National Western Life Insurance Company - Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

AMENDMENT NO. 1

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

THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2006

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

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number: 2-17039

NATIONAL WESTERN LIFE INSURANCE COMPANY

(Exact name of Registrant as specified in its charter)

COLORADO

84-0467208

(State of Incorporation)

(I.R.S. Employer Identification Number)

850 EAST ANDERSON LANE

AUSTIN, TEXAS 78752-1602

(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 August 7, 2006, the number of shares of Registrant's common stock outstanding was:   Class A - 3,420,824 and Class B - 200,000.





Explanatory Note

The purpose of this Amendment No. 1 to the Quarterly Report on Form 10-Q of National Western Life Insurance Company for the second quarter ended June 30, 2006 is to update the disclosures under Part I, Item 4. Controls and Procedures. This amended Form 10-Q/A does not attempt to modify or update any other disclosures set forth in the original Form 10-Q filed August 9, 2006, except for the matters discussed in Part I, Part 4, and continues to reflect circumstances as of the date of the original filing.

INDEX

Page

Part I.  Financial Information:

Item 1.  Financial Statements

Condensed Consolidated Balance Sheets

June 30, 2006 (Unaudited) and December 31, 2005

Condensed Consolidated Statements of Earnings

For the Three Months Ended June 30, 2006 and 2005 (Unaudited)

Condensed Consolidated Statements of Earnings

For the Six Months Ended June 30, 2006 and 2005 (Unaudited)

Condensed Consolidated Statements of Comprehensive Income

For the Three Months Ended June 30, 2006 and 2005 (Unaudited)

Condensed Consolidated Statements of Comprehensive Income

For the Six Months Ended June 30, 2006 and 2005 (Unaudited)

Condensed Consolidated Statements of Stockholders' Equity

For the Six Months Ended June 30, 2006 and 2005 (Unaudited)

Condensed Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2006 and 2005 (Unaudited)

Notes to Condensed Consolidated Financial Statements (Unaudited)

Item 2.  Management's Discussion and Analysis of

Financial Condition and Results of Operations

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Item 4.  Controls and Procedures

Part II.  Other Information:

Item 1.   Legal Proceedings

Item 1A.  Risk Factors

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

Item 4.   Submission of Matters to a Vote of Security Holders

Item 6.   Exhibits

Signatures

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

June 30,

December 31,

ASSETS

2006

2005

Investments:

    Securities held to maturity, at amortized cost

$

3,618,542 

3,524,724 

    Securities available for sale, at fair value

1,721,061 

1,744,727 

    Mortgage loans, net of allowances for possible

         losses ($0 and $368)

105,908 

110,639 

    Policy loans

86,502 

86,385 

    Derivatives

35,927 

39,405 

    Other long-term investments

26,457 

30,013 

Total investments

5,594,397 

5,535,893 

Cash and short-term investments

28,406 

31,355 

Deferred policy acquisition costs

649,829 

620,129 

Deferred sales inducements

90,974 

80,450 

Accrued investment income

63,384 

61,283 

Federal income tax receivable

4,559 

2,107 

Other assets

47,662 

37,791 

$

6,479,211 

6,369,008 

Note:  The condensed consolidated balance sheet at December 31, 2005, 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)

June 30,

December 31,

LIABILITIES AND STOCKHOLDERS' EQUITY

2006

2005

LIABILITIES:

Future policy benefits:

    Traditional life and annuity contracts

$

139,536 

139,309 

    Universal life and annuity contracts

5,254,232 

5,176,610 

Other policyholder liabilities

113,559 

100,557 

Deferred Federal income tax liability

23,401 

37,735 

Other liabilities

60,300 

40,789 

Total liabilities

5,591,028 

5,495,000 

COMMITMENTS AND CONTINGENCIES (Notes 5 and 8)

STOCKHOLDERS' EQUITY:

Common stock:

    Class A - $1 par value; 7,500,000 shares authorized; 3,446,482

    issued and 3,433,653 outstanding in 2006 and 3,412,839 issued

    and outstanding in 2005

3,434 

3,413 

    Class B - $1 par value; 200,000 shares authorized, issued,

    and outstanding in 2006 and 2005

200 

200 

Additional paid-in capital

40,624 

37,923 

Accumulated other comprehensive income (loss)

(11,325)

10,564 

Retained earnings

858,180 

821,908 

Less treasury stock at cost; 12,829 shares in 2006

(2,930)

-   

Total stockholders' equity

888,183 

874,008 

$

6,479,211 

6,369,008 

Note:  The condensed consolidated balance sheet at December 31, 2005, 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 STATEMENTS OF EARNINGS

For the Three Months Ended June 30, 2006 and 2005

(Unaudited)

(In thousands, except per share amounts)

2006

2005

Premiums and other revenue:

    Traditional life and annuity premiums

$

4,097 

3,932 

    Universal life and annuity contract revenues

25,598 

24,642 

    Net investment income

66,323 

79,488 

    Other income

3,009 

2,319 

    Realized gains on investments

1,616 

7,616 

Total premiums and other revenue

100,643 

117,997 

Benefits and expenses:

    Life and other policy benefits

7,646 

9,432 

    Amortization of deferred policy acquisition costs

22,715 

22,325 

    Universal life and annuity contract interest

23,565 

39,172 

    Other operating expenses

13,724 

11,098 

Total benefits and expenses

67,650 

82,027 

Earnings before Federal income taxes

32,993 

35,970 

Provision for Federal income taxes:

    Current

9,286 

11,592 

    Deferred

1,480 

280 

Total Federal income taxes

10,766 

11,872 

Net earnings

$

22,227 

24,098 

Basic Earnings Per Share

$

6.13 

6.70 

Diluted Earnings Per Share

$

6.07 

6.64 

See accompanying notes to condensed consolidated financial statements.



NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

For the Six Months Ended June 30, 2006 and 2005

(Unaudited)

(In thousands, except per share amounts)

2006

2005

Premiums and other revenue:

    Traditional life and annuity premiums

$

8,088 

7,413 

    Universal life and annuity contract revenues

52,554 

48,590 

    Net investment income

165,010 

142,234 

    Other income

8,207 

4,552 

    Realized gains on investments

3,039 

8,584 

Total premiums and other revenue

236,898 

211,373 

Benefits and expenses:

    Life and other policy benefits

19,088 

20,660 

    Amortization of deferred policy acquisition costs

45,013 

41,399 

    Universal life and annuity contract interest

79,613 

66,527 

    Other operating expenses

39,098 

22,141 

Total benefits and expenses

182,812 

150,727 

Earnings before Federal income taxes

54,086 

60,646 

Provision (benefit) for Federal income taxes:

    Current

20,773 

17,884 

    Deferred

(2,959)

2,462 

Total Federal income taxes

17,814 

20,346 

Net earnings

$

36,272 

40,300 

Basic Earnings Per Share

$

10.01 

11.21 

Diluted Earnings Per Share

$

9.91 

11.11 

See accompanying notes to condensed consolidated financial statements.



NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Three Months Ended June 30, 2006 and 2005

(Unaudited)

(In thousands)

2006

2005

Net earnings

$

22,227 

24,098 

Other comprehensive income (loss) net of effects of

   deferred policy acquisition costs and taxes:

    Unrealized gains (losses) on securities:

        Unrealized holding gains (losses) arising during period

(9,898)

11,124 

        Reclassification adjustment for gains included in net earnings

(806)

(276)

        Amortization of net unrealized losses (gains)

            related to transferred securities

(15)

        Net unrealized gains (losses) on securities

(10,703)

10,833 

    Foreign currency translation adjustments

100 

16 

Other comprehensive income (loss)

(10,603)

10,849 

Comprehensive income

$

11,624 

34,947 

See accompanying notes to condensed consolidated financial statements.



NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Six Months Ended June 30, 2006 and 2005

(Unaudited)

(In thousands)

2006

2005

Net earnings

$

36,272 

40,300 

Other comprehensive income (loss), net of effects of

   deferred policy acquisition costs and taxes:

    Net unrealized gains (losses) on securities:

        Net unrealized holding gains (losses) arising during period

(20,260)

1,243 

        Reclassification adjustment for gains included in net earnings

(1,698)

(505)

        Amortization of net unrealized losses (gains)

            related to transferred securities

(96)

12 

        Net unrealized gains (losses) on securities

(22,054)

750 

    Foreign currency translation adjustments

165 

185 

Other comprehensive income (loss)

(21,889)

935 

Comprehensive income

$

14,383 

41,235 

See accompanying notes to condensed consolidated financial statements.



NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

For the Six Months Ended June 30, 2006 and 2005

(Unaudited)

(In thousands)

2006

2005

Common stock:

    Balance at beginning of year

$

3,613 

3,584 

    Shares exercised under stock option plan

21 

21 

Balance at end of period

3,634 

3,605 

Additional paid-in capital:

    Balance at beginning of year

37,923 

33,834 

    Shares exercised under stock option plan, including tax benefits

1,435 

1,954 

    Liability awards exercised, including forfeitures

1,266 

-   

    Stock option expense

-   

509 

Balance at end of period

40,624 

36,297 

Accumulated other comprehensive income:

    Unrealized gains on securities:

        Balance at beginning of year

10,401 

25,032 

        Change in unrealized gains (losses) during period

(22,054)

750 

        Balance at end of period

(11,653)

25,782 

    Foreign currency translation adjustments:

        Balance at beginning of year

3,300 

3,170 

        Change in translation adjustments during period

165 

185 

        Balance at end of period

3,465 

3,355 

    Minimum pension liability adjustment:

        Balance at beginning of year

(3,137)

(2,783)

        Change in minimum pension liability adjustment during period

-   

-   

        Balance at end of period

(3,137)

(2,783)

Accumulated other comprehensive income (loss) at end of period

(11,325)

26,354 

Retained earnings:

    Balance at beginning of year

821,908 

745,835 

    Net earnings

36,272 

40,300 

Balance at end of period

858,180 

786,135 

Treasury shares:

    Balance at beginning of year

-   

-   

    Common stock acquired during period

(2,930)

-   

Balance at end of period

(2,930)

-   

Total stockholders' equity

$

888,183 

852,391 

See accompanying notes to condensed consolidated financial statements.

NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended June 30, 2006 and 2005

(Unaudited)

(In thousands)

2006

2005

Cash flows from operating activities:

    Net earnings

$

36,272 

40,300 

    Adjustments to reconcile net earnings to net cash

    from operating activities:

        Universal life and annuity contract interest

79,613 

66,527 

        Surrender charges and other policy revenues

(16,283)

(14,579)

        Realized gains on investments

(3,039)

(8,584)

        Accrual and amortization of investment income

(2,655)

(1,791)

        Depreciation and amortization

770 

804 

        Decrease in value of derivatives

6,905 

9,278 

        Increase in deferred policy acquisition and sale inducement costs

(2,817)

(11,076)

        Increase in accrued investment income

(2,101)

(1,966)

        Increase in other assets

(10,575)

(10,106)

        Increase (decrease) in liabilities for future policy benefits

226 

(1,362)

        Increase in other policyholder liabilities

13,002 

12,301 

        Increase (decrease) in Federal income tax liability

(2,687)

998 

        Increase (decrease) in other liabilities

16,024 

(1,884)

        Other

(98)

(1,141)

Net cash provided by operating activities

112,557 

77,719 

Cash flows from investing activities:

    Proceeds from sales of:

        Securities held to maturity

-   

10,853 

        Securities available for sale

21,368 

11,890 

        Other investments

21,759 

31,018 

    Proceeds from maturities and redemptions of:

        Securities held to maturity

105,889 

170,584 

        Securities available for sale

52,497 

62,670 

    Purchases of:

        Securities held to maturity

(197,703)

(297,587)

        Securities available for sale

(111,436)

(138,651)

        Other investments

(20,780)

(17,360)

    Principal payments on mortgage loans

7,547 

14,021 

    Cost of mortgage loans acquired

(2,715)

(5,617)

    Decrease (increase) in policy loans

(117)

1,572 

    Other

(538)

(1,006)

Net cash used in investing activities

(124,229)

(157,613)

(Continued on next page)



NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

For the Six Months Ended June 30, 2006 and 2005

(Unaudited)

(In thousands)

2006

2005

Cash flows from financing activities:

    Deposits to account balances for universal life

        and annuity contracts

$

273,949 

328,910 

    Return of account balances on universal life

        and annuity contracts

(265,222)

(219,059)

    Issuance of common stock under stock option plan

1,687 

1,317 

    Repurchase of common stock

(2,930)

-   

Net cash provided by financing activities

7,484 

111,168 

Effect of foreign exchange

1,239 

(17)

Net increase (decrease) in cash and cash equivalents

(2,949)

31,257 

Cash and cash equivalents at beginning of year

31,355 

50,194 

Cash and cash equivalents at end of period

$

28,406 

81,451 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash paid during the six month period for:

   Interest

$

20 

20 

   Income taxes

21,915 

17,100 

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 June 30, 2006, and the results of its operations and its cash flows for the three months and six months ended June 30, 2006 and 2005. The results of operations for the three months and six months ended June 30, 2006 and 2005 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, 2005 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 2006.

(2)  CHANGES IN ACCOUNTING PRINCIPLES

In May of 2005, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 154, Accounting Changes and Error Correction. This standard is a replacement of Accounting Policy Board Opinion No. 20, Accounting Changes, and FASB Standard No. 3, Reporting Accounting Changes in Interim Financial Statements. Under the new standard, any voluntary changes in accounting principles are to be adopted via a retrospective application of the accounting principle in the financial statements presented and an opinion obtained from the auditors that the new principle is preferred. In addition, adoption of a change in accounting principle required by the issuance of a new accounting standard will also require retroactive restatement, unless the new standard includes explicit transition guidelines. This standard was effective for fiscal years beginning after December 15, 2005. Adoption of this standard did not have an impact on the consolidated financial statements of the Company.

In March 2004, the Emerging Issues Task Force ("EITF") reached a final consensus on Issue 03-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments. This Issue establishes impairment models for determining whether to record impairment losses associated with investments in certain equity and debt securities and requires expanded disclosures related to securities with unrealized losses. It also requires income to be accrued on a level-yield basis following an impairment of debt securities, where reasonable estimates of the timing and amount of future cash flows can be made. The Company's current policy has generally been to record income only as cash is received following an impairment of a debt security. The application of this Issue was required for reporting periods beginning after June 15, 2004. In September 2004, the FASB approved FASB Staff Position EITF 03-1-1, which deferred the effective date for the recognition and measurement guidance contained in EITF 03-1 until certain issues were resolved. On November 3, 2005, the FASB issued FASB Staff Position ("FSP") Nos. FAS 115-1 and FAS 124-1 titled The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. This FSP nullifies certain requirements of EITF 03-1 and carries forward certain requirements and disclosures. The guidance in this FSP is to be applied to reporting periods beginning after December 15, 2005. The Company has adopted the disclosure provisions and has included the required disclosures. The Company did adopt FSP Nos. FAS 115-1 and FAS 124-1 as of the beginning of fiscal year 2006, and the FSP did not have a material impact on the consolidated financial statements of the Company.

The Company adopted Statement No. 123(R), Share-Based Payments ("SFAS 123(R)") as of January 1, 2006. However, because the Company began recognizing stock-based employee compensation cost using the fair value based method of accounting in 2003, the adoption did not have a material impact on the consolidated financial statements of the Company.

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"). 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. SOP 05-1 is effective for internal replacements occurring in fiscal years beginning after December 15, 2006, with earlier adoption encouraged. The adoption of SOP 05-1 is not expected to have a material impact on the consolidated financials statements of the Company.

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 will require 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 will also be 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. Adoption of FIN 48 is not expected to have a material impact on the Company's consolidated financial statements.


(3)  STOCKHOLDERS' EQUITY

The Company is restricted by state insurance laws as to dividend amounts which may be paid to stockholders without prior approval from the Colorado Division of Insurance. The Company paid no cash dividends on common stock during the six months ended June 30, 2006 and 2005, as it generally follows a policy of retaining earnings in order to finance the development of business and to meet regulatory requirements for capital.


(4)  EARNINGS PER SHARE

Basic earnings per share of common stock are computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share assumes the issuance of common shares applicable to stock options. Refer to Exhibit 11 of this report for further information concerning the computation of earnings per share.


(5)  PENSION AND OTHER POSTRETIREMENT PLANS

(A)  Defined Benefit Pension Plans

The Company sponsors a qualified defined benefit pension plan covering substantially all full-time employees. The plan provides benefits based on the participants' years of service and compensation. The Company makes annual contributions to the plan that comply with the minimum funding provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"). The following summarizes the components of net periodic benefit costs.

