

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2015



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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). : Yes x 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 x 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 x

As of May 7, 2015, the number of shares of Registrant's common stock outstanding was: Class A – 3,436,166 and Class B - 200,000.



TABLE OF CONTENTS
	Page

Part I. Financial Information:	3

Item 1. Financial Statements	3

Condensed Consolidated Balance Sheets March 31, 2015 (Unaudited) and December 31, 2014	3

Condensed Consolidated Statements of Earnings For the Three Months Ended March 31, 2015 and 2014 (Unaudited)	5

Condensed Consolidated Statements of Comprehensive Income (Loss) For the Three Months Ended March 31, 2015 and 2014 (Unaudited)	6

Condensed Consolidated Statements of Changes in Stockholders' Equity For the Three Months Ended March 31, 2015 and 2014 (Unaudited)	7

Condensed Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2015 and 2014 (Unaudited)	9

Notes to Condensed Consolidated Financial Statements (Unaudited)	11

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	41

Item 3. Quantitative and Qualitative Disclosures About Market Risk	76

Item 4. Controls and Procedures	76

Part II. Other Information:	76

Item1. Legal Proceedings	76

Item1A. Risk Factors	76

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	77

Item 4. Removed and Reserved	77

Item 6. Exhibits	77

Signatures	78

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)



	(Unaudited)
ASSETS	March 31, 2015		December 31, 2014

Investments:
Securities held to maturity, at amortized cost (fair value: $7,470,133 and $7,175,443)	$	7,042,233	6,841,543
Securities available for sale, at fair value (cost: $2,687,568 and $2,590,074)	2,854,690		2,728,680
Mortgage loans, net of allowance for possible losses ($650 and $650)	143,918		149,503
Policy loans	63,877		63,645
Derivatives, index options	95,987		114,287
Other long-term investments	29,030		28,774
Short-term investments	14,989		—

Total investments	10,244,724		9,926,432

Cash and cash equivalents	71,104		277,078
Deferred policy acquisition costs	792,992		802,919
Deferred sales inducements	152,352		159,766
Accrued investment income	101,545		96,127
Federal income tax receivable	—		—
Other assets	99,286		89,570

Total assets	$	11,462,003	11,351,892

See accompanying notes to condensed consolidated financial statements (unaudited).

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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)



	(Unaudited)
LIABILITIES AND STOCKHOLDERS’ EQUITY	March 31, 2015		December 31, 2014

LIABILITIES:

Future policy benefits:
Universal life and annuity contracts	$	9,404,339	9,384,297
Traditional life reserves	137,928		138,225
Other policyholder liabilities	153,389		139,222
Deferred Federal income tax liability	44,987		31,675
Federal income tax payable	42		3,336
Other liabilities	134,666		98,817

Total liabilities	9,875,351		9,795,572

COMMITMENTS AND CONTINGENCIES (Note 8)

STOCKHOLDERS’ EQUITY:

Common stock:
Class A - $1 par value; 7,500,000 shares authorized; 3,436,166 issued and outstanding in 2015 and 2014	3,436		3,436
Class B - $1 par value; 200,000 shares authorized, issued, and outstanding in 2015 and 2014	200		200
Additional paid-in capital	38,116		38,116
Accumulated other comprehensive income	50,792		41,786
Retained earnings	1,494,108		1,472,782

Total stockholders’ equity	1,586,652		1,556,320

Total liabilities and stockholders' equity	$	11,462,003	11,351,892

Note: The Condensed Consolidated Balance Sheet at December 31, 2014 has been derived from the audited Consolidated Financial Statements as of that date.

See accompanying notes to condensed consolidated financial statements (unaudited).

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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

For the Three Months Ended March 31, 2015 and 2014

(Unaudited)

(In thousands, except per share amounts)



	2015			2014

Premiums and other revenues:
Universal life and annuity contract charges	$	37,313		38,005
Traditional life premiums	4,347			4,271
Net investment income	99,923			108,451
Other revenues	5,329			5,763
Net realized investment gains (losses):
Total other-than-temporary impairment (“OTTI”) gains (losses)	160			(32		)
Portion of OTTI (gains) losses recognized in other comprehensive income	(160		)	(3		)
Net OTTI losses recognized in earnings	—			(35		)
Other net investment gains (losses)	978			1,548
Total net realized investment gains (losses)	978			1,513

Total revenues	147,890			158,003

Benefits and expenses:
Life and other policy benefits	19,266			12,963
Amortization of deferred policy acquisition costs	27,652			28,579
Universal life and annuity contract interest	49,039			62,936
Other operating expenses	20,510			23,463

Total benefits and expenses	116,467			127,941

Earnings before Federal income taxes	31,423			30,062

Federal income taxes	10,097			10,236

Net earnings	$	21,326		19,826

Basic earnings per share:
Class A	$	6.03		$	5.61
Class B	$	3.02		$	2.80

Diluted earnings per share:
Class A	$	6.03		$	5.61
Class B	$	3.02		$	2.80

See accompanying notes to condensed consolidated financial statements (unaudited).

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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the Three Months Ended March 31, 2015 and 2014

(Unaudited)

(In thousands)



	2015			2014

Net earnings	$	21,326		19,826

Other comprehensive income (loss), net of effects of deferred costs and taxes:
Unrealized gains (losses) on securities:
Net unrealized holding gains (losses) arising during period	9,372			11,002
Net unrealized liquidity gains (losses)	61			23
Reclassification adjustment for net amounts included in net earnings	(165		)	(425	)

Net unrealized gains (losses) on securities	9,268			10,600

Foreign currency translation adjustments	41			(511	)

Benefit plans:
Amortization of net prior service cost and net gain (loss)	(303		)	(176	)

Other comprehensive income (loss)	9,006			9,913

Comprehensive income (loss)	$	30,332		29,739

See accompanying notes to condensed consolidated financial statements (unaudited).

