-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F6cWNUQtAPnXgY767Kdf/hMrWwW4SgxiduovzUAaBFd8NhP3Geeoy3l9jHKw1+N7 NdAlAiEsyGymOwvNEOA48A== 0000950131-03-001026.txt : 20030228 0000950131-03-001026.hdr.sgml : 20030228 20030228163427 ACCESSION NUMBER: 0000950131-03-001026 CONFORMED SUBMISSION TYPE: 485APOS PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 20030228 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT CENTRAL INDEX KEY: 0000742277 IRS NUMBER: 390509570 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485APOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-03989 FILM NUMBER: 03587128 BUSINESS ADDRESS: STREET 1: 720 E WISCONSIN AVE CITY: MILWAUKEE STATE: WI ZIP: 53202 BUSINESS PHONE: 4146652508 MAIL ADDRESS: STREET 1: 720 EAST WISCONSIN AVENUE CITY: MILWAUKEE STATE: WI ZIP: 53202 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT CENTRAL INDEX KEY: 0000742277 IRS NUMBER: 390509570 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485APOS SEC ACT: 1933 Act SEC FILE NUMBER: 033-89188 FILM NUMBER: 03587129 BUSINESS ADDRESS: STREET 1: 720 E WISCONSIN AVE CITY: MILWAUKEE STATE: WI ZIP: 53202 BUSINESS PHONE: 4146652508 MAIL ADDRESS: STREET 1: 720 EAST WISCONSIN AVENUE CITY: MILWAUKEE STATE: WI ZIP: 53202 485APOS 1 d485apos.txt POST EFFECTICE AMENDMENT # 9 Registration No. 33-89188 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-6 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ] Pre-Effective Amendment No. [ ] Post-Effective Amendment No. 9 [X] and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ] Amendment No. 2 [X] (Check appropriate box or boxes.) NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT (Exact Name of Registrant) THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY (Name of Depositor) 720 East Wisconsin Avenue, Milwaukee, Wisconsin 53202 (Address of Depositor's Principal Executive Offices) (Zip Code) Depositor's Telephone Number, including Area Code 414-271-1444 ROBERT J. BERDAN, Vice President, General Counsel and Secretary 720 East Wisconsin Avenue, Milwaukee, Wisconsin 53202 (Name and Address of Agent for Service) It is proposed that this filing will become effective (check appropriate space) [ ] immediately upon filing pursuant to paragraph (b) of Rule 485 [ ] on (DATE) pursuant to paragraph (b) of Rule 485 [ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485 [X] on May 1, 2003 pursuant to paragraph (a)(1) of Rule 485 [ ] this post-effective amendment designates a new effective date for a previously filed post-effective amendment. NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT CROSS-REFERENCE SHEET N-6, Part A Heading in Item Prospectus - ----------- ---------- 1.........Front Cover Page, Back Cover Page 2.........Summary of Benefits and Risks 3.........Fee Tables 4.........Northwestern Mutual, The Account, The Funds, Voting Rights, Guarantee of Premiums, Deductions and Charges 5.........Deductions and Charges 6.........Premiums, Death Benefit, Annual Dividends, Other Policy Provisions, Allocations to the Account, Right to Exchange for a Fixed Benefit Policy 7.........Premiums, Requirements for Insurance, Loans and Withdrawals, Excess Amount, Paid-Up Insurance, Allocations to the Account, Cash Value 8.........Death Benefit, Other Policy Provisions, Policy Value and Paid-Up Additional Insurance 9.........Cash Value, Loans and Withdrawals 10........Loans and Withdrawals 11........Reinstatement, Cash Value, Paid-Up Insurance 12........Tax Treatment of Policy Benefits 13........Legal Proceedings 14........Financial Statements N-6, Part B Heading in Statement Item of Additional Information - ----------- ------------------------- 15........Cover Page, Table of Contents 16........General Information, History 17........Experts 18........Not applicable 19........Not applicable 20........Distribution of the Policies 21........Not applicable 22........Not applicable 23........Not applicable 24........Financial Statements May 1, 2003 Variable CompLife(R) Variable Whole Life Policy with Additional Protection CompLife(R)is a registered service mark of Northwestern Mutual Life Insurance Company Northwestern Mutual Variable Life Account Northwestern Mutual Series Fund, Inc., Fidelity VIP Mid Cap Portfolio and Russell Investment Funds [PHOTO] The Northwestern Mutual Life Insurance Company 720 East Wisconsin Avenue Milwaukee, Wisconsin 53202 (414) 271-1444 The Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense. [GRAPHIC] [LOGO]NORTHWESTERN MUTUAL/TM/ CONTENTS FOR THIS PROSPECTUS Page ---- Prospectus............................................................. 1 Summary of Benefits and Risks.......................................... 3 Benefits of the Policy.............................................. 3 Death Benefit.................................................... 3 Access to your values............................................ 3 Flexibility...................................................... 3 Tax Benefits..................................................... 3 Risks of the Policy................................................. 3 Investment Risk.................................................. 3 Policy as Long-Term Investment................................... 3 Policy Lapse..................................................... 3 Limitations on Access to Your Values............................. 3 Adverse Tax Consequences......................................... 3 Fee Tables............................................................. 4 Transaction Fees.................................................... 4 Periodic Charges Other Than Fund Operating Expenses................. 5 Annual Fund Operating Expenses...................................... 5 Management Fees and Other Expenses for the Funds.................... 6 The Northwestern Mutual Life Insurance Company, Northwestern Mutual Variable Life Account, Northwestern Mutual Series Fund, Inc., Fidelity VIP Mid Cap Portfolio and Russell Investment Funds............................................ 8 Northwestern Mutual................................................. 8 The Account......................................................... 8 The Funds........................................................... 8 Northwestern Mutual Series Fund, Inc............................. 8 Fidelity VIP Mid Cap Portfolio................................... 8 Russell Investment Funds......................................... 8 Information About the Policy........................................... 9 The Policy Design................................................... 9 Requirements for Insurance.......................................... 9 Premiums............................................................ 9 Death Benefit....................................................... 11 Policy Value and Paid-Up Additional Insurance....................... 12 Allocations to the Account.......................................... 12 Deductions and Charges.............................................. 13 Deductions from Premiums......................................... 13 Charges Against the Policy Value................................. 13 Charges Against the Account Assets............................... 13 Transaction Charges.............................................. 14 Surrender Charges................................................ 14 Guarantee of Premiums, Deductions and Charges....................... 14 Cash Value.......................................................... 14 Annual Dividends.................................................... 15 Loans and Withdrawals............................................... 15 Excess Amount....................................................... 16 Paid-Up Insurance................................................... 16 Reinstatement....................................................... 17 Right to Return Policy.............................................. 17 Right to Exchange for a Fixed Benefit Policy........................ 17 Other Policy Provisions............................................. 17 Owner............................................................ 17 Beneficiary...................................................... 17 Incontestability................................................. 17 Suicide.......................................................... 17 Misstatement of Age or Sex....................................... 17 Collateral Assignment............................................ 17 Payment Plans.................................................... 17 Deferral of Determination and Payment............................ 17 Voting Rights....................................................... 18 Substitution of Fund Shares and Other Changes....................... 18 Reports............................................................. 18 Special Policy for Employers........................................ 18 Financial Statements................................................ 