Three Months Ended June 30,

Six Months Ended June 30,

2006

2005

2006

2005

(In thousands)

Service cost

$

172 

195 

343 

343 

Interest cost

243 

256 

487 

487 

Expected return on plan assets

(227)

(246)

(455)

(455)

Amortization of prior service cost

Amortization of net loss

82 

94 

165 

165 

Net periodic benefit cost

$

271 

300 

542 

542 

As previously disclosed in its financial statements for the year ended December 31, 2005, the Company expects to contribute $1.0 million to the qualified plan in 2006. No contributions have been made as of June 30, 2006.

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.

Three Months Ended June 30,

Six Months Ended June 30,

2006

2005

2006

2005

(In thousands)

Service cost

$

324 

106 

648 

211 

Interest cost

73 

44 

146 

89 

Amortization of prior service cost

161 

73 

323 

146 

Amortization of net loss

-   

-   

Net periodic benefit cost

$

558 

224 

1,117 

448 

As previously disclosed in its financial statements for the year ended December 31, 2005, the Company expects to contribute $1.0 million to the non-qualified plans in 2006. As of June 30, 2006, the Company has contributed $0.4 million to the plan.

(B)  Defined Benefit Postretirement Plans

The Company sponsors two healthcare plans that were amended in 2004 to provide postretirement benefits to certain fully-vested individuals. The following summarizes the components of net periodic benefit cost.

Three Months Ended June 30,

Six Months Ended June 30,

2006

2005

2006

2005

(In thousands)

Interest cost

$

25 

26 

50 

50 

Amortization of prior service cost

25 

25 

51 

51 

Net periodic benefit cost

$

50 

51 

101 

101 

As previously disclosed in its financial statements for the year ended December 31, 2005, the Company expects to contribute minimal amounts to the healthcare plans in 2006.


(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 June 30, 2006 and 2005 is provided below.

Selected Segment Information.

Domestic

International

Life

Life

All

Insurance

Insurance

Annuities

Others

Totals

(In thousands)

June 30, 2006:

Selected Balance Sheet Items:

Deferred policy acquisition

   costs and sales inducements

$

46,914 

176,709 

517,180 

-   

740,803 

Total segment assets

370,597 

671,099 

5,319,538 

97,658 

6,458,892 

Future policy benefits

310,334 

465,194 

4,618,240 

-   

5,393,768 

Other policyholder liabilities

9,977 

21,535 

82,047 

-   

113,559 

Three Months Ended

June 30, 2006:

Condensed Income Statements:

Premiums and contract

   revenues

$

5,699 

18,700 

5,296 

-   

29,695 

Net investment income

5,020 

5,173 

53,409 

2,721 

66,323 

Other income

22 

155 

2,825 

3,009 

    Total revenues

10,726 

23,895 

58,860 

5,546 

99,027 

Life and other policy benefits

3,077 

3,839 

730 

-   

7,646 

Amortization of deferred

   policy acquisition costs

1,971 

4,570 

16,174 

-   

22,715 

Universal life and annuity

   contract interest

2,273 

3,273 

18,019 

-   

23,565 

Other operating expenses

2,200 

3,707 

5,199 

2,618 

13,724 

Federal income taxes

409 

2,780 

6,053 

958 

10,200 

    Total expenses

9,930 

18,169 

46,175 

3,576 

77,850 

Segment earnings

$

796 

5,726 

12,685 

1,970 

21,177 

Domestic

International

Life

Life

All

Insurance

Insurance

Annuities

Others

Totals

(In thousands)

Six Months Ended

June 30, 2006:

Condensed Income Statements:

Premiums and contract

   revenues

$

11,533 

38,084 

11,025 

-   

60,642 

Net investment income

10,216 

12,187 

139,407 

3,200 

165,010 

Other income

15 

45 

2,862 

5,285 

8,207 

    Total revenues

21,764 

50,316 

153,294 

8,485 

233,859 

Life and other policy benefits

8,031 

9,220 

1,837 

-   

19,088 

Amortization of deferred

   policy acquisition costs

3,372 

9,511 

32,130 

-   

45,013 

Universal life and annuity

   contract interest

4,543 

9,214 

65,856 

-   

79,613 

Other operating expenses

7,462 

11,825 

14,960 

4,851 

39,098 

Federal income taxes (benefit)

(540)

3,460 

12,637 

1,193 

16,750 

    Total expenses

22,868 

43,230 

127,420 

6,044 

199,562 

Segment earnings (losses)

$

(1,104)

7,086 

25,874 

2,441 

34,297 


Selected Segment Information.

Domestic

International

Life

Life

All

Insurance

Insurance

Annuities

Others

Totals

(In thousands)

June 30, 2005:

Selected Balance Sheet Items:

Deferred policy acquisition

   costs and sales inducements

$

46,558 

151,340 

464,033 

-   

661,931 

Total segment assets

369,499 

594,811 

5,136,518 

93,325 

6,194,153 

Future policy benefits

304,512 

421,106 

4,455,778 

-   

5,181,396 

Other policyholder liabilities

10,348 

11,484 

65,706 

-   

87,538 

Three Months Ended

June 30, 2005:

Condensed Income Statements:

Premiums and contract

   revenues

$

6,035 

17,305 

5,234 

-   

28,574 

Net investment income

4,849 

5,752 

64,487 

4,400 

79,488 

Other income

18 

95 

2,198 

2,319 

    Total revenues

10,892 

23,075 

69,816 

6,598 

110,381 

Life and other policy benefits

3,610 

5,068 

754 

-   

9,432 

Amortization of deferred

   policy acquisition costs

614 

5,931 

15,780 

-   

22,325 

Universal life and annuity

   contract interest

2,188 

4,971 

32,013 

-   

39,172 

Other operating expenses

2,099 

2,772 

4,313 

1,914 

11,098 

Federal income taxes

785 

1,397 

5,475 

1,550 

9,207 

    Total expenses

9,296 

20,139 

58,335 

3,464 

91,234 

Segment earnings

$

1,596 

2,936 

11,481 

3,134 

19,147 

Domestic

International

Life

Life

All

Insurance

Insurance

Annuities

Others

Totals

(In thousands)

Six Months Ended

June 30, 2005:

Condensed Income Statements:

Premiums and contract

   revenues

$

12,116 

34,342 

9,545 

-   

56,003 

Net investment income

9,827 

11,090 

116,158 

5,159 

142,234 

Other income

16 

32 

182 

4,322 

4,552 

    Total revenues

21,959 

45,464 

125,885 

9,481 

202,789 

Life and other policy benefits

8,270 

11,051 

1,339 

-   

20,660 

Amortization of deferred

   policy acquisition costs

1,832 

10,845 

28,722 

-   

41,399 

Universal life and annuity

   contract interest

4,369 

8,583 

53,575 

-   

66,527 

Other operating expenses

4,299 

6,101 

7,950 

3,791 

22,141 

Federal income taxes

1,062 

2,959 

11,425 

1,896 

17,342 

    Total expenses

19,832 

39,539 

103,011 

5,687 

168,069 

Segment earnings

$

2,127 

5,925 

22,874 

3,794 

34,720 

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

Three Months Ended June 30,

Six Months Ended June 30,

2006

2005

2006

2005

(In thousands)

Premiums and Other Revenue:

Premiums and contract revenues

$

29,695 

28,574 

60,642 

56,003 

Net investment income

66,323 

79,488 

165,010 

142,234 

Other income

3,009 

2,319 

8,207 

4,552 

Realized gains on investments

1,616 

7,616 

3,039 

8,584 

Total consolidated premiums and

   other revenue

$

100,643 

117,997 

236,898 

211,373 


Three Months Ended June 30,

Six Months Ended June 30,

2006

2005

2006

2005

(In thousands)

Federal Income Taxes:

Total segment Federal income taxes

$

10,200 

9,207 

16,750 

17,342 

Taxes on realized gains on

   investments

566 

2,665 

1,064 

3,004 

Total consolidated Federal

   income taxes

$

10,766 

11,872 

17,814 

20,346 

Three Months Ended June 30,

Six Months Ended June 30,

2006

2005

2006

2005

(In thousands)

Net Earnings:

Total segment earnings

$

21,177 

19,147 

34,297 

34,720 

Realized gains on investments,

   net of taxes

1,050 

4,951 

1,975 

5,580 

Total consolidated net earnings

$

22,227 

24,098 

36,272 

40,300 


June 30,

2006

2005

(In thousands)

Assets:

Total segment assets

$

6,458,892 

6,194,153 

Other unallocated assets

20,319 

20,304 

Total consolidated assets

$

6,479,211 

6,214,457 


(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 or treasury 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 2006 or 2005.

