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 September 30, 2007
 
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 November 7, 2007, the number of shares of Registrant's common stock outstanding was:   Class A – 3,422,324 and Class B - 200,000.





   
 
Page
   
3
   
3
   
3
September 30, 2007 (Unaudited) and December 31, 2006
 
   
5
For the Three Months Ended September 30, 2007 and 2006 (Unaudited)
 
   
6
For the Nine Months Ended September 30, 2007 and 2006 (Unaudited)
 
   
7
For the Three Months Ended September 30, 2007 and 2006 (Unaudited)
 
   
8
For the Nine Months Ended September 30, 2007 and 2006 (Unaudited)
 
   
9
For the Nine Months Ended September 30, 2007 and 2006 (Unaudited)
 
   
10
For the Nine Months Ended September 30, 2007 and 2006 (Unaudited)
 
   
12
   
24
Financial Condition and Results of Operations
 
   
48
   
48
   
48
   
48
   
48
   
49
   
49
   
50


 
   
 
   
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
 
 
(In thousands)
 
             
             
   
(Unaudited)
       
   
September 30,
   
December 31,
 
   
2007
   
2006
 
ASSETS
           
Investments:
           
Securities held to maturity, at amortized cost
  $
3,750,933
     
3,603,434
 
Securities available for sale, at fair value
   
1,893,854
     
1,902,568
 
Mortgage loans, net of allowances for possible
               
losses ($3,566 and $2,100)
   
98,852
     
103,325
 
Policy loans
   
84,377
     
86,856
 
Derivatives
   
51,797
     
72,012
 
Other long-term investments
   
16,965
     
22,822
 
                 
Total investments
   
5,896,778
     
5,791,017
 
                 
Cash and short-term investments
   
41,036
     
49,901
 
Deferred policy acquisition costs
   
653,893
     
643,964
 
Deferred sales inducements
   
101,888
     
93,139
 
Accrued investment income
   
63,469
     
64,393
 
Federal income tax receivable
   
10,922
     
-
 
Other assets
   
47,197
     
51,029
 
                 
    $
6,815,183
     
6,693,443
 
                 
                 
Note:  The condensed consolidated balance sheet at December 31, 2006, has been derived from the audited consolidated financial statements as of that date.

See accompanying notes to condensed consolidated financial statements.
 

NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(In thousands, except share amounts)
 
             
             
   
(Unaudited)
       
   
September 30,
   
December 31,
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
2007
   
2006
 
             
LIABILITIES:
           
             
Future policy benefits:
           
Traditional life and annuity contracts
  $
138,720
     
138,382
 
Universal life and annuity contracts
   
5,454,962
     
5,395,075
 
Other policyholder liabilities
   
117,342
     
112,449
 
Federal income tax liability:
               
Current
   
-
     
1,666
 
Deferred
   
46,366
     
32,207
 
Other liabilities
   
77,727
     
80,680
 
                 
Total liabilities
   
5,835,117
     
5,760,459
 
                 
COMMITMENTS AND CONTINGENCIES (Note 5 and 9)
               
                 
STOCKHOLDERS' EQUITY:
               
                 
Common stock:
               
Class A - $1 par value; 7,500,000 shares authorized; 3,422,324 and
               
3,420,824 issued and outstanding in 2007 and 2006
   
3,422
     
3,421
 
Class B - $1 par value; 200,000 shares authorized, issued,
               
and outstanding in 2007 and 2006
   
200
     
200
 
Additional paid-in capital
   
36,236
     
36,110
 
Accumulated other comprehensive loss
    (9,458 )     (3,731 )
Retained earnings
   
949,666
     
896,984
 
                 
Total stockholders' equity
   
980,066
     
932,984
 
                 
    $
6,815,183
     
6,693,443
 
                 
                 
Note:  The condensed consolidated balance sheet at December 31, 2006, has been derived from the audited consolidated financial statements as of that date.

See accompanying notes to condensed consolidated financial statements.
 
 
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
 
 
For the Three Months Ended September 30, 2007 and 2006
 
(Unaudited)
 
(In thousands, except per share amounts)
 
             
             
   
2007
   
2006
 
             
Premiums and other revenue:
           
Traditional life and annuity premiums
  $
4,755
     
3,654
 
Universal life and annuity contract revenues
   
30,025
     
26,923
 
Net investment income
   
75,075
     
96,049
 
Other income
   
3,786
     
3,064
 
Realized gains (losses) on investments
    (1,505 )    
190
 
                 
Total premiums and other revenue
   
112,136
     
129,880
 
                 
Benefits and expenses:
               
Life and other policy benefits
   
11,337
     
9,212
 
Amortization of deferred acquisition costs
   
25,238
     
24,430
 
Universal life and annuity contract interest
   
38,219
     
59,065
 
Other operating expenses
   
12,871
     
12,513
 
                 
Total benefits and expenses
   
87,665
     
105,220
 
                 
Earnings before Federal income taxes
   
24,471
     
24,660
 
                 
Provision (benefit) for Federal income taxes:
               
Current
    (2,836 )    
8,214
 
Deferred
   
11,685
     
374
 
                 
Total Federal income taxes
   
8,849
     
8,588
 
                 
Net earnings
  $
15,622
     
16,072
 
                 
                 
Basic Earnings Per Share
  $
4.31
     
4.44
 
                 
                 
Diluted Earnings Per Share
  $
4.28
     
4.40
 
                 
                 
See accompanying notes to condensed consolidated financial statements.
               


 
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
 
 
For the Nine Months Ended September 30, 2007 and 2006
 
(Unaudited)
 
(In thousands, except per share amounts)
 
             
             
   
2007
   
2006
 
             
Premiums and other revenue:
           
Traditional life and annuity premiums
  $
14,074
     
11,742
 
Universal life and annuity contract revenues
   
87,474
     
79,477
 
Net investment income
   
260,033
     
261,059
 
Other income
   
10,461
     
11,271
 
Realized gains on investments
   
2,901
     
3,229
 
                 
Total premiums and other revenue
   
374,943
     
366,778
 
                 
Benefits and expenses:
               
Life and other policy benefits
   
32,748
     
28,300
 
Amortization of deferred acquisition costs
   
74,660
     
69,443
 
Universal life and annuity contract interest
   
143,037
     
138,678
 
Other operating expenses
   
43,354
     
51,611
 
                 
Total benefits and expenses
   
293,799
     
288,032
 
                 
Earnings before Federal income taxes
   
81,144
     
78,746
 
                 
Provision (benefit) for Federal income taxes:
               
Current
   
6,551
     
28,987
 
Deferred
   
18,448
      (2,585 )
                 
Total Federal income taxes
   
24,999
     
26,402
 
                 
Net earnings
  $
56,145
     
52,344
 
                 
                 
Basic Earnings Per Share
  $
15.50
     
14.46
 
                 
                 
Diluted Earnings Per Share
  $
15.37
     
14.32
 
                 
                 
See accompanying notes to condensed consolidated financial statements.
               



 
 
For the Three Months Ended September 30, 2007 and 2006
 
(Unaudited)
 
(In thousands)
 
             
             
   
2007
   
2006
 
             
Net earnings
  $
15,622
     
16,072
 
                 
Other comprehensive income (loss), net of effects of
               
deferred policy acquisition costs and taxes:
               
Net unrealized gains on securities:
               
Net unrealized holding gains arising during period
   
4,860
     
15,866
 
Reclassification adjustment for (gains) and losses included
               
in net earnings
   
16
      (42 )
Amortization of net unrealized gains
               
related to transferred securities
   
25
     
6
 
                 
Net unrealized gains on securities
   
4,901
     
15,830
 
                 
Foreign currency translation adjustments
   
47
      (317 )
Benefit plan adjustment
   
308
     
-
 
                 
Other comprehensive income
   
5,256
     
15,513
 
                 
Comprehensive income
  $
20,878
     
31,585
 
                 
                 
See accompanying notes to condensed consolidated financial statements.
               



 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
For the Nine Months Ended September 30, 2007 and 2006
 
(Unaudited)
 
(In thousands)
 
             
             
   
2007
   
2006
 
             
Net earnings
  $
56,145
     
52,344
 
                 
Other comprehensive income (loss), net of effects of
               
deferred policy acquisition costs and taxes:
               
Net unrealized losses on securities:
               
Net unrealized holding losses arising during period
    (3,745 )     (4,394 )
Reclassification adjustment for gains included in net earnings
    (2,848 )     (1,740 )
Amortization of net unrealized gains (losses)
               
related to transferred securities
   
79
      (90 )
                 
Net unrealized losses on securities
    (6,514 )     (6,224 )
                 
Foreign currency translation adjustments
    (139 )     (152 )
Benefit plan adjustment
   
926
     
-
 
                 
Other comprehensive loss
    (5,727 )     (6,376 )
                 
Comprehensive income
  $
50,418
     
45,968
 
                 
                 
See accompanying notes to condensed consolidated financial statements.
               



 
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
For the Nine Months Ended September 30, 2007 and 2006
 
(Unaudited)
 
(In thousands)
 
             
             
   
2007
   
2006
 
Common stock:
           
Balance at beginning of year
  $
3,621
     
3,613
 
Shares exercised under stock option plan
   
1
     
8
 
                 
Balance at end of period
   
3,622
     
3,621
 
                 
Additional paid-in capital:
               
Balance at beginning of year
   
36,110
     
37,923
 
Shares exercised under the stock option plan
   
126
     
510
 
Adjustment for stock option liability classification
   
-
      (1,211 )
                 
Balance at end of period
   
36,236
     
37,222
 
                 
Accumulated other comprehensive income:
               
Unrealized gains (losses) on securities:
               
Balance at beginning of year
   
3,148
     
10,401
 
Change in unrealized losses during period
    (6,514 )     (6,224 )
                 
Balance at end of period
    (3,366 )    
4,177
 
                 
Foreign currency translation adjustments:
               
Balance at beginning of year
   
3,122
     
3,300
 
Change in translation adjustments during period
    (139 )     (152 )
                 
Balance at end of period
   
2,983
     
3,148
 
                 
Benefit plan liability adjustment:
               
Balance at beginning of year
    (10,001 )     (3,137 )
Change in benefit plan liability adjustment during period
   
926
     
-
 
                 
Balance at end of period
    (9,075 )     (3,137 )
                 
Accumulated other comprehensive loss at end of period
    (9,458 )    
4,188
 
                 
Retained earnings:
               
Balance at beginning of year
   
896,984
     
821,908
 
Cumulative effect of change in accounting principle, net of tax
    (2,195 )    
-
 
Net earnings
   
56,145
     
52,344
 
Stockholder dividends
    (1,268 )     (1,267 )
                 
Balance at end of period
   
949,666
     
872,985
 
                 
Total stockholders' equity
  $
980,066
     
918,016
 
                 
                 
See accompanying notes to condensed consolidated financial statements.
               