19 Legal Proceedings................................................... 19 Illustrations....................................................... 19 Tax Treatment of Policy Benefits.................................... 19 General.......................................................... 19 Life Insurance Qualification..................................... 19 Tax Treatment of Life Insurance.................................. 19 Modified Endowment Contracts..................................... 20 Other Tax Considerations......................................... 21 P R O S P E C T U S NORTHWESTERN MUTUAL VARIABLE COMPLIFE(R) Variable Whole Life Policy with Additional Protection SUMMARY OF BENEFITS AND RISKS The following summary identifies some of the benefits and risks of the Policy. It omits important information which is included elsewhere in this prospectus, in the attached mutual fund prospectuses and in the terms of the Policy. Benefits of the Policy Death Benefit The primary benefit of your Policy is the life insurance protection that it provides. The Policy combines a Minimum Guaranteed Death Benefit with Additional Protection. We guarantee the Minimum Guaranteed Death Benefit for the lifetime of the insured so long as premiums are paid when due and no Policy debt is outstanding. We guarantee the Additional Protection for a period of years defined in the Policy. Your Policy may also include variable paid-up additional insurance. Any Excess Amount or any adjustment required for certain tax purposes may also increase your death benefit. See "Death Benefit", p. 11. Access to Your Values You may surrender your Policy for the cash value at any time during the lifetime of the insured. We will permit partial surrenders so long as the Policy that remains meets our regular size requirements. You may make a withdrawal from the Policy if the Excess Amount is sufficient. You may borrow up to 90% of your Policy's cash value using the Policy as security. See "Loans and Withdrawals", p. 15. Flexibility You may select the proportions of Minimum Guaranteed Death Benefit and Additional Protection, subject to our minimum requirements for the Minimum Guaranteed Death Benefit. You may increase the scheduled premium, or pay optional unscheduled additional premiums, at any time before the Policy anniversary nearest to the insured's 85th birthday, subject to our insurability requirements and issue limits. You may reduce or suspend payment of premiums within the limits provided in the Policy. You may direct the allocation of your premiums and apportion the Account assets supporting your Policy among the 24 divisions of the Account, using as many as 10 divisions at any time. You may transfer accumulated amounts from one division to another as often as 12 times in a Policy year. Tax Benefits You are generally not taxed on your Policy's investment gains until you surrender the Policy or make a withdrawal. See "Tax Treatment of Life Insurance", p. 19. Risks of the Policy Investment Risk Your Policy allows you to participate in the investment experience of the Account divisions you select. You bear the corresponding investment risks. These risks are described in the attached prospectuses for the Funds. Policy for Long-Term Protection Your Policy is designed to serve your need for long-term life insurance protection. It is not a suitable vehicle for short-term goals. We have not designed the Policy for frequent trading. Policy Lapse Your Policy will lapse if you do not pay sufficient premium to keep it in force. Favorable investment experience may reduce the required premium, but we do not guarantee investment experience. Policy loans or withdrawals may increase the premium required to keep the Policy in force. Limitations on Access to Your Values We will deduct a surrender charge if you request a surrender or partial surrender of your Policy during the first 15 Policy years. We permit withdrawals only if the Excess Amount is sufficient. The minimum amount for a withdrawal is $250. A partial surrender or withdrawal will reduce the death benefit. Adverse Tax Consequences Our understanding of the principal tax considerations for the Policy under current tax law is set forth in this prospectus. There are areas of some uncertainty under current law, and we do not address the likelihood of future changes in the law or interpretations thereof. Among other risks, your Policy may become a modified endowment contract if cumulative premium you pay exceeds a defined limit; surrenders, withdrawals and loans under the Policy will then be taxable as ordinary income to the extent there are earnings in the Policy, and a 10% penalty will apply to these distributions. Conversely, excessive Policy loans could cause a Policy to terminate with insufficient value to pay the tax due upon termination. 3 FEE TABLES The following tables describe the fees and expenses that you will pay when buying, owning, and surrendering the Policy. See "Deductions and Charges," p. 13, for a more detailed description. TRANSACTION FEES This table describes the fees and expenses you will pay when you pay premiums, withdraw Excess Amount, surrender the Policy or transfer amounts between the Account divisions.
- ----------------------------------------------------------------------------------------------------------------------------------- Maximum When Charge is Amount Charge Deducted Current Amount Deducted Deducted - ----------------------------------------------------------------------------------------------------------------------------------- Taxes Attributable When you pay premiums 3.5% of the premium 3.5% of the to Premiums premium - ----------------------------------------------------------------------------------------------------------------------------------- Sales Load When you pay premiums 4.5% of the premium 4.5% of the premium - ----------------------------------------------------------------------------------------------------------------------------------- Administrative When you make a Currently waived $25 Charge for withdrawal of Excess Withdrawals Amount - ----------------------------------------------------------------------------------------------------------------------------------- Administrative When you surrender the $216 plus $1.08 per $1,000 of Minimum Guaranteed Death Benefit Same as the Surrender Charge Policy or make a and Additional Protection for the first Policy year, graded down current amount partial surrender linearly each year to zero at the beginning of the tenth Policy year - ----------------------------------------------------------------------------------------------------------------------------------- Premium Surrender When you surrender the A percentage* of the surrender charge base. If payment of the Same as the Charge Policy or make a premium for a Policy year has been suspended, the premium current amount partial surrender surrender charge percentage will be as if you had paid the before you have paid annual premium. During the first five Policy years, if you pay the premium that is premiums more frequently than annually we will adjust the due at the beginning premium surrender charge percentages to reflect the actual of the fifteenth period for which you have paid premiums. The surrender charge policy year base equals the sum of an annual premium for the Minimum Guaranteed Death Benefit (exclusive of the Policy fee and exclusive of any charge for extra mortality) plus a term insurance premium for the initial amount of Additional Protection. - ----------------------------------------------------------------------------------------------------------------------------------- Administrative When you make a $250 The charge will Charge for Partial partial surrender of not exceed our Surrender the Policy administrative costs. - ----------------------------------------------------------------------------------------------------------------------------------- Fee for Transfer When you transfer Currently waived $25 of Assets assets among the Account divisions - -----------------------------------------------------------------------------------------------------------------------------------
- ---------- * For Policies surrendered after Premium Surrender payment of the Charge Percentage premium due at the ------------------------------------- beginning of year Issue age 65 and under Issue age 75 - ------------------ ---------------------- ------------ 1................. 24% 24% 2................. 28% 25.5% 3................. 32% 27% 4................. 36% 28.5% 5 through 10...... 40% 30% 11................ 32% 24% 12................ 24% 18% 13................ 16% 12% 14................ 8% 6% 15 and later...... 0% 0% For issue ages 66 through 74, the percentages are determined by linear interpolation between the percentages shown. 4 PERIODIC CHARGES OTHER THAN FUND OPERATING EXPENSES This table describes the fees and expenses, other than operating expenses for the Funds, that you will pay periodically during the time that you own the Policy.