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, 2006

21,207 

156,959 

$

117.62

Stock Options:

    Exercised

-   

(20,454)

78.93

    Forfeited

2,000 

(2,000)

150.00

Balance at June 30, 2006

23,207 

134,505 

$

123.02

The total intrinsic value of options exercised was $1.1 million and $2.3 million for the six months ended June 30, 2006 and 2005, respectively. The total share-based liabilities paid were $1.8 million for the six months ended June 30, 2006. The total fair value of shares vested during the six months ended June 30, 2006 and 2005 was $2.6 million and $3.3 million, respectively.

The following table summarizes information about stock options outstanding at June 30, 2006.

Options Outstanding

Weighted-

Average

Number

Remaining

Options

Outstanding

Contractual Life

Exercisable

Exercise prices:

$

  85.13

1,581 

0.8 years

1,581 

105.25

22,980 

1.8 years

22,980 

112.38

6,800 

2.0 years

6,800 

  92.13

31,894 

4.8 years

16,637 

  95.00

7,200 

5.0 years

7,200 

150.00

64,050 

7.8 years

3,800 

Totals

134,505 

58,998 

Aggregate intrinsic value

(in thousands)

$

15,687 

$

8,035 

The aggregate intrinsic value in the table above is based on the closing stock price of $239.65 per share on June 30, 2006.

In estimating the fair value of the options outstanding at June 30, 2006, the Company employed the Black-Scholes option pricing model with assumptions as detailed below.

Expected term of options

1 to 6 years

Expected volatility:

    Range

15.53% to 24.35%

    Weighted-average

21.12%

Expected dividends

-   

Risk-free rate:

    Range

5.07% to 5.31%

    Weighted-average

5.21%

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

The pre-tax compensation cost recognized in the financial statements related to the Plan was $13.9 million and $0.5 million for the six months ended June 30, 2006 and 2005, respectively. The related tax benefit recognized was $4.9 million and $0.2 million for the six months ended June 30, 2006 and 2005, 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. The intent of the limited buy-back program was to minimize dilution to the existing shareholders. 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 method to the liability method. 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 June 30, 2006, the total compensation cost related to nonvested options not yet recognized was $3.8 million. This amount is expected to be recognized over a weighted-average period of 2 years. The Company recognizes compensation cost over the graded vesting periods.

For the six months ended June 30, 2006 and 2005, the total cash received from the exercise of options under the Plan was $0.5 million and $1.3 million, respectively. The related tax benefit realized for the six months ended June 30, 2006 and 2005 was $1.0 million and $0.7 million, respectively.

The Plan offers two alternatives to option holders for exercising options. In the first alternative, option holders have the choice of either holding shares acquired through exercising options, selling the acquired shares in the open market, or requesting a broker-assisted cashless exercise of all or part of the options exercised. A broker-assisted cashless exercise simultaneously executes the exercise of the options and the sale of acquired shares in the open market with the net proceeds payable to the option holder.

In the second alternative, option holders have the option 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.


(8)  LEGAL PROCEEDINGS

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

The Company is a defendant in several class action lawsuits, however, no class has been certified to date on any of these suits. Management believes that the Company has good and meritorious defenses and intends 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, equity-indexed universal life insurance and traditional life insurance, which include both term and whole life products. The majority of domestic sales are the Company's annuities, which include single and flexible premium deferred annuities, single premium immediate annuities, and equity-indexed annuities. Most of these annuities can be sold as tax qualified or nonqualified products. At June 30, 2006, the Company maintained approximately 123,600 annuity policies in force.

National Western markets and distributes its domestic products through independent national marketing organizations ("NMOs"). These NMOs assist the Company in recruiting, contracting, and managing independent agents. The Company currently has approximately 10,900 independent agents contracted. Roughly 17% 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 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 June 30, 2006, the Company had approximately 66,500 international life insurance policies in force representing approximately $12.6 billion in face amount of coverage.

International applications are submitted by independent contractor broker-agents. The Company has approximately 4,000 independent international brokers currently contracted, over 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 socio-economic classes who have substantial financial resources. This targeted customer base coupled with National Western's conservative underwriting practices have historically resulted in claims experience, due to natural causes, similar to that in the United States. The Company minimizes exposure to foreign currency risks by requiring payment of premiums, claims, and other benefits almost entirely in United States dollars. Finally, the Company's nearly forty years of experience with the international products and its longstanding independent 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 June 30,

 

Six Months Ended June 30,

   

2006

 

2005

 

2006

 

2005

   

(In thousands)

International:

               

  Universal life

$

1,565

 

1,286

 

3,471

 

2,548

  Traditional life

 

917

 

923

 

2,136

 

1,671

  Equity-indexed life

 

4,067

 

4,416

 

8,202

 

8,038

   

6,549

 

6,625

 

13,809

 

12,257

Domestic:

               

  Universal life

 

462

 

677

 

1,157

 

1,430

  Traditional life

 

86

 

104

 

150

 

193

  Equity-indexed life

 

1,018

 

-  

 

1,426

 

-  

   

1,566

 

781

 

2,733

 

1,623

                 

Totals

$

8,115

 

7,406

 

16,542

 

13,880

Life insurance sales as measured by annualized first year premiums increased 19% in the first six months of 2006 as compared to the first six months of 2005. Both of the Company's life lines of business, international and domestic, posted increases over the comparable results in the first half of 2005 with international sales up 13% and domestic sales 68% greater. Life insurance sales in the second quarter increased 10% in 2006 over 2005 with all of the increase derived from the domestic line of business. 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 life insurance sales have increased from 12% of total life insurance sales in the first six months of 2005 to 17% in the same period of 2006.

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 considered to still be in a developmental phase, sales from these countries have gradually become a larger percentage of overall international sales as shown below.

Six Months Ended June 30,

2006

2005

Percentage of International Sales:

  Latin America

74.2

%

83.8

%

  Pacific Rim

12.1

11.1

  Eastern Europe

13.7

5.1

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 (34%), Taiwan (11%), and Venezuela (8%) making up the largest markets.

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 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 52% of domestic life insurance sales in the first half of 2006 and management anticipates this share to grow throughout the remainder of 2006. 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, 2002

$

68,100 

222,000 

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 

Six months ended June 30, 2006

241,100 

241,400 

The international life products historically have consisted of larger average face amounts of coverage per policy due to the higher net worth of the individuals purchasing these products.

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

Insurance In Force as of June 30,

2006

2005

($ in thousands)

Universal life:

  Number of policies

77,900

81,400

  Face amounts

$

8,022,260

8,165,030

Traditional life:

  Number of policies

53,920

56,140

  Face amounts

$

1,749,140

1,695,510

Equity-indexed life:

  Number of policies

17,630

13,320

  Face amounts

$

3,667,620

2,691,930

Rider face amounts

$

1,644,710

1,486,620

Total life insurance:

  Number of policies

149,450

150,860

  Face amounts

$

15,083,730

14,039,090


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 June 30,

 

Six Months Ended June 30,

   

2006

 

2005

 

2006

 

2005

   

(In thousands)

                 

Equity-indexed annuities

               

  and other deferred annuities

$

126,526

 

144,733

 

232,741

 

285,351

Immediate annuities

 

3,671

 

8,534

 

7,750

 

16,200

                 

Totals

$

130,197

 

153,267

 

240,491

 

301,551

Annuity sales for the first six months of 2006 were 20% lower than the comparable period in 2005 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 2005, the interest rate levels experienced an infrequent occurrence where the yield curve was 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. Annuity sales in the second quarter of 2006 were 15% lower than the second quarter of 2005 but 18% higher than the first quarter of 2006.

