nwl10q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
þ         QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended March 31, 2008
 
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
(512) 836-1010
(Address of Principal Executive Offices)
(Telephone Number)
   
   
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 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.
 
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
 
As of May 6, 2008, the number of shares of Registrant's common stock outstanding was:   Class A – 3,425,454 and Class B - 200,000.


 
 

 

 

   
 
Page
   
3
   
3
   
 
March 31, 2008 (Unaudited) and December 31, 2007
3
   
 
For the Three Months Ended March 31, 2008 and 2007 (Unaudited)
5
   
 
For the Three Months Ended March 31, 2008 and 2007 (Unaudited)
6
   
 
For the Three Months Ended March 31, 2008 and 2007 (Unaudited)
7
   
 
For the Three Months Ended March 31, 2008 and 2007 (Unaudited)
8
   
10
   
 
Financial Condition and Results of Operations
21
   
46
   
46
   
46
   
46
   
46
   
47
   
47
   
48


2



 
             
 
             
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(In thousands)
 
             
             
   
(Unaudited)
       
   
March 31,
   
December 31,
 
ASSETS
 
2008
   
2007
 
             
Investments:
           
Securities held to maturity, at amortized cost
  $ 3,766,162       3,778,603  
Securities available for sale, at fair value
    1,911,583       1,900,714  
Mortgage loans, net of allowance for possible losses
               
($3,568 and $3,567)
    98,530       99,033  
Policy loans
    82,032       83,772  
Derivatives
    8,069       25,907  
Other long-term investments
    16,214       16,562  
                 
Total Investments
    5,882,590       5,904,591  
                 
Cash and short-term investments
    93,997       45,206  
Deferred policy acquisition costs
    663,117       664,805  
Deferred sales inducements
    104,937       104,029  
Accrued investment income
    64,222       65,034  
Federal income tax receivable
    6,099       10,010  
Other assets
    46,112       41,651  
                 
    $ 6,861,074       6,835,326  

See accompanying notes to condensed consolidated financial statements.


3



NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(In thousands, except share amounts)
 
             
             
   
(Unaudited)
       
   
March 31,
   
December 31,
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
2008
   
2007
 
             
LIABILITIES:
           
             
Future policy benefits:
           
Traditional life and annuity contracts
  $ 138,723       138,672  
Universal life and annuity contracts
    5,423,348       5,441,871  
Other policyholder liabilities
    130,685       120,400  
Federal income tax liability:
               
Current
    -       -  
Deferred
    65,599       61,720  
Other liabilities
    75,742       60,978  
                 
Total liabilities
    5,834,097       5,823,641  
                 
COMMITMENTS AND CONTINGENCIES (Notes 5 and 8)
               
                 
STOCKHOLDERS’ EQUITY:
               
                 
Common stock:
               
Class A - $1 par value; 7,500,000 shares authorized; 3,425,454 and
               
3,422,324 issued and outstanding in 2008 and 2007
    3,425       3,422  
Class B - $1 par value; 200,000 shares authorized, issued,
               
and outstanding in 2008 and 2007
    200       200  
Additional paid-in capital
    36,563       36,236  
Accumulated other comprehensive loss
    (6,549 )     (7,065 )
Retained earnings
    993,338       978,892  
                 
Total stockholders’ equity
    1,026,977       1,011,685  
                 
    $ 6,861,074       6,835,326  

Note:  The condensed consolidated balance sheet at December 31, 2007, has been derived from the audited consolidated financial statements as of that date.

See accompanying notes to condensed consolidated financial statements.


4



NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
 
 
For the Three Months Ended March 31, 2008 and 2007
 
(Unaudited)
 
(In thousands, except per share amounts)
 
             
             
   
2008
   
2007
 
             
Premiums and other revenue:
           
Life and annuity premiums
  $ 3,894       4,733  
Universal life and annuity contract revenues
    32,218       28,796  
Net investment income
    59,430       77,026  
Other income
    3,139       3,316  
Realized gains (losses) on investments
    (44 )     241  
                 
Total premiums and other revenue
    98,637       114,112  
                 
Benefits and expenses:
               
Life and other policy benefits
    10,455       10,974  
Amortization of deferred policy acquisition costs
    26,249       23,785  
Universal life and annuity contract interest
    26,617       37,433  
Other operating expenses
    13,430       14,116  
                 
Total benefits and expenses
    76,751       86,308  
                 
Earnings before Federal income taxes
    21,886       27,804  
                 
Provision for Federal income taxes:
               
Current
    3,890       4,314  
Deferred
    3,550       4,818  
                 
Total Federal income taxes
    7,440       9,132  
                 
Net earnings
  $ 14,446       18,672  
                 
Basic Earnings Per Share:
               
Class A
  $ 4.10       5.30  
Class B
  $ 2.05       2.65  
                 
Diluted Earnings Per Share:
               
Class A
  $ 4.07       5.23  
Class B
  $ 2.05       2.65  

See accompanying notes to condensed consolidated financial statements.


