National Western Life Insurance 10-Q 2002 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[  3   ]          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2002
[        ]           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, TX 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 [ 3 ]   No  [    ]
As of May 10, 2002, the number of shares of Registrant's common stock outstanding was:   Class A - 3,322,217 and Class B - 200,000.

NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
INDEX
Part I.  Financial Information:	Page
Item 1.  Financial Statements
Condensed Consolidated Balance Sheets
March 31, 2002 (Unaudited) and December 31, 2001
Condensed Consolidated Statements of Earnings
For the Three Months Ended March 31, 2002 and 2001 (Unaudited)
Condensed Consolidated Statements of Comprehensive Income
For the Three Months Ended March 31, 2002 and 2001 (Unaudited)
Condensed Consolidated Statements of Stockholders' Equity
For the Three Months Ended March 31, 2002 and 2001 (Unaudited)
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2002 and 2001 (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
Part II.  Other Information:
Item 1.   Legal Proceedings
Item 6.   Exhibits and Reports on Form 8-K
Signatures
Exhibit 11 - Computation of Earnings per Share
For the Three Months Ended March 31, 2002 and 2001 (Unaudited)

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

		(Unaudited)
		March 31,	December 31,
ASSETS		2002	2001
Cash and investments:
Securities held to maturity, at amortized cost	$	2,080,015	2,059,146
Securities available for sale, at fair value		953,321	925,975
Mortgage loans, net of allowances for possible
losses ($1,515 and $2,115)		181,550	186,278
Policy loans		96,088	97,019
Index options		6,438	6,288
Other long-term investments		57,610	51,272
Cash and short-term investments		19,660	10,203
Total cash and investments		3,394,682	3,336,181
Deferred policy acquisition costs		412,798	401,380
Accrued investment income		47,675	49,537
Federal income tax receivable		1,284	1,284
Deferred Federal income tax asset		1,439	-
Other assets		19,808	21,090
	$	3,877,686	3,809,472
Note:  The condensed consolidated balance sheet at December 31, 2001, has been derived from the audited 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)
		March 31,		December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY		2002		2001
LIABILITIES:
Future policy benefits:
Traditional life and annuity contracts	$	146,212		146,891
Universal life and investment annuity contracts		3,077,074		3,039,056
Other policyholder liabilities		39,033		38,655
Federal income tax liability:
Current		7,699		3,581
Deferred		-	-	263
Other liabilities		37,350		21,638
Total liabilities		3,307,368		3,250,084
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Common stock:
Class A - $1 par value; 7,500,000 shares authorized; 3,319,887 and
3,314,947 shares issued and outstanding in 2002 and 2001		3,320		3,315
Class B - $1 par value; 200,000 shares authorized, issued,
and outstanding in 2002 and 2001		200		200
Additional paid-in capital		26,341		25,921
Accumulated other comprehensive income		2,405		4,134
Retained earnings		538,052		525,818
Total stockholders' equity		570,318		559,388
	$	3,877,686		3,809,472
Note:  The condensed consolidated balance sheet at December 31, 2001, has been derived from the audited 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 March 31, 2002 and 2001
(Unaudited)
(In thousands, except per share amounts)

		2002	2001
Premiums and other revenue:
Life and annuity premiums	$	3,374	4,407
Universal life and investment annuity contract revenues		17,784	19,427
Net investment income		58,298	52,407
Other income		1,791	1,095
Realized gains on investments		54	98
Total premiums and other revenue		81,301	77,434
Benefits and expenses:
Life and other policy benefits		7,666	11,846
Decrease in liabilities for future policy benefits		(562)	(1,252)
Amortization of deferred policy acquisition costs		10,221	11,972
Universal life and investment annuity contract interest		36,973	33,051
Other operating expenses		8,549	8,221
Total benefits and expenses		62,847	63,838
Earnings before Federal income taxes and cumulative effect of
change in accounting principle		18,454	13,596
Provision for Federal income taxes:
Current		6,992	4,248
Deferred		(772)	382
Total Federal income taxes		6,220	4,630
Earnings before cumulative effect of change in
accounting principle		12,234	8,966
Cumulative effect of change in accounting principle,
net of $1,149 of Federal income taxes		-	2,134
Net earnings	$	12,234	11,100
Basic Earnings Per Share:
Earnings before cumulative effect of change in accounting principle	$	3.48	2.56
Cumulative effect of change in accounting principle		-	0.61
Net earnings	$	3.48	3.17
Diluted Earnings Per Share:
Earnings before cumulative effect of change in accounting principle	$	3.45	2.54
Cumulative effect of change in accounting principle		-	0.60
Net earnings	$	3.45	3.14
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 March 31, 2002 and 2001
(Unaudited)
(In thousands)

		2002	2001
Net earnings	$	12,234	11,100
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		(1,999)	11,099
Reclassification adjustment for losses (gains) included in net earnings		21	(321)
Amortization of net unrealized losses
related to transferred securities		10	415
Unrealized losses on securities transferred during period
from held to maturity to available for sale		(66)	-
Cumulative effect of change in accounting principle - transfers
of securities from held to maturity to available for sale upon
adoption of Statement of Financial Accounting Standards No. 133		-	(5,148)
Net unrealized gains (losses) on securities		(2,034)	6,045
Foreign currency translation adjustments		32	305
Minimum pension liability adjustment		273	-
Other comprehensive income (loss)		(1,729)	6,350
Comprehensive income	$	10,505	17,450
See accompanying notes to condensed consolidated financial statements.

NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 2002 and 2001
(Unaudited)
(In thousands)

		2002	2001
Common stock:
Balance at beginning of year	$	3,515	3,504
Shares exercised under stock option plan		5	5
Balance at end of period		3,520	3,509
Additional paid-in capital:
Balance at beginning of year		25,921	25,174
Shares exercised under stock option plan		420	212
Balance at end of period		26,341	25,386
Accumulated other comprehensive income (loss):
Unrealized gains (losses) on securities:
Balance at beginning of year		2,409	(11,282)
Change in unrealized gains (losses) during period		(2,034)	6,045
Balance at end of period		375	(5,237)
Foreign currency translation adjustments:
Balance at beginning of year		3,037	3,611
Change in translation adjustments during period		32	305
Balance at end of period		3,069	3,916
Minimum pension liability adjustment:
Balance at beginning of year		(1,312)	-
Change in minimum pension liability adjustment during period		273	-
Balance at end of period		(1,039)	-
Accumulated other comprehensive income (loss) at end of period		2,405	(1,321)
Retained earnings:
Balance at beginning of year		525,818	479,099
Net earnings		12,234	11,100
Balance at end of period		538,052	490,199
Total stockholders' equity	$	570,318	517,773
See accompanying notes to condensed consolidated financial statements.

NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2002 and 2001
(Unaudited)
(In thousands)

		2002	2001
Cash flows from operating activities:
Net earnings	$	12,234	11,100
Adjustments to reconcile net earnings to net cash
from operating activities:
Universal life and investment annuity contract interest		36,973	33,051
Surrender charges and other policy revenues		(6,800)	(9,251)
Realized gains on investments		(54)	(98)
Accrual and amortization of investment income		(1,724)	(1,242)
Depreciation and amortization		334	371
Decrease (increase) in value of index options		(1,822)	1,464
Increase in deferred policy acquisition costs		(6,329)	(657)
Decrease in accrued investment income		1,862	2,385
Decrease (increase) in other assets		1,155	(3,492)
Decrease in liabilities for future policy benefits		(562)	(1,252)
Increase in other policyholder liabilities		378	2,202
Increase in Federal income tax liability		3,600	5,566
Increase in other liabilities		7,628	7,313
Cumulative effect of change in accounting
principle, before taxes		-	(3,283)
Other		(46)	(355)
Net cash provided by operating activities		46,827	43,822
Cash flows from investing activities:
Proceeds from sales of:
Securities held to maturity		-	-
Securities available for sale		7,161	26,739
Other investments		4,731	7,008
Proceeds from maturities and redemptions of:
Securities held to maturity		40,548	9,376
Securities available for sale		17,681	8,109
Purchases of:
Securities held to maturity		(69,626)	(58,790)
Securities available for sale		(42,321)	(22,247)
Other investments		(9,550)	(4,215)
Principal payments on mortgage loans		7,956	5,652
Cost of mortgage loans acquired		(3,195)	(2,669)
Decrease in policy loans		931	1,568
Other		(100)	(128)
Net cash used in investing activities		(45,784)	(29,597)
		(Continued on next page)

NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
For the Three Months Ended March 31, 2002 and 2001
(Unaudited)
(In thousands)

		2002	2001
Cash flows from financing activities:
Deposits to account balances for universal life
and investment annuity contracts	$	84,814	76,343
Return of account balances on universal life
and investment annuity contracts		(76,737)	(103,931)
Issuance of common stock under stock option plan		360	217
Net cash provided by (used in) financing activities		8,437	(27,371)
Effect of exchange rate changes on cash		(23)	-
Net increase (decrease) in cash and short-term investments		9,457	(13,146)
Cash and short-term investments at beginning of year		10,203	22,665
Cash and short-term investments at end of period	$	19,660	9,519

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash paid during the quarter for:
Interest	$	27	74
Income taxes		2,600	222
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 consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United State of America (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company as of March 31, 2002, and the results of its operations and its cash flows for the three months ended March 31, 2002 and 2001. The results of operations for the three months ended March 31, 2002 and 2001 are not necessarily indicative of the results to be expected for the full year.

The accompanying condensed consolidated financial statements include the accounts of National Western Life Insurance Company and its wholly-owned subsidiaries (the Company), The Westcap Corporation (Westcap), NWL Investments, Inc., NWL Properties, Inc., NWL 806 Main, 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 2002.


(2)  STOCKHOLDERS' EQUITY

The Company is restricted by state insurance laws as to dividend amounts which may be paid to stockholders without prior approval from the Colorado Division of Insurance. The Company paid no cash dividends on common stock during the three months ended March 31, 2002 and 2001, as it follows a policy of retaining any earnings in order to finance the development of business and to meet regulatory requirements for capital.


(3)  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.


(4)  SEGMENT AND OTHER OPERATING INFORMATION

Under Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures About Segments of an Enterprise and Related Information," the Company defines its reportable operating segments as domestic life insurance, international life insurance, and annuities. These segments are organized based on product types and geographic marketing areas. A summary of segment information for the quarters ended March 31, 2002 and 2001 is provided below.