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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the Three Months Ended March 31, 2015 and 2014 (Unaudited) (In thousands)

	2015			2014

Common stock:
Balance at beginning of period	$	3,636		3,635
Shares exercised under stock option plan	—			—

Balance at end of period	3,636			3,635

Additional paid-in capital:
Balance at beginning of period	38,116			37,767
Shares exercised under stock option plan	—			—

Balance at end of period	38,116			37,767

Accumulated other comprehensive income:
Unrealized gains on non-impaired securities:
Balance at beginning of period	54,229			46,693
Change in unrealized gains (losses) during period, net of tax	9,207			10,578

Balance at end of period	63,436			57,271

Unrealized losses on impaired held to maturity securities:
Balance at beginning of period	(1,262		)	(1,287	)
Amortization	104			57
Other-than-temporary impairments, non-credit, net of tax	—			—
Additional credit loss on previously impaired securities	—			—
Change in shadow deferred policy acquisition costs	(43		)	(35	)

Balance at end of period	(1,201		)	(1,265	)

Unrealized losses on impaired available for sale securities:
Balance at beginning of period	(1		)	(2	)
Other-than-temporary impairments, non-credit, net of tax	—			—
Change in shadow deferred policy acquisition costs	—			(1	)
Recoveries, net of tax	—			2

Balance at end of period	(1		)	(1	)

	Continued on Next Page

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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(continued) For the Three Months Ended March 31, 2015 and 2014 (Unaudited) (In thousands)



	2015			2014

Foreign currency translation adjustments:
Balance at beginning of period	2,685			3,241
Change in translation adjustments during period	41			(511		)

Balance at end of period	2,726			2,730

Benefit plan liability adjustment:
Balance at beginning of period	(13,865		)	(10,565		)
Amortization of net prior service cost and net loss, net of tax	(303		)	(176		)

Balance at end of period	(14,168		)	(10,741		)

Accumulated other comprehensive income at end of period	50,792			47,994

Retained earnings:
Balance at beginning of period	1,472,782			1,368,466
Net earnings	21,326			19,826
Stockholder dividends	—			—

Balance at end of period	1,494,108			1,388,292

Total stockholders' equity	$	1,586,652		$	1,477,688

See accompanying notes to condensed consolidated financial statements (unaudited).

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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Months Ended March 31, 2015 and 2014 (Unaudited) (In thousands)

	2015			2014

Cash flows from operating activities:
Net earnings	$	21,326		19,826
Adjustments to reconcile net earnings to net cash from operating activities:
Universal life and annuity contract interest	49,039			62,936
Surrender charges and other policy revenues	(3,894		)	(4,148	)
Realized (gains) losses on investments	(978		)	(1,513	)
Accretion/amortization of discounts and premiums, investments	(4		)	(216	)
Depreciation and amortization	841			883
(Increase) decrease in value of derivatives	8,287			(548	)
(Increase) decrease in deferred policy acquisition and sales inducement costs	2,919			2,344
(Increase) decrease in accrued investment income	(5,418		)	(3,197	)
(Increase) decrease in other assets	(7,227		)	(1,515	)
Increase (decrease) in liabilities for future policy benefits	(129		)	(648	)
Increase (decrease) in other policyholder liabilities	14,168			1,151
Increase (decrease) in Federal income taxes liability	(3,294		)	(11,853	)
Increase (decrease) in deferred Federal income tax	8,327			9,715
Increase (decrease) in other liabilities	6,804			(213	)
Other, net	—			1

Net cash provided by operating activities	90,767			73,005

Cash flows from investing activities:
Proceeds from sales of:
Securities held to maturity	—			—
Securities available for sale	5,752			2,042
Other investments	—			579
Proceeds from maturities and redemptions of:
Securities held to maturity	101,444			134,670
Securities available for sale	48,565			53,872
Derivatives, index options	26,450			54,133
Purchases of:
Securities held to maturity	(271,797		)	(212,725	)
Securities available for sale	(152,742		)	(57,141	)
Derivatives, index options	(19,166		)	(15,507	)
Other investments	(421		)	(164	)
Net change in short-term investments	(14,989		)	—

	Continued on Next Page

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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, (continued) For the Three Months Ended March 31, 2015 and 2014 (Unaudited) (In thousands)

	2015			2014

Principal payments on mortgage loans	6,907			5,845
Cost of mortgage loans acquired	(1,281		)	(1,537		)
Decrease (increase) in policy loans	(232		)	825
Other, net	—			—

Net cash used in investing activities	(271,510		)	(35,108		)

Cash flows from financing activities:
Deposits to account balances for universal life and annuity contracts	202,472			199,563
Return of account balances on universal life and annuity contracts	(227,744		)	(224,969		)

Net cash provided by (used in) financing activities	(25,272		)	(25,406		)

Effect of foreign exchange	41			(511		)

Net increase (decrease) in cash and short-term investments	(205,974		)	11,980
Cash and short-term investments at beginning of period	277,078			120,859

Cash and short-term investments at end of period	$	71,104		$	132,839

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash paid during the period for:
Interest	$	10		10
Income taxes	$	5,247		11,918

Noncash operating activities:
Deferral of sales inducements	$	(4,680	)	(3,450		)

See accompanying notes to condensed consolidated financial statements (unaudited).

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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


(1)	CONSOLIDATION AND BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of National Western Life Insurance Company and its subsidiaries (“Company” or "National Western") as of March 31, 2015, and the results of its operations and its cash flows for the for the three months ended March 31, 2015 and 2014. The results of operations for the three months ended March 31, 2015 are not necessarily indicative of the results to be expected for the full year. It is recommended that these condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014 and are 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 condensed consolidated balance sheet at December 31, 2014 has been derived from the audited consolidated financial statements as of that date.

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

The preparation of financial statements in accordance with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates in the accompanying condensed consolidated financial statements include (1) liabilities for future policy benefits, (2) valuation of derivative instruments, (3) recoverability and amortization of deferred policy acquisition costs, (4) valuation allowances for deferred tax assets, (5) other-than-temporary impairment losses on debt securities, (6) commitments and contingencies, and (7) valuation allowances for mortgage loans and real estate.

The table below shows the unrealized gains and losses on available-for-sale securities that were reclassified out of accumulated other comprehensive income for the three months ended March 31, 2015 and 2014.



