-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RgtQMNZn9LD7pW3uYq6DAl/VrJc2ObTttXLYlwfAWhaqUtMxj0RDDqHbLGrZD9DZ m08wosUu0osQJ6/vrxojkw== 0000950124-99-002245.txt : 19990402 0000950124-99-002245.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950124-99-002245 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTHWESTERN MUTUAL LIFE INSURANCE CO CENTRAL INDEX KEY: 0000073076 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 390509570 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 002-64683 FILM NUMBER: 99580953 BUSINESS ADDRESS: STREET 1: 720 E WISCONSIN AVENUE CITY: MILWAUKEE STATE: WI ZIP: 53202 BUSINESS PHONE: 4142711444 MAIL ADDRESS: STREET 1: 720 EAST WISCONSIN AVENUE CITY: MILWAUKEE STATE: WI ZIP: 53202 10-K405 1 FORM 10-K405 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 ----------------- Commission file numbers 333-2245 and 2-89905. -------------------- THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY in respect of NML Variable Annuity Account A & NML Variable Annuity Account C ----------------------------------------------------------------------------- (Exact name of Registrant as specified in its Charter) Wisconsin 39-0509570 ------------------------------ ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 720 East Wisconsin Avenue Milwaukee, Wisconsin 53202 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 414/271-1444 --------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ------------------- ------------------------ None None ---- ---- Securities registered pursuant to Section 12(g) of the Act: None ---- 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 . ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-K or any amendment to this Form 10-K. X ----- State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of a specified date within the past 60 days. Not Applicable -------------- Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. None ---- DOCUMENTS INCORPORATED BY REFERENCE None ---- This Form 10-K report contains 66 pages. The Exhibit Index is located on page 62. 2 The Northwestern Mutual Life Insurance Company Form 10-K PART I Item 1. Business Founded in 1857, The Northwestern Mutual Life Insurance Company ("Northwestern Mutual") is a mutual insurance company organized under the laws of the State of Wisconsin. Northwestern Mutual's products consist of a complete range of permanent and term life insurance, disability income insurance, long-term care insurance, mutual funds and annuities for personal, estate, retirement, business and benefits planning. Northwestern Mutual markets its insurance products and services in all 50 states of the United States and in the District of Columbia through an exclusive network of approximately 7,400 agents at December 31, 1998 associated with over 100 general agencies. At December 31, 1998, Northwestern Mutual had approximately 3,700 full and part-time employees. Northwestern Mutual's three principal lines of business are: (i) life insurance, which provides a full range of individual life insurance products, including traditional whole life, CompLife, variable life and term policies to meet the needs of middle to upper income individuals, small business owners and professionals, estates and selected large corporations; (ii) disability income insurance, which provides a complete line of individual and group products, including individual non-cancelable, guaranteed renewable loss of earnings, buyout, key person, and short and long-term group coverages, marketed primarily to middle to upper income individuals, professionals, and small- to medium-sized businesses and their owners; and (iii) annuity and accumulation products, which provide individual variable, fixed and immediate annuities offered in conjunction with qualified pension plans, retirement plans for self employed individuals, individual retirement and personal non-tax qualified situations, group annuities and a family of retail mutual funds known as Mason Street Funds, marketed primarily to middle to upper income individuals, small business owners and professionals. A new business line for Northwestern Mutual, long-term care insurance, commenced in August 1998 with the introduction of its QuietCare product. For the years ended December 31, 1998, 1997 and 1996, Northwestern Mutual had total premiums, including annuity considerations and deposit funds, of $8.0 billion, $7.3 billion, and $6.7 billion, respectively, of which $6.5 billion, $5.9 billion and $5.3 billion, respectively, was attributable to life insurance, $0.5 billion, $0.5 billion and $0.5 billion, respectively, was attributable to disability income insurance and $1.0 billion, $0.9 billion and $0.9 billion, respectively, was attributable to annuity and accumulation products. The life insurance industry is mature and highly competitive. Competitiveness in the life insurance business is affected by various factors including, but not limited to, product quality, financial strength and stability, claims-paying ratings, size and competence of agency force, range of product lines, customer service, and reputation. At the end of 1998, there were more than 1,500 life insurance companies in the United States and many of these companies offer individual life insurance and annuity products similar to those offered by Northwestern Mutual. In addition, Northwestern Mutual competes with banks, brokerage firms, investment advisers, mutual funds and other financial entities for investment and savings customers. In the individual and group disability markets, Northwestern Mutual competes with a limited number of major national and regional companies offering these specialized products. National banks, with their pre-existing customer bases for financial services products, may pose increasing competition in the future to insurers who sell life insurance and annuity products, including Northwestern Mutual. Recent United States Supreme Court decisions have expanded the authority of national banks to sell life insurance products and annuities. From time to time, legislative proposals, including repeal or modification of the Glass-Steagall Act or the Bank Holding Company Act, which would allow banks to diversify into other businesses, including insurance, are put forth. Such proposals, if enacted, could increase the competition Northwestern Mutual will face. Northwestern Mutual is licensed to transact its insurance business in, and is subject to regulation and supervision by, all 50 states of the United States and the District of Columbia. Northwestern Long Term Care Insurance Company, Northwestern's only insurance subsidiary, is authorized and regulated in all jurisdictions in which it conducts its long-term care business. The extent of such regulation varies, but most jurisdictions have laws and regulations governing the financial aspects of insurance companies, including standards of solvency, reserves, reinsurance, capital adequacy and the business conduct of insurance 2 3 The Northwestern Mutual Life Insurance Company Form 10-K companies. In addition, statutes and regulations usually require the licensing of insurers and their agents, the approval of policy forms and related materials and, for certain lines of insurance, the approval of rates. Such statutes and regulations also prescribe the permitted types and concentration of investments. Robert W. Baird & Co. Incorporated ("Baird"), a subsidiary of Northwestern Mutual, is one of the nation's largest regional investment banking firms based on dollar volume of underwritings, amount of equity capital, and the number of investment officers and branch offices. Baird, a member of the New York Stock Exchange, Inc., provides broker-dealer, asset management, equity research, investment banking, merchant banking and public finance services for individuals, corporations, municipalities and institutional investors. On January 1, 1999, Northwestern Mutual acquired all the outstanding common stock of Frank Russell Company ("Frank Russell"). Founded in 1936, Frank Russell is a leading investment management and consulting firm, providing investment advice, analytical tools and funds to institutional and individual investors in more than 30 countries. Through its subsidiaries, at December 31, 1998, Frank Russell managed approximately $45 billion in assets. Frank Russell is also well known for its family of market indices, including the Russell 2000, which provide complete sets of performance benchmarks for investors in Australia, Canada, Japan and the United States. This Annual Report on Form 10-K of Northwestern Mutual is filed with respect to its NML Variable Annuity Account A and NML Variable Annuity Account C. These Variable Annuity Accounts are segregated asset accounts of Northwestern Mutual used to fund variable annuity contracts for HR-10 and corporate pension and profit-sharing plans which qualify for special tax treatment under the Internal Revenue Code. While certain information in this Form 10-K relates to Northwestern Mutual as a whole, this Form 10-K is intended to provide information with respect to such Variable Annuity Accounts where relevant. Item 2. Properties Northwestern Mutual owns and occupies all of the space in its home office complex in Milwaukee, Wisconsin. Northwestern Mutual is the lessee of ten leases covering its real estate regional offices in locations throughout the United States. Item 3 is on page 4. 3 4 The Northwestern Mutual Life Insurance Company Form 10-K Item 3. Legal Proceedings Northwestern Mutual is engaged in litigation of various kinds, which in its judgment is not material in relation to its total assets. The litigation includes various administrative or judicial proceedings, relating to investments of Northwestern Mutual, arising under Federal, State or local provisions that have been enacted or adopted regulating the discharge of materials into the environment or primarily for the purpose of protecting the environment. Northwestern Mutual believes that these proceedings, singly and in the aggregate, are not material. In addition, NML Variable Annuity Accounts A and C are not engaged in any litigation which is considered material to their total assets. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. As a mutual life insurance company, Northwestern Mutual has no shareholders. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters Not applicable. As a mutual life insurance company, Northwestern Mutual has no common equity securities. Item 6 is on page 5. 4 5 The Northwestern Mutual Life Insurance Company Form 10K Item 6. Selected Financial Data
Results of Operations for NML Variable Annuity Account A for each of the five years ending December 31, follows: 1998 1997 1996 1995 1994 ----------- ----------- ----------- ------------ ----------- Investment Income Dividend Income from Northwestern Mutual Series Fund, Inc. Aggressive Growth Stock Portfolio... $ 3,294,065 $ 5,046,819 $ 2,456,762 $ 256,787 $ 248,438 Dividend Income from Northwestern Mutual Series Fund, Inc. International Equity Portfolio...... 2,854,899 1,627,765 1,820,972 217,966 853,704 Dividend Income from Northwestern Mutual Series Fund, Inc. Growth Stock Portfolio.............. 460,727 769,950 379,453 128,854 18,971 ## Dividend Income from Northwestern Mutual Series Fund, Inc. Growth and Income Stock Portfolio... 294,097 5,154,785 1,206,606 465,091 53,075 ## Dividend Income from Northwestern Mutual Series Fund, Inc. Index 500 Stock Portfolio................. 4,267,429 3,229,605 1,906,168 522,842 2,155,181 Dividend Income from Northwestern Mutual Series Fund, Inc. Balanced Portfolio.................. 19,089,250 13,244,993 14,325,426 8,146,698 33,071,685 Dividend Income from Northwestern Mutual Series Fund, Inc. High Yield Bond Portfolio................ 951,201 1,418,106 473,729 199,805 68,840 ## Dividend Income from Northwestern Mutual Series Fund, Inc. Select Bond Portfolio............... 1,767,739 1,556,695 906,892 652,667 2,990,731 Dividend Income from Northwestern Mutual Series Fund, Inc. Money Market Portfolio.................... 1,254,017 1,203,410 1,024,534 1,119,254 708,559 Dividend Income from Northwestern Mutual Capital Appreciation Stock Fund, Inc........ NA NA NA NA NA ----------- ----------- ----------- ------------ ----------- Total Income........................ 34,233,424 33,252,128 24,500,542 11,709,964 40,169,184 Annuity Rate and Expense Guarantees... 8,068,866 7,048,888 5,783,739 5,072,064 4,466,142 ----------- ----------- ----------- ------------ ----------- Net Investment Income................. $26,164,558 $26,203,240 $18,716,803 $ 6,637,900 $35,703,042 =========== =========== =========== ============ =========== Realized and Unrealized Gain (Loss) on Investments Realized Gain on Investments.......... $37,627,804 $23,135,675 $13,967,988 $13,141,169 $ 1,687,702 Unrealized Appreciation ( Depreciation) of Investments During the Year..................... 36,249,405 56,364,111 33,051,905 76,916,515 (39,969,923) ------------ ------------ ------------ ------------ ------------ Net Gain (Loss) on Investments........ $73,877,209 $79,499,786 $47,019,893 $90,057,684 ($38,282,221) =========== =========== =========== =========== ===========
## Commenced operations on May 3, 1994. See Notes to Financial Statements on pages 23-24. 5 6 The Northwestern Mutual Life Insurance Company Form 10K Item 6. (continued)
Changes in Equity for NML Variable Annuity Account A for each of the five years ending December 31, follows: 1998 1997 1996 1995 1994 ------------- ------------- ------------- ------------- ------------- From Investment Activities Net Investment Income $ 26,164,558 $ 26,203,240 $ 18,716,803 $ 6,637,900 $ 35,703,042 Net Realized Gain on Investments 37,627,804 23,135,675 13,967,988 13,141,169 1,687,702 Net Change in Unrealized Appreciation (Depreciation) of Investments 36,249,405 56,364,111 33,051,905 76,916,515 (39,969,923) ------------- ------------- ------------- ------------- ------------- Increase (Decrease) in Equity Derived from Investment Activities 100,041,767 105,703,026 65,736,696 96,695,584 (2,579,179) ------------- ------------- ------------- ------------- ------------- From Equity Transactions Contract Owners' Net Payments 62,320,941 61,964,558 65,169,358 49,124,853 52,262,816 Annuity Payments (1,305,331) (1,046,956) (830,996) (610,983) (603,158) Surrenders and Other (Net) (83,817,967) (65,746,579) (52,376,445) (62,309,189) (33,008,630) ------------- ------------- ------------- ------------- ------------- Increase (Decrease) in Equity Derived from Equity Transactions (22,802,357) (4,828,977) 11,961,917 (13,795,319) 18,651,028 ------------- ------------- ------------- ------------- ------------- Net Increase (Decrease) in Equity 77,239,410 100,874,049 77,698,613 82,900,265 16,071,849 Equity, Beginning of Year 648,394,089 547,520,040 469,821,427 386,921,162 370,849,313 ------------- ------------- ------------- ------------- ------------- Equity, End of Year $ 725,633,499 $ 648,394,089 $ 547,520,040 $ 469,821,427 $ 386,921,162 ============= ============= ============= ============= =============
See Notes to Financial Statements on pages 23-24. 6 7 The Northwestern Mutual Life Insurance Company Form 10K Item 6. (continued)
Total Assets of NML Variable Annuity Account A at December 31, follows: 1998 1997 1996 1995 1994 ----------- ------------ ------------ ------------ -------- Assets Investments at Market Value: Northwestern Mutual Series Fund, Inc. Aggressive Growth Stock Portfolio .................... $ 87,973,307 $ 89,428,723 $ 78,087,972 $ 56,491,009 $ 36,256,480 Northwestern Mutual Series Fund, Inc. International Equity Portfolio .................... 44,994,454 50,148,435 41,497,787 31,789,148 28,832,978 Northwestern Mutual Series Fund, Inc. Growth Stock Portfolio .. 26,774,398 17,260,514 9,523,179 4,284,669 1,397,703 ## Northwestern Mutual Series Fund, Inc. Growth and Income Stock Portfolio .................... 36,439,779 23,575,574 13,199,558 7,891,655 3,282,764 ## Northwestern Mutual Series Fund, Inc. Index 500 Stock Portfolio .................... 143,375,448 111,140,823 80,917,025 62,391,687 43,545,408 Northwestern Mutual Series Fund, Inc. Balanced Portfolio ...... 325,287,406 302,749,909 270,745,111 257,867,967 230,871,659 Northwestern Mutual Series Fund, Inc. High Yield Bond Portfolio .................... 9,287,355 8,743,385 4,907,490 2,060,076 1,242,382 ## Northwestern Mutual Series Fund, Inc. Select Bond Portfolio .................... 25,969,869 25,252,973 26,648,961 25,742,752 22,258,901 Northwestern Mutual Series Fund, Inc. Money Market Portfolio .. 26,910,774 21,586,115 23,380,205 21,556,895 20,120,832 Due from NML Insurance Company .......... 22,305 322,747 123,152 491,572 179,152 Due from Sale of Fund Shares ............ 1,407,778 1,555,441 387,086 78,037 319,392 ------------ ------------ ------------ ------------ ------------ Total Assets ................. $728,442,873 $651,764,639 $549,417,526 $470,645,467 $388,307,651 ============ ============ ============ ============ ============
## Commenced operations on May 3, 1994. See Notes to Financial Statements on pages 23-24. 7 8 The Northwestern Mutual Life Insurance Company Form 10K Item 6. (continued) Results of Operations for NML Variable Annuity Account C for each of the five years ending December 31, follows:
1998 1997 1996 1995 1994 ----------- ----------- ----------- ----------- ------------ Investment Income Dividend Income from Northwestern Mutual Series Fund, Inc. ........ Aggressive Growth Stock Portfolio $ 4,152,153 $ 6,049,655 $ 2,574,462 $ 242,583 $ 232,345 Dividend Income from Northwestern Mutual Series Fund, Inc. ........ International Equity Portfolio .. 3,732,935 1,945,549 1,805,160 190,138 703,931 Dividend Income from Northwestern Mutual Series Fund, Inc. ........ Growth Stock Portfolio .......... 447,543 712,380 366,920 59,271 4,518 ## Dividend Income from Northwestern Mutual Series Fund, Inc. ........ Growth and Income Stock Portfolio 343,472 5,940,640 1,146,200 276,923 19,233 ## Dividend Income from Northwestern Mutual Series Fund, Inc. ........ Index 500 Stock Portfolio ....... 5,270,794 3,755,769 2,082,261 544,553 2,226,240 Dividend Income from Northwestern Mutual Series Fund, Inc. ........ Balanced Portfolio .............. 9,908,961 6,460,653 7,534,370 4,212,478 17,046,665 Dividend Income from Northwestern Mutual Series Fund, Inc. High Yield Bond Portfolio ............ 883,190 1,028,027 309,003 55,220 11,456 ## Dividend Income from Northwestern Mutual Series Fund, Inc. ........ Select Bond Portfolio ........... 1,357,040 1,057,558 566,451 395,357 1,874,182 Dividend Income from Northwestern Mutual Series Fund, Inc. ........ Money Market Portfolio .......... 899,183 738,932 609,543 494,253 443,639 Dividend Income from Northwestern Mutual Capital Appreciation Stock Fund, Inc. ................ NA NA NA NA NA ----------- ----------- ----------- ---------- ----------- Total Income ......... 26,995,271 27,689,163 16,994,370 6,470,776 22,562,209 Annuity Rate and Expense Guarantees 3,154,686 2,501,975 1,738,625 856,764 509,648 ----------- ----------- ----------- ---------- ----------- Net Investment Income ............. $23,840,585 $25,187,188 $15,255,745 $5,614,012 $22,052,561 =========== =========== =========== ========== =========== Realized and Unrealized Gain (Loss) on Investments Realized Gain on Investments ........... $29,250,486 $18,686,284 $ 8,855,390 $ 9,884,364 $ 5,949,795 Unrealized Appreciation (Depreciation) of Investments During the Year ...................... 37,105,560 44,241,434 29,832,124 53,407,857 (27,055,878) ----------- ----------- ----------- ----------- ------------ Net Gain (Loss) on Investments.......... $66,356,046 $62,927,718 $38,687,514 $63,292,221 $(21,106,083) =========== =========== =========== =========== ============
