497 1 c69236e497.txt PROSPECTUSES - VARIABLE EXECUTIVE LIFE APRIL 30, 2002 NML VARIABLE EXECUTIVE LIFE Flexible Premium Variable Life Insurance Policy (Photo) NORTHWESTERN MUTUAL SERIES FUND, INC. AND RUSSELL INSURANCE FUNDS The Northwestern Mutual Life Insurance Company 720 East Wisconsin Avenue Milwaukee, Wisconsin 53202 (414) 271-1444 Prospectuses [NORTHWESTERN MUTUAL LOGO] CONTENTS FOR THIS PROSPECTUS
PAGE ---- Prospectus......................................... 1 Summary............................................ 2 Variable Life Insurance.......................... 2 The Account and its Divisions.................... 2 The Policy....................................... 2 Availability Limitations....................... 2 Premiums....................................... 2 Death Benefit.................................. 2 Cash Value..................................... 2 Deductions and Charges......................... 2 From Premiums............................... 2 From Policy Value........................... 3 From the Mutual Funds....................... 3 The Northwestern Mutual Life Insurance Company, Northwestern Mutual Variable Life Account, Northwestern Mutual Series Fund, Inc. and Russell Insurance Funds.................................. 5 Northwestern Mutual.............................. 5 The Account...................................... 5 The Funds........................................ 5 Northwestern Mutual Series Fund, Inc. ........... 5 Small Cap Growth Stock Portfolio............... 5 T. Rowe Price Small Cap Value Portfolio........ 6 Aggressive Growth Stock Portfolio.............. 6 International Growth Portfolio................. 6 Franklin Templeton International Equity Portfolio................................... 6 Index 400 Stock Portfolio...................... 6 Growth Stock Portfolio......................... 6 J.P. Morgan Select Growth and Income Stock Portfolio................................... 6 Capital Guardian Domestic Equity Portfolio..... 6 Index 500 Stock Portfolio...................... 6 Asset Allocation Portfolio..................... 6 Balanced Portfolio............................. 6 High Yield Bond Portfolio...................... 6 Select Bond Portfolio.......................... 6 Money Market Portfolio......................... 7 Russell Insurance Funds.......................... 7 Multi-Style Equity Fund........................ 7 Aggressive Equity Fund......................... 7 Non-U.S. Fund.................................. 7 Real Estate Securities Fund.................... 7 Core Bond Fund................................. 7 Detailed Information About the Policy.............. 8 Premiums......................................... 8 Death Benefit.................................... 8 Death Benefit Options.......................... 8 Choice of Tests for Tax Purposes............... 8 Death Benefit Changes.......................... 9 Allocations to the Account....................... 9 Deductions and Charges........................... 10 Deductions from Premiums....................... 10
PAGE ---- Charges Against the Policy Value................. 10 Expenses of the Funds............................ 11 Policies Issued Prior to November 8, 1999...... 11 Cash Value....................................... 11 Policy Loans..................................... 11 Withdrawals of Policy Value...................... 12 Termination and Reinstatement.................... 12 Right to Return Policy........................... 12 Other Policy Provisions.......................... 13 Owner.......................................... 13 Beneficiary.................................... 13 Incontestability............................... 13 Suicide........................................ 13 Misstatement of Age or Sex..................... 13 Collateral Assignment.......................... 13 Deferral of Determination and Payment.......... 13 Dividends...................................... 13 Voting Rights.................................... 13 Substitution of Fund Shares and Other Changes.................................. 14 Reports.......................................... 14 Distribution of the Policies..................... 14 Tax Considerations............................... 14 General........................................ 14 Life Insurance Qualification................... 14 Tax Treatment of Life Insurance................ 15 Modified Endowment Contracts................... 15 Other Tax Considerations....................... 16 Other Information.................................. 18 Management....................................... 18 Regulation....................................... 20 Legal Proceedings................................ 20 Illustrations.................................... 20 Registration Statement........................... 20 Experts.......................................... 20 Financial Statements............................... 21 Report of Independent Accountants (as of December 31, 2001 and for each of the two years in the period ended December 31, 2001).......................................... 21 Financial Statements of the Account (as of December 31, 2001 and for each of the two years in the period ended December 31, 2001).......................................... 22 Financial Statements of Northwestern Mutual (as of December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001)...................................... 34 Report of Independent Accountants (as of December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001)... 50
PROSPECTUS NORTHWESTERN MUTUAL VARIABLE EXECUTIVE LIFE FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY This prospectus describes the Variable Executive Life Policy (the "Policy") offered by The Northwestern Mutual Life Insurance Company. The Policy is an individual flexible premium variable life insurance policy. The Policy offers flexible premium payments, twenty investment funding options and a choice of three death benefit options. The investment options correspond to the fifteen Portfolios of Northwestern Mutual Series Fund, Inc. and the five Funds which comprise the Russell Insurance Funds. The prospectuses for these mutual funds, attached to this prospectus, describe the investment objectives for all of the Portfolios and Funds. The values provided by the Policy vary daily depending on investment results. These values are not guaranteed. The Portfolios and Funds present varying degrees of investment risk. You may return a Policy for a limited period of time. See "Right to Return Policy", p. 12. IT MAY NOT BE ADVANTAGEOUS TO REPLACE EXISTING INSURANCE WITH A VARIABLE LIFE INSURANCE POLICY. SEE DEDUCTIONS AND CHARGES AND CASH VALUE. THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUSES FOR NORTHWESTERN MUTUAL SERIES FUND, INC. AND THE RUSSELL INSURANCE FUNDS WHICH ARE ATTACHED HERETO, AND SHOULD BE RETAINED FOR FUTURE REFERENCE. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. 1 Prospectus SUMMARY The following summary provides a brief overview of the Policy. It omits details which are included elsewhere in this prospectus and the attached mutual fund prospectuses and in the terms of the Policy. VARIABLE LIFE INSURANCE Variable life insurance is cash value life insurance and is similar in many ways to traditional fixed benefit life insurance. Both kinds of life insurance provide an income tax-free death benefit and a cash value that grows tax- deferred. Variable life insurance allows the policyowner to direct the premiums, after certain deductions, among a range of investment options. The variable life insurance cash value will vary to reflect the performance of the selected investments. The variable life insurance death benefit may vary to reflect the performance of the selected investments. THE ACCOUNT AND ITS DIVISIONS Northwestern Mutual Variable Life Account is the investment vehicle for the Policies. The Account has twenty divisions. You determine how net premiums are to be apportioned. We invest the assets of each division in a corresponding Portfolio of Northwestern Mutual Series Fund, Inc. or one of the Russell Insurance Funds. The fifteen Portfolios of Northwestern Mutual Series Fund, Inc. are the Small Cap Growth Stock Portfolio, T. Rowe Price Small Cap Value Portfolio, Aggressive Growth Stock Portfolio, International Growth Portfolio, Franklin Templeton International Equity Portfolio, Index 400 Stock Portfolio, Growth Stock Portfolio, J.P. Morgan Select Growth and Income Stock Portfolio, Capital Guardian Domestic Equity Portfolio, Index 500 Stock Portfolio, Asset Allocation Portfolio, Balanced Portfolio, High Yield Bond Portfolio, Select Bond Portfolio and Money Market Portfolio. The five Russell Insurance Funds are the Multi-Style Equity Fund, Aggressive Equity Fund, Non-U.S. Fund, Real Estate Securities Fund, and Core Bond Fund. For additional information about the funds see the attached prospectuses. THE POLICY AVAILABILITY LIMITATIONS We have designed the Variable Executive Life Policy for use with non-tax qualified executive benefit plans. We offer the Policy for use with corporate-sponsored plans where the first year premium for the plan will be at least $25,000. In addition, we offer this Policy where no corporate sponsor is involved and the first year premium for each Policy will be at least $25,000. We will permit exceptions in some cases and additional requirements may apply. Each case must be approved at our Home Office. PREMIUMS You may pay premiums at any time and in any amounts, within limits, but additional premiums will be required to keep the Policy in force if values become insufficient to pay current charges. DEATH BENEFIT The Policy offers a choice of three death benefit options: - Specified Amount (Option A) - Specified Amount Plus Policy Value (Option B) - Specified Amount Plus Premiums Paid (Option C) In each case, the death benefit will be at least the amount needed to meet federal income tax requirements for life insurance. You select the Specified Amount when you purchase the Policy. You may increase or decrease the Specified Amount, within limits and subject to conditions, after a Policy is issued. The minimum amount is $50,000. No minimum death benefit is guaranteed. CASH VALUE The cash value of a Policy is not guaranteed and varies daily to reflect investment experience. You may surrender a Policy for its cash value. The Policy also includes loan and withdrawal provisions. DEDUCTIONS AND CHARGES FROM PREMIUMS - Deduction of 3.6% for local, state and federal taxes attributable to premiums. - Sales load of 15% up to the Target Premium for first Policy year, 6.8% of premiums up to the Target Premium for Policy years 2-6, and 3% of all other premiums. The initial Target Premium is based on the modified endowment contract seven-pay limit for the initial Specified Amount and the age and sex of the insured. See "Modified Endowment Contracts", p. 15. Prospectus 2 Generally, a Policy receiving the 3% deduction in the first Policy year on the initial premium will be classified as a modified endowment contract. Increases and decreases in Specified Amount will be reflected in the Target Premium. FROM POLICY VALUE - Cost of insurance charge deducted monthly, is based on the net amount at risk, the age, sex and risk classification of the insured, and the Policy duration. Current charges are based on our experience. Maximum charges are based on the 1980 CSO Mortality Tables. - Monthly mortality and expense risk charge. The current charge is at the annual rate of .75% (0.06250% monthly rate) of the Policy Value, less any Policy debt, for the first 10 Policy years, and .38% (0.03167% monthly rate) thereafter. The maximum annual rate is .90% (0.07500% monthly rate). - Monthly administrative charge. The current charge is $15.00 in the first Policy year and $5.00 thereafter. The maximum charge is $15 in the first Policy year and $10 thereafter. - Charge for expenses and taxes associated with the Policy loan, if any. The aggregate charge is at the current annual rate of .75% (0.06250% monthly rate) of the Policy debt for the first ten Policy years and .20% (0.01667%) thereafter. - Any transaction charges that may result from a withdrawal, a transfer, a change in the Specified Amount or a change in the death benefit option. We are currently waiving these charges. The maximum charge is $250 for death benefit option changes and $25 for each of the other transactions. FROM THE MUTUAL FUNDS - A daily charge for investment advisory and other services provided to the mutual funds. The total expenses vary by Portfolio or Fund and currently fall in an approximate range of .20% to 1.43% of assets on an annual basis. The following table shows the annual expenses for each of the Portfolios and Funds, as a percentage of the average net assets, based on 2001 operations. NORTHWESTERN MUTUAL SERIES FUND, INC.
INVESTMENT ADVISORY OTHER TOTAL PORTFOLIO FEE EXPENSES EXPENSES --------- ---------- -------- -------- Small Cap Growth Stock................. .59% .01% .60% T. Rowe Price Small Cap Value*................ .85% .51% 1.36% Aggressive Growth Stock................. .52% .00% .52% International Growth*... .75% .50% 1.25% Franklin Templeton International Equity................ .66% .08% .74% Index 400 Stock......... .25% .06% .31% Growth Stock............ .42% .01% .43% J.P. Morgan Select Growth and Income Stock................. .57% .01% .58% Capital Guardian Domestic Equity*...... .65% .25% .90% Index 500 Stock......... .20% .01% .21% Asset Allocation*....... .60% .32% .92% Balanced................ .30% .00% .30% High Yield Bond......... .50% .03% .53% Select Bond............. .30% .00% .30% Money Market............ .30% .00% .30%
* T. Rowe Price Small Cap Value Portfolio Northwestern Mutual Series Funds' advisor, Mason Street Advisors, LLC ("MSA") has contractually agreed to waive, at least until December 31, 2006, a portion of its 0.85% management fee, up to the full amount of that fee, equal to the amount by which the Portfolio's total operating expenses exceed 1.00% of the Fund's average daily net assets on an annual basis and to reimburse the Portfolio for all remaining expenses after fee waivers which exceed 1.00% of the average daily net assets on an annual basis. Taking the fee waivers into account, the annual total operating expenses were 1.00% of the average net assets of the T. Rowe Price Small Cap Value Portfolio. International Growth Portfolio MSA has contractually agreed to waive, at least until December 31, 2006, a portion of its 0.75% management fee, up to the full amount of that fee, equal to the amount by which the Portfolio's total operating expenses exceed 1.10% of the Fund's average daily net assets on an annual basis and to reimburse the Portfolio for all remaining expenses after fee waivers which exceed 1.10% of the average daily net assets on an annual basis. Taking the fee waivers into account, the annual total operating expenses were 1.10% of the average net assets of the International Growth Portfolio. Capital Guardian Domestic Equity Portfolio MSA has contractually agreed to waive, at least until December 31, 2006, a portion of its 0.65% management fee, up to the full amount of that fee, equal to the amount by which the Portfolio's total operating expenses exceed 0.75% of the Fund's average daily net assets on an annual basis and to reimburse the Portfolio for all remaining expenses after fee waivers which exceed 0.75% of the average daily net assets on an 3 Prospectus annual basis. Taking the fee waivers into account, the annual total operating expenses were 0.75% of the average net assets of the Capital Guardian Domestic Equity Portfolio. Asset Allocation Portfolio MSA has contractually agreed to waive, at least until December 31, 2006, a portion of its 0.60% management fee, up to the full amount of that fee, equal to the amount by which the Portfolio's total operating expenses exceed 0.75% of the Fund's average daily net assets on an annual basis and to reimburse the Portfolio for all remaining expenses after fee waivers which exceed 0.75% of the average daily net assets on an annual basis. Taking the fee waivers into account, the annual total operating expenses were 0.75% of the average net assets of the Asset Allocation Portfolio. RUSSELL INSURANCE FUNDS
INVESTMENT ADVISORY OTHER TOTAL FUND FEE** EXPENSES** EXPENSES ---- ---------- ---------- -------- Multi-Style Equity Fund.................. 0.78% 0.21% 0.99% Aggressive Equity Fund.................. 0.95% 0.43% 1.38% Non-U.S. Fund........... 0.94% 0.49% 1.43% Real Estate Securities Fund.................. 0.84% 0.22% 1.06% Core Bond Fund.......... 0.60% 0.28% 0.88%
** Multi-Style Equity Fund Russell Insurance Funds' advisor, Frank Russell Investment Management Company (FRIMCo) has contractually agreed to waive, at least until April 30, 2003, a portion of its 0.78% management fee, up to the full amount of that fee, equal to the amount by which the Fund's total operating expenses exceed 0.92% of the Fund's average daily net assets on an annual basis and to reimburse the Fund for all remaining expenses after fee waivers which exceed 0.92% of the average daily net assets on an annual basis. Taking the fee waivers into account, the actual annual total operating expenses were 0.92% of the average net assets of the Multi-Style Fund. Aggressive Equity Fund FRIMCo has contractually agreed to waive, at least until April 30, 2003, a portion of its 0.95% management fee, up to the full amount of that fee, equal to the amount by which the Fund's total operating expenses exceed 1.25% of the Fund's average daily net assets on an annual basis and to reimburse the Fund for all remaining expenses after fee waivers which exceed 1.25% of the average daily net assets on an annual basis. Taking the fee waivers into account, the actual annual total operating expenses were 1.25% of the average net assets of the Aggressive Equity Fund. Non-U.S. Fund FRIMCo has contractually agreed to waive, at least until April 30, 2003, a portion of its 0.94% management fee, up to the full amount of that fee, equal to the amount by which the Fund's total operating expenses exceed 1.30% of the Fund's average daily net assets on an annual basis and to reimburse the Fund for all remaining expenses after fee waivers which exceed 1.30% of the average daily net assets on an annual basis. Taking the fee waivers into account, the actual annual total operating expenses were 1.30% of the average net assets of the Non-U.S. Fund. Real Estate Securities Fund FRIMCo has contractually agreed to waive, at least until April 30, 2003, a portion of its .84% management fee, up to the full amount of that fee, equal to the amount by which the Fund's total operating expenses exceed 1.06% of the Fund's average daily net assets on an annual basis and to reimburse the Fund for all remaining expenses after fee waivers which exceed 1.06% of the average daily net assets on an annual basis. Core Bond Fund FRIMCo has contractually agreed to waive, at least until April 30, 2003, a portion of its 0.60% management fee, up to the full amount of that fee, equal to the amount by which the Fund's total operating expenses exceed ..80% of the Fund's average daily net assets on an annual basis and to reimburse the Fund for all remaining expenses after fee waivers which exceed .80% of the average daily net assets on an annual basis. Taking the fee waivers into account, the actual annual total operating expenses were .80% of the average net assets of the Core Bond Fund. Prospectus 4 THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY, NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT, NORTHWESTERN MUTUAL SERIES FUND, INC. AND RUSSELL INSURANCE FUNDS NORTHWESTERN MUTUAL The Northwestern Mutual Life Insurance Company is a mutual life insurance company organized by a special act of the Wisconsin Legislature in 1857. It is licensed to conduct a conventional life insurance business in the District of Columbia and in all states of the United States. The total assets of Northwestern Mutual exceed $98 billion. Northwestern Mutual sells life and disability insurance policies and annuity contracts through its own field force of approximately 6,000 full time producing agents. The Internal Revenue Service Employer Identification Number of Northwestern Mutual is 39-0509570. "We" in this prospectus means Northwestern Mutual. THE ACCOUNT We established Northwestern Mutual Variable Life Account by action of our Trustees on November 23, 1983, in accordance with the provisions of Wisconsin insurance law. Under Wisconsin law the income, gains and losses, realized or unrealized, of the Account are credited to or charged against the assets of the Account without regard to our other income, gains or losses. We use the Account only for variable life insurance policies, including other variable life insurance policies which are described in other prospectuses. The Account is registered with the Securities and Exchange Commission as a unit investment trust under the Investment Company Act of 1940. This registration does not involve supervision of management or investment practices or policies. The Account has twenty divisions. All of the assets of each division are invested in shares of the corresponding Portfolio or Fund described below. THE FUNDS NORTHWESTERN MUTUAL SERIES FUND, INC. Northwestern Mutual Series Fund, Inc. is a mutual fund of the series type registered under the Investment Company Act of 1940 as an open-end diversified management investment company. The Account buys shares of each Portfolio at their net asset value without any sales charge. The investment adviser for the Fund is Mason Street Advisors, LLC ("MSA"), our wholly-owned company. The investment advisory agreements for the respective Portfolios provide that MSA will provide services and bear certain expenses of the Fund. For providing investment advisory and other services and bearing Fund expenses, the Fund pays MSA a fee at an annual rate which ranges from .20% of the aggregate average daily net assets of the Index 500 Stock Portfolio to a maximum of .85% for the T. Rowe Price Small Cap Value Portfolio. Other expenses borne by the Portfolios range from .00% for the Aggressive Growth Stock, Balanced, Select Bond, and Money Market Portfolios to .51% for the T. Rowe Price Small Cap Value Portfolio. We provide the people and facilities MSA