Affected Line Item in the Statements of Earnings	Amount Reclassified From Accumulated Other Comprehensive Income
	Three Months Ended March 31,
	2015		2014
	(In thousands)

Other net investment gains (losses)	$	254	689
Net OTTI losses recognized in earnings	—		(35	)
Earnings before Federal income taxes	254		654
Federal income taxes	89		229

Net earnings	$	165	425

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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


(2)	NEW ACCOUNTING PRONOUNCEMENTS

In July 2013, the FASB issued guidance to amend the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The new guidance states that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as reduction to deferred tax assets for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. This guidance is effective for annual reporting periods beginning on or after December 15, 2013 and interim periods within those annual periods. The Company adopted this guidance as of January 1, 2014 and the adoption did not have an effect on the deferred tax asset or liability classification on the Company's balance sheet and did not result in any additional disclosures to the financial statements.

In June 2014, the FASB issued guidance that applies to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. It requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition and follows existing accounting guidance for the treatment of performance conditions. The standard will be effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, with early adoption permitted. The Company’s current employee share-based plans do not require performance targets and the adoption of this guidance is not expected to have a material impact on the Company’s financial position or results of operations.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants ("AICPA"), and the SEC are not believed by management to, have a material impact on the Company’s present or future 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 restrictions are based on the greater of statutory earnings from operations excluding capital gains or 10% of statutory surplus of the Company. The maximum dividend payment which may be made without prior approval in 2015 is $118.2 million. The Company did not declare or pay cash dividends on its common stocks during the three months ended March 31, 2015 and 2014.

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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


(4)	EARNINGS PER SHARE

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



	Three Months Ended March 31,
	2015			2014
	Class A		Class B	Class A	Class B
	(In thousands except per share amounts)

Numerator for Basic and Diluted Earnings Per Share:
Net income	$	21,326		19,826
Dividends - Class A shares	—			—
Dividends - Class B shares	—			—

Undistributed income	$	21,326		19,826

Allocation of net income:
Dividends	$	—	—	—	—
Allocation of undistributed income	20,723		603	19,265	561

Net income	$	20,723	603	19,265	561

Denominator:
Basic earnings per share - weighted-average shares	3,436		200	3,435	200
Effect of dilutive stock options	2		—	2	—

Diluted earnings per share - adjusted weighted-average shares for assumed conversions	3,438		200	3,437	200

Basic Earnings Per Share	$	6.03	3.02	5.61	2.80

Diluted Earnings Per Share	$	6.03	3.02	5.61	2.80

Stock options that were outstanding during the three months ended March 31, 2015 and 2014, but were not included in the computation of diluted earnings per share because the effect was anti-dilutive, were approximately 21,800 and 22,400, respectively.

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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


(5)	PENSION AND OTHER POSTRETIREMENT PLANS


(A)	Defined Benefit Pension Plans

The Company sponsors a qualified defined benefit pension plan covering employees enrolled prior to 2008. The plan provides benefits based on the participants' years of service and compensation. The Company makes annual contributions to the plan that complies with the minimum funding provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"). On October 19, 2007, the Company's Board of Directors approved an amendment to freeze the Pension Plan as of December 31, 2007. The freeze ceased future benefit accruals to all participants and closed the plan to any new participants. In addition, all participants became immediately 100% vested in their accrued benefits as of that date. Going forward, future pension expense is projected to be minimal. Fair values of plan assets and liabilities are measured as of the prior December 31 for each respective year. The following table summarizes the components of net periodic benefit cost.



	Three Months Ended
	March 31,
	2015			2014
	(In thousands)

Service cost	$	51		42
Interest cost	246			240
Expected return on plan assets	(330		)	(320	)
Amortization of prior service cost	1			1
Amortization of net loss	196			105

Net periodic benefit cost	$	164		68

The service costs shown in the above table represent plan expenses expected to be paid out of plan assets. Under clarification provided by the Pension Protection Act, plan expenses paid from plan assets are to be included in the plan's service cost component.

The Company's minimum required contribution for the 2015 plan year is $0.0 million. The Company had no remaining contribution payable for the 2014 plan year as of March 31, 2015. As of March 31, 2015, the Company had contributed a total of $0.0 million to the plan for the 2015 plan years.

The Company also sponsors a nonqualified 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 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 nonqualified defined benefit plan for the benefit of the Chairman and the President 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 nonqualified defined benefit plan, while complying with the requirements of the Act.

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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following table summarizes the components of net periodic benefit costs for the Chairman and President's nonqualified defined benefit plans.



	Three Months Ended
	March 31,
	2015		2014
	(In thousands)

Service cost	$	64	73
Interest cost	219		251
Amortization of prior service cost	15		15
Amortization of net loss	378		323

Net periodic benefit cost	$	676	662

The Company expects to contribute $2.0 million to these plans in 2015. As of March 31, 2015, the Company has contributed $0.4 million to the plans.


(B)	Defined Benefit Postretirement Healthcare Plans

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



	Three Months Ended
	March 31,
	2015		2014
	(In thousands)

Interest cost	$	32	28
Amortization of prior service cost	26		26
Amortization of net loss	15		(1	)

Net periodic benefit cost	$	73	53

The Company expects to contribute minimal amounts to the plan in 2015.

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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


(6)	SEGMENT AND OTHER OPERATING INFORMATION

The Company defines its reportable operating segments as domestic life insurance, international life insurance, and annuities. These segments are organized based on product types and geographic marketing areas. A summary of segment information for the quarters ended March 31, 2015 and March 31, 2014 is provided below.