 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the Nine Months Ended September 30, 2007 and 2006
 
(Unaudited)
 
(In thousands)
 
             
             
   
2007
   
2006
 
             
Cash flows from operating activities:
           
Net earnings
  $
56,144
     
52,344
 
Adjustments to reconcile net earnings to net cash
               
from operating activities:
               
Universal life and annuity contract interest
   
143,037
     
138,678
 
Surrender charges and other policy revenues
    (26,776 )     (24,226 )
Realized gains on investments
    (2,901 )     (3,229 )
Accrual and amortization of investment income
    (3,829 )     (3,793 )
Depreciation and amortization
   
746
     
1,030
 
(Increase) decrease in value of derivatives
   
26,393
      (7,901 )
Increase in deferred policy acquisition and sales inducement costs
    (9,730 )     (6,479 )
(Increase) decrease in accrued investment income
   
924
      (615 )
(Increase) decrease in other assets
   
582
      (7,126 )
Increase (decrease) in liabilities for future policy benefits
   
338
      (612 )
Increase in other policyholder liabilities
   
4,893
     
15,913
 
Increase (decrease) in Federal income tax liability
   
6,861
     
987
 
Increase (decrease) in other liabilities
    (5,924 )    
14,941
 
Other
   
168
      (72 )
                 
Net cash provided by operating activities
   
190,926
     
169,840
 
                 
Cash flows from investing activities:
               
Proceeds from sales of:
               
Securities held to maturity
   
5,175
     
-
 
Securities available for sale
   
28,418
     
21,502
 
Other investments
   
33,255
     
32,951
 
Proceeds from maturities and redemptions of:
               
Securities held to maturity
   
106,023
     
199,590
 
Securities available for sale
   
268,999
     
86,848
 
Purchases of:
               
Securities held to maturity
    (256,014 )     (254,994 )
Securities available for sale
    (284,742 )     (160,576 )
Other investments
    (35,619 )     (33,039 )
Principal payments on mortgage loans
   
21,623
     
8,867
 
Cost of mortgage loans acquired
    (18,480 )     (3,999 )
Decrease in policy loans
    (2,309 )     (29 )
Other
    (2,006 )     (247 )
                 
Net cash used in investing activities
    (135,677 )     (103,126 )
                 
                 
   
(Continued on next page)
 



NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
 
For the Nine Months Ended September 30, 2007 and 2006
 
(Unaudited)
 
(In thousands)
 
             
             
   
2007
   
2006
 
             
Cash flows from financing activities:
           
Deposits to account balances for universal life
           
and annuity contracts
  $
380,708
     
419,003
 
Return of account balances on universal life
               
and annuity contracts
    (444,877 )     (393,077 )
Issuance of common stock under stock option plan
   
127
     
510
 
                 
Net cash (used in) provided by financing activities
    (64,042 )    
26,436
 
                 
Effect of foreign exchange
    (72 )    
738
 
                 
Net increase (decrease) in cash and short-term investments
    (8,865 )    
93,888
 
Cash and short-term investments at beginning of year
   
49,901
     
31,355
 
                 
Cash and short-term investments at end of period
  $
41,036
     
125,243
 
                 
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
               
                 
Cash paid during the nine month period for:
               
Interest
  $
30
     
30
 
Income taxes
   
19,155
     
24,990
 
                 
                 
                 
See accompanying notes to condensed consolidated financial statements.
 



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 September 30, 2007, and the results of its operations and its cash flows for the three months and nine months ended September 30, 2007 and 2006.  The results of operations for the three months and nine months ended September 30, 2007 and 2006 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, 2006 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., and NWL Financial, Inc.  All significant intercorporate transactions and accounts have been eliminated in consolidation.

Certain reclassifications have been made to the prior periods to conform to the reporting categories used in 2007.


(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 is 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 has an impact related to the adoption of SOP 05-1 for contracts which have annuitized and relative to reinstatements of contracts in that the unamortized deferred acquisition costs and deferred sales inducement assets must be written-off at the time of annuitization and may not be continued related to reinstatements.  SOP 05-1 results in changes in assumptions relative to estimated gross profits which affects unamortized deferred acquisition costs, unearned revenue liabilities, and deferred sales inducement balances as of the beginning of the year.  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
 


The FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 ("FIN 48"), dated June, 2006. The interpretation requires public companies to recognize the tax benefits of uncertain tax positions only where the position is "more likely than not" to be sustained assuming examination by tax authorities. The amount recognized would be the amount that represents the largest amount of tax benefit that is greater than 50% likely of being ultimately realized. A liability would be recognized for any benefit claimed, or expected to be claimed, in a tax return in excess of the benefit recorded in the financial statements, along with any interest and penalty (if applicable) on the excess. FIN 48 requires a tabular reconciliation of the change in the aggregate unrecognized tax benefits claimed, or expected to be claimed, in tax returns and disclosure relating to accrued interest and penalties for unrecognized tax benefits. Discussion is required for those uncertain tax positions where it is reasonably possible that the estimate of the tax benefit will change significantly in the next 12 months. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 did not have a material impact on the Company's consolidated financial statements.

On February 16, 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments, which amends SFAS No. 133, Accounting for Derivatives and Hedging Activities, and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Hybrid financial instruments are single financial instruments that contain an embedded derivative. Under SFAS No. 155, entities can elect to record certain hybrid financial instruments at fair value as individual financial instruments. Prior to this amendment, certain hybrid financial instruments were required to be separated into two instruments – a derivative and host – and generally only the derivative was recorded at fair value. SFAS No. 155 also requires that beneficial interests in securitized assets be evaluated for either freestanding or embedded derivatives. SFAS No. 155 is effective for all financial instruments acquired or issued after January 1, 2007.  SFAS No. 155 did not have a material effect on the Company's consolidated financial statements on the date of adoption.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and requires additional disclosures about fair value measurements. This Statement does not require any new fair value measurements, but the application of this Statement could change current practices in determining fair value. The Company plans to adopt this guidance effective January 1, 2008. The Company is currently assessing the impact of SFAS No. 157 on the Company's consolidated financial position and results of operations.

In February of 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities.  This Statement permits entities to choose to measure many financial instruments and certain other items at fair value.  SFAS No. 159 is effective for fiscal years beginning after November 15, 2007.  The Company is currently assessing the impact of SFAS No. 159.


(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 nine months ended September 30, 2007 and 2006.  However, the Company declared a cash dividend on August 24, 2007 payable November 29, 2007 to stockholders on record as of October 31, 2007.  The dividends declared were $0.36 per common share to Class A stockholders and $0.18 per common share to Class B stockholders.  The dividend payment was approved by the Colorado Division of Insurance.  A dividend in the same amounts per share on Class A and Class B shares was declared in August and payable in November of 2006.


(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
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(In thousands, except per share data)
 
                         
Numerator for basic and diluted
                       
earnings per share:
                       
Earnings available to common stockholders
                       
before and after assumed conversions
  $
15,622
     
16,072
     
56,145
     
52,344
 
                                 
                                 
Denominator:
                               
Basic earnings per share -
                               
weighted-average shares
   
3,622
     
3,621
     
3,622
     
3,620
 
                                 
Effect of dilutive stock options
   
31
     
34
     
31
     
36
 
                                 
Diluted earnings per share -
                               
adjusted weighted-average
                               
shares for assumed conversions
   
3,653
     
3,655
     
3,653
     
3,656
 
                                 
                                 
Basic earnings per share
  $
4.31
     
4.44
     
15.50
     
14.46
 
                                 
                                 
Diluted earnings per share
  $
4.28
     
4.40
     
15.37
     
14.32
 


(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 complies with the minimum funding provisions of the Employee Retirement Income Security Act of 1974 ("ERISA").  The following summarizes the components of net periodic benefit cost.

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(In thousands)
 
                         
Service cost
  $
180
     
175
     
540
     
518
 
Interest cost
   
272
     
279
     
815
     
766
 
Expected return on plan assets
    (275 )     (255 )     (825 )     (710 )
Amortization of prior service cost
   
1
     
1
     
3
     
3
 
Amortization of net loss
   
80
     
99
     
240
     
264
 
                                 
Net periodic benefit cost
  $
258
     
299
     
773
     
841
 

The Company has contributed $1.8 million to the qualified plan in 2007.  No further contributions are expected in 2007.


Effective October 19, 2007, the Company’s Board of Directors approved an amendment to freeze the Plan as of December 31, 2007.  As of that date, the freeze will cease future benefit accruals to all participants and close the Plan to any new participants.  In addition, all participants will become 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 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.

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

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(In thousands)
 
                         
Service cost
  $
194
     
574
     
580
     
1,222
 
Interest cost
   
240
     
385
     
721
     
531
 
Amortization of prior service cost
   
260
     
457
     
780
     
780
 
Amortization of net loss
   
101
     
137
     
303
     
137
 
                                 
Net periodic benefit cost
  $
795
     
1,553
     
2,384
     
2,670
 

The Company expects to contribute $1.4 million to these plans in 2007.  As of September 30, 2007, the Company has contributed $1.0 million 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 September 30,
   
Nine Months Ended September 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(In thousands)
 
                         
Interest cost
  $
36
     
38
     
106
     
88
 
Amortization of prior service cost
   
25
     
26
     
77
     
77
 
Amortization of net loss
   
7
     
-
     
22
     
-
 
                                 
Net periodic benefit cost
  $
68
     
64
     
205
     
165
 

As previously disclosed in its financial statements for the year ended December 31, 2006, the Company expects to contribute minimal amounts to the plan in 2007.



(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 September 30, 2007 and 2006 is provided below.

Selected Segment Information.
                             
   
Domestic
   
International
                   
   
Life
   
Life
         
All
       
   
Insurance
   
Insurance
   
Annuities
   
Others
   
Totals
 
   
(In thousands)
 
                               
September 30, 2007:
                             
Selected Balance Sheet Items:
                         
Deferred policy acquisition
                             
costs and sales inducements
  $
57,063
     
189,866
     
508,852
     
-
     
755,781
 
Total segment assets
   
392,465
     
769,225
     
5,513,462
     
104,786
     
6,779,938
 
Future policy benefits
   
318,171
     
541,526
     
4,733,985
     
-
     
5,593,682
 
Other policyholder liabilities
   
10,915
     
17,225
     
89,202
     
-
     
117,342
 
                                         
Three Months Ended
                                       
September 30, 2007:
                                       
Condensed Income Statements:
                                       
Premiums and contract
                                       
revenues
  $
6,875
     
21,826
     
6,079
     
-
     
34,780
 
Net investment income
   
4,774
     
6,460
     
62,833
     
1,008
     
75,075
 
Other income
   
7
     
19
     
543
     
3,217
     
3,786
 
                                         
Total revenues
   
11,656
     
28,305
     
69,455
     
4,225
     
113,641
 
                                         
Life and other policy benefits
   
3,969
     
6,353
     
1,015
     
-
     
11,337
 
Amortization of deferred
                                       
policy acquisition costs
   
2,229
     
8,045
     
14,964
     
-
     
25,238
 
Universal life and annuity
                                       
contract interest
   
2,396
     
6,131
     
29,692
     
-
     
38,219
 
Other operating expenses
   
2,877
     
3,616
     
3,593
     
2,785
     
12,871
 
Federal income taxes (benefit)
   
42
     
1,457
     
7,314
     
563
     
9,376
 
                                         
Total expenses
   
11,513
     
25,602
     
56,578
     
3,348
     
97,041
 
                                         
Segment earnings
  $
143
     
2,703
     
12,877
     
877
     
16,600
 
                                         



   
Domestic
   
International
                   
   
Life
   
Life
         
All
       
   
Insurance
   
Insurance
   
Annuities
   
Others
   
Totals
 
   
(In thousands)
 
                               
Nine Months Ended
                             
September 30, 2007:
                             
Condensed Income Statements:
                             
Premiums and contract
                             
revenues
  $
19,522
     
64,061
     
17,965
     
-
     
101,548
 
Net investment income
   
13,967
     
21,075
     
220,263
     
4,728
     
260,033
 
Other income
   
34
     
106
     
909
     
9,412
     
10,461
 
                                         
Total revenues
   
33,523
     
85,242
     
239,137
     
14,140
     
372,042
 
                                         
Life and other policy benefits
   
12,727
     
17,330
     
2,691
     
-
     
32,748
 
Amortization of deferred
                                       
policy acquisition costs
   
5,041
     
25,401
     
44,218
     
-
     
74,660
 
Universal life and annuity
                                       
contract interest
   
7,028
     
19,227
     
116,782
     
-
     
143,037
 
Other operating expenses
   
9,084
     
12,388
     
13,673
     
8,209
     
43,354
 
Federal income taxes (benefit)
    (109 )    
3,340
     
18,936
     
1,817
     
23,984
 
                                         
Total expenses
   
33,771
     
77,686
     
196,300
     
10,026
     
317,783
 
                                         
Segment earnings (losses)
  $ (248 )    
7,556
     
42,837
     
4,114
     
54,259
 



Selected Segment Information.
                             