5



NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
 
 
For the Three Months Ended March 31, 2008 and 2007
 
(Unaudited)
 
(In thousands)
 
             
             
   
2008
   
2007
 
             
Net earnings
  $ 14,446       18,672  
                 
Other comprehensive income, net of effects of
               
deferred costs and taxes:
               
Unrealized gains on securities:
               
Net unrealized holding gains arising during period
    408       4,723  
Reclassification adjustment for net gains
               
included in net earnings
    (36 )     (167 )
Amortization of net unrealized gains related to transferred securities
    16       20  
                 
Net unrealized gains on securities
    388       4,576  
                 
Foreign currency translation adjustments
    (181 )     (87 )
                 
Benefit plans:
               
Amortization of net prior service cost and net gain
    309       -  
                 
Other comprehensive gain
    516       4,489  
                 
Comprehensive income
  $ 14,962       23,161  

See accompanying notes to condensed consolidated financial statements.


6



NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
 
 
For the Three Months Ended March 31, 2008 and 2007
 
(Unaudited)
 
(In thousands)
 
             
             
   
2008
   
2007
 
Common stock:
           
Balance at beginning of year
  $ 3,622       3,621  
Shares exercised under stock option plan
    3       1  
                 
Balance at end of period
    3,625       3,622  
                 
Additional paid-in capital:
               
Balance at beginning of year
    36,236       36,110  
Shares exercised under the stock option plan
    327       126  
                 
Balance at end of period
    36,563       36,236  
                 
Accumulated other comprehensive income:
               
Unrealized gains on securities:
               
Balance at beginning of year
    1,184       3,148  
Change in unrealized gains during period
    388       4,576  
                 
Balance at end of period
    1,572       7,724  
                 
Foreign currency translation adjustments:
               
Balance at beginning of year
    3,078       3,122  
Change in translation adjustments during period
    (181 )     (87 )
                 
Balance at end of period
    2,897       3,035  
                 
Benefit plan liability adjustment:
               
Balance at beginning of year
    (11,327 )     (10,001 )
Amortization of net prior service cost and net gain
    309       -  
                 
Balance at end of period
    (11,018 )     (10,001 )
                 
Accumulated other comprehensive income (loss) at end of period
    (6,549 )     758  
                 
Retained earnings:
               
Balance at beginning of year
    978,892       896,984  
Cumulative effect of change in accounting principle, net of tax
    -       (2,195 )
Net earnings
    14,446       18,672  
                 
Balance at end of period
    993,338       913,461  
                 
Total stockholders' equity
  $ 1,026,977       954,077  

See accompanying notes to condensed consolidated financial statements.


7



 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the Three Months Ended March 31, 2008 and 2007
 
(Unaudited)
 
(In thousands)
 
             
             
   
2008
   
2007
 
             
Cash flows from operating activities:
           
Net earnings
  $ 14,446       18,672  
Adjustments to reconcile net earnings to net cash
               
from operating activities:
               
Universal life and annuity contract interest
    26,617       37,433  
Surrender charges and other policy revenues
    (9,568 )     (8,600 )
Realized (gains) losses on investments
    44       (241 )
Accrual and amortization of investment income
    (1,300 )     (996 )
Depreciation and amortization
    272       356  
Decrease in value of derivatives
    20,480       8,590  
Increase in deferred policy acquisition and sales inducement costs
    (1,535 )     (1,290 )
Decrease in accrued investment income
    812       610  
(Increase) decrease in other assets
    (2,773 )     5,580  
Increase in liabilities for future policy benefits
    52       784  
Increase in other policyholder liabilities
    10,285       6,173  
Increase in Federal income tax liability
    8,100       7,788  
Decrease in other liabilities
    (814 )     (10,547 )
Other
    1,810       (1,742 )
                 
Net cash provided by operating activities
    66,928       62,570  
                 
Cash flows from investing activities:
               
Proceeds from sales of:
               
Securities held to maturity
    -       5,175  
Securities available for sale
    124       234  
Other investments
    197       171  
Proceeds from maturities and redemptions of:
               