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

March 31, 2015
Condensed Consolidated Balance Sheet Items:
Deferred policy acquisition costs and sales inducements	$	65,368		249,736		630,240	—	945,344
Total segment assets	783,839			1,246,906		8,988,348	259,212	11,278,305
Future policy benefits	675,837			949,876		7,916,554	—	9,542,267
Other policyholder liabilities	13,661			17,777		121,951	—	153,389

Three Months Ended
March 31, 2015
Condensed Consolidated Income Statements:
Premiums and contract revenues	$	6,487		30,333		4,840	—	41,660
Net investment income	7,165			8,614		79,236	4,908	99,923
Other revenues	16			86		15	5,212	5,329

Total revenues	13,668			39,033		84,091	10,120	146,912

Life and other policy benefits	5,113			6,205		7,948	—	19,266
Amortization of deferred acquisition costs	3,181			(650	)	25,121	—	27,652
Universal life and annuity contract interest	4,939			7,130		36,970	—	49,039
Other operating expenses	3,715			5,922		6,178	4,695	20,510
Federal income taxes (benefit)	(1,051		)	6,545		2,523	1,738	9,755

Total expenses	15,897			25,152		78,740	6,433	126,222

Segment earnings (loss)	$	(2,229	)	13,881		5,351	3,687	20,690

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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



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

March 31, 2014
Condensed Consolidated Balance Sheet Items:
Deferred policy acquisition costs and sales inducements	$	53,815	239,432	644,532	—	937,779
Total segment assets	634,334		1,188,473	8,627,243	264,435	10,714,485
Future policy benefits	554,247		920,665	7,682,956	—	9,157,868
Other policyholder liabilities	11,867		15,587	116,284	—	143,738

Three Months Ended
March 31, 2014
Condensed Consolidated Income Statements:
Premiums and contract revenues	$	8,165	29,108	5,003	—	42,276
Net investment income	6,283		10,718	86,617	4,833	108,451
Other revenues	18		241	37	5,467	5,763

Total revenues	14,466		40,067	91,657	10,300	156,490

Life and other policy benefits	2,492		5,035	5,436	—	12,963
Amortization of deferred acquisition costs	2,400		6,745	19,434	—	28,579
Universal life and annuity contract interest	5,105		10,205	47,626	—	62,936
Other operating expenses	4,279		7,025	7,096	5,063	23,463
Federal income taxes (benefit)	65		3,759	4,102	1,780	9,706

Total expenses	14,341		32,769	83,694	6,843	137,647

Segment earnings (loss)	$	125	7,298	7,963	3,457	18,843

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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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



	Three Months Ended March 31,
	2015		2014
	(In thousands)

Premiums and Other Revenues:
Premiums and contract revenues	$	41,660	42,276
Net investment income	99,923		108,451
Other revenues	5,329		5,763
Realized gains (losses) on investments	978		1,513

Total condensed consolidated premiums and other revenues	$	147,890	158,003



	Three Months Ended March 31,
	2015		2014
	(In thousands)

Federal Income Taxes:
Total segment Federal income taxes	$	9,755	9,706
Taxes on realized gains (losses) on investments	342		530

Total condensed consolidated Federal income taxes	$	10,097	10,236



	Three Months Ended March 31,
	2015		2014
	(In thousands)

Net Earnings:
Total segment earnings	$	20,690	18,843
Realized gains (losses) on investments, net of taxes	636		983

Total condensed consolidated net earnings	$	21,326	19,826

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



	March 31,
	2015		2014
	(In thousands)

Assets:
Total segment assets	$	11,278,305	10,714,485
Other unallocated assets	183,698		198,132

Total condensed consolidated assets	$	11,462,003	10,912,617


(7)	SHARE-BASED PAYMENTS

The Company had a stock and incentive plan ("1995 Plan") which provided 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; and, (4) performance awards. The 1995 Plan began on April 21, 1995, and 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 were allowed to be issued under the 1995 Plan, or as to which stock appreciation rights ("SARs") or other awards were allowed to be granted, could not exceed 300,000. Effective June 20, 2008, the Company's shareholders approved a 2008 Incentive Plan (“2008 Plan”). The 2008 Plan is substantially similar to the 1995 Plan and authorized an additional number of Class A, $1.00 par value, common stock shares eligible for issue not to exceed 300,000. These shares may be authorized and unissued shares. The Company has issued only nonqualified stock options and SARs under these plans.

All of the employees of the Company and its subsidiaries are eligible to participate in the current 2008 Plan (as well as previously in the expired 1995 Plan). In addition, directors of the Company are eligible to receive the same types of awards as employees except that they are not eligible to receive incentive stock options. Company directors, including members of the Compensation and Stock Option Committee, are eligible for nondiscretionary stock options. The directors' grants vest 20% annually following one full year of service to the Company from the date of grant. The employees' grants vest 20% annually following three full years of service to the Company from the date of grant. All grants issued expire after ten years. No awards were issued during the first three months of 2015 or 2014.

Effective during March 2006, the Company adopted and implemented a limited stock buy-back program with respect to the 1995 Plan which provides option holders the additional alternative of selling shares acquired through the exercise of options directly back to the Company. Option holders may elect to sell such acquired shares back to the Company at any time within ninety (90) days after the exercise of options at the prevailing market price as of the date of notice of election. The buy-back program did not alter the terms and conditions of the 1995 Plan; however, the program necessitated a change in accounting from the equity classification to the liability classification.

In August 2008, the Company implemented another limited stock buy-back program, substantially similar to the 2006 program, for shares issued under the 2008 Plan.

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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The Company uses the current fair value method to measure compensation cost. As of March 31, 2015 and 2014, the liability balance was $8.4 million and $7.1 million, respectively. A summary of shares available for grant and activity is detailed below.



		Options Outstanding
	Shares Available For Grant	Shares	Weighted- Average Exercise Price

Stock Options:
Balance at January 1, 2015	291,000	29,768	$	242.48
Exercised	—	—	$	—
Forfeited	—	—	$	—
Expired	—	—	$	—
Stock options granted	—	—	$	—

Balance at March 31, 2015	291,000	29,768	$	242.48



	Stock Appreciation Rights Outstanding
	Awards		Weighted- Average Exercise Price

Stock Appreciation Rights:
Balance at January 1, 2015	92,186		$	157.71
Exercised	(775	)	$	116.95
Forfeited	—		$	—
Granted	—		$	—

Balance at March 31, 2015	91,411		$	158.05

Stock options and SARs shown as forfeited in the above tables represent vested and unvested awards not exercised by plan participants prior to their termination from the Company. Forfeited stock options during the three months ended March 31, 2014 were awarded under the 1995 Plan. As the 1995 Plan terminated during calendar year 2010, the forfeited shares are not shown as being added back to the "Shares Available For Grant" balance.