Selected Segment Information:
		Domestic	International
		Life	Life		All
		Insurance	Insurance	Annuities	Others	Totals
		(In thousands)
March 31, 2002:
Selected Balance Sheet Items:
Deferred policy acquisition
costs	$	71,700	82,023	259,075	-	412,798
Total segment assets		416,544	392,268	3,000,554	55,890	3,865,256
Future policy benefits		327,241	294,782	2,601,263	-	3,223,286
Other policyholder liabilities		9,551	9,495	19,987	-	39,033
Three Months Ended
March 31, 2002:
Condensed Income Statements:
Premiums and contract
revenues	$	5,704	10,819	4,635	-	21,158
Net investment income		6,142	5,534	46,046	576	58,298
Other income		12	6	313	1,460	1,791
Total revenues		11,858	16,359	50,994	2,036	81,247
Policy benefits		3,671	2,997	436	-	7,104
Amortization of deferred
policy acquisition costs		841	3,825	5,555	-	10,221
Universal life and investment
annuity contract interest		2,456	4,160	30,357	-	36,973
Other operating expenses		2,524	2,373	2,382	1,270	8,549
Federal income taxes		797	1,012	4,134	258	6,201
Total expenses		10,289	14,367	42,864	1,528	69,048
Segment earnings	$	1,569	1,992	8,130	508	12,199

		Domestic	International
		Life	Life		All
		Insurance	Insurance	Annuities	Others	Totals
		(In thousands)
March 31, 2001:
Selected Balance Sheet Items:
Deferred policy acquisition
costs	$	73,265	76,675	236,674	-	386,614
Total segment assets		410,434	394,423	2,865,060	52,953	3,722,870
Future policy benefits		322,445	296,832	2,511,444	-	3,130,721
Other policyholder liabilities		9,075	12,972	13,795	-	35,842
Three Months Ended
March 31, 2001:
Condensed Income Statements:
Premiums and contract
revenues	$	5,790	11,238	6,806	-	23,834
Net investment income		6,392	5,629	39,745	641	52,407
Other income		7	6	51	1,031	1,095
Total revenues		12,189	16,873	46,602	1,672	77,336
Policy benefits		4,867	5,610	117	-	10,594
Amortization of deferred
policy acquisition costs		1,843	3,232	6,897	-	11,972
Universal life and investment
annuity contract interest		2,440	3,920	26,691	-	33,051
Other operating expenses		2,148	2,705	2,307	1,061	8,221
Federal income taxes		304	478	3,606	208	4,596
Total expenses		11,602	15,945	39,618	1,269	68,434
Segment earnings	$	587	928	6,984	403	8,902

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

		Three Months Ended March 31,
		2002	2001
		(In thousands)
Premiums and Other Revenue:
Premiums and contract revenues	$	21,158	23,834
Net investment income		58,298	52,407
Other income		1,791	1,095
Realized gains (losses) on investments		54	98
Total consolidated premiums and other revenue	$	81,301	77,434

		Three Months Ended March 31,
		2002	2001
		(In thousands)
Federal Income Taxes:
Total segment Federal income taxes	$	6,201	4,596
Taxes (benefits) on realized gains (losses) on investments		19	34
Taxes on cumulative effect of change in
accounting principle		-	1,149
Total consolidated Federal income taxes	$	6,220	5,779

		Three Months Ended March 31,
		2002	2001
		(In thousands)
Net Earnings:
Total segment earnings	$	12,199	8,902
Realized gains (losses) on investments,
net of taxes		35	64
Cumulative effect of change in accounting principle,
net of taxes		-	2,134
Total consolidated net earnings	$	12,234	11,100

		March 31,
		2002	2001
		(In thousands)
Assets:
Total segment assets	$	3,865,256	3,722,870
Other unallocated assets		12,430	18,220
Total consolidated assets	$	3,877,686	3,741,090

(5)  CHANGES IN ACCOUNTING PRINCIPLES

SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. Derivatives must be recognized as either assets or liabilities in the statement of financial position and be measured at fair value. The Company adopted the provisions of SFAS 133 on January 1, 2001.

The Company offers for sale equity-indexed annuities that contain an equity return component for policyholders which is an embedded derivative instrument under SFAS 133. Equity-indexed annuities combine features associated with traditional fixed annuities with the option to have interest rates linked entirely or in part to an index, such as the S&P 500 Index^®. The equity return component of such policy contracts must be separately identified and accounted for at fair value as embedded derivatives and reflected in the balance sheet as a component of future policy benefits with changes in fair value included in earnings. The remaining portions of these policy contracts are considered the host contracts and are recorded separately as fixed annuity contracts. The host contracts are accounted for as investment contracts under provisions of SFAS No. 97, which requires the host contracts to be recorded as discounted debt instruments that are accreted, using the effective yield method, to thei r guaranteed account values at the projected maturity or termination dates. The cumulative effect adjustment for the implementation of the change in accounting for equity-indexed annuities resulted in an increase to net earnings totaling $2,134,000, net of taxes of $1,149,000, as of January 1, 2001.

In conjunction with the sale of equity-indexed annuities, the Company purchases index options to hedge or offset the equity return component of the annuities. Although the Company uses index options to hedge the equity return component of the equity-indexed annuities, these options do not qualify as hedging instruments or for hedge accounting treatment pursuant to SFAS No. 133. Accordingly, the index options are carried at fair value in the balance sheet based upon quoted market prices and mark-to-market gains or losses to record the options at fair value are recognized as net investment income in earnings in the period of change, which has been the Company's practice. Consequently, there was no financial statement impact in connection with the change in accounting principle for these options upon implementation of SFAS No. 133.