## Commenced operations on May 3, 1994. Notes to Financial Statements on pages 32-33. 8 9 The Northwestern Mutual Life Insurance Company Form 10K Item 6. (continued)
Changes in Equity for NML Variable Annuity Account C for each of the five years ending December 31, follows: 1998 1997 1996 1995 1994 ------------- ------------- ------------- -------------- ------------- From Investment Activities Net Investment Income ................. $ 23,840,585 $ 25,187,188 $ 15,255,745 $ 5,614,012 $ 22,052,561 Net Realized Gain (Loss) on Investments ......................... 29,250,486 18,686,284 8,855,390 9,884,364 5,949,795 Net Change in Unrealized Appreciation (Depreciation) of Investments ....... 37,105,561 44,241,434 29,832,124 53,407,857 (27,055,878) ------------- ------------- ------------- ------------- ------------- Increase in Equity Derived from Investment Activities.. 90,196,632 88,114,906 53,943,259 68,906,233 946,478 ------------- ------------- ------------- ------------- ------------- From Equity Transactions Contract Owners' Net Payments ......... 93,658,882 91,195,224 89,650,916 59,390,267 48,709,729 Surrenders and Other (Net) ............ (86,757,540) (57,974,180) (34,747,640) 60,872,729 (26,720,946) ------------- ------------- ------------- ------------- ------------- Increase in Equity Derived from Equity Transactions ... 6,901,342 33,221,044 54,903,276 (1,482,462) 21,988,783 ------------- ------------- ------------- ------------- ------------- Net Increase in Equity ..................... 97,097,974 121,335,950 108,846,535 67,423,771 22,935,261 Equity, Beginning of Year .................. 547,988,523 426,652,573 317,806,038 250,382,267 227,447,006 ------------- ------------- ------------- ------------- ------------- Equity, End of Year ........................ $ 645,086,497 $ 547,988,523 $ 426,652,573 $ 317,806,038 $ 250,382,267 ============= ============= ============= ============= =============
See Notes to Financial Statements on pages 32-33. 9 10 The Northwestern Mutual Life Insurance Company Form 10K Item 6. (continued)
Total Assets of NML Variable Annuity Account C at December 31, follows: 1998 1997 1996 1995 1994 ------------- ------------- ------------- ------------- ------------- Assets Investments at Market Value: Northwestern Mutual Series Fund, Inc. Aggressive Growth Stock Portfolio .................... $ 112,355,230 $ 111,586,520 $ 95,276,983 $ 57,421,016 $ 33,266,862 Northwestern Mutual Series Fund, Inc. International Equity Portfolio .................... 59,264,930 63,877,146 49,461,520 30,039,223 24,647,586 Northwestern Mutual Series Fund, Inc. Growth Stock Portfolio .. 27,819,393 15,850,257 9,734,427 2,084,697 329,792 ## Northwestern Mutual Series Fund, Inc. Growth and Income Stock Portfolio .................... 40,353,938 27,484,626 13,034,961 4,888,505 1,159,187 ## Northwestern Mutual Series Fund, Inc. Index 500 Stock Portfolio 183,326,114 133,927,705 93,249,123 64,560,752 45,552,429 Northwestern Mutual Series Fund, Inc. Balanced Portfolio ...... 172,971,811 153,733,599 131,324,909 132,469,239 119,452,506 Northwestern Mutual Series Fund, Inc. High Yield Bond Portfolio 8,611,383 6,568,438 2,983,258 736,774 201,656 ## Northwestern Mutual Series Fund, Inc. Select Bond Portfolio ... 20,754,940 18,059,926 17,803,016 16,281,140 14,262,125 Northwestern Mutual Series Fund, Inc. Money Market Portfolio .. 19,628,758 16,900,306 13,784,374 9,324,692 11,510,121 Due from NML Insurance Company ...... 355,553 196,511 1,662,368 808,493 279,107 Due from Sale of Fund Shares ........ 495,042 2,927,350 52,909 36 79,226 ------------- ------------- ------------- ------------- ------------- Total Assets ...... $ 645,937,092 $ 551,112,384 $ 428,367,848 $ 318,614,567 $ 250,740,600 ============ ============= ============= ============= =============
## Commenced operations on May 3, 1994. See Notes to Financial Statements on pages 32-33. Item 7 is on page 11. 10 11 The Northwestern Mutual Life Insurance Company Form 10-K Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity The assets of the NML Variable Annuity Accounts A and C are invested solely in shares of Northwestern Mutual Series Fund, Inc. (the "Fund") Index 500 Stock Portfolio, Aggressive Growth Stock Portfolio, International Equity Portfolio, Select Bond Portfolio, Growth and Income Stock Portfolio, High Yield Bond Portfolio, Growth Stock Portfolio, Balanced Portfolio and the Money Market Portfolio. The Fund is an open-end investment company registered under the Investment Company Act of 1940. In order to pay annuity benefits and expenses, the Accounts redeem shares in the Fund. Capital Resources All payments from contract owners of NML Variable Annuity Accounts A and C are invested in shares of the Fund. The capital resources of NML Variable Annuity Accounts A and C are the equity in the respective Accounts. This consists of payments from the contract owners, plus unrealized and realized appreciation on the investment of these payments, plus investment income received from the Fund, minus payment of annuity benefits and expenses. Results of Operations NML Variable Annuity Account A
Accumulation Unit Values Contracts Issued Prior to December 17, 1981: Division 12/31/98 % Change 12/31/97 % of Change 12/31/96 Aggressive Growth Stock.... $3.964849 6.75% $3.714008 13.02% $3.286265 International Equity.......... 1.947470 4.04 1.871861 11.44 1.679665 Growth Stock.... 2.549324 25.75 2.027359 28.89 1.572985 Growth and Income Stock.... 2.437983 22.22 1.994748 29.06 1.545596 Index 500 Stock. 4.202480 27.76 3.289255 32.21 2.487952 Balanced........ 7.372322 17.99 6.248153 20.61 5.180408 High Yield Bond. 1.582307 -2.57 1.624115 14.99 1.412413 Select Bond..... 7.718724 6.27 7.263164 8.65 6.685035 Money Market.... 2.646458 4.64 2.529098 4.69 2.415898
11 12 The Northwestern Mutual Life Insurance Company Form 10K Item 7. (continued)
Accumulation Unit Values Contracts Issued on or After December 17, 1981 and Prior to March 31, 1995: Division 12/31/98 % Change 12/31/97 % of Change 12/31/96 Aggressive Growth Stock..... $3.808330 6.22% $3.585281 12.45% $3.188266 International Equity........... 1.893030 3.52 1.828649 10.89 1.649102 Growth Stock..... 2.490522 25.12 1.990509 28.24 1.552125 Growth and Income Stock..... 2.381813 21.61 1.958555 28.42 1.525144 Index 500 Stock.. 4.036666 27.13 3.175298 31.55 2.413788 Balanced......... 6.771353 17.40 5.767570 20.01 4.805896 High Yield Bond.. 1.545816 -3.06 1.594619 14.42 1.393713 Select Bond...... 7.088069 5.74 6.703164 8.11 6.200523 Money Market..... 2.430915 4.12 2.334748 4.16 2.241420 Accumulation Unit Values Contracts Issued On or After March 31, 1995: Front Load Version Division 12/31/98 % Change 12/31/97 % of Change 12/31/96 Aggressive Growth Stock...... $1.858751 7.12% $1.735135 13.41% $1.529999 International Equity............ 1.604722 4.40 1.537080 11.83 1.374484 Growth Stock...... 2.375383 26.18 1.882500 29.33 1.455537 Growth and Income Stock............. 2.270962 22.64 1.851666 29.51 1.429760 Index 500 Stock... 2.597374 28.21 2.025922 32.67 1.527085 Balanced.......... 1.912247 18.40 1.615054 21.03 1.334426 High Yield Bond... 1.495835 -2.24 1.530051 15.39 1.326020 Select Bond....... 1.350384 6.64 1.266282 9.03 1.161454 Money Market...... 1.203067 5.01 1.145720 5.05 1.090643
12 13 The Northwestern Mutual Life Insurance Company Form 10K Item 7. (continued)
Accumulation Unit Values Contracts Issued On or After March 31, 1995: Back Load Version Division 12/31/98 % Change 12/31/97 % of Change 12/31/96 Aggressive Growth Stock...... $3.808330 6.22% $3.585281 12.45% $3.188266 International Equity............ 1.893030 3.52 1.828649 10.89 1.649102 Growth Stock...... 2.490522 25.12 1.990509 28.24 1.552125 Growth and Income Stock............. 2.381813 21.61 1.958555 28.42 1.525144 Index 500 Stock... 4.036666 27.13 3.175298 31.55 2.413788 Balanced.......... 6.771353 17.40 5.767570 20.01 4.805896 High Yield Bond... 1.545816 -3.06 1.594619 14.42 1.393713 Select Bond....... 7.088069 5.74 6.703164 8.11 6.200523 Money Market...... 2.430915 4.12 2.334748 4.16 2.241420 Equity: 12/31/98 12/31/97 12/31/96 -------- -------- -------- $725,633,499 $648,394,089 $547,520,040 The change in these amounts is largely derived from investment activities within the Account: A $100,041,767 increase for the year ended December 31, 1998, a $105,703,026 increase for the year ended December 31, 1997, and a $65,736,696 increase for the year ended December 31, 1996. Net contributions (surrenders) from contract owners amounted to $(22,802,357) for the year ended December 31, 1998, ($4,828,977) for the year ended December 31, 1997, and $11,961,917 for the year ended December 31, 1996. NML Variable Annuity Account C Accumulation Unit Values Contracts Issued Prior to December 17, 1981 or between April 30, 1984 and December 31, 1991: Division 12/31/98 % Change 12/31/97 % of Change 12/31/96 Aggressive Growth Stock..... $39.854126 7.56% $37.054456 13.86% $32.542621 International Equity........... 2.031842 4.82 1.938399 12.28 1.726413 Growth Stock..... 26.398692 26.69 20.837268 29.85 16.046821 Growth and Income Stock..... 25.245888 23.14 20.502206 30.03 15.767435 Index 500 Stock.. 46.522428 28.72 36.141676 33.20 27.133645 Balanced......... 84.986573 18.88 71.490869 21.52 58.832423 High Yield Bond.. 16.385350 -1.84 16.692972 15.85 14.408967 Select Bond...... 89.873176 7.07 83.938645 9.46 76.681608 Money Market..... 28.923541 5.43 27.434762 5.47 26.011476
13 14 The Northwestern Mutual Life Insurance Company Form 10K Item 7. (continued)
Accumulation Unit Values Contracts Issued After December 16, 1981 and Prior to May 1, 1984: Division 12/31/98 % Change 12/31/97 % of Change 12/31/96 Aggressive Growth Stock..... $38.303948 7.02% $35.791674 13.30% $31.591115 International Equity........... 1.975051 4.30 1.893664 11.72 1.695019 Growth Stock..... 25.790044 26.06 20.458788 29.21 15.834243 Growth and Income Stock..... 24.663747 22.52 20.129770 29.38 15.558532 Index 500 Stock.. 44.708227 28.08 34.906216 32.54 26.337300 Balanced......... 78.082648 18.29 66.012286 20.91 54.595947 High Yield Bond.. 16.007423 -2.33 16.389706 15.27 14.218083 Select Bond...... 82.531570 6.54 77.468103 8.92 71.125132 Money Market..... 26.605346 4.90 25.362364 4.95 24.167111 Accumulation Unit Values Contracts Issued After December 31, 1991 - Front Load Version: Division 12/31/98 % Change 12/31/97 % of Change 12/31/96 Aggressive Growth Stock..... $2.511728 6.86% $2.350498 13.13% $2.077739 International Equity........... 1.958397 4.14 1.880500 11.55 1.685759 Growth Stock..... 2.561090 25.87 2.034708 29.01 1.577134 Growth and Income Stock..... 2.449237 22.34 2.001981 29.19 1.549666 Index 500 Stock.. 3.278539 27.89 2.563560 32.34 1.937139 Balanced......... 2.281157 18.11 1.931409 20.73 1.599774 High Yield Bond.. 1.589625 -2.48 1.630023 15.10 1.416152 Select Bond...... 1.585144 6.38 1.490112 8.75 1.370157 Money Market..... 1.308441 4.74 1.249188 4.79 1.192105
14 15 The Northwestern Mutual Life Insurance Company Form 10K Item 7. (continued)
Accumulation Unit Values Contracts Issued After December 31, 1991 - Simplified Load Version: Division 12/31/98 % Change 12/31/97 % of Change 12/31/96 Aggressive Growth Stock..... $3.822308 6.22% $3.598431 12.45% $3.199964 International Equity........... 1.893030 3.52 1.828649 10.89 1.649102 Growth Stock..... 2.490522 25.12 1.990509 28.24 1.552125 Growth and Income Stock..... 2.381813 21.61 1.958555 28.42 1.525144 Index 500 Stock.. 4.119000 27.13 3.240055 31.55 2.463008 Balanced......... 6.804809 17.40 5.796067 20.01 4.829655 High Yield Bond.. 1.545816 -3.06 1.594619 14.42 1.393713 Select Bond...... 7.157135 5.74 6.768475 8.11 6.260939 Money Market..... 2.436196 4.12 2.339812 4.16 2.246287 Equity: 12/31/98 12/31/97 12/31/96 -------- -------- -------- $645,086,497 $547,988,523 $426,652,573
These changes are largely derived from investment activities within the Account: A $90,196,631 increase for the year ended December 31, 1998, an $88,114,906 increase for the year ended December 31, 1997, and a $53,943,259 increase for the year ended December 31, 1996. Net contributions (surrenders) from contract owners amounted to $6,901,342 for the year ended December 31, 1998, $33,221,044 for the year ended December 31, 1997, and $54,903,276 for the year ended December 31, 1996. Year 2000 Issue Northwestern Mutual's state of readiness: Northwestern Mutual recognized the Year 2000 issue early and has been preparing since 1996 for the century change and the expected impact on computers and programs. Northwestern Mutual fully expects to be ready for January 1, 2000, the leap year, and other significant dates before they occur. Renovation and testing of operating and application systems had been completed by November 1998. Facilities and infrastructure assessment and renovation/replacement began in 1996, as well, and is complete. Year 2000 activity for the remainder of 1999 will be focused on detailing contingency plans and time warp testing of mission critical systems. Northwestern Mutual's internal auditors have conducted favorable Year 2000 audits. Important business partners for Northwestern Mutual reside prominently in two economic sectors, financial institutions and information technology vendors. Business partners were assessed and readiness disclosures requested from all critical vendors in 1998. Positive responses have been received from 62% of the critical vendors. Northwestern Mutual is in the process of following up with partners who have not responded to date. The costs to address the Northwestern Mutual's Year 2000 issues: The total cost for addressing all phases of Year 2000 issues is expected to be approximately $34.4 million spread over five years, 1996 through 2000. The amount incurred by the Information Systems Department through December 31, 1998, was approximately $20.1 million. The amount budgeted by Northwestern Mutual for 1999 is approximately $13.3 million, primarily earmarked for contingency plan implementation and time warp testing. The remaining $1.0 million would be expended in 2000 to address any remaining issues. 15 16 The Northwestern Mutual Life Insurance Company Form 10K Item 7. (continued) The risks of Northwestern Mutual's Year 2000 issues: Northwestern Mutual's operations rely heavily upon its computer software and hardware. Malfunctions in Northwestern Mutual's systems could lead to business delays and disruptions. Interruptions to electrical service and public perception are factors in Northwestern Mutual's preparations for Year 2000. Large electrical companies have provided substantial assurance for being prepared for Year 2000. There is only speculation about how the grid network will effect the supply of electricity. An apprehensive public may cause some policyowners to seek available cash before Year 2000. Markets may experience unusual behavior. Northwestern Mutual is prepared for these contingencies and believes that, while there is no absolute assurance due to inherent uncertainties associated with Year 2000, these matters will have no material impact on future operations. Northwestern Mutual's contingency plans: Contingency plans are being documented to minimize the potential impact on Northwestern Mutual's operations of an unforeseen failure of critical business systems. These plans include assuring policyowners about Northwestern Mutual's state of Year 2000 readiness, preparing for a potential pre- Year 2000 search for cash by policyowners, and emergency processes to maintain critical business functions and service to policyowners after January 1, 2000. Northwestern Mutual has contracted temporary electric generators to avoid inaccessibility to computer systems from any interruption of electrical service. The Year 2000 discussion above contains a number of forward-looking statements concerning plans, costs, risks and uncertainties facing Northwestern Mutual as a result of the Year 2000 Issue. The Year 2000 Issue has many elements and potential consequences, some of which may not be reasonably foreseeable, and there can be no assurance that every Year 2000 problem will be identified and addressed or that unforeseen consequences will not arise. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. The assets of NML Variable Annuity Account A and NML Variable Annuity Account C consist entirely of shares of the nine portfolios of the Fund, together with current amounts due from the sale of Fund shares and due from Northwestern Mutual. The liabilities of each Variable Annuity Account consist of current amounts due to participants, due to Northwestern Mutual and due on purchase of fund shares. Neither of the Variable Annuity Accounts enters into any market risk sensitive instruments, either for trading purposes or for purposes other than trading purposes. DERIVATIVE FINANCIAL INSTRUMENTS In the normal course of business, the Fund enters into transactions to reduce its exposure to fluctuations in interest rates, foreign currency exchange rates and market volatility. These hedging strategies include the use of forwards and futures. The Fund held the following positions for hedging purposes at December 31, 1998 and 1997:
Derivative Financial Instrument Notional Value Risks Reduced - ------------------------------- -------------- ------------- December 31, December 31, 1998 1997 ----------------- ----------------- Common Stock Futures $279,931,137 $124,340,532 Stock market price fluctuation. Bond Futures 6,002,781 77,675,938 Bond market price fluctuation.