Securities held to maturity
    248,009       28,571  
Securities available for sale
    78,696       78,592  
Derivatives
    8,964       8,570  
Purchases of:
               
Securities held to maturity
    (234,856 )     (71,837 )
Securities available for sale
    (67,636 )     (87,912 )
Other investments
    (11,810 )     (9,576 )
Principal payments on mortgage loans
    1,308       13,912  
Cost of mortgage loans acquired
    (777 )     (16,066 )
Decrease in policy loans
    (1,546 )     (613 )
Other
    (1,893 )     (938 )
                 
Net cash provided by (used in) investing activities
    18,780       (51,717 )

(Continued on next page)


8



NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
 
For the Three Months Ended March 31, 2008 and 2007
 
(Unaudited)
 
(In thousands)
 
             
             
   
2008
   
2007
 
             
Cash flows from financing activities:
           
Deposits to account balances for universal life
           
and annuity contracts
  $ 115,410       111,937  
Return of account balances on universal life
               
and annuity contracts
    (152,553 )     (137,622 )
Issuance of common stock under stock option plan
    330       127  
                 
Net cash used in financing activities
    (36,813 )     (25,558 )
                 
Effect of foreign exchange
    (104 )     (156 )
                 
Net increase (decrease) in cash and short-term investments
    48,791       (14,861 )
Cash and short-term investments at beginning of year
    45,206       49,901  
                 
Cash and short-term investments at end of period
  $ 93,997       35,040  

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
           
             
Cash paid during the three month period for:
           
Interest
  $ 10       10  
Income taxes
    -       1,254  

See accompanying notes to condensed consolidated financial statements.


9


NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1)  CONSOLIDATION AND BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements.  In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company as of March 31, 2008, and the results of its operations and its cash flows for the three months ended March 31, 2008 and 2007.  The results of operations for the three months ended March 31, 2008 and 2007 are not necessarily indicative of the results to be expected for the full year.  For further information, refer to the consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2007 accessible free of charge through the Company's internet site at www.nationalwesternlife.com or the Securities and Exchange Commission internet site at www.sec.gov.

The accompanying condensed consolidated financial statements include the accounts of National Western Life Insurance Company and its wholly-owned subsidiaries ("Company"), The Westcap Corporation, NWL Investments, Inc., NWL Services, Inc., NWL Financial, Inc., and Regent Care San Marcos Holdings, LLC.  All significant intercorporate transactions and accounts have been eliminated in consolidation.


(2)  CHANGES IN ACCOUNTING PRINCIPLES

In September 2005, the AICPA issued Statement of Position 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts ("SOP 05-1") which was effective for internal replacements occurring in fiscal years beginning after December 15, 2006. SOP 05-1 provides guidance on accounting by insurance enterprises for deferred acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in FASB No. 97. SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights, or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract.  The Company had an impact related to the adoption of SOP 05-1 for contracts which annuitized and for reinstatements of contracts.  The unamortized deferred acquisition costs and deferred sales inducement assets have to be written-off at the time of annuitization and can not be continued related to reinstatements.  SOP 05-1 resulted in changes in assumptions relative to estimated gross profits which affected unamortized deferred acquisition costs, unearned revenue liabilities, and deferred sales inducement balances as of the beginning of 2007.  The effect of this SOP on beginning retained earnings as of January 1, 2007 was a decrease of $2.2 million, net of tax, as detailed below.

   
Amounts
 
   
(In thousands)
 
       
Write-off of deferred acquisition cost
  $ 3,321  
Adjustment to deferred annuity revenue
    56  
      3,377  
         
Federal income tax
    (1,182 )
         
Cumulative effect of change in accounting for
       
internal replacements and investment contracts
  $ 2,195  


10


In September of 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements.  This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.  The Company adopted SFAS 157 effective January 1, 2008, and the adoption did not have an impact on the Company’s consolidated financial statements.  See Note 9 for additional disclosures concerning fair value measurement.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which permits entities to choose to measure at fair value many financial instruments and certain other items that are not currently required to be measured at fair value. The Company adopted  SFAS 159 effective January 1, 2008, which did not have an impact on the consolidated financial statements as no items were elected for measurement at fair value upon initial adoption.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements. SFAS 160 establishes accounting and reporting standards for entities that have equity investments that are not attributable directly to the parent, called noncontrolling interests or minority interests. Specifically, SFAS 160 states where and how to report noncontrolling interests in the consolidated statements of financial position and operations, how to account for changes in noncontrolling interests and provides disclosure requirements. The provisions of SFAS 160 are effective beginning January 1, 2009.  The Company is currently evaluating the impact that the adoption of this statement will have on the consolidated financial position, results of operations and disclosures.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations.  SFAS 141(R) establishes how an entity accounts for the identifiable assets acquired, liabilities assumed, and any noncontrolling interests acquired, how to account for goodwill acquired and determines what disclosures are required as part of a business combination. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, early adoption is prohibited. The adoption of SFAS 141(R) is not expected to have a material impact on the Company’s consolidated financial statements.