(6)  LEGAL PROCEEDINGS

The Company is currently a defendant in several lawsuits, substantially all of which are in the normal course of business. In the opinion of management, the liability, if any, which may arise from these lawsuits would not have a material adverse effect on the Company's financial position, results of operations or cash flows.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Insurance Operations - Domestic

The Company is currently licensed to do business in all states except for New York, Delaware, New Hampshire, and Connecticut. Products marketed are annuities, universal life insurance, and traditional life insurance, which includes 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 March 31, 2002, the Company maintained over 100,000 annuity policies inforce.

National Western markets and distributes its domestic products primarily through independent marketing organizations (IMOs). These IMOs assist the Company in recruiting, contracting, and managing independent agents. The Company currently has approximately 90 IMOs contracted who in turn have contracted over 6,200 independent agents with the Company. Roughly 19% 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, and the Pacific Rim. Issuing policies to residents in 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 March 31, 2002, the Company had nearly 49,000 international life insurance policies inforce representing approximately $7.3 billion in face amount of coverage.

International applications are submitted by independent contractor broker-agents, many of whom have been submitting policy applications to National Western for 20 or more years. The Company has approximately 2,900 independent international agents currently contracted, over 45% of which have submitted policy applications to the Company in the past twelve months.

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


RESULTS OF OPERATIONS

Consolidated Operations

A summary of operating results for the three months ended March 31, 2002 and 2001 is provided below:

		Three Months Ended March 31,
		2002	2001
		(In thousands, except per share data)
Revenues:
Revenues, excluding realized investment
gains and index options	$	83,483	84,664
Index options		(2,236)	(7,328)
Realized gains on investments		54	98
Total revenues	$	81,301	77,434
Earnings:
Earnings from operations	$	12,199	8,902
Net realized gains on investments		35	64
Cumulative effect of change in accounting principle		-	2,134
Net earnings	$	12,234	11,100
Basic Earnings Per Share:
Earnings from operations	$	3.47	2.54
Net realized gains on investments		0.01	0.02
Cumulative effect of change in accounting principle		-	0.61
Net earnings	$	3.48	3.17
Diluted Earnings Per Share:
Earnings from operations	$	3.44	2.52
Net realized gains on investments		0.01	0.02
Cumulative effect of change in accounting principle		-	0.60
Net earnings	$	3.45	3.14

Revenues:The following details revenues excluding index options and realized gains on investments:

		Three Months Ended March 31,
		2002	2001
		(In thousands)
Universal life and annuity product charges	$	17,784	19,427
Traditional life premiums		3,374	4,407
Net investment income		60,534	59,735
Other revenue		1,791	1,095
Totals	$	83,483	84,664

Revenues for universal life and annuity products consist of policy charges for the cost of insurance, administration charges, and surrender charges assessed policyholder account balances. During the course of 2001 and continuing into the first quarter of 2002, the Company has seen improved retention of inforce policies which has contributed to higher operating earnings while decreasing revenues due to the lower level of surrender charges assessed against policyholder account balances. Surrender charge revenue was $5.3 million in the first quarter of 2002 compared to $7.7 million in the first quarter of 2001.

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 been de-emphasizing in favor of interest sensitive products, particularly in its international life insurance operations. In addition, first quarter 2002 traditional life premiums were muted for increases in reinsurance premiums and translation losses associated with policies in Haiti which is the only international country where premiums and benefits may be paid in other than U.S. dollars.

A detail of net investment income, excluding index options, is provided below:

		Three Months Ended March 31,
		2002	2001
		(In thousands)
Gross investment income:
Debt securities	$	53,890	52,472
Mortgage loans		3,978	4,651
Policy loans		1,905	2,018
Other investment income		1,162	1,349
Total investment income		60,935	60,490
Investment expenses		401	755
Net investment income	$	60,534	59,735

Net investable cash flow is primarily invested in investment grade debt securities. With the steady decline in interest rate levels during 2001, this has been even more the case as the market for mortgage loans fell below the Company's required yield levels for this type of investment. Despite the drop in interest rate levels, the Company still generated higher overall net investment earnings due to higher levels of invested assets.

Net investment income performance is summarized as follows:

		Three Months Ended March 31,
		2002	2001
		(In thousands except percentages)
Net investment income, excluding index options	$	60,534	59,735
Average invested assets, at amortized cost	$	3,435,704	3,365,324
Annual yield on average invested assets		7.05%	7.10%

Other revenue primarily pertains to the Company's other operations involving a nursing home which commenced operations in 2000. Revenues associated with this operation were $1.5 million and $1.0 million for the three months ended March 31, 2002 and 2001, respectively.

Index Options:Index options are derivative financial instruments used to hedge the equity return component of the Company's equity-indexed products. 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 paid to equity-indexed policyholders.

The loss from index options in the first quarters of 2002 and 2001 was due to declining stock market conditions, specifically the performance of the S&P 500 Index^®. Index options are intended to act as hedges to match closely the returns on the S&P 500 Index^®. With the decline in this index, the index option values likewise declined. While income from index options was lower, the contract interest expense for the Company's equity-indexed products was also substantially lower.

Realized Gains on Investments: In the quarters ended March 31, 2002 and 2001 the Company had minimal realized investment activity. The investment strategy followed is to generally hold securities to maturity unless economic conditions produce situations where it is to the Company's advantage to dispose of a security. Investment losses reported in prior year annual reports have primarily pertained to write downs of certain holdings whose decline in value were considered to be other than temporary. The net realized gains in the first quarter of 2001 included a $0.4 million write down while no write downs occurred in the first quarter of 2002.