The notional or contractual amounts of derivative financial instruments are used to denominate these types of transactions and do not represent the amounts exchanged between the parties. Stock futures are reported at fair value. Resulting gains and losses on these contracts are unrealized until expiration of the contract. Changes in the value of derivative investments are expected to offset gains and losses on the hedged investments. The effect of derivative instruments in 1998, 1997 was not material to the Fund's results of operations. Item 8 is on page 17. 16 17 The Northwestern Mutual Life Insurance Company Form 10-K Item 8. Financial Statements and Supplementary Data NML VARIABLE ANNUITY ACCOUNT A STATEMENT OF ASSETS AND LIABILITIES
December 31 ----------------------------------------- Assets 1998 1997 ------------- ------------- Investments at market value: Northwestern Mutual Series Fund, Inc. Aggressive Growth Stock 1998: 25,396,541 shares (cost $66,276,258)................. $ 87,973,307 1997: 26,799,138 shares (cost $63,803,191)................. $ 89,428,723 International Equity 1998: 26,830,324 shares (cost $38,805,844)................. 44,994,454 1997: 29,691,199 shares (cost $40,304,940)................. 50,148,435 Growth 8tock 1998: 11,915,620 shares (cost $20,533,350).................. 26,774,398 1997: 9,536,195 shares (cost $13,891,054).................. 17,260,514 Growth and Income Stock 1998: 22,438,287 shares (cost $31,395,228)................. 36,439,779 1997: 17,712,678 shares (cost $23,485,676)................. 23,575,574 Index 500 Stock 1998: 43,592,413 shares (cost $75,957,867)................. 143,375,448 1997: 42,035,107 shares (cost $62,642,616)................. 111,140,823 Balanced 1998: 146,262,322 shares (cost $214,781,294)............... 325,287,407 1997: 152,059,221 shares (cost $210,403,734)............... 302,749,909 High Yield Bond 1998: 9,922,388 shares (cost $10,685,890).................. 9,287,355 1997: 8,225,197 shares (cost $9,217,130)................... 8,743,385 Select Bond 1998: 20,792,528 shares (cost $24,420,052)................. 25,969,868 1997: 20,089,875 shares (cost $23,555,171)................. 25,252,973 Money Market 1998: 26,910,773 shares (cost $26,910,773)................. 26,910,774 1997: 21,586,115 shares (cost $21,586,115)................. 21,586,115 ------------- ------------- 727,012,790 649,886,451 Due from Sales of Fund Shares............................................ 1,407,778 1,555,441 Due from Northwestern Mutual Life Insurance Company...................... 22,304 322,747 ------------- ------------- Total Assets................................................ $ 728,442,872 $ 651,764,639 ============= ============= Liabilities Due to Participants...................................................... $ 1,374,691 $ 1,492,363 Due to Northwestern Mutual Life Insurance Company........................ 1,407,778 1,555,441 Due from Purchase of Fund Shares......................................... 26,904 322,747 ------------- ------------- Total Liabilities........................................... $ 2,809,373 $ 3,370,551 ============= =============
The Accompanying Notes are an Integral Part of the Financial Statements. 17 18 The Northwestern Mutual Life Insurance Company Form 10-K Item 8. (continued) NML VARIABLE ANNUITY ACCOUNT A STATEMENT OF ASSETS AND LIABILITIES
December 31 ----------------------------------------- Equity 1998 1997 ------------- ------------- Contracts Issued Prior to December 17, 1981: Aggressive Growth Stock Division 1998: 479,410 Accumulation Units @ 3.964849.................... $ 1,900,789 1997: 640,838 Accumulation Units @ 3.714008.................... $ 2,380,076 Annuity Reserves................................................ 63,360 71,827 ------------- ------------- 1,964,149 2,451,903 ------------- ------------- International Equity Division 1998: 647,766 Accumulation Units @ 1.947470.................... 1,261,505 1997: 1,297,660 Accumulation Units @ 1.871861.................. 2,429,039 Annuity Reserves................................................ 143,068 150,892 ------------- ------------- 1,404,573 2,579,931 Growth Stock Division 1998: 247,490 Accumulation Units @ 2.549324.................... 630,934 1997: 327,731 Accumulation Units @ 2.027359.................... 664,427 Annuity Reserves................................................ 0 0 ------------- ------------- 630,934 664,427 ------------- ------------- Growth and Income Stock Division 1998: 310,014 Accumulation Units @ 2.437983.................... 755,809 1997: 348,188 Accumulation Units @ 1.994748.................... 694,546 Annuity Reserves................................................ 0 0 ------------- ------------- 755,809 694,546 ------------- ------------- Index 500 Stock Division 1998: 7,343,356 Accumulation Units @ 4.202480.................. 30,860,310 1997: 8,175,537 Accumulation Units @ 3.289255.................. 26,891,427 Annuity Reserves................................................ 1,568,449 1,305,930 ------------- ------------- 32,428,759 28,197,357 ------------- ------------- Balanced Division 1998: 3,013,625 Accumulation Units @ 7.372322.................. 22,217,418 1997: 3,845,538 Accumulation Units @ 6.248153.................. 24,027,509 Annuity Reserves................................................ 2,367,898 1,640,281 ------------- ------------- 24,585,316 25,667,790 ------------- ------------- High Yield Bond Division 1998: 183,181 Accumulation Units @ 1.582307.................... 289,848 1997: 600,752 Accumulation Units @ 1.624115.................... 975,690 Annuity Reserves................................................ 0 0 ------------- ------------- 289,848 975,690 -------------- ------------- Select Bond Division 1998: 899,838 Accumulation Units @ 7.718724.................... 6,945,608 1997: 1,012,083 Accumulation Units @ 7.263164.................. 7,350,925 Annuity Reserves................................................ 102,541 273,840 ------------- ------------- 7,048,149 7,624,765 ------------- ------------- Money Market Division 1998: 1,723,331 Accumulation Units @ 2.646458.................. 4,560,725 1997: 893,452 Accumulation Units @ 2.529098.................... 2,259,628 Annuity Reserves................................................ 53,415 58,694 ------------- ------------- 4,614,140 2,318,322 ------------- -------------
The Accompanying Notes are an Integral Part of the Financial Statements. 18 19 The Northwestern Mutual Life Insurance Company Form 10-K Item 8. (continued) NML VARIABLE ANNUITY ACCOUNT A STATEMENT OF ASSETS AND LIABILITIES
December 31 ----------------------------------------- Equity (cont'd.) 1998 1997 ------------- ------------- Contracts Issued After December 16, 1981 and Prior to March 31, 1995: Aggressive Growth Stock Division 1998: 18,213,134 Accumulation Units @ 3.808330 $ 69,361,627 1997: 20,861,309 Accumulation Units @ 3.585281................. $ 74,793,655 Annuity Reserves................................................ 144,879 137,989 ------------- ------------- 69,506,506 74,931,644 ------------- ------------- International Equity Division 1998: 19,261,447 Accumulation Units @ 1.893030 36,462,499 1997: 22,910,908 Accumulation Units @ 1.828649................. 41,896,009 Annuity Reserves................................................ 214,477 174,073 ------------- ------------- 36,676,976 42,070,082 ------------- ------------- Growth Stock Division 1998: 7,215,893 Accumulation Units @ 2.490522.................. 17,971,343 1997: 6,045,075 Accumulation Units @ 1.990509.................. 12,032,777 Annuity Reserves................................................ 28,537 11,803 ------------- ------------- 17,999,880 12,044,580 ------------- ------------- Growth and Income Stock Division 1998: 10,866,892 Accumulation Units @ 2.381813................. 25,882,906 1997: 8,963,724 Accumulation Units @ 1.958555.................. 17,555,947 Annuity Reserves:............................................... 476,032 332,207 ------------- ------------- 26,358,938 17,888,154 ------------- ------------- Index 500 Stock Division 1998: 21,467,930 Accumulation Units @ 4.036666................. 86,658,865 1997: 21,531,879 Accumulation Units @ 3.175298................. 68,370,132 Annuity Reserves................................................ 2,980,558 2,462,112 ------------- ------------- 89,639,423 70,832,244 ------------- ------------- Balanced Division 1998: 40,487,925 Accumulation Units @ 6.771353................. 274,158,039 1997: 44,638,127 Accumulation Units @ 5.767570................. 257,453,521 Annuity Reserves................................................ 4,964,030 3,937,936 ------------- ------------- 279,122,069 261,391,457 ------------- ------------- High Yield Bond Division 1998: 3,974,655 Accumulation Units @ 1.545816.................. 6,144,087 1997: 3,770,055 Accumulation Units @ 1.594619.................. 6,011,801 Annuity Reserves................................................ 60,760 67,256 ------------- ------------- 6,204,847 6,079,057 ------------- ------------- Select Bond Division 1998: 2,171,878 Accumulation Units @ 7.088069.................. 15,394,427 1997: 2,252,704 Accumulation Units @ 6.703164.................. 15,100,242 Annuity Reserves................................................ 593,977 591,284 ------------- ------------- 15,988,404 15,691,526 ------------- ------------- Money Market Division 1998: 6,699,738 Accumulation Units @ 2.430915.................. 16,286,495 1997: 6,270,333 Accumulation Units @ 2.334748.................. 14,639,648 Annuity Reserves................................................ 444,677 454,275 ------------- ------------- 16,731,172 15,093,923 ------------- -------------
The Accompanying Notes are an Integral Part of the Financial Statements. 19 20 The Northwestern Mutual Life Insurance Company Form 10-K Item 8. (continued) NML VARIABLE ANNUITY ACCOUNT A STATEMENT OF ASSETS AND LIABILITIES
December 31 ----------------------------------------- Equity (cont'd.) 1998 1997 ------------- ------------- Contracts Issued On or After March 31, 1995 - Back Load Version: Aggressive Growth Stock Division 1998: 3,703,652 Accumulation Units @ 3.808330.................. $ 14,104,732 1997: 2,926,218 Accumulation Units @ 3.585281.................. $ 10,491,351 Annuity Reserves................................................ 27,177 27,274 ------------- ------------- 14,131,909 10,518,625 ------------- ------------- International Equity Division 1998: 3,028,502 Accumulation Units @ 1.893030.................. 5,733,046 1997: 2,488,184 Accumulation Units @ 1.828649.................. 4,550,016 Annuity Reserves................................................ 0 0 ------------- ------------- 5,733,046 4,550,016 ------------- ------------- Growth Stock Division 1998: 2,761,432 Accumulation Units @ 2.490522.................. 6,877,407 1997: 1,870,296 Accumulation Units @ 1.990509.................. 3,722,840 Annuity Reserves................................................ 31,578 26,907 ------------- ------------- 6,908,985 3,749,747 ------------- ------------- Growth and Income Stock Division 1998: 3,046,516 Accumulation Units @ 2.381813.................. 7,256,233 1997: 1,940,827 Accumulation Units @ 1.958555.................. 3,801,216 Annuity Reserves................................................ 30,040 26,336 ------------- ------------- 7,286,273 3,827,552 ------------- ------------- Index 500 Stock Division 1998: 4,504,321 Accumulation Units @ 4.036666.................. 18,182,442 1997: 3,279,176 Accumulation Units @ 3.175298.................. 10,412,362 Annuity Reserves................................................ 112,142 0 ------------- ------------- 18,294,584 10,412,362 ------------- ------------- Balanced Division 1998: 2,565,265 Accumulation Units @ 6.771353.................. 17,370,319 1997: 2,109,606 Accumulation Units @ 5.767570.................. 12,167,299 Annuity Reserves................................................ 257,473 219,112 ------------- ------------- 17,627,792 12,386,411 ------------- ------------- High Yield Bond Division 1998: 1,400,603 Accumulation Units @ 1.545816.................. 2,165,075 1997: 967,188 Accumulation Units @ 1.594619.................... 1,542,185 Annuity Reserves................................................ 0 0 ------------- ------------- 2,165,075 1,542,185 ------------- ------------- Select Bond Division 1998: 368,314 Accumulation Units @ 7.088069.................... 2,610,636 1997: 271,027 Accumulation Units @ 6.703164.................... 1,816,737 Annuity Reserves................................................ 0 0 ------------- ------------- 2,610,636 1,816,737 ------------- ------------- Money Market Division 1998: 1,515,127 Accumulation Units @ 2.430915.................. 3,683,147 1997: 1,081,227 Accumulation Units @ 2.334748.................. 2,524,393 Annuity Reserves................................................ 0 0 ------------- ------------- 3,683,147 2,524,393 ------------- -------------
The Accompanying Notes are an Integral Part of the Financial Statements. 20 21 The Northwestern Mutual Life Insurance Company Form 10-K Item 8. (continued) NML VARIABLE ANNUITY ACCOUNT A STATEMENT OF ASSETS AND LIABILITIES
December 31 ----------------------------------------- Equity (cont'd.) 1998 1997 ------------- ------------- Contracts Issued On or After March 31, 1995 - Front Load Version: Aggressive Growth Stock Division 1998: 1,195,051 Accumulation Units @ 1.858751.................. $ 2,221,302 1997: 832,513 Accumulation Units @ 1.735135.................... $ 1,444,522 Annuity Reserves................................................ 55,688 55,374 ------------- ------------- 2,276,990 1,499,896 ------------- ------------- International Equity Division 1998: 669,024 Accumulation Units @ 1.604722.................... 1,073,598 1997: 575,775 Accumulation Units @ 1.537080.................... 885,012 Annuity Reserves................................................ 23,666 24,148 ------------- ------------- 1,097,264 909,160 ------------- ------------- Growth Stock Division 1998: 447,934 Accumulation Units @ 2.375383.................... 1,064,015 1997: 422,029 Accumulation Units @ 1.882500.................... 794,469 Annuity Reserves................................................ 0 0 ------------- ------------- 1,064,015 794,469 ------------- ------------- Growth and Income Stock Division 1998: 736,836 Accumulation Units @ 2.270962.................... 1,673,327 1997: 540,977 Accumulation Units @ 1.851666.................... 1,001,708 Annuity Reserves................................................ 153,898 133,668 ------------- ------------- 1,827,225 1,135,376 ------------- ------------- Index 500 Stock Division 1998: 1,057,935 Accumulation Units @ 2.597374.................. 2,747,852 1997: 690,248 Accumulation Units @ 2.025922.................... 1,398,389 Annuity Reserves................................................ 65,122 54,108 ------------- ------------- 2,812,974 1,452,497 ------------- ------------- Balanced Division 1998: 1,768,956 Accumulation Units @ 1.912247.................. 3,382,680 1997: 1,296,330 Accumulation Units @ 1.615054.................. 2,093,642 Annuity Reserves................................................ 84,632 95,364 ------------- ------------- 3,467,312 2,189,006 ------------- ------------- High Yield Bond Division 1998: 400,132 Accumulation Units @ 1.495835.................... 598,531 1997: 95,718 Accumulation Units @ 1.530051..................... 146,453 Annuity Reserves................................................ 0 0 ------------- ------------- 598,531 146,453 ------------- ------------- Select Bond Division 1998: 159,609 Accumulation Units @ 1.350384.................... 215,534 1997: 72,941 Accumulation Units @ 1.266282..................... 92,364 Annuity Reserves................................................ 0 0 ------------- ------------- 215,534 92,364 ------------- ------------- Money Market Division 1998: 1,564,597 Accumulation Units @ 1.203067.................. 1,882,315 1997: 1,439,686 Accumulation Units @ 1.145720.................. 1,649,477 Annuity Reserves................................................ 0 0 ------------- ------------- 1,882,315 1,649,477 ------------- ------------- Total Equity................................................ $ 725,633,499 $ 648,394,124 ------------- ------------- Total Liabilities and Equity................................ $ 728,442,872 $ 651,764,675 ============= =============