The Company's mix of annuity sales has shifted the past few years. With a stronger performance in the equity market, sales of equity-indexed annuity products became more prevalent beginning in 2004 and have continued thus far in 2006. Sales of equity-indexed products have consistently accounted for more than one-half of all annuity sales. Contributing to the increase in sales of these products has been the Company's introduction of a new series of equity-indexed annuity products featuring a different indexing mechanism (monthly cap) to complement the existing equity-indexed annuity products which utilize a monthly average annual reset feature. For all equity-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 any form of timing risk. The index return, less any asset fees, during the indexing period (if the underlying index increases) is credited to the contract holders electing the equity feature at the beginning of the contract year. 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. 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 June 30,

2006

2005

($ in thousands)

Equity-indexed annuities

  Number of policies

28,770

25,430

  GAAP annuity reserves

$

1,661,760

1,473,330

Other deferred annuities

  Number of policies

82,100

85,330

  GAAP annuity reserves

$

2,704,690

2,730,710

Immediate annuities

  Number of policies

12,710

12,540

  GAAP annuity reserves

$

248,780

248,790

Total annuities

  Number of policies

123,580

123,300

  GAAP annuity reserves

$

4,615,230

4,452,830

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. Upon impairment, a net realized loss is recorded 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 assumed. For universal life and annuity products, the Company's liability is the amount of the contract's account balance. Account balances are also subject to minimum liability calculations as a result of minimum guaranteed interest rates in the policies. While management and Company actuaries have used their best judgment in determining the assumptions and in calculating the liability for future policy benefits, there is no assurance that the estimate of the liabilities reflected in the financial statements represents the Company's ultimate obligation. In addition, significantly different assumptions could result in materially different reported amounts.

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, 2005, and the discussions under Investments in Item 3 of the annual report.

Pension Plans and Other Postretirement Benefits.  The Company sponsors a qualified defined benefit pension plan covering substantially all employees and three non-qualified defined benefit plans covering certain senior officers. In addition, the Company also has postretirement healthcare benefits for certain senior officers.

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.

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

    -  exercise price
    -  expected term based on contractual term and perceived future behavior relative to exercise
    -  current price
    -  expected volatility
    -  risk-free interest rates

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

Other significant accounting policies, although not involving the same level of measurement uncertainties as those discussed above but nonetheless important to an understanding of the financial statements, are described in the Company's annual report on Form 10-K for the year ended December 31, 2005.


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 June 30,

Six Months Ended June 30,

2006

2005

2006

2005

(In thousands)

Traditional life and annuity premiums

$

4,097 

3,932 

8,088 

7,413 

Universal life and annuity

   contract revenues

25,598 

24,642 

52,554 

48,590 

Net investment income

   excluding derivatives

83,651 

81,966 

167,162 

158,634 

Other income

3,009 

2,319 

8,207 

4,552 

Operating revenues

116,355 

112,859 

236,011 

219,189 

Derivative losses

(17,328)

(2,478)

(2,152)

(16,400)

Realized gains

    on investments

1,616 

7,616 

3,039 

8,584 

Total revenues

$

100,643 

117,997 

236,898 

211,373 

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

Revenues for universal life and annuity contract revenues consist of policy charges for the cost of insurance, administration charges, and surrender charges assessed against policyholder account balances. Product sales have remained consistent from 2005 to 2006 relative to the block of business in force, and notably international universal life products continue growing steadily. This contributes to higher revenues in the form of cost of insurance charges which were $16.6 million and $33.1 million for the three and six months ended of 2006 compared to $15.7 million and $31.2 million for the three and six months ended June 30, 2005. Surrender charges assessed against policyholder account balances upon withdrawal totaled approximately $7.0 million for the three months ended June 30 in both 2006 and 2005. These amounts totaled $14.7 million and $13.1 million for the six months ended June 30, 2006 and 2005, respectively.

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.

A detail of net investment income is provided below.

Three Months Ended June 30,

Six Months Ended June 30,

% of

% of

2006

2005

2006

Total

2005

Total

(In thousands except percentages)

Gross investment income:

    Debt securities

$

76,989 

73,443 

153,114 

90.8

145,086 

90.8

    Mortgage loans

2,038 

2,324 

4,676 

2.8

4,966 

3.1

    Policy loans

1,567 

1,588 

3,147 

1.8

3,176 

2.0

    Other investment

       income

3,537 

4,956 

7,721 

4.6

6,469 

4.1

100.0

100.0

Total investment income

84,131 

82,311 

168,658 

159,697 

Investment expenses

480 

345 

1,496 

1,063 

Net investment income

    (excluding derivatives)

83,651 

81,966 

167,162 

158,634 

Derivative losses

(17,328)

(2,478)

(2,152)

(16,400)

Net investment income

$

66,323 

79,488 

165,010 

142,234 

Income from other invested assets for the six months ended June 30, 2006 includes a profit participation interest of $1.6 million and residual profits of $1.1 million from the sale of equity loans during the quarter. 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). Despite the drop in interest rate levels over the past several years, the Company still generated higher overall net investment income, excluding derivatives, due to higher levels of invested assets.

Net investment income performance is summarized as follows:

Six Months Ended June 30,

2006

2005

(In thousands except percentages)

Excluding derivatives:

Net investment income

$

167,163   

158,634   

Average invested assets, at amortized cost

$

5,453,706   

5,101,518   

Annual yield on average invested assets

6.13%

6.22%

Including derivatives:

Net investment income

$

165,010   

142,234   

Average invested assets, at amortized cost

$

5,493,256   

5,156,932   

Annual yield on average invested assets

6.01%

5.52%

The yield on average invested assets has decreased from 6.22% in 2005 to 6.13% in 2006, excluding derivatives, due to the yield on current investments being at lower levels. 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 primarily pertains to the Company's operations involving a nursing home. Revenues associated with this operation were $5.3 million and $4.3 million for the six months ended June 30, 2006 and 2005, respectively. Included in other income for the six months ended June 30, 2006 is $2.6 million resulting from partial lawsuit settlements in relation to the Company's litigation against Enron and related parties.

Index options are derivative financial instruments used to properly hedge the equity return component of the Company's equity-indexed products. Index options are intended to act as hedges to match closely the returns on equity-indexed products. With an increase or decline in this index, the index option values likewise increase or decline. Any gains or losses from the sale or expiration of the options, as well as period-to-period changes in fair values, are reflected as a component of net investment income. However, increases or decreases in income from these options are substantially offset by corresponding increases or decreases in amounts credited to equity-indexed policyholders as contract interest.

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

Three Months Ended June 30,

Six Months Ended June 30,

2006

2005

2006

2005

(In thousands)

Derivatives:

   Unrealized gains (losses)

$

(22,919)

660 

(6,905)

(9,278)

   Realized gains (losses)

5,591 

(3,138)

4,753 

(7,122)

Total losses included

   in net investment income

$

(17,328)

(2,478)

(2,152)

(16,400)

Total contract interest

$

23,565 

39,172 

79,613 

66,527 

Net realized gains in the second quarter of 2006 include $0.8 million related to several previously impaired default bond securities which received principal payments or stock exchanges. Further gains during the quarter from sales or tenders of other bond securities totaled $0.4 million and sales of real estate properties totaled $0.4 million. Gains recorded during the second quarter of 2005 resulted primarily from sales of bond securities totaling $1.2 million and real estate sales of $6.5 million.

Benefits and Expenses.  The following details benefits and expenses.

Three Months Ended June 30,

Six Months Ended June 30,

2006

2005

2006

2005

(In thousands)

Life and other policy benefits

$

7,646 

9,432 

19,088 

20,660 

Amortization of deferred policy

   acquisition costs

22,715 

22,325 

45,013 

41,399 

Universal life and annuity

   contract interest

23,565 

39,172 

79,613 

66,527 

Other operating expenses

13,724 

11,098 

39,098 

22,141 

Totals

$

67,650 

82,027 

182,812 

150,727 

Death claims decreased from $7.0 million and $16.8 million during the three months and six months ended of 2005 to $5.3 million and $14.2 million for the three and six months ended June 30, 2006. 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.

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.

As a result of a true-up of assumptions in the first quarter of 2006, amortization of deferred policy acquisition costs increased to $45.0 million in the first six months of 2006 compared to $41.4 million reported in 2005. The increase in international life sales has caused an increase in life insurance in force since 2001 from $10.0 billion to $15.1 billion at June 30, 2006. In addition, annuity sales activity has increased the number of active annuity contracts from approximately 120,000 at June 30, 2004, to 124,000 at June 30, 2006. Deferred acquisition costs associated with this growth in business are being amortized currently in conjunction with the emergence of profits from these blocks of policies.

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:

Six Months Ended June 30,

Six Months Ended June 30,

2006

2005

2006

2005

(Excluding derivative products)

(Including derivative products)

Annuity

3.39%

3.34%

2.87%

2.44%

Interest sensitive life

4.73%

4.80%

4.38%

4.49%

Contract interest also includes the performance of the equity-index component of the Company's derivative products. As previously noted, the recent market performance of these equity-index features impacts contract interest expenses while also impacting the Company's investment income given the hedge nature of the options purchased for these products.