The total intrinsic value of SARs exercised was $0.1 million and $0.5 million for the three months ended March 31, 2015 and 2014, respectively. The total share-based liabilities paid for the exercised SARs were $0.1 million and $0.5 million for the three months ended March 31, 2015 and 2014, respectively. The total fair value of stock options and SARs vested during the three months ended March 31, 2015 and 2014 was $0.3 million and $0.4 million, respectively. For the three months ended March 31, 2015 and 2014, the total cash received from the exercise of stock options under the Plans was $0 million and $0, respectively, as no stock options were exercised in these periods.

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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following table summarizes information about stock options and SARs outstanding at March 31, 2015.



	Options/SARs Outstanding
	Number Outstanding		Weighted- Average Remaining Contractual Life	Number Exercisable

Exercise prices:
$255.13 (options)	21,768		3.0 years	17,615
$208.05 (options)	8,000		3.2 years	8,000
$236.00 (SARs)	250		3.4 years	200
$114.64 (SARs)	25,243		3.9 years	21,064
$132.56 (SARs)	30,418		6.7 years	9,604
$210.22 (SARs)	35,500		8.7 years	2,800

Totals	121,179			59,283

Aggregate intrinsic value (in thousands)	$	9,168		$	4,608

The aggregate intrinsic value in the table above is based on the closing stock price of $254.30 per share on March 31, 2015.

In estimating the fair value of the options outstanding at March 31, 2015 and December 31, 2014, the Company employed the Black-Scholes option pricing model with assumptions detailed below.



	March 31, 2015		December 31, 2014

Expected term of options	3.0 to 8.7 years		3.3 to 9.0 years
Expected volatility:
Range	21.30% to 37.77%		19.67% to 37.75%
Weighted-average	24.30	%	22.91	%
Expected dividend yield	0.14	%	0.13	%
Risk-free rate:
Range	0.22% to 1.47%		0.13% to 1.62%
Weighted-average	0.49	%	0.56	%

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

The pre-tax compensation cost recognized in the financial statements related to the two plans defined above was $(0.8) million and $1.7 million for the three months ended March 31, 2015 and 2014, respectively. The related tax (expense)/benefit recognized was $0.3 million and $(0.6) million for the three months ended March 31, 2015 and 2014, respectively.

As of March 31, 2015, the total compensation cost related to nonvested options not yet recognized was $2.0 million. This amount is expected to be recognized over a weighted-average period of 2.0 years. The Company recognizes compensation cost over the graded vesting periods.

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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


(8)	COMMITMENTS AND CONTINGENCIES

(A) Legal Proceedings

In the normal course of business, the Company is involved or may become involved in various legal actions in which claims for alleged economic and punitive damages have been or may be asserted, some for substantial amounts. In recent years, carriers offering life insurance and annuity products have faced litigation, including class action lawsuits, alleging improper product design, improper sales practices, and similar claims. The Company has been a defendant over the past several years in two such class action lawsuits. Given the uncertainty involved in these types of actions, the ability to make a reliable evaluation of the likelihood of an unfavorable outcome or an estimate of the amount of or range of potential loss is endemic to the particular circumstances and evolving developments of each individual matter on its own merits.

The Company resolved a class action lawsuit pending since June 12, 2006, in the U.S. District Court for the Southern District of California. The case is titled In Re National Western Life Insurance Deferred Annuities Litigation. The complaint asserted claims for RICO violations, Financial Elder Abuse, Violation of Cal. Bus. & Prof. Code 17200, et seq, Violation of Cal. Bus. & Prof. Code 17500, et seq, Breach of Fiduciary Duty, Aiding and Abetting Breach of Fiduciary Duty, Fraudulent Concealment, Cal. Civ. Code 1710, et seq, Breach of the Duty of Good Faith and Fair Dealing, and Unjust Enrichment and Imposition of Constructive Trust. On July 12, 2010 the Court certified a nationwide class of policyholders under the RICO allegation and a California class under all of the remaining causes of action except breach of fiduciary duty. The parties entered into a Settlement and Release Agreement in August of 2013 ("Settlement") which was finally approved by the Court on February 11, 2014. On February 12, 2014, the Court issued a redacted final approval order granting the Motion for Final Approval of Class Action Settlement. The Settlement became final and non-appealable on April 12, 2014. The Settlement Agreement and Plaintiffs' Request for Attorneys' Fees and Costs were approved by the Court, and the Company paid the Court-approved amount of attorneys’ fees and costs in April 2014. The Company also made certain payments to surrendered and annuitized policyholders in June 2014. In addition, the Company agreed to provide bonuses on annuitization for active policyholders who choose a 10-year or a 20-year certain and life settlement option. The Company had held reserves of $6.5 million for the matter which approximated the ultimate settlement amounts described above.

In addition to the class action lawsuit described above, the Company was the named defendant in the case of Sheila Newman vs. National Western Life Insurance Company, which alleged mishandling of policyholder funds by an agent. On February 3, 2010, the 415th Judicial District Court of Parker County in Weatherford, Texas, entered a Final Judgment against the Company of approximately $208,000 including actual damages of $113,000 and amounts for attorney's fees, and prejudgment interest on the actual damages. In addition, the Final Judgment included $150 million for exemplary damages. The Company vigorously defended this case and appealed the Final Judgment to the Court of Appeals Second District of Texas in Fort Worth. The Court of Appeals on August 11, 2011, reversed the trial court judgment in its entirety and rendered a take nothing verdict in favor of National Western. Plaintiffs (Appellees) filed a motion for a rehearing which the Court ruled on October 13, 2011, that the trial court's judgment was still reversed and judgment was still entered that Newman take nothing, all in favor of National Western. The Plaintiffs (Appellees) filed a Motion for Reconsideration En Banc which the Court of Appeals denied on October 27, 2011. The Plaintiffs (Appellees) then filed a Motion for Rehearing of the Court's amended decision, which the Court of Appeals denied on December 22, 2011. On March 21, 2012, Plaintiffs (Appellees) filed a petition for review with the Texas Supreme Court and the Company filed its response on April 20, 2012. The Supreme Court asked the parties for briefs on the issues before deciding on whether to hear the case and both parties submitted their briefs. On February 14, 2013, the Supreme Court denied the Plaintiffs petition for review. On April 3, 2013, Plaintiff filed a Motion for Rehearing. The Supreme Court denied Plaintiff's Motion for Rehearing on June 7, 2013, thus ending the matter.