The Accompanying Notes are an Integral Part of the Financial Statements. 21 22 The Northwestern Mutual Life Insurance Company Form 10-K Item 8. (continued) NML VARIABLE ANNUITY ACCOUNT A COMBINED STATEMENT OF OPERATIONS AND CHANGES IN EQUITY For the Years Ended December 31
1998 1997 1996 ------------- ------------- ------------- Investment Income Dividend Income.......................................................... $ 34,233,423 $ 33,252,128 $ 24,500,542 Annuity Rate and Expense Guarantees...................................... 8,068,865 7,048,888 5,783,739 ------------- ------------ ------------ Net Investment Income.................................................... 26,164,558 26,203,240 18,716,803 ------------ ------------ ------------ Realized and Unrealized Gain on Investments Net Unrealized Gain on Investments....................................... 37,627,804 23,135,675 13,967,988 Unrealized Appreciation (Depreciation) During the Year................... 36,249,405 56,364,111 33,051,905 ------------ ------------ ------------ Net Gain (Loss) on Investments........................................... 73,877,209 79,499,786 47,019,893 ------------ ------------ ------------ Increase (Decrease) in Equity Derived from Investment Activity................ 100,041,767 105,703,026 65,736,696 ------------ ------------ ------------ Equity Transactions Contract Owners' Net Payments............................................ 62,320,941 61,964,558 65,169,358 Annuity Payments......................................................... (1,305,331) (1,046,956) (830,996) Surrenders and Other (Net)............................................... (83,817,967) (65,746,579) (52,376,445) ------------ ------------ ------------ Increase (Decrease) in Equity Derived from Equity Transactions................ (22,802,357) (4,828,977) 11,961,917 ------------ ------------ ------------ Net Increase in Equity........................................................ 77,239,410 100,874,049 77,698,613 Equity, Beginning of Year..................................................... 648,394,089 547,520,040 469,821,427 ------------ ------------ ------------ Equity, End of Year........................................................... $725,633,499 $648,394,089 $547,520,040 ============ ============ ============
The Accompanying Notes are an Integral Part of the Financial Statements. 22 23 The Northwestern Mutual Life Insurance Company Form 10-K Item 8. (continued) NML VARIABLE ANNUITY ACCOUNT A NOTES TO FINANCIAL STATEMENTS Note 1--NML Variable Annuity Account A (the "Account") is a segregated asset account of The Northwestern Mutual Life Insurance Company ("Northwestern Mutual Life") used to fund variable annuity contracts ("contracts") for HR-10 and corporate pension and profit-sharing plans which qualify for special tax treatment under the Internal Revenue Code. Beginning March 31, 1995, two versions of the contract are offered: Front Load contracts with a sales charge up to 4% of purchase payments and Back Load contracts with a withdrawal charge of 0-8%. Note 2--The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Principal accounting policies are summarized below. Note 3--All assets of each Division of the Account are invested in shares of the corresponding Portfolio of Northwestern Mutual Series Fund, Inc. (the "Fund"). The shares are valued at the Fund's offering and redemption price per share. On May 3, 1994, five new portfolios commenced operations in the Fund: Aggressive Growth Stock Portfolio, International Equity Portfolio, Growth Stock Portfolio, Growth and Income Stock Portfolio and High Yield Bond Portfolio. Additionally, on May 3, 1994, the assets of Northwestern Mutual Life's Variable Annuity funds were merged into the respective portfolio of the Fund in a tax-free exchange of shares. The Fund is an open-end investment company registered under the Investment Company Act of 1940. Note 4--Annuity reserves are based on published annuity tables with age adjustment and benefit payments which reflect actual investment experience. For variable payment plans issued prior to January 1, 1974, annuity reserves are based on the 1955 American Annuity Table with assumed interest rates of 3%, 3 1/2% or 5%. For variable payment plans issued on or after January 1, 1974 and before January 1, 1985, annuity reserves are based on the 1971 Individual Annuity Table with assumed interest rates of 3 1/2% or 5%. For variable payment plans issued on or after January 1, 1985, annuity reserves are based on the 1983 Table with assumed interest rates of 3 1/2% or 5%. Note 5--Dividend income from the Fund is recorded on the record date of the dividends. Transactions in Fund shares are accounted for on the trade date. The basis for determining cost on sale of Fund shares is identified cost. Purchases and sales of Fund shares for the years ended December 31 by each Division are shown below:
Purchases 1998 1997 1996 ----------- ----------- ------------ Aggressive Growth Division $10,360,035 $13,774,024 $17,797,661 International Equity Division 6,698,885 9,401,229 8,274,087 Growth Stock Division 9,097,053 6,679,256 4,830,460 Growth & Income Stock Division 10,667,937 13,074,930 5,756,071 Index 500 Stock Division 18,355,852 14,059,126 11,279,772 Balanced Division 28,049,864 21,076,301 20,896,761 High Yield Bond Division 5,801,403 5,687,823 3,296,028 Select Bond Division 5,372,185 4,506,469 5,463,472 Money Market Division 24,597,925 13,132,202 13,328,217 Sales Aggressive Growth Division $14,639,276 $ 8,367,827 $ 4,234,497 International Equity Division 11,198,223 4,431,627 3,828,530 Growth Stock Division 4,198,359 1,576,559 508,512 Growth & Income Stock Division 3,780,324 2,076,927 1,277,020 Index 500 Stock Division 13,607,476 8,104,812 5,728,800 Balanced Division 40,333,474 32,274,893 26,932,275 High Yield Bond Division 4,113,088 1,516,721 568,230 Select Bond Division 4,608,524 6,636,325 4,528,222 Money Market Division 19,273,286 14,926,292 11,504,938
23 24 The Northwestern Mutual Life Insurance Company Form 10-K Item 8. (continued) NML VARIABLE ANNUITY ACCOUNT A NOTES TO FINANCIAL STATEMENTS Note 6--On April 30, 1993, Northwestern Mutual Capital Appreciation Stock Fund was merged into the Northwestern Mutual Index 500 Stock Fund in a tax-free exchange of fund shares. 21,689,286 shares of Northwestern Mutual Capital Appreciation Stock Fund, Inc. were exchanged for 22,749,651 shares of Northwestern Mutual Index 500 Stock Fund, Inc. The shares exchanged were valued at $30,719,638 for each Division. Note 7--A deduction for annuity rate and expense guarantees is determined daily and paid to Northwestern Mutual Life as compensation for assuming the risk that annuity payments will continue for longer periods than anticipated because the annuitants as a group live longer than expected, and the risk that the charges made by Northwestern Mutual Life may be insufficient to cover the actual costs incurred in connection with the contracts. For contracts issued on or after March 31, 1995, for the Front Load version and the Back Load version, the deduction for annuity rate and expense guarantees is determined daily at annual rates of 4/10 of 1% and a 1 1/4%, respectively, of the net assets of each Division attributable to these contracts and is paid to Northwestern Mutual Life. For these contracts, the rates may be increased or decreased by the Board of Trustees of Northwestern Mutual Life not to exceed 3/4 of 1% and 1 1/2%, respectively. For contracts issued after December 16, 1981 and prior to March 31, 1995, the deduction is at an annual rate of 1 1/4% of the net assets of each Division attributable to these contracts. For these contracts, the rate may be increased or decreased by the Board of Trustees of Northwestern Mutual Life not to exceed a 1 1/2% annual rate. For contracts issued prior to December 17, 1981, the deduction is at an annual rate of 3/4 of 1% of the net assets of each Division attributable to these contracts. For these contracts, the rate may be increased or decreased by the Board of Trustees of Northwestern Mutual Life not to exceed a 1% annual rate. Since 1995, Northwestern Mutual Life has paid a dividend to certain contracts. The dividend is reinvested in the Account and has been reflected as a Contract Owners' Net Payment in the accompanying financial statements. Note 8--Northwestern Mutual Life is taxed as a "life insurance company" under the Internal Revenue Code and the operations of the Account form a part of and are taxed with those of Northwestern Mutual Life. Under current law, no federal income taxes are payable with respect to the Account. Accordingly, no provision for any such liability has been made. 24 25 The Northwestern Mutual Life Insurance Company Form 10-K Item 8. (continued) Report of Independent Accountants To The Northwestern Mutual Life Insurance Company and Contract Owners of NML Variable Annuity Account A In our opinion, the statements appearing on pages 17 through 24 present fairly, in all material respects, the financial position of NML Variable Annuity Account A at December 31, 1998 and 1997, and the results of its operations and the changes in its equity for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of The Northwestern Mutual Life Insurance Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PriceWaterhouseCoopers LLP Milwaukee, Wisconsin January 25, 1999 25 26 The Northwestern Mutual Life Insurance Company Form 10-K Item 8. (continued) NML VARIABLE ANNUITY ACCOUNT C STATEMENT OF ASSETS AND LIABILITIES
December 31 ----------------------------------------- Assets 1998 1997 ------------- ------------- Investments at market value: Northwestern Mutual Series Fund, Inc. Aggressive Growth Stock 1998: 32,435,113 shares (cost $90,546,838)................. $ 112,355,230 1997: 33,439,173 shares (cost $85,858,851)................. $ 111,586,520 International Equity 1998: 35,339,851 shares (cost $52,600,652)................. 59,264,930 1997: 37,819,506 shares (cost $52,786,634)................. 63,877,146 Growth Stock 1998: 12,380,682 shares (cost $21,943,825)................. 27,819,393 1997: 8,757,048 shares (cost $13,278,855).................. 15,850,257 Growth and Income Stock 1998: 24,848,484 shares (cost $35,764,080)................. 40,353,938 1997: 20,649,607 shares (cost $28,811,270)................. 27,484,626 Index 500 Stock 1998: 55,739,165 shares (cost $103,423,250)................ 183,326,114 1997: 50,653,443 shares (cost $81,303,357)................. 133,927,705 Balanced 1998: 77,775,095 shares (cost $122,950,926)................ 172,971,811 1997: 77,214,264 shares (cost $114,230,115)................ 153,733,599 High Yield Bond 1998: 9,200,196 shares (cost $10,065,238).................. 8,611,383 1997: 6,179,152 shares (cost $6,940,417)................... 6,568,438 Select Bond 1998: 16,617,246 shares (cost $19,964,276)................. 20,754,940 1997: 14,367,483 shares (cost $16,785,623)................. 18,059,926 Money Market 1998: 19,628,758 shares (cost $19,628,758)................. 19,628,758 1997: 16,900,306 shares (cost $16,900,306)................. 16,900,306 ------------- ------------- 645,086,497 547,988,523 Due from Sales of Fund Shares............................................ 495,042 2,927,350 Due from Northwestern Mutual Life Insurance Company...................... 355,553 196,511 ------------- ------------- Total Assets................................................ $ 645,937,092 $ 551,112,384 ============= ============= Liabilities Due to Northwestern Mutual Life Insurance Company $ 495,042 $ 2,927,350 Due from Purchase of Fund Shares......................................... 355,553 196,511 ------------- ------------- Total Liabilities........................................... $ 850,595 $ 3,123,861 ============= =============
The Accompanying Notes are an Integral Part of the Financial Statements. 26 27 The Northwestern Mutual Life Insurance Company Form 10-K Item 8. (continued) NML VARIABLE ANNUITY ACCOUNT C STATEMENT OF ASSETS AND LIABILITIES
December 31 ----------------------------------------- Equity 1998 1997 ------------- ------------- Contracts Issued Before December 17, 1981 or Between April 30, 1984 and December 31, 1991: Aggressive Growth Stock Division 1998: 1,801,179 Accumulation Units @ 39.854126................. $ 71,784,423 1997: 1,935,434 Accumulation Units @ 37.054456................. $ 71,716,451 International Equity Division 1998: 20,139,789 Accumulation Units @ 2.031842................. 40,920,871 1997: 23,069,550 Accumulation Units @ 1.938399................. 44,717,992 Growth Stock Division 1998: 651,555 Accumulation Units @ 26.398692................... 17,200,222 1997: 482,897 Accumulation Units @ 20.837268................... 10,062,263 Growth and Income Stock Division 1998: 801,963 Accumulation Units @ 25.245888................... 20,246,304 1997: 711,558 Accumulation Units @ 20.502206................... 14,588,507 Index 500 Stock Division 1998: 2,699,180 Accumulation Units @ 46.522428................. 125,572,411 1997: 2,558,205 Accumulation Units @ 36.141676................. 92,457,808 Balanced Division 1998: 1,211,838 Accumulation Units @ 84.986573................. 102,989,851 1997: 1,341,930 Accumulation Units @ 71.490869................. 95,935,733 High Yield Bond Division 1998: 301,661 Accumulation Units @ 16.385350................... 4,942,825 1997: 235,585 Accumulation Units @ 16.692972................... 3,932,608 Select Bond Division 1998: 84,033 Accumulation Units @ 89.873176.................... 7,552,345 1997: 85,036 Accumulation Units @ 83.938645.................... 7,137,800 Money Market Division 1998: 45,208 Accumulation Units @ 28.923541.................... 1,307,598 1997: 38,584 Accumulation Units @ 27.434762.................... 1,058,532
The Accompanying Notes are an Integral Part of the Financial Statements. 27 28 The Northwestern Mutual Life Insurance Company Form 10-K Item 8. (continued) NML VARIABLE ANNUITY ACCOUNT C STATEMENT OF ASSETS AND LIABILITIES