Benefits and Expenses: The following details benefits and expenses:

		Three Months Ended March 31,
		2002	2001
		(In thousands)
Policy benefits	$	7,104	10,594
Amortization of deferred policy acquisition costs		10,221	11,972
Universal life and annuity contract interest		36,973	33,051
Other operating expenses		8,549	8,221
Totals	$	62,847	63,838

The Company benefited from improved mortality experience in the first quarter of 2002 resulting in lower policy benefits. Death claims decreased to $5.2 million from $8.3 million. The Company's mortality experience over the past five years 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. Recognition of these deferred policy acquisition costs in the financial statements is to occur 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 revisit 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 amortizati on patterns of deferred policy acquisition costs are reflective of actual experience.

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 market interest rates fluctuate, the Company=s credited interest rates are often adjusted accordingly taking into consideration other factors as described above. Raising policy credited rates can typically have an impact sooner than higher market rates on the Company=s investment portfolio yield, making it more difficult to maintain the current interest spread. The difference between yields earned over policy credited rates is often referred to as the interest spread.

Contract interest also includes the performance of the equity-index component of the Company's equity-indexed products. As previously noted, the recent market performance of these equity-index features reduced contract interest expenses while also reducing the Company's investment income given the hedge nature of the options purchased for these products. Excluding equity-indexed products, the Company's average credited rate on annuity products was approximately 5.5% in the first quarter of both 2002 and 2001. The average credited rate for interest sensitive life products approximated 5.5% and 5.6% in the first quarters of 2002 and 2001, respectively.

Other operating expenses consist of general administrative expenses, licenses and fees, and commissions not subject to deferral. As noted with Other Revenues, the Company commenced its nursing home operations in 2000 and these expenses are included in other operating expenses in the amount of $1.3 million and $1.1 million for the first quarters of 2002 and 2001, respectively. Excluding nursing home operations expenses, the Company has been able to leverage its operations to keep expenses relatively stable.

Federal Income Taxes:Federal income taxes on earnings from continuing operations reflect effective tax rates of 33.7% and 34.1% for the first quarter of 2002 and 2001, 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 quarters ended March 31, 2002 and 2001 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:
March 31, 2002	$	1,569	1,992	8,130	508	12,199
March 31, 2001	$	587	928	6,984	403	8,902

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 March 31,
		2002	2001
		(In thousands)
Premiums and other revenue:
Premiums and contract revenues	$	5,704	5,790
Net investment income		6,142	6,392
Other income		12	7
Total premiums and other revenue		11,858	12,189
Benefits and expenses:
Policy benefits		3,671	4,867
Amortization of deferred policy acquisition costs		841	1,843
Universal life insurance contract interest		2,456	2,440
Other operating expenses		2,524	2,148
Total benefits and expenses		9,492	11,298
Segment earnings before Federal income taxes		2,366	891
Federal income taxes		797	304
Segment earnings	$	1,569	587

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 March 31,
		2002	2001
		(In thousands)
Universal life insurance revenues	$	3,863	3,739
Traditional life insurance premiums		2,063	2,295
Reinsurance premiums		(222)	(244)
Totals	$	5,704	5,790

The Company's U.S. operations have historically emphasized annuity product sales over life product sales. Consequently, domestic life revenues have been declining for several years. However, a refocus on domestic life business was identified as a focal point of the Company in 2001 which resulted in increased recruiting of new distribution and the development of new life insurance products. It is the Company's goal to significantly increase domestic life product sales in 2002 and to continue to attract new sources of distribution.

Segment earnings have generally declined as the block of business has contracted. First quarter earnings in 2002 were aided by favorable mortality experience. The face amount of domestic life insurance inforce has declined from $3.0 billion at March 31, 2001, to $2.9 billion at December 31, 2001 and March 31, 2002. Absent the growth rates targeted by management, the block of business will continue to contract due to the normal incidence of terminations from death or surrender with lower earnings resulting.

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 March 31,
		2002	2001
		(In thousands)
Premiums and other revenue:
Premiums and contract revenues	$	10,819	11,238
Net investment income		5,534	5,629
Other income		6	6
Total premiums and other revenue		16,359	16,873
Benefits and expenses:
Policy benefits		2,997	5,610
Amortization of deferred policy acquisition costs		3,825	3,232
Universal life insurance contract interest		4,160	3,920
Other operating expenses		2,373	2,705
Total benefits and expenses		13,355	15,467
Segment earnings before Federal income taxes		3,004	1,406
Federal income taxes		1,012	478
Segment earnings	$	1,992	928

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 March 31,
		2002	2001
		(In thousands)
Universal life insurance revenues	$	11,626	10,684
Traditional life insurance premiums		1,457	2,457
Reinsurance premiums		(2,264)	(1,903)
Totals	$	10,819	11,238

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 generally accepted accounting principles. Actual universal life premiums collected are detailed below:

		Three Months Ended March 31,
		2002	2001
		(In thousands)
Universal life insurance:
First year and single premiums	$	6,206	3,697
Renewal premiums		8,151	8,992
Totals	$	14,357	12,689

The Company's international life operations has been a steady performer as evidenced by the growth in collected premiums. Management expects this growth to continue in 2002 with the addition of new contracted distribution which began to occur in the fourth quarter of 2001. This distribution was attracted to National Western given the Company's longstanding reputation for supporting its international life products and the instability of competing companies in this area. In addition, the Company released its first equity-indexed universal life product for international life operations early in 2002 which has been well received by its independent distribution.