In February 2008, the FASB issued FSP FAS 157-2, Effective Date of FASB Statement No. 157. This FSP delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis, to fiscal years and interim periods beginning after November 15, 2008.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133. This statement requires enhanced disclosures regarding an entity’s derivative and hedging activity to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of SFAS 161 is not expected to have a material impact on the Company’s consolidated financial statements.


(3)  STOCKHOLDERS' EQUITY

The Company is restricted by state insurance laws as to dividend amounts which may be paid to stockholders without prior approval from the Colorado Division of Insurance.  The Company paid no cash dividends on common stock during the three months ended March 31, 2008 and 2007.

11


(4)  EARNINGS PER SHARE

Basic earnings per share of common stock are computed by dividing net income by the weighted-average basic common shares outstanding during the period.  Diluted earnings per share assumes the issuance of common shares applicable to stock options in the denominator.

   
Three Months Ended March 31,
 
   
2008
   
2007
 
   
Class A
   
Class B
   
Class A
   
Class B
 
   
(In thousands except per share amounts)
 
                         
Numerator for Basic and
                       
Diluted Earnings Per Share:
                       
Net income
  $ 14,446             18,672        
Dividends – Class A shares
    -             -        
Dividends – Class B shares
    -             -        
                             
Undistributed income
  $ 14,446             18,672        
                             
Allocation of net income:
                           
Dividends
  $ -       -       -       -  
Allocation of undistributed income
    14,036       410       18,142       530  
                                 
Net income
  $ 14,036       410       18,142       530  
                                 
Denominator:
                               
Basic earnings per share -
                               
weighted-average shares
    3,423       200       3,421       200  
Effect of dilutive
                               
stock options
    24       -       48       -  
                                 
Diluted earnings per share -
                               
adjusted weighted-average
                               
shares for assumed
                               
conversions
    3,447       200       3,469       200  
                                 
Basic Earnings Per Share
  $ 4.10       2.05       5.30       2.65  
                                 
Diluted Earnings Per Share
  $ 4.07       2.05       5.23       2.65  


12


(5)  PENSION AND OTHER POSTRETIREMENT PLANS

(A)  Defined Benefit Pension Plans

The Company sponsors a qualified defined benefit pension plan covering substantially all employees. The plan provides benefits based on the participants' years of service and compensation. The Company makes annual contributions to the plan that comply with the minimum funding provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"). On October 19, 2007, the Company’s Board of Directors approved an amendment to freeze the Pension Plan as of December 31, 2007.  The freeze ceased future benefit accruals to all participants and closed the Plan to any new participants. In addition, all participants became immediately 100% vested in their accrued benefits as of that date.  Using estimated assumptions, the cumulative estimated minimum required contribution for the next five years is $2.1 million at which time the Plan is expected to be fully funded.  Future pension expense is projected to be minimal.  The following summarizes the components of net periodic benefit cost.

   
Three Months Ended March 31,
 
   
2008
   
2007
 
   
(In thousands)
 
             
Service cost
  $ 180       173  
Interest cost
    272       255  
Expected return on plan assets
    (275 )     (237 )
Amortization of prior service cost
    1       1  
Amortization of net loss
    80       88  
                 
Net periodic benefit cost
  $ 258       280  

The Company expects to contribute $1.1 million to the plan in 2008.  As of March 31, 2008, the Company has not yet contributed to the plan.

The Company also sponsors a non-qualified defined benefit plan primarily for senior officers. The plan provides benefits based on the participants' years of service and compensation.  The pension obligations and administrative responsibilities of the plan are maintained by a pension administration firm, which is a subsidiary of American National Insurance Company ("ANICO"). ANICO has guaranteed the payment of pension obligations under the plan.  However, the Company has a contingent liability with respect to the pension plan should these entities be unable to meet their obligations under the existing agreements.  Also, the Company has a contingent liability with respect to the plan in the event that a plan participant continues employment with the Company beyond age seventy, the aggregate average annual participant salary increases exceed 10% per year, or any additional employees become eligible to participate in the plan.  If any of these conditions are met, the Company would be responsible for any additional pension obligations resulting from these items.  Amendments were made to the plan to allow an additional employee to participate and to change the benefit formula for the Chairman of the Company.  As previously mentioned, these additional obligations are a liability to the Company. Effective December 31, 2004, this plan was frozen with respect to the continued accrual of benefits of the Chairman and the President of the Company in order to comply with law changes under the American Jobs Creation Act of 2004 ("Act").