   
Domestic
   
International
                   
   
Life
   
Life
         
All
       
   
Insurance
   
Insurance
   
Annuities
   
Others
   
Totals
 
   
(In thousands)
 
                               
September 30, 2006:
                             
Selected Balance Sheet Items:
                         
Deferred policy acquisition
                             
costs and sales inducements
  $
49,041
     
177,482
     
499,212
     
-
     
725,735
 
Total segment assets
   
377,777
     
691,455
     
5,414,024
     
98,269
     
6,581,525
 
Future policy benefits
   
312,671
     
479,838
     
4,671,975
     
-
     
5,464,484
 
Other policyholder liabilities
   
9,702
     
21,680
     
85,089
     
-
     
116,471
 
                                         
Three Months Ended
                                       
September 30, 2006:
                                       
Condensed Income Statements:
                                       
Premiums and contract
                                       
revenues
  $
5,932
     
19,364
     
5,281
     
-
     
30,577
 
Net investment income
   
4,545
     
6,771
     
83,900
     
833
     
96,049
 
Other income
   
10
     
21
     
106
     
2,927
     
3,064
 
                                         
Total revenues
   
10,487
     
26,156
     
89,287
     
3,760
     
129,690
 
                                         
Life and other policy benefits
   
3,505
     
4,984
     
723
     
-
     
9,212
 
Amortization of deferred
                                       
policy acquisition costs
   
1,496
     
6,951
     
15,983
     
-
     
24,430
 
Universal life and annuity
                                       
contract interest
   
2,293
     
7,185
     
49,587
     
-
     
59,065
 
Other operating expenses
   
2,533
     
3,131
     
4,027
     
2,822
     
12,513
 
Federal income taxes
   
212
     
1,376
     
6,598
     
336
     
8,522
 
                                         
Total expenses
   
10,039
     
23,627
     
76,918
     
3,158
     
113,742
 
                                         
Segment earnings
  $
448
     
2,529
     
12,369
     
602
     
15,948
 



   
Domestic
   
International
                   
   
Life
   
Life
         
All
       
   
Insurance
   
Insurance
   
Annuities
   
Others
   
Totals
 
   
(In thousands)
 
                               
Nine Months Ended
                             
September 30, 2006:
                             
Condensed Income Statements:
                             
Premiums and contract
                             
revenues
  $
17,465
     
57,448
     
16,306
     
-
     
91,219
 
Net investment income
   
14,761
     
18,958
     
223,307
     
4,033
     
261,059
 
Other income
   
25
     
66
     
2,968
     
8,212
     
11,271
 
                                         
Total revenues
   
32,251
     
76,472
     
242,581
     
12,245
     
363,549
 
                                         
Life and other policy benefits
   
11,536
     
14,204
     
2,560
     
-
     
28,300
 
Amortization of deferred
                                       
policy acquisition costs
   
4,868
     
16,462
     
48,113
     
-
     
69,443
 
Universal life and annuity
                                       
contract interest
   
6,836
     
16,399
     
115,443
     
-
     
138,678
 
Other operating expenses
   
9,995
     
14,956
     
18,987
     
7,673
     
51,611
 
Federal income taxes (benefit)
    (328 )    
4,836
     
19,235
     
1,529
     
25,272
 
                                         
Total expenses
   
32,907
     
66,857
     
204,338
     
9,202
     
313,304
 
                                         
Segment earnings (losses)
  $ (656 )    
9,615
     
38,243
     
3,043
     
50,245
 

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

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(In thousands)
 
Premiums and Other Revenue:
                       
Premiums and contract revenues
  $
34,780
     
30,577
     
101,548
     
91,219
 
Net investment income
   
75,075
     
96,049
     
260,033
     
261,059
 
Other income
   
3,786
     
3,064
     
10,461
     
11,271
 
Realized gains (losses) on investments
    (1,505 )    
190
     
2,901
     
3,229
 
                                 
Total consolidated premiums and
                               
other revenue
  $
112,136
     
129,880
     
374,943
     
366,778
 



   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(In thousands)
 
Federal Income Taxes:
                       
Total segment Federal income taxes
  $
9,376
     
8,522
     
23,984
     
25,272
 
Taxes on realized gains (losses)
                               
on investments
    (527 )    
66
     
1,015
     
1,130
 
                                 
Total consolidated Federal
                               
income taxes
  $
8,849
     
8,588
     
24,999
     
26,402
 


   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(In thousands)
 
Net Earnings:
                       
Total segment earnings
  $
16,600
     
15,948
     
54,259
     
50,245
 
Realized gains (losses) on
                               
investments, net of taxes
    (978 )    
124
     
1,886
     
2,099
 
                                 
Total consolidated net earnings
  $
15,622
     
16,072
     
56,145
     
52,344
 


   
September 30,
 
   
2007
   
2006
 
   
(In thousands)
 
Assets:
           
Total segment assets
  $
6,779,938
     
6,581,525
 
Other unallocated assets
   
35,245
     
20,156
 
                 
Total consolidated assets
  $
6,815,183
     
6,601,681
 


(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 2007 or 2006.


Through December 31, 2005, the Company classified the Plan as equity, and as such, utilized the grant date fair value method to measure compensation.  Effective March 10, 2006, as more fully described below, the Company's Plan classification was changed to liability and accordingly, the Company began 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, 2007
   
26,477
     
128,465
    $
123.00
 
Stock Options:
                       
Exercised
   
-
      (31,690 )    
106.08
 
Forfeited
   
1,110
      (1,110 )    
131.23
 
Expired
   
81
      (81 )    
85.13
 
                         
Balance at September 30, 2007
   
27,668
     
95,584
    $
128.54
 

The total intrinsic value of options exercised was $4.6 million and $3.2 million for the nine months ended September 30, 2007 and 2006, respectively.  The total share-based liabilities paid were $4.3 million for the nine months ended September 30, 2007.  The total fair value of shares vested during the nine months ended September 30, 2007 and 2006 was $3.2 million and $2.6 million, respectively.

The following table summarizes information about stock options outstanding at September 30, 2007.

   
Options Outstanding
   
       
Weighted-
   
       
Average
   
   
Number
 
Remaining
 
Options
   
Outstanding
 
Contractual Life
 
Exercisable
Exercise prices:
           
$  105.25
 
7,130 
 
1.0 years
 
7,130 
    112.38
 
4,800 
 
1.2 years
 
4,800 
      92.13
 
20,154 
 
4.1 years
 
13,286 
      95.00
 
7,000 
 
4.2 years
 
7,000 
    150.00
 
56,500 
 
7.1 years
 
13,100 
             
Totals
 
95,584 
     
45,316 
             
Aggregate intrinsic value
           
(in thousands)
$
12,179 
   
$
6,455 

The aggregate intrinsic value in the table above is based on the closing stock price of $255.96 per share on September 30, 2007.


In estimating the fair value of the options outstanding at September 30, 2007, the Company employed the Black-Scholes option pricing model with assumptions as detailed below.

   
2007
   
2006
           
Expected term of options
 
2 to 6 years
   
2 to 6 years
Expected volatility:
         
Range
 
16.21% to 23.19%
 
 
 
15.31% to 24.73%
Weighted-average
    19.55%
 
    19.73%
Expected dividends
  $
0.36    
     
-   
Risk-free rate:
             
Range
 
3.95% to 4.35%
 
 
4.49% to 4.85%
Weighted-average
    4.12%
 
    4.61%

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 $2.6 million and $12.7 million for the nine months ended September 30, 2007 and 2006, respectively.  The related tax benefit recognized was $0.9 million and $4.4 million for the nine months ended September 30, 2007 and 2006, respectively.

Effective March 10, 2006, 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.  The modification affected 35 plan participants who had options outstanding on the date of modification and resulted in $11.7 million of total incremental pre-tax compensation cost due to the change from the equity to liability classification.

As of September 30, 2007, the total compensation cost related to nonvested options not yet recognized was $2.1 million.  This amount is expected to be recognized over a weighted-average period of 1.2 years.  The Company recognizes compensation cost over the graded vesting periods.

For the nine months ended September 30, 2007 and 2006, the total cash received from the exercise of options under the Plan was $0.1 million and $0.5 million, respectively.


(8)  FEDERAL INCOME TAXES

During the second quarter of 2007, upon the completion of a detailed review of the deferred tax items, the Company identified a $2.3 million error in the net deferred tax liability. The error, which occurred during various periods prior to 2005, was corrected in the second quarter of 2007 and resulted in a decrease in the net deferred tax liability and deferred tax expense.  The adjustment was not material to the current period or any prior period financial statements.


(9)  LEGAL PROCEEDINGS

In the course of an audit of a charitable tax-exempt foundation, the Internal Revenue Service (“IRS”) raised an issue under the special provisions of the Internal Revenue Code (“IRC”) governing tax-exempt private foundations as to certain interest-bearing loans from the Company to another corporation in which the tax-exempt foundation owns stock. The issue was whether such transactions constitute indirect self-dealing by the foundation, the result of which would be excise taxes on the Company by virtue of its participation in such transactions. By letter to the Company dated August 21, 2003, the IRS proposed an initial excise tax liability in the total amount approximating one million dollars as a result of such transactions. The Company disagreed with the IRS analysis. The Company contested and requested that this issue instead be referred to the IRS National Office for technical advice. The IRS audit team agreed and the matter was referred in November of 2003 to the IRS National Office. Such technical advice was subsequently issued by the IRS National Office in the form of a memorandum analyzing the issue which concluded that such loans do not constitute indirect self-dealing.  This technical advice memorandum is binding on the IRS audit team.


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 NWL.  Management believes that the Company has good and meritorious defenses and intends to continue to vigorously defend itself against these claims.

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


ITEM 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 is or may be viewed as forward-looking.  Although the Company has used 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 filings with the Securities and Exchange Commission ("SEC") 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.


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 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 September 30, 2007, the Company maintained approximately 121,300 annuity policies in force.

National Western markets and distributes its domestic products primarily through independent national marketing organizations ("NMOs"). These NMOs assist the Company in recruiting, contracting, and managing independent agents. The Company currently has approximately 5,800 independent agents contracted.  Roughly 26% of these contracted agents have submitted policy applications to the Company in the past twelve months.