December 31 ----------------------------------------- Equity (Cont'd.) 1998 1997 ------------- ------------- Contracts Issued After December 16, 1981 and Prior to May 1, 1984: Aggressive Growth Stock Division 1998: 1,469 Accumulation Units @ 38.303948..................... $ 56,266 1997: 1,141 Accumulation Units @ 35.791674..................... $ 40,847 Annuity Reserves................................................ 33,440 33,487 ------------- ------------- 89,706 74,334 ------------- ------------- International Equity Division 1998: 119,120 Accumulation Units @ 1.975051.................... 235,268 1997: 109,646 Accumulation Units @ 1.893664.................... 207,632 Annuity Reserves................................................ 16,925 17,392 ------------- ------------- 252,193 225,024 ------------- ------------- Growth Stock Division 1998: 137 Accumulation Units @ 25.790044....................... 3,536 1997: 137 Accumulation Units @ 20.458788....................... 2,809 Annuity Reserves................................................ 48,049 40,850 ------------- ------------- 51,585 43,659 ------------- ------------- Growth and Income Stock Division 1998: 4,298 Accumulation Units @ 24.663747..................... 105,994 1997: 2,270 Accumulation Units @ 20.129770..................... 45,701 Annuity Reserves................................................ 0 0 ------------- ------------- 105,994 45,701 ------------- ------------- Index 500 Stock Division 1998: 13,564 Accumulation Units @ 44.708227.................... 606,427 1997: 19,041 Accumulation Units @ 34.906216.................... 664,652 Annuity Reserves................................................ 51,080 42,741 ------------- ------------- 657,507 707,393 ------------- ------------- Balanced Division 1998: 80,125 Accumulation Units @ 78.082648.................... 6,256,421 1997: 86,634 Accumulation Units @ 66.012286.................... 5,718,908 Annuity Reserves................................................ 539,064 486,559 ------------- ------------- 6,795,485 6,205,467 ------------- ------------- High Yield Division 1998: 157 Accumulation Units @ 16.007423....................... 3,536 1997: N/A...................................................... Annuity Reserves................................................ 0 0 ------------- ------------- 3,536 0 ------------- ------------- Select Bond Division 1998: 480 Accumulation Units @ 82.531570....................... 39,623 1997: 532 Accumulation Units @ 77.468103....................... 41,227 Annuity Reserves................................................ 40,052 40,290 ------------- ------------- 79,675 81,517 ------------- ------------- Money Market Division 1998: 946 Accumulation Units @ 26.605346....................... 25,162 1997: 871 Accumulation Units @ 25.362364....................... 22,084 Annuity Reserves................................................ 7,371 7,530 ------------- ------------- 32,533 29,614 ------------- -------------
The Accompanying Notes are an Integral Part of the Financial Statements. 28 29 The Northwestern Mutual Life Insurance Company Form 10-K Item 8. (continued) NML VARIABLE ANNUITY ACCOUNT C STATEMENT OF ASSETS AND LIABILITIES
December 31 ----------------------------------------- Equity (cont'd) 1998 1997 ------------- ------------- Contracts Issued After December 31, 1991 Front Load Version: Aggressive Growth Stock Division 1998: 2,921,308 Accumulation Units @ 2.511728.................. $ 7,337,533 1997: 3,169,006 Accumulation Units @ 2.350498.................. $ 7,448,743 International Equity Division 1998: 2,807,888 Accumulation Units @ 1.958397.................. 5,498,960 1997: 3,021,349 Accumulation Units @ 1.880500.................. 5,681,647 Growth Stock Division 1998: 845,190 Accumulation Units @ 2.561090.................... 2,164,608 1997: 710,110 Accumulation Units @ 2.034708.................... 1,444,866 Growth and Income Stock Division 1998: 2,452,149 Accumulation Units @ 2.449237.................. 6,005,593 1997: 1,970,478 Accumulation Units @ 2.001981.................. 3,944,860 Index 500 Stock Division 1998: 4,231,423 Accumulation Units @ 3.278539.................. 13,872,886 1997: 3,966,706 Accumulation Units @ 2.563560.................. 10,168,888 Balanced Division 1998: 6,324,559 Accumulation Units @ 2.281157.................. 14,427,311 1997: 6,187,478 Accumulation Units @ 1.931409.................. 11,950,551 High Yield Bond Division 1998: 441,272 Accumulation Units @ 1.589625.................... 701,458 1997: 423,726 Accumulation Units @ 1.630023.................... 690,684 Select Bond Division 1998: 2,718,375 Accumulation Units @ 1.585144.................. 4,309,016 1997: 2,574,248 Accumulation Units @ 1.490112.................. 3,835,918 Money Market Division 1998: 1,905,815 Accumulation Units @ 1.308441.................. 2,493,647 1997: 1,710,473 Accumulation Units @ 1.249188.................. 2,136,703
The Accompanying Notes are an Integral Part of the Financial Statements. 29 30 The Northwestern Mutual Life Insurance Company Form 10-K Item 8. (continued) NML VARIABLE ANNUITY ACCOUNT C STATEMENT OF ASSETS AND LIABILITIES
December 31 ----------------------------------------- Equity (cont'd) 1998 1997 ------------- ------------- Contracts Issued After December 31, 1991 Simplified Load Version: Aggressive Growth Stock Division 1998: 8,671,088 Accumulation Units @ 3.822308.................. $ 33,143,567 1997: 8,989,193 Accumulation Units @ 3.598431.................. $ 32,346,992 International Equity Division 1998: 6,652,248 Accumulation Units @ 1.893030.................. 12,592,906 1997: 7,247,144 Accumulation Units @ 1.828649.................. 13,252,483 Growth Stock Division 1998: 3,373,983 Accumulation Units @ 2.490522.................. 8,402,978 1997: 2,159,985 Accumulation Units @ 1.990509.................. 4,299,469 Growth and Income Stock Division 1998: 5,876,089 Accumulation Units @ 2.381813.................. 13,995,745 1997: 4,547,004 Accumulation Units @ 1.958555.................. 8,905,558 Index 500 Stock Division 1998: 10,493,642 Accumulation Units @ 4.119000................. 43,223,310 1997: 9,442,314 Accumulation Units @ 3.240055.................. 30,593,616 Balanced Division 1998: 7,165,398 Accumulation Units @ 6.804809.................. 48,759,164 1997: 6,839,439 Accumulation Units @ 5.796067.................. 39,641,848 High Yield Bond Division 1998: 1,917,813 Accumulation Units @ 1.545816.................. 2,964,586 1997: 1,219,819 Accumulation Units @ 1.594619.................. 1,945,147 Select Bond Division 1998: 1,231,485 Accumulation Units @ 7.157135.................. 8,813,904 1997: 1,034,899 Accumulation Units @ 6.768475.................. 7,004,691 Money Market Division 1998: 6,483,460 Accumulation Units @ 2.436196.................. 15,794,980 1997: 5,844,682 Accumulation Units @ 2.339812.................. 13,675,458 ------------- ------------- Total Equity....................................... $ 645,087,216 $ 547,988,525 ------------- ------------- Total Liabilities and Equity....................... $645,937,811 $551,112,386 ============ ============
The Accompanying Notes are an Integral Part of the Financial Statements. 30 31 The Northwestern Mutual Life Insurance Company Form 10-K Item 8. (continued) NML VARIABLE ANNUITY ACCOUNT C COMBINED STATEMENT OF OPERATIONS AND CHANGES IN EQUITY For the Years Ended December 31
1998 1997 1996 ------------ ------------ ------------ Investment Income Dividend Income........................................................ $ 26,995,272 $ 27,689,163 $ 16,994,370 Annuity Rate and Expense Guarantees.................................... 3,154,687 2,501,975 1,738,625 ------------ ------------ ------------ Net Investment Income.................................................. 23,840,585 25,187,188 15,255,745 ------------ ------------ ------------ Realized and Unrealized Gain (Loss) on Investments Net Realized Gain (Loss) on Investments................................ 29,250,486 18,686,284 8,855,390 Unrealized Appreciation (Depreciation) During the Year................. 37,105,561 44,241,434 29,832,124 ------------ ------------ ------------ Net Gain (Loss) on Investments......................................... 66,356,047 62,927,718 38,687,514 ------------ ------------ ------------ Increase in Equity Derived from Investment Activity......................... 90,196,632 88,114,906 53,943,259 ------------ ------------ ------------ Equity Transactions Contract Owners' Net Payments.......................................... 93,658,882 91,195,224 89,650,916 Surrenders and Other (Net)............................................. (86,757,540) (57,974,180) (34,747,640) ------------ ------------ ------------ Increase (Decrease) in Equity Derived from Equity Transactions.............. 6,901,342 33,221,044 54,903,276 ------------ ------------ ------------ Net Increase in Equity...................................................... 97,097,974 121,335,950 108,846,535 Equity, Beginning of Year................................................... 547,988,523 426,652,573 317,806,038 ------------ ------------ ------------ Equity, End of Year......................................................... $645,086,497 $547,988,523 $426,652,573 ============ ============ ============
The Accompanying Notes are an Integral Part of the Financial Statements. 31 32 The Northwestern Mutual Life Insurance Company Form 10-K Item 8. (continued) NML VARIABLE ANNUITY ACCOUNT C NOTES TO FINANCIAL STATEMENTS Note 1--NML Variable Annuity Account C (the "Account") is a segregated asset account of The Northwestern Mutual Life Insurance Company ("Northwestern Mutual Life" or "Sponsor") used to fund variable annuity contracts ("contracts") for HR-10 and corporate pension and profit-sharing plans which qualify for special tax treatment under the Internal Revenue Code. Beginning December 31, 1991, two versions of the contract are offered: Front Load contracts with a sales charge up to 4.5% of purchase payments and Simplified Load contracts with an installation fee of $750. Note 2--The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Principal accounting policies are summarized below. Note 3--All assets of each Division of the Account are invested in shares of the corresponding Portfolio of Northwestern Mutual Series Fund, Inc. (the "Fund"). The shares are valued at the Fund's offering and redemption price per share. On May 3, 1994, five new portfolios commenced operations in the Fund: Aggressive Growth Stock Portfolio, International Equity Portfolio, Growth Stock Portfolio, Growth and Income Stock Portfolio and High Yield Bond Portfolio. Additionally, on May 3, 1994, the assets of Northwestern Mutual Life's Variable Annuity funds were merged into the respective portfolio of the Fund in a tax-free exchange of shares. The Fund is an open-end investment company registered under the Investment Company Act of 1940. Note 4--Annuity reserves are based on published annuity tables with age adjustment and benefit payments which reflect actual investment experience. Annuity reserves are based on the 1983 Table with assumed interest rates of 3 1/2% or 5%. Note 5--Dividend income from the Fund is recorded on the record date of the dividends. Transactions in Fund shares are accounted for on the trade date. The basis for determining cost on sale of Fund shares is identified cost. Purchases and sales of Fund shares for the years ended December 31 by each Division are shown below:
Purchases 1998 1997 1996 ----------- ----------- ----------- Aggressive Growth Division $15,042,444 $21,563,810 $30,690,195 International Equity Division 10,115,335 14,484,423 15,119,614 Growth Stock Division 11,736,176 5,929,895 7,308,964 Growth & Income Stock Division 12,220,296 18,445,529 8,410,421 Index 500 Stock Division 27,128,970 22,292,577 19,824,136 Balanced Division 25,547,459 18,920,420 19,426,753 High Yield Bond Division 4,842,682 4,398,102 2,362,508 Select Bond Division 7,219,542 4,295,571 5,445,050 Money Market Division 28,689,880 20,035,837 20,346,897 Sales Aggressive Growth Division $18,315,682 $12,675,291 $ 1,045,256 International Equity Division 13,861,624 4,352,840 1,571,810 Growth Stock Division 4,445,344 2,395,716 303,927 Growth & Income Stock Division 6,047,669 2,674,188 839,196 Index 500 Stock Division 12,386,814 10,114,507 5,253,981 Balanced Division 24,616,712 17,783,563 29,797,911 High Yield Bond Division 1,661,445 480,911 158,086 Select Bond Division 4,504,138 4,561,008 3,918,139 Money Market Division 25,961,429 16,919,905 15,887,232
32 33 The Northwestern Mutual Life Insurance Company Form 10-K Item 8. (continued) NML VARIABLE ANNUITY ACCOUNT C NOTES TO FINANCIAL STATEMENTS Note 6--On April 30, 1993, Northwestern Mutual Capital Appreciation Stock Fund was merged into the Northwestern Mutual Index 500 Stock Fund in a tax-free exchange of fund shares. 23,586,477 shares of Northwestern Mutual Capital Appreciation Stock Fund, Inc. were exchanged for 24,739,593 shares of Northwestern Mutual Index 500 Stock Fund, Inc. The shares exchanged were valued at $33,406,725 for each Division. Note 7--A deduction for annuity rate and expense guarantees is determined daily and paid to Northwestern Mutual Life as compensation for assuming the risk that annuity payments will continue for longer periods than anticipated because the annuitants as a group live longer than expected and the risk that the charges made by Northwestern Mutual Life may be insufficient to cover the actual costs incurred in connection with the contracts. Generally, for contracts issued after December 31, 1991, for the Front Load Version and the Simplified Load Version, the deduction for annuity rate and expense guarantees is determined daily at annual rates of 6.5/10 of 1% and 1 1/4%, respectively, of the net assets of each Division attributable to these contracts and is paid to Northwestern Mutual Life. For these contracts, the rates may be increased or decreased by the Board of Trustees of Northwestern Mutual Life not to exceed 1% and 1 1/2% annual rates, respectively. Generally, the deduction for contracts issued before December 17, 1981 or between April 30, 1984 and December 31, 1991, as provided for in the contracts has been waived by the Board of Trustees of Northwestern Mutual Life. For these contracts, the rate may be determined by the Board of Trustees of Northwestern Mutual Life not to exceed a 1/4 of 1% annual rate. For contracts issued after December 16, 1981, and prior to May 1, 1984, the deduction is determined daily at an annual rate of 1/2 of 1% of the net assets of each Division attributable to these contracts and is paid to Northwestern Mutual Life. For these contracts, the rate may be increased or decreased by the Board of Trustees of Northwestern Mutual Life not to exceed a 3/4 of 1% annual rate. Since 1996, Northwestern Mutual Life has paid a dividend to certain contracts. The dividend is re-invested in the Account and has been reflected as a Contract Owners' Net Payment in the accompanying financial statements. Note 8--Northwestern Mutual Life is taxed as a "life insurance company" under the Internal Revenue Code and the operations of the Account form a part of and are taxed with those of Northwestern Mutual Life. Under current law, no federal income taxes are payable with respect to the Account. Accordingly, no provision for any such liability has been made. 33 34 The Northwestern Mutual Life Insurance Company Form 10-K Item 8. (continued) Report of Independent Accountants To The Northwestern Mutual Life Insurance Company and Contract Owners of NML Variable Annuity Account C In our opinion, the statements appearing on pages 26 through 33 present fairly, in all material respects, the financial position of NML Variable Annuity Account C at December 31, 1998 and 1997, and the results of its operations and the changes in its equity for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of The Northwestern Mutual Life Insurance Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PriceWaterhouseCoopers LLP Milwaukee, Wisconsin January 25, 1999 34 35 The Northwestern Mutual Life Insurance Company Form 10-K Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. Item 10 is on page 36. 35 36 The Northwestern Mutual Life Insurance Company Form 10-K PART III Item 10. Directors and Executive Officers of the Registrant The following information as of March 1, 1999, is provided with respect to each director, including persons chosen to become directors, of the Registrant. The Registrant uses the title of Trustee to denote the directors.