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 $2.6 million and $1.9 million for the three months ended June 30, 2006 and 2005, respectively. In addition, other operating expenses for the first quarter of 2006 includes additional compensation cost of $12.5 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. The compensation cost for the second quarter totaled $1.4 million. Prior to this implementation, the plan was accounted for under the equity classification, which allowed for compensation cost recognition in the current service period.

Federal Income Taxes. Federal income taxes on earnings from continuing operations reflect effective tax rates of 32.9% and 33.5% for the first six months of 2006 and 2005, respectively, which are lower than the expected Federal rate of 35%. 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.

Segment Operations

Summary of Segment Earnings

A summary of segment earnings for the three months and six months ended June 30, 2006 and 2005 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:

Three months ended:

   June 30, 2006

$

796 

5,726 

12,685 

1,970 

21,177 

   June 30, 2005

$

1,596 

2,936 

11,481 

3,134 

19,147 

Six months ended:

   June 30, 2006

$

(1,104)

7,086 

25,874 

2,441 

34,297 

   June 30, 2005

$

2,127 

5,925 

22,874 

3,794 

34,720 

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 June 30,

Six Months Ended June 30,

2006

2005

2006

2005

(In thousands)

Premiums and other revenue:

    Premiums and contract revenues

$

5,699 

6,035 

11,533 

12,116 

    Net investment income

5,020 

4,849 

10,216 

9,827 

    Other income

15 

16 

Total premiums and other revenue

10,726 

10,892 

21,764 

21,959 

Benefits and expenses:

    Life and other policy benefits

3,077 

3,610 

8,031 

8,270 

    Amortization of deferred policy

       acquisition costs

1,971 

614 

3,372 

1,832 

    Universal life insurance contract

       interest

2,273 

2,188 

4,543 

4,369 

    Other operating expenses

2,200 

2,099 

7,462 

4,299 

Total benefits and expenses

9,521 

8,511 

23,408 

18,770 

Segment earnings (losses) before

    Federal income taxes

1,205 

2,381 

(1,644)

3,189 

Provision (benefit) for Federal

    income taxes

409 

785 

(540)

1,062 

Segment earnings

$

796 

1,596 

(1,104)

2,127 

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 June 30,

Six Months Ended June 30,

2006

2005

2006

2005

(In thousands)

Universal life insurance revenues

$

4,189 

4,316 

8,657 

8,903 

Traditional life insurance premiums

1,921 

1,926 

3,669 

3,689 

Reinsurance premiums

(411)

(207)

(793)

(476)

Totals

$

5,699 

6,035 

11,533 

12,116 

The Company's U.S. operations have historically emphasized annuity product sales over life product sales. The Company has strived to increase domestic life product sales and to continue to attract new sources of distribution. The face amount of domestic life insurance in force has increased from $2.4 billion at June 30, 2005, to $2.5 billion at June 30, 2006.

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 June 30,

Six Months Ended June 30,

2006

2005

2006

2005

(In thousands)

Universal life insurance:

    First year and single premiums

$

2,347 

3,523 

6,219 

7,389 

    Renewal premiums

3,416 

3,552 

7,008 

7,316 

Totals

$

5,763 

7,075 

13,227 

14,705 

Other operating expenses were $7.5 million and $4.3 million for the six months ended June 30, 2006 and 2005. The increase in 2006 is due to an increase in compensation costs under SFAS 123(R) due to the implementation of liability classification in the first quarter under the accounting standard.

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 June 30,

Six Months Ended June 30,

2006

2005

2006

2005

(In thousands)

Premiums and other revenue:

    Premiums and contract revenues

$

18,700 

17,305 

38,084 

34,342 

    Net investment income

5,173 

5,752 

12,187 

11,090 

    Other income

22 

18 

45 

32 

Total premiums and other revenue

23,895 

23,075 

50,316 

45,464 

Benefits and expenses:

    Life and other policy benefits

3,839 

5,068 

9,220 

11,051 

    Amortization of deferred policy

       acquisition costs

4,570 

5,931 

9,511 

10,845 

    Universal life insurance contract

       interest

3,273 

4,971 

9,214 

8,583 

    Other operating expenses

3,707 

2,772 

11,825 

6,101 

Total benefits and expenses

15,389 

18,742 

39,770 

36,580 

Segment earnings before Federal

    income taxes

8,506 

4,333 

10,546 

8,884 

Provision for Federal income taxes

2,780 

1,397 

3,460 

2,959 

Segment earnings

$

5,726 

2,936 

7,086 

5,925 

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 June 30,

Six Months Ended June 30,

2006

2005

2006

2005

(In thousands)

Universal life insurance revenues

$

18,999 

17,662 

38,436 

35,063 

Traditional life insurance premiums

2,715 

2,413 

5,461 

4,474 

Reinsurance premiums

(3,014)

(2,770)

(5,813)

(5,195)

Totals

$

18,700 

17,305 

38,084 

34,342 

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 June 30,

Six Months Ended June 30,

2006

2005

2006

2005

(In thousands)

Universal life insurance:

    First year and single premiums

$

8,393 

8,190 

16,932 

15,696 

    Renewal premiums

19,493 

17,230 

38,502 

32,493 

Totals

$

27,886 

25,420 

55,434 

48,189 

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 equity-indexed universal life products for international life operations with premiums approximating $26.7 million and $20.9 million for the first six months ended 2006 and 2005, respectively.

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

Three Months Ended June 30,

Six Months Ended June 30,

2006

2005

2006

2005

(In thousands)

Net investment income

   (excluding derivatives)

$

6,232 

5,860 

12,554 

11,693 

Derivative losses

(1,059)

(108)

(367)

(603)

Net investment income

$

5,173 

5,752 

12,187 

11,090 

Net investment income excluding derivatives increased for the six months in 2006 compared to 2005 in conjunction with greater investment balances associated with the Company's growth in business. As the international life insurance in force continues to grow, the Company anticipates operating earnings to similarly increase. The amount of international life insurance in force has grown from $11.6 billion at June 30, 2005, to $12.6 billion at June 30, 2006. As previously noted, contract interest includes a decrease due to the S&P 500 Index® performance relative to equity-indexed products, decreasing in the current quarter of 2006 compared to the same period in 2005.

Other operating expenses were $11.8 million and $6.1 million for the six months ended June 30, 2006 and 2005. The increase in 2006 is due to an increase in compensation costs under SFAS 123(R) due to the implementation of liability classification during the first quarter under the accounting standard.

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 June 30,

Six Months Ended June 30,

2006

2005

2006

2005

(In thousands)

Premiums and other revenue:

    Premiums and contract revenues

$

5,296 

5,234 

11,025 

9,545 

    Net investment income

53,409 

64,487 

139,407 

116,158 

    Other income

155 

95 

2,862 

182 

Total premiums and other revenue

58,860 

69,816 

153,294 

125,885 

Benefits and expenses:

    Policy benefits

730 

754 

1,837 

1,339 

    Amortization of deferred policy

       acquisition costs

16,174 

15,780 

32,130 

28,722 

    Annuity contract interest

18,019 

32,013 

65,856 

53,575 

    Other operating expenses

5,199 

4,313 

14,960 

7,950 

Total benefits and expenses

40,122 

52,860 

114,783 

91,586 

Segment earnings before Federal

    income taxes

18,738 

16,956 

38,511 

34,299 

Provision for Federal income taxes

6,053 

5,475 

12,637 

11,425 

Segment earnings

$

12,685 

11,481 

25,874 

22,874 

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 June 30,

Six Months Ended June 30,

2006

2005

2006

2005

(In thousands)

Surrender charges

$

4,307 

4,408 

8,856 

7,895 

Payout annuity and other revenues

982 

817 

2,155 

1,633 

Traditional annuity premiums

14 

17 

Totals

$

5,296 

5,234 

11,025 

9,545 

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 six months ended June 30, 2006 and 2005 are detailed below.