As the international life insurance inforce continues to grow, the Company anticipates operating earnings to similarly increase. The amount of international life insurance inforce has grown from $6.8 billion at March 31, 2001, to $7.1 billion at December 31, 2001 and $7.3 billion at March 31, 2002.

Annuity Operations

The Company's annuity operations are almost exclusively in the United States. Although some of the Company's annuities and 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 March 31,
		2002	2001
		(In thousands)
Premiums and other revenue:
Premiums and contract revenues	$	4,635	6,806
Net investment income		46,046	39,745
Other income		313	51
Total premiums and other revenue		50,994	46,602
Benefits and expenses:
Policy benefits		436	117
Amortization of deferred policy acquisition costs		5,555	6,897
Annuity contract interest		30,357	26,691
Other operating expenses		2,382	2,307
Total benefits and expenses		38,730	36,012
Segment earnings before Federal income taxes		12,264	10,590
Federal income taxes		4,134	3,606
Segment earnings	$	8,130	6,984

Revenues from annuity operations include primarily 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 March 31,
		2002	2001
		(In thousands)
Surrender charges	$	3,147	5,462
Payout annuity and other revenues		1,476	1,330
Traditional annuity premiums		12	14
Totals	$	4,635	6,806

As previously noted, the Company's earnings are dependent upon annuity contracts persisting or remaining in force. While revenues decline with a reduction in surrender charges, the Company's earnings benefit.

Deposits collected on annuity contracts are not reflected as revenues in the Company's statements of earnings in accordance with generally accepted accounting principles. Actual annuity deposits collected for the three months ended March 31, 2002 and 2001 are detailed below.

		Three Months Ended March 31,
		2002	2001
		(In thousands)
Equity-indexed annuities	$	9,527	10,642
Other deferred annuities		65,296	58,382
Immediate annuities		4,654	2,953
Totals	$	79,477	71,977

Sales of equity-indexed annuities began declining during 1999, primarily due to volatility in the stock market. This volatility affects both the demand for these annuities and the pricing of these products. Increased product costs from stock market volatility, including costs of index options used to hedge the equity return component of these annuities and lower policyholder asset fees, can reduce potential credited interest to policyholders. The lower production level continued throughout 2001, which is consistent with the poor performance of the stock market and the negative outlook that persisted during 2001. However, because the Company does not offer variable products or mutual funds, these products provide a key equity-based alternative to the Company=s existing fixed annuity products.

As previously described, index options are used to hedge the equity return component of the Company=s equity-indexed annuity products with any gains or losses from the sale or expiration of the options, as well as period-to-period changes in fair values, reflected in net investment income. Excluding index option income or losses from investment income in the annuity segment results in net investment income totaling $48.3 million and $47.1 million in the three months ended March 31, 2002 and 2001, respectively.

The Company unlocked its deferred policy acquisition cost amortization factors for changes in persistency of the annuity block of business in both 2000 and 2001 and for changes in investment earnings in 2001. The changes in 2000 accelerated the amortization of deferred policy acquisition costs while the 2001 unlocking adjusted the amortization stream back. The Company is required to periodically adjust these factors for actual experience that varies from assumptions. While management does not currently anticipate any impact from unlocking in 2002, facts and circumstances may arise in the future which require that the factors be reexamined.

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

		Three Months Ended March 31,
		2002	2001
		(In thousands)
Equity-indexed annuities	$	539	(873)
All other annuities		29,818	27,564
Totals contract interest	$	30,357	26,691

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 $190,000 of operating earnings in the first quarter of 2002 compared to operating losses of $30,000 in the same period of 2001.


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 March 31, 2002 and December 31, 2001. The Company emphasizes investment grade debt securities, with smaller holdings in mortgage loans and policy loans.

	Percent of Investments
	March 31,		December 31,
	2002		2001
Debt securities	89.0	%	89.1	%
Mortgage loans	5.3		5.6
Policy loans	2.8		2.9
Equity securities	0.4		0.4
Real estate	0.5		0.4
Index options	0.2		0.2
Other	1.8		1.4
Totals	100.0	%	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 March 31, 2002 and December 31, 2001 the Company's debt securities portfolio consisted of the following:

	Percent of Debt Securities
	March 31,		December 31,
	2002		2001
Corporate	52.2	%	53.1	%
Mortgage-backed securities	23.6		22.7
Public utilities	14.5		14.5
Asset-backed securities	7.1		7.1
Foreign governments	1.7		1.8
States & political subdivisions	0.8		0.7
U.S. government	0.1		0.1
Totals	100.0	%	100.0	%

In addition to diversification, an important aspect of the Company=s investment approach is managing the credit quality of its investments in debt securities. 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 Poor=s (S&P⁷), or other nationally recognized statistical rating organizations if securities were not rated by S&P⁷:

	March 31,		December 31,
	2002		2001
AAA and U.S. government	31.3	%	30.8	%
AA	6.6		6.9
A	28.5		28.5
BBB	29.1		29.8
BB and other below investment grade	4.5		4.0
Totals	100.0	%	100.0	%

National Western does not purchase below investment grade securities. Investments held in debt securities below investment grade are the result of subsequent downgrades of the securities. During the first quarter of 2002, the Company's percentage of below investment grade securities increased marginally due to two issuer downgrades. Despite these downgrades, the Company's holdings of below investment grades securities is much lower than industry averages and is a small percentage of total invested assets. These holdings are summarized below.