Effective July 1, 2005, the Company established a second non-qualified defined benefit plan for the benefit of the Chairman of the Company.  This plan is intended to provide for post-2004 benefit accruals that mirror and supplement the pre-2005 benefit accruals under the previously discussed non-qualified plan, while complying with the requirements of the Act.

Effective November 1, 2005, the Company established a third non-qualified defined benefit plan for the benefit of the President of the Company.  This plan is intended to provide for post-2004 benefit accruals that supplement the pre-2005 benefit accruals under the first non-qualified plan as previously discussed, while complying with the requirements of the Act.


13


The following summarizes the components of net periodic benefit costs for these non-qualified plans.

   
Three Months Ended March 31,
 
   
2008
   
2007
 
   
(In thousands)
 
             
Service cost
  $ 193       407  
Interest cost
    241       177  
Amortization of prior service cost
    260       260  
Amortization of net loss
    101       46  
                 
Net periodic benefit cost
  $ 795       890  

The Company expects to contribute $1.7 million to these plans in 2008.  As of March 31, 2008, the Company has not yet contributed to the plan.

(B)  Defined Benefit Postretirement Plans

The Company sponsors two healthcare plans to provide postretirement benefits to certain fully-vested individuals.  The following summarizes the components of net periodic benefit costs.

   
Three Months Ended March 31,
 
   
2008
   
2007
 
   
(In thousands)
 
             
Interest cost
  $ 35       29  
Amortization of net loss
    7       -  
Amortization of prior service cost
    26       26  
                 
Net periodic benefit cost
  $ 68       55  

As previously disclosed in its financial statements for the year ended December 31, 2007, the Company expects to contribute minimal amounts to the plan in 2008.


14


(6)  SEGMENT AND OTHER OPERATING INFORMATION

Under Statement of Financial Accounting Standards ("SFAS") No. 131, Disclosures about Segments of an Enterprise and Related Information, the Company defines its reportable operating segments as domestic life insurance, international life insurance, and annuities. These segments are organized based on product types and geographic marketing areas.  A summary of segment information for the quarters ended March 31, 2008 and 2007 is provided below.

Selected Segment Information:
                             
   
Domestic
   
International
                   
   
Life
   
Life
         
All
       
   
Insurance
   
Insurance
   
Annuities
   
Others
   
Total
 
   
(In thousands)
 
                               
March 31, 2008:
                             
Selected Balance Sheet Items:
                         
Deferred policy acquisition
                             
costs and sales inducements
  $ 61,709       206,193       500,152       -       768,054  
Total segment assets
    403,186       812,575       5,489,342       123,456       6,828,559  
Future policy benefits
    320,225       565,910       4,675,936       -       5,562,071  
Other policyholder liabilities
    11,502       18,608       100,575       -       130,685  
                                         
Three Months Ended
                                       
March 31, 2008:
                                       
Condensed Income Statements:
                                       
Premiums and contract
                                       
revenues
  $ 6,619       23,485       6,008       -       36,112  
Net investment income
    5,161       3,039       50,297       933       59,430  
Other income
    6       12       38       3,083       3,139  
                                         
Total revenues
    11,786       26,536       56,343       4,016       98,681  
                                         
Policy benefits
    4,205       5,313       937       -       10,455  
Amortization of deferred
                                       
acquisition costs
    2,287       8,791       15,171       -       26,249  
Universal life and investment
                                       
annuity contract interest
    2,355       2,694       21,568       -       26,617  
Other operating expenses
    2,974       3,872       3,806       2,778       13,430  
Federal income taxes
    (12 )     1,994       5,052       421       7,455  
                                         
Total expenses
    11,809       22,664       46,534       3,199       84,206  
                                         
Segment earnings (losses)
  $ (23 )     3,872       9,809       817       14,475  


15



Selected Segment Information:
                             
   
Domestic
   
International
                   
   
Life
   
Life
         
All
       
   
Insurance
   
Insurance
   
Annuities
   
Others
   
Total
 
   
(In thousands)
 