- ----------------------------------------------------------------------------------------------------------------------------------- Maximum When Charge is Amount Charge Deducted Current Amount Deducted Deducted - ----------------------------------------------------------------------------------------------------------------------------------- Charge for Annually on the Policy $60 $84 plus 12 cents Administrative anniversary per $1,000 of both Costs the Minimum Guaranteed Death Benefit and the Additional Protection - ----------------------------------------------------------------------------------------------------------------------------------- Charge for Annually on the Policy $24 plus 12 cents per $1,000 of Minimum Guaranteed Death Benefit Same as current Issuance Expenses anniversary for each and Additional Protection amount of the first ten policy years - ----------------------------------------------------------------------------------------------------------------------------------- Charge for Annually on the Policy 12 cents per $1,000 of Minimum Guaranteed Death Benefit Same as current Guarantee of the anniversary amount Minimum Guaranteed Death Benefit - ----------------------------------------------------------------------------------------------------------------------------------- Charge for Cost of Annually on the Policy The amount is determined by multiplying the net amount at risk Same as current Insurance anniversary by the cost of insurance rate. The net amount at risk is the amount projected insurance amount, discounted at 4%, less the Policy Value. The projected insurance amount is the amount of insurance at the end of the Policy year, assuming that the Policy Value increases by the 4% annual growth rate assumed in constructing the Policy. The cost of insurance rate reflects the attained age of the insured and a mortality table. The selection of the mortality table is determined by the risk classification of the insured. The cost of insurance ranges from a minimum of $0.69 per $1,000 of net amount of risk for a female age 10 to a maximum of $1,000 per $1,000 of net amount of risk at age 99. For a male insured age 35 in the select risk classification the cost of insurance rate is $1.69 per $1,000 of net amount at risk.* - ----------------------------------------------------------------------------------------------------------------------------------- Charge for Daily Annual rate of .60% of the assets of the Account* Same as current Mortality and amount Expense Risks - ----------------------------------------------------------------------------------------------------------------------------------- Charge for Waiver Annually on the Policy The charge ranges from 1.3% of premium at issue ages 0-9 to 5.1% Same as current of Premium anniversary to age 65 at issue age 57 and is 2.5% at issue age 35. amount Rider/#/ - ----------------------------------------------------------------------------------------------------------------------------------- Charge for Annually on the Policy The charge ranges from 54 cents per $1,000 of the benefit at Same as current Additional anniversary to age 40 issue age 0 to Policy $2.21 per $1,000 at issue age 38, with a amount Purchase maximum benefit amount of $100,000. Benefit/#/ - -----------------------------------------------------------------------------------------------------------------------------------
*The amounts of these deductions are effectively reduced by the dividends we currently pay on Policies in force. The dividends we currently pay are reflected in illustrations we provide. You may request an illustration from your Northwestern Mutual financial representative. We do not guarantee future dividends. The cost of insurance rate shown in the table may not be representative of the charge that a particular Policyowner may pay. Request an illustration for personalized information. /#/These charges apply only for Policies with these optional benefits. Annual Fund Operating Expenses This table describes the fees and expenses for the Funds that you will pay daily during the time that you own the Policy. The table shows the range (minimum and maximum) of total operating expenses, including investment advisory fees, distribution (12b-1) fees and other expenses. The range shown in this table does not reflect fee waivers or expense limits and reimbursements. The information is based on operations for the year ended December 31, 2002. Information for new Funds is estimated. More details concerning these fees and expenses are contained in the attached prospectuses for the Funds. - -------------------------------------------------------------------------------- Charge Minimum Maximum - -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.2% 1.48% - -------------------------------------------------------------------------------- 5 Management Fees and Other Expenses for the Funds Fund operating expenses are expressed as a percentage of average net assets for the year ended December 31, 2002, except as otherwise set forth in the notes to this table. Information for the Russell Insurance Funds has been restated to reflect current fee waivers and expense reimbursement as set forth in the footnotes for those funds.
Total Net Operating Expenses (Including Investment Total Contractual Waivers, Advisory Other Operating Limitations and Fund or Portfolio Fees Expenses 12b-1 Fees Expenses Reimbursements) - ----------------- ---------- -------- ---------- --------- -------------------- Northwestern Mutual Series Fund, Inc. Small Cap Growth Stock Portfolio.................. 0.59% 0.01% -- 0.60% 0.60% T. Rowe Price Small Cap Value Portfolio/1/........ 0.85% 0.17% -- 1.02% 1.00% Aggressive Growth Stock Portfolio................. 0.52% 0.00% -- 0.52% 0.52% International Growth Portfolio/2/................. 0.75% 0.40% -- 1.15% 1.10% Franklin Templeton International Equity Portfolio...................................... 0.67% 0.07% -- 0.74% 0.74% AllianceBernstein Mid Cap Value Portfolio/3/...... 0.85% 0.18% -- 1.03% 1.00% Index 400 Stock Portfolio......................... 0.25% 0.03% -- 0.28% 0.28% Janus Capital Appreciation Portfolio/4/........... 0.55% 0.38% -- 0.93% 0.90% Growth Stock Portfolio............................ 0.42% 0.01% -- 0.43% 0.43% Large Cap Core Stock Portfolio/5/................. 0.57% 0.01% -- 0.58% 0.58% Capital Guardian Domestic Equity Portfolio/6/..... 0.65% 0.05% -- 0.70% 0.70% T. Rowe Price Equity Income Portfolio/7/.......... 0.65% 0.13% -- 0.78% 0.75% Index 500 Stock Portfolio......................... 0.20% 0.01% -- 0.21% 0.21% Asset Allocation Portfolio/8/..................... 0.60% 0.27% -- 0.87% 0.75% Balanced Portfolio................................ 0.30% 0.00% -- 0.30% 0.30% High Yield Bond Portfolio......................... 0.51% 0.03% -- 0.54% 0.54% Select Bond Portfolio............................. 0.30% 0.00% -- 0.30% 0.30% Money Market Portfolio/9/......................... 0.30% 0.00% -- 0.30% 0.30% Fidelity VIP Mid Cap Portfolio.................... 0.58% 0.11% 0.25% 0.94% 0.94% Russell Investment Funds Multi-Style Equity Fund/10/....................... 0.78% 0.21% -- 0.99% 0.87% Aggressive Equity Fund/11/........................ 0.95% 0.41% -- 1.36% 1.05% Non-U.S. Fund/12/................................. 0.95% 0.53% -- 1.48% 1.15% Real Estate Securities Fund/13/................... 0.85% 0.13% -- 0.98% 0.98% Core Bond Fund/14/................................ 0.60% 0.20% -- 0.80% 0.70%
/1./ T. Rowe Price Small Cap Value Portfolio Northw estern 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. /2./ 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. /3./ AllianceBernstein Mid Cap Value Portfolio Expenses are estimated for 2003 at annualized rates. MSA has contractually agreed to waive, at least until December 31, 2008, 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 would be estimated at 1.00% of the average net assets of the AllianceBernstein Mid Cap Value Portfolio. /4./ Janus Capital Appreciation Portfolio Expenses are estimated for 2003 at annualized rates. MSA has contractually agreed to waive, at least until December 31, 2008, a portion of its 0.555% management fee, up to the full amount of that fee, equal to the amount by which the Portfolio's total operating expenses exceed 0.90% 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 would be estimated at 0.90% of the average net assets of the Janus Capital Appreciation Portfolio. /5./ Large Cap Core Stock Portfolio Prior to January 31, 2003 this Portfolio was named the J. P. Morgan Select Growth and Income Stock Portfolio. Effective on that date the investment advisory agreement was amended to conform the investment advisory fee to the corresponding fee for the Growth Stock Portfolio. If this amendment had been in effect for the 12 months ended December 31, 2002, investment advisory fees for 2002 would have been % and total operating --- expenses would have been %. --- /6./ 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 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. 