		Below Investment Grade Debt Securities
				Estimated	% of
		Amortized	Carrying	Fair	Invested
		Cost	Value	Value	Assets
	(In thousands except percentages)
March 31, 2002	$	149,865	136,669	136,030	4.0%
December 31, 2001	$	132,689	119,960	118,709	3.6%
December 31, 2000	$	113,018	82,764	75,700	2.6%

Generally accepted accounting principles require that investments in debt securities be written down to fair value when declines in value are judged to be other than temporary. Since quoted market prices are readily available and understood by investors and creditors they are the most common source for fair value estimation. In some instances, quoted market prices may not be available for securities that have limited buyer demand. When the quoted market price is not available other valuation techniques such as discounted cash flow analysis and fundamental analysis may be used. No impairments were recorded in the first quarter of 2002 related to the Company's holdings in debt securities. The Company recorded an other than temporary impairment writedown totaling $400,000 related to one security during the first quarter of 2001.

The Company is closely monitoring its other below investment grade holdings. While 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.

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 March 31, 2002, approximately 31% of the Company's total debt and equity securities, based on fair values, were classified as securities available for sale. These holdings provide flexibility to the Company to react to market opportunities and conditions and to practice active management within the portfolio to provide adequate liquidity to meet policyh older obligations and other cash needs.

		Fair	Amortized	Unrealized
		Value	Cost	Gains (Losses)
		(In thousands)
Securities held to maturity:
Debt securities	$	2,125,900	2,080,015	45,885
Securities available for sale:
Debt securities		939,811	954,850	(15,039)
Equity securities		13,510	8,609	4,901
Totals	$	3,079,221	3,043,474	35,747

In accordance with the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the Company transferred debt securities totaling $9,717,000 in the first quarter of 2002 from held to maturity to available for sale due to credit deterioration. Net unrealized losses of $66,000 related to these transfers were recorded as a component of accumulated other comprehensive income. No such transfers were made in the first quarter of 2001. Proceeds from sales of securities available for sale totaled $7,161,000 and $26,739,000 which resulted in realized losses of $178,000 and realized gains of $559,000 during the first quarters of 2002 and 2001, respectively.

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, motels, and health care 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 lessee. 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 $181,550,000 and $186,278,000 at March 31, 2002 and December 31, 2001, respectively. The diversification of the portfolio by geographic region and by property type was as follows:

	March 31,		December 31,
Geographic Region:	2002		2001
West South Central	52.8	%	54.8	%
Mountain	22.9		22.5
Pacific	11.6		11.1
South Atlantic	4.1		4.1
East South Central	4.0		3.9
Other	4.6		3.6
Totals	100.0	%	100.0	%
	March 31,		December 31,
Property Type:	2002		2001
Retail	58.6	%	63.8	%
Office	26.1		22.0
Hotel/Motel	6.6		6.5
Land/Lots	5.2		3.7
Nursing homes	1.1		1.0
Apartment	0.2		0.8
Other	2.2		2.2
Totals	100.0	%	100.0	%

The Company does not recognize interest income on loans past due three months or more. At March 31, 2002 and December 31, 2001, the Company had mortgage loan principal balances past due three months or more of $5,990,000 and $3,014,000, respectively. The Company will at times restructure mortgage loans under certain conditions, which may involve changes in interest rates, payment terms, or other modifications. The Company had mortgage loan principal balances with restructured terms totaling $6,425,000 and $7,486,000 at March 31, 2002 and December 31, 2001, respectively. Interest income not recognized for past due and restructured loans totaled approximately $900 and $77,000 for the three months ended March 31, 2002 and 2001, respectively.

As of March 31, 2002, the allowance for possible losses on mortgage loans was $1,515,000 representing a reduction of $600,000 from December 31, 2001. The allowance was adjusted as a result of an analysis of specific loans and management believes that the allowance for possible losses is adequate. While the Company closely manages its mortgage loan portfolio, future changes in economic conditions can result in impairments beyond those currently identified.

The Company's real estate investments totaled approximately $15,212,000 and $15,220,000 at March 31, 2002 and December 31, 2001, respectively, and consist primarily of income-producing properties which are being operated by a wholly owned subsidiary of the Company. The Company recognized operating income on these properties of approximately $353,000 and $154,000 for the three months ended March 31, 2002 and 2001, respectively. The Company monitors the conditions and market values of these properties on a regular basis and makes repairs and capital improvements to keep the properties in good condition. The Company recorded no net realized investment gains or losses for the three months ended March 31, 2002 and 2001 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.

		March 31,		December 31,
		2002		2001
		(In thousands except percentages)
Debt securities - fair value	$	3,065,711		3,041,472
Debt securities - amortized cost	$	3,034,865		2,978,392
Fair value as a percentage of amortized cost		101.02	%	102.12	%
Unrealized gains (losses) at quarter-end	$	30,846		63,080
Ten-year U.S. Treasury bond - increase (decrease)
in yield for the quarter		0.3	%	(0.6)	%

		Unrealized Gains (Losses)
		At	At	Unrealized
		March 31,	December 31,	Losses
		2002	2001	During 2002
		(In thousands)
Debt securities held to maturity	$	45,885	69,440	(23,555)
Debt securities available for sale		(15,039)	(6,360)	(8,679)
Totals	$	30,846	63,080	(32,234)

Changes in interest rates typically have a significant impact on the fair values of the Company's debt securities. Market interest rates of the ten-year U.S. Treasury bond increased approximately 30 basis points from year-end 2001 causing an unrealized loss of $32.2 million on a portfolio of approximately $3 billion. The Company would expect similar results in the future from any significant upward or downward movement in market rates. However, since the majority of the Company's debt securities are classified as held to maturity, which are recorded at amortized cost, changes in fair values have relatively small effects on the Company's 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 li kely be different from actual changes experienced, and the differences could be significant.