On October 26, 2011 the Brazilian Superintendence of Private Insurance (“SUSEP”) attempted to serve the Company with a subpoena regarding an administrative proceeding initiated by SUSEP in which it alleged that the Company was operating as an insurance company in Brazil without due authorization. The Company had been informed that SUSEP was attempting to impose a penal fine of approximately $6.0 billion on the Company. SUSEP unsuccessfully attempted to serve the Company with notice regarding this matter. The Company does not transact business in Brazil and has no officers, employees, property, or assets in Brazil. The Company believes that SUSEP has no jurisdiction over the Company, that SUSEP's attempts at service of process were invalid, and that any penal fine would be unenforceable. For the reasons described above, the Company does not believe that this matter meets the definition of a material pending legal proceeding as such term is defined in Item 103 of Regulation S-K but has included the foregoing description solely due to the purported amount of the fine sought at that time.

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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Although there can be no assurances, at the present time, the Company does not anticipate that the ultimate liability arising from such other potential, pending, or threatened legal actions will have a material adverse effect on the financial condition or operating results of the Company.

Separately, the Company has recently become aware that the Brazilian authorities have commenced an investigation into possible violations of Brazilian criminal law in connection with the issuance of the Company's insurance policies to Brazilian residents, and in assistance of such investigation a Commissioner appointed by the U.S. District Court for the Western District of Texas has issued a subpoena upon the Company to provide information relating to such possible violations. Because the Company has only recently become aware of this investigation, no conclusion can be drawn at this time as to its outcome or how such outcome may impact the Company's business, results of operations or financial condition. The Company plans to cooperate with the relevant governmental authorities in regard to this matter.

(B) Financial Instruments

In order to meet the financing needs of its customers in the normal course of business, the Company is a party to financial instruments with off-balance sheet risk. These financial instruments are commitments to extend credit which involve elements of credit and interest rate risk in excess of the amounts recognized in the condensed consolidated balance sheet.

The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amounts, assuming that the amounts are fully advanced and that collateral or other security is of no value. Commitments to extend credit are legally binding agreements to lend to a customer that generally have fixed expiration dates or other termination clauses and may require payment of a fee. Commitments do not necessarily represent future liquidity requirements, as some could expire without being drawn upon. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Company controls the credit risk of these transactions through credit approvals, limits, and monitoring procedures.

The Company had no commitments to extend credit relating to mortgage loans at March 31, 2015. The Company evaluates each customer's creditworthiness on a case-by-case basis.


(9)	INVESTMENTS


(A)	Investment Gains and Losses

The table below presents realized investment gains and losses, excluding impairment losses, for the periods indicated.



	Three Months Ended March 31,
	2015			2014
	(In thousands)

Available for sale debt securities:
Realized gains on disposal	$	213		692
Realized losses on disposal	(9		)	(8	)
Held to maturity debt securities:	—
Realized gains on disposal	724			782
Realized losses on disposal	—			(11	)
Equity securities realized gains (losses)	50			4
Real estate gains (losses)	—			89

Totals	$	978		1,548

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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The Company uses the specific identification method in computing realized gains and losses. Approximately 75% of the gains on bonds are due to calls of securities rather than sales. This includes calls out of the Company's available for sale portfolio of debt securities.

The table below presents net impairment losses recognized in earnings for the periods indicated.



	Three Months Ended
	March 31,
	2015			2014
	(In thousands)

Total other-than-temporary impairment gains (losses) on debt securities	$	160		(4	)
Portion of loss (gain) recognized in comprehensive income	(160		)	(3	)

Net impairment losses on debt securities recognized in earnings	—			(7	)
Equity securities impairments	—			(28	)

Totals	$	—		(35	)

The table below presents a roll forward of credit losses on securities for which the Company also recorded non-credit other-than-temporary impairments in other comprehensive loss.



	Three months ended March 31, 2015			Twelve Months Ended December 31, 2014


Beginning balance, cumulative credit losses related to other-than-temporary impairments	$	2,298		2,472
Reductions for securities sold during current period	(20		)	(181	)
Additions for credit losses not previously recognized in other-than-temporary impairments	—			7

Ending balance, cumulative credit losses related to other-than-temporary impairments	$	2,278		2,298

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


(B)	Debt and Equity Securities

The table below presents amortized costs and fair values of securities held to maturity at March 31, 2015.



	Securities Held to Maturity
	Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses		Fair Value
	(In thousands)

Debt securities:
U.S. agencies	$	15,047	634	—		15,681
U.S. Treasury	1,921		414	—		2,335
States and political subdivisions	436,398		35,935	(250	)	472,083
Foreign governments	—		—	—		—
Public utilities	975,817		78,915	(68	)	1,054,664
Corporate	3,975,303		226,933	(4,642	)	4,197,594
Mortgage-backed	1,614,749		86,462	(1,403	)	1,699,808
Home equity	18,704		4,614	—		23,318
Manufactured housing	4,294		356	—		4,650

Totals	$	7,042,233	434,263	(6,363	)	7,470,133

The table below presents amortized costs and fair values of securities available for sale at March 31, 2015.



	Securities Available for Sale
	Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses		Fair Value
	(In thousands)

Debt securities:
States and political subdivisions	$	588	—	(35	)	553
Foreign governments	9,941		684	—		10,625
Public utilities	164,169		10,580	—		174,749
Corporate	2,441,317		152,193	(5,538	)	2,587,972
Mortgage-backed	45,563		4,177	—		49,740
Home equity	11,577		213	(13	)	11,777
Manufactured housing	1,606		53	—		1,659
	2,674,761		167,900	(5,586	)	2,837,075

Equity securities	12,807		4,964	(156	)	17,615

Totals	$	2,687,568	172,864	(5,742	)	2,854,690

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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The table below presents amortized costs and fair values of securities held to maturity at December 31, 2014.