Insurance Operations - International

The Company's international operations focus on foreign nationals in upper socioeconomic classes.  Insurance products are issued primarily to residents of countries in Central and South America, the Caribbean, Eastern Europe, Asia and the Pacific Rim. Issuing policies to residents of countries in these different regions provides diversification that helps to minimize large fluctuations that could arise due to various economic, political, and competitive pressures that may occur from one country to another.  Products issued to international residents are almost entirely universal life and traditional life insurance products.  However, certain annuity and investment contracts are also available. At September 30, 2007, the Company had approximately 71,000 international life insurance policies in force representing approximately $14.2 billion in face amount of coverage.


International applications are submitted by independent contractor consultants and broker-agents. The Company has approximately 4,900 independent international consultants and brokers currently contracted, 44% of which have submitted policy applications to the Company in the past twelve months.

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


SALES

Life Insurance

The following table sets forth information regarding the Company's life insurance sales activity as measured by annualized first year premiums. While the figures shown below are in accordance with industry practice and represent the amount of new business sold during the periods indicated, they are considered a non-GAAP financial measure. The Company believes sales are a measure of distribution productivity and are a leading indicator of future revenue trends. However, revenues are driven by sales in prior periods as well as in the current period and therefore, a reconciliation of sales to revenues is not meaningful or determinable.

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(In thousands)
 
                         
International:
                       
Universal life
  $
2,544
     
1,858
     
6,695
     
5,329
 
Traditional life
   
1,454
     
969
     
4,946
     
3,105
 
Fixed indexed life
   
6,397
     
4,673
     
16,176
     
12,875
 
     
10,395
     
7,500
     
27,817
     
21,309
 
Domestic:
                               
Universal life
   
1,826
     
2,074
     
3,158
     
3,231
 
Traditional life
   
66
     
109
     
194
     
259
 
Fixed indexed life
   
1,962
     
1,233
     
4,817
     
2,659
 
     
3,854
     
3,416
     
8,169
     
6,149
 
                                 
Totals
  $
14,249
     
10,916
     
35,986
     
27,458
 

Life insurance sales as measured by annualized first year premiums increased 31% in the third quarter of 2007 as compared to the third quarter of 2006 and also increased 31% for the first nine months of 2007 versus 2006. Both of the Company's life lines of business, international and domestic, posted increases over the comparable results in the third quarter of 2007 with international sales up 39% and domestic sales 13% greater.



Company management has placed considerable emphasis on building domestic life insurance sales as a strategic focus and in response to comments from outside rating agencies reviewing the Company. Domestic operations have generally focused more heavily on annuity sales than on life insurance sales. The Company spent the greater part of 2003 and 2004 revamping its domestic life operations by changing the way it contracts distribution for life business, eliminating products and distribution that have not contributed significantly to earnings, and creating new and competitive products. A single premium universal life ("SPUL") product was launched at the end of 2003 beginning a diversification of the Company's product portfolio away from smaller dollar face amount policies. The Company released its first fixed equity-indexed universal life ("EIUL") product for its domestic markets at the end of the third quarter of 2005 and began receiving applications. This product accounted for 59% of domestic life insurance sales in the first nine months of 2007 and management anticipates this share to continue throughout the remainder of the year. With the introduction of the EIUL and SPUL products and the discontinued marketing of smaller premium and volume life insurance policies, the Company has seen an increase in the average amount of per policy coverage purchased in its domestic markets as shown in the following table:

   
Average New Policy Face Amount
 
   
Domestic
   
International
 
             
Year ended December 31, 2003
  $
76,100
     
219,600
 
Year ended December 31, 2004
   
101,700
     
234,500
 
Year ended December 31, 2005
   
137,900
     
245,900
 
Year ended December 31, 2006
   
315,800
     
254,700
 
Nine months ended September 30, 2007
   
388,000
     
247,000
 


The Company's international life business consists of applications submitted from residents in various regions outside of the United States, the volume of which typically varies based upon changes in the socioeconomic climates of these regions. Historically, the Company has experienced a simultaneous combination of rising and declining sales in various countries; however, the appeal of the Company's dollar-denominated life insurance products overcomes many of the local and national difficulties. Applications submitted from residents of Latin America and the Pacific Rim perennially have comprised the majority of the Company's international life insurance sales. Over the past few years, effort has been directed toward the sale of a traditional endowment form of life insurance product for residents of Eastern European and the Commonwealth of Independent States (former Soviet Union). More recently, the Company's universal life product offerings have been made available to residents of these countries. While business is still in a formative phase, sales from these countries have gradually become a larger percentage of overall international sales as shown below.

   
Nine Months Ended September 30,
 
   
2007
   
2006
 
       
Percentage of International Sales:
           
Latin America
    68.7 %     75.2 %
Pacific Rim
   
13.7
     
11.7
 
Eastern Europe
   
17.6
     
13.1
 
                 
Totals
    100.0 %     100.0 %

Year-to-date, the Company has recorded sales to residents outside of the United States in over thirty different countries with Brazil (33%), Taiwan (13%), and Kazakhstan (9%) making up the largest markets.


The table below sets forth information regarding the Company's life insurance in force for each date presented.

   
Insurance In Force as of September 30,
 
   
2007
   
2006
 
   
($ in thousands)
 
Universal life:
           
Number of policies
   
74,120
     
77,160
 
Face amounts
  $
8,020,940
     
8,034,930
 
                 
Traditional life:
               
Number of policies
   
52,180
     
53,440
 
Face amounts
  $
1,802,340
     
1,752,000
 
                 
Fixed-indexed life:
               
Number of policies
   
22,880
     
18,700
 
Face amounts
  $
5,161,250
     
3,937,350
 
                 
Rider face amounts
  $
1,946,640
     
1,695,190
 
                 
Total life insurance:
               
Number of policies
   
149,180
     
149,300
 
Face amounts
  $
16,931,170
     
15,419,470
 

Annuities

The following table sets forth information regarding the Company's annuity sales activity as measured by single and annualized first year premiums. Similar to life insurance sales, these figures are considered a non-GAAP financial measure but are shown in accordance with industry practice and depict the Company's sales productivity.

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(In thousands)
 
                         
Fixed indexed annuities
  $
90,895
     
85,997
     
245,163
     
224,763
 
Other deferred annuities
   
22,680
     
36,650
     
80,569
     
130,625
 
Immediate annuities
   
782
     
2,160
     
3,274
     
9,910
 
                                 
Totals
  $
114,357
     
124,807
     
329,006
     
365,298
 

Annuity sales for the third quarter of 2007 were 8% lower than the comparable period in 2006 and were 10% lower of the first nine months of the year, continuing a trend that began in the first quarter of 2004. Annuity sales in the first quarter of 2004 represented the tail end of the increase in fixed annuity sales that began in 2003 when the Company achieved nearly $1.2 billion in sales. Annuity sales began trending lower due to a combination of declining interest rates, investors returning to alternative investment vehicles and the Company managing its targeted levels of risk and statutory capital and surplus. During the past several years interest rate levels have experienced an infrequent occurrence in which the yield curve is inverted, that is, longer term interest rate levels were below shorter term interest rate levels. In such an environment, consumers opt for short term investment vehicles such as bank certificates of deposits rather than longer term choices which include fixed rate annuities.

The Company's mix of annuity sales has shifted the past few years. With a stronger performance in the equity market, sales of fixed indexed annuity products became more prevalent beginning in 2004 and have continued thus far in 2007. Over the past several years sales of fixed indexed products have consistently accounted for more than one-half of all annuity sales and were 75% during the first nine months of 2007. For all fixed indexed products, the Company purchases over the counter options to hedge the equity return feature. The options are purchased relative to the issuance of the annuity contracts in such a manner to minimize timing risk. Generally, the index return during the indexing period (if the underlying index increases), becomes a component in a formula (set forth in the annuity), the result of which is credited as interest to contract holders electing the index formula crediting method at the beginning of the indexing period. The formula result can never be less than zero. The Company does not deliberately mismatch or under hedge for the equity feature of these products.


The sizable increase in annuity sales volume the past several years has required a greater level of asset/liability analysis. The Company monitors its asset/liability matching within the self-constraints of desired capital levels and risk tolerance. Despite the amounts of new business, the company's capital level remains substantially above industry averages and regulator targets.

The following table sets forth information regarding annuities in force for each date presented.

   
Annuities in Force as of September 30,
 
   
2007
   
2006
 
   
($ in thousand)
 
             
Fixed indexed annuities
           
Number of policies
   
32,000
     
29,690
 
GAAP annuity reserves
  $
1,937,730
     
1,730,620
 
                 
Other deferred annuities
               
Number of policies
   
75,970
     
81,260
 
GAAP annuity reserves
  $
2,540,270
     
2,690,100
 
                 
Immediate annuities
               
Number of policies
   
13,320
     
12,850
 
GAAP annuity reserves
  $
253,050
     
248,270
 
                 
Total annuities
               
Number of policies
   
121,290
     
123,800
 
GAAP annuity reserves
  $
4,731,050
     
4,668,990
 


Critical Accounting Estimates

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

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


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

DAC is also subject to periodic recoverability and loss recognition testing.  These tests ensure that the present value of future contract-related cash flows will support the capitalized DAC balance to be amortized in the future.  The present value of these cash flows, less the benefit reserve, is compared with the unamortized DAC balance and if the DAC balance is greater, the deficiency is charged to expense as a component of amortization and the asset balance is reduced to the recoverable amount.

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

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

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

Investment activities of the Company are integral to its insurance operations. Since life insurance benefits may not be paid until many years into the future, the accumulation of cash flows from premium receipts are invested with income reported as revenue when earned. Anticipated yields on investments are reflected in premium rates, contract liabilities, and other product contract features.  These anticipated yields are implied in the interest required on the Company's net insurance liabilities (future policy benefits less deferred acquisition costs) and contractual interest obligations in its insurance and annuity products.  The Company benefits to the extent actual net investment income exceeds the required interest on net insurance liabilities and manages the rates it credits on its products to maintain the targeted excess or "spread" of investment earnings over interest credited. The Company will continue to be required to provide for future contractual obligations in the event of a decline in investment yield. For more information concerning revenue recognition, investment accounting, and interest sensitivity, please refer to Note 1, Summary of Significant Accounting Policies, and Note 3, Investments, in the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2006, and the discussions under Investments in Item 3 of this report.


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

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

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

Other significant accounting policies, although not involving the same level of measurement uncertainties as those discussed above but nonetheless important to an understanding of the financial statements, are described in the Company's Annual Report on Form 10-K for the year ended December 31, 2006.


RESULTS OF OPERATIONS

The Company's consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). In addition, the Company regularly evaluates operating performance using non-GAAP financial measures which exclude or segregate derivatives and realized investment gains and losses from operating revenues and earnings. Similar measures are commonly used in the insurance industry in order to assess profitability and results from ongoing operations. The Company believes that the presentation of these non-GAAP financial measures enhances the understanding of the Company's results of operations by highlighting the results from ongoing operations and the underlying profitability factors of the Company's business. The Company excludes or segregates derivatives and realized investment gains and losses because such items are often the result of events which may or may not be at the Company's discretion and the fluctuating effects of these items could distort trends in the underlying profitability of the Company's business. Therefore, in the following sections discussing consolidated operations and segment operations appropriate reconciliations have been included to report information management considers useful in enhancing an understanding of the Company's operations to reportable GAAP balances reflected in the consolidated financial statements.