                               
March 31, 2007:
                             
Selected Balance Sheet Items:
                         
Deferred policy acquisition
                             
costs and sales inducements
  $ 52,491       180,409       499,369       -       732,269  
Total segment assets
    388,103       723,250       5,487,541       103,794       6,702,688  
Future policy benefits
    316,880       509,015       4,713,294       -       5,539,189  
Other policyholder liabilities
    10,812       18,605       89,205       -       118,622  
                                         
Three Months Ended
                                       
March 31, 2007:
                                       
Condensed Income Statements:
                                       
Premiums and contract
                                       
revenues
  $ 6,333       21,671       5,525       -       33,529  
Net investment income
    4,678       5,762       65,753       833       77,026  
Other income
    14       45       228       3,029       3,316  
                                         
Total revenues
    11,025       27,478       71,506       3,862       113,871  
                                         
Policy benefits
    6,141       3,677       1,156       -       10,974  
Amortization of deferred
                                       
acquisition costs
    1,864       8,163       13,758       -       23,785  
Universal life and investment
                                       
annuity contract interest
    2,320       5,252       29,861       -       37,433  
Other operating expenses
    2,712       4,310       4,481       2,613       14,116  
Federal income taxes
    (660 )     1,995       7,303       410       9,048  
                                         
Total expenses
    12,377       23,397       56,559       3,023       95,356  
                                         
Segment earnings (losses)
  $ (1,352 )     4,081       14,947       839       18,515  

Reconciliations of segment information to the Company's condensed consolidated financial statements are provided below.

   
Three Months Ended March 31,
 
   
2008
   
2007
 
   
(In thousands)
 
Premiums and Other Revenue:
           
Premiums and contract revenues
  $ 36,112       33,529  
Net investment income
    59,430       77,026  
Other income
    3,139       3,316  
Realized gains (losses) on investments
    (44 )     241  
                 
Total consolidated premiums and other revenue
  $ 98,637       114,112  


16



   
Three Months Ended March 31,
 
   
2008
   
2007
 
   
(In thousands)
 
Federal Income Taxes:
           
Total segment Federal income taxes
  $ 7,455       9,048  
Taxes on realized gains (losses) on investments
    (15 )     84  
                 
Total consolidated Federal income taxes
  $ 7,440       9,132  


   
Three Months Ended March 31,
 
   
2008
   
2007
 
   
(In thousands)
 
Net Earnings:
           
Total segment earnings
  $ 14,475       18,515  
Realized gains (losses) on investments, net of taxes
    (29 )     157  
                 
Total consolidated net earnings
  $ 14,446       18,672  


   
March 31,
 
   
2008
   
2007
 
   
(In thousands)
 
Assets:
           
Total segment assets
  $ 6,828,559       6,702,688  
Other unallocated assets
    32,515       24,790  
                 
Total consolidated assets
  $ 6,861,074       6,727,478  


(7)  SHARE-BASED PAYMENTS

The Company has a stock and incentive plan ("Plan") which provides for the grant of any or all of the following types of awards to eligible employees:  (1) stock options, including incentive stock options and nonqualified stock options;  (2)  stock appreciation rights, in tandem with stock options or freestanding;  (3)  restricted stock; (4)  incentive awards; and (5)  performance awards.  The Plan began on April 21, 1995, and was to terminate on April 20, 2005, unless terminated earlier by the Board of Directors.  The Plan was amended on June 25, 2004 to extend the termination date to April 20, 2010.  The number of shares of Class A, $1.00 par value, common stock which may be issued under the Plan, or as to which stock appreciation rights or other awards may be granted, may not exceed 300,000.  These shares may be authorized and unissued shares.  The Company has only issued nonqualified stock options.

All of the employees of the Company and its subsidiaries are eligible to participate in the Plan.  In addition, directors of the Company, other than Compensation and Stock Option Committee members, are eligible for restricted stock awards, incentive awards, and performance awards.  Company directors, including members of the Compensation and Stock Option Committee, are eligible for nondiscretionary stock options. The directors' stock options vest 20% annually following one full year of service to the Company from the date of grant.  The officers' stock options vest 20% annually following three full years of service to the Company from the date of grant.  Options issued expire after ten years.  No awards were issued in the first quarter of 2008 or during the year 2007.