	Securities Held to Maturity
	Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses		Fair Value
	(In thousands)

Debt securities:
U.S. agencies	$	10,061	705	—		10,766
U.S. Treasury	1,920		409	—		2,329
States and political subdivisions	432,186		31,417	(336	)	463,267
Public utilities	978,847		67,836	(757	)	1,045,926
Corporate	3,754,222		183,650	(18,591	)	3,919,281
Mortgage-backed	1,640,582		68,726	(4,164	)	1,705,144
Home equity	18,886		4,734	(57	)	23,563
Manufactured housing	4,839		328	—		5,167

Totals	$	6,841,543	357,805	(23,905	)	7,175,443

The table below presents amortized costs and fair values of securities available for sale at December 31, 2014.



	Securities Available for Sale
	Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses		Fair Value
	(In thousands)

Debt securities:
States and political subdivisions	$	589	—	(36	)	553
Foreign governments	9,939		386	—		10,325
Public utilities	169,179		10,163	(126	)	179,216
Corporate	2,334,700		128,280	(8,961	)	2,454,019
Mortgage-backed	48,674		4,116	—		52,790
Home equity	11,702		225	(9	)	11,918
Manufactured housing	2,492		64	—		2,556
	2,577,275		143,234	(9,132	)	2,711,377

Equity securities	12,799		4,849	(345	)	17,303

Totals	$	2,590,074	148,083	(9,477	)	2,728,680

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following table shows the gross unrealized losses and fair values of the Company's held to maturity investments by investment category and length of time the individual securities have been in a continuous unrealized loss position at March 31, 2015.



	Securities Held to Maturity
	Less than 12 Months				12 Months or Greater			Total
	Fair Value		Unrealized Losses		Fair Value	Unrealized Losses		Fair Value	Unrealized Losses
	(In thousands)

Debt securities:
States and political subdivisions	$	—	—		13,220	(250	)	13,220	(250	)
Public utilities	2,003		(5	)	18,445	(63	)	20,448	(68	)
Corporate	99,277		(1,080	)	308,553	(3,562	)	407,830	(4,642	)
Mortgage-backed	30,877		(159	)	88,592	(1,244	)	119,469	(1,403	)

Total temporarily impaired securities	$	132,157	(1,244	)	428,810	(5,119	)	560,967	(6,363	)

The following table shows the gross unrealized losses and fair values of the Company's available for sale investments by investment category and length of time the individual securities have been in a continuous unrealized loss position at March 31, 2015.



	Securities Available for Sale
	Less than 12 Months				12 Months or Greater			Total
	Fair Value		Unrealized Losses		Fair Value	Unrealized Losses		Fair Value	Unrealized Losses
	(In thousands)

Debt securities:
States and political subdivisions	$	—	—		553	(35	)	553	(35	)
Public utilities	—		—		—	—		—	—
Corporate	104,238		(2,401	)	116,966	(3,137	)	221,204	(5,538	)
Home equity	—		—		4,822	(13	)	4,822	(13	)
	104,238		(2,401	)	122,341	(3,185	)	226,579	(5,586	)

Equity public	598		(106	)	1,545	(50	)	2,143	(156	)

Total temporarily impaired securities	$	104,836	(2,507	)	123,886	(3,235	)	228,722	(5,742	)

Unrealized losses for securities held to maturity and securities available for sale decreased during the first three months of 2015 due primarily to the decline in market interest rates. The Company does not consider investments with unrealized losses to be other-than-temporarily impaired since it does not anticipate selling these securities prior to maturity and expects to receive all amounts due relative to principal and interest.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The Company does not consider securities to be other-than-temporarily impaired when the market decline is attributable to factors such as interest rate movements, market volatility, liquidity, spread widening and credit quality and when recovery of all amounts due under the contractual terms of the security is anticipated. Based on the review and the Company's ability and intent not to sell these securities until maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2015. The Company will monitor the investment portfolio for future changes in issuer facts and circumstances that could result in future impairments beyond those currently identified.

During the first quarter of 2015, the Company recorded no other-than-temporary impairment on debt or equity securities.

Debt securities. The gross unrealized losses for debt securities are made up of 109 individual issues, or 8.2% of the total debt securities held by the Company. The market value of these bonds as a percent of amortized cost averages 98.5%. Of the 109 securities, 77, or 70.6%, fall in the 12 months or greater aging category; and 106 were rated investment grade at March 31, 2015.

Equity securities. The gross unrealized losses for equity securities are made up of 23 individual issues. These holdings are reviewed quarterly for impairment.



	Securities Held to Maturity
	Less than 12 Months				12 Months or Greater			Total
	Fair Value		Unrealized Losses		Fair Value	Unrealized Losses		Fair Value	Unrealized Losses
	(In thousands)

Debt securities:
States and political subdivisions	$	—	—		23,076	(336	)	23,076	(336	)
Public utilities	7,078		(13	)	48,198	(744	)	55,276	(757	)
Corporate	156,839		(2,997	)	698,316	(15,594	)	855,155	(18,591	)
Mortgage-backed	17,698		(240	)	181,694	(3,924	)	199,392	(4,164	)
Home equity	2,206		(57	)	—	—		2,206	(57	)

Total temporarily impaired securities	$	183,821	(3,307	)	951,284	(20,598	)	1,135,105	(23,905	)

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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following table shows the gross unrealized losses and fair values of the Company's available for sale investments by investment category and length of time that the individual securities have been in a continuous unrealized loss position at December 31, 2014.



	Securities Available for Sale
	Less than 12 Months				12 Months or Greater			Total
	Fair Value		Unrealized Losses		Fair Value	Unrealized Losses		Fair Value	Unrealized Losses
	(In thousands)

Debt securities:
States and political subdivisions	$	—	—		553	(36	)	553	(36	)
Public utilities	—		—		14,827	(126	)	14,827	(126	)
Corporate	100,373		(2,990	)	187,699	(5,971	)	288,072	(8,961	)
Home equity	—		—		4,826	(9	)	4,826	(9	)
	100,373		(2,990	)	207,905	(6,142	)	308,278	(9,132	)

Equity public	305		(52	)	3,801	(293	)	4,106	(345	)

Total temporarily impaired securities	$	100,678	(3,042	)	211,706	(6,435	)	312,384	(9,477	)


(C)	Transfer of Securities

During the three months ended March 31, 2015 and 2014, the Company made no transfers to the held to maturity category from securities available for sale.