Consolidated Operations

Revenues.  The following details Company revenues.

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(In thousands)
 
                         
Traditional life and annuity premiums
  $
4,755
     
3,654
     
14,074
     
11,742
 
Universal life and annuity
                               
contract revenues
   
30,025
     
26,923
     
87,474
     
79,477
 
Net investment income
                               
(excluding derivatives)
   
82,821
     
80,217
     
249,095
     
247,379
 
Other income
   
3,786
     
3,064
     
10,461
     
11,271
 
                                 
Operating revenues
   
121,387
     
113,858
     
361,104
     
349,869
 
Derivative income (loss)
    (7,746 )    
15,832
     
10,938
     
13,680
 
Realized gains (losses) on investments
    (1,505 )    
190
     
2,901
     
3,229
 
                                 
Total revenues
  $
112,136
     
129,880
     
374,943
     
366,778
 

Traditional life and annuity premiums - Traditional life and annuity premiums increased 30.1% and 19.9% for the three and nine months ended September 30, 2007 compared to the same period in 2006.  Increasing life sales has been a strategic focus over the past several years.  Traditional life insurance premiums for products such as whole life and term life are recognized as revenues over the premium-paying period.

Universal life and annuity contract revenues - Revenues for universal life and annuity contract revenues increased 11.5% for the three months ended September 30, 2007 and 10.1% for the first nine months of the current year compared to 2006 and consist of policy charges for the cost of insurance, administration charges, and surrender charges assessed against policyholder account balances.  Revenues in the form of cost of insurance charges were $18.7 million and $54.8 million for the three and nine months of 2007 compared to $17.1 million and $50.2 million for the three and nine months ended September 30, 2006.  Surrender charges assessed against policyholder account balances upon withdrawal increased to $8.4 million and $24.3 million for the three and nine months of 2007 versus $7.2 million and $21.9 million for the three and nine months ended September 30, 2006.

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

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(In thousands)
 
                         
Gross investment income:
                       
Debt securities
  $
77,843
     
76,037
     
231,418
     
229,151
 
Mortgage loans
   
2,206
     
1,837
     
6,540
     
6,513
 
Policy loans
   
1,582
     
1,564
     
4,698
     
4,711
 
Short-term investments
   
1,622
     
882
     
5,284
     
1,493
 
Other invested assets
   
556
     
660
     
3,565
     
7,770
 
                                 
Total investment income
   
83,809
     
80,980
     
251,505
     
249,638
 
Investment expenses
   
988
     
763
     
2,410
     
2,259
 
                                 
Net investment income
                               
(excluding derivatives)
   
82,821
     
80,217
     
249,095
     
247,379
 
Derivative income (loss)
    (7,746 )    
15,832
     
10,938
     
13,680
 
                                 
Net investment income
  $
75,075
     
96,049
     
260,033
     
261,059
 



Short-term investments contributed $1.6 million and $5.3 million to income for the three months and nine months ended September 30, 2007 compared to $0.9 million and $1.5 million for the same period in 2006.  This increase in 2007 is attributable to higher asset holdings in these investments compared to 2006.  Income from other invested assets for the nine months ended September 30, 2006 includes a profit participation interest of $1.6 million and residual profits of $1.1 million from the sale of equity loans contributing to higher income year to date.  Derivative gains and losses are recorded as a component of investment income but may fluctuate substantially from period to period based on the performance of the S&P 500® Composite Stock Price Index ("S&P 500 Index®").  See the discussion that follows this section relating to index options and derivatives.

To ensure the Company will be able to pay future commitments to policyholders and provide a financial return, the funds received as premium payments and deposits are invested in high quality investments, primarily debt securities.  The income from these investments is closely monitored by the Company due to its significant impact on the business.

Net investment income performance is summarized as follows:

   
Nine Months Ended September 30,
 
   
2007
   
2006
 
   
(In thousands)
 
             
Excluding derivatives:
           
Net investment income
  $
249,095
     
247,379
 
Average invested assets, at amortized cost
  $
5,715,069
     
5,430,366
 
Annual yield on average invested assets
    5.81 %     6.07 %
                 
Including derivatives:
               
Net investment income
  $
260,033
     
261,059
 
Average invested assets, at amortized cost
  $
5,769,681
     
5,462,464
 
Annual yield on average invested assets
    6.01 %     6.37 %

The higher yield in 2006 compared to 2007 is due to the additional income recognized from the other invested assets of $2.7 million as previously described.  Net investment income performance is analyzed excluding the derivative income which is a common practice in the insurance industry in order to assess underlying profitability and results from ongoing operations.

Other income - Other income primarily pertains to the Company's operations involving a nursing home.  Revenues associated with this operation were $9.4 million and $8.2 million for the nine months ended September 30, 2007 and 2006, respectively.  In addition, included in other income for the nine months ended September 30, 2006 is $2.6 million resulting from lawsuit settlements.

Derivative income (loss) - Index options are derivative financial instruments used to fully hedge the equity return component of the Company's fixed-indexed products. Index options are intended to act as hedges to match closely the returns on the S&P 500 Index®.  With an increase or decline in this index, the index option values likewise increase or decline.  Any income or loss from the sale or expiration of the options, as well as period-to-period changes in fair values, are reflected as a component of net investment income. However, increases or decreases in income from these options are substantially offset by corresponding increases or decreases in amounts credited to fixed-indexed annuity and life policyholders.


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

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(In thousands)
 
Derivatives:
                       
Unrealized income (loss)
  $ (27,754 )    
14,807
      (26,393 )    
7,902
 
Realized income
   
20,008
     
1,025
     
37,331
     
5,778
 
                                 
Total income (loss) included
                               
in net investment income
  $ (7,746 )    
15,832
     
10,938
     
13,680
 
                                 
Total contract interest
  $
38,219
     
59,065
     
143,037
     
138,678
 

Realized gains (losses) on investments - The third quarter loss in 2007 is due to an additional valuation allowance related to one mortgage loan.  Net gains for the nine months ended September 30, 2007 include a gain of $3.7 million in the second quarter from a sale of a previously impaired bond.  The gains in 2006 are primarily due to sales of collateralized bond obligation holdings from the debt securities portfolio which had previously been impaired.

Benefits and Expenses.  The following details benefits and expenses.

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(In thousands)
 
                         
Life and other policy benefits
  $
11,337
     
9,212
     
32,748
     
28,300
 
Amortization of deferred policy
                               
acquisition costs
   
25,238
     
24,430
     
74,660
     
69,443
 
Universal life and annuity
                               
contract interest
   
38,219
     
59,065
     
143,037
     
138,678
 
Other operating expenses
   
12,871
     
12,513
     
43,354
     
51,611
 
                                 
Totals
  $
87,665
     
105,220
     
293,799
     
288,032
 

Life and other policy benefits - Death claims increased from $7.5 million and $21.7 million during the three and nine months of the third quarter of 2006 to $8.0 million and $23.6 million for the same period ended September 30, 2007.  While death claim amounts are subject to variation from period to period, the Company's mortality experience has generally been consistent with its product pricing assumptions.

Amortization of deferred acquisition costs - Life insurance companies are required to defer certain expenses associated with acquiring new business.  The majority of these acquisition expenses consist of commissions paid to agents, underwriting costs, and certain marketing expenses and sales inducements.  The Company defers sales inducements in the form of first year interest bonuses on annuity and universal life products that are directly related to the production of new business.  These charges are deferred and amortized using the same methodology and assumptions used to amortize other capitalized acquisition costs and the amortization is included in contract interest.  Recognition of these deferred policy acquisition costs in the financial statements occurs over future periods in relation to the emergence of profits priced into the products sold.  This emergence of profits is based upon assumptions regarding premium payment patterns, mortality, persistency, investment performance, and expense patterns.  Companies are required to review these assumptions periodically to ascertain whether actual experience has deviated significantly from that assumed. If it is determined that a significant deviation has occurred, the emergence of profits pattern is to be "unlocked" and reset based upon the actual experience.  While the Company is required to evaluate its emergence of profits continually, management believes that the current amortization patterns of deferred policy acquisition costs are reflective of actual experience.


In accordance with the newly adopted SOP 05-1, the Company’s amortization of these deferred policy acquisition costs is expected to increase in the future.  Under this pronouncement, annuitizations and certain internal replacements of contracts result in the associated unamortized deferred acquisition costs, unearned revenue liabilities, and deferred sales inducement assets being written off.

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

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

   
September 30,
   
September 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(Excluding derivative products)
   
(Including derivative products)
 
                         
Annuity
    3.43 %     3.36 %     3.30 %     3.34 %
Interest sensitive life
    3.32 %     4.26 %     5.00 %     4.88 %

Contract interest also includes the performance of the fixed-index component of the Company's derivative products as noted which resulted in losses of $7.7 million and income of $10.9 million in the three months ended September 30, 2007 and 2006, respectively, and income of $15.8 million and $13.7 million for the nine months ended September 30, 2007 and 2006, respectively. As previously noted, the recent market performance of these fixed-index features is included in contract interest expense while also being a component of the Company's investment income given the hedge nature of the options purchased for these products.

Other operating expenses - Other operating expenses consist of general administrative expenses, licenses and fees, and commissions not subject to deferral.  Like revenues from other income, nursing home operation expenses are included in other operating expenses in the amount of $2.8 million and $8.2 million for the three and nine months ended September 30, 2007 and $2.8 million and $7.7 million for the same period in 2006. Compensation cost recorded in the three and nine months ended September 30, 2007 totaled $0.1 million and $2.7 million. Other operating expenses for the nine months ended September 30, 2006 included compensation cost of $13.7 million as a result of implementation of liability classification under SFAS 123(R) for the Company's stock option plan.  Implementation of liability classification resulted in a current charge for option costs related to outstanding vested and unvested options.

Federal Income Taxes.  Federal income taxes on earnings from continuing operations reflect effective tax rates of 30.8% and 33.5% for the first nine months of 2007 and 2006, respectively.  The effective tax rate is lower than the Federal rate of 35% primarily due to tax-exempt investment income related to municipal securities and dividends-received deductions on income from stocks.

During the second quarter of 2007, upon the completion of a detailed review of the deferred tax items, the Company identified a $2.3 million error in the net deferred tax liability. The error, which occurred during various periods prior to 2005, was corrected in the second quarter of 2007 and resulted in a decrease in the net deferred tax liability and deferred tax expense.  The adjustment was not material to the current period or any prior period financial statements.


Segment Operations

Summary of Segment Earnings

A summary of segment earnings for the three months and nine months ended September 30, 2007 and 2006 is provided below.  The segment earnings exclude realized gains and losses on investments, net of taxes.