Three Months Ended June 30,

Six Months Ended June 30,

2006

2005

2006

2005

(In thousands)

Equity-indexed annuities

$

82,651 

84,239 

146,991 

159,088 

Other deferred annuities

47,532 

56,752 

93,541 

116,549 

Immediate annuities

3,261 

8,500 

6,261 

15,019 

Totals

$

133,444 

149,491 

246,793 

290,656 

Amounts collected from equity-indexed annuities decreased 7.6% comparing the six months of June 30, 2005 quarter end deposits collected to the six months of 2006. Equity-indexed product sales typically follow the stock market in that sales are higher when confidence is high in the stock market and low if the stock market is showing poor performance. Since the Company does not offer variable products or mutual funds, these equity-indexed products provide an interest crediting alternative to the Company's existing fixed annuity products.

Other deferred annuity deposits decreased during the three and six months ended June 30, 2006 versus the same periods of June 30, 2005 with $47.5 million and $93.5 million collected as compared to $56.8 million and $116.5 million, respectively. 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 $10.7 million and $10.3 million during the first six months of 2006 and 2005, respectively.

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

Three Months Ended June 30,

Six Months Ended June 30,

2006

2005

2006

2005

(In thousands)

Net investment income

   (excluding derivatives)

$

69,678 

66,857 

141,192 

131,955 

Derivative losses

(16,269)

(2,370)

(1,785)

(15,797)

Net investment income

$

53,409 

64,487 

139,407 

116,158 

Net investment income excluding derivatives increased for the six months ended June 30, 2006 compared to 2005 due to a larger block of assets under management. Derivative gains and losses fluctuate from period to period based on the S&P 500 Index® performance.

The Company is required to periodically adjust deferred policy acquisition amortization factors for actual experience that varies from assumptions. In the first quarter of 2006, a true-up of assumptions based upon actual results increased amortization during the current period.

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

Three Months Ended June 30,

Six Months Ended June 30,

2006

2005

2006

2005

(In thousands)

Equity-indexed annuities

$

(901)

11,712 

20,584 

7,109 

All other annuities

22,187 

25,030 

50,969 

53,758 

Gross contract interest

21,286 

36,742 

71,553 

60,867 

Bonus interest deferred and capitalized

(5,978)

(6,253)

(10,699)

(10,322)

Bonus interest amortization

2,711 

1,524 

5,002 

3,030 

Total contract interest

$

18,019 

32,013 

65,856 

53,575 

As previously noted, contract interest includes a decrease due to the S&P 500 Index® performance relative to equity-indexed products decreasing in the current quarter and the first six months of 2006 compared to the same period in 2005.

Other operating expenses were $15.0 million and $8.0 million during the six months ended June 30, 2006 and 2005, respectively. The increase in 2006 is due to increased compensation cost in the current quarter as a result of 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 $0.4 million and $0.5 million of operating earnings in the first six months of 2006 and 2005, 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 June 30, 2006 and December 31, 2005. The Company emphasizes investment grade debt securities, with smaller holdings in mortgage loans and policy loans.

Composition of Investments

June 30, 2006

December 31, 2005

Amount

%

Amount

%

(In thousands)

(In thousands)

Debt securities

$

5,319,587 

95.1

$

5,249,156 

94.8

Mortgage loans

105,908 

1.9

110,639 

2.0

Policy loans

86,502 

1.5

86,385 

1.6

Derivatives

35,927 

0.6

39,405 

0.7

Equity securities

20,016 

0.4

20,295 

0.4

Real estate

15,209 

0.3

13,436 

0.2

Other

11,248 

0.2

16,577 

0.3

Totals

$

5,594,397 

100.0

$

5,535,893 

100.0

Debt and Equity Securities

The Company maintains a diversified portfolio which consists primarily of corporate, mortgage-backed, and public 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 June 30, 2006 and December 31, 2005, the Company's debt securities portfolio consisted of the following:

Composition of Debt Securities

June 30, 2006

December 31, 2005

Amount

%

Amount

%

(In thousands)

(In thousands)

Corporate

$

2,314,046 

43.5

$

2,320,306 

44.2

Mortgage-backed securities

1,778,017 

33.4

1,715,245 

32.7

Public utilities

654,356 

12.3

661,333 

12.6

U.S. government/agencies

345,660 

6.5

306,260 

5.8

Asset-backed securities

142,433 

2.7

161,324 

3.1

States & political subdivisions

54,773 

1.0

53,940 

1.0

Foreign governments

30,302 

0.6

30,748 

0.6

Totals

$

5,319,587 

100.0

$

5,249,156 

100.0

The Company's investment guidelines prescribe limitations by type and based on quality of each security and all holdings were within these threshold limits at June 30, 2006. 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. However, in conjunction with rating agency observations, the Company limits its holdings in these securities to no more than 35% of the overall portfolio. 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.

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 June 30, 2006, 97.5% 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 the table below, investments in debt securities are classified according to credit ratings by Standard and Poors ("S&P®"), or other nationally recognized statistical rating organizations if securities were not rated by S&P® .

June 30, 2006

December 31, 2005

Amount

%

Amount

%

(In thousands)

(In thousands)

AAA and U.S. government

$

2,372,635 

44.6

$

2,285,094 

43.5

AA

263,857 

5.0

202,092 

3.9

A

1,334,945 

25.1

1,360,716 

25.9

BBB

1,214,943 

22.8

1,230,799 

23.5

BB and other below investment grade

133,207 

2.5

170,455 

3.2

Totals

$

5,319,587 

100.0

$

5,249,156 

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 second quarter of 2006, the Company's percentage of below investment grade securities decreased primarily as a result of the tender of two securities, the maturity of a security and an upgrade of one security. 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)

June 30, 2006

$

130,592 

133,207 

130,509 

2.4%    

December 31, 2005

$

168,423 

170,455 

167,770 

3.1%    

December 31, 2004

$

132,617 

137,930 

137,503 

2.6%    

No impairment writedowns were deemed necessary during the first six months of 2006. Impairment writedowns totaling $0.4 million were recognized in the first six months of 2005. The writedowns resulted from an additional impairment of one issuer due to continued market value decline reported in the first quarter of 2005 in the amount of $0.2 million and in the second quarter of 2005, an impairment was recognized on an asset-backed security in the amount of $0.2 million.

The Company is closely monitoring 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 June 30, 2006

Amortized

Carrying

Fair

Fair

Cost

Value

Value

Value

Category

2006

2006

2006

2005

(In thousands)

Retail

$

35,861 

36,085 

36,002 

36,223 

Utilities/Energy

34,550 

35,527 

35,557 

36,700 

Asset-backed

13,486 

13,486 

11,479 

11,402 

Telecommunication

9,994 

9,850 

9,850 

9,875 

Transportation

6,857 

8,926 

8,926 

8,343 

Manufacturing

6,016 

7,626 

7,610 

7,132 

Auto finance

6,186 

6,186 

5,723 

5,422 

Other

17,642 

15,521 

15,362 

15,181 

Totals

$

130,592 

133,207 

130,509 

130,278 

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 June 30, 2006, approximately 33% of the Company's total debt and equity securities, based on fair values, were classified as securities available for sale. 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

$

3,493,117 

3,618,542 

(125,425)

Securities available for sale:

    Debt securities

1,701,045 

1,756,017 

(54,972)

    Equity securities

20,016 

12,215 

7,801 

Totals

$

5,214,178 

5,386,774 

(172,596)

Proceeds from sales of securities available for sale totaled $12.0 million and $9.6 million during the second quarter of 2006 and 2005, respectively, which resulted in realized gains of $0.3 million and $0.5 million. For the six months ended June 30, 2006 and 2005, respectively, proceeds from sales of securities available for sale totaled $21.4 million and $11.9 million. These sales resulted in realized gains of $1.7 million and $1.0 million, respectively. During the first six months of 2005, two securities were sold from the held to maturity portfolio, in accordance with the provisions of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, due to credit deterioration with amortized cost of $10.0 million resulting in a realized gain of $0.9 million. There were no securities sold from the held to maturity portfolio during the first six months of 2006.


Mortgage Loans and Real Estate

In general, the Company originates loans on high quality, income-producing properties such as shopping centers, freestanding retail stores, office buildings, industrial and sales or service facilities, selected apartment buildings, hotels, and healthcare facilities. The location of these loans is typically in major metropolitan areas that offer a potential for property value appreciation. Credit and default risk is minimized through strict underwriting guidelines and diversification of underlying property types and geographic locations. In addition to being secured by the property, mortgage loans with leases on the underlying property are often guaranteed by the leasee. This approach has proven to result in higher quality mortgage loans with fewer defaults.

The Company's direct investments in real estate are not a significant portion of its total investment portfolio as many of these investments were acquired through mortgage loan foreclosures. The Company also participates in several real estate joint ventures and limited partnerships that invest primarily in income-producing retail properties. These investments have enhanced the Company's overall investment portfolio returns.