6 /7./ T. Rowe Price Equity Income Portfolio Expenses are estimated for 2003 at annualized rates. MSA has contractually agreed to waive, at least until December 31, 2008, a portion of its 0.40% 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 would be estimated at 0.75% of the average net assets of the T. Rowe Price Equity Income Portfolio. /8./ 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. /9./ Money Market Portfolio MSA has voluntarily waived its management fee since December 2, 2002. Taking the fee waiver into account the total operating expenses for the 12 months ended December 31, 2002 were 0.27%. /10./ Multi-Style Equity Fund The Fund's Manager, Frank Russell Investment Management Company (FRIMCo) has contractually agreed to waive, at least until April 20, 2004, 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 0.87% 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 0.87% of the average daily net assets on an annual basis. /11./ Aggressive Equity Fund FRIMCo has contractually agreed to waive, at least until April 30, 2004, 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 1.05% 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 1.05% of the average daily net assets on an annual basis. /12./ Non-U.S. Fund FRIMCo has contractually agreed to waive, at least until April 30, 2004, 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 1.15% 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 1.15% of the average daily net assets on an annual basis. /13./ Real Estate Securities Fund FRIMCo has contractually agreed to waive, at least until April 30, 2004, a portion of its 0.85% management fee, up to the full amount of that fee, equal to the amount by which the Fund's total operating expenses exceed 1.10% 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 1.10% of the average daily net assets on an annual basis. /14./ Core Bond Fund FRIMCo has contractually agreed to waive, at least until April 30, 2004, 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 0.70% 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 0.70% of the average daily net assets on an annual basis. 7 THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY, NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT, NORTHWESTERN MUTUAL SERIES FUND, INC., FIDELITY VIP MID CAP PORTFOLIO AND RUSSELL INVESTMENT 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 $102 billion. Northwestern Mutual sells life and disability insurance policies and annuity contracts through its own field force of approximately 7,000 full time producing agents. Our Home Office is at 720 East Wisconsin Avenue, Milwaukee, Wisconsin 53202. "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. However, the policies issued prior to the introduction of Variable CompLife(R) (October 11, 1995 in most states) are different from the Variable CompLife(R) Policies described in this prospectus. The older policies are described in a separate prospectus and are no longer offered. We also use the Account for 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-four 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. MSA has retained Templeton Investment Counsel, LLC, Capital Guardian Trust Company, T. Rowe Price Associates, Inc., Alliance Capital Management L.P. and Janus Capital Management LLC under investment sub-advisory agreements to provide investment advice to six of the Portfolios. The types of investments for each of the Portfolios of the Fund are indicated by the names of the Portfolios. For information about the investment objectives and policies, the attendant risk factors and expenses see the attached prospectus for Northwestern Mutual Series Fund, Inc. Fidelity VIP Mid Cap Portfolio The Fidelity(R) VIP Mid Cap Portfolio is a fund of Variable Insurance Products Fund III, 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 Service Class 2 shares of the Fidelity(R) VIP Mid Cap Portfolio at their net asset value. The investment adviser for the Fidelity(R) VIP Mid Cap Portfolio is Fidelity Management and Research Company. The Fidelity(R) VIP Mid Cap Portfolio normally invests at least 80% of its assets in securities of companies with medium market capitalization. These are companies with market capitalizations similar to companies in the Russell Midcap(R) Index or the Standard & Poor's(R) MidCap 400 Index. The Portfolio normally invests primarily in common stocks. For information about the investment objectives and policies, the attendant risk factors and expenses see the attached prospectus for the Fidelity(R) Variable Insurance Products Service Class 2 Mid Cap Portfolio. Russell Investment Funds The Russell Investment Funds 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 Investment Funds at their net asset value without any sales charge. The assets of each of the Russell Investment 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 Investment Funds. Russell is our majority-owned subsidiary. The types of investments for each of the five Russell Investment Funds are indicated by the names of the Funds. For information about the investment objectives and policies, the attendant risk factors and expenses see the attached prospectus for the Russell Investment Funds. 8 INFORMATION ABOUT THE POLICY The Policy Design We have included this simplified description of the Variable CompLife(R) Policy design in this section to help you understand how the Policy is constructed. It omits details and important qualifications which are discussed in the following sections. The Policy combines a Minimum Guaranteed Death Benefit with Additional Protection in an integrated policy design. The Minimum Guaranteed Death Benefit represents permanent life insurance guaranteed for the lifetime of the insured if premiums are paid when due and no Policy debt is outstanding. The Additional Protection is guaranteed for a period of years which depends on the sex and risk classification and age of the insured when the Policy is issued and the relative proportions of Minimum Guaranteed Death Benefit and Additional Protection. For an insured aged less than 43 the guaranteed period is not less than ten years. It is generally longer for younger insureds and shorter for insureds who are older, but will not be less than six years, or more than forty-six years. We place net premiums in the Account divisions you select. The net premiums increase the Policy Value. The Policy Value is the cumulative amount invested, adjusted for investment results, reduced by the cost of insurance. The cost of insurance is based on the net amount at risk. This is the amount of insurance in force less the Policy Value. The cost of insurance also reflects the attained age of the insured each year. If you pay premiums when they are due, and investment experience is favorable, the Policy Value will increase year by year. We have designed the Policy so that the increase in Policy Value over time should reduce the net amount at risk. The reduction in the net amount at risk offsets the rising cost of the mortality risk as the age of the insured increases, reducing the total cost of insurance which we subtract from the Policy Value each year. This scenario depends, however, on the investment experience which is a principal factor in determining Policy Value. Investment experience is not guaranteed. If investment experience does not produce a sufficient rate of return, the amount of Additional Protection will be reduced in later Policy years, or you will need to pay additional premium to keep the Additional Protection from falling. For a typical Policy the average annual net investment rate of return required to maintain the initial amount of Additional Protection, without additional premium, should be between 4% and 6%, based on the current charges and dividend scale. Any excess Policy Value (we call it the "Excess Amount") is simply added to the death benefit and the cash value, dollar for dollar, unless a greater increase in the death benefit is required to meet tax requirements for life insurance. See "Excess Amount", p. 16 and "Tax Treatment of Policy Benefits", p. 19. The Policy also allows you to pay additional premiums to purchase variable paid-up additional insurance. We calculate the values for the additional insurance separately from those which support the initial amount of insurance. The values for the variable paid-up additional insurance do not affect the Policy Value. We allow unscheduled additional premiums to purchase variable paid-up additional insurance, subject to insurability of the insured when we