uses in performing its investment advisory functions and we are a party to the investment advisory agreement. MSA has retained J.P. Morgan Investment Management, Inc., Templeton Investment Counsel, LLC, Capital Guardian Trust Company and T. Rowe Price Associates, Inc. under investment sub-advisory agreements to provide investment advice to the J.P. Morgan Select Growth and Income Stock Portfolio, the Franklin Templeton International Equity Portfolio, the Capital Guardian Domestic Equity Portfolio and the T. Rowe Price Small Cap Value Portfolio. The investment objectives and types of investments for each of the fifteen Portfolios of the Fund are set forth below. There can be no assurance that the Portfolios will realize their objectives. For more information about the investment objectives and policies, the attendant risk factors and expenses see the attached prospectus for Northwestern Mutual Series Fund, Inc. SMALL CAP GROWTH STOCK PORTFOLIO. The investment objective of the Small Cap Growth Stock Portfolio is long-term growth of capital. The Portfolio will seek to achieve this objective primarily by investing in the common stocks of companies which can reasonably be expected to increase 5 Prospectus sales and earnings at a pace which will exceed the growth rate of the U.S. economy over an extended period. T. ROWE PRICE SMALL CAP VALUE PORTFOLIO. The investment objective of the T. Rowe Price Small Cap Value Portfolio is long-term growth of capital. The Portfolio seeks to achieve this objective by investing primarily in small companies whose common stocks are believed to be undervalued. AGGRESSIVE GROWTH STOCK PORTFOLIO. The investment objective of the Aggressive Growth Stock Portfolio is to achieve long-term appreciation of capital primarily by investing in the common stocks of companies which can reasonably be expected to increase their sales and earnings at a pace which will exceed the growth rate of the nation's economy over an extended period. INTERNATIONAL GROWTH PORTFOLIO. The investment objective of the International Growth Portfolio is long-term capital appreciation. Normally, the Portfolio invests at least 80% of its assets in non-U.S. securities. In addition to common stocks, the Portfolio may invest in preferred stocks, convertible bonds, warrants and money market instruments. FRANKLIN TEMPLETON INTERNATIONAL EQUITY PORTFOLIO. The investment objective of the Franklin Templeton International Equity Portfolio is long-term capital growth. It pursues its objective through a flexible policy of investing in stocks and debt securities of companies and governments outside the United States. INDEX 400 STOCK PORTFOLIO. The investment objective of the Index 400 Stock Portfolio is to achieve investment results that approximate the performance of the Standard & Poor's MidCap 400 Index ("S&P 400 Index"). The Portfolio will attempt to meet this objective by investing in stocks included in the S&P 400 Index. GROWTH STOCK PORTFOLIO. The investment objective of the Growth Stock Portfolio is long-term growth of capital; current income is secondary. The Portfolio will seek to achieve this objective by selecting investments in companies which have above average earnings growth potential. J.P. MORGAN SELECT GROWTH AND INCOME STOCK PORTFOLIO. The investment objective of the J.P. Morgan Select Growth and Income Stock Portfolio is long-term growth of capital and income. Ordinarily the Portfolio pursues its investment objectives by investing primarily in dividend-paying common stock. CAPITAL GUARDIAN DOMESTIC EQUITY PORTFOLIO. The investment objective of the Capital Guardian Domestic Equity Portfolio is long-term growth of capital and income. The Portfolio seeks to achieve this objective by investing primarily in the stocks of larger American companies. INDEX 500 STOCK PORTFOLIO. The investment objective of the Index 500 Stock Portfolio is to achieve investment results that approximate the performance of the Standard & Poor's 500 Composite Stock Price Index ("S&P 500 Index"). The Portfolio will attempt to meet this objective by investing in stocks included in the S&P 500 Index. Stocks are generally more volatile than debt securities and involve greater investment risks. ASSET ALLOCATION PORTFOLIO. The investment objective of the Asset Allocation Portfolio is to realize as high a level of total return, including current income and capital appreciation, as is consistent with reasonable investment risk. The Portfolio will follow a flexible policy for allocating assets among common stocks, bonds and cash. Stocks may include foreign stocks and bonds may include non-investment grade obligations. BALANCED PORTFOLIO. The investment objective of the Balanced Portfolio is to realize as high a level of long-term total rate of return as is consistent with prudent investment risk. The Balanced Portfolio will invest in common stocks and other equity securities, bonds and money market instruments. Investment in the Balanced Portfolio necessarily involves the risks inherent in stocks and debt securities of varying maturities, including the risk that the Portfolio may invest too much or too little of its assets in each type of security at any particular time. HIGH YIELD BOND PORTFOLIO. The investment objective of the High Yield Bond Portfolio is to achieve high current income and capital appreciation by investing primarily in fixed income securities that are rated below investment grade by the major rating agencies. SELECT BOND PORTFOLIO. The primary investment objective of the Select Bond Portfolio is to provide as high a level of long-term total rate of return as is consistent with prudent investment risk. A secondary objective is to seek preservation of shareholders' capital. The Select Bond Portfolio will invest Prospectus 6 primarily in debt securities. The value of debt securities will tend to rise and fall inversely with the rise and fall of interest rates. MONEY MARKET PORTFOLIO. The investment objective of the Money Market Portfolio is to realize maximum current income consistent with liquidity and stability of capital. The Money Market Portfolio will invest in money market instruments and other debt securities with maturities generally not exceeding one year. The return produced by these securities will reflect fluctuations in short-term interest rates. RUSSELL INSURANCE FUNDS The Russell Insurance Funds also comprise a mutual fund of the series type registered under the Investment Company Act of 1940 as an open-end diversified management investment company. The Account buys shares of each of the Russell Insurance Funds at their net asset value without any sales charge. The assets of each of the Russell Insurance Funds are invested by one or more investment management organizations researched and recommended by Frank Russell Company ("Russell"), and an affiliate of Russell, Frank Russell Investment Management Company ("FRIMCo"). FRIMCo also advises, operates and administers the Russell Insurance Funds. Russell is our majority-owned subsidiary. The investment objectives and types of investments for each of the five Russell Insurance Funds are set forth below. There can be no assurance that the Funds will realize their objectives. A table showing the expense ratios for each of the Russell Insurance Funds is included in the Summary above, at page 4. For more information about the investment objectives and policies, the attendant risk factors and expenses see the attached prospectus for the Russell Insurance Funds. MULTI-STYLE EQUITY FUND. The investment objective of the Multi-Style Equity Fund is to provide income and capital growth by investing principally in equity securities. The Multi-Style Equity Fund invests primarily in common stocks of medium and large capitalization companies. These companies are predominately US-based, although the Fund may invest a limited portion of its assets in non-US firms from time to time. AGGRESSIVE EQUITY FUND. The investment objective of the Aggressive Equity Fund is to provide capital appreciation by assuming a higher level of volatility than is ordinarily expected from Multi-Style Equity Fund by investing in equity securities. The Aggressive Equity Fund invests primarily in common stocks of small and medium capitalization companies. These companies are predominately US-based, although the Fund may invest in non-US firms from time to time. NON-U.S. FUND. The investment objective of the Non-U.S. Fund is to provide favorable total return and additional diversification for US investors by investing primarily in equity and fixed-income securities of non-US companies, and securities issued by non-US governments. The Non-U.S. Fund invests primarily in equity securities issued by companies domiciled outside the United States and in depository receipts, which represent ownership of securities of non-US companies. REAL ESTATE SECURITIES FUND. The investment objective of the Real Estate Securities Fund is to generate a high level of total return through above average current income, while maintaining the potential for capital appreciation. The Fund seeks to achieve its objective by concentrating its investments in equity securities of issuers whose value is derived primarily from development, management and market pricing of underlying real estate properties. CORE BOND FUND. The investment objective of the Core Bond Fund is to maximize total return, through capital appreciation and income, by assuming a level of volatility consistent with the broad fixed-income market, by investing in fixed-income securities. The Core Bond Fund invests primarily in fixed-income securities. In particular, the Fund holds debt securities issued or guaranteed by the US government, or to a lesser extent by non-US governments, or by their respective agencies and instrumentalities. It also holds mortgage-backed securities, including collateralized mortgage obligations. The Fund also invests in corporate debt securities and dollar-denominated obligations issued in the US by non-US banks and corporations (Yankee Bonds). A majority of the Fund's holdings are US dollar-denominated. From time to time the Fund may invest in municipal debt obligations. 7 Prospectus DETAILED INFORMATION ABOUT THE POLICY PREMIUMS The Policy permits you to pay premiums at any time before the Policy anniversary that is nearest the insured's 95th birthday and in any amounts within the limits described in this section. We use the Specified Amount you select when you purchase the Policy to determine the minimum initial premium. The minimum initial premium varies with the issue age and sex of the insured. We use the Target Premium to determine the sales load. The initial Target Premium is based on the modified endowment contract seven-pay limit for the initial Specified Amount and the age and sex of the insured. Increases and decreases in Specified Amount will be reflected in the Target Premium. After a Policy is issued, there are no minimum premiums, except that we will not accept a premium of less than $25. The Policy will remain in force during the insured's lifetime so long as the Policy Value, less the amount of any Policy debt, is sufficient to pay the monthly cost of insurance charge and other current charges. The Policy sets no maximum on premiums, but we will accept a premium that would increase the net amount at risk only if the insurance, as increased, will be within our issue limits, the insured meets our insurability requirements and we receive the premium prior to the anniversary nearest the insured's 75th birthday. We will not accept a premium if it would disqualify the Policy as life insurance for federal income tax purposes. We will accept a premium, however, even if it would cause the Policy to be classified as a modified endowment contract. See "Tax Considerations", p. 14. DEATH BENEFIT DEATH BENEFIT OPTIONS The Policy provides for three death benefit options: Specified Amount (Option A) You select the Specified Amount when you purchase the Policy. Specified Amount Plus Policy Value (Option B) The Policy Value is the cumulative amount invested, adjusted for investment results, reduced by the charges for insurance and other expenses. Specified Amount Plus Premiums Paid (Option C) In addition, under any of the Options, we will increase the Death Benefit if necessary to meet the definitional requirements for life insurance for federal income tax purposes as discussed below. Under any of the death benefit options the death benefit will be equal to the Policy Value at all times on and after the Policy anniversary nearest the 100th birthday of the insured. CHOICE OF TESTS FOR TAX PURPOSES A Policy must satisfy one of two testing methods to qualify as life insurance for federal income tax purposes. You may choose either the Guideline Premium/Cash Value Corridor Test or the Cash Value Accumulation Test. Both tests require the Policy to meet minimum ratios, or multiples, of death benefit to the Policy Value. The minimum multiple decreases as the age of the insured advances. You make the choice of testing methods when you purchase a Policy and it may not be changed. For the Guideline Premium/Cash Value Corridor Test the Prospectus 8 minimum multiples of death benefit to the Policy Value are shown below. GUIDELINE PREMIUM/CASH VALUE CORRIDOR TEST MULTIPLES
ATTAINED POLICY ATTAINED POLICY AGE VALUE % AGE VALUE % -------- ------- -------- ------- 40 or under.......... 250 61............... 128 41................... 243 62............... 126 42................... 236 63............... 124 43................... 229 64............... 122 44................... 222 65............... 120 45................... 215 66............... 119 46................... 209 67............... 118 47................... 203 68............... 117 48................... 197 69............... 116 49................... 191 70............... 115 50................... 185 71............... 113 51................... 178 72............... 111 52................... 171 73............... 109 53................... 164 74............... 107 54................... 157 75-90............ 105 55................... 150 91............... 104 56................... 146 92............... 103 57................... 142 93............... 102 58................... 138 94............... 101 59................... 134 95 or over....... 100 60................... 130
For the Cash Value Accumulation Test the minimum multiples of death benefit to the Policy Value are calculated using net single premiums based on the attained age of the insured and the Policy's underwriting classification, using a 4% interest rate. The Guideline Premium/Cash Value Corridor Test has lower minimum multiples than the Cash Value Accumulation Test, usually resulting in better cash value accumulation for a given amount of premium and Specified Amount. But the Guideline Premium/Cash Value Corridor Test limits the amount of premium that may be paid in each Policy year. The Cash Value Accumulation Test has no such annual limitation, and allows more premium to be paid during the early Policy years. DEATH BENEFIT CHANGES After we issue a Policy you may change the death benefit option, or increase or decrease the Specified Amount, subject to our approval. Changes are subject to insurability requirements and issue limits. We will not permit a change if it results in a Specified Amount less than the minimum for a new Policy that we would issue on that date. A change in the death benefit option, or an increase or decrease in the Specified Amount, will be effective on the monthly processing date next following receipt of a written request at our Home Office. Administrative charges of up to $250 for a change in the death benefit option, and up to $25 for each of more than one change in the Specified Amount in a Policy year, may apply. We will deduct any such charges from the Policy Value. We are currently waiving these charges. A change in the death benefit option, or an increase or decrease in the Specified Amount, may have important tax effects. See "Tax Considerations", p. 14. The cost of insurance charge will increase if a change results in a larger net amount at risk. See "Charges Against the Policy Value", p. 10. ALLOCATIONS TO THE ACCOUNT We place the initial net premium in the Account on the Policy date. Net premiums you pay thereafter are placed in the Account on the date we receive them at our Home Office. Net premiums are premiums less the deductions from premiums. See "Deductions from Premiums", p. 10. We invest premiums we place in the Account prior to the initial allocation date in the Money Market Division of the Account. The initial allocation date is identified in the Policy and is the later of the date we approved the application and the date we received the initial premium at our Home Office. A different initial allocation date applies in those states which require a refund of at least the premium paid during the period when the Policy may be returned. In those states, the initial allocation date will be one day after the end of the period during which the policyowner has the right to return the Policy, based on the applicable state laws. See "Right to Return Policy", p. 12. On the initial allocation date we invest the amount in the Money Market Division in the Account divisions as you have directed in the application for the Policy. You may change the allocation for future net premiums at any time by written request and the change will be effective for premiums we place in the Account thereafter. Allocation must be in whole percentages. 9 Prospectus You may transfer accumulated amounts from one division of the Account to another. Transfers are effective on the date we receive a written request at our Home Office. If you contemplate the transfer of funds from one division to another, you should consider the risk inherent in a switch from one investment medium to another. In general, frequent transfers based on short-term expectations for the stock and bond markets, especially transfers of large sums, will tend to accentuate the danger that a transfer will be made at an inopportune time. Frequent transfers, or transfers that are large in relation to the assets of the Portfolio or Fund in which a division invests, may also be disruptive and may disadvantage other investors. We reserve the right to limit the frequency or amount of transfers. We reserve the right to charge a fee of up to $25, to cover administrative costs of transfers, if there are more than twelve transfers in a Policy year. We are currently waiving these charges. DEDUCTIONS AND CHARGES DEDUCTIONS FROM PREMIUMS We deduct a charge for taxes attributable to premiums from each premium. The total amount of this deduction is 3.6% of the premium. Of this amount, 2.35% is for state premium taxes. This 2.35% rate is an average rate since premium tax rates vary from state to state (they currently range from ..5% to 3.5% of life insurance premiums). We do not expect to profit from this charge. The remainder of the deduction, 1.25% of each premium, is for federal income taxes measured by premiums. We believe that this charge does not exceed a reasonable estimate of our federal income taxes attributable to the treatment of deferred acquisition costs. We may change the charge for taxes to reflect any changes in the law. We deduct a charge for sales costs from each premium. The charge is 15% of premiums paid during the first Policy year up to the Target Premium, 6.8% of premiums paid during each of Policy years 2-6 up to the Target Premium, and 3% of all other premiums. The initial Target Premium is based on the modified endowment contract seven-pay limit for the initial Specified Amount and the age and sex of the insured. Increases and decreases in Specified Amount will be reflected in the Target Premium. See "Modified Endowment Contracts", p. 15. To the extent that sales expenses exceed the amounts deducted, we will pay the expenses from our other assets. These assets may include, among other things, any gain realized from the monthly charge against the Policy Value for the mortality and expense risks we have assumed, as described below. CHARGES AGAINST THE POLICY VALUE We deduct a cost of insurance charge from the Policy Value on each monthly processing date. We determine the amount by multiplying the net amount at risk by the cost of insurance rate. The net amount at risk is equal to the death benefit currently in effect less the Policy Value. The cost of insurance rate reflects the issue age, policy duration and risk classification of the insured. The maximum cost of insurance rates are included in the Policy. We also deduct a charge for the mortality and expense risks we have assumed. The maximum amount of the charge is equal to an annual rate of .90% (0.07500% monthly rate) of the Policy Value, less any Policy debt. Currently the charge is equal to an annual rate of .75% (0.06250% monthly rate) of Policy Value, less any Policy debt, for the first ten Policy years and .38% (0.03167% monthly rate) thereafter. The mortality risk is that insureds may not live as long as we estimated. The expense risk is that expenses of issuing and administering the Policies may exceed the estimated costs. We will realize a gain from this charge to the extent it is not needed to provide benefits and pay expenses under the Policies. We deduct a monthly administrative charge of not more than $15 for the first Policy year and $10 thereafter. Currently this charge will be $5 after the first Policy year. This charge is for administrative expenses, including costs of premium collection, processing claims, keeping records and communicating with Policyowners. We do not expect to profit from this charge. We deduct a charge for the expenses and taxes associated with the Policy debt, if any. The aggregate charge is at the current annual rate of 0.75% (0.06250% monthly rate) of the Policy debt for the first ten Policy years and 0.20% (0.01667% monthly rate) thereafter. The Policy provides for transaction fees to be deducted from the Policy Value on the dates on which transactions take place. These charges are $25 for changes in the Specified Amount, withdrawals or transfers of assets among the divisions of the Account if more than twelve transfers take place in a Policy year. The fee for a change in the death Prospectus 10 benefit option is $250. Currently we are waiving