Edgar Filing: NATIONAL WESTERN LIFE INSURANCE CO

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.

TABLE OF CONTENTS

	Page

Part I. Financial Information:	3

Item 1. Financial Statements	3

Condensed Consolidated Balance Sheets
March 31, 2008 (Unaudited) and December 31, 2007	3

Condensed Consolidated Statements of Earnings
For the Three Months Ended March 31, 2008 and 2007 (Unaudited)	5

Condensed Consolidated Statements of Comprehensive Income
For the Three Months Ended March 31, 2008 and 2007 (Unaudited)	6

Condensed Consolidated Statements of Stockholders' Equity
For the Three Months Ended March 31, 2008 and 2007 (Unaudited)	7

Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2008 and 2007 (Unaudited)	8

Notes to Condensed Consolidated Financial Statements (Unaudited)	10

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations	21

Item 3. Quantitative and Qualitative Disclosures About Market Risk	46

Item 4. Controls and Procedures	46

Part II. Other Information:	46

Item 1. Legal Proceedings	46

Item 1A. Risk Factors	46

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	47

Item 6. Exhibits	47

Signatures	48

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
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.

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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.

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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
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.

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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
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.

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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
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.

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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
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)

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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.

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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

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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.

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(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

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(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.

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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.

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(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

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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

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	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.

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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.

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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.

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(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.

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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.

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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