(D) Mortgage Loans

A financing receivable is a contractual right to receive money on demand or on fixed or determinable dates that is recognized as an asset in a company's statement of financial position. Mortgage, equity, participation and mezzanine loans on real estate are considered financing receivables reported by the Company.

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 lease payments and also by the borrower. This approach has proven to result in quality mortgage loans with few defaults. Mortgage loan interest income is recognized on an accrual basis with any premium or discount amortized over the life of the loan. Prepayment and late fees are recorded on the date of collection.

Loans in foreclosure, loans considered impaired or loans past due 90 days or more are placed on a non-accrual status. If a mortgage loan is determined to be on non-accrual status, the mortgage loan does not accrue any revenue into the Condensed Consolidated Statements of Earnings. The loan is independently monitored and evaluated as to potential impairment or foreclosure. If delinquent payments are made and the loan is brought current, then the Company returns the loan to active status and accrues income accordingly. The Company had no mortgage loans past due 90 days or more at March 31, 2015 or 2014 and as a result all interest income was recognized at March 31, 2015 or 2014.

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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following table represents the mortgage loan portfolio by loan-to-value ratio.



	March 31, 2015					December 31, 2014
	Amount			%		Amount			%
	(In thousands)					(In thousands)

Mortgage Loans by Loan-to-Value Ratio (1):
Less than 50%	$	47,448		32.8		$	52,564		35.0
50% to 60%	49,388			34.2		50,553			33.7
60% to 70%	20,115			13.9		14,567			9.7
70% to 80%	7,934			5.5		12,656			8.4
80% to 90%	19,683			13.6		5,399			3.6
Greater than 90%	—			—		14,414			9.6
Gross balance	144,568			100.0		150,153			100.0

Allowance for possible losses	(650		)	(0.5	)	(650		)	(0.4	)

Totals	$	143,918		99.5		$	149,503		99.6

(1) Loan-to-Value Ratio determined using the most recent appraised value. Appraisals are required at the time of funding and may be updated if a material change occurs from the original loan agreement.

The mortgage loans in the greater than 90% category relate to loans made with a long standing borrower. The loans are backed by the investment property, contracted leases, as well as a separate and additional guarantee of the long standing borrower.

All mortgage loans are analyzed quarterly in order to monitor the financial quality of these assets. Based on ongoing monitoring, mortgage loans with a likelihood of becoming delinquent are identified and placed on an internal “watch list”. Among the criteria that may indicate a potential problem include: major tenant vacancies or bankruptcies, late payments, and loan relief/restructuring requests. The mortgage loan portfolio is analyzed for the need for a valuation allowance on any loan that is on the internal watch list, in the process of foreclosure or that currently has a valuation allowance.

Mortgage loans are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. When it is determined that a loan is impaired, a loss is recognized for the difference between the carrying amount of the mortgage loan and the estimated value reduced by the cost to sell. Estimated value is typically based on the loan's observable market price or the fair value of the collateral less cost to sell. Impairments and changes in the valuation allowance are reported in net realized investment gains (losses) in the Condensed Consolidated Statements of Earnings.

The following table represents the mortgage loan allowance.



	March 31, 2015		December 31, 2014
	(In thousands)

Balance, beginning of period	$	650	650
Provision	—		—
Releases	—		—

Balance, end of period	$	650	650

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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


(10)	FAIR VALUES OF FINANCIAL INSTRUMENTS

For financial instruments the FASB provides guidance which defines fair value, establishes a framework for measuring fair value under GAAP, and requires additional disclosures about fair value measurements. In compliance with this GAAP guidance, the Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into the required three level hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument.

Financial assets and liabilities recorded at fair value on the Condensed Consolidated Balance Sheets are categorized as follows:

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

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

Level 3: Fair value is based on significant unobservable inputs which reflect the entity’s or third party pricing service’s assumptions about the assumptions market participants would use in pricing an asset or liability. The Company’s Level 3 assets are over-the-counter derivative contracts and the Company’s Level 3 liabilities consist of share-based compensation obligations and certain product-related embedded derivatives. Valuations are estimated based on non-binding broker prices or internally developed valuation models or methodologies, discounted cash flow models and other similar techniques.

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



	March 31, 2015
	Total		Level 1	Level 2	Level 3
	(In thousands)

Debt securities, available for sale	$	2,837,075	—	2,837,075	—
Equity securities, available for sale	17,615		17,059	556	—
Derivatives, index options	95,987		—	—	95,987

Total assets	$	2,950,677	17,059	2,837,631	95,987

Policyholder account balances (a)	$	111,627	—		111,627
Other liabilities (b)	8,360		—	—	8,360

Total liabilities	$	119,987	—	—	119,987

Table of Contents

NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

During the three months ended March 31, 2015, the Company had no transfers into or out of Levels 1, 2 or 3.



	December 31, 2014
	Total		Level 1	Level 2	Level 3
	(In thousands)

Debt securities, available for sale	$	2,711,377	—	2,711,377	—
Equity securities, available for sale	17,303		16,862	441	—
Derivatives, index options	114,287		—	—	114,287

Total assets	$	2,842,967	16,862	2,711,818	114,287

Policyholder account balances (a)	$	133,236	—		133,236
Other liabilities (b)	9,256		—	—	9,256

Total liabilities	$	142,492	—	—	142,492

(a) Represents the fair value of certain product-related embedded derivatives that were recorded at fair value.

(b) Represents the liability for share-based compensation.

The following tables present, by pricing source and fair value hierarchy level, the Company’s assets that are measured at fair value on a recurring basis:



	March 31, 2015
	Total		Level 1	Level 2	Level 3
	(In thousands)

Debt securities, available for sale:
Priced by third-party vendors	$	2,837,075	—	2,837,075	—
Priced internally	—		—	—	—
Subtotal	2,837,075		—	2,837,075	—

Equity securities, available for sale:
Priced by third-party vendors	17,615		17,059

NATIONAL WESTERN LIFE INSURANCE CO 10-Q