Year EXPIRATION OF TRUSTEE(2) AGE ELECTED TERM OF OFFICE OTHER POSITIONS PRESENTLY HELD WITH REGISTRANT ---------- --- ------- --------- ---------------------------------------------- R. Quintus Anderson 68 1984 May 1999 (1) Chairman, Audit Committee; Member, Ad Hoc Committee Edward E. Barr 62 1991 May 1999 (1) Member, Human Resources and Public Policy Committee Gordon T. Beaham, III 67 1988 May 2001 Member, Operations and Technology Committee Robert C. Buchanan 58 1991 May 1999 (1) Member, Audit, Executive and Finance Committees Robert E. Carlson 63 1989 May 2002 Executive Vice President(Strategic Marketing); Member, Executive Committee George A. Dickerman 60 1994 May 2000 Member, Agency and Marketing Committee Pierre S. du Pont 64 1985 May 2002 Member, Agency and Marketing Committee James D. Ericson 63 1989 May 2000 President and C.E.O.; Member, Human Resources and Public Policy, Agency and Marketing, and Operations and Technology Committees; Chairman, Executive and Finance Committees J. E. Gallegos 63 1985 May 2000 Member, Audit Committee Stephen N. Graff 64 1996 May 2000 Member, Executive, Finance, and Operations and Technology Committees Patricia Albjerg Graham 64 1980 May 2000 Member, Human Resources and Public Policy Committee Stephen F. Keller 60 1984 May 1999 (1) Member, Human Resources and Public Policy Committee Barbara A. King 52 1996 May 2002 Member, Agency and Marketing Committee J. Thomas Lewis 62 1978 May 2002 Chairman, Human Resources and Public Policy and Ad Hoc Committees Daniel F. McKeithan, Jr. 63 1988 May 1999 (1) Member, Executive, Finance, and Human Resources and Public Policy Committees
36 37 The Northwestern Mutual Life Insurance Company Form 10-K
YEAR EXPIRATION OF TRUSTEE(2) AGE ELECTED TERM OF OFFICE OTHER POSITIONS PRESENTLY HELD WITH REGISTRANT ---------- --- ------- --------- ---------------------------------------------- Guy A. Osborn 63 1994 May 2001 Member, Operations and Technology, Executive and Finance Committees Timothy D. Proctor 49 1997 May 2001 Member, Audit Committee Donald J. Schuenke (3) 70 1980 May 2002 Member, Agency and Marketing, Executive and Finance and Ad Hoc Committees H. Mason Sizemore, Jr. 57 1993 May 1999 (1) Member, Agency and Marketing Committee Harold B. Smith 65 1973 May 2000 Member, Operations and Technology Committee Sherwood H. Smith, Jr. 64 1992 May 2002 Chairman, Agency and Marketing Committee; Member, Ad Hoc Committee John E. Steuri 59 1994 May 1999 (1) Chairman, Operations and Technology Committee; Member, Ad Hoc Committee John J. Stollenwerk 59 1993 May 2001 Member, Agency and Marketing, Executive and Finance Committees Barry L. Williams 54 1987 May 2001 Member, Human Resources and Public Policy Committee Kathryn D. Wriston 60 1986 May 2001 Member, Audit Committee
(1) Candidate proposed for re-election by the Board of Trustees for the election to be held at the May 1999 Annual meeting of Policyowners. If re-elected, these Trustees' terms will expire in May of 2003. (2) Peter M. Sommerhauser (56) is a candidate proposed for election to the Board at the May 1999 Annual Meeting of Policyowners. If elected, his term will expire in 2002. (3) Retiring from the Board on May 26, 1999. 37 38 The Northwestern Mutual Life Insurance Company Form 10-K Item 10. (continued) The following information as of March 1, 1999, is provided with respect to each Executive Officer of the Registrant.
NAME AGE POSITION ---- --- -------- James D. Ericson 63 President and Chief Executive Officer; Trustee John M. Bremer 51 Executive Vice President, General Counsel and Secretary (Administration and Law) Peter W. Bruce 53 Executive Vice President (Accumulation Products and Long Term Care) Robert E. Carlson 63 Executive Vice President (Strategic Marketing); Trustee Edward J. Zore 53 Executive Vice President (Life and Disability Income Insurance) Deborah A. Beck 51 Senior Vice President (Insurance Operations/Chief Compliance Officer) William H. Beckley 51 Senior Vice President (Agencies) Mark G. Doll 49 Senior Vice President (Public Markets) Richard L. Hall 53 Senior Vice President (Life Marketing) William C. Koenig 51 Senior Vice President and Chief Actuary Donald L. Mellish 60 Senior Vice President (Field Financial Services) Bruce L. Miller 56 Senior Vice President (Corporate Planning and Development) Mason G. Ross 55 Senior Vice President (Investment Administration and Real Estate) Leonard F. Stecklein 52 Senior Vice President (Agency Services) Frederic H. Sweet 55 Senior Vice President (Corporate and Government Relations) Dennis Tamcsin 60 Senior Vice President (Field Relations) Walt J. Wojcik 59 Senior Vice President (Information Systems) Robert J. Berdan 52 Vice President (Compliance/Best Practices) Steven T. Catlett 49 Vice President (New Business) Thomas E. Dyer 53 Vice President (Corporate Services) Gary E. Long 54 Vice President and Controller Susan A. Lueger 45 Vice President (Human Resources) Meridee J. Maynard 43 Vice President (Annuity and Accumulation Products) Gregory C. Oberland 41 Vice President (Disability Income) Barbara F. Piehler 48 Vice President (Policyowner Services) James F. Reiskytl 61 Vice President (Tax and Financial Planning) John E. Schlifske 39 Vice President (Securities) Martha M. Valerio 52 Vice President (Corporate Development) W. Ward White 59 Vice President (Communications)
All of the Executive Officers, except Susan A. Lueger and Bruce L. Miller, have been associated with Northwestern Mutual, although not necessarily in their present positions, for more than five years. Susan A. Lueger has been Vice President of Northwestern Mutual since May, 1994. Prior thereto she had been Vice President of Human Resources at Wisconsin Electric Power Company since 1992. Bruce L. Miller has been Senior Vice President of Northwestern Mutual since July, 1996. Prior thereto he participated in private equity investing, operating and serving as a consultant to various firms in the financial services and healthcare industries since 1989. 38 39 The Northwestern Mutual Life Insurance Company Form 10-K Item 10. (continued) Term of office for all Executive Officers is one year expiring May 31, 1999. No one of the Executive Officers, Trustees or nominees is related to any other to the best of our knowledge. Business experience and directorships of Trustees are as follows:
PRINCIPAL OCCUPATION TRUSTEE DURING PAST FIVE YEARS DIRECTORSHIPS - ------------------------------------------------------------------------------------------------------------------------------------ R. Quintus Anderson Chairman, The Aarque Capital Corporation (diversified metal products Cold Metal Products Company, manufacturing), Jamestown, New York, since 1997. Prior thereto, Inc. Oneida, Ltd. Chairman, The Aarque Companies. Edward E. Barr Chairman, Sun Chemical Group, B.V.(graphic arts) , Fort Lee, New Jersey, First Union Corporation since 1998. Chairman and CEO 1997-1998. Prior thereto President and United Water Resources Chief Executive Officer 1987-1997. Gordon T. Beaham, III Chairman and President, Faultless Starch/Bon Ami Company(consumer products manufacturer), Kansas City, Missouri, since 1987. Robert C. Buchanan President and Chief Executive Officer, Fox Valley W.H. Brady Corporation Corporation(manufacturer of gift wrap and writing paper), Appleton, Firstar Corporation Wisconsin, since 1980. Robert E. Carlson Executive Vice President of Northwestern Mutual since 1987. George A. Dickerman Chairman of the Board, Spalding Sports Worldwide(manufacturer of sporting equipment), Chicopee, Massachusetts, since 1997. Prior thereto, President 1981-1997. Pierre S. du Pont Partner with Richards, Layton & Finger(law firm), Wilmington, Delaware, Whitman Corporation since 1985. James D. Ericson President and Chief Executive Officer of NML since 1993. MGIC Investment Corporation Kohl's Corporation Consolidated Paper Inc. Mason Street Funds, Inc. Green Bay Packaging, Inc. Northwestern Mutual Series Fund, Inc. J. E. Gallegos Attorney, Gallegos Law Firm, Santa Fe, New Mexico since 1988.
39 40 The Northwestern Mutual Life Insurance Company Form 10-K
PRINCIPAL OCCUPATION TRUSTEE DURING PAST FIVE YEARS DIRECTORSHIPS - ------------------------------------------------------------------------------------------------------------------------------------ Stephen N. Graff Office Managing Partner (retired), Arthur Andersen LLP, Milwaukee, Mason Street Funds, Inc. Wisconsin, 1981-1994. Regal-Beloit Corporation Northwestern Mutual Series Fund, Inc. Patricia Albjerg Graham President, Spencer Foundation(social and behavioral sciences), Chicago, Illinois, since 1991; and Professor of the History of American Education, Harvard University, Cambridge, Massachusetts, since 1974.. Stephen F. Keller Attorney since 1996. Prior thereto, Chairman, The Santa Anita Companies, Los Angeles, California, since 1993. Barbara A. King President, Landscape Structures, Inc.(manufacturer of playground equipment), Delano, Minnesota, since 1973. J. Thomas Lewis Attorney, (sole practitioner) since 1998. Prior thereto, associated with Monroe & Lemann (law firm), New Orleans, Louisiana, 1965-1998. Daniel F. McKeithan, Jr. President, Tamarack Petroleum Co. Inc.(operator of oil and gas wells), Firstar Corporation Milwaukee, Wisconsin, since 1982. The Marcus Corporation WICOR, Inc. Guy A. Osborn Retired Chairman, Universal Foods Corp., Milwaukee, Wisconsin, since Fleming Companies, Inc. 1997. Chairman,1996-1997. Chairman and Chief Executive Officer, WICOR, Inc. 1990-1996 Timothy D. Proctor Director, Worldwide Human Resources, Glaxo Wellcome plc(pharmaceuticals), Greenford, Middlesex, United Kingdom, since 1998. Senior Vice President Human Resources, General Counsel and Secretary, Glaxo Wellcome Inc., since 1996. Senior Vice President, General Counsel and Secretary, 1994-1996. Donald J. Schuenke Chairman of the Board, Northern Telecom Limited since 1994. Retired A. O. Smith Corporation Chairman of Northwestern Mutual 1993-1994. Chairman of the Board of NML Badger Meter, Inc. 10-1-93 to 1-31-94 Federal Home Loan Mortgage Corporation (Freddie Mac) Northern Telecom, Limited H. Mason Sizemore, Jr. President and Chief Operating Officer, The Seattle Times, Seattle, Washington, since 1985. Harold B. Smith Chairman, Executive Committee, Illinois Tool Works Inc.(engineered W.W. Grainger, Inc. components and industrial systems and consumables), Glenview, Illinois, Illinois Tool Works Inc. since 1982 Northern Trust Corporation
40 41 The Northwestern Mutual Life Insurance Company Form 10-K
PRINCIPAL OCCUPATION TRUSTEE DURING PAST FIVE YEARS DIRECTORSHIPS - ------------------------------------------------------------------------------------------------------------------------------------ Sherwood H. Smith, Jr. Chairman of the Board, Carolina Power & Light Company, Raleigh, North Carolina Power & Light Company Carolina, since October 1996. Prior thereto, Chairman and Chief Northern Telecom Limited Executive Officer, 1992-1996 Springs Industries, Inc. Wachovia Corporation Peter M. Sommerhauser Attorney, Godfrey & Kahn, S.C.(law firm), Milwaukee, Wisconsin, since Kohl's Corporation (proposed for election 1969. to the Board on 5/26/99) John E. Steuri Chairman, Advanced Thermal Technologies(heating, air conditioning and National Computer Systems Inc. humidity control), Little Rock, Arkansas, since May 1997. Prior Intelligroup, Inc. thereto, Chairman and CEO ALLTEL Information Services, Inc., Little Rock, Arkansas, since 1989. John J. Stollenwerk President and Chief Executive Officer, Allen-Edmonds Shoe Corporation, Firstar Corporation Port Washington, Wisconsin since 1998. Prior thereto President and Badger Meter, Inc. Owner 1980-1998. Koss Corporation Barry L. Williams President and Chief Executive Officer, Williams Pacific Ventures, R. H. Donnelly Corporation Inc.(venture capital), San Francisco, California, since 1993. Pacific Gas & Electric Company Simpson Manufacturing Co., Inc. Comp USA, Inc. The Newhall Land and Farming Company CH2M Hill Companies, Ltd. Kathryn D. Wriston Director of various corporations. Santa Fe Energy Resources, Inc. The Stanley Works
Item 11 is on page 42. 41 42 The Northwestern Mutual Life Insurance Company Form 10-K Item 11. Executive Compensation Not applicable. NML Variable Annuity Accounts A and C have no directors or executive officers, the Executive Officers and Trustees of Northwestern Mutual spend no substantial portion of their time on matters relating to NML Variable Annuity Accounts A and C, and the amounts of compensation received by the Executive Officers and Trustees of The Northwestern Mutual have no bearing on the values associated with variable annuity contracts issued in connection with NML Variable Annuity Accounts A and C. Item 12. Security Ownership of Certain Beneficial Owners and Management Not applicable. As a mutual life insurance company, Northwestern Mutual has no shareholders. Item 13. Certain Relationships and Related Transactions Northwestern Mutual's subsidiary, Northwestern Mutual Investment Services, LLC ("NMIS"), serves as the investment advisor to the Fund a series company registered as an open-end management company under the Investment Company Act of 1940, consisting of nine portfolios. Northwestern Mutual is a party to investment advisory agreement with the Fund. The investment advisory agreements was entered into or renewed during the fiscal year. Various Trustees and Executive officers of Northwestern Mutual serve as directors and officers of the Fund and may be deemed to have a direct or indirect material interest in the existence of the investment advisory agreement. Various Trustees and Executive Officers of Northwestern Mutual have securities accounts with Baird and effected transactions through such accounts during the fiscal year. Loans are made to Trustees and Executive Officers in accordance with the provisions of insurance policies which they may own. Such loans are made in the ordinary course of business and are administered solely according to the terms of the policy. Item 14 is on page 43. 42 43 The Northwestern Mutual Life Insurance Company Form 10-K
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K Page (a) Financial Statements and Exhibits 17 (1) NML Variable Annuity Account A (in Part II, Item 8) Statement of Assets and Liabilities, December 31, 1998 and 1997 Combined Statement of Operations and Changes in Equity, for years ended December 31, 1998, 1997 and 1996 Notes to Financial Statements Report of Independent Accountants (2) NML Variable Annuity Account C (in Part II, Item 8) 26 Statement of Assets and Liabilities, December 31, 1998 and 1997 Combined Statement of Operations and Changes in Equity, for years ended December 31, 1998, 1997 and 1996 Notes to Financial Statements Report of Independent Accountants (3) The Northwestern Mutual Life Insurance Company 44 Attached are: Report of Independent Accountants Consolidated Statement of Financial Position, December 31, 1998 and 1997 Consolidated Statement of Operations, for years ended December 31, 1998, 1997 and 1996 Consolidated Statement of Changes in Surplus, for years ended December 31, 1998, 1997 and 1996 Consolidated Statement of Cash Flows, for years ended December 31, 1998, 1997 and 1996 Notes to Consolidated Statutory Financial Statements (b) No reports on Form 8-K have been filed during the last quarter of the year ended December 31, 1998. (c) See Index to Exhibits on page 62, which is incorporated herein by reference 62 (d) Financial Statements of majority owned subsidiaries of Northwestern Mutual not consolidated have been omitted because, considered in the aggregate as a single subsidiary, they do not constitute a significant subsidiary.