all of these fees. We will apportion deductions from the Policy Value among the divisions of the Account in proportion to the amounts invested in the divisions. EXPENSES OF THE FUNDS The investment performance of each division of the Account reflects all expenses borne by the corresponding Portfolio or Fund. The expenses are summarized above on page 3. See the attached mutual fund prospectuses for more information about those expenses. POLICIES ISSUED PRIOR TO NOVEMBER 8, 1999 For Policies issued prior to November 8, 1999, including Policies issued after that date in states where the current Policy form had not been approved at the time of policy issuance. The deduction from premiums for sales costs is 15% of premiums paid during the first Policy year up to the Target Premium and 3% of all other premiums. CASH VALUE You may surrender a Policy for the cash value at any time during the lifetime of the insured. The cash value for the Policy will change daily in response to investment results. No minimum cash value is guaranteed. The cash value is equal to the Policy Value reduced by any Policy debt outstanding. During the first Policy year the cash value is increased by the amount of sales load previously deducted from premiums, during the second Policy year the cash value is increased by 66.67% of previous sales load deductions and during the third Policy year the cash value is increased by 33.33% of the previous sales load deductions. This increase in cash value during the first three Policy years does not apply if the Policy is in a grace period on the date on which you surrender the Policy. This increase in cash value is available only for Policies sold to corporate-sponsored plans where at least five Policies will be issued, each on the life of a different eligible insured person (except New Jersey). The cash values shown in the illustrations, which are found in an exhibit to the registration statement, are not applicable for Policy Years 1, 2, and 3 for Policies sold to (1) individuals where no corporate sponsor is involved, (2) for corporate-sponsored plans with less than five Policies, and (3) corporate-sponsored plans in New Jersey. Applicable illustrations are available upon request. We determine the cash value for a Policy at the end of each valuation period. Each business day, together with any non-business days before it, is a valuation period. A business day is any day on which the New York Stock Exchange is open for trading. In accordance with the requirements of the Investment Company Act of 1940, we may also determine the cash value for a Policy on any other day on which there is sufficient trading in securities to materially affect the value of the securities held by the Portfolios or Funds. For Policies issued prior to November 8, 1999, including Policies issued after that date in states where the current Policy form has not been approved, the cash value is equal to the Policy Value reduced by any Policy debt outstanding. During the first Policy year the cash value is increased by the amount of sales load previously deducted from premiums, and during the second Policy year the cash value is increased by 50% of previous sales load deductions. The increase in cash value during the first two Policy years does not apply if the Policy is in a grace period on the date on which you surrender the Policy. This increase in cash value is not available in New Jersey. See "Policies Issued Prior to November 8, 1999", above. POLICY LOANS You may borrow up to 90% of the Policy Value using the Policy as security. If a Policy loan is already outstanding, the maximum amount for any new loan is 90% of the Policy Value, less the amount already borrowed. Interest on a Policy loan accrues and is payable on a daily basis at an annual effective rate of 5%. We add unpaid interest to the amount of the loan. If the amount of the loan equals or exceeds the Policy Value on a monthly processing date, the Policy will enter the grace period. See "Termination and Reinstatement", p. 12. We will send you a notice at least 61 days before the termination date. The notice will show how much you must pay to keep the Policy in force. We will take the amount of a Policy loan from the Account divisions in proportion to the amounts in the divisions. We will transfer the amounts withdrawn to our general account and will credit them on a daily basis with an annual earnings rate equal to the 5% Policy loan interest rate. A Policy loan, even if you repay it, will have a permanent effect on the Policy Value because the amounts borrowed will not participate in the Account's investment results while the loan 11 Prospectus is outstanding. The effect may be either favorable or unfavorable depending on whether the earnings rate credited to the loan amount is higher or lower than the rate credited to the unborrowed amount left in the Account. You may repay a Policy loan, and any accrued interest outstanding, in whole or in part, at any time. We will credit payments as of the date we receive them and will transfer those amounts from our general account to the Account divisions, in proportion to the premium allocation in effect, as of the same date. A Policy loan may have important tax consequences. See "Tax Considerations", p. 14. WITHDRAWALS OF POLICY VALUE You may make a withdrawal of Policy Value. A withdrawal may not reduce the loan value to less than any Policy debt outstanding. The loan value is 90% of the Policy Value, less any Policy debt already outstanding. Following a withdrawal the remaining Policy Value, less any Policy debt outstanding, must be at least three times the current monthly charges for the cost of insurance and other expenses. The minimum amount for withdrawals is $250. We permit up to four withdrawals in a Policy year. An administrative charge of up to $25 may apply, but we are currently waiving this charge. A withdrawal of Policy Value decreases the death benefit by the same amount. If the death benefit for a Policy has been increased to meet the federal tax requirements for life insurance, the decrease in the death benefit caused by a subsequent withdrawal will be larger than the amount of the withdrawal. If Option A or Option C is in effect a withdrawal of Policy Value will reduce the Specified Amount by the amount of the withdrawal. Following a withdrawal the remaining death benefit must be at least the minimum amount that we would currently issue. We will take the amount withdrawn from Policy Value from the Account divisions in proportion to the amounts in the divisions. The Policy makes no provision for repayment of amounts withdrawn. A withdrawal of Policy Value may have important tax consequences. See "Tax Considerations", p. 14. TERMINATION AND REINSTATEMENT If the Policy Value, less any Policy debt outstanding, is less than the monthly charges for the cost of insurance and other expenses on any monthly processing date, we allow a grace period of 61 days for the payment of sufficient premium to keep the Policy in force. The grace period begins on the date that we send you a notice. The notice will state the minimum amount of premium required to keep the Policy in force and the date by which you must pay the premium. The Policy will terminate unless you pay the required amount before the grace period expires. After a Policy has terminated, it may be reinstated within one year. The insured must provide satisfactory evidence of insurability. The minimum amount of premium required for reinstatement will be the monthly charges that were due when the Policy terminated plus the charges for three more months. Reinstatement of a Policy will be effective on the first monthly processing date after an application for reinstatement is received at our Home Office, subject to our approval. Any Policy debt that was outstanding when the Policy terminated will also be reinstated. The Policy Value when a Policy is reinstated is equal to the premium paid, after the deduction for taxes and sales load, less the sum of all monthly charges for the cost of insurance and other expenses for the grace period and for the current month. We will allocate the Policy Value among the Account divisions based on the allocation for premiums currently in effect. A Policy may not be reinstated after the Policy has been surrendered for its cash value. See "Tax Considerations", p. 14, for a discussion of the tax effects associated with termination and reinstatement of a Policy. RIGHT TO RETURN POLICY You may return a Policy within 45 days after you signed the application for insurance or within 10 days (or later where required by state law) after you receive the Policy, whichever is later. You may mail or deliver the Policy to the agent who sold it or to our Home Office. If you return it, we will consider the Policy void from the beginning. We will refund the sum of the amounts deducted from the premium paid plus Prospectus 12 the value of the Policy in the Account on the date we receive the returned Policy. In some states, the amount we refund will not be less than the premium you paid. OTHER POLICY PROVISIONS OWNER. The owner is identified in the Policy. The owner may exercise all rights under the Policy while the insured is living. Ownership may be transferred to another. We must receive written proof of the transfer at our Home Office. "You" in this prospectus means the owner or prospective purchaser of a Policy. BENEFICIARY. The beneficiary is the person to whom the death benefit is payable. The beneficiary is named in the application. After we issue the Policy you may change the beneficiary in accordance with the Policy provisions. INCONTESTABILITY. We will not contest a Policy after it has been in force during the lifetime of the insured for two years from the date of issue. We will not contest an increase in the amount of insurance that was subject to insurability requirements after the increased amount has been in force during the lifetime of the insured for two years from the date of issuance of the increase. SUICIDE. If the insured dies by suicide within one year from the date of issue, the amount payable under the Policy will be limited to the premiums paid, less the amount of any Policy debt and withdrawals. If the insured dies by suicide within one year of the date of issuance of an increase in the amount of insurance, which was subject to insurability requirements, the amount payable with respect to the increase will be limited to the amounts charged for the cost of insurance and other expenses attributable to the increase. MISSTATEMENT OF AGE OR SEX. If the age or sex of the insured has been misstated, we will adjust the charges for cost of insurance and other expenses under a Policy to reflect the correct age and sex. COLLATERAL ASSIGNMENT. You may assign a Policy as collateral security. We are not responsible for the validity or effect of a collateral assignment and will not be deemed to know of an assignment before receipt of the assignment in writing at our Home Office. DEFERRAL OF DETERMINATION AND PAYMENT. We will ordinarily pay Policy benefits within seven days after we receive all required documents at our Home Office. However, we may defer determination and payment of benefits during any period when it is not reasonably practicable to value securities because the New York Stock Exchange is closed or an emergency exists or the Securities and Exchange Commission, by order, permits deferral for the protection of Policyowners. DIVIDENDS. The Policies will share in divisible surplus to the extent we determine annually. Since we do not expect the Policies to contribute to divisible surplus, we do not expect to pay any dividends. VOTING RIGHTS We are the owner of the shares of both mutual funds in which all assets of the Account are invested. As the owner of the shares we will exercise our right to vote the shares to elect directors of the mutual funds, to vote on matters required to be approved or ratified by mutual fund shareholders under the Investment Company Act of 1940 and to vote on any other matters that may be presented to any mutual fund shareholders' meeting. However, we will vote the mutual fund shares held in the Account in accordance with instructions from owners of the Policies. We will vote any shares of the mutual funds held in our general account in the same proportions as the shares for which we have received voting instructions. If the applicable laws or regulations change so as to permit us to vote the shares in our own discretion, we may elect to do so. The number of mutual fund shares for each division of the Account for which the owner of a Policy may give instructions is determined by dividing the amount of the Policy Value apportioned to that division, if any, by the per share value for the corresponding Portfolio or Fund. The number will be determined as of a date we choose, but not more than 90 days before the shareholders' meeting. Fractional votes are counted. We will solicit voting instructions with written materials at least 14 days before the meeting. We will vote shares as to which we receive no instructions in the same proportion as the shares as to which we receive instructions. We may, if required by state insurance officials, disregard voting instructions which would require mutual fund shares to be voted for a change in the sub-classification or investment objectives of a Portfolio or Fund, or to approve or 13 Prospectus disapprove an investment advisory agreement for either of the mutual funds. We may also disregard voting instructions that would require changes in the investment policy or investment adviser for either a Portfolio or a Fund, provided that we reasonably determine to take this action in accordance with applicable federal law. If we disregard voting instructions, we will include a summary of the action and reasons therefore in the next semiannual report to the owners of the Policies. SUBSTITUTION OF FUND SHARES AND OTHER CHANGES If, in our judgment, a Portfolio or Fund becomes unsuitable for continued use with the Policies because of a change in investment objectives or restrictions, shares of another Portfolio or Fund or another mutual fund may be substituted. Any substitution of shares will be subject to any required approval of the Securities and Exchange Commission, the Wisconsin Commissioner of Insurance or other regulatory authority. We have also reserved the right, subject to applicable federal and state law, to operate the Account or any of its divisions as a management company under the Investment Company Act of 1940, or in any other form permitted, or to terminate registration of the Account if registration is no longer required, and to change the provisions of the Policies to comply with any applicable laws. REPORTS At least once each Policy year you will receive a statement showing the death benefit, cash value, Policy Value and any Policy loan, including loan interest. This report will show the apportionment of invested assets among the Account divisions. You will also receive annual and semiannual reports for the Account and both of the mutual funds, including financial statements. DISTRIBUTION OF THE POLICIES We sell the Policies through individuals who are licensed life insurance agents appointed by Northwestern Mutual and are registered representatives of Northwestern Mutual Investment Services, LLC ("NMIS"), our wholly-owned company. NMIS is a registered broker-dealer under the Securities Exchange Act of 1934 and is a member of the National Association of Securities Dealers. NMIS was organized in 1968 as a Wisconsin corporation. Its address is 611 East Wisconsin Avenue, Milwaukee, Wisconsin 53202. The Internal Revenue Service Employer Identification Number of NMIS is 52-2114207. Commissions paid to the agents will not exceed 15% of the premium for the first year, 5.75% of the premium for years 2-6, and 2.75% of the premium thereafter. During the sixth Policy year and thereafter agents will receive compensation at the annual rate of .20% of the cash value of a Policy. General agents and district agents who are registered representatives of NMIS and have supervisory responsibility for sales of the Policies receive commission overrides and other compensation. TAX CONSIDERATIONS GENERAL The following discussion provides a general description of federal income tax considerations relating to the Policy. The discussion is based on current provisions of the Internal Revenue Code ("Code") as currently interpreted by the Internal Revenue Service. We do not intend this as tax advice. The discussion is not exhaustive, it does not address the likelihood of future changes in federal income tax law or interpretations thereof, and it does not address state or local tax considerations which may be significant in the purchase and ownership of a Policy. The Economic Growth and Tax Relief Reconciliation Act of 2001, enacted on June 7, 2001, made substantial changes to the estate, gift and generation skipping transfer tax. The Act increases the amount of an estate exempt from tax from $675,000 in 2001 to $1 million in 2002, $2 million in 2006 and $3.5 million in 2009. The Act reduces the top estate, gift and generation skipping transfer tax rate from 55% in 2001 to 45% in 2009. In 2010, the estate tax and generation skipping transfer tax are repealed and the gift tax is reduced to 35%. All of these changes are sunsetted or repealed in 2011, unless extended or made permanent. It is generally believed that the estate tax repeal will not be made permanent but that further changes may be made. LIFE INSURANCE QUALIFICATION Section 7702 of the Code defines life insurance for federal income tax purposes. The Code provides two alternative tests for determining whether the death benefit is a sufficient multiple of the Policy Value. See "Choice of Tests for Tax Purposes", p. 8. We have designed the Policy to comply with these rules. We will return premiums that would cause a Policy to be disqualified Prospectus 14 as life insurance, or take any other action that may be necessary for the Policy to qualify as life insurance. Section 817(h) of the Code authorizes the Secretary of the Treasury to set standards for diversification of the investments underlying variable life insurance policies. Final regulations have been issued pursuant to this authority. Failure to meet the diversification requirements would disqualify the Policies as life insurance for purposes of Section 7702 of the Code. We intend to comply with these requirements. The Treasury Department, in connection with the diversification requirements, stated that it expected to issue guidance about circumstances where a policyowner's control of separate account assets would cause the policyowner, and not the life insurance company, to be treated as the owner of those assets. These guidelines have not been issued. If the owner of a Policy were treated as the owner of the Fund shares held in the Account, the income and gains related to those shares would be included in the owner's gross income for federal income tax purposes. We believe that we own the assets of the Account under current federal income tax law. TAX TREATMENT OF LIFE INSURANCE While a Policy is in force, increases in the Policy Value as a result of investment experience are not subject to federal income tax until there is a distribution as defined by the Code. The death benefit received by a beneficiary will not be subject to federal income tax. Unless the Policy is a modified endowment contract, as described below, a loan received under a Policy will not be treated as a distribution subject to current federal income tax. Interest paid by individual owners of the Policies will ordinarily not be deductible. You should consult a qualified tax adviser as to the deductibility of interest paid, or accrued, by other purchasers of the Policies. See "Other Tax Considerations", p. 16. As a general rule, the proceeds from a withdrawal of Policy Value will be taxable only to the extent that the withdrawal exceeds the basis of the Policy. The basis of the Policy is generally equal to the premiums paid less any amounts previously received as tax-free distributions. In certain circumstances, a withdrawal of Policy Value during the first 15 Policy years may be taxable to the extent that the Policy Value exceeds the basis of the Policy. This means that the amount withdrawn may be taxable even if that amount is less than the basis of the Policy. Caution must be used when taking cash out of a Policy through policy loans. If interest is not paid annually, it is added to the principal amount and the total amount will continue to accrue for as long as the loan is maintained on the Policy. If the Policy remains in force until death, the loan will be repaid from the tax-free death benefit. However, if the Policy terminates by any method other than death, the total cash value of the Policy, plus the total amount of the loan, will be taxable to the extent it exceeds the basis of the Policy. In extreme situations, policyowners can face what is called the "surrender squeeze". The surrender squeeze occurs when there is neither enough unborrowed value remaining in the Policy to cover the interest payment required to keep the Policy in force, nor to cover the tax due if the Policy terminates. Either the interest would have to be paid annually or the Policy would terminate and any income tax due would have to be paid with other assets. Special tax rules may apply when ownership of a Policy is transferred. You should seek qualified tax advice if you plan a transfer of ownership. MODIFIED ENDOWMENT CONTRACTS A Policy will be classified as a modified endowment contract if the cumulative premium paid during the first seven Policy years exceeds a defined "seven-pay" limit. The seven-pay limit is based on a hypothetical life insurance policy issued on the same insured person and for the same initial death benefit which, under specified conditions (which include the absence of expense and administrative charges) will be fully paid for after seven level annual payments. A Policy will be treated as a modified endowment contract unless cumulative premiums paid under the Policy, at all times during the first seven Policy years, are less than or equal to the cumulative seven-pay premiums which would have been paid under the hypothetical policy on or before such times. Whenever there is