accept the premiums. You may also pay additional premiums to increase the Policy Value. Requirements for Insurance The minimum amount we require for the Minimum Guaranteed Death Benefit is $100,000, reduced to $50,000 if the insured is below age 15 or over age 59. If the initial premium is at least $10,000 ($5,000 for ages below 15) the required minimum for the Minimum Guaranteed Death Benefit is $1,000. A lower minimum may apply in some circumstances and will apply if the Policy is purchased for an employer-sponsored benefit plan. See "Special Policy for Employers", p. 18. The Minimum Guaranteed Death Benefit must always be at least $1,000. Before issuing a Policy, we will require satisfactory evidence of insurability. Non-smokers who meet preferred underwriting requirements are considered select risks. Nonsmokers in the second best classification are considered standard plus risks. The best class of smokers are considered standard risks. The premium is different for each risk classification. We charge a higher premium for insureds who do not qualify as select, standard plus or standard risks. The amount of extra premium depends on the risk classification in which we place the insured. Premiums The Policy provides for a level scheduled premium to be paid annually at the beginning of each Policy year. Premiums are payable at our Home Office or to an authorized Agent of Northwestern Mutual. By administrative practice, we accept premiums on a monthly, quarterly or semi-annual schedule and we permit premium payment by preauthorized check. If you pay premiums more frequently than annually, we place the scheduled net annual premium in the Account on each Policy anniversary. We advance this amount on this date and we are reimbursed as we receive your premium payments. You have no obligation to repay the amount that we have advanced, but failure to pay the premiums when due will cause (a) premium payments to 9 be suspended (subject to the conditions described later in this section), (b) the Policy to continue in force as a reduced amount of paid-up insurance, or (c) the Policy to terminate. If you do not pay premiums when they are due, we will reduce the Account assets supporting the Policy to reflect the premiums due later in the Policy year. Premiums you pay other than on an annual basis are increased to (1) reflect the time value of money, based on an 8% interest rate, and (2) cover the administrative costs to process the additional premium payments. A monthly premium is currently equal to the annual premium times .0863 plus 50 cents. Thus, the total of monthly premiums for a year is currently 3.56% plus $6.00 higher than a premium paid annually. You may pay monthly premiums only through an automatic payment plan arranged with your bank. A quarterly premium is currently equal to the annual premium times .2573 plus $2.00. Thus, the total of quarterly premiums for a year is currently 2.92% plus $8.00 higher than a premium paid annually. A semiannual premium is equal to the annual premium times ..5096 plus $1.35. Thus, the total of semiannual premiums for a year is currently 1.92% plus $2.70 higher than a premium paid annually. For any frequency other than annual, the annual percentage rate ("APR") will depend on the amount of the amount of the annual premium. For monthly premiums, the APR will be between 7.71% and 12.88%. For quarterly premiums, the APR will be between 7.81% and 16.48%. For semi-annual premiums, the APR will be between 7.83% and 12.38%. The scheduled premium includes the premium for the Minimum Guaranteed Death Benefit and the premium for any Additional Protection. The amount of the premium depends on the amount of the Minimum Guaranteed Death Benefit and the amount of Additional Protection, as well as the insured's age and risk classification. The amount of the premium also reflects the sex of the insured except where state or federal law requires that premiums and other charges and values be determined without regard to sex. We send a notice to you not less than two weeks before each premium is due. You may select the proportions of Minimum Guaranteed Death Benefit and Additional Protection, subject to the required minimum amount for the Minimum Guaranteed Death Benefit. See "Requirements for Insurance", above. Policies that include Additional Protection are subject to a minimum premium that is equal to 70% of the premium for a Policy that consists solely of Minimum Guaranteed Death Benefit. The premium for the Additional Protection consists of two times the cost of term insurance (for the insured's age when the Policy was issued) as long as this amount in combination with the premium for the Minimum Guaranteed Death Benefit meets the 70% requirement. If this combination does not meet the 70% requirement the premium for Additional Protection is increased to bring the total up to the 70% level. We apply the amount by which the premium is increased, after deductions, to increase the Policy Value. In most cases we will also guarantee the Additional Protection for a longer period. The premium rates for term insurance are set forth in the Policy. In addition to the premium required for the Minimum Guaranteed Death Benefit and any Additional Protection, the scheduled premium may include additional premium to purchase paid-up additional insurance or to increase the Policy Value. The scheduled premium will also include the premium required for any additional benefit included as part of the Policy. After the Policy is issued we will reduce the additional premium included in the scheduled premium at any time upon your request. You may increase the additional premium included in the scheduled premium, or you may pay optional unscheduled additional premiums, at any time before the Policy anniversary nearest to the insured's 85th birthday, subject to our insurability requirements and issue limits. If the Policy includes Additional Protection, we may require an increased premium after the guaranteed period to prevent a reduction of the amount of Additional Protection. We determine the increased premium, if required, each year as of the date 25 days before the Policy anniversary. You are entitled to pay the increased premium required to keep the Additional Protection from falling until the insured reaches age 80 but this right terminates as of the first Policy anniversary on which you do not pay the increased premium when it is due. You may suspend payment of scheduled premiums, at your option, if as of 25 days prior to the Policy anniversary on or before the due date of the premium, (1) the Excess Amount exceeds one year's minimum premium, and (2) the Policy Value exceeds the sum of the net single premium for the amount of insurance then in force, plus the present value of future charges for expenses, additional benefits, and any extra mortality. See "Excess Amount", p. 16. The minimum premium is the sum of the premiums for the Minimum Guaranteed Death Benefit, the Additional Protection and any additional benefit included in the Policy. We will calculate the net single premium and the present value of future charges using the mortality basis for the cost of insurance charges with 6% interest. See "Charges Against the Policy Value", p. 13. While payment of premiums is suspended, certain charges ordinarily deducted from premiums will reduce the Policy Value instead. These charges are set forth in your Policy in the Table of Charges under Premium Suspension. You may resume payment of scheduled premiums as of any Policy anniversary. You must resume payment of 10 scheduled premiums as of the next Policy anniversary if the Excess Amount, as of 25 days prior to the Policy anniversary, is determined to be less than one year's minimum premium. You may pay unscheduled additional premiums while suspension of scheduled premiums is in effect, subject to our insurability requirements and issue limits. The Policy provides for a grace period of 31 days for any premium that is not paid when due. The Policy remains in force during this period. If you pay a premium during the grace period, the values for the Policy will be the same as if you had paid the premium when it was due. If you do not pay the premium within the grace period, and the Policy does not qualify for premium suspension, the Policy will terminate as of the date when the premium was due and will no longer be in force, unless it is continued as paid-up insurance. See "Paid-Up Insurance", p. 16. If you surrender a Policy, its cash value will be paid. See "Cash Value", p. 14. The following table shows representative annual premiums for a Policy with an initial death benefit amount of $400,000, divided equally between Minimum Guaranteed Death Benefit and Additional Protection, for male select, standard plus and standard risks, at three ages.