17


The Company adopted and implemented a limited stock buy-back program which provides option holders the additional alternative of selling shares acquired through the exercise of options directly back to the Company.  Option holders may elect to sell such acquired shares back to the Company at any time within ninety (90) days after the exercise of options at the prevailing market price as of the date of notice of election. The buy-back program did not alter the terms and conditions of the Plan, however the program necessitated a change in accounting from the equity classification to the liability classification.  Accordingly, the Company is using the current fair value method to measure compensation cost.  A summary of shares available for grant and stock option activity is detailed below.

         
Options Outstanding
 
               
Weighted-
 
   
Shares
         
Average
 
   
Available
         
Exercise
 
   
For Grant
   
Shares
   
Price
 
                   
Balance at January 1, 2008
    27,668       94,984     $ 128.47  
Stock Options:
                       
Exercised
    -       (15,580 )     99.43  
Forfeited
    -       -       -  
Expired
    -       -       -  
                         
Balance at March 31, 2008
    27,668       79,404     $ 134.16  

The total intrinsic value of options exercised was $1.6 million and $2.4 million for the three months ended March 31, 2008 and 2007, respectively.  The total share-based liabilities paid were $1.3 million for the three months ended March 31, 2008.  There were no shares vested during the first quarter of 2008.

The following table summarizes information about stock options outstanding at March 31, 2008.

   
Options Outstanding
       
         
Weighted-
       
         
Average
       
   
Number
   
Remaining
   
Options
 
   
Outstanding
   
Contractual Life
   
Exercisable
 
Exercise prices:
                 
$   112.38
    3,800       0.2 years       3,800  
       92.13
    12,604       3.1 years       5,736  
       95.00
    7,000       3.2 years       7,000  
     150.00
    56,000       6.0 years       12,600  
                         
Totals
    79,404               29,136  
                         
Aggregate intrinsic value
                       
(in thousands)
  $ 6,561             $ 2,806  

The aggregate intrinsic value in the table above is based on the closing stock price of $216.79 per share on March 31, 2008.

18


In estimating the fair value of the options outstanding at March 31, 2008 and 2007, the Company employed the Black-Scholes option pricing model with assumptions as detailed below.

   
2008
   
2007
 
             
Expected term of options
 
1 to 5 years
   
2 to 6 years
 
Expected volatility:
           
Range
 
21.59% to 30.17%
   
15.63% to 23.72%
 
Weighted-average
    24.07%       19.36%  
Expected dividends
    $0.36       -  
Risk-free rate:
               
Range
 
1.61% to 3.06%
   
4.57% to 4.95%
 
Weighted-average
    2.31%       4.67%  

The Company reviewed the contractual term relative to the options as well as perceived future behavior patterns of exercise.  Volatility is based on historical volatility over the expected term.

The pre-tax compensation cost recognized in the financial statements related to the Plan was $(58,000) and $1.3 million for the three months ended March 31, 2008 and 2007, respectively.  The related tax (benefit) expense recognized was $(20,000) and $0.4 million for the three months ended March 31, 2008 and 2007, respectively.

As of March 31, 2008, the total compensation cost related to nonvested options not yet recognized was $0.9 million.  This amount is expected to be recognized over a weighted-average period of 1.4 years.  The Company recognizes compensation cost over the graded vesting periods.

For the three months ended March 31, 2008 and 2007, the total cash received from the exercise of options under the Plan was $0.3 million and $0.1 million, respectively.


(8)  LEGAL PROCEEDINGS

The Company is a defendant in three class action lawsuits.  The Court has certified a class consisting of certain California policyholders age 65 and older alleging violations under California Business and Professions Code section 17200.  The Court has additionally certified a subclass of 36 policyholders alleging fraud against their agent, and vicariously, against National Western Life.  Management believes that the Company has good and meritorious defenses and intends to continue to vigorously defend itself against these claims.  A second class action lawsuit is in discovery with no class certification motion pending.  The third class action lawsuit was certified as a class by the trial court, but ultimately reversed by the Texas Supreme Court.  Thereupon the plaintiff filed a new motion for class certification which was denied by the trial court.  The Plaintiff filed a notice of appeal, which has not been perfected.

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.


19


(9)  FAIR VALUE MEASUREMENTS

As defined in SFAS 157, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price methodology). SFAS 157 establishes a framework for measuring fair value that includes a hierarchy used to classify inputs used in measuring fair value. The hierarchy prioritizes inputs to valuation techniques used to measure fair value into three levels which are either observable or unobservable. Observable inputs reflect market data obtained from independent sources while unobservable inputs reflect an entity’s view of market assumptions in the absence of observable market information. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The three levels of the fair value hierarchy defined by SFAS 157 are as follows:

Level 1:  Fair value is based on unadjusted quoted prices in active markets that are accessible to the Company for identical assets or liabilities. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. These generally provide the most reliable evidence and are used to measure fair value whenever available. The Company’s Level 1 assets include equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets.