a "material change" under a Policy, it will generally be treated as a new contract for purposes of determining whether the Policy is a modified endowment contract, and subjected to a new seven-pay period and a new seven-pay limit. The new seven-pay limit would be determined taking into account the Policy Value of the Policy at the time of such change. A materially changed Policy would be considered a modified endowment contract if it failed to 15 Prospectus satisfy the new seven-pay limit. A material change could occur as a result of a change in the death benefit option, a change in the Specified Amount, and certain other changes. If the benefits are reduced during the first seven Policy years after entering into the Policy (or within seven years after a material change), for example, by requesting a decrease in the Specified Amount or, in some cases, by lapsing the Policy or making a withdrawal of Policy Value, the seven-pay premium limit will be redetermined based on the reduced level of benefits and applied retroactively for purposes of the seven-pay test. If the premiums previously paid are greater than the recalculated seven-pay premium limit, the Policy will become a modified endowment contract. A life insurance policy which is received in exchange for a modified endowment contract will also be considered a modified endowment contract. If a Policy is a modified endowment contract, any distribution from the Policy will be taxed on a gain-first basis. Distributions for this purpose include a loan (including any increase in the loan amount to pay interest on an existing loan or an assignment or a pledge to secure a loan) or a withdrawal of Policy Value. Any such distributions will be considered taxable income to the extent the Policy Value exceeds the basis in the Policy. For modified endowment contracts, the basis would be increased by the amount of any prior loan under the Policy that was considered taxable income. For purposes of determining the taxable portion of any distribution, all modified endowment contracts issued by Northwestern Mutual to the same policyowner (excluding certain qualified plans) during any calendar year are to be aggregated. The Secretary of the Treasury has authority to prescribe additional rules to prevent avoidance of gain-first taxation on distributions from modified endowment contracts. A 10% penalty tax will apply to the taxable portion of a distribution from a modified endowment contract. The penalty tax will not, however, apply to distributions (i) to taxpayers 59 1/2 years of age or older, (ii) in the case of a disability (as defined in the Code) or (iii) received as part of a series of substantially equal periodic annuity payments for the life (or life expectancy) of the taxpayers or the joint lives (or joint life expectancies) of the taxpayer and his beneficiaries. If a Policy is surrendered, the excess, if any, of the Policy Value over the basis of the Policy will be subject to federal income tax and, unless one of the above exceptions applies, the 10% penalty tax. The exceptions generally do not apply to life insurance policies owned by corporations or other entities. If a Policy terminates while there is a Policy loan, the cancellation of the loan and accrued loan interest will be treated as a distribution to the extent not previously treated as such and could be subject to tax, including the penalty tax, as described under the above rules. If a Policy becomes a modified endowment contract, distributions that occur during the Policy year it becomes a modified endowment contract and any subsequent Policy year will be taxed as described in the two preceding paragraphs. In addition, distributions from a Policy within two years before it becomes a modified endowment contract will be subject to tax in this manner. This means that a distribution made from a Policy that is not a modified endowment contract could later become taxable as a distribution from a modified endowment contract. The Secretary of the Treasury has been authorized to prescribe rules which would treat similarly other distributions made in anticipation of a policy becoming a modified endowment contract. OTHER TAX CONSIDERATIONS Business-owned life insurance may be subject to certain additional rules. Section 264(a)(1) of the Code generally disallows a deduction for premiums paid on Policies by anyone who is directly or indirectly a beneficiary under the Policy. Increases in Policy Value may also be subject to tax under the corporation alternative minimum tax provisions. Section 264(a)(4) of the Code limits the Policyowner's deduction for interest on loans taken against life insurance policies to interest on an aggregate total of $50,000 of loans per covered life only with respect to life insurance policies covering key persons. Generally, a key person means an officer or a 20% owner. However, the number of key persons will be limited to the greater of (a) five individuals, or (b) the lesser of 5% of the total officers and employees of the taxpayer or 20 individuals. Deductible interest for these Policies will be subject to limits based on current market rates. In addition, Section 264(f) disallows a proportionate amount of a business' interest deduction on non-life insurance indebtedness based on the amount of unborrowed cash value of non-exempt life insurance policies held in relation to other business assets. Exempt policies include policies held by natural persons unless the business is a direct or indirect Prospectus 16 beneficiary under the policy and policies owned by a business and insuring employees, directors, officers and 20% owners (as well as joint policies insuring 20% owners and their spouses). Finally, life insurance purchased under a split dollar arrangement is subject to special tax rules. Under prior Internal Revenue Service rulings, a split dollar arrangement was taxable to the employee in the amount of the annual value of the economic benefit to the employee measured by the insurer's lowest one year term rates as defined by the various Internal Revenue Service rulings or the government's P.S. 58 rate table. Then IRS Notice 2001-10, published on January 29, 2001, provided, as interim guidance, that the employer under a split dollar arrangement could be treated by the parties as making loans to the employee or as acquiring beneficial ownership of the contract attributable to its share of premium payments. Notice 2001-10 also replaced the government P.S. 58 table with Table 2001. On January 3, 2002, the Internal Revenue Service published Notice 2002-8 which: (1) revoked Notice 2001-10 and restored prior law (amended to allow loan treatment); (2) provided that future proposed regulations are expected to require that collateral assignment split dollar arrangements be taxed under a loan regime and endorsement split dollar arrangements be taxed under a Code section 83 economic benefit regime; (3) provided that, on an interim basis, life insurance protection can be valued using Table 2001 rates or the insurer's lower one year term rates (after 2003, the alternate term rates must satisfy additional sales requirements); and (4) provided that, for split dollar arrangements entered into prior to the publication of final regulations, (a) the annual accrual of income will not, by itself, be enough to trigger a taxable transfer; (b) equity (cash surrender value in excess of the amount payable to the employer) will not be taxed regardless of the level of the employer's economic interest in the life insurance policy as long as the value of the life insurance protection is treated and reported as an economic benefit; (c) the employee can elect loan treatment at any time, provided all premiums paid by the employer are treated as a loan entered into at the beginning of the first year in which payments are treated as loans; and (d) for arrangements entered into before January 28, 2002, equity is not taxed if the split dollar arrangement is terminated prior to January 1, 2004 or if the arrangement is converted to a loan beginning on or after January 1, 2004 and all payments by the employer from the beginning of the arrangement are treated as loans. Depending on the circumstances, the exchange of a Policy, a change in the death benefit option, a Policy loan, a withdrawal of Policy Value, a change in ownership or an assignment of the Policy may have federal income tax consequences. In addition, federal, state and local transfer, estate, inheritance, and other tax consequences of Policy ownership, premium payments and receipt of Policy proceeds depend on the circumstances of each Policyowner or beneficiary. If you contemplate any such transaction you should consult a qualified tax adviser. 17 Prospectus OTHER INFORMATION MANAGEMENT Northwestern Mutual is managed by a Board of Trustees. The Trustees and senior officers of Northwestern Mutual and their positions including Board committee memberships, and their principal occupations, as of the date of this prospectus, are listed below. Unless otherwise indicated, the business address of each Trustee and senior officer is c/o The Northwestern Mutual Life Insurance Company, 720 East Wisconsin Avenue, Milwaukee, Wisconsin 53202. TRUSTEES
NAME PRINCIPAL OCCUPATION DURING LAST FIVE YEARS ---- ------------------------------------------- Edward E. Barr (HR)....................... Chairman, Sun Chemical Corporation, 222 Bridge Plaza South, Fort Lee, New Jersey 07024 (graphic arts) since 1998; prior thereto, President and Chief Executive Officer Gordon T. Beaham, III (OT)................ Chairman and Chief Executive Officer, Faultless Starch/Bon Ami Company, 1025 West Eighth Street, Kansas City, MO 64101 (consumer products manufacturer) since 2001; prior thereto, Chairman and President John M. Bremer (E)........................ Senior Executive Vice President and Chief Operating Officer since June 2001; from March 2000 to June 2001, Senior Executive Vice President, General Counsel and Secretary; from February 1998 to March 2000, Executive Vice President, General Counsel and Secretary; prior thereto, Senior Vice President, General Counsel and Secretary Peter W. Bruce (E)........................ Senior Executive Vice President since March 2000; prior thereto, Executive Vice President Robert C. Buchanan (A, E, F).............. President and Chief Executive Officer, Fox Valley Corporation, 100 West Lawrence Street, P.O. Box 727, Appleton, WI 54911 (manufacturer of gift wrap and writing paper) George A. Dickerman (AM).................. Chairman (retired), Spalding Sports Worldwide (manufacturer of sporting equipment) since 1999; Chairman of the Board from 1997 to 1999; prior thereto, President. Address: 68 Normandy Road, Longmeadow, MA 01106-1259 Pierre S. du Pont (AM).................... Attorney, Richards, Layton and Finger, P.O. Box 551, 1 Rodney Square, Wilmington, DE 19899 James D. Ericson (AM, E, F)............... Retired Chairman of Northwestern Mutual since 2001; Chairman, 2001; Chairman and Chief Executive Officer from 2000 to 2001; prior thereto, President and Chief Executive Officer. Address: 777 East Wisconsin Avenue, Suite 3010, Milwaukee, WI 53202 J. E. Gallegos (A)........................ Attorney at Law; Gallegos Law Firm, 460 St. Michaels Drive, Building 300, Santa Fe, NM 87505 Stephen N. Graff (A, E, F)................ Retired Partner, Arthur Andersen LLP (public accountants). Address: 805 Lone Tree Road, Elm Grove, WI 53122-2014 Patricia Albjerg Graham (HR).............. Professor, Graduate School of Education, Harvard University, 420 Gutman, Cambridge, MA 02138; President, The Spencer Foundation (social and behavioral sciences) from 1991 to 2000 James P. Hackett (OT)..................... President and Chief Executive Officer of Steelcase Inc., 901 -- 44th Street, Grand Rapids, MI 49508 Stephen F. Keller (HR).................... Attorney. Address: 101 South Las Palmas Avenue, Los Angeles, CA 90004 Barbara A. King (AM)...................... President, Landscape Structures, Inc., Rt 3, 601 -- 7th Street South, Delano, MN 55328 (manufacturer of playground equipment) J. Thomas Lewis (HR)...................... Sole practitioner, 228 St. Charles Avenue, Suite 1024, New Orleans, LA 70130, since 1998; prior thereto, Attorney, Monroe & Lemann, New Orleans, LA Daniel F. McKeithan, Jr. (E, F, HR)....... President, Tamarack Petroleum Company, Inc., 777 East Wisconsin Avenue, Milwaukee, WI 53202 (operator of oil and gas wells); President, Active Investor Management, Inc., Milwaukee, WI
Prospectus 18
NAME PRINCIPAL OCCUPATION DURING LAST FIVE YEARS ---- ------------------------------------------- Guy A. Osborn (E, F, OT).................. Retired Chairman of Universal Foods Corporation. Address: 3809 West Fairway Heights, Mequon, WI 53092 Timothy D. Proctor (A).................... Group General Counsel, Diageo plc, Kingsley House, 1a Wimpole Street, London W1G 0DA, United Kingdom, since 2000 (multinational branded food and drink company); Director, Worldwide Human Resources of Glaxo Wellcome plc (now Glaxo Smith Kline) from 1998 to 1999 (pharmaceuticals); prior thereto, Senior Vice President, Human Resources, General Counsel & Secretary of Glaxo Wellcome Inc., (Glaxo's US operating company) H. Mason Sizemore, Jr. (AM)............... President and Chief Operating Officer, The Seattle Times, Fairview Avenue North and John Street, P.O. Box 70, Seattle, WA 98109 (publishing) Harold B. Smith (OT)...................... Chairman, Executive Committee, Illinois Tool Works, Inc., 3600 West Lake Avenue, Glenview, IL 60025-5811 (engineered components and industrial systems and consumables) Sherwood H. Smith, Jr. (AM)............... Chairman Emeritus of CP&L (Carolina Power & Light), 421 Fayetteville Street Mall, P.O. Box 1551, Raleigh, NC 27602, since 1999; Chairman of the Board from 1996 to 1999; prior thereto, Chairman of the Board and Chief Executive Officer Peter M. Sommerhauser (E, F, HR).......... Partner, Godfrey & Kahn, S.C. (attorneys), 780 North Water Street, Milwaukee, WI 53202-3590 John E. Steuri (OT)....................... Private Investor, 52 River Ridge Road, Little Rock, AR 72227 John J. Stollenwerk (AM, E, F)............ President and Chief Executive Officer, Allen-Edmonds Shoe Corporation, 201 East Seven Hills Road, P.O. Box 998, Port Washington, WI 53074-0998 Barry L. Williams (A)..................... President and Chief Executive Officer of Williams Pacific Ventures, Inc., 109 Stevenson Street -- 5th Floor, San Francisco, CA 94105-3409 (venture capital consulting) Kathryn D. Wriston (A).................... Director of various corporations. Address: c/o Shearman & Sterling, 599 Lexington Avenue, Room 1064, New York, NY 10022 Edward J. Zore (AM, E, F, OT)............. President and Chief Executive Officer of Northwestern Mutual since 2001; President from 2000 to 2001; prior thereto, Executive Vice President
A -- Member, Audit Committee AM -- Member, Agency and Marketing Committee E -- Member, Executive Committee F -- Member, Finance Committee HR -- Member, Human Resources and Public Policy Committee OT -- Member, Operations and Technology Committee
SENIOR OFFICERS (OTHER THAN TRUSTEES)
POSITION WITH NAME NORTHWESTERN MUTUAL ---- ------------------- Deborah A. Beck............................................. Executive Vice President (Planning and Technology) William H. Beckley.......................................... Executive Vice President (Agencies) Bruce L. Miller............................................. Executive Vice President (Marketing) Mason G. Ross............................................... Executive Vice President and Chief Investment Officer Mark G. Doll................................................ Senior Vice President (Public Markets) Richard L. Hall............................................. Senior Vice President (Life Insurance) William C. Koenig........................................... Senior Vice President and Chief Actuary Gary A. Poliner............................................. Senior Vice President & CFO Charles D. Robinson......................................... Senior Vice President (Investment Products and Services) John E. Schlifske........................................... Senior Vice President (Securities and Real Estate) Leonard F. Stecklein........................................ Senior Vice President (Annuity and Accumulation Products) Frederic H. Sweet........................................... Senior Vice President (Corporate and Government Relations) Walt J. Wojcik.............................................. Senior Vice President (Information Systems) Robert J. Berdan............................................ Vice President, General Counsel and Secretary Steven T. Catlett........................................... Vice President and Controller
19 Prospectus REGULATION We are subject to the laws of Wisconsin governing insurance companies and to regulation by the Wisconsin Commissioner of Insurance. We file an annual statement in a prescribed form with the Department of Insurance on or before March 1 in each year covering operations for the preceding year and including financial statements. Regulation by the Wisconsin Insurance Department includes periodic examination to determine solvency and compliance with insurance laws. We are also subject to the insurance laws and regulations of the other jurisdictions in which we are licensed to operate. LEGAL PROCEEDINGS We are engaged in litigation of various kinds which in our judgment is not of material importance in relation to its total assets. There are no legal proceedings pending to which the Account is a party. ILLUSTRATIONS We will provide you with illustrations for a Policy upon your request. The illustrations show how the death benefit and cash value for a Policy would vary based on hypothetical investment results. The illustrations will be based on the information you give us about the insured person and will reflect such factors as the Specified Amount, death benefit option and premium payments as you select. We have filed an example of such an illustration as an exhibit to the registration statement referred to below. REGISTRATION STATEMENT We have filed a registration statement with the Securities and Exchange Commission, Washington, D.C. under the Securities Act of 1933, as amended, with respect to the Policies. This prospectus does not contain all the information set forth in the registration statement. A copy of the omitted material is available from the main office of the SEC in Washington, D.C. upon payment of the prescribed fee. Further information about the Policies is also available from the Home Office of Northwestern Mutual. The address and telephone number are on the cover of this prospectus. EXPERTS The financial statements of Northwestern Mutual as of December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001 and of the Account as of December 31, 2001 and for each of the two years in the period ended December 31, 2001 included in this prospectus have been so included in reliance on the reports of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. Actuarial matters included in this prospectus have been examined by William C. Koenig, F.S.A., Senior Vice President and Chief Actuary of Northwestern Mutual. His opinion is filed as an exhibit to the registration statement. Prospectus 20 [PRICEWATERHOUSECOOPERS LLP - LETTERHEAD] REPORT OF INDEPENDENT ACCOUNTANTS To The Northwestern Mutual Life Insurance Company and Contract Owners of Northwestern Mutual Variable Life Account In our opinion, the accompanying combined statement of assets and liabilities and the related combined and separate statements of operations and of changes in equity and financial highlights, present fairly, in all material respects, the financial position of Northwestern Mutual Variable Life Account and its Small Cap Growth Stock Division, T. Rowe Price Small Cap Value Division, Aggressive Growth Stock Division, International Growth Stock Division, Franklin Templeton International Equity Division, Index 400 Stock Division, Growth Stock Division, J.P. Morgan Select Growth & Income Stock Division, Capital Guardian Domestic Equity Division, Index 500 Stock Division, Asset Allocation Division, Balanced Division, High Yield Bond Division, Select Bond Division, Money Market Division, Russell Multi-Style Equity Division, Russell Aggressive Equity Division, Russell Non-U.S. Division, Russell Real Estate Securities Division and Russell Core Bond Division thereof at December 31, 2001, the results of each of their operations for the year or period then ended and the changes in each of their equity for the two years or the period then ended and the financial highlights for the year or period then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "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 auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included direct confirmation of the number of shares owned at December 31, 2001 with Northwestern Mutual Series Fund, Inc., and the Russell Insurance Funds, provide a reasonable basis for our opinion. [PRICEWATERHOUSECOOPERS LLP] Milwaukee, Wisconsin January 25, 2002 21 NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT Statement of Assets and Liabilities December 31, 2001 (in thousands)