Premium for Minimum Minimum Guaranteed Guaranteed Premium for Age at Death Death Additional Additional Total Issue Benefit Benefit Protection Protection Premium - ------ ---------- ----------- ------------- ----------- ------- SELECT 15.............................. $200,000 $1,292 $200,000 $ 588 $ 1,880 35.............................. 200,000 2,610 200,000 1,010 3,620 55.............................. 200,000 6,618 200,000 3,320 9,938 STANDARD PLUS 15.............................. $200,000 $1,406 $200,000 $ 608 $ 2,014 35.............................. 200,000 2,874 200,000 1,118 3,992 55.............................. 200,000 7,196 200,000 4,428 11,624 STANDARD 15.............................. $200,000 $1,612 $200,000 $ 740 $ 2,352 35.............................. 200,000 3,362 200,000 1,310 4,672 55.............................. 200,000 8,650 200,000 6,380 15,030
We accept premium payment by various means, including check and electronic funds transfer (EFT). Death Benefit The death benefit for a Policy includes the Minimum Guaranteed Death Benefit, any Additional Protection in effect, any Excess Amount and any paid-up additional insurance. It is reduced by the amount of any Policy debt outstanding and by an adjustment for any unpaid premiums which have been applied to purchase paid-up additional insurance. The Minimum Guaranteed Death Benefit you select when the Policy is issued will neither increase nor decrease, regardless of the investment experience of the Account divisions where assets for the Policy are held, so long as you pay scheduled premiums when they are due and no Policy debt is outstanding. In setting the premium rates for the Minimum Guaranteed Death Benefit we have assumed that the Account assets will grow at a net annual rate of 4% after the Account charges and the expenses of the Portfolios and Funds in which you invest. See "Charges Against the Account Assets", p. 13. We bear the risk that the rate of growth will be less. A higher rate of growth results in an increase in the Policy Value. The Additional Protection included in a Policy when it is issued will not increase by reason of investment experience more favorable than the assumed 4% net annual rate of growth. It will not decrease, regardless of investment experience, until expiration of the guaranteed period, so long as you pay scheduled premiums when they are due and no Policy debt is outstanding. A condition for this guarantee is that you must use any dividends paid on the Policy to increase Policy Value until the end of the guaranteed period unless the Policy has an Excess Amount. See "Excess Amount" p. 16. After the guaranteed period, the Additional Protection may be reduced unless the Policy Value exceeds the amount defined by the formula in the Policy. We calculate the amount of Policy Value, and the amount of increased premium required to prevent a reduction in the Additional Protection, 25 days before each Policy anniversary. You may pay any increased premium required to prevent a reduction in the Additional Protection each year until the Policy anniversary nearest the insured's 80th birthday, but this right terminates the first time you do not pay any required increased premium when it is due. The Policy Value represents the total cumulative net premiums for the Minimum Guaranteed Death Benefit and the Additional Protection, including any additional 11 net premiums or Policy dividends which have been used to increase the Policy Value, adjusted for investment experience, less the cost of insurance which we deduct from the Policy Value on each Policy anniversary. The Policy Value may exceed the amount required to support the Minimum Guaranteed Death Benefit and the Additional Protection. This may result from favorable investment experience or from additional premium or Policy dividends used to increase the Policy Value. The amount by which the Policy Value exceeds the amount needed to support the Minimum Guaranteed Death Benefit and the Additional Protection under a specified set of assumptions is called the Excess Amount. See "Excess Amount", p. 16. Any Excess Amount will increase the death benefit for the Policy, dollar-for-dollar, except as described in the next paragraph. The Policy Value and any Excess Amount change daily. We have designed the Policy to meet the definitional requirements for life insurance in Section 7702 of the Internal Revenue Code. See "Tax Treatment of Policy Benefits", p. 19. These rules require that the death benefit will never be less than the Policy Value divided by the net single premium per dollar of death benefit. The required difference between the death benefit and the Policy Value is higher at younger ages than at older ages. The Policy provides for an increase in the death benefit to the extent required to meet this test. After the death benefit has been increased to meet this requirement an increase in the Policy Value will cause a greater than dollar-for-dollar increase in the death benefit, and a decrease in the Policy Value will cause a greater than dollar-for-dollar decrease in the death benefit. The death benefit is increased by the amount of any paid-up additional insurance purchased with additional premium or Policy dividends. The amount and value of the paid-up additional insurance vary daily to reflect investment experience and are not guaranteed. The amount of any paid-up additional insurance is its value used as a net single premium at the attained age of the insured. Policy Value and Paid-Up Additional Insurance We determine the Policy Value and the value of any paid-up additional insurance daily by separate calculations. An increase or decrease in the Policy Value has no effect on the value of any paid-up additional insurance, and an increase or decrease in the value of any paid-up additional insurance has no effect on the Policy Value. You may increase or decrease the amount of scheduled additional premium which you are paying to increase the Policy Value or to increase the amount of paid-up additional insurance, and you may change the allocation for applying this additional premium. You must make changes in the scheduled additional premium and its allocation by written request. We may require evidence of insurability. We do not permit increases in the scheduled additional premium after the Policy anniversary nearest the insured's 85th birthday. You may transfer the value of paid-up additional insurance to increase the Policy Value by written request. This will generally result in a decrease in the total death benefit. You may not transfer Policy Value to the value of paid-up additional insurance. Allocations to the Account We place the first net annual premium for the Policy, including any net scheduled additional premium, in the Account on the Policy date. We place the net scheduled annual premium in the Account on each Policy anniversary thereafter even if you are paying premiums on an other-than-annual frequency. We will place net unscheduled premiums in the Account on the date they are received at our Home Office. Net premiums are premiums less the deductions from premiums. See "Deductions from Premiums", p. 13. We invest premiums placed 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 latest of the Policy date, 45 days after the date of the completed application or 32 days after we approve the application. 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 placed in the Account thereafter. If you allocate any portion of a premium to a division, the division must receive at least 1% of that premium. You may apportion the Account assets supporting your Policy among as many as ten divisions of the Account at any one time. We count the Money Market Division as one of the ten available divisions if you are using it for any purpose, including the initial allocation date procedure described above or dollar cost averaging. You may transfer accumulated amounts from one division of the Account to another as often as twelve times in a Policy year. 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 if we determine that this is necessary to protect the interests of other investors. Transfers are effective on the date we receive a written request at our Home Office. We 12 reserve the right to charge a fee of up to $25 to cover administrative costs of transfers. No fee is presently charged. 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 3.5% of the premium. Of this amount 2.25% is for state premium taxes. Premium taxes vary from state to state and currently range from .5% to 3.5% of life insurance premiums. The 2.25% rate is an average. The tax rate for a particular state may be lower, higher, or equal to the 2.25% deduction. 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 an increase in our federal income taxes resulting from a change in the Internal Revenue Code relating to deferred acquisition costs. We deduct a charge of 4.5% for sales costs from each premium. We expect to recover our sales expenses from this amount, over the period while the Policies are in force, and from the surrender charges described below. The amounts we deduct for sales costs in a Policy year are not specifically related to sales costs incurred that year. 