   
Domestic
   
International
                   
   
Life
   
Life
         
All
       
   
Insurance
   
Insurance
   
Annuities
   
Others
   
Totals
 
   
(In thousands)
 
                               
Segment earnings (losses):
                             
Three months ended:
                             
                               
September 30, 2007
  $
143
     
2,703
     
12,877
     
877
     
16,600
 
                                         
September 30, 2006
  $
448
     
2,529
     
12,369
     
602
     
15,948
 
                                         
Nine months ended:
                                       
                                         
September 30, 2007
  $ (248 )    
7,556
     
42,837
     
4,114
     
54,259
 
                                         
September 30, 2006
  $ (656 )    
9,615
     
38,243
     
3,043
     
50,245
 

Domestic Life Insurance Operations

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

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(In thousands)
 
                         
Premiums and other revenue:
                       
Premiums and contract revenues
  $
6,875
     
5,932
     
19,522
     
17,465
 
Net investment income
   
4,774
     
4,545
     
13,967
     
14,761
 
Other income
   
7
     
10
     
34
     
25
 
                                 
Total premiums and other revenue
   
11,656
     
10,487
     
33,523
     
32,251
 
                                 
Benefits and expenses:
                               
Life and other policy benefits
   
3,969
     
3,505
     
12,727
     
11,536
 
Amortization of deferred policy
                               
acquisition costs
   
2,229
     
1,496
     
5,041
     
4,868
 
Universal life insurance contract
                               
interest
   
2,396
     
2,293
     
7,028
     
6,836
 
Other operating expenses
   
2,877
     
2,533
     
9,084
     
9,995
 
                                 
Total benefits and expenses
   
11,471
     
9,827
     
33,880
     
33,235
 
                                 
Segment earnings (losses) before
                               
Federal income taxes
   
185
     
660
      (357 )     (984 )
                                 
Provision (benefit) for Federal
                               
income taxes
   
42
     
212
      (109 )     (328 )
                                 
Segment earnings (losses)
  $
143
     
448
      (248 )     (656 )



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

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(In thousands)
 
                         
Universal life insurance revenues
  $
5,857
     
4,714
     
16,272
     
13,371
 
Traditional life insurance premiums
   
1,760
     
1,617
     
5,396
     
5,286
 
Reinsurance premiums
    (742 )     (399 )     (2,146 )     (1,192 )
                                 
Totals
  $
6,875
     
5,932
     
19,522
     
17,465
 

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

Premiums collected on universal life products are not reflected as revenues in the Company's statements of earnings in accordance with GAAP.  Actual universal life premiums collected are detailed below.

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(In thousands)
 
                         
Universal life insurance:
                       
First year and single premiums
  $
4,279
     
4,244
     
10,650
     
10,463
 
Renewal premiums
   
3,825
     
3,620
     
11,883
     
10,628
 
                                 
Totals
  $
8,104
     
7,864
     
22,533
     
21,091
 

Amortization of deferred policy acquisition costs increased by $0.7 million for the three months ended September 30, 2007 due to a true-up in the current period related to surrender rates, portfolio rates, mortality, expenses and credited rates.  Other operating expenses for the nine months ended September 30, 2006 include an additional expense related to compensation costs from the implementation of liability classification under SFAS 123(R).

 
International Life Insurance Operations

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

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(In thousands)
 
                         
Premiums and other revenue:
                       
Premiums and contract revenues
  $
21,826
     
19,364
     
64,061
     
57,448
 
Net investment income
   
6,460
     
6,771
     
21,075
     
18,958
 
Other income
   
19
     
21
     
106
     
66
 
                                 
Total premiums and other revenue
   
28,305
     
26,156
     
85,242
     
76,472
 
                                 
Benefits and expenses:
                               
Life and other policy benefits
   
6,353
     
4,984
     
17,330
     
14,204
 
Amortization of deferred policy
                               
acquisition costs
   
8,045
     
6,951
     
25,401
     
16,462
 
Universal life insurance contract
                               
interest
   
6,131
     
7,185
     
19,227
     
16,399
 
Other operating expenses
   
3,616
     
3,131
     
12,388
     
14,956
 
                                 
Total benefits and expenses
   
24,145
     
22,251
     
74,346
     
62,021
 
                                 
Segment earnings before Federal
                               
income taxes
   
4,160
     
3,905
     
10,896
     
14,451
 
                                 
Provision for Federal income taxes
   
1,457
     
1,376
     
3,340
     
4,836
 
                                 
Segment earnings
  $
2,703
     
2,529
     
7,556
     
9,615
 

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

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(In thousands)
 
                         
Universal life insurance revenues
  $
21,555
     
19,729
     
63,212
     
58,165
 
Traditional life insurance premiums
   
3,646
     
2,560
     
10,619
     
8,021
 
Reinsurance premiums
    (3,375 )     (2,925 )     (9,770 )     (8,738 )
                                 
Totals
  $
21,826
     
19,364
     
64,061
     
57,448
 



International operations have emphasized universal life policies over traditional life insurance products.  Premiums collected on universal life products are not reflected as revenues in the Company's statements of earnings in accordance with GAAP.  Actual universal life premiums collected are detailed below.

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(In thousands)
 
                         
Universal life insurance:
                       
First year and single premiums
  $
11,423
     
9,473
     
31,121
     
26,405
 
Renewal premiums
   
23,335
     
20,854
     
66,269
     
59,356
 
                                 
Totals
  $
34,758
     
30,327
     
97,390
     
85,761
 

The Company's international life operations have been a significant part of the Company's business which is based upon a long standing reputation in the international market.  The Company reported increased sales of fixed-indexed universal life products for international life operations with premiums approximating $19.8 million and $54.1 million for the three and nine months ended September 30, 2007 and $16.3 million and $43.0 million for the same periods in 2006.  As previously noted, net investment income and contract interest include an increase due to the S&P 500 Index® performance relative to fixed-indexed products in the three and nine months of 2007 compared to the same period in 2006.

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

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(In thousands)
 
                         
Net investment income
                       
(excluding derivatives)
  $
6,812
     
5,954
     
19,782
     
18,508
 
Derivative income (loss)
    (352 )    
817
     
1,293
     
450
 
                                 
Net investment income
  $
6,460
     
6,771
     
21,075
     
18,958
 
 
Amortization of deferred policy acquisition costs increased approximately 54% comparing the first nine months of 2007 to the same period in 2006.  This increase is due primarily to the application of SOP 05-1 which requires the write-off of deferred balances on contracts that are considered substantially changed under this new guidance.  These balances were previously carried and amortized over the projected life of the contract.

Other operating expenses for the nine months ended September 30, 2006, include an additional expense from an increase in compensation costs under SFAS 123(R) as a result of the implementation of liability classification for stock options.


Annuity Operations

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

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(In thousands)
 
                         
Premiums and other revenue:
                       
Premiums and contract revenues
  $
6,079
     
5,281
     
17,965
     
16,306
 
Net investment income
   
62,833
     
83,900
     
220,263
     
223,307
 
Other income
   
543
     
106
     
909
     
2,968
 
                                 
Total premiums and other revenue
   
69,455
     
89,287
     
239,137
     
242,581
 
                                 
Benefits and expenses:
                               
Life and other benefits
   
1,015
     
723
     
2,691
     
2,560
 
Amortization of deferred policy
                               
acquisition costs
   
14,964
     
15,983
     
44,218
     
48,113
 
Annuity contract interest
   
29,692
     
49,587
     
116,782
     
115,443
 
Other operating expenses
   
3,593
     
4,027
     
13,673
     
18,987
 
                                 
Total benefits and expenses
   
49,264
     
70,320
     
177,364
     
185,103
 
                                 
Segment earnings before Federal
                               
income taxes
   
20,191
     
18,967
     
61,773
     
57,478
 
                                 
Provision for Federal income taxes
   
7,314
     
6,598
     
18,936
     
19,235
 
                                 
Segment earnings
  $
12,877
     
12,369
     
42,837
     
38,243
 

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

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(In thousands)
 
                         
Surrender charges
  $
4,969
     
4,320
     
14,703
     
13,176
 
Payout annuity and other revenues
   
1,100
     
952
     
3,239
     
3,107
 
Traditional annuity premiums
   
10
     
9
     
23
     
23
 
                                 
Totals
  $
6,079
     
5,281
     
17,965
     
16,306
 

The Company's earnings are dependent upon annuity contracts persisting or remaining in force.  While premium and contract revenues decline with a reduction in surrender charges, the Company's investment earnings benefit as more policies remain in force.



Deposits collected on annuity contracts are not reflected as revenues in the Company's statements of earnings in accordance with GAAP. Actual annuity deposits collected for the nine months ended September 30, 2007 and 2006 are detailed below.

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(In thousands)
 
                         
Fixed-indexed annuities
  $
87,815
     
82,599
     
239,819
     
229,590
 
Other deferred annuities
   
25,394
     
44,398
     
87,424
     
137,939
 
Immediate annuities
   
611
     
1,384
     
3,012
     
7,645
 
                                 
Totals
  $
113,820
     
128,381
     
330,255
     
375,174
 

Sales of fixed-indexed annuities increased 6.3% and 4.5% comparing September 30, 2007 three and nine months deposits compared to the same period of 2006.  Fixed-indexed product sales typically follow the stock market in that sales are higher when confidence is high in the stock market and lower if the stock market is showing poor performance.  Since the Company does not offer variable products or mutual funds, these fixed-indexed products provide an interest crediting alternative to the Company's existing fixed annuity products and have continued to be a significant portion of the Company’s annuity business.

Other deferred annuity deposits decreased as of September 30, 2007 versus September 30, 2006 with $25.4 million and $87.4 million collected as compared to $44.4 million and $137.9 million for the three and nine months, respectively.  These product sales have been trending lower over the past few years due to low interest rates and investor preferences.  As a selling inducement, many of the deferred products include a first year interest bonus in addition to a base interest rate.  These bonus rates are deferred in conjunction with other capitalized policy acquisition costs.  The amount deferred and amortized over future periods amounted to approximately $5.6 million and $15.7 million for the three and nine months ended September 30, 2007 and $4.9 million and $15.6 million in 2006, respectively.

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

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(In thousands)
 
Net investment income
                       
(excluding derivatives)
  $
70,228
     
68,885
     
210,618
     
210,077
 
Derivative income (loss)
    (7,395 )    
15,015
     
9,645
     
13,230
 
                                 
Net investment income
  $
62,833
     
83,900
     
220,263
     
223,307
 

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

Other income reported for the nine months ended September 30, 2006 includes $2.6 million relating to lawsuit settlements.

The Company is required to periodically adjust deferred policy acquisition amortization factors for actual experience that varies from assumptions.  In the third quarters of 2007 and 2006, a true-up of assumptions based upon actual results increased amortization for the nine months ended September 30, by $2.3 million and $2.0 million, respectively.  Amounts reported for three and nine months totaled $15.0 million and $44.2 million for 2007 and $16.0 million and $48.1 million for the same period in 2006.


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

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(In thousands)
 
                         
Fixed-indexed annuities
  $
9,350
     
27,993
     
53,110
     
48,577
 
All other annuities
   
23,728
     
24,856
     
71,550
     
75,825
 
                                 
Gross contract interest
   
33,078
     
52,849
     
124,660
     
124,402
 
Bonus interest deferred and capitalized
    (5,560 )     (4,883 )     (15,653 )     (15,582 )
Bonus interest amortization
   
2,174
     
1,621
     
7,775
     
6,623
 
                                 
Total contract interest
  $
29,692
     
49,587
     
116,782
     
115,443
 

As previously noted, contract interest reflects variations due to the S&P 500 Index® performance relative to the fair values of fixed-indexed products, increasing and decreasing in 2007 compared to the same period in 2006.

Other operating expenses during the nine months ended September 30, 2006, include an additional expense from implementing liability classification related to the Company's stock option plan under SFAS 123(R) accounting guidance.