43 44 The Northwestern Mutual Life Insurance Company Form 10-K REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Trustees and Policyowners of The Northwestern Mutual Life Insurance Company We have audited the accompanying consolidated statement of financial position of The Northwestern Mutual Life Insurance Company and its subsidiary as of December 31, 1998 and 1997, and the related consolidated statements of operations, of changes in surplus and of cash flows for each of the three years in the period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described in Note 1, these consolidated financial statements were prepared in conformity with accounting practices prescribed or permitted by the Office of the Commissioner of Insurance of the State of Wisconsin (statutory basis of accounting), which practices differ from generally accepted accounting principles. Accordingly, the consolidated financial statements are not intended to represent a presentation in accordance with generally accepted accounting principles. The effects on the consolidated financial statements of the variances between the statutory basis of accounting and generally accepted accounting principles, although not reasonably determinable, are presumed to be material. In our opinion, the consolidated financial statements audited by us (1) do not present fairly in conformity with generally accepted accounting principles, the financial position of The Northwestern Mutual Life Insurance Company and its subsidiary at December 31, 1998 and 1997, or the results of their operations or their cash flows for each of the three years in the period ended December 31, 1998 because of the effects of the variances between the statutory basis of accounting and generally accepted accounting principles referred to in the preceding paragraph and (2) do present fairly, in all material respects, the financial position of The Northwestern Mutual Life Insurance Company and its subsidiary at December 31, 1998 and 1997 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, on the basis of accounting described in Note 1. /s/ PriceWaterhouseCoopers LLP Milwaukee, Wisconsin January 25, 1999 44 45 The Northwestern Mutual Life Insurance Company Form 10-K THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF FINANCIAL POSITION (IN MILLIONS) - --------------------------------------------------------------------------------
DECEMBER 31, ------------------------- 1998 1997 -------- -------- Assets Bonds $ 34,888 $ 32,359 Common and preferred stocks 6,576 6,524 Mortgage loans 12,250 10,835 Real estate 1,481 1,372 Policy loans 7,580 7,163 Other investments 1,839 2,026 Cash and temporary investments 1,275 572 Due and accrued investment income 827 795 Other assets 1,313 1,275 Separate account assets 9,966 8,160 -------- -------- Total assets $ 77,995 $ 71,081 ======== ======== Liabilities and Surplus Reserves for policy benefits $ 51,815 $ 47,343 Policy benefit and premium deposits 1,709 1,624 Policyowner dividends payable 2,870 2,640 Interest maintenance reserve 606 461 Asset valuation reserve 1,994 1,974 Income taxes payable 1,161 1,043 Other liabilities 3,133 3,735 Separate account liabilities 9,966 8,160 -------- -------- Total liabilities 73,254 66,980 Surplus 4,741 4,101 -------- -------- Total liabilities and surplus $ 77,995 $ 71,081 ======== ========
The accompanying notes are an integral part of these financial statements. 45 46 The Northwestern Mutual Life Insurance Company Form 10-K THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF OPERATIONS (IN MILLIONS) - --------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, -------------------------------------- 1998 1997 1996 -------- -------- -------- Revenue Premium income $ 8,021 $ 7,294 $ 6,667 Net investment income 4,536 4,171 3,836 Other income 922 861 759 -------- -------- -------- Total revenue 13,479 12,326 11,262 -------- -------- -------- Benefits and expenses Benefit payments to policyowners and beneficiaries 3,602 3,329 2,921 Net additions to policy benefit reserves 4,521 4,026 3,701 Net transfers to separate accounts 564 566 579 -------- --------- --------- Total benefits 8,687 7,921 7,201 Operating expenses 1,297 1,138 1,043 -------- -------- -------- Total benefits and expenses 9,984 9,059 8,244 -------- -------- -------- Gain from operations before dividends and taxes 3,495 3,267 3,018 Policyowner dividends 2,869 2,636 2,341 -------- -------- -------- Gain from operations before taxes 626 631 677 Income tax expense 301 356 452 -------- -------- -------- Net gain from operations 325 275 225 Net realized capital gains 484 414 395 -------- -------- -------- Net income $ 809 $ 689 $ 620 ======== ======== =======
The accompanying notes are an integral part of these financial statements. 46 47 The Northwestern Mutual Life Insurance Company Form 10-K THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF CHANGES IN SURPLUS (IN MILLIONS) - --------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, ------------------------------- 1998 1997 1996 -------- -------- -------- Beginning of year balance $ 4,101 $ 3,515 $ 2,786 Net income 809 689 620 Increase (decrease) in net unrealized gains (147) 576 295 Increase in investment reserves (20) (526) (176) Other, net (2) (153) (10) ------- ------- ------- Net increase in surplus 640 586 729 ------- ------- ------- End of year balance $ 4,741 $ 4,101 $ 3,515 ======= ======= =======
The accompanying notes are an integral part of these financial statements. 47 48 The Northwestern Mutual Life Insurance Company Form 10-K THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS (IN MILLIONS) - --------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, ------------------------------------ 1998 1997 1996 ---------- ---------- ---------- Cash flows from operating activities Insurance and annuity premiums $ 8,876 $ 8,093 $ 7,361 Investment income received 4,216 3,928 3,634 Disbursement of policy loans, net of repayments (416) (360) (326) Benefits paid to policyowners and beneficiaries (3,572) (3,316) (2,912) Net transfers to separate accounts (564) (565) (579) Policyowner dividends paid (2,639) (2,347) (2,105) Operating expenses and taxes (1,749) (1,722) (1,663) Other, net (83) 124 (59) -------- -------- -------- Net cash provided by operating activities 4,069 3,835 3,351 -------- -------- -------- Cash flows from investing activities Proceeds from investments sold or matured Bonds 28,720 38,284 31,942 Common and preferred stocks 10,359 9,057 4,570 Mortgage loans 1,737 1,012 1,253 Real estate 159 302 178 Other investments 768 398 316 -------- -------- -------- 41,743 49,053 38,259 -------- -------- -------- Cost of investments acquired Bonds 30,873 41,169 35,342 Common and preferred stocks 9,642 9,848 4,463 Mortgage loans 3,135 2,309 2,455 Real estate 268 202 125 Other investments 567 359 255 -------- -------- -------- 44,485 53,887 42,640 -------- -------- -------- Net increase (decrease) in securities lending and other (624) 440 1,617 -------- -------- -------- Net cash used in investing activities (3,366) (4,394) (2,764) -------- -------- -------- Net increase (decrease) in cash and temporary investments 703 (559) 587 Cash and temporary investments, beginning of year 572 1,131 544 -------- -------- -------- Cash and temporary investments, end of year $ 1,275 $ 572 $ 1,131 ======== ======== ========
The accompanying notes are an integral part of these financial statements. 48 49 The Northwestern Mutual Life Insurance Company Form 10-K THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 1. PRINCIPAL ACCOUNTING POLICIES The accompanying consolidated statutory financial statements include the accounts of The Northwestern Mutual Life Insurance Company ("Company") and its wholly-owned life insurance subsidiary, Northwestern Long Term Care Insurance Company ( "Subsidiary"). The Company and its Subsidiary offer life, annuity, disability income and long term care products to the personal, business, estate and tax-qualified markets. The consolidated financial statements have been prepared using accounting policies prescribed or permitted by the Office of the Commissioner of Insurance of the State of Wisconsin ("statutory basis of accounting"). In 1998, the National Association of Insurance Commissioners ("NAIC") adopted the Codification of Statutory Accounting Principles, which will replace the current Accounting Practices and Procedures manual as the NAIC's primary guidance on statutory accounting. The NAIC is now considering amendments to the codification guidance that would also be effective upon its planned implementation effective January 1, 2001. It is expected that the Office of the Commissioner of Insurance of the State of Wisconsin ("OCI") will adopt the codification, but it is not known whether the OCI will make any changes to that guidance. The potential effect of the codification on the Company will depend upon the guidance adopted by the OCI. Financial statements prepared on the statutory basis of accounting vary from financial statements prepared on the basis of Generally Accepted Accounting Principles ("GAAP") primarily because on a GAAP basis (1) policy acquisition costs are deferred and amortized, (2) investment valuations and insurance reserves are based on different assumptions, (3) funds received under deposit-type contracts are not reported as premium revenue, and (4) deferred taxes are provided for temporary differences between book and tax basis of certain assets and liabilities. The effects on the financial statements of the differences between the statutory basis of accounting and GAAP are material to the Company. The preparation of financial statements in conformity with the statutory basis of accounting requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual future results could differ from these estimates. INVESTMENTS The Company's investments are valued on the following bases: Bonds - Amortized cost using the interest method; loan-backed and structured securities are amortized using estimated prepayment rates and, generally, the prospective adjustment method Common and preferred stocks - Common stocks are carried at fair value, preferred stocks are generally carried at cost, and unconsolidated subsidiaries are recorded using the equity method Mortgage loans - Amortized cost Real estate - Lower of cost, less depreciation and encumbrances, or estimated net realizable value Policy loans - Unpaid principal balance, which approximates fair value Other investments - Consists primarily of joint venture investments which are valued at equity in ventures' net assets Cash and temporary investments - Amortized cost, which approximates fair value TEMPORARY INVESTMENTS Temporary investments consist of debt securities that have maturities of one year or less at acquisition. 49 50 The Northwestern Mutual Life Insurance Company Form 10-K THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 NET INVESTMENT INCOME Net investment income includes interest and dividends received or due and accrued on debt securities and stocks, equity in unconsolidated subsidiaries' earnings and the Company's share of joint venture income. Net investment income is reduced by investment management expenses, real estate depreciation, depletion related to energy assets and costs associated with securities lending. INTEREST MAINTENANCE RESERVE The Company is required to maintain an interest maintenance reserve ("IMR"). The IMR is used to defer realized gains and losses, net of tax, on fixed income investments resulting from changes in interest rates. Net realized gains and losses deferred to the IMR are amortized into investment income over the approximate remaining term to maturity of the investment sold. INVESTMENT RESERVES The Company is required to maintain an asset valuation reserve ("AVR"). The AVR establishes a general reserve for invested asset valuation using a formula prescribed by state regulations. The AVR is designed to stabilize surplus against potential declines in the value of investments. In addition, the Company maintained a $200 million voluntary investment reserve at December 31, 1998 and 1997 to absorb potential investment losses exceeding those considered by the AVR formula. Increases or decreases in these investment reserves are recorded directly to surplus. SEPARATE ACCOUNTS Separate account assets and related policy liabilities represent the segregation of funds deposited by "variable" life insurance and annuity policyowners. Policyowners bear the investment performance risk associated with variable products. Separate account assets are invested at the direction of the policyowner in a variety of Company-managed mutual funds. Variable product policyowners also have the option to invest in a fixed interest rate annuity in the general account of the Company. Separate account assets are reported at fair value. PREMIUM REVENUE AND OPERATING EXPENSES Life insurance premiums are recognized as revenue at the beginning of each policy year. Annuity and disability income premiums are recognized when received by the Company. Operating expenses, including costs of acquiring new policies, are charged to operations as incurred. OTHER INCOME Other income includes considerations on supplementary contracts, ceded reinsurance expense allowances and miscellaneous policy charges. BENEFIT PAYMENTS TO POLICYOWNERS AND BENEFICIARIES Benefit payments to policyowners and beneficiaries include death, surrender and disability benefits, matured endowments and supplementary contract payments. RESERVES FOR POLICY BENEFITS Reserves for policy benefits are determined using actuarial estimates based on mortality and morbidity experience tables and valuation interest rates prescribed by the Office of the Commissioner of Insurance of the State of Wisconsin. See Note 3. POLICYOWNER DIVIDENDS Almost all life insurance policies, and certain annuity and disability income policies, issued by the Company are participating. Annually, the Company's Board of Trustees approves dividends payable on participating policies in the following fiscal year, which are accrued and charged to operations when approved. 50 51 The Northwestern Mutual Life Insurance Company Form 10-K THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 RECLASSIFICATION Certain financial statement balances for 1997 and 1996 have been reclassified to conform to the current year presentation. 2. INVESTMENTS DEBT SECURITIES Debt securities consist of all bonds and fixed-maturity preferred stocks. The estimated fair values of debt securities are based upon quoted market prices, if available. For securities not actively traded, fair values are estimated using independent pricing services or internally developed pricing models. The Company records unrealized losses for debt securities considered impaired. 51 52 The Northwestern Mutual Life Insurance Company Form 10-K THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 Statement value, which principally represents amortized cost, and estimated fair value of the Company's debt securities at December 31, 1998 and 1997 were as follows:
December 31, 1998 Reconciliation to Estimated Fair Value - ----------------- ---------------------------------------------- Gross Gross Unrealized Estimated Statement Unrealized Depreciation Fair Value Appreciation (in millions) Value ---------- ------------ ------------ --------- US Government and political obligations $ 3,904 $ 461 $ (11) $ 4,354 Mortgage-backed securities 7,357 280 (15) 7,622 Corporate and other debt securities 23,627 1,240 (382) 24,485 ---------- --------- -------- -------- 34,888 1,981 (408) 36,461 Preferred stocks 189 4 (1) 192 ---------- -------- -------- -------- Total $ 35,077 $ 1,985 $ (409) $ 36,653 ========== ======== ======== ======== December 31, 1997 Reconciliation to Estimated Fair Value - ----------------- ---------------------------------------------- Gross Unrealized Gross Depreciation Estimated Statement Unrealized (in Fair Value Appreciation millions) Value ---------- ------------ ------------ --------- US Government and political obligations $ 3,695 $ 336 $ (3) $ 4,028 Mortgage-backed securities 7,015 264 (4) 7,275 Corporate and other debt securities 21,649 1,098 (208) 22,539 ---------- -------- -------- -------- 32,359 1,698 (215) 33,842 Preferred stocks 167 4 (2) 169 ---------- -------- -------- -------- Total $ 32,526 $ 1,702 $ (217) $ 34,011 ========== ======== ======== ========
The statement value of debt securities by contractual maturity at December 31, 1998 and 1997 is shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. 52 53 The Northwestern Mutual Life Insurance Company Form 10-K THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996
December 31, December 31, 1998 1997 ------------ ------------ (in millions) Due in one year or less $ 655 $ 605 Due after one year through five years 5,031 4,878 Due after five years through ten years 10,286 9,760 Due after ten years 11,748 10,268 ------- ------- 27,720 25,511 Mortgage-backed securities 7,357 7,015 ------- ------- $35,077 $32,526 ======= =======
STOCKS The estimated fair values of common and perpetual preferred stocks are based upon quoted market prices, if available. For securities not actively traded, fair values are estimated using independent pricing services or internally developed pricing models. The adjusted cost of common and preferred stock held by the Company at December 31, 1998 and 1997 was $4.8 billion and $5.0 billion, respectively. MORTGAGE LOANS AND REAL ESTATE Mortgage loans are collateralized by properties located throughout the United States and Canada. The Company attempts to minimize mortgage loan investment risk by diversification of geographic locations and types of collateral properties. The fair value of mortgage loans as of December 31, 1998 and 1997 was approximately $12.9 billion and $11.5 billion, respectively. The fair value of the mortgage loan portfolio is estimated by discounting the future estimated cash flows using current interest rates of debt securities with similar credit risk and maturities, or utilizing net realizable values. 53 54 The Northwestern Mutual Life Insurance Company Form 10-K THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 At December 31, 1998 and 1997, real estate includes $61 million acquired through foreclosure at each date and $120 million and $124 million, respectively, of home office real estate. In 1998, 1997 and 1996, the Company recorded unrealized losses of $5 million, $2 million and $43 million, respectively, for the excess of statement value over fair value of certain real estate investments and mortgage loans. REALIZED GAINS AND LOSSES Realized investment gains and losses for the years ended December 31, 1998, 1997 and 1996 were as follows:
For the year ended For the year ended For the year ended December 31, 1998 December 31, 1997 December 31, 1996 ------------------------------ ------------------------------ ---------------------------- Net Net Net Realized Realized Realized Realized Realized Gains Realized Realized Gains Realized Realized Gains Gains Losses (Losses) Gains Losses (Losses) Gains Losses (Losses) -------- -------- -------- -------- ------- -------- -------- -------- -------- (in millions) (in millions) (in millions) Bonds $ 514 $(231) $ 283 $ 518 $(269) $249 $ 396 $(383) $ 13 Common and preferred stocks 885 (240) 645 533 (150) 383 580 (115) 465 Mortgage loans 18 (11) 7 14 (14) - 2 (15) (13) Real estate 41 - 41 100 (2) 98 36 - 36 Other investments 330 (267) 63 338 (105) 233 204 (51) 153 ------ ------ ------ ------ ----- ---- ------ ----- ---- 1,788 (749) 1,039 1,503 (540) 963 1,218 (564) 654 ------ ------ ------ ------ ----- ---- ------ ----- ---- Less: Capital gains taxes 358 340 224 Less: IMR deferrals 197 209 35 ------ ---- ---- Net realized capital gains $ 484 $414 $395 ------ ---- ----
SECURITIES LENDING The Company has entered into a securities lending agreement whereby certain securities are loaned to third parties, primarily major brokerage firms. The Company's policy requires a minimum of 102 percent of the fair value of the loaned securities as collateral, calculated on a daily basis in the form of either cash or securities. Collateral assets received and related liability due to counterparties of $1.5 billion are included in the consolidated statements of financial position for each of the periods ended at December 31, 1998 and 1997, and approximate the statement value of securities loaned at those dates. INVESTMENT IN MGIC The Company owns 11.0% (11.9 million shares) of the outstanding common stock of MGIC Investment Corporation ("MGIC"). This investment is accounted for using the equity method. At December 31, 1998 and 1997, the fair value of the Company's investment in MGIC exceeded the statement value of $180 million and $273 million, respectively, by $296 million and $768 million, respectively. In July 1995, the Company entered into a forward contract with a brokerage firm to deliver 8.9 million to 10.7 million shares of MGIC (or cash in an amount equal to the market value of the MGIC shares at contract maturity) in August, 1998, in exchange for a fixed cash payment of $247 million ($24 per share). The Company's objective in entering into the forward contract was to hedge against depreciation in the value of its MGIC holdings during the contract period below the initial spot price of $24, while partially participating in appreciation, if any, during the forward contract's duration. In August 1998, the Company delivered 8.9 million shares to settle the forward contract. In conjunction with the settlement, the Company recorded a $114 million realized gain. 54 55 The Northwestern Mutual Life Insurance Company Form 10-K THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 DERIVATIVE FINANCIAL INSTRUMENTS In the normal course of business, the Company enters into transactions to reduce its exposure to fluctuations in interest rates, foreign currency exchange rates and market volatility. These hedging strategies include the use of forwards, futures, options and swaps. The Company held the following positions for hedging purposes at December 31, 1998 and 1997:
Derivative Financial Instrument Notional Amounts Risks Reduced - ------------------------------- ---------------- ------------- (in millions) December 31, December 31, 1998 1997 ----------- ----------- Foreign Currency $601 $564 Currency exposure on foreign- denominated investments Forward Contracts Common Stock Futures 657 327 Stock market price fluctuation. Bond Futures 379 95 Bond market price fluctuation. Options to Acquire Interest 419 530 Interest rates payable on certain Rate Swaps annuity and insurance contracts. Foreign Currency and Interest 94 209 Interest rates on variable rate notes Rate Swaps and currency exposure on foreign-denominated bonds.