Level 2:  Fair value is based upon significant inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable for substantially the full term of the asset or liability through corroboration with observable market data as of the reporting date. Level 2 inputs include quoted market prices in active markets for similar assets and liabilities, quoted market prices in markets that are not active for identical or similar assets or liabilities, model-derived valuations whose inputs are observable or whose significant value drivers are observable  and other observable inputs. The Company’s Level 2 assets include fixed maturity debt securities (corporate and private bonds, government or agency securities, asset-backed and mortgage-backed securities), preferred stock, certain equity securities, and over-the-counter derivative contracts. The Company's Level 2 liabilities consist of certain product-related embedded derivatives.  Valuations are generally obtained from third party pricing services for identical or comparable assets or determined through use of valuation methodologies using observable market inputs.

Level 3:  Fair value is based on significant unobservable inputs which reflect the entity’s or third party pricing service assumptions about the assumptions market participants would use in pricing an asset or liability. The Company’s Level 3 assets include certain equity securities and certain less liquid or private fixed maturity debt securities where significant valuation inputs cannot be corroborated with market observable data. The Company's Level 3 liabilities consist of share-based compensation obligations.  Valuations are estimated based on non-binding broker prices or internally developed valuation models or methodologies, discounted cash flow models and other similar techniques.

The following table sets forth the Company’s assets and liabilities that are measured at fair value on a recurring basis as of the date indicated:

   
March 31, 2008
 
Description
 
Total
   
Level 1
   
Level 2
   
Level 3
 
   
(In thousands)
 
                         
Debt securities, available for sale
  $ 1,892,223       -       1,890,607       1,616  
Equity securities, available for sale
    19,360       267       11,903       7,190  
Derivatives
    8,069       -       8,069       -  
                                 
Total assets
  $ 1,919,652       267       1,910,579       8,806  
                                 
Policyholder account balances (a)
  $ 18,867       -       18,867       -  
Other liabilities (b)
    6,387        -             6,387  
                                 
Total liabilities
  $ 25,254        -        18,867       6,387  

(a)  Represents the fair value of certain product-related embedded derivatives that were recorded at fair value.
(b)  Represents the liability for share-based compensation.


20


The following table provides additional information about fair value measurements for which significant unobservable (Level 3) inputs were utilized to determine fair value.

   
Debt
   
Equity
             
   
Securities,
   
Securities,
             
   
Available
   
Available
   
Total
   
Other
 
   
For Sale
   
For Sale
   
Assets
   
Liabilities
 
   
(In thousands)
 
                         
Beginning balance, January 1, 2008
  $ 1,618       7,147       8,765       7,712  
Total realized and unrealized gains (losses):
                               
Included in net income
    -       -       -       (58 )
Included in other comprehensive income (loss)
    -       43       43       -  
Purchases, sales, issuances and settlements, net
    (2 )     -       (2 )     (1,267 )
Transfers into (out of) Level 3
    -       -       -       -  
                                 
Ending balance, March 31, 2008
  $ 1,616       7,190       8,806       6,387  
                                 
Amount of total gains (losses) for the period
                               
included in net income attributable to the change
                               
in unrealized gains (losses) relating to assets still
                               
held as of March 31, 2008
  $ -       -       -       (58 )
 
Realized gains (losses) on Level 3 assets and liabilities are reported in the consolidated statements of earnings as net investment gains (losses) while unrealized gain (losses) are reported as other comprehensive income (loss) within stockholders’ equity.

The fair value hierarchy classifications are reviewed each reporting period. Reclassification of certain financial assets and liabilities may result based on changes in the observability of valuation attributes. Reclassifications are reported as transfers into and out of Level 3 at the beginning fair value for the reporting period in which the changes occur.


ITEM 2. 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.


21


OVERVIEW

Insurance Operations - Domestic

The Company is currently licensed to do business in all states except for New York.  Products marketed are annuities, universal life insurance, fixed indexed annuities and fixed indexed universal life, and traditional life insurance, which include both term and whole life products.  The Company’s domestic sales have historically been more heavily weighted toward annuity products, which include single and flexible premium deferred annuities, single premium immediate annuities, and fixed indexed annuities.  Most of these annuities can be sold as tax qualified or nonqualified products.  At March 31, 2008, the Company maintained approximately 119,100 annuity policies in force.

National Western markets and distributes its domestic