Other Operations

National Western's primary business encompasses its domestic and international life insurance operations and its annuity operations.  However, National Western also has small real estate, nursing home, and other investment operations through its wholly-owned subsidiaries.  Nursing home operations generated $1.2 million and $0.5 million of operating earnings in the first nine months of 2007 and 2006, respectively.


INVESTMENTS

General

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


The Company's overall conservative investment philosophy is reflected in the allocation of its investments, which is detailed below as of September 30, 2007 and December 31, 2006.  The Company emphasizes investment grade debt securities, with smaller holdings in mortgage loans and policy loans.

   
Composition of Investments
 
   
September 30, 2007
   
December 31, 2006
 
   
Amount
   
%
   
Amount
   
%
 
   
(In thousands)
         
(In thousands)
       
                         
Debt securities
  $
5,623,778
     
95.4
    $
5,484,799
     
94.7
 
Mortgage loans
   
98,852
     
1.7
     
103,325
     
1.8
 
Policy loans
   
84,377
     
1.4
     
86,856
     
1.5
 
Derivatives
   
51,797
     
0.9
     
72,012
     
1.2
 
Equity securities
   
21,009
     
0.4
     
21,203
     
0.4
 
Real estate
   
12,103
     
0.2
     
12,113
     
0.2
 
Other
   
4,862
     
-
     
10,709
     
0.2
 
                                 
Totals
  $
5,896,778
     
100.0
    $
5,791,017
     
100.0
 

Debt and Equity Securities

The Company maintains a diversified portfolio which consists primarily of corporate, mortgage-backed, and public utilities fixed income securities. Investments in mortgage-backed securities include primarily U.S. government agency pass-through securities and collateralized mortgage obligations ("CMOs"). As of September 30, 2007 and December 31, 2006, the Company's debt securities portfolio consisted of the following:

   
Composition of Debt Securities
 
   
September 30, 2007
   
December 31, 2006
 
   
Amount
   
%
   
Amount
   
%
 
   
(In thousands)
         
(In thousands)
       
                         
Corporate
  $
2,401,924
     
42.7
    $
2,384,762
     
43.5
 
Mortgage-backed securities
   
1,910,242
     
34.0
     
1,817,532
     
33.1
 
Public utilities
   
667,467
     
11.9
     
623,649
     
11.4
 
U.S. government/agencies
   
438,640
     
7.8
     
447,573
     
8.2
 
Asset-backed securities
   
110,266
     
2.0
     
122,101
     
2.2
 
States & political subdivisions
   
64,616
     
1.1
     
58,627
     
1.1
 
Foreign governments
   
30,623
     
0.5
     
30,555
     
0.5
 
                                 
Totals
  $
5,623,778
     
100.0
    $
5,484,799
     
100.0
 

The Company has expanded its holdings of U.S. government and private mortgage-backed securities over the past several years given attractive yields and spreads.  Because the Company's holdings of mortgage-backed securities are subject to prepayment and extension risk, the Company has substantially reduced these risks by investing primarily in collateralized mortgage obligations, which have more predictable cash flow patterns than pass-through securities.  These securities, known as planned amortization class I ("PAC I") and sequential tranches are designed to amortize in a more predictable manner than other CMO classes or pass-throughs.  Using this strategy, the Company can more effectively manage and reduce prepayment and extension risks, thereby helping to maintain the appropriate matching of the Company's assets and liabilities.


Within the debt securities portfolio, the Company holds approximately $110.3 million in asset-backed securities at September 30, 2007, which include manufactured housing bonds and home equity loans. The Company does not have any holdings in collaterized bond obligations (CBOs), collateralized debt obligations (CDOs), or collateralized loan obligations (CLOs). Principal risks in holding asset-backed securities are structural, credit and capital market risks. Structural risks include the securities’ priority in the issuer’s capital structure, the adequacy of and ability to realize proceeds from collateral and the potential for prepayments. Credit risks include corporate credit risks or consumer credit risks for financing such as subprime mortgages. Capital market risks include the general level of interest rates and the liquidity for these securities in the marketplace. As of September 30, 2007, the Company held investments in asset-backed securities collateralized by subprime mortgages with a carrying value of $55 million, less than 1% of invested assets. None of these securities are rated below “AAA” and over 50% are insured. In addition, all of the subprime related asset-backed securities were purchased prior to 2005, the commencement of the period during which management believes the quality of underwriting was lessened. In light of the high credit quality of these securities, the Company does not expect to incur any material losses despite the recent increase in default rates and market concern over future performance of this asset class. The Company also does not have investments in bond funds with subprime exposure.

In addition to diversification, an important aspect of the Company's investment approach is managing the credit quality of its investments in debt securities.  As of September 30, 2007, 98% of the Company's debt securities were investment grade quality.  Thorough credit analysis is performed on potential corporate investments including examination of a company's credit and industry outlook, financial ratios and trends, and event risks.  This emphasis is reflected in the high average credit rating of the Company's portfolio.  In addition, the Company is monitoring the bond portfolio in reference to the possibility of leveraged buyouts that would likely result in lower credit quality ratings.  In the table below, investments in debt securities are classified according to credit ratings by Standard and Poor's ("S&P®"), or other nationally recognized statistical rating organizations if securities were not rated by S&P® .

   
September 30, 2007
   
December 31, 2006
 
   
Amount
   
%
   
Amount
   
%
 
   
(In thousands)
         
(In thousands)
       
                         
AAA and U.S. government
  $
2,576,275
     
45.8
    $
2,485,122
     
45.3
 
AA
   
304,296
     
5.4
     
284,965
     
5.2
 
A
   
1,342,781
     
23.9
     
1,330,980
     
24.3
 
BBB
   
1,289,290
     
22.9
     
1,237,151
     
22.5
 
BB and other below investment grade
   
111,136
     
2.0
     
146,581
     
2.7
 
                                 
Totals
  $
5,623,778
     
100.0
    $
5,484,799
     
100.0
 

The Company does not purchase below investment grade securities.  Investments held in debt securities below investment grade are the result of subsequent downgrades of the securities.  During the first nine months of 2007, the Company's percentage of below investment grade securities decreased from 2.7% of the portfolio to 2.0%.  The Company's holdings of below investment grade securities as a percentage of total invested assets is relatively small compared to industry averages.  These holdings are summarized below.

   
Below Investment Grade Debt Securities
 
               
Estimated
   
% of
 
   
Amortized
   
Carrying
   
Fair
   
Invested
 
   
Cost
   
Value
   
Value
   
Assets
 
   
(In thousands except percentages)
 
                         
September 30, 2007
  $
114,396
     
111,136
     
109,341
      1.9 %
                                 
December 31, 2006
  $
145,858
     
146,581
     
146,170
      2.5 %
                                 
December 31, 2005
  $
168,423
     
170,455
     
167,770
      3.1 %



The Company closely monitors its other below investment grade holdings by reviewing investment performance indicators including information such as issuer operating performance, debt ratings, analyst reports and other economic factors that may affect these specific investments.  While additional losses are not currently anticipated based on the existing status and condition of these securities, continued credit deterioration of some securities is possible, which may result in further writedowns.  Holdings in below investment grade securities by category are summarized below.

   
Below Investment Grade Debt Securities as of September 30,
 
   
Amortized
   
Carrying
   
Fair
   
Fair
 
   
Cost
   
Value
   
Value
   
Value
 
   
2007
   
2007
   
2007
   
2006
 
   
(In thousands)
 
                         
Retail
  $
21,965
     
21,780
     
21,799
     
21,723
 
Utilities/Energy
   
21,444
     
22,664
     
22,890
     
23,259
 
Telecommunication
   
19,998
     
17,532
     
17,532
     
17,999
 
Auto finance
   
13,000
     
12,493
     
11,668
     
12,481
 
Asset-backed
   
11,570
     
11,571
     
10,706
     
10,944
 
Medical
   
6,153
     
6,153
     
5,722
     
6,200
 
Manufacturing
   
5,492
     
5,492
     
5,573
     
5,466
 
Transportation
   
2,288
     
2,767
     
2,767
     
3,109
 
Other
   
12,486
     
10,684
     
10,684
     
10,467
 
                                 
Totals
  $
114,396
     
111,136
     
109,341
     
111,648
 

The Company is required to classify its investments in debt and equity securities into one of three categories:  (a) trading securities, (b) securities available for sale, or (c) securities held to maturity.  The Company purchases securities with the intent to hold to maturity and accordingly does not maintain a portfolio of trading securities.  Of the remaining two categories, available for sale and held to maturity, the Company makes a determination based on various factors including the type and quality of the particular security and how it will be incorporated into the Company's overall asset/liability management strategy. As shown in the table below, at September 30, 2007, approximately 33.9% of the Company's total debt and equity securities, based on fair values, were classified as securities available for sale.  This slight increase in available for sale securities is a result of short-term investments in bonds.  These holdings provide the Company flexibility to react to market opportunities and conditions and to practice active management within the portfolio to provide adequate liquidity to meet policyholder obligations and other cash needs.

   
Fair
   
Amortized
   
Unrealized
 
   
Value
   
Cost
   
Gains (Losses)
 
   
(In thousands)
 
Securities held to maturity:
                 
Debt securities
  $
3,699,411
     
3,750,933
      (51,522 )
Securities available for sale:
                       
Debt securities
   
1,872,845
     
1,901,219
      (28,374 )
Equity securities
   
21,009
     
12,203
     
8,806
 
                         
Totals
  $
5,593,265
     
5,664,355
      (71,090 )

In accordance with SFAS No. 115, Accounting for Certain Debt and Equity Securities, during the first nine months of 2007 one security was sold from the held to maturity portfolio due to significant credit deterioration.  The amortized cost of the bond was $5.2 million and resulted in a realized gain of $19,000.  No securities were sold during the first nine months of 2006.  No securities were transferred from the held to maturity portfolio during the first nine months of 2007 or 2006.

Proceeds from sales of securities available for sale totaled $15.2 million and $0.1 million during the third quarter of 2007 and 2006, respectively, which resulted in realized losses of $0.3 million in 2007 and minimal realized gains in 2006.  For the nine months ended September 30, 2007 and 2006, proceeds from sales of securities available for sale totaled $28.4 million and $21.5 million, respectively.  These sales resulted in gains of $4.3 million and $1.7 million, respectively.


Market Risk

Market risk is the risk of change in market values of financial instruments due to changes in interest rates, currency exchange rates, commodity prices, or equity prices.  The most significant market risk exposure for National Western is interest rate risk. The fair values of fixed income debt securities correlate to external market interest rate conditions.  Because interest rates are fixed on almost all of the Company's debt securities, market values typically increase when market interest rates decline, and decrease when market interest rates rise.  However, market values may fluctuate for other reasons, such as changing economic conditions or increasing event-risk concerns.

The correlation between fair values and interest rates for debt securities is reflected in the tables below.