ASSETS Investments at Market Value: Northwestern Mutual Series Fund, Inc. Small Cap Growth Stock 46,295 shares (cost $86,393)....................... $ 82,643 T. Rowe Price Small Cap Value 6,207 shares (cost $5,819)......................... 6,302 Aggressive Growth Stock 97,403 shares (cost $341,112)...................... 274,896 International Growth Stock 1,254 shares (cost $1,125)......................... 1,136 Franklin Templeton International Equity 134,988 shares (cost $210,527)..................... 170,668 Index 400 Stock 48,743 shares (cost $54,811)....................... 54,677 Growth Stock 96,733 shares (cost $210,828)...................... 196,115 J.P. Morgan Select Growth and Income Stock 107,992 shares (cost $153,430)..................... 131,656 Capital Guardian Domestic Equity 5,715 shares (cost $5,268)......................... 5,571 Index 500 Stock 148,020 shares (cost $435,818)..................... 425,707 Asset Allocation 2,258 shares (cost $2,134)......................... 2,194 Balanced 114,180 shares (cost $202,810)..................... 208,026 High Yield Bond 42,510 shares (cost $35,306)....................... 27,597 Select Bond 36,038 shares (cost $42,032)....................... 43,382 Money Market 107,420 shares (cost $107,420)..................... 107,420 Russell Insurance Funds Multi-Style Equity 5,140 shares (cost $72,596)........................ 60,864 Aggressive Equity 2,551 shares (cost $30,954)........................ 29,181 Non-U.S. 3,781 shares (cost $41,410)........................ 32,708 Real Estate Securities 1,467 shares (cost $15,215)........................ 15,767 Core Bond 1,879 shares (cost $18,868)........................ 19,035 $1,895,545 -------- Due from Sale of Fund Shares.............................. 133 Due from Northwestern Mutual Life Insurance Company....... 798 ---------- Total Assets..................................... $1,896,476 ========== LIABILITIES Due to Northwestern Mutual Life Insurance Company......... $ 133 Due on Purchase of Fund Shares............................ 798 ---------- Total Liabilities................................ 931 ---------- EQUITY (NOTE 8) Variable Life Policies Issued Before October 11, 1995..... 441,285 Variable Complife Policies Issued On or After October 11, 1995.................................................... 1,320,475 Variable Executive Life Policies Issued On or After March 2, 1998................................................. 72,653 Variable Joint Life Policies Issued On or After December 10, 1998................................................ 61,132 ---------- Total Equity..................................... 1,895,545 ---------- Total Liabilities and Equity..................... $1,896,476 ==========
The Accompanying Notes are an Integral Part of the Financial Statements 22 NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT Statement of Operations (in thousands)
T. ROWE PRICE SMALL CAP SMALL CAP GROWTH VALUE COMBINED STOCK DIVISION DIVISION# --------------------------- --------------------------- ------------ YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2001 2000 2001 2000 2001 ------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME Dividend Income................... $ 127,172 $ 98,818 $ 5 $ 828 $ 15 Mortality and Expense Risks....... 7,362 6,166 276 130 6 Taxes............................. 2,636 2,675 93 56 1 --------- --------- ----- ------- ---- Net Investment Income............. 117,174 89,977 (364) 642 8 --------- --------- ----- ------- ---- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Realized Gain (Loss) on Investments..................... 199 15,962 (296) 1,839 -- Unrealized Appreciation (Depreciation) of Investments During the Period............... (300,285) (155,582) 21 (5,210) 483 --------- --------- ----- ------- ---- Net Gain (Loss) on Investments.... (300,086) (139,620) (275) (3,371) 483 --------- --------- ----- ------- ---- Increase (Decrease) in Equity Derived from Investment Activity........................ $(182,912) $ (49,643) $(639) $(2,729) $491 ========= ========= ===== ======= ==== INTERNATIONAL GROWTH FRANKLIN TEMPLETON AGGRESSIVE GROWTH STOCK INTERNATIONAL STOCK DIVISION DIVISION# EQUITY DIVISION --------------------------- ------------- --------------------------- YEAR ENDED YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2001 2000 2001 2001 2000 ----------------------------------- ------------------------------------------------------------------------- INVESTMENT INCOME Dividend Income................... $ 55,735 $ 29,746 --$ $ 16,480 $ 9,885 Mortality and Expense Risks....... 1,156 1,141 1 719 595 Taxes............................. 419 489 -- 260 257 --------- -------- --- -------- -------- Net Investment Income............. 54,160 28,116 (1) 15,501 9,033 --------- -------- --- -------- -------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Realized Gain (Loss) on Investments..................... 470 3,321 -- (282) 1,818 Unrealized Appreciation (Depreciation) of Investments During the Period............... (113,399) (23,838) 10 (40,155) (12,052) --------- -------- --- -------- -------- Net Gain (Loss) on Investments.... (112,929) (20,517) 10 (40,437) (10,234) --------- -------- --- -------- -------- Increase (Decrease) in Equity Derived from Investment Activity........................ $ (58,769) $ 7,599 $ 9 $(24,936) $ (1,201) ========= ======== === ======== ======== J.P. MORGAN SELECT INDEX 400 GROWTH AND INCOME STOCK DIVISION GROWTH STOCK DIVISION STOCK DIVISION --------------------------- --------------------------- --------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2001 2000 2001 2000 2001 2000 ----------------------------------- --------------------------------------------------------------------------------------- INVESTMENT INCOME Dividend Income................... $439 $ 2,587 $ 7,586 $ 6,953 $ 4,135 $ 6,106 Mortality and Expense Risks....... 163 52 773 644 530 470 Taxes............................. 53 22 271 275 188 201 ---- ------- -------- -------- -------- -------- Net Investment Income............. 223 2,513 6,542 6,034 3,417 5,435 ---- ------- -------- -------- -------- -------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Realized Gain (Loss) on Investments..................... (7) 71 352 1,026 (204) 1,538 Unrealized Appreciation (Depreciation) of Investments During the Period............... 718 (1,171) (34,280) (13,347) (13,126) (15,724) ---- ------- -------- -------- -------- -------- Net Gain (Loss) on Investments.... 711 (1,100) (33,928) (12,321) (13,330) (14,186) ---- ------- -------- -------- -------- -------- Increase (Decrease) in Equity Derived from Investment Activity........................ $934 $ 1,413 $(27,386) $ (6,287) $ (9,913) $ (8,751) ==== ======= ======== ======== ======== ========
# The initial investment in this Division was made on July 31, 2001 The Accompanying Notes are an Integral Part of the Financial Statements 23 NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT Statement of Operations (in thousands)
CAPITAL GUARDIAN ASSET DOMESTIC EQUITY INDEX 500 ALLOCATION DIVISION# STOCK DIVISION DIVISION# BALANCED DIVISION ---------------- --------------------------- ------------ --------------------------- PERIOD ENDED YEAR ENDED YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, (CONTINUED) 2001 2001 2000 2001 2001 2000 --------------------------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME Dividend Income................... $ 23 $ 16,748 $ 14,015 $15 $ 15,012 $ 15,457 Mortality and Expense Risks....... 5 1,726 1,575 2 915 891 Taxes............................. 1 633 676 -- 376 382 ---- -------- -------- --- -------- -------- Net Investment Income............. 17 14,389 11,764 13 13,721 14,184 ---- -------- -------- --- -------- -------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Realized Gain (Loss) on Investments..................... (2) 2,729 1,749 5 559 5,358 Unrealized Appreciation (Depreciation) of Investments During the Period............... 302 (67,629) (50,374) 60 (21,699) (21,229) ---- -------- -------- --- -------- -------- Net Gain (Loss) on Investments.... 300 (64,900) (48,625) 65 (21,140) (15,871) ---- -------- -------- --- -------- -------- Increase (Decrease) in Equity Derived from Investment Activity........................ $317 $(50,511) $(36,861) $78 $ (7,419) $ (1,687) ==== ======== ======== === ======== ======== HIGH YIELD BOND DIVISION SELECT BOND DIVISION MONEY MARKET DIVISION --------------------------- --------------------------- --------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, (CONTINUED) 2001 2000 2001 2000 2001 2000 ------------------------------------ --------------------------------------------------------------------------------------- INVESTMENT INCOME Dividend Income................... $ 2,905 $ 2,383 $1,762 $1,285 $3,627 $4,666 Mortality and Expense Risks....... 108 82 123 75 419 278 Taxes............................. 38 35 44 31 112 150 ------- ------- ------ ------ ------ ------ Net Investment Income............. 2,759 2,266 1,595 1,179 3,096 4,238 ------- ------- ------ ------ ------ ------ REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Realized Gain (Loss) on Investments..................... (1,060) (626) (45) (82) -- -- Unrealized Appreciation (Depreciation) of Investments During the Period............... (861) (2,680) 1,419 829 -- -- ------- ------- ------ ------ ------ ------ Net Gain (Loss) on Investments.... (1,921) (3,306) 1,374 747 -- -- ------- ------- ------ ------ ------ ------ Increase (Decrease) in Equity Derived from Investment Activity........................ $ 838 $(1,040) $2,969 $1,926 $3,096 $4,238 ======= ======= ====== ====== ====== ======
# The initial investment in this Division was made on July 31, 2001 The Accompanying Notes are an Integral Part of the Financial Statements 24 NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT Statement of Operations (in thousands)
RUSSELL MULTI- RUSSELL AGGRESSIVE RUSSELL NON- STYLE EQUITY DIVISION EQUITY DIVISION U.S. DIVISION --------------------------- --------------------------- --------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, (CONTINUED) 2001 2000 2001 2000 2001 2000 ---------------------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME Dividend Income.................. $ 1,011 $ 989 $ 26 $ 1,909 $ 195 $ 1,559 Mortality and Expense Risks...... 180 105 85 45 103 60 Taxes............................ 60 45 28 20 35 26 ------- ------- ----- ------- ------- ------- Net Investment Income............ 771 839 (87) 1,844 57 1,473 ------- ------- ----- ------- ------- ------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Realized Gain (Loss) on Investments.................... (545) (121) (173) 47 (1,972) 31 Unrealized Appreciation (Depreciation) of Investments During the Period.............. (7,053) (5,159) 217 (2,428) (5,137) (4,148) ------- ------- ----- ------- ------- ------- Net Gain (Loss) on Investments... (7,598) (5,280) 44 (2,381) (7,109) (4,117) ------- ------- ----- ------- ------- ------- Increase (Decrease) in Equity Derived from Investment Activity....................... $(6,827) $(4,441) $ (43) $ (537) $(7,052) $(2,644) ======= ======= ===== ======= ======= ======= RUSSELL REAL ESTATE RUSSELL SECURITIES DIVISION CORE BOND DIVISION --------------------------- --------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, (CONTINUED) 2001 2000 2001 2000 ----------------------------------- --------------------------------------------------------- INVESTMENT INCOME Dividend Income.................. $ 633 $204 $820 $246 Mortality and Expense Risks...... 47 14 25 9 Taxes............................ 16 6 8 4 ----- ---- ---- ---- Net Investment Income............ 570 184 787 233 ----- ---- ---- ---- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Realized Gain (Loss) on Investments.................... 486 1 184 (8) Unrealized Appreciation (Depreciation) of Investments During the Period.............. (130) 692 (46) 257 ----- ---- ---- ---- Net Gain (Loss) on Investments... 356 693 138 249 ----- ---- ---- ---- Increase (Decrease) in Equity Derived from Investment Activity....................... $ 926 $877 $925 $482 ===== ==== ==== ====
# The initial investment in this Division was made on July 31, 2001 The Accompanying Notes are an Integral Part of the Financial Statements 25 NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT Statement of Changes in Equity (in thousands)
T. ROWE PRICE SMALL CAP SMALL CAP GROWTH VALUE AGGRESSIVE GROWTH COMBINED STOCK DIVISION DIVISION# STOCK DIVISION --------------------------- --------------------------- ------------ --------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2001 2000 2001 2000 2001 2001 2000 ----------------------------------------------------------------------------------------------------------------------------- OPERATIONS Net Investment Income............ $ 117,174 $ 89,977 $ (364) $ 642 $ 8 $ 54,160 $ 28,116 Net Realized Gain (Loss)............ 199 15,962 (296) 1,839 -- 470 3,321 Net Change in unrealized Appreciation (Depreciation).... (300,285) (155,582) 21 (5,210) 483 (113,399) (23,838) ---------- ---------- ------- ------- ------ --------- -------- Increase (Decrease) in Equity......... (182,912) (49,643) (639) (2,729) 491 (58,769) 7,599 ---------- ---------- ------- ------- ------ --------- -------- EQUITY TRANSACTIONS Policyowners' Net Payments.......... 697,763 613,832 23,485 8,148 434 66,834 46,622 Policy Loans and Surrenders........ (112,180) (85,955) (4,593) (1,391) (67) (18,126) (17,395) Death Benefits, Mortality and Other (net)....... (107,907) (91,405) (4,385) (1,558) (58) (13,223) (10,329) Transfers from Other Divisions......... 402,319 419,640 26,320 44,208 5,543 43,394 65,880 Transfers to Other Divisions......... (402,319) (419,640) (7,922) (3,863) (41) (23,039) (20,612) ---------- ---------- ------- ------- ------ --------- -------- Increase in Equity Derived from Equity Transactions........ 477,676 436,472 32,905 45,544 5,811 55,840 64,166 ---------- ---------- ------- ------- ------ --------- -------- Net Increase in Equity.............. 294,764 386,829 32,266 42,815 6,302 (2,929) 71,765 EQUITY Beginning of Period............ 1,600,781 1,213,952 50,377 7,562 -- 277,825 206,060 ---------- ---------- ------- ------- ------ --------- -------- End of Period....... $1,895,545 $1,600,781 $82,643 $50,377 $6,302 $ 274,896 $277,825 ========== ========== ======= ======= ====== ========= ======== INTERNATIONAL GROWTH FRANKLIN TEMPLETON STOCK INTERNATIONAL EQUITY INDEX 400 DIVISION# DIVISION STOCK DIVISION GROWTH STOCK DIVISION ------------- --------------------------- --------------------------- --------------------------- PERIOD ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2001 2001 2000 2001 2000 2001 2000 --------------------- ------------------------------------------------------------------------------------------------------- OPERATIONS Net Investment Income............ $ (1) $ 15,501 $ 9,033 $ 223 $ 2,513 $ 6,542 $ 6,034 Net Realized Gain (Loss)............ -- (282) 1,818 (7) 71 352 1,026 Net Change in unrealized Appreciation (Depreciation).... 10 (40,155) (12,052) 718 (1,171) (34,280) (13,347) ------ -------- -------- ------- ------- -------- -------- Increase (Decrease) in Equity......... 9 (24,936) (1,201) 934 1,413 (27,386) (6,287) ------ -------- -------- ------- ------- -------- -------- EQUITY TRANSACTIONS Policyowners' Net Payments.......... 98 41,543 32,762 12,735 3,691 52,360 37,607 Policy Loans and Surrenders........ -- (10,571) (8,140) (2,168) (586) (11,723) (9,123) Death Benefits, Mortality and Other (net)....... (11) (7,910) (6,157) (2,455) (724) (10,223) (7,575) Transfers from Other Divisions......... 1,041 26,521 28,171 25,046 17,439 37,491 44,134 Transfers to Other Divisions......... (1) (11,896) (10,026) (3,729) (1,179) (16,082) (12,837) ------ -------- -------- ------- ------- -------- -------- Increase in Equity Derived from Equity Transactions........ 1,127 37,687 36,610 29,429 18,641 51,823 52,206 ------ -------- -------- ------- ------- -------- -------- Net Increase in Equity.............. 1,136 12,751 35,409 30,363 20,054 24,437 45,919 EQUITY Beginning of Period............ -- 157,917 122,508 24,314 4,260 171,678 125,759 ------ -------- -------- ------- ------- -------- -------- End of Period....... $1,136 $170,668 $157,917 $54,677 $24,314 $196,115 $171,678 ====== ======== ======== ======= ======= ======== ======== J.P. MORGAN SELECT GROWTH AND INCOME STOCK DIVISION --------------------------- YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 2001 2000 --------------------- --------------------------- OPERATIONS Net Investment Income............ $ 3,417 $ 5,435 Net Realized Gain (Loss)............ (204) 1,538 Net Change in unrealized Appreciation (Depreciation).... (13,126) (15,724) -------- -------- Increase (Decrease) in Equity......... (9,913) (8,751) -------- -------- EQUITY TRANSACTIONS Policyowners' Net Payments.......... 32,889 29,344 Policy Loans and Surrenders........ (9,380) (6,846) Death Benefits, Mortality and Other (net)....... (6,571) (6,174) Transfers from Other Divisions......... 20,061 17,575 Transfers to Other Divisions......... (7,529) (16,300) -------- -------- Increase in Equity Derived from Equity Transactions........ 29,470 17,599 -------- -------- Net Increase in Equity.............. 19,557 8,848 EQUITY Beginning of Period............ 112,099 103,251 -------- -------- End of Period....... $131,656 $112,099 ======== ========
# The initial investment in this Division was made on July 31, 2001 The Accompanying Notes are an Integral Part of the Financial Statements 26 NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT Statement of Changes in Equity (in thousands)
CAPITAL GUARDIAN DOMESTIC EQUITY INDEX 500 ASSET ALLOCATION DIVISION# STOCK DIVISION DIVISION# BALANCED DIVISION ---------------- --------------------------- ---------------- --------------------------- PERIOD ENDED YEAR ENDED YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, (CONTINUED) 2001 2001 2000 2001 2001 2000 --------------------------------------------------------------------------------------------------------------------------------- OPERATIONS Net Investment Income.......... $ 17 $ 14,389 $ 11,764 $ 13 $ 13,721 $ 14,184 Net Realized Gain (Loss)....... (2) 2,729 1,749 5 559 5,358 Net Change in unrealized Appreciation (Depreciation)............... 302 (67,629) (50,374) 60 (21,699) (21,229) ------ -------- -------- ------ -------- -------- Increase (Decrease) in Equity... 317 (50,511) (36,861) 78 (7,419) (1,687) ------ -------- -------- ------ -------- -------- EQUITY TRANSACTIONS Policyowners' Net Payments..... 420 104,548 85,004 76 30,367 25,988 Policy Loans and Surrenders.... (62) (25,831) (20,850) (15) (11,836) (11,702) Death Benefits, Mortality and Other (net).................. (47) (20,549) (16,957) (30) (6,614) (5,718) Transfers from Other Divisions.................... 4,971 67,234 69,748 2,086 21,637 14,233 Transfers to Other Divisions... (28) (29,177) (28,136) (1) (11,057) (16,597) ------ -------- -------- ------ -------- -------- Increase in Equity Derived from Equity Transactions............ 5,254 96,225 88,809 2,116 22,497 6,204 ------ -------- -------- ------ -------- -------- Net Increase in Equity.......... 5,571 45,714 51,948 2,194 15,078 4,517 EQUITY Beginning of Period............ -- 379,993 328,045 -- 192,948 188,431 ------ -------- -------- ------ -------- -------- End of Period.................. $5,571 $425,707 $379,993 $2,194 $208,026 $192,948 ====== ======== ======== ====== ======== ======== HIGH YIELD BOND DIVISION SELECT BOND DIVISION MONEY MARKET DIVISION --------------------------- --------------------------- --------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, (CONTINUED) 2001 2000 2001 2000 2001 2000 -------------------------------- --------------------------------------------------------------------------------------- OPERATIONS Net Investment Income.......... $ 2,759 $ 2,266 $ 1,595 $ 1,179 $ 3,096 $ 4,238 Net Realized Gain (Loss)....... (1,060) (626) (45) (82) -- -- Net Change in unrealized Appreciation (Depreciation)............... (861) (2,680) 1,419 829 -- -- ------- ------- ------- ------- --------- --------- Increase (Decrease) in Equity... 838 (1,040) 2,969 1,926 3,096 4,238 ------- ------- ------- ------- --------- --------- EQUITY TRANSACTIONS Policyowners' Net Payments..... 6,831 6,244 8,111 5,193 265,283 312,705 Policy Loans and Surrenders.... (2,040) (1,031) (1,894) (930) (7,403) (5,338) Death Benefits, Mortality and Other (net).................. (1,318) (1,023) (1,589) (930) (24,561) (30,361) Transfers from Other Divisions.................... 6,262 3,354 23,459 6,989 35,827 26,244 Transfers to Other Divisions... (3,473) (3,972) (12,147) (3,102) (252,248) (287,463) ------- ------- ------- ------- --------- --------- Increase in Equity Derived from Equity Transactions............ 6,262 3,572 15,940 7,220 16,898 15,787 ------- ------- ------- ------- --------- --------- Net Increase in Equity.......... 7,100 2,532 18,909 9,146 19,994 20,025 EQUITY Beginning of Period............ 20,497 17,965 24,473 15,327 87,426 67,401 ------- ------- ------- ------- --------- --------- End of Period.................. $27,597 $20,497 $43,382 $24,473 $ 107,420 $ 87,426 ======= ======= ======= ======= ========= =========
# The initial investment in this Division was made on July 31, 2001 The Accompanying Notes are an Integral Part of the Financial Statements 27 NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT Statement of Changes in Equity (in thousands)
RUSSELL MULTI-STYLE RUSSELL AGGRESSIVE RUSSELL NON- EQUITY DIVISION EQUITY DIVISION U.S. DIVISION --------------------------- --------------------------- --------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, (CONTINUED) 2001 2000 2001 2000 2001 2000 -------------------------------------------------------------------------------------------------------------------------- OPERATIONS Net Investment Income.......... $ 771 $ 839 $ (87) $ 1,844 $ 57 $ 1,473 Net Realized Gain (Loss)....... (545) (121) (173) 47 (1,972) 31 Net Change in unrealized Appreciation (Depreciation)............... (7,053) (5,159) 217 (2,428) (5,137) (4,148) ------- ------- ------- ------- -------- ------- Increase (Decrease) in Equity.... (6,827) (4,441) (43) (537) (7,052) (2,644) ------- ------- ------- ------- -------- ------- EQUITY TRANSACTIONS Policyowners' Net Payments..... 21,720 9,683 8,802 3,674 12,021 5,228 Policy Loans and Surrenders.... (2,510) (1,153) (1,295) (550) (1,528) (550) Death Benefits, Mortality and Other (net).................. (3,622) (1,847) (1,605) (762) (1,813) (884) Transfers from Other Divisions.................... 16,182 30,351 8,226 14,978 15,996 25,372 Transfers to Other Divisions... (5,154) (5,256) (4,141) (2,922) (10,603) (6,442) ------- ------- ------- ------- -------- ------- Increase in Equity Derived from Equity Transactions............ 26,616 31,778 9,987 14,418 14,073 22,724 ------- ------- ------- ------- -------- ------- Net Increase in Equity........... 19,789 27,337 9,944 13,881 7,021 20,080 EQUITY Beginning of Period............ 41,075 13,738 19,237 5,356 25,687 5,607 ------- ------- ------- ------- -------- ------- End of Period.................. $60,864 $41,075 $29,181 $19,237 $ 32,708 $25,687 ======= ======= ======= ======= ======== ======= RUSSELL REAL ESTATE RUSSELL CORE SECURITIES DIVISION BOND DIVISION --------------------------- --------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, (CONTINUED) 2001 2000 2001 2000 --------------------------------- --------------------------------------------------------- OPERATIONS Net Investment Income.......... $ 570 $ 184 $ 787 $ 233 Net Realized Gain (Loss)....... 486 1 184 (8) Net Change in unrealized Appreciation (Depreciation)............... (130) 692 (46) 257 ------- ------ ------- ------ Increase (Decrease) in Equity.... 926 877 925 482 ------- ------ ------- ------ EQUITY TRANSACTIONS Policyowners' Net Payments..... 3,200 1,150 6,006 789 Policy Loans and Surrenders.... (833) (73) (305) (297) Death Benefits, Mortality and Other (net).................. (660) (198) (663) (208) Transfers from Other Divisions.................... 8,119 5,039 6,903 5,925 Transfers to Other Divisions... (2,497) (431) (1,554) (502) ------- ------ ------- ------ Increase in Equity Derived from Equity Transactions............ 7,329 5,487 10,387 5,707 ------- ------ ------- ------ Net Increase in Equity........... 8,255 6,364 11,312 6,189 EQUITY Beginning of Period............ 7,512 1,148 7,723 1,534 ------- ------ ------- ------ End of Period.................. $15,767 $7,512 $19,035 $7,723 ======= ====== ======= ======