The Company held net investments in mortgage loans totaling $105.9 million and $110.6 million at June 30, 2006 and December 31, 2005, respectively. The diversification of the portfolio by geographic region and by property type was as follows:

June 30, 2006

December 31, 2005

Geographic Region:

Amount

%

Amount

%

(In thousands)

(In thousands)

West South Central

$

69,016 

65.2

$

68,413 

61.8

Mountain

10,973 

10.3

15,831 

14.3

Pacific

11,020 

10.4

11,342 

10.3

South Atlantic

4,779 

4.5

4,838 

4.4

All other

10,120 

9.6

10,215 

9.2

Totals

$

105,908 

100.0

$

110,639 

100.0


June 30, 2006

December 31, 2005

Property Type:

Amount

%

Amount

%

(In thousands)

(In thousands)

Retail

$

71,795 

67.8

$

75,545 

68.3

Office

23,744 

22.4

24,536 

22.2

Land/Lots

3,636 

3.4

3,725 

3.4

Hotel/Motel

6,724 

6.4

6,797 

6.1

All other

-  

36 

-  

Totals

$

105,908 

100.0

$

110,639 

100.0

The Company does not recognize interest income on impaired loans which is deemed to be uncollectible. There was no interest income unrecognized for the three months ended March 31, 2006 and 2005. During the first quarter of 2005, an allowance was released due to the sale of the impaired loan for which the allowance had been established. The Company holds a mortgage loan in the amount of $6.9 million related to a New Orleans property, which is six months past due on principal and interest payments as of the reporting date of this filing. The Company has not recorded an impairment related to this loan as of June 30, 2006, pending further review and evaluation. It is possible, though not certain, the forthcoming review could result in an impairment write down when the evaluation is complete.

The Company's real estate investments totaled approximately $15.2 million and $13.4 million at June 30, 2006 and December 31, 2005, respectively, and consist primarily of income-producing properties which are being operated by a wholly-owned subsidiary of the Company. The Company monitors the condition and market values of these properties on a regular basis and makes repairs and capital improvements to keep the properties in good condition. There were no writedowns in the second quarters of 2006 or 2005 associated with these properties.

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.

June 30,

March 31,

December 31,

2006

2006

2005

(In thousands except percentages)

Debt securities - fair value

$

5,194,162 

5,225,988 

5,248,425 

Debt securities - amortized cost

$

5,374,559 

5,328,442 

5,238,120 

Fair value as a percentage of amortized cost

96.64 

%

98.08 

%

100.20 

%

Unrealized gains (losses)

$

(180,397)

(102,454)

10,305 

Ten-year U.S. Treasury bond - increase

in yield for the quarter

0.29 

%

0.46 

%

Unrealized Gains (Losses) Balance

Qtr

YTD

At

At

At

Change in

Change in

June 30,

March 31,

December 31,

Unrealized

Unrealized

2006

2006

2005

Gains (Losses)

Gains (Losses)

(In thousands)

Debt securities held to

   maturity

$

(125,425)

(76,400)

(731)

(49,025)

(124,694)

Debt securities available

   for sale

(54,972)

(26,054)

11,036 

(28,918)

(66,008)

Totals

$

(180,397)

(102,454)

10,305 

(77,943)

(190,702)

Market interest rate of ten-year U.S. Treasury bonds increased an additional 29 basis points from the first quarter of 2006, resulting in an unrealized loss for the second quarter of 2006 in the amount of $77.9 million on a portfolio of approximately $5.4 billion. The increase in rates results in an unrealized loss balance of $180.4 million as of June 30, 2006, a change of $190.7 million from the year-end, 2005. However, since the majority of the Company's debt securities are classified as held to maturity, which are recorded at amortized cost, changes in fair values 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, 2005, for its interest rate-sensitive assets and liabilities. The changes in market values of the Company's debt securities in the second quarter of 2006 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. Although the Company historically has not been put in the position of liquidating invested assets to provide cash flow, its 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. This line of credit was renewed through July 2009.

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 three and six months ended June 30 are noted in the table below.

Three Months Ended June 30,

Six Months Ended June 30,

2006

2005

2006

2005

(In thousands)

Product Line:

   Traditional Life

$

1,142 

1,303 

2,057 

2,649 

   Universal Life

8,491 

7,188 

15,509 

14,695 

   Annuities

91,055 

83,728 

181,587 

156,106 

Total

$

100,688 

92,219 

199,153 

173,450 

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 $112.6 million and $77.7 million for the six months ended June 30, 2006 and 2005, respectively. The Company also has significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments. These cash flows totaled $158.4 million and $233.3 million for the six months ended June 30, 2006 and 2005, respectively. These cash flow items could be reduced if interest rates rise. Net cash inflows from the Company's universal life and investment annuity deposit product operations totaled $8.7 million and $109.9 million during the six months ended June 30, 2006 and 2005, 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 June 30, 2006, the Company had commitments of approximately $8.0 million which were 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 is expected to begin in 2006.


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, 2005 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

$

3,142 

817 

1,458 

867 

-   

Purchase obligations

14,625 

14,625 

-   

-   

-   

Life claims payable (1)

49,294 

49,294 

-   

-   

-   

Other long-term reserve liabilities

   reflected on the balance sheet

   under GAAP (2)

357,901 

68,882 

101,258 

54,079 

133,682 

Total

$

424,962 

133,618 

102,716 

54,946 

133,682 

(1)  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.

(2)  Other long-term reserve liabilities includes 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 June 30, 2006 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 Financial 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 June 30, 2006 that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.

By letter dated May 16, 2006 addressed to the Audit Committee of National Western Life Insurance Company, the Company's independent auditors, KPMG LLP ("KPMG"), provided notice that as part of their review of the Company's condensed consolidated interim financial statements as of March 31, 2006 and for the three months ended, they noted a control deficiency they considered to be a material weakness. The control deficiency noted by KPMG involved the Company's application of SFAS No. 123(R), Share-Based Payments, specifically the Company's level of technical expertise in this area, with respect to the Company's stock option plan and its recent implementation of a limited stock buy-back program.

The Company subsequently addressed KPMG's material weakness notice by obtaining additional clarification from an independent third party regarding the guidance of SFAS No. 123(R) and its application to the Company's stock option plan and limited stock buy-back program. Additional remediation procedures were implemented enhancing the Company's existing controls including oversight by the Company's Disclosure Controls and Procedures Committee corresponding to Company planned efforts relative to the implementation and application of new accounting standards.


PART II. OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS

Refer to Note 8 "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, 2005.


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 in order to minimize dilution to the existing shareholders. 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.

For the months ended in May and June, 2006 the Company purchased 1,060 shares and 6,390 shares from option holders at an average price of $225.50 and $231.48, respectively. These purchased shares are reported as treasury stock in the Company's condensed consolidated financial statements.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On June 23, 2006, the stockholders voted upon the following matters at the annual stockholders meeting:

(a) The election of Class A directors to the Company's Board of Directors to serve one-year terms. The results of the voting were as follows:

For

Against

Robert L. Moody

2,847,916

381,074

Harry L. Edwards

2,821,660

407,330

Stephen E. Glasgow

3,166,375

62,615

E.J. Pederson

3,155,557

73,433

(b) The election of Class B directors to the Company's Board of Directors to serve one-year terms. The results of the voting were as follows:

For

Against

E. Douglas McLeod

200,000 

-      

Charles D. Milos

200,000 

-      

Frances A. Moody Dahlberg

200,000 

-      

Ross R. Moody

200,000 

-      

Russell S. Moody

200,000 

-      

Louis E. Pauls, Jr.

200,000 

-      


ITEM 6. EXHIBITS

(a) Exhibits

     

Exhibit 11

-

Computation of Earnings Per Share (filed on page 52 of this report).

     

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

     



SIGNATURES

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:  October 18, 2006

/S/ Ross R. Moody

Ross R. Moody

President, Chief Operating Officer,

and Director

(Authorized Officer)

Date:  October 18, 2006

/S/ Brian M. Pribyl

Brian M. Pribyl

Senior Vice President,

Chief Financial & Administrative

Officer and Treasurer

(Principal Financial Officer)

Date:  October 18, 2006

/S/ Kay E. Osbourn

Kay E. Osbourn

Vice President,

Controller and Assistant Treasurer

(Principal Accounting Officer)