizes the careful handling of policyowners' and stockholders' funds to achieve security of principal, to obtain the maximum possible yield while maintaining security of principal, and to maintain liquidity in a measure consistent with current and long-term requirements of the Company.

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The Company's overall conservative investment philosophy is reflected in the allocation of its investments, which is detailed below as of December 31, 2006 and 2005. The Company emphasizes investment grade debt securities, with smaller holdings in mortgage loans and policy loans.

	2006				2005
	Carrying				Carrying
	Value		%		Value		%
	(In thousands)				(In thousands)

Debt securities	$	5,484,799		94.7	$	5,249,156		94.8
Mortgage loans		103,325		1.8		110,639		2.0
Policy loans		86,856		1.5		86,385		1.6
Derivatives		72,012		1.2		39,405		0.7
Equity securities		21,203		0.4		20,295		0.4
Real estate		12,113		0.2		13,436		0.2
Other		10,709		0.2		16,577		0.3

Totals	$	5,791,017		100.0	$	5,535,893		100.0

Debt and Equity Securities

The Company maintains a diversified portfolio which consists primarily of corporate, mortgage-backed, and public utility fixed income securities. Investments in mortgage-backed securities include primarily U.S. government agency pass-through securities and collateralized mortgage obligations ("CMO"). As of December 31, 2006 and 2005, the Company's debt securities portfolio consisted of the following:

	2006				2005
	Carrying				Carrying
	Value		%		Value		%
	(In thousands)				(In thousands)

Corporate	$	2,384,762		43.5	$	2,320,306		44.2
Mortgage-backed securities		1,817,532		33.1		1,715,245		32.7
Public utilities		623,649		11.4		661,333		12.6
U.S. government/agencies		447,573		8.2		306,260		5.8
Asset-backed securities		122,101		2.2		161,324		3.1
States & political subdivisions		58,627		1.1		53,940		1.0
Foreign governments		30,555		0.5		30,748		0.6

Totals	$	5,484,799		100.0	$	5,249,156		100.0

The Company's investment guidelines prescribe limitations as a percent of the total investment portfolio by type of security and all holdings were within these threshold limits at December 31, 2006 and 2005. During 2005 and continuing into 2006, the Company expanded its holdings of U.S. government and private mortgage-backed securities given attractive yields and spreads. Because the Company's holdings of mortgage-backed securities are subject to prepayment and extension risk, the Company has substantially reduced these risks by investing primarily in collateralized mortgage obligations, 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. 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.

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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 portfolio with 97% 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^®.

	2006				2005
	Carrying				Carrying
	Value		%		Value		%
	(In thousands)				(In thousands)

AAA and U.S. government	$	2,485,122		45.3	$	2,285,094		43.5
AA		284,965		5.2		202,092		3.9
A		1,330,980		24.3		1,360,716		25.9
BBB		1,237,151		22.5		1,230,799		23.5
BB and other below investment grade		146,581		2.7		170,455		3.2

Totals	$	5,484,799		100.0	$	5,249,156		100.0

National Western does not purchase below investment grade securities. Investments held in debt securities below investment grade are the result of subsequent downgrades of the securities. During 2006, the Company's percentage of below investment grade securities compared to total invested assets decreased from 3.1% to 2.5% as of December 31, 2005 and 2006, respectively. The decrease from year to year is primarily due to principal payments received and settlements from bankruptcy proceedings as well as sales, tenders and a maturity. Also, there were three upgraded and four downgraded securities. The Company's holdings of below investment grade securities as a percentage of total invested assets is relatively small compared to industry averages. These holdings are summarized below.

	Below Investment Grade Debt Securities
							% of
	Amortized		Carrying		Fair		Invested
	Cost		Value		Value		Assets
	(In thousands except percentages)

December 31, 2006	$	145,858		146,581		146,170		2.5	%

December 31, 2005	$	168,423		170,455		167,770		3.1	%

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Holdings in below investment grade securities by category as of December 31, 2006 are summarized below, including 2005 fair values for comparison. The Company is continually monitoring developments in these industries that would affect security valuations.

Below Investment Grade Debt Securities

Amortized

Carrying