# The initial investment in this Division was made on July 31, 2001 The Accompanying Notes are an Integral Part of the Financial Statements 28 NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT (For a unit outstanding during the period)
UNIT VALUE, INCREASE YEAR OR PERIOD BEGINNING (DECREASE) IN UNIT VALUE, TOTAL EXPENSE DIVISION ENDED OF PERIOD EQUITY END OF PERIOD RETURN(2) RATIO(3) --------------------------------------------------------------------------------------------------------------------------------- VARIABLE LIFE Small Cap Growth Stock...................... 12/31/01 $1.625492 $(0.072172) $1.553320 (4.44%) 0.70% T. Rowe Price Small Cap Value (1)........... 12/31/01 1.000000 0.014592 1.014592 1.46% 0.70% Aggressive Growth Stock..................... 12/31/01 3.065764 (0.626551) 2.439213 (20.44%) 0.70% International Growth Stock (1).............. 12/31/01 1.000000 (0.096657) 0.903343 (9.67%) 0.70% Franklin Templeton International Equity..... 12/31/01 1.903987 (0.278048) 1.625939 (14.60%) 0.70% Index 400 Stock............................. 12/31/01 1.240431 (0.016775) 1.223656 (1.35%) 0.70% Growth Stock................................ 12/31/01 3.009395 (0.445945) 2.563450 (14.82%) 0.70% J.P. Morgan Select Growth and Income Stock..................................... 12/31/01 2.409229 (0.202875) 2.206354 (8.42%) 0.70% Capital Guardian Domestic Equity (1)........ 12/31/01 1.000000 (0.024750) 0.975250 (2.48%) 0.70% Index 500 Stock............................. 12/31/01 8.120164 (1.014851) 7.105313 (12.50%) 0.70% Asset Allocation (1)........................ 12/31/01 1.000000 (0.023889) 0.976111 (2.39%) 0.70% Balanced.................................... 12/31/01 5.984864 (0.229274) 5.755590 (3.83%) 0.70% High Yield Bond............................. 12/31/01 1.485108 0.063770 1.548878 4.29% 0.70% Select Bond................................. 12/31/01 3.963949 0.380276 4.344225 9.59% 0.70% Money Market................................ 12/31/01 2.353569 0.075030 2.428599 3.19% 0.70% Russell Multi-Style Equity.................. 12/31/01 0.907213 (0.134361) 0.772852 (14.81%) 0.70% Russell Aggressive Equity................... 12/31/01 1.032281 (0.031476) 1.000805 (3.05%) 0.70% Russell Non-U.S............................. 12/31/01 1.054966 (0.238179) 0.816787 (22.58%) 0.70% Russell Real Estate Securities.............. 12/31/01 1.185448 0.083946 1.269394 7.08% 0.70% Russell Core Bond........................... 12/31/01 1.094091 0.072780 1.166871 6.65% 0.70%
UNIT VALUE, INCREASE YEAR OR PERIOD BEGINNING (DECREASE) IN UNIT VALUE, TOTAL EXPENSE DIVISION ENDED OF PERIOD EQUITY END OF PERIOD RETURN(2) RATIO(3) --------------------------------------------------------------------------------------------------------------------------------- VARIABLE COMPLIFE Small Cap Growth Stock...................... 12/31/01 $1.627985 $(0.070672) $1.557313 (4.34%) 0.60% T. Rowe Price Small Cap Value (1)........... 12/31/01 1.000000 0.015029 1.015029 1.50% 0.60% Aggressive Growth Stock..................... 12/31/01 2.345657 (0.477468) 1.868189 (20.36%) 0.60% International Growth Stock (1).............. 12/31/01 1.000000 (0.096278) 0.903722 (9.63%) 0.60% Franklin Templeton International Equity..... 12/31/01 1.732972 (0.251549) 1.481423 (14.52%) 0.60% Index 400 Stock............................. 12/31/01 1.242339 (0.015540) 1.226799 (1.25%) 0.60% Growth Stock................................ 12/31/01 2.451994 (0.361209) 2.090785 (14.73%) 0.60% J.P. Morgan Select Growth and Income Stock..................................... 12/31/01 1.981528 (0.164993) 1.816535 (8.33%) 0.60% Capital Guardian Domestic Equity (1)........ 12/31/01 1.000000 (0.024335) 0.975665 (2.43%) 0.60% Index 500 Stock............................. 12/31/01 2.402584 (0.298124) 2.104460 (12.41%) 0.60% Asset Allocation (1)........................ 12/31/01 1.000000 (0.023476) 0.976524 (2.35%) 0.60% Balanced.................................... 12/31/01 1.853571 (0.069171) 1.784400 (3.73%) 0.60% High Yield Bond............................. 12/31/01 1.266464 0.055737 1.322201 4.40% 0.60% Select Bond................................. 12/31/01 1.328892 0.128981 1.457873 9.71% 0.60% Money Market................................ 12/31/01 1.283261 0.042267 1.325528 3.29% 0.60% Russell Multi-Style Equity.................. 12/31/01 0.908607 (0.133773) 0.774834 (14.72%) 0.60% Russell Aggressive Equity................... 12/31/01 1.033884 (0.030497) 1.003387 (2.95%) 0.60% Russell Non-U.S............................. 12/31/01 1.056582 (0.237709) 0.818873 (22.50%) 0.60% Russell Real Estate Securities.............. 12/31/01 1.187265 0.085378 1.272643 7.19% 0.60% Russell Core Bond........................... 12/31/01 1.095758 0.074097 1.169855 6.76% 0.60%
(1) Portfolio commenced operations on July 31, 2001. (2) Total Return includes deductions for management and other expenses; excludes deductions for sales loads and other charges. Returns are not annualized for periods less than one year. (3) Computed on an annualized basis. Does not include expenses of the underlying portfolio. The Accompanying Notes are an Integral Part of the Financial Statements 29 NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT (For a unit outstanding during the period)
UNIT VALUE, INCREASE YEAR OR PERIOD BEGINNING (DECREASE) IN UNIT VALUE, TOTAL EXPENSE DIVISION ENDED OF PERIOD EQUITY END OF PERIOD RETURN(2) RATIO(3) --------------------------------------------------------------------------------------------------------------------------------- VARIABLE EXECUTIVE LIFE Small Cap Growth Stock....................... 12/31/01 $19.859931 $ (0.747302) $ 19.112629 (3.76%) 0.00% T. Rowe Price Small Cap Value (1)............ 12/31/01 10.000000 0.175772 10.175772 1.76% 0.00% Aggressive Growth Stock...................... 12/31/01 60.845203 (12.091795) 48.753408 (19.87%) 0.00% International Growth Stock (1)............... 12/31/01 10.000000 (0.940000) 9.060000 (9.40%) 0.00% Franklin Templeton International Equity...... 12/31/01 2.477334 (0.346781) 2.130553 (14.00%) 0.00% Index 400 Stock.............................. 12/31/01 13.224995 (0.086543) 13.138452 (0.65%) 0.00% Growth Stock................................. 12/31/01 31.531943 (4.482417) 27.049526 (14.22%) 0.00% J.P. Morgan Select Growth and Income Stock... 12/31/01 25.243989 (1.962061) 23.281928 (7.77%) 0.00% Capital Guardian Domestic Equity (1)......... 12/31/01 10.000000 (0.218792) 9.781208 (2.19%) 0.00% Index 500 Stock.............................. 12/31/01 51.325633 (6.096747) 45.228886 (11.88%) 0.00% Asset Allocation (1)......................... 12/31/01 10.000000 (0.210197) 9.789803 (2.10%) 0.00% Balanced..................................... 12/31/01 94.345469 (2.972733) 91.372736 (3.15%) 0.00% High Yield Bond.............................. 12/31/01 15.560950 0.782881 16.343831 5.03% 0.00% Select Bond.................................. 12/31/01 98.036463 10.163796 108.200259 10.37% 0.00% Money Market................................. 12/31/01 32.311690 1.265628 33.577318 3.92% 0.00% Russell Multi-Style Equity................... 12/31/01 9.440627 (1.341174) 8.099453 (14.21%) 0.00% Russell Aggressive Equity.................... 12/31/01 11.017913 (0.260391) 10.757522 (2.36%) 0.00% Russell Non-U.S.............................. 12/31/01 10.725190 (2.362632) 8.362558 (22.03%) 0.00% Russell Real Estate Securities............... 12/31/01 11.800164 0.924897 12.725061 7.84% 0.00% Russell Core Bond............................ 12/31/01 10.905549 0.807668 11.713217 7.41% 0.00%
UNIT VALUE, INCREASE YEAR OR PERIOD BEGINNING (DECREASE) IN UNIT VALUE, TOTAL EXPENSE DIVISION ENDED OF PERIOD EQUITY END OF PERIOD RETURN(2) RATIO(3) --------------------------------------------------------------------------------------------------------------------------------- VARIABLE JOINT LIFE Small Cap Growth Stock....................... 12/31/01 $19.859931 $ (0.747302) $ 19.112629 (3.76%) 0.00% T. Rowe Price Small Cap Value (1)............ 12/31/01 10.000000 0.175772 10.175772 1.76% 0.00% Aggressive Growth Stock...................... 12/31/01 60.845203 (12.091795) 48.753408 (19.87%) 0.00% International Growth Stock (1)............... 12/31/01 10.000000 (0.940000) 9.060000 (9.40%) 0.00% Franklin Templeton International Equity...... 12/31/01 2.477334 (0.346781) 2.130553 (14.00%) 0.00% Index 400 Stock.............................. 12/31/01 13.224995 (0.086543) 13.138452 (0.65%) 0.00% Growth Stock................................. 12/31/01 31.531943 (4.482417) 27.049526 (14.22%) 0.00% J.P. Morgan Select Growth and Income Stock... 12/31/01 25.243989 (1.962061) 23.281928 (7.77%) 0.00% Capital Guardian Domestic Equity (1)......... 12/31/01 10.000000 (0.218792) 9.781208 (2.19%) 0.00% Index 500 Stock.............................. 12/31/01 51.325633 (6.096747) 45.228886 (11.88%) 0.00% Asset Allocation (1)......................... 12/31/01 10.000000 (0.210197) 9.789803 (2.10%) 0.00% Balanced..................................... 12/31/01 94.345469 (2.972733) 91.372736 (3.15%) 0.00% High Yield Bond.............................. 12/31/01 15.560950 0.782881 16.343831 5.03% 0.00% Select Bond.................................. 12/31/01 98.036463 10.163796 108.200259 10.37% 0.00% Money Market................................. 12/31/01 32.311690 1.265628 33.577318 3.92% 0.00% Russell Multi-Style Equity................... 12/31/01 9.440627 (1.341174) 8.099453 (14.21%) 0.00% Russell Aggressive Equity.................... 12/31/01 11.017913 (0.260391) 10.757522 (2.36%) 0.00% Russell Non-U.S.............................. 12/31/01 10.725190 (2.362632) 8.362558 (22.03%) 0.00% Russell Real Estate Securities............... 12/31/01 11.800164 0.924897 12.725061 7.84% 0.00% Russell Core Bond............................ 12/31/01 10.905549 0.807668 11.713217 7.41% 0.00%
(1) Portfolio commenced operations on July 31, 2001. (2) Total Return includes deductions for management and other expenses; excludes deductions for sales loads and other charges. Returns are not annualized for periods less than one year. (3) Computed on an annualized basis. Does not include expenses of the underlying portfolio. The Accompanying Notes are an Integral Part of the Financial Statements 30 NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT Notes to Financial Statements December 31, 2001 NOTE 1 -- Northwestern Mutual Variable Life Account ("the Account") is registered as a unit investment trust under the Investment Company Act of 1940 and is a segregated asset account of The Northwestern Mutual Life Insurance Company ("Northwestern Mutual") used to fund variable life insurance policies. 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. and the Russell Insurance Funds (collectively known as "the Funds"). The shares are valued at the Funds' offering and redemption prices per share. The Funds are diversified open-end investment companies registered under the Investment Company Act of 1940. NOTE 4 -- Dividend income from the Funds is recorded on the record date of the dividends. Transactions in the Funds' shares are accounted for on the trade date. The basis for determining cost on sale of Funds' shares is identified cost. Purchase and sales of the Funds' shares for the year ended December 31, 2001 by each Division are shown below:
DIVISION PURCHASES SALES -------- --------- ----- Small Cap Growth Stock........ $ 36,062,728 $ 3,628,084 T. Rowe Small Cap Value....... 5,920,531 103,389 Aggressive Growth Stock....... 120,218,505 10,144,810 International Growth Stock.... 1,135,646 9,892 Franklin Templeton International Equity........ 57,676,693 4,667,094 Index 400 Stock............... 30,946,024 1,280,888 Growth Stock.................. 63,653,548 5,326,105 J.P. Morgan Select Growth and Income Stock................ 37,325,853 4,450,776 Capital Guardian Domestic Equity...................... 5,377,702 111,526 Index 500 Stock............... 124,872,507 14,408,478 Asset Allocation.............. 2,175,042 44,592 Balanced...................... 41,511,869 5,513,138 High Yield Bond............... 11,212,886 2,199,213 Select Bond................... 20,671,693 3,164,962
DIVISION PURCHASES SALES -------- --------- ----- Money Market.................. 91,193,504 71,307,576 Russell Multi-Style Equity.... 29,803,353 2,450,663 Russell Aggressive Equity..... 11,736,452 1,834,549 Russell Non-U.S............... 18,563,013 4,472,046 Russell Real Estate Securities.................. 9,899,757 1,794,537 Russell Core Bond............. 12,883,583 1,588,423
NOTE 5 -- A deduction for mortality and expense risks is determined daily and paid to Northwestern Mutual. Generally, for Variable Life policies issued before October 11, 1995, and Variable Complife policies issued on or after October 11, 1995 the deduction is at an annual rate of .50% and .60%, respectively, of the net assets of the Account. A deduction for the mortality and expense risks for the Variable Executive Life policies issued on or after March 3, 1998 and Variable Joint Life polices issued on or after December 10, 1998 are determined monthly at an annual rate of .75% of the amount invested in the Account for the Policy for the first ten Policy years, and .30% thereafter. The mortality risk is that insureds may not live as long as estimated. The expense risk is that expenses of issuing and administering the policies may exceed the estimated costs. Certain deductions are also made from the annual, single or other premiums before amounts are allocated to the Account. These deductions are for (1) sales load, (2) administrative expenses, (3) taxes and (4) a risk charge for the guaranteed minimum death benefit. Additional mortality costs are deducted from the policy annually and are paid to Northwestern Mutual to cover the cost of providing insurance protection. This cost is actuarially calculated based upon the insured's age, the 1980 Commissioners Standard Ordinary Mortality Table and the amount of insurance provided under the policy. NOTE 6 -- Northwestern Mutual is taxed as a "life insurance company" under the Internal Revenue Code. The variable life insurance policies which are funded in the Account are taxed as part of the operations of Northwestern Mutual. Policies provide that a charge for taxes may be made against the assets of the Account. Generally, for Variable Life policies issued before October 11, 1995, Northwestern Mutual charges the Account at an annual rate of .20% of the Account's net assets and reserves the right to increase, decrease or eliminate the charge for taxes in the future. 31 Generally, for Variable Complife policies issued on or after October 11, 1995, and for Variable Executive Life policies issued on or after March 2, 1998, and Variable Joint Life policies issued on or after December 10, 1998, there is no charge being made against the assets of the Account for federal income taxes, but Northwestern Mutual reserves the right to charge for taxes in the future. NOTE 7 -- The Account is credited for the policyowners' net annual premiums at the respective policy anniversary dates regardless of when policyowners actually pay their premiums. Northwestern Mutual's equity represents any unpaid portion of net annual premiums. This applies to Variable Life and Variable Complife policies only. NOTE 8 -- Equity Values by Division are shown below: (in thousands, except accumulation unit values)
VARIABLE LIFE POLICIES ISSUED BEFORE OCTOBER 11, 1995 EQUITY OF: ----------------------- TOTAL DIVISION POLICYOWNERS NML EQUITY --------------------------------------------------------------------------------------------------- Small Cap Growth Stock...................................... $ 9,126 $ 446 $ 9,572 T. Rowe Price Small Cap Value............................... 1,474 68 1,542 Aggressive Growth Stock..................................... 54,639 3,167 57,806 International Growth Stock.................................. 266 13 279 Franklin Templeton International Equity..................... 35,423 2,257 37,680 Index 400 Stock............................................. 5,623 249 5,872 Growth Stock................................................ 27,807 1,451 29,258 J.P. Morgan Select Growth and Income Stock.................. 22,535 1,363 23,898 Capital Guardian Domestic Equity............................ 1,040 55 1,095 Index 500 Stock............................................. 99,331 4,331 103,662 Asset Allocation............................................ 540 28 568 Balanced.................................................... 130,224 3,828 134,052 High Yield Bond............................................. 4,109 259 4,368 Select Bond................................................. 10,455 372 10,827 Money Market................................................ 7,967 271 8,238 Russell Multi-Style......................................... 3,566 175 3,741 Russell Aggressive Equity................................... 2,423 102 2,525 Russell Non-U.S. ........................................... 2,586 146 2,732 Russell Real Estate Securities.............................. 2,336 84 2,420 Russell Core Bond........................................... 1,110 40 1,150 -------- ------- -------- $422,580 $18,705 $441,285 ======== ======= ========
32
VARIABLE COMPLIFE POLICIES ISSUED ON OR AFTER OCTOBER 11, 1995 EQUITY OF: ------------------------ TOTAL DIVISION POLICYOWNERS NML EQUITY ------------------------------------------------------------------------------------------------------ Small Cap Growth Stock...................................... $ 50,047 $ 18,621 $ 68,668 T. Rowe Price Small Cap Value............................... 2,927 1,146 4,073 Aggressive Growth Stock..................................... 169,999 40,075 210,074 International Growth Stock.................................. 488 282 770 Franklin Templeton International Equity..................... 102,320 24,572 126,892 Index 400 Stock............................................. 32,202 12,452 44,654 Growth Stock................................................ 123,231 32,268 155,499 J.P. Morgan Select Growth and Income Stock.................. 82,960 19,583 102,543 Capital Guardian Domestic Equity............................ 2,461 950 3,411 Index 500 Stock............................................. 238,275 61,549 299,824 Asset Allocation............................................ 1,083 318 1,401 Balanced.................................................... 53,255 13,586 66,841 High Yield Bond............................................. 17,525 4,052 21,577 Select Bond................................................. 17,630 4,481 22,111 Money Market................................................ 54,002 32,924 86,926 Russell Multi-Style Equity.................................. 32,131 12,215 44,346 Russell Aggressive Equity................................... 15,451 5,721 21,172 Russell Non-U.S. ........................................... 16,432 6,148 22,580 Russell Real Estate Securities.............................. 7,941 3,262 11,203 Russell Core Bond........................................... 4,380 1,530 5,910 ---------- -------- ---------- $1,024,740 $295,735 $1,320,475 ========== ======== ==========
VARIABLE VARIABLE JOINT EXECUTIVE LIFE LIFE POLICIES POLICIES ISSUED ISSUED ON ON OR AFTER OR AFTER MARCH 2, 1998 DECEMBER 10, 1998 --------------- ----------------- DIVISION TOTAL EQUITY TOTAL EQUITY --------------------------------------------------------------------------------------------------- Small Cap Growth Stock...................................... $ 789 $ 3,614 T. Rowe Price Small Cap Value............................... 158 529 Aggressive Growth Stock..................................... 3,167 3,848 International Growth Stock.................................. 4 83 Franklin Templeton International Equity..................... 2,738 3,357 Index 400 Stock............................................. 1,223 2,928 Growth Stock................................................ 5,429 5,929 J.P. Morgan Select Growth and Income Stock.................. 2,045 3,170 Capital Guardian Domestic Equity............................ 183 881 Index 500 Stock............................................. 8,770 13,451 Asset Allocation............................................ 2 223 Balanced.................................................... 2,852 4,281 High Yield Bond............................................. 1,122 530 Select Bond................................................. 8,790 1,654 Money Market................................................ 4,697 7,560 Russell Multi-Style Equity.................................. 8,844 3,934 Russell Aggressive Equity................................... 4,079 1,406 Russell Non-U.S. ........................................... 5,397 2,000 Russell Real Estate Securities.............................. 960 1,183 Russell Core Bond........................................... 11,404 571 ------- ------- $72,653 $61,132 ======= =======
33 THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY Consolidated Statement of Financial Position (in millions) The following financial statement of Northwestern Mutual should be considered only as bearing upon the ability of Northwestern Mutual to meet its obligations under the Policies.