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 charge against the assets of the Account for the mortality and expense risks we have assumed. See "Charges Against the Account Assets", p. 13. To the extent that the amounts deducted for sales costs exceed the amounts needed, we will realize a gain. We deduct an annual charge of $60 from premiums each year for administrative costs to maintain the Policy. These expenses include costs of premium billing and collection, processing claims, keeping records and communicating with Policyowners. We retain the right to increase this charge after 10 years, but it is guaranteed not to exceed $84 plus 12 cents per $1,000 of both the Minimum Guaranteed Death Benefit and the Additional Protection. We do not expect to profit from this charge. We deduct an annual charge from premiums each of the first 10 years to compensate us for expenses, other than sales expenses, incurred in conjunction with issuance of the Policy. These expenses include the costs of processing applications, medical examinations, determining insurability and establishing records. The annual amount of this charge is $24 plus 12 cents per $1,000 of Minimum Guaranteed Death Benefit and Additional Protection. If you surrender the Policy before these charges have been deducted for 10 years, the remaining charges will be reflected in the administrative surrender charge. See "Surrender Charges", p. 14. We deduct an annual charge of 12 cents per $1,000 of Minimum Guaranteed Death Benefit from premiums each year to compensate us for the risk we have assumed by guaranteeing the Minimum Guaranteed Death Benefit, as long as you pay all premiums when they are due, no matter how unfavorable investment performance may be. We will also deduct any extra amounts we charge for insureds who do not qualify as select, standard plus or standard risks, plus the cost of any additional benefits purchased with the Policy, to determine the net annual premium. Charges Against the Policy Value We deduct a cost of insurance charge from the Policy Value on each Policy Anniversary. We determine the amount by multiplying the net amount at risk by the cost of insurance rate. The net amount at risk is the projected insurance amount, discounted at a net annual rate of 4%, less the Policy Value. The projected insurance amount is the amount of insurance at the end of the Policy year, assuming that the Policy Value increases by the 4% net annual growth rate assumed in constructing the Policy. The cost of insurance rate reflects the attained age of the insured. For select and standard risks, the cost of insurance rate is based on the Commissioners 1980 Standard Ordinary Smoker and Non-Smoker Mortality Tables. For other risks, the cost of insurance rate is based on the Commissioners 1980 Standard Ordinary Mortality Tables. The cost of insurance rates are included in the Policy. We also deduct a cost of insurance charge from the cash value of any paid-up additional insurance on each Policy anniversary. If we receive an unscheduled premium on a day other than a Policy anniversary and the net amount at risk increases as a result, we will deduct a cost of insurance charge on that day, reflecting the increase in the net amount at risk and the portion of the Policy year remaining. While payment of premiums is suspended, a portion of the annual charges which we would ordinarily deduct from premiums will be deducted from the Policy Value instead. We will also make this deduction on the Policy anniversary each year. We will also reduce the Policy Value by any surrender charges, administrative charges or decrease in Policy debt that may result from a withdrawal, a decrease in the face amount of insurance or a change to variable benefit paid-up insurance. Charges Against the Account Assets There is a daily charge to the Account for the mortality and expense risks that we have assumed. The charge is at the annual rate of .60% of the assets of the Account. The mortality risk is that insureds may not live as long as we estimated. The expense risk is that expenses of 13 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. The actual mortality and expense experience under the Policies will be the basis for determining dividends. See "Annual Dividends", p. 15. The Policies provide that a charge for taxes may be made against the assets of the Account. We are not currently making a daily charge for federal income taxes we have incurred. In no event will the charge for taxes exceed that portion of our actual tax expenses which is fairly allocable to the Policies. The Portfolios and Funds in which the assets that support your Policy are invested also bear expenses which reduce the investment rate of return. See "Management Fees and Other Expenses of the Funds", p. 6. Transaction Charges The Policy provides for a fee of up to $25 for a transfer of assets among the Account divisions and for a fee of up to $25 for a withdrawal of Excess Amount. We are currently waiving these charges. Surrender Charges If you surrender the Policy before you have paid the premium that is due at the beginning of the fifteenth year, we will deduct surrender charges from the Policy Value. A table of surrender charges is in the Policy. The surrender charges consist of an administrative surrender charge and a premium surrender charge. The administrative surrender charge is equal to the sum of the issue expense charges which we have not deducted. The administrative surrender charge in the first Policy year is $216, plus $1.08 per $1,000 of Minimum Guaranteed Death Benefit and Additional Protection. This charge grades down linearly each year as you pay the premium (or payment of premiums is suspended) and is zero after you have paid the premium that is due at the beginning of the tenth Policy year (or it is suspended). The premium surrender charge is a percentage (shown in the table below) of the surrender charge base. If payment of the premium for a Policy year has been suspended, the premium surrender charge percentage will be as if you had paid the annual premium. During the first five policy years, if you pay premiums more frequently than annually we will adjust the premium surrender charge percentages to reflect the actual period for which you have paid premiums. If none of the premium payments during the first five Policy years have been suspended, the surrender charge base equals the sum of an annual premium for the Minimum Guaranteed Death Benefit (exclusive of the Policy fee and exclusive of any charge for extra mortality) plus a term insurance premium for the initial amount of Additional Protection. If any of the premium payments during the first five Policy years have been suspended, the surrender charge base equals the lesser of (1) the sum of an annual premium for the Minimum Guaranteed Death Benefit (exclusive of the Policy fee and exclusive of any charge for extra mortality) plus a term insurance premium for the initial amount of Additional Protection, and (2) the sum of the total premiums paid (exclusive of any premiums for additional benefits purchased with the Policy, and premiums for extra mortality, and any extra amount for premiums paid more often than annually) divided by the number of years (including fractions), but not more than five, for which premiums have been paid or suspended
For Policies Premium Surrender Charge surrendered after Percentage payment of the ------------------------------------- beginning of year Issue age 65 and under Issue age 75 - ----------------- ---------------------- ------------ 1 24% 24% 2 28% 25.5% 3 32% 27% 4 36% 28.5% 5 through 10 40% 30% 11 32% 24% 12 24% 18% 13 16% 12% 14 8% 6% 15 and later 0% 0%
For issue ages 66 through 74, the percentages are determined by linear interpolation between the percentages shown. For a Policy that has a Minimum Guaranteed Death Benefit of $50,000 or more, the surrender charges will not exceed $41.16 per $1,000 of Minimum Guaranteed Death Benefit. For a Policy that has a Minimum Guaranteed Death Benefit of $100,000 or more, issued for an insured ages 15-59, the surrender charges will not exceed $22.86 per $1,000 of Minimum Guaranteed Death Benefit. The surrender charges could equal or exceed the Policy Value but we will not apply the surrender charges to the value of any paid-up additional insurance. Guarantee of Premiums, Deductions and Charges We guarantee and may not increase the premiums for the Minimum Guaranteed Death Benefit and the charge for mortality and expense risks. These amounts will not increase regardless of future changes in longevity or increases in expenses. Cash Value 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 plus the value of any paid-up additional insurance, reduced by any Policy debt outstanding and the surrender charges. If you are not paying premiums 14 on an annual basis we reduce the cash value for any premiums due later in the Policy year. 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 l940, 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. You may surrender your Policy for the cash value at any time during the lifetime of the insured. Alternatively, you may request that we apply the cash value to provide a reduced amount of fixed or variable paid-up insurance. See "Paid-Up Insurance", p.16. We will permit partial surrenders of the Policies so long as the Policy that remains meets the regular minimum size requirements. A partial surrender will cause the Policy to be split into two Policies. One Policy will be surrendered; the other will continue in force on the same terms as the original Policy except that the premiums will be based on the reduced amount of insurance. You will receive a new Policy document. The cash value and the death benefit will be proportionately reduced. We will allocate reductions among the Account divisions in proportion to the amounts in the divisions. We will make a deduction from the Policy proceeds for a proportionate part of the surrender charges if a partial surrender takes place before you have paid the premium that is due at the beginning of the fifteenth Policy year. We will make a transaction charge when a partial surrender is effected. The amount of the transaction charge will not exceed the actual administrative costs for the transaction. We currently expect this charge to be $250. Annual Dividends The Policies share in divisible surplus to the extent we determine annually. We will distribute a Policy's share annually as a dividend payable on each Policy anniversary. Although the source of dividends may vary, dividends under participating policies may be described as refunds of premiums which adjust the cost of a policy to the actual level of cost emerging over time after the policy's issue. Thus participating policies generally have gross premiums which are higher than those for comparable non-participating policies. Both federal and state tax law recognize that a dividend is considered to be a refund of a portion of the premium paid. Dividend illustrations published at the time a life insurance policy is issued reflect the actual recent experience of the issuing company with respect to investment earnings, mortality and expenses. State law generally prohibits a company from projecting or estimating future results. State law also requires that dividends be paid out of surplus, after certain necessary amounts are set aside, and that such surplus be apportioned equitably among participating policies. In summary, dividends must be based on actual experience and cannot be guaranteed at issue of a policy. Our actuary annually examines current and recent experience and compares these results with those which were assumed in determining premium rates when each class of policies was issued. We determine classes by such factors as year of issue, age, plan of insurance and risk classification. The actuary then determines the amount of dividends to be equitably apportioned to each class of policies. Following the actuary's recommendations, our Trustees adopt a dividend scale each year, thereby authorizing the distribution of the dividend. We pay any dividend on a Policy's anniversary and the dividend reflects the experience we expect for the year in which the dividend is paid. For purposes of the current dividend scale used