The Company performed detailed sensitivity analysis at December 31, 2001, for its interest rate-sensitive assets and liabilities. Based on the recent change in market conditions in the first quarter of 2002, the changes in market values of the Company's debt securities 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 $60 million on its bank line of credit for short-term cash needs.

A primary liquidity concern 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. Cash flow projections and cash flow 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 adequate to meet the demand for funds.

In the past, cash flows from the Company's insurance operations have been more than adequate to meet current needs. Cash flows from operating activities were $47 million and $44 million for the three months ended March 31, 2002 and 2001, respectively. The Company also has significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments. These cash flows totaled $58 million and $17 million for the three months ended March 31, 2002 and 2001, respectively. The Company expects cash flows from these sources in the remainder of 2002 at levels consistent with the past year.

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. There are also no current or anticipated material commitments for capital expenditures in 2002.


CHANGES IN ACCOUNTING PRINCIPLES AND CRITICAL ACCOUNTING POLICIES

Change in Accounting Principles

Derivative Instruments:Refer to Note 5 of the Notes to Condensed Consolidated Financial Statements.

Critical Accounting Policies

Future Policy Benefits:Because of the long-term nature of insurance contracts, the Company is liable for policy benefit payments many years into the future. The liability for future policy benefits represents estimates of the present value of the Company's expected benefit payments, net of the related present value of future net premium collections. For traditional life insurance contracts, this is determined by standard actuarial procedures, using assumptions as to mortality (life expectancy), morbidity (health expectancy), persistency, and interest rates, which are based on the Company's experience with similar products. The assumptions used are those considered to be appropriate at the time the policies are issued. An additional provision is made on most products to allow for possible adverse deviation from the assumptions used. For universal life, investment annuity and equity-indexed annuity products, the Company's liability is the amount of the contract's account balance. Account bala nces 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. Additionally, significantly different assumptions could result in materially different reported amounts.

Deferred Acquisition Costs: The Company is required to defer certain policy acquisition costs and amortize them over future periods. Deferred acquisition costs are 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 deferred acquisition cost balance. The present value of these cash flows, less the benefit reserve, is compared with the unamortized deferred acquisition cost balance and if the asset balance is greater, the deficiency is charged to expense as a component of amortization and the asset balance is reduced to the recoverable amount.

Revenue Recognition:Premium income for the Company's traditional life insurance contracts is generally recognized as the premium becomes due. Revenue on universal life and annuity contracts (deposit balance products) are recognized differently. Premiums on deposit balance products are added to the policy account value as the Company's liability. This deposit balance is then charged a fee for the cost of insurance, administration, surrender, and certain other charges which are recognized as revenue in the period the fees are charged to the policyholder. Benefits and expenses are matched against revenues in a manner by which they are incurred as the revenues are earned.

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 invest ment yield.


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). Insurance companies were required to adopt new statutory accounting practices promulgated by the NAIC in 2001 which resulted in changes to existing practices used in the preparation of statutory financial statements, and in the case of National Western increased statutory capital and surplus by approximately $3.9 million as of January 1, 2001. 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 other 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 th reshold RBC requirements.

Disclosure Matters

The events of 2001 have called into question company activities and transactions which are not regularly disclosed in an SEC registrant's Annual Report and are not readily apparent from the financial statements. These include the use of unconsolidated entities, off-balance sheet arrangements and other transactions not conducted at arm's-length. The Company's consolidated financial statements include all subsidiaries and related operations and the Company does not utilize relationships with unconsolidated entities that facilitate the transfer of or access to assets such as "structured finance" or "special purpose" entities. Accordingly, the Company does not rely on off-balance sheet arrangements for financing, liquidity, or market or credit risk support which would expose the Company to liabilities not reflected on the face of its consolidated financial statements.


FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information contained herein or in other written or oral statements made by or on behalf of National Western Life Insurance Company or its subsidiaries are or may be viewed as forward-looking. Although the Company has 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 SEC filings such as exposure to market risks, anticipated cash flows or operating performance, future capital needs, and statutory or regulatory related issues. However, National Western, as a matter of policy, does not make any specific projections as to future earnings, nor does it endorse any projections regarding future performance that may be made by others. Whether or not actual results differ materially from forward-looking statements may depend on numerous foreseeable and unforeseeable events or developments. Also, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future developments, or otherwise.

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.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is currently a defendant in several lawsuits, substantially all of which are in the normal course of business. In the opinion of management, the liability, if any, which may arise from these lawsuits would not have a material adverse effect on the Company's financial position, results of operations or cash flows.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

Exhibit 11 - Computation of Earnings Per Share (filed on page __ of this report).

(b) Reports on Form 8-K

No reports on Form 8-K were filed during the quarter ended March 31, 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:  May 13, 2002	/S/ Ross R. Moody
	Ross R. Moody
	President, Chief Operating Officer,
	and Director
	(Authorized Officer)
Date:  May 13, 2002	/S/ Brian M. Pribyl
	Brian M. Pribyl
	Senior Vice President -
	Chief Financial & Administrative Officer,
	and Treasurer
	(Principal Financial Officer)
Date:  May 13, 2002	/S/ Larry E. Carson
	Larry E. Carson
	Assistant Vice President -
	Assistant Controller
	(Principal Accounting Officer)