DECEMBER 31, ------------------ 2001 2000 ---------------------------------------------------------------------------------- ASSETS Bonds..................................................... $44,306 $40,607 Common and preferred stocks............................... 5,369 6,216 Mortgage loans............................................ 15,164 14,431 Real estate............................................... 1,671 1,627 Policy loans.............................................. 9,028 8,504 Other investments......................................... 4,817 4,508 Cash and temporary investments............................ 2,018 1,217 ------- ------- TOTAL INVESTMENTS....................................... 82,373 77,110 Due and accrued investment income......................... 1,048 1,008 Net deferred tax assets................................... 1,602 -- Deferred premium and other assets......................... 1,583 1,510 Separate account assets................................... 11,786 12,497 ------- ------- TOTAL ASSETS............................................ $98,392 $92,125 ======= ======= LIABILITIES AND SURPLUS Reserves for policy benefits.............................. $68,432 $62,816 Policyowner dividends payable............................. 3,650 3,350 Interest maintenance reserve.............................. 375 378 Asset valuation reserve................................... 2,034 2,298 Income taxes payable...................................... 1,329 1,228 Other liabilities......................................... 3,894 3,662 Separate account liabilities.............................. 11,786 12,497 ------- ------- TOTAL LIABILITIES....................................... 91,500 86,229 Surplus................................................... 6,892 5,896 ------- ------- TOTAL LIABILITIES AND SURPLUS........................... $98,392 $92,125 ======= =======
The Accompanying Notes are an Integral Part of these Financial Statements 34 THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY Consolidated Statement of Operations (in millions)
FOR THE YEAR ENDED DECEMBER 31, ----------------------------- 2001 2000 1999 --------------------------------------------------------------------------------------------- REVENUE Premiums.................................................. $ 9,408 $ 8,925 $ 8,344 Net investment income..................................... 5,532 5,339 4,766 Other income.............................................. 405 1,118 970 ------- ------- ------- TOTAL REVENUE........................................... 15,345 15,382 14,080 ------- ------- ------- BENEFITS AND EXPENSES Benefit payments to policyowners and beneficiaries........ 3,808 4,541 4,023 Net additions to policy benefit reserves.................. 5,367 4,815 4,469 Net transfers to separate accounts........................ 502 469 516 ------- ------- ------- TOTAL BENEFITS.......................................... 9,677 9,825 9,008 Commissions and operating expenses........................ 1,453 1,416 1,287 ------- ------- ------- TOTAL BENEFITS AND EXPENSES............................. 11,130 11,241 10,295 ------- ------- ------- GAIN FROM OPERATIONS BEFORE DIVIDENDS AND TAXES......... 4,215 4,141 3,785 Policyowner dividends..................................... 3,651 3,334 3,091 ------- ------- ------- GAIN FROM OPERATIONS BEFORE TAXES....................... 564 807 694 Income tax expense........................................ 173 125 203 ------- ------- ------- NET GAIN FROM OPERATIONS................................ 391 682 491 Net realized capital gains................................ 259 1,147 846 ------- ------- ------- NET INCOME.............................................. $ 650 $ 1,829 $ 1,337 ======= ======= =======
The Accompanying Notes are an Integral Part of these Financial Statements 35 THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY Consolidated Statement of Changes in Surplus (in millions)
FOR THE YEAR ENDED DECEMBER 31, --------------------------- 2001 2000 1999 ------------------------------------------------------------------------------------------- BEGINNING OF YEAR BALANCE................................... $5,896 $ 5,069 $4,741 Net income................................................ 650 1,829 1,337 Increase (decrease) in net unrealized gains............... (555) (1,043) 213 (Increase) decrease in asset valuation reserve............ 264 73 (377) Charge-off of goodwill (Note 11).......................... (9) (12) (842) Cumulative effect of changes in accounting principles (Note 1)................................................ 749 -- -- Increase in net deferred tax assets....................... 73 -- -- Change in reserve valuation basis (Note 5)................ (61) -- -- Other net decreases....................................... (115) (20) (3) ------ ------- ------ NET INCREASE IN SURPLUS................................. 996 827 328 ------ ------- ------ END OF YEAR BALANCE......................................... $6,892 $ 5,896 $5,069 ====== ======= ======
The Accompanying Notes are an Integral Part of these Financial Statements 36 THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY Consolidated Statement of Cash Flows (in millions)
FOR THE YEAR ENDED DECEMBER 31, --------------------------------- 2001 2000 1999 ------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Premiums and other income received........................ $ 6,607 $ 6,279 $ 5,881 Investment income received................................ 5,527 5,000 4,476 Disbursement of policy loans, net of repayments........... (524) (566) (358) Payments to policyowners and beneficiaries................ (3,996) (3,967) (3,495) Net transfers to separate accounts........................ (534) (469) (516) Commissions, expenses and taxes paid...................... (1,708) (1,845) (1,699) Other, net................................................ 202 224 (56) ------- ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES............. 5,574 4,656 4,233 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: PROCEEDS FROM INVESTMENTS SOLD OR MATURED: Bonds................................................... 35,318 29,539 20,788 Common and preferred stocks............................. 15,465 9,437 13,331 Mortgage loans.......................................... 1,174 1,198 1,356 Real estate............................................. 244 302 216 Other investments....................................... 413 659 830 ------- ------- ------- 52,614 41,135 36,521 ------- ------- ------- COST OF INVESTMENTS ACQUIRED: Bonds................................................... 38,915 33,378 22,849 Common and preferred stocks............................. 15,014 8,177 13,794 Mortgage loans.......................................... 2,003 2,261 2,500 Real estate............................................. 353 224 362 Other investments....................................... 1,106 1,535 1,864 ------- ------- ------- 57,391 45,575 41,369 ------- ------- ------- Net increase (decrease) due to securities lending and other................................................... 4 (158) 499 ------- ------- ------- NET CASH USED IN INVESTING ACTIVITIES................. (4,773) (4,598) (4,349) ------- ------- ------- NET INCREASE (DECREASE) IN CASH AND TEMPORARY INVESTMENTS.......................................... 801 58 (116) Cash and temporary investments, beginning of year........... 1,217 1,159 1,275 ------- ------- ------- Cash and temporary investments, end of year................. $ 2,018 $ 1,217 $ 1,159 ======= ======= =======
The Accompanying Notes are an Integral Part of these Financial Statements 37 THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY Notes to Consolidated Statutory Financial Statements December 31, 2001, 2000 and 1999 1. BASIS OF PRESENTATION AND CHANGES IN ACCOUNTING PRINCIPLES The accompanying consolidated statutory financial statements include the accounts of The Northwestern Mutual Life Insurance Company and its wholly-owned subsidiary, Northwestern Long Term Care Insurance Company (together, "the Company"). All intercompany balances and transactions have been eliminated. The Company offers life, annuity, disability income and long-term care insurance products to the personal, business, estate and tax-qualified markets. The 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"). Effective January 1, 2001, insurance companies domiciled in Wisconsin are required to prepare statutory basis financial statements in accordance with the new National Association of Insurance Commissioners ("NAIC") Accounting Practices and Procedures Manual, subject to any deviations prescribed or permitted by the Office of the Commissioner of Insurance of the State of Wisconsin ("OCI"). These new requirements differ from those used prior to January 1, 2001, primarily because under the new statutory accounting principles: (1) deferred tax balances are established for temporary differences between book and tax bases of certain assets and liabilities, (2) investment valuation adjustments on impaired assets are measured differently and are reported as realized losses, (3) pension and other employee benefit obligations are accounted for based on the funded status of the related plans, (4) recognition of earnings from unconsolidated subsidiaries and affiliates as net investment income is limited to dividends received, (5) certain software costs can be capitalized and amortized to expense over a maximum of five years, and (6) premiums, benefits and reserve changes for policies that do not have significant mortality or morbidity risks ("deposit-type contracts") are not included in revenue or benefits as reported in the consolidated statement of operations. The cumulative effect of adoption of these new accounting principles was reported as an adjustment to surplus as of January 1, 2001, with no restatement of prior periods permitted. This cumulative effect was the difference in the amount of surplus that would have been reported at that date if the new accounting principles had been retroactively applied to all prior periods. The cumulative effect of these accounting changes increased surplus by $749 million at that date, and included the following (in millions): Deferred tax accounting........................... $850 Pension plan liabilities.......................... (74) Investment valuation changes, net................. (27) ---- $749 ====
Financial statements prepared on the statutory basis of accounting differ from financial statements prepared in accordance with generally accepted accounting principles ("GAAP"), primarily because on a GAAP basis: (1) certain policy acquisition costs are deferred and amortized, (2) investment valuations and insurance reserves use different methods and assumptions, (3) deposit-type contracts, for which premiums, benefits and reserve changes are not included in revenue or benefits as reported in the statement of operations, are defined differently, (4) majority-owned, non-insurance subsidiaries are consolidated, (5) changes in deferred taxes are reported as a component of net income, and (6) no deferral of realized gains and losses is permitted. The effects on the financial statements of the Company from the differences between the statutory basis of accounting and GAAP are material. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The preparation of financial statements in conformity with the statutory basis of accounting requires management to use assumptions or make estimates 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 assumptions and estimates. INVESTMENTS See Note 3 regarding the reported statement value and estimated fair value of the Company's investments in bonds, common and preferred stocks, mortgage loans and real estate. POLICY LOANS Policy loans primarily represent amounts borrowed from the Company by life insurance policyowners, secured by the cash 38 value of the related policies. They are reported in the financial statements at unpaid principal balance. OTHER INVESTMENTS Other investments consist primarily of joint venture and partnership investments. These investments are valued at the Company's share of equity in the partnerships' or ventures' net assets, which approximates fair value. Other investments also include derivative financial instruments. See Note 4 regarding the Company's use of derivatives. TEMPORARY INVESTMENTS Temporary investments represent debt securities that have maturities of one year or less at purchase. They are reported at amortized cost, which approximates fair value. NET INVESTMENT INCOME Net investment income primarily represents interest and dividends received or accrued on bonds, mortgage loans, policy loans and other investments. It also includes amortization of any purchase premium or discount using the interest method, adjusted prospectively for any change in estimated yield-to-maturity. Investment income due and accrued that is deemed uncollectible is charged against net investment income in the period such determination is made, while investment income greater than 90 days past due is nonadmitted and charged directly to surplus. Beginning January 1, 2001, net investment income also includes dividends paid to the Company from accumulated earnings of unconsolidated subsidiaries, affiliates, partnerships and joint ventures. Prior to 2001, the Company's share of undistributed earnings in these entities was recognized as net investment income using the equity method. Net investment income is reduced by investment management expenses, real estate depreciation, depletion related to energy assets and interest 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 estimated remaining term-to-maturity of the investment sold. INVESTMENT CAPITAL GAINS AND LOSSES Realized investment gains and losses are recognized based upon specific identification of securities sold. Beginning January 1, 2001 realized investment gains and losses also include valuation adjustments for impairment of bonds, stocks, mortgage loans and other investments with a decline in value that management considers to be other than temporary. Prior to 2001, these valuation adjustments were classified as unrealized investment losses and only realized upon disposition. Realized capital gains and losses as reported in the consolidated statement of operations are net of any IMR deferrals and current income tax expense. See Note 3 regarding details of reported realized capital gains and losses. Unrealized investment gains and losses primarily represent changes in the reported fair value of common stocks. Beginning January 1, 2001 changes in the Company's share of undistributed earnings in unconsolidated subsidiaries, affiliates, partnerships and joint ventures are classified as changes in unrealized capital gains and losses. Prior to 2001, the Company's share of undistributed earnings in these entities was recognized as net investment income using the equity method. See Note 3 regarding details of reported changes in unrealized capital gains and losses. ASSET VALUATION RESERVE 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 the NAIC. The AVR is designed to protect surplus against potential declines in the value of the Company's investments. Increases or decreases in AVR are reported as direct adjustments to surplus. SEPARATE ACCOUNTS See Note 7 regarding separate account assets and liabilities reported by the Company. PREMIUM REVENUE Life insurance premiums are recognized as revenue at the beginning of each policy year. Annuity, disability income and long-term care insurance premiums are recognized as revenue when received by the Company. Premium revenue is reported net of ceded reinsurance, see Note 9. 39 OTHER INCOME Other income includes considerations received on supplementary annuity contracts, ceded reinsurance expense allowances and various insurance policy charges. Beginning January 1, 2001, considerations received on supplementary contracts without life contingencies are classified as deposit-type transactions and thereby excluded from revenue. Prior to 2001, these considerations were reported as revenue. BENEFIT PAYMENTS TO POLICYOWNERS AND BENEFICIARIES Benefit payments to policyowners and beneficiaries include death, surrender and disability benefits, as well as matured endowments and supplementary contract payments. Beginning January 1, 2001 benefit payments on supplementary contracts without life contingencies are classified as deposit-type transactions and thereby excluded from expense. Prior to 2001, these payments were reported as benefit expense. Benefit payments are reported net of ceded reinsurance recoveries, see Note 9. RESERVES FOR POLICY BENEFITS See Note 5 regarding the methods and assumptions used to establish the Company's reserves for future insurance policy benefits. COMMISSIONS AND OPERATING EXPENSES Commissions and other operating costs, including costs of acquiring new insurance policies, are generally charged to expense as incurred. ELECTRONIC DATA PROCESSING EQUIPMENT AND SOFTWARE Electronic data processing ("EDP") equipment and software used in the Company's business are reported at cost less accumulated depreciation. Beginning January 1, 2001 certain software costs are capitalized and depreciated over a maximum of five years, while EDP equipment is capitalized and depreciated over three years. Most unamortized software costs are nonadmitted assets and thereby excluded from surplus. Prior to 2001, the Company expensed all software costs, while EDP equipment was capitalized and amortized over its useful life. EDP equipment and software of $18 million and $16 million at December 31, 2001 and 2000, respectively, were net of accumulated depreciation of $44 million and $43 million, respectively, and included in other assets in the consolidated statement of financial position. Depreciation expense is recorded using the straight-line method and totaled $14 million, $8 million and $9 million for the years ended December 31, 2001, 2000 and 1999, respectively. 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. Participating policyowners generally have the option to direct their dividends to be paid in cash, used to reduce future premiums due or used to purchase additional insurance. A majority of dividends are used by policyowners to purchase additional insurance and are reported as premiums in the consolidated statement of operations, but are not included in premiums received or policy benefits paid in the consolidated statement of cash flows. NONADMITTED ASSETS Certain assets are designated as nonadmitted and thereby not permitted as a component of surplus on the statutory basis of accounting. Such assets, principally pension-related assets, amounts advanced to or due from the Company's financial representatives, and fixed assets, EDP equipment and software net of accumulated depreciation, are excluded from the consolidated statement of financial position. Changes in nonadmitted assets are reported as direct adjustments to surplus. RECLASSIFICATION Certain financial statement balances for 2000 and 1999 have been reclassified to conform to the current year presentation. 3. INVESTMENTS BONDS Investments in bonds are reported in the financial statements at amortized cost, except for bonds in default, which are reported at the lower of amortized cost or fair value. 40 Statement value and estimated fair value of these securities at December 31, 2001 and 2000 were as follows:
RECONCILIATION TO ESTIMATED FAIR VALUE ----------------------------------------------- GROSS GROSS ESTIMATED STATEMENT UNREALIZED UNREALIZED FAIR DECEMBER 31, 2001 VALUE GAINS LOSSES VALUE ----------------- --------- ---------- ---------- --------- (IN MILLIONS) U.S. Government...... $ 4,271 $ 221 $ (84) $ 4,408 States, territories and possessions.... 262 29 -- 291 Special revenue and assessments........ 6,032 185 (23) 6,194 Public utilities..... 2,748 86 (19) 2,815 Banks, trust and insurance companies.......... 1,306 46 (18) 1,334 Industrial and miscellaneous...... 29,685 1,026 (555) 30,156 Parent, subsidiaries and affiliates..... 2 -- -- 2 ------- ------ ----- ------- Total.............. $44,306 $1,593 $(699) $45,200 ======= ====== ===== =======
RECONCILIATION TO ESTIMATED FAIR VALUE ----------------------------------------------- GROSS GROSS ESTIMATED STATEMENT UNREALIZED UNREALIZED FAIR DECEMBER 31, 2000 VALUE GAINS LOSSES VALUE ----------------- --------- ---------- ---------- --------- (IN MILLIONS) U.S. Government...... $ 3,870 $ 241 $ (44) $ 4,067 States, territories and possessions.... 261 18 -- 279 Special revenue and assessments........ 5,830 190 (26) 5,994 Public utilities..... 2,669 37 (77) 2,629 Banks, trust and insurance companies.......... 1,128 29 (3) 1,154 Industrial and miscellaneous...... 26,846 542 (888) 26,500 Parent, subsidiaries and affiliates..... 3 -- -- 3 ------- ------ ------- ------- Total.............. $40,607 $1,057 $(1,038) $40,626 ======= ====== ======= =======
Estimated fair value is based upon values published by the Securities Valuation Office ("SVO") of the NAIC. In the absence of SVO-published values, estimated fair value is based upon quoted market prices, if available. For bonds without quoted market prices, fair value is estimated using independent pricing services or internally developed pricing models. Statement value and estimated fair value by contractual maturity at December 31, 2001 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.
STATEMENT ESTIMATED VALUE FAIR VALUE --------- ---------- (IN MILLIONS) Due in one year or less............... $ 823 $ 812 Due after one year through five years............................... 5,931 6,062 Due after five years through ten years............................... 13,923 14,186 Due after ten years................... 10,604 10,730 ------- ------- 31,281 31,790 Structured securities................. 13,025 13,410 ------- ------- Total............................... $44,306 $45,200 ======= =======
COMMON AND PREFERRED STOCKS Common stocks are reported in the financial statements at fair value, which is based upon quoted market prices, if available. For common stock without quoted market prices, fair value is estimated using independent pricing services or internally developed pricing models. Preferred stocks rated "1" (highest quality), "2" (high quality), or "3" (medium quality) by the SVO are reported in the financial statements at amortized cost. All other preferred stock is reported at the lower of cost or fair value. Estimated fair value is based upon quoted market prices, if available. For preferred stock without quoted market prices, fair value is estimated using independent pricing services or internally developed pricing models. For any decline in the fair value of a common or preferred stock that is considered to be other than temporary, a valuation adjustment is made to reduce the cost of the security to fair value and recognized as a realized capital loss. MORTGAGE LOANS AND REAL ESTATE Mortgage loans are reported in the financial statements at unpaid principal balance, less any valuation allowance or unamortized commitment or origination fees. These fees are generally deferred and amortized into investment income using the interest method. 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 borrowers, geographic locations and types of collateral properties. The maximum and minimum interest rates for mortgage loans originated during 2001 were 9.8% and 6.4%, respectively. The aggregate average ratio of loaned amounts to the 41 value of collateral for mortgage loans originated during 2001 was 68%, with a maximum of 100% for any single loan. Mortgage loans are considered impaired when, based on current information, management considers it probable that the Company will be unable to collect all principal and interest due according to the contractual terms of the loan. If necessary, a valuation adjustment is made to reduce the carrying value of an impaired loan to the lower of unpaid principal balance or estimated net realizable value based on appraisal of the collateral property. If the impairment is considered to be temporary, the change in valuation adjustment is classified as an unrealized gain or loss. Beginning January 1, 2001 valuation adjustments for impairments considered to be other than temporary are classified as realized losses. Prior to 2001, all changes in valuation adjustments were classified as unrealized gains and losses. At December 31, 2001, reported value of mortgage loans was reduced by $112 million in valuation adjustments. Real estate investments are reported in the financial statements at cost, less encumbrances and accumulated depreciation of buildings or other improvements using a straight-line method over the estimated useful life of the improvements. An investment in real estate is considered impaired when the projected undiscounted net cash flow from the investment is less than depreciated cost. When the Company determines that an investment in real estate is impaired, a valuation adjustment is made to reduce the carrying value to estimated fair value, after encumbrances, based on appraisal of the property. At December 31, 2001, reported value of real estate investments was reduced by $52 million in valuation adjustments. CAPITAL GAINS AND LOSSES Realized investment gains and losses for the years ended December 31, 2001, 2000 and 1999 were as follows:
FOR THE YEAR ENDED DECEMBER 31, 2001 ------------------------------ NET REALIZED REALIZED REALIZED GAINS GAINS LOSSES (LOSSES) -------- -------- -------- (IN MILLIONS) Bonds........................... $ 537 $ (674) $(137) Common and preferred stocks..... 863 (569) 294 Mortgage loans.................. -- (10) (10) Real estate..................... 85 (11) 74 Other invested assets........... 296 (149) 147 ------ ------- ----- $1,781 $(1,413) 368 ====== ======= Less: Capital gains taxes....... 98 Less: IMR gains (losses)........ 11 ----- Net realized capital gains...... $ 259 =====
FOR THE YEAR ENDED DECEMBER 31, 2000 ------------------------------ NET REALIZED REALIZED REALIZED GAINS GAINS LOSSES (LOSSES) -------- -------- -------- (IN MILLIONS) Bonds.......................... $ 369 $(416) $ (47) Common and preferred stocks.... 1,534 (333) 1,201 Mortgage loans................. -- (25) (25) Real estate.................... 101 -- 101 Other invested assets.......... 395 (177) 218 ------ ----- ------ $2,399 $(951) 1,448 ====== ===== Less: Capital gains taxes...... 353 Less: IMR gains (losses)....... (52) ------ Net realized capital gains..... $1,147 ======
FOR THE YEAR ENDED DECEMBER 31, 1999 ------------------------------ NET REALIZED REALIZED REALIZED GAINS GAINS LOSSES (LOSSES) -------- -------- -------- (IN MILLIONS) Bonds.......................... $ 219 $(404) $ (185) Common and preferred stocks.... 1,270 (255) 1,015 Mortgage loans................. 22 (12) 10 Real estate.................... 92 -- 92 Other invested assets.......... 308 (189) 119 ------ ----- ------ $1,911 $(860) 1,051 ====== ===== Less: Capital gains taxes...... 244 Less: IMR gains (losses)....... (39) ------ Net realized capital gains..... $ 846 ======
42 Proceeds on the sale of securities totaled $30 billion, $25 billion, and $16 billion for the years ended December 31, 2001, 2000 and 1999, respectively. Changes in net unrealized investment gains and losses for the years ended December 31, 2001, 2000 and 1999 were as follows:
FOR THE YEAR ENDED DECEMBER 31, ------------------------- 2001 2000 1999 ----- ------- ----- (IN MILLIONS) Bonds............................. $ (15) $ (208) $(178) Common and preferred stocks....... (699) (851) 415 Mortgage loans.................... -- (2) (10) Real estate....................... -- (4) (2) Other investments................. (193) 22 (12) ----- ------- ----- (907) $(1,043) $ 213 ======= ===== Change in deferred taxes.......... 352 ----- $(555) =====
See Note 10 regarding the accounting change in 2001 for deferred taxes. SECURITIES LENDING The Company has entered into securities lending agreements whereby certain securities are loaned to third parties, primarily major brokerage firms. The Company's policy requires a minimum of 102% 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 held and the related liability due to counterparties of $1.3 billion and $1.4 billion are included in the consolidated statement of financial position at December 31, 2001 and 2000, respectively, and approximate the statement value of securities loaned at those dates. 4. 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. Market risk arises from changes in the fair value of the underlying instruments. The Company is also exposed to credit risk in the event of nonperformance of the counterparties. Derivative investments are classified as other investments in the consolidated statement of financial position. Derivative financial instruments that hedge specific assets and liabilities are reported in a manner consistent with the hedged item (e.g. at amortized cost or fair value), while derivative financial instruments that hedge a portfolio of assets or liabilities are reported at fair value. Fair value is estimated as the amount that the Company would expect to receive or pay upon termination of the contract at the reporting date. Changes in the carrying value of derivatives that hedge a portfolio of assets or liabilities are reported as realized capital gains and losses. The Company held the following positions for hedging purposes at December 31, 2001 and 2000:
DECEMBER 31, 2001 DECEMBER 31, 2000 ----------------------------- ----------------------------- CARRYING NOTIONAL FAIR CARRYING NOTIONAL FAIR DERIVATIVE INSTRUMENT VALUE AMOUNT VALUE VALUE AMOUNT VALUE -------------------------------------------------------------------------------------------------------------------------------- (IN MILLIONS) SPECIFIC HEDGES: Foreign currency swaps.................................... 1 70 11 6 118 5 Forward contracts......................................... -- 200 3 -- 400 10 Interest rate swaps....................................... 1 88 6 -- 83 2 Swaptions/interest rate floors............................ 14 829 32 16 977 16 Default swaps............................................. -- 57 -- -- 52 -- PORTFOLIO HEDGES: Common stock futures and equity swaps..................... 9 221 9 28 565 28 Financial futures......................................... (2) 203 (2) -- -- -- Foreign currency forward contracts........................ -- 502 -- (26) 803 (3)
The carrying value of derivative financial instruments includes receivables of $9 million and $23 million at December 31, 2001 and 2000, respectively. The notional or contractual amounts of derivative financial instruments are used to denominate the transactions and do not represent the amounts exchanged between the parties. 43 The Company uses foreign currency swaps, which are traded over-the-counter, to hedge its exposure to bond cash-flows denominated in foreign currencies. A foreign currency swap is a contractual agreement to exchange the currencies of two different countries at a specified rate of exchange in the future. The Company uses forward contracts to buy or sell a financial instrument at a specified future date. Forward contracts fix the price, quantity, quality and date of the purchase and sale. Some forward contracts involve the initial payment of cash and may be settled in cash instead of physical delivery of the underlying instrument. The Company uses interest rate swap agreements to hedge its exposure to floating rate bond coupon payments. An interest rate swap is a contractual agreement to exchange payments based on the actual or expected price level, performance or value of one or more underlying interest rates. The Company is required to pay the counterparty the stream of variable interest payments based on the coupon payments from the hedged bonds, and in turn, receives a fixed payment from the counterparty, at a predetermined interest rate. The net receipts/payments from these interest rate swaps are recorded in net investment income. The Company uses swaptions and interest rate floors to hedge against the negative impact of a significant and sustained increase or decrease in interest rates. The purpose of the Company's swaption program is to protect against the effect of rising interest rates. Swaptions entitle the Company to receive settlement payments from the counterparties on specified expiration date, contingent on future interest rates. For each swaption, the amount of such settlement payments, if any, is determined by the present value of the difference between the fixed rate on a market rate swap and the strike rate multiplied by the notional amount. The premium paid for the swaptions is included in other investments and is amortized into interest income over the term of the agreements. Floors are option contracts in which the floor seller, in return for a premium, agrees to limit the risk associated with a decline in a reference rate or index. The Company uses default swaps to hedge against a drop in bond prices due to credit concerns of certain bond issuers. A credit swap allows the Company to put the bond back to the counterparty at par upon a credit event by the bond issuer. A credit event is defined as bankruptcy, failure to pay, or obligation acceleration. The Company uses common stock futures and equity swaps to mitigate its exposure to equity market fluctuations. Futures are standardized forward contracts traded on organized exchanges. Swaps are contracts to exchange, for a period of time, the investment performance of one underlying instrument for the investment performance of another underlying instrument, typically without exchanging the instruments themselves. The Company uses financial futures contracts to hedge against interest rate risks on a portion of its fixed maturity securities. These contracts obligate the Company to buy or sell a financial instrument at a specified future date for a specified price. They may be settled in cash or through delivery of the financial instrument. Cash settlements on the change in market value of financial futures contracts are made daily. The Company uses foreign currency forward contracts, which are traded over-the-counter, to hedge some of the foreign exchange risk of investments denominated in foreign currencies. The foreign currency forward contracts obligate the Company to deliver a specified amount of foreign currency at a future date at a specified exchange rate. 5. RESERVES FOR POLICY BENEFITS Reserves for policy benefits represent the estimated net present value of future policy benefits, less future policy premiums, established using actuarial methods based on mortality and morbidity experience tables and valuation interest rates prescribed by the OCI. Use of these actuarial tables and methods involves estimation of future mortality and morbidity. Actual future experience could differ from the assumptions used to make these estimates. Life insurance reserves on substantially all policies issued since 1978 are based on the Commissioner's Reserve Valuation Method ("CRVM") 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%. As of December 31, 2001, the Company has $690 billion of total life insurance in-force, including $7 billion of life insurance in-force for which the gross premiums are less than the net 44 premiums according to the standard valuation methods and assumptions set by the OCI. As of January 1, 2001, the Company changed the valuation basis for reserves on certain term life insurance policies. The impact of this change increased policy benefit reserves by $61 million, and is reported as a direct reduction of surplus for the year ended December 31, 2001. Tabular cost has been determined from the basic data for the calculation of policy reserves. Tabular less actual reserves released has been determined from the basic data for the calculation of reserves and reserves released. Tabular interest has been determined from the basic data for the calculation of policy reserves. Tabular interest on funds not involving life contingencies is calculated as the product of the valuation rate of interest times the mean of the amount of funds subject to such rate held at the beginning and end of the year of valuation. Additional premiums are charged for substandard lives for policies issued after January 1, 1956. Net level premium or CRVM mean reserves are based on multiple mortality tables or one-half the net flat or other extra mortality charge. The Company waives deduction of fractional premiums upon death of insured and returns any portion of the final premium beyond the date of death. Surrender values are not promised in excess of the legally computed reserves. Deferred annuity reserves on contracts issued since 1985 are primarily valued 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%. Beginning January 1, 2001 changes in future policy benefits on supplementary contracts without life contingencies are classified as deposit-type transactions and thereby excluded from net additions to policy benefit reserves in the consolidated statement of operations. Prior to 2001, these reserve changes were reported as a component of operations. At December 31, 2001, the withdrawal characteristics of the Company's annuity reserves and deposit liabilities were as follows:
AMOUNT PERCENT ------- ------- (IN MILLIONS) Subject to discretionary withdrawal -- with market value adjustment........................... $ 8,936 63.5% Subject to discretionary withdrawal -- without market value adjustment........................... 2,260 16.1% Not subject to discretionary withdrawal provision............................ 2,869 20.4% ------- ------ $14,065 100.0% =======
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, interest rates ranging from 3% to 4% 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 four years of disability) and interest rates ranging from 3% to 5 1/2%. 6. PREMIUM AND ANNUITY CONSIDERATIONS DEFERRED AND UNCOLLECTED Gross deferred and uncollected insurance premiums represent premiums due to be received from policyowners through the next policy anniversary date. Net deferred and uncollected premiums represent only the portion of gross premiums related to mortality charges and interest. Deferred and uncollected premiums at December 31, 2001 were as follows:
TYPE OF BUSINESS GROSS NET ---------------- ------ ------ (IN MILLIONS) Ordinary new business................... $ 145 $ 77 Ordinary renewal........................ 1,351 1,103 ------ ------ $1,496 $1,180 ====== ======
7. 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 mutual fund options. Variable annuity policyowners also have the option to invest in a fixed interest 45 rate annuity in the general account of the Company. Separate account assets are reported at fair value based primarily on quoted market prices. All separate accounts liabilities are non-guaranteed. Following is a summary of separate account liabilities by withdrawal characteristic at December 31, 2001 (in millions): At market value................................ $ 9,780 Not subject to discretionary withdrawal........ 1,762 Non-policy liabilities......................... 244 ------- Total........................................ $11,786 =======
Separate account premiums and other considerations received during the year ended December 31, 2001 were $1,419 million and reported as revenues in the consolidated statement of operations. Following is a summary reconciliation of amounts reported as transfers to and from separate accounts in the summary of operations of the Company's NAIC Separate Account Annual Statement and the amount reported as net transfers to separate accounts in the accompanying statement of operations for the year ended December 31, 2001 (in millions): From Separate Account Annual Statement: Transfers to Separate Accounts................. $ 1,419 Transfers from Separate Accounts............... (1,128) ------- 291 Reconciling adjustments: Investment management and administrative charges...................................... 72 Mortality, breakage and taxes.................. 139 ------- Net transfers to separate accounts........... $ 502 =======
8. EMPLOYEE AND REPRESENTATIVE BENEFIT PLANS The Company sponsors noncontributory defined benefit retirement plans for all eligible employees and field representatives. These include tax-qualified plans, as well as nonqualified plans that provide benefits to certain participants in excess of ERISA limits for qualified plans. The Company's policy is to fully fund the obligations of qualified plans in accordance with ERISA requirements. Beginning January 1, 2001 the costs associated with these retirement benefits are expensed over the period that the participant provides services to the Company, including recognition of pension assets and liabilities based on the funded status of the related plans. Pension assets are nonadmitted and thereby excluded from surplus. Prior to 2001, the Company recognized pension expense only in the periods in which contributions to plan assets were made. In addition to pension benefits, the Company provides certain health care and life insurance benefits ("postretirement benefits") to retired employees, representatives and eligible dependents. Substantially all employees and representatives will become eligible for these benefits if they reach retirement age while working for the Company. The funded status of the Company's defined benefit plans, both funded and unfunded, and postretirement benefits at December 31, 2001 were as follows:
FUNDED UNFUNDED POSTRETIREMENT PLANS PLANS BENEFITS ------ -------- -------------- (IN MILLIONS) Accumulated benefit obligation: Vested participants...... $ 874 $ 169 $ 96 Nonvested participants... 10 1 -- ------ ----- ---- 884 170 96 Effect of future salary increases................ 240 71 -- ------ ----- ---- Projected benefit obligation............. 1,124 241 96 Plan assets at fair value.................... 1,819 (4) 24 ------ ----- ---- Funded status............ 695 (245) (72) Unrecognized transition (asset) liability........ (657) -- -- ------ ----- ---- Net pension asset (liability)............ $ 38 $(245) $(72) ====== ===== ====
The projected benefit obligations were estimated using a discount rate of 7%, an assumed long-term rate of return on plan assets of 9%, and assumptions regarding future employee turnover and compensation trends based on Company experience. Plan assets are invested primarily in common stocks and corporate debt securities through a separate account of the Company. Fair value of plan assets is based primarily on quoted market value. 46 Changes in projected benefit obligations and plan assets during the year ended December 31, 2001 were as follows:
PENSION POSTRETIREMENT PLANS BENEFITS ------- -------------- (IN MILLIONS) Benefit obligation at January 1..... $1,259 $89 Changes in benefit obligation: Service cost...................... 50 7 Interest cost..................... 86 6 Benefits paid..................... (30) (6) ------ --- Benefit obligation at December 31... $1,365 $96 ====== === Fair value of plan assets at January 1................................. $1,694 $23 Changes in plan assets: Expected return on plan assets.... 151 2 Benefits paid..................... (30) (1) ------ --- Fair value of plan assets at December 31....................... $1,815 $24 ====== ===
The components of net periodic pension expense (benefit) for the year ended December 31, 2001 were as follows (in millions): Service cost of benefits earned.................... $ 50 Interest cost on projected obligations............. 86 Expected return on plan assets..................... (151) ----- Net periodic pension expense (benefit)........... $ (15) =====
The components of net periodic postretirement expense (benefit) for the year ended December 31, 2001 were as follows (in millions): Service cost of benefits earned..................... $ 7 Interest cost on projected obligations.............. 6 Expected return on plan assets...................... (2) --- Net periodic postretirement expense............... $11 ===
The accumulated postretirement benefit obligation was estimated using a discount rate of 7%, an assumed rate of return on plan assets of 9%, and assumptions regarding participant retirement, morbidity and mortality based on Company experience. The estimate also assumes a health care cost rate increase of 10% per year, grading down 1% to an ultimate rate of 5% after 5 years. A further increase in the assumed healthcare cost trend of 1% in each year would increase the accumulated postretirement benefit obligation as of December 31, 2001 by $8 million and net periodic postretirement benefit expense during 2001 by $1 million. A decrease in the assumed healthcare cost trend of 1% in each year would decrease the accumulated postretirement benefit obligation as of December 31, 2001 by $8 million and net periodic postretirement benefit expense during 2001 by $1 million. The Company also sponsors a contributory 401(k) plan for eligible employees and a noncontributory defined contribution plan for full-time representatives. For the years ended December 31, 2001, 2000 and 1999 the Company expensed total contributions to these plans of $20 million, $19 million and $18 million, respectively. 9. REINSURANCE In the normal course of business, the Company seeks to limit its life insurance exposure to loss on any single insured and to recover a portion of benefits paid by ceding insurance coverage to reinsurers under excess 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 also has an excess reinsurance contract for certain disability income policies with retention limits varying based upon coverage type. The amounts shown in the consolidated financial statements are reported net of reinsurance. Reserves for policy benefits at December 31, 2001 and 2000 were reported net of ceded reserves of $757 million and $663 million, respectively. The effect of reinsurance on premium revenue and benefits expense for the years ended December 31, 2001, 2000 and 1999 was as follows:
FOR THE YEAR ENDED DECEMBER 31, -------------------------- 2001 2000 1999 ------ ------ ------ (IN MILLIONS) Direct premium revenue.......... $9,956 $9,419 $8,785 Premiums ceded.................. (548) (494) (441) ------ ------ ------ Net premium revenue $9,408 $8,925 $8,344 ====== ====== ====== Direct benefits expense......... 10,109 10,140 $9,270 Benefits ceded.................. (432) (315) (262) ------ ------ ------ Net benefits expense.......... $9,677 $9,825 $9,008 ====== ====== ======
In addition, the Company received $161 million, $146 million and $133 million for the years ended December 31, 2001, 2000 and 1999, respectively, from reinsurers as allowances for reimbursement of commissions and other expenses on ceded business. 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. The Company attempts to minimize this risk by diversifying its 47 reinsurance coverage among a number of reinsurers that meet its standards for strong financial condition. 10. INCOME TAXES The Company files a consolidated federal income tax return with the following entities: Northwestern Mutual Investment Services, LLC Northwestern International Holdings, Inc. NML Real Estate Holdings, LLC and subsidiaries NML Securities Holdings, LLC and subsidiaries Northwestern Investment Management Company, LLC Northwestern Securities Holdings, LLC Northwestern Mutual Trust Company Baird Holding Company Frank Russell Company Bradford, Inc. Network Planning Advisors, LLC Mason Street Advisors, LLC NML -- CBO, LLC Under written tax sharing agreements, the Company collects from or refunds to these subsidiaries income taxes determined as if the subsidiaries filed separate tax returns. Federal income tax returns for years through 1997 are closed as to further assessment of tax. Adequate provision has been made in the financial statements for any additional taxes that may become due with respect to the open years. Beginning January 1, 2001 the Company accounts for deferred tax assets and liabilities, which reflect the financial statement impact of cumulative temporary differences between the tax and financial statement bases of assets and liabilities. Prior to 2001, no deferred tax balances were reported. The components of the net deferred tax asset at December 31, 2001 were as follows (in millions): Deferred tax assets............................. $ 3,053 Deferred tax liabilities........................ (1,451) ------- Net deferred tax assets....................... $ 1,602 =======
Deferred tax assets relate primarily to temporary differences between the tax and financial statement bases of policy benefit liabilities, as well as the temporary difference created by unamortized policy acquisition costs capitalized for tax purposes. Deferred tax assets increased by $374 million for the year ended December 31, 2001 due primarily to increases in these same temporary differences. Deferred tax liabilities relate primarily to temporary differences between the tax and financial statement bases of investments. Deferred tax liabilities decreased by $51 million for the year ended December 31, 2001 due primarily to changes in temporary differences relating to investments. Changes in deferred tax assets and liabilities related to changes in unrealized gains and losses on investments are reported as a component of changes in unrealized capital gains and losses in the consolidated statement of changes in surplus. Other changes in deferred tax assets and liabilities are direct adjustments to surplus and separately reported in the consolidated statement of changes in surplus. The Company's taxable income can vary significantly from gain from operations before taxes due to differences between book and tax valuation of assets and liabilities. Also, the Company must capitalize and amortize for tax purposes, as opposed to immediately deducting, an amount deemed to represent the cost of acquiring new business ("DAC tax"). Further, the Company pays an "equity tax" that is assessed only on the surplus of mutual life insurance companies. The Company's effective tax rate of 21%, for the year ended December 31, 2001, is determined as the relationship between the sum of total taxes, including those that affect net income and changes in deferred taxes not related to unrealized gains and losses on investments, to the sum of gain from operations before taxes and pretax net realized gains. This rate was less than the federal corporate tax rate of 35% due primarily to differences between book and tax basis amounts of net investment income and realized capital gains and losses. Prior to 2001, the Company's effective tax rate was based only on tax expense attributed to net gain from operations and its relationship to gain from operations before taxes. Effective tax rates for the years ended December 31, 2000, and 1999 were 16% and 29%, respectively. The effective rates were less than the federal corporate rate of 35% due primarily to differences between book and tax investment income and, in 2000, prior year adjustments. 11. FRANK RUSSELL COMPANY ACQUISITION AND GOODWILL The Company acquired Frank Russell Company ("Russell") effective January 1, 1999 for a purchase price of approximately $955 million. Russell is a leading investment management and consulting firm, providing investment advice, analytical tools and investment vehicles to 48 institutional and individual investors in more than 30 countries. This investment is accounted for using the equity method, adjusted for the charge-off of acquisition goodwill, and is included in common stocks in the consolidated statement of financial position. During the three years ended December 31, 2001, the Company charged-off directly from surplus approximately $863 million, representing the goodwill associated with the acquisition. The Company has received permission from the OCI for this charge-off. As part of the acquisition, the Company has unconditionally guaranteed certain debt obligations of Russell, including $350 million of senior notes and up to $150 million of other credit facilities. 12. CONTINGENCIES The Company has also guaranteed certain obligations of other affiliates. These guarantees totaled approximately $135 million at December 31, 2001 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 $1.9 billion at December 31, 2001 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 results of operations or financial position. 13. RELATED PARTY TRANSACTIONS During 2001, 2000 and 1999, the Company transferred appreciated equity investments to wholly-owned subsidiaries as a capital contribution to the subsidiaries. Realized capital gains of $244 million, $220 million and $287 million for 2001, 2000 and 1999, respectively, were reported based on the fair value of the assets at transfer. 14. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of financial instruments, represented by investment assets (including derivatives) and certain policy liabilities at December 31, 2001 was as follows (in millions):
DECEMBER 31, 2001 -------------------- STATEMENT FAIR VALUE VALUE --------- ------- ASSETS Bonds................................. $44,306 $45,200 Common and preferred stocks........... 5,369 7,072 Mortgage loans........................ 15,164 15,875 Real estate........................... 1,671 2,406 Policy loans.......................... 9,028 9,375 Other investments, including derivatives......................... 4,817 5,244 Cash and short-term investments....... 2,018 2,018 LIABILITIES Investment-type insurance reserves.... $ 3,417 $ 3,191
Fair value of bonds, common and preferred stocks and derivative financial instruments were based upon quoted market prices, when available. For those not actively traded, fair values were estimated using independent pricing services or internally developed pricing models. The fair value of mortgage loans was estimated by discounting estimated future cash flows using market interest rates for debt with comparable credit risk and maturities. Real estate fair value was determined by discounting estimated future cash flows using market interest rates. Policy loan fair value was estimated based on discounted projected cash flows using market interest rates and assumptions regarding future loan repayments based on Company experience. Other investments include joint ventures and partnerships, valued using the equity method, which approximates fair value. The fair value of investment-type insurance reserves was estimated by discounting estimated future cash flows at market interest rates for similar instruments with comparable maturities. 49 [PRICEWATERHOUSECOOPERS LLP - LETTERHEAD] 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 ("the Company") as of December 31, 2001 and 2000, 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, 2001. 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 auditing standards generally accepted in the United States of America. 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 to the financial statements, the Company prepared these consolidated financial statements using 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 accounting principles generally accepted in the United States of America. 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 as of December 31, 2001 and 2000, or the results of their operations or their cash flows for each of the three years in the period ended December 31, 2001 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 as of December 31, 2001 and 2000 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, on the basis of accounting described in Note 1. As discussed in Note 1 to the financial statements, the Company adopted the accounting policies in the revised National Association of Insurance Commissioners "Accounting Practices and Procedures Manual" -- Effective January 1, 2001, as required by the Office of the Commissioner of Insurance of the State of Wisconsin. The effect of adoption is recorded as an adjustment to surplus as of January 1, 2001. [PRICEWATERHOUSECOOPERS LLP] January 22, 2002 50 More information about Northwestern Mutual Series Fund, Inc. is included in the Fund's Statement of Additional Information (SAI), incorporated by reference in this prospectus, which is available free of charge. More information about the Fund's investments is included in the Fund's annual and semi-annual reports, which discuss the market conditions and investment strategies that significantly affected each Portfolio's performance during the previous fiscal period. To request a free copy of the Fund's SAI, or current annual or semi-annual report, call us at 1-888-455-2232. Information about the Fund (including the SAI) can be reviewed and copied at the Public Reference Room of the Securities and Exchange Commission (SEC) in Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. Reports and other information about the Fund are available on the SEC's Internet site at http://www.sec.gov. Copies of this information may be obtained, upon payment of a duplicating fee, by writing the Public Reference Section of the SEC, Washington, DC 20549-6009. -------------------------------------------------------------------------------- NORTHWESTERN MUTUAL NORTHWESTERN MUTUAL VARIABLE EXECUTIVE LIFE NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT NORTHWESTERN MUTUAL SERIES FUND, INC. RUSSELL INSURANCE FUNDS PROSPECTUSES [NORTHWESTERN MUTUAL LOGO] PO Box 3095 Milwaukee WI 53201-3095 Investment Company Act File Nos. 811-3990 and 811-5371 Change Service Requested