The notional or contractual amounts of derivative financial instruments are used to denominate these types of transactions and do not represent the amounts exchanged between the parties. In addition to the use of derivatives for hedging purposes, equity swaps were held for investment purposes during 1997 and 1998. The notional amount of equity swaps outstanding at December 31, 1998 and 1997 was $188 million and $143 million, respectively. Foreign currency forwards, foreign currency swaps, stock futures and equity swaps are reported at fair value. Resulting gains and losses on these contracts are unrealized until expiration of the contract. There is no statement value reported for interest rate swaps, bond futures and options to acquire interest rate swaps prior to the settlement of the contract, at which time realized gains and losses are deferred to IMR. Changes in the value of derivative instruments are expected to offset gains and losses on the hedged investments. During 1998, net realized and unrealized gains on investments were partially offset by net realized losses of $104 million and net unrealized losses of $58 million on derivative instruments. The effect of derivative instruments in 1997 and 1996 was not material to the Company's results of operations. 3. RESERVES FOR POLICY BENEFITS Life insurance reserves on substantially all policies issued since 1978 are based on the Commissioner's Reserve Valuation Method with interest rates ranging from 3-1/2% to 5-1/2%. Other life policy reserves are primarily based on the net level premium method employing various mortality tables at interest rates ranging from 2% to 4-1/2%. 55 56 The Northwestern Mutual Life Insurance Company Form 10-K THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 Deferred annuity reserves on contracts issued since 1985 are valued primarily using the Commissioner's Annuity Reserve Valuation Method with interest rates ranging from 3-1/2% to 6-1/4%. Other deferred annuity reserves are based on contract value. Immediate annuity reserves are based on present values of expected benefit payments at interest rates ranging from 3-1/2% to 7-1/2%. Active life reserves for disability income ("DI") policies issued since 1987 are primarily based on the two-year preliminary term method using a 4% interest rate and the 1985 Commissioner's Individual Disability Table A ("CIDA") for morbidity. Active life reserves for prior DI policies are based on the net level premium method, a 3% to 4% interest rate and the 1964 Commissioner's Disability Table for morbidity. Disabled life reserves for DI policies are based on the present values of expected benefit payments primarily using the 1985 CIDA (modified for Company experience in the first two years of disability) with interest rates ranging from 3% to 5-1/2%. Use of these actuarial tables and methods involves estimation of future mortality and morbidity based on past experience. Actual future experience could differ from these estimates. 4. EMPLOYEE AND AGENT BENEFIT PLANS The Company sponsors noncontributory defined benefit retirement plans for all eligible employees and agents. The expense associated with these plans is generally recorded by the Company in the period contributions to the plans are funded. As of January 1, 1998, the most recent actuarial valuation date available, the qualified defined benefit plans were fully funded. The Company recorded a liability of $98 million and $87 million for nonqualified defined benefit plans at December 31, 1998 and 1997, respectively. In addition, the Company has a contributory 401(k) plan for eligible employees and a noncontributory defined contribution plan for all full-time agents. The Company's contributions are expensed in the period contributions are made to the plans. The Company recorded $29 million, $27 million and $25 million of total expense related to its defined benefit and defined contribution plans for the years ended December 31, 1998, 1997 and 1996, respectively. The defined benefit and defined contribution plans' assets of $1.9 billion and $1.7 billion at December 31, 1998 and 1997, respectively, were primarily invested in the separate accounts of the Company. In addition to pension and retirement benefits, the Company provides certain health care and life insurance benefits ("postretirement benefits") for retired employees. Substantially all employees may become eligible for these benefits if they reach retirement age while working for the Company. Postretirement benefit costs for the years ended December 31, 1998, 1997 and 1996 were a net expense (benefit) of $1.8 million, ($1.3) million and ($12.0) million, respectively. Net benefits were primarily a result of favorable differences between actuarial assumptions and actual experience.
December 31, December 31, 1998 1997 ------------ ------------ Unfunded postretirement benefit obligation for retirees and other fully eligible employees $35 million $34 million (Accrued in statement of financial position) Estimated postretirement benefit obligation for active non-vested employees (Not accrued until employee vests) $56 million $50 million Discount rate 7% 7% Health care cost trend rate 10% to an ultimate 10% to an ultimate 5%, declining 1% 5%, declining 1% for 5 years for 5 years
56 57 The Northwestern Mutual Life Insurance Company Form 10-K THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 If the health care cost trend rate assumptions were increased by 1%, the accrued postretirement benefit obligation as of December 31, 1998 and 1997 would have been increased by $5 million and $4 million, respectively. At December 31, 1998 and 1997, the recorded postretirement benefit obligation was reduced by $23 million and $20 million, respectively, for assets funded for postretirement health care benefits. 5. REINSURANCE In the normal course of business, the Company seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by ceding to reinsurers under excess coverage and coinsurance contracts. The Company retains a maximum of $25 million of coverage per individual life and $35 million maximum of coverage per joint life. The Company has an excess reinsurance contract for disability income policies with retention limits varying based upon on coverage type. The amounts shown in the accompanying consolidated financial statements are net of reinsurance. Policy benefit reserves at December 31, 1998 and 1997 were reported net of ceded reserves of $518 million and $435 million, respectively. The effect of reinsurance on premiums and benefits for the years ended December 31, 1998, 1997 and 1996 was as follows:
1998 1997 1996 -------- -------- -------- (in millions) Direct premiums $8,426 $7,647 $7,064 Premiums ceded (405) (353) (397) ------ ------ ------ Net premium revenue $8,021 $7,294 $6,667 ====== ====== ====== Benefits to policyowners and beneficiaries 8,869 $8,057 $7,348 Benefits ceded (182) (136) (147) ------ ------ ------ Net benefits to policyowners and beneficiaries $8,687 $7,921 $7,201 ====== ====== ======
In addition, the Company received $121 million, $115 million and $93 million for the years ended December 31, 1998, 1997 and 1996, respectively, from reinsurers representing allowances for reimbursement of commissions and other expenses. These amounts are included in other income in the consolidated statement of operations. Reinsurance contracts do not relieve the Company from its obligations to policyowners. Failure of reinsurers to honor their obligations could result in losses to the Company; consequently, allowances are established for amounts deemed uncollectible. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. 6. INCOME TAXES Provisions for income taxes are based on current income tax payable without recognition of deferred taxes. The Company files a consolidated life-nonlife federal income tax return. Federal 57 58 The Northwestern Mutual Life Insurance Company Form 10-K THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 income tax returns for years through 1988 are closed as to further assessment of tax. Adequate provision has been made in the financial statements for any additional taxes which may become due with respect to the open years. The Company's effective tax rate on gains from operations before taxes for the years ended December 31, 1998, 1997 and 1996 was 48%, 56%, and 67% respectively. The Company's effective tax rate exceeds the federal corporate rate of 35% primarily because, (1) the Company pays a tax that is assessed only on the surplus of mutual life insurance companies ("equity tax"), and (2) the Company must capitalize and amortize (as opposed to immediately deducting) an amount deemed to represent the cost of acquiring new business ("DAC tax"). 7. ACQUISITION OF FRANK RUSSELL COMPANY Pursuant to an Agreement and Plan of Merger, dated as of August 10, 1998, the Company acquired Frank Russell Company effective January 1, 1999 for a purchase price of approximately $950 million. Frank Russell is a leading investment management and consulting firm, providing investment advice, analytical tools and investment vehicles to institutional and individual investors in more than 30 countries. In connection with its acquisition of Frank Russell Company, the Company will be required in 1999 to charge-off directly from surplus approximately $341 million, which represents the amount of acquisition goodwill less 10% of the Company's surplus at December 31, 1998. In addition, the Company will request permission from the OCI to charge-off the remaining $474 million of acquisition goodwill in 1999 and currently intends to do so. In connection with the acquisition, the Company has unconditionally guaranteed certain debt obligations of Frank Russell Company, including $350 million of senior notes and up to $150 million of other credit facilities. 8. CONTINGENCIES The Company has guaranteed certain obligations of its affiliates. These guarantees totaled approximately $133 million at December 31, 1998 and are generally supported by the underlying net asset values of the affiliates. In addition, the Company routinely makes commitments to fund mortgage loans or other investments in the normal course of business. These commitments aggregated to $2.1 billion at December 31, 1998 and were extended at market interest rates and terms. The Company is engaged in various legal actions in the normal course of its investment and insurance operations. In the opinion of management, any losses resulting from such actions would not have a material effect on the Company's financial position. 58 59 The Northwestern Mutual Life Insurance Company Form 10-K SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) 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. THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY (Registrant) By James D. Ericson --------------------------------------- James D. Ericson President and Chief Executive Officer Date: March 25 , 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Title James D. Ericson - ------------------------------- Trustee, President and Chief Executive Officer James D. Ericson Gary E. Long - ------------------------------- Vice President and Controller Gary E. Long (Principal Financial and Accounting Officer) 59 60 The Northwestern Mutual Life Insurance Company Form 10-K SIGNATURES (continued) R. QUINTUS ANDERSON* - ------------------------------- Trustee R. Quintus Anderson EDWARD E. BARR* - ------------------------------- Trustee Edward E. Barr GORDON T. BEAHAM, III* - ------------------------------- Trustee Gordon T. Beaham, III ROBERT C. BUCHANAN* - ------------------------------- Trustee Robert C. Buchanan ROBERT E. CARLSON* - ------------------------------- Trustee Robert E. Carlson GEORGE A. DICKERMAN* - ------------------------------- Trustee George A. Dickerman PIERRE S. DU PONT* - ------------------------------- Trustee Pierre S. Du Pont J. E. GALLEGOS* - ------------------------------- Trustee J. E. Gallegos STEPHEN N. GRAFF* - ------------------------------- Trustee Stephen N. Graff PATRICIA ALBJERG GRAHAM* - ------------------------------- Trustee Patricia Alberg Graham 60 61 The Northwestern Mutual Life Insurance Company Form 10-K SIGNATURES (continued) STEPHEN F. KELLER* - ------------------------------- Trustee Stephen F. Keller BARBARA A. KING* - ------------------------------- Trustee Barbara A. King J. THOMAS LEWIS* - ------------------------------- Trustee J. Thomas Lewis DANIEL F. McKEITHAN, JR.* - ------------------------------- Trustee Daniel F. McKeithan, Jr. GUY A. OSBORN* - ------------------------------- Trustee Guy A. Osborn TIMOTHY D. PROCTOR* - ------------------------------- Trustee Timothy D. Proctor DONALD J. SCHUENKE* - ------------------------------- Trustee Donald J. Schuenke H. MASON SIZEMORE, JR.* - ------------------------------- Trustee H. Mason Sizemore, Jr. HAROLD B. SMITH* - ------------------------------- Trustee Harold B. Smith SHERWOOD H. SMITH, JR.* - ------------------------------- Trustee Sherwood H. Smith, Jr. JOHN E. STEURI* - ------------------------------- Trustee John E. Steuri JOHN J. STOLLENWERK* - ------------------------------- Trustee John J. Stollenwerk BARRY L. WILLIAMS* - ------------------------------- Trustee Barry L. Williams KATHRYN D. WRISTON* - ------------------------------- Trustee Kathryn D. Wriston Each of the above signatures is affixed as of March 25, 1999 *By James D. Ericson ------------------------------- James D. Ericson, Attorney in fact, pursuant to the Power of Attorney attached as exhibit 24.1 hereto. 61 62 The Northwestern Mutual Life Insurance Company Form 10-K Index To Exhibits Exhibit Description Page - ------- ----------- ---- 24.1 Power of Attorney 63 27.1 NML Variable Annuity Account A Financial Data Schedule 65 27.2 NML Variable Annuity Account C Financial Data Schedule 66 62 EX-24.1 2 POWER OF ATTORNEY 1 The Northwestern Mutual Life Insurance Company Form 10-K Exhibit 24.1 POWER OF ATTORNEY The undersigned Trustees of THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY hereby constitute and appoint James D. Ericson and Robert E. Carlson, or either of them, their true and lawful attorneys and agents to sign the names of the undersigned Trustees to (1) the registration statement or statements to be filed under the Securities Act of 1933 and to any instrument or document filed as part thereof or in connection therewith or in any way related thereto, and any and all amendments thereto in connection with variable contracts issued or sold by The Northwestern Mutual Life Insurance Company or any separate account credited therein and (2) the Form 10-K Annual Report or Reports of The Northwestern Mutual Life Insurance Company and/or its separate accounts for its or their fiscal year ended December 31, 1998 to be filed as part thereof or in connection therewith or in any way related thereto, and any and all amendments thereto. "Variable contracts" as used herein means any contracts providing for benefits or values which may vary according to the investment experience of any separate account maintained by The Northwestern Mutual Life Insurance Company, including variable annuity contracts and variable life insurance policies. Each of the undersigned hereby ratifies and confirms all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, each of the undersigned has subscribed these presents this 22nd day of July, 1998. R. QUINTUS ANDERSON ------------------------- Trustee R. Quintus Anderson EDWARD E. BARR ------------------------- Trustee Edward E. Barr GORDON T. BEAHAM, III ------------------------- Trustee Gordon T. Beaham, III ROBERT C. BUCHANAN ------------------------- Trustee Robert C. Buchanan ROBERT E. CARLSON ------------------------- Trustee Robert E. Carlson GEORGE A. DICKERMAN ------------------------- Trustee George A. Dickerman PIERRE S. DU PONT ------------------------- Trustee Pierre S. Du Pont JAMES D. ERICSON ------------------------- Trustee James D. Ericson J. E. GALLEGOS ------------------------- Trustee J. E. Gallegos STEPHEN N. GRAFF ------------------------- Trustee Stephen N. Graff PATRICIA ALBJERG GRAHAM ------------------------- Trustee Patricia Albjerg Graham 63 2 The Northwestern Mutual Life Insurance Company Form 10-K STEPHEN F. KELLER ------------------------- Trustee Stephen F. Keller BARBARA A. KING ------------------------- Trustee Barbara A. King J. THOMAS LEWIS ------------------------- Trustee J. Thomas Lewis DANIEL F. McKEITHAN, JR. ------------------------- Trustee Daniel F. McKeithan, Jr. GUY A. OSBORN ------------------------- Trustee Guy A. Osborn TIMOTHY D. PROCTOR ------------------------- Trustee Timothy D. Proctor DONALD J. SCHUENKE ------------------------- Trustee Donald J. Schuenke H. MASON SIZEMORE, JR. ------------------------- Trustee H. Mason Sizemore, Jr. HAROLD B. SMITH ------------------------- Trustee Harold B. Smith SHERWOOD H. SMITH, JR. ------------------------- Trustee Sherwood H. Smith, Jr. JOHN E. STEURI ------------------------- Trustee John E. Steuri JOHN J. STOLLENWERK ------------------------- Trustee John J. Stollenwerk BARRY L. WILLIAMS ------------------------- Trustee Barry L. Williams KATHRYN D. WRISTON ------------------------- Trustee Kathryn D. Wriston 64 EX-27.1 3 NML VARIABLE ANNUITY ACCOUNT A FDS
6 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NML VARIABLE ANNUITY ACCOUNT A, DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 01 Annuity Account A 1000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 509762 727012 1430 0 0 728442 0 0 2809 2809 725633 0 0 0 0 0 0 0 0 725633 34233 0 0 8067 26166 37625 36250 100041 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
EX-27.2 4 NML VARIABLE ANNUITY ACCOUNT C FDS
6 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NML VARIABLE ANNUITY ACCOUNT C, DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 02 Annuity Account C 1000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 476888 645086 851 0 0 645937 0 0 851 851 645086 0 0 0 0 0 0 0 0 645086 26993 0 0 3155 23838 29249 37108 90195 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
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