   
September 30,
   
June 30,
   
December 31,
 
   
2007
   
2007
   
2006
 
   
(In thousands except percentages)
 
                   
Debt securities - fair value
  $
5,572,256
     
5,459,172
     
5,448,990
 
Debt securities - amortized cost
  $
5,652,152
     
5,598,374
     
5,498,461
 
Fair value as a percentage of amortized cost
    98.59 %     97.51 %     99.10 %
Unrealized losses
  $ (79,896 )     (139,201 )     (49,471 )
Ten-year U.S. Treasury bond – increase (decrease)
                       
     in yield for the quarter
    (0.44 )%     0.38 %        


   
Unrealized Losses Balance
             
                     
Qtr
   
YTD
 
   
At
   
At
   
At
   
Change in
   
Change in
 
   
September 30,
   
June 30,
   
December 31,
   
Unrealized
   
Unrealized
 
   
2007
   
2007
   
2006
   
Losses
   
Losses
 
                               
Debt securities held to
                             
maturity
  $ (51,522 )     (95,719 )     (35,809 )    
44,197
      (15,713 )
Debt securities available
                                       
for sale
    (28,374 )     (43,482 )     (13,662 )    
15,108
      (14,712 )
                                         
Totals
  $ (79,896 )     (139,201 )     (49,471 )    
59,305
      (30,425 )

Changes in interest rates typically have a significant impact on the fair values of the Company's debt securities. Market interest rates of the ten-year U.S. Treasury bond decreased approximately 44 basis points from the second quarter of 2007, decreasing the unrealized loss to $80.0 million on a portfolio of approximately $5.6 billion.  The Company would expect similar results in the future from any significant upward or downward movement in market rates.  However, since the majority of the Company's debt securities are classified as held to maturity, which are recorded at amortized cost, as the Company has the ability and intent to hold these securities, changes in fair values due to interest rate risk have relatively small effects on the Company's consolidated balance sheet.

The Company manages interest rate risk through on-going cash flow testing required for insurance regulatory purposes. Computer models are used to perform cash flow testing under various commonly used stress test interest rate scenarios to determine if existing assets would be sufficient to meet projected liability outflows.  Sensitivity analysis allows the Company to measure the potential gain or loss in fair value of its interest-sensitive instruments and to protect its economic value and achieve a predictable spread between what is earned on invested assets and what is paid on liabilities.  The Company seeks to minimize the impact of interest risk through surrender charges that are imposed to discourage policy surrenders.  Interest rate changes can be anticipated in the computer models and the corresponding risk addressed by management actions affecting asset and liability instruments.  However, potential changes in the values of financial instruments indicated by hypothetical interest rate changes will likely be different from actual changes experienced, and the differences could be significant.

The Company performed detailed sensitivity analysis as of December 31, 2006, for its interest rate-sensitive assets and liabilities.  The changes in market values of the Company's debt securities in the third quarter of 2007 were reasonable given the expected range of results of this analysis.


LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Liquidity requirements are met primarily by funds provided from operations. Premium deposits and revenues, investment income, and investment maturities are the primary sources of funds while investment purchases, policy benefits, and operating expenses are the primary uses of funds.  The Company historically has not been put in the position of liquidating invested assets to provide cash flow.  However, investments consist primarily of marketable debt securities that could be readily converted to cash for liquidity needs.  The Company may also borrow up to $40 million on its bank line of credit for short-term cash needs.

A primary liquidity concern for life insurers is the risk of an extraordinary level of early policyholder withdrawals.  The Company includes provisions within its annuity and universal life insurance policies, such as surrender charges, that help limit and discourage early withdrawals.

The actual amounts paid by product line in connection with surrenders and withdrawals for the periods ended September 30 are noted in the table below.

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(In thousands)
 
                         
Product Line:
                       
Traditional Life
  $
2,036
     
1,359
     
4,753
     
3,416
 
Universal Life
   
9,691
     
7,564
     
25,758
     
23,073
 
Annuities
   
103,523
     
89,585
     
318,653
     
271,172
 
                                 
Total
  $
115,250
     
98,508
     
349,164
     
297,661
 

The above contractual withdrawals, as well as the level of surrenders experienced, were generally consistent with the Company's assumptions in asset/liability management, and the associated cash outflows did not have an adverse impact on overall liquidity. Individual life insurance policies are less susceptible to withdrawal than annuity reserves and deposit liabilities because policyholders may incur surrender charges and undergo a new underwriting process in order to obtain a new insurance policy. Cash flow projections and tests under various market interest rate scenarios are also performed to assist in evaluating liquidity needs and adequacy.  The Company currently expects available liquidity sources and future cash flows to be more than adequate to meet the demand for funds.

In the past, cash flows from the Company's insurance operations have been sufficient to meet current needs.  Cash flows from operating activities were $190.9 million and $169.8 million for the nine months ended September 30, 2007 and 2006, respectively. The Company also has significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments.  These cash flows totaled $375.0 million and $286.4 million for the nine months ended September 30, 2007 and 2006, respectively.  These cash flow items could be reduced if interest rates rise.  Net cash inflows (outflows) from the Company's universal life and investment annuity deposit product operations totaled $(64.2) million and $25.9 million during the nine months ended September 30, 2007 and 2006, respectively.

Capital Resources

The Company relies on stockholders' equity for its capital resources as there is no long-term debt outstanding and the Company does not anticipate the need for any long-term debt in the near future.  As of September 30, 2007, the Company had commitments of approximately $8.9 million remaining to be funded of a $12.0 million commitment which was approved by the Company's Board of Directors for the construction of a nursing home facility in Central Texas.  The construction of the new facility began in 2007.



OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

It is not Company practice to enter into off-balance sheet arrangements nor is it Company policy to issue guarantees to third parties, other than in the normal course of issuing insurance contracts.  Commitments related to insurance products sold are reflected as liabilities for future policy benefits.  Insurance contracts guarantee certain performances by the Company.

Insurance reserves are the means by which life insurance companies determine the liabilities that must be established to assure that future policy benefits are provided for and can be paid.  These reserves are required by law and based upon standard actuarial methodologies to ensure fulfillment of commitments guaranteed to policyholders and their beneficiaries, even though the obligations may not be due for many years. Refer to Note (1) in the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2006 for a discussion of reserving methods.

The table below summarizes future estimated cash payments under existing contractual obligations.

   
Payment Due by Period
 
         
Less Than
     
1 - 3
     
3 - 5
   
More Than
 
   
Total
   
1 Year
   
   Years
   
   Years
   
5 Years
 
   
(In thousands)
 
                                   
Operating lease obligations (1)
  $
2,325
     
808
     
1,300
     
217
     
-
 
Loan commitments
   
8,882
     
8,882
     
-
     
-
     
-
 
Life claims payable (2)
   
46,029
     
46,029
     
-
     
-
     
-
 
Other long-term reserve
                                       
liabilities reflected on the
                                       
balance sheet under GAAP (3)
   
370,453
     
72,988
     
108,289
     
55,158
     
134,018
 
                                         
Total
  $
427,689
     
128,707
     
109,589
     
55,375
     
134,018
 

(1)  Refer to Note 9 in the Notes to Consolidated Financial Statements relating to leases in the Company’s Annual Report on Form 10-K.
(2)  Life claims payable include benefit and claim liabilities for which the Company believes the amount and timing of the payment is essentially fixed and determinable.  Such amounts generally relate to incurred and reported death and critical illness claims including an estimate of claims incurred but not reported.
(3)  Other long-term reserve liabilities include obligations that are reported within the Company's reserve liabilities that reflect determinable payout patterns related to immediate annuities.  The above amounts are undiscounted whereas the amounts included in future policy benefit liabilities are discounted in accordance with GAAP.  Liabilities for future policy benefits and other policyholder liabilities of approximately $5.2 billion as of September 30, 2007 have been excluded from the contractual obligations table.  These excluded liabilities include future policy benefits relating to life insurance products, deferred annuities, and universal life products.  Amounts excluded from the table are comprised of policies or contracts where (a) the Company is not currently making payments and will not make payments in the future until the occurrence of a payment triggering event, such as death or (b) the occurrence of a payment triggering event, such as a surrender of a policy or contract, which is outside of the control of the Company.  The timing of these payments is not reasonably fixed and determinable.  These uncertainties are considered in the Company's asset/liability management program as previously noted.


CHANGES IN ACCOUNTING PRINCIPLES AND CRITICAL ACCOUNTING POLICIES

Changes in Accounting Principles

Refer to Note 2 of the Notes to Condensed Consolidated Financial Statements.


REGULATORY AND OTHER ISSUES

Statutory Accounting Practices

Regulations that affect the Company and the insurance industry are often the result of efforts by the National Association of Insurance Commissioners ("NAIC").  The NAIC routinely publishes new regulations as model acts or laws which states subsequently adopt as part of their insurance regulations.  Currently, the Company is not aware of any NAIC regulatory matter material to its operations or reporting of financial results.

Risk-Based Capital Requirements

The NAIC established risk-based capital ("RBC") requirements to help state regulators monitor the financial strength and stability of life insurers by identifying those companies that may be inadequately capitalized.  Under the NAIC's requirements, each insurer must maintain its total capital above a calculated threshold or take corrective measures to achieve the threshold.  The threshold of adequate capital is based on a formula that takes into account the amount of risk each company faces on its products and investments.  The RBC formula takes into consideration four major areas of risk which are:  (i) asset risk which primarily focuses on the quality of investments; (ii) insurance risk which encompasses mortality and morbidity risk; (iii) interest rate risk which involves asset/liability matching issues; and (iv) other business risks. Statutory laws prohibit public dissemination of certain RBC information.  However, the Company's current statutory capital and surplus is significantly in excess of the threshold RBC requirements.


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

This information is included in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, in the Investments in Debt and Equity Securities section.


ITEM 4.  CONTROLS AND PROCEDURES

The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report.  Based on such evaluation, the Company's Chief Executive Officer and Chief Finanical Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in recording, processing, summarizing, and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.

There have been no changes in the Company's internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2007 that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.


PART II.  OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS

Refer to Note 9 "Legal Proceedings" of the accompanying financial statements included in this Form 10-Q.


ITEM 1A. RISK FACTORS

There have been no changes relative to the risk factors disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2006.


ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Effective March 10, 2006, the Company adopted and implemented a limited stock buy-back program associated with the Company's 1995 Stock Option and Incentive Plan ("Plan") 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.

During the months ended August and September 2007, the Company purchased 6,350 shares and 1,780 shares from option holders at an average price of $261.96 and $247.98, respectively.  These purchased shares are reported in the Company's condensed consolidated financial statements as authorized and unissued.


ITEM 6.  EXHIBITS

(a) Exhibits

Exhibit 3 ii (g)
-
National Western Life Insurance Company Bylaws changes effective August 24, 2007.
     
Exhibit 31(a)
-
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
Exhibit 31(b)
-
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
Exhibit 32(a)
-
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



     
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
     
     
NATIONAL WESTERN LIFE INSURANCE COMPANY
(Registrant)
         
           
           
           
           
           
Date:  November 8, 2007
   
/S/ Ross R. Moody
   
     
Ross R. Moody
   
     
President, Chief Operating Officer,
   
     
and Director
   
     
(Authorized Officer)
   
           
           
           
           
Date:  November 8, 2007
   
/S/ Brian M. Pribyl
   
     
Brian M. Pribyl
   
     
Senior Vice President,
   
     
Chief Financial & Administrative
   
     
Officer and Treasurer
   
     
(Principal Financial Officer)
   
           
           
           
           
Date:  November 8, 2007
   
/S/ Kay E. Osbourn
   
     
Kay E. Osbourn
   
     
Vice President,
   
     
Controller and Assistant Treasurer
   
     
(Principal Accounting Officer)
   
           
         
         
         


50