for the illustrations we publish, we have assumed that mortality experience in connection with the Policies will be comparable to that actually experienced with all life insurance. Dividends for variable life insurance are generally lower than those for participating fixed benefit life insurance, primarily because a variable life insurance policy provides a contractual mechanism for translation of investment experience into a variable death benefit and variable cash value. For participating fixed benefit life insurance the dividend includes amounts produced by favorable investment results. Dividends based on the Minimum Guaranteed Death Benefit for the Policies described in this prospectus are expected be relatively low during the first 15 Policy years. You may use dividends to increase the Policy Value. If the Policy has Additional Protection in force, the dividends will be used to increase the Policy Value unless the Policy has Excess Amount. See "Excess Amount", p. 16. If the Policy has Excess Amount, or if no Additional Protection is in force, you may use dividends to purchase variable benefit paid-up additional insurance, or to pay premiums, or we may pay the dividend in cash. We will use dividends to increase the Policy Value if you give us no direction. If the Policy is in force as fixed benefit paid-up insurance, you may use dividends to purchase fixed benefit paid-up additional insurance or we will pay you the dividend in cash. If the Policy is in force as variable benefit paid-up insurance, you may use the dividends to purchase variable benefit paid-up additional insurance or we will pay you the dividend in cash. Loans and Withdrawals You may borrow up to 90% of the Policy's cash value using the Policy as security. If a Policy loan is already outstanding, the maximum amount for any new loan is 15 90% of the amount of cash value the Policy would have if there were no loan, less the amount already borrowed. You may take loan proceeds in cash or you may apply them to pay premiums on the Policy. Interest on a Policy loan accrues and is payable on a daily basis. We add unpaid interest to the amount of the loan. The Policy cash value is reduced by the amount of the Policy loan. If the cash value decreases to zero the Policy will terminate unless a sufficient portion of the Policy loan is repaid. We will send you a notice at least 31 days before the termination date. The notice will show how much you must repay to keep the Policy in force. You select the Policy loan interest rate. A specified annual effective rate of 5% is one choice. The other choice is a variable rate based on a corporate bond yield index. We will adjust the variable rate annually, but it will not be less than 5%. We will take the amount of a Policy loan, including interest as it accrues, 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 those amounts on a daily basis with an annual earnings rate equal to the Policy loan interest rate less a charge for the mortality and expense risks we have assumed and for expenses, including taxes. The aggregate charge is currently at the annual rate of .90% for the 5% specified Policy loan interest rate and .90% for the variable Policy loan interest rate. For example, the earnings rate corresponding to the specified 5% Policy loan interest rate is currently 4.10%. A Policy loan, even if it is repaid, will have a permanent effect on the Policy Value and cash value because the amounts borrowed will not participate in the Account's investment results while the loan 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. Except when the Policy is in force as fixed benefit paid-up insurance, we will allocate a Policy loan between Policy Value and variable paid-up additional insurance in proportion to the amount of cash value attributable to each. 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 transfer them from our general account to the Account divisions, in proportion to the amounts in the divisions, as of the same date. You may make a withdrawal if the Excess Amount is sufficient. See "Excess Amount" below. A withdrawal may neither decrease the Excess Amount to less than the surrender charge which would apply if the Policy were surrendered nor reduce the loan value to less than any Policy debt outstanding. The minimum amount for withdrawals is $250. An administrative charge of up to $25 may apply, but we are currently waiving that charge. We will allocate withdrawals in proportion to the amounts in the Account divisions. 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 may be larger than the amount of the withdrawal. If cumulative withdrawals exceed the cumulative additional premiums which have been used to increase the Policy Value, with both withdrawals and premiums increased by 4% annual interest, subsequent unfavorable investment experience may cause the Policy to lapse unless you pay an additional unscheduled premium to increase the Policy Value. The due date for this premium is the Policy anniversary following written notice to you. Excess Amount The Excess Amount is the amount by which the Policy Value exceeds the Tabular Cash Value for the sum of the Minimum Guaranteed Death Benefit and any Additional Protection in effect. The Tabular Cash Value is an amount equal to a Policy Value calculated assuming (1) a whole life Policy with a face amount equal to the sum of the Minimum Guaranteed Death Benefit and the Additional Protection, (2) all premiums are paid when due, (3) no additional premiums or dividends used to increase Policy Value, (4) a 4% level annual net rate of return, and (5) maximum Policy charges apply. If you are not paying premiums on an annual basis, the Excess Amount is reduced for any premiums due later in the Policy year. Paid-Up Insurance If you do not pay a premium within the 31-day grace period, and the Policy does not qualify for suspension of premium payments, the Policy will continue in force as a reduced amount of fixed benefit paid-up insurance. Alternatively you may select a reduced amount of variable benefit paid-up insurance. You must make this selection during the grace period or sooner. If the Policy is in force as a reduced amount of fixed benefit paid-up insurance, we will transfer the amount of the cash value from the Account to our general account. Thereafter the Policy will not participate in the Account's investment results unless the Policy is subsequently reinstated. See "Reinstatement", p. 17. The minimum cash value for fixed benefit paid-up insurance is $1,000. If the cash value is less than $1,000 as of the last day of the grace period we will treat the Policy as surrendered. You may select variable benefit paid-up insurance only if the cash value of the Policy is at least $5,000. 16 We determine the amount of paid-up insurance by applying the amount of cash value plus any Policy debt as a net single premium at the attained age. Paid-up insurance has cash and loan values. For fixed benefit paid-up insurance the amounts of these are guaranteed. For variable paid-up insurance neither the death benefit or the cash value is guaranteed. Paid-up insurance remains in force for the lifetime of the insured unless you surrender or terminate the Policy. While the Policy is in force as either fixed or variable benefit paid-up insurance the Minimum Guaranteed Death Benefit and any Additional Protection will not be in effect. Any Policy debt and the Policy loan interest rate will continue. See "Loans and Withdrawals", p. 15. Reinstatement If a premium is due and remains unpaid after the grace period expires, the Policy may be reinstated while the insured is alive within three years after the premium due date. The insured must provide satisfactory evidence of insurability unless reinstatement takes place within 31 days after the end of the grace period. We may require a substantial payment. Following reinstatement the Policy will have the same Minimum Guaranteed Death Benefit, Additional Protection, Policy Value and paid-up additional insurance as if minimum premiums had been paid when due. We will credit a 4% annual net rate of investment earnings for the period from the due date of the overdue premium to the date of reinstatement. We will make an adjustment for any Policy debt or the debt may be reinstated. The Policy may not be reinstated if you have surrendered it for its cash value. Right to Return Policy You may return a Policy for a full refund of the premium you paid within 45 days after you sign the application for insurance, or within 10 days after you received the Policy, or within 10 days after a Notice of Cancellation Right is mailed or delivered to you, whichever date is latest. You may mail or deliver the Policy to the agent who sold it or to our Home Office. If returned, we will consider the Policy void from the beginning. Right to Exchange for a Fixed Benefit Policy You may exchange a Policy for a whole life insurance policy with benefits that do not vary with the investment experience of a separate account. You may elect the exchange at any time within twenty-four months after the issue date of the Policy provided premiums are duly paid. We do not require evidence of insurability. The new policy will be on the life of the same insured and will have the same initial guaranteed death benefit, policy date and issue age. The premiums and cash values will be the same as those for fixed benefit policies we issued on the issue date of the Policy. The exchange will be subject to an equitable cash adjustment. The amount will recognize the difference in premiums and investment performance of the two policies. An exchange will be effective when we receive a proper written request, as well as the Policy and any amount due on the exchange. You may also exchange a Policy for a fixed benefit policy if either of the mutual funds changes its investment adviser or if there is a material change in the investment policies of a Portfolio or Fund. You will be given notice of any such change and will have 60 days to make the exchange. 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. Written proof of the transfer must be received by Northwestern Mutual at its Home Office. In this prospectus "you" 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 the Policy is issued 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. 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 and less the cash value of any variable paid-up insurance surrendered. Misstatement of Age or Sex. If the age or sex of the insured has been misstated, we will adjust benefits 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. Payment Plans. The Policy provides a variety of payment plans for Policy benefits. A Northwestern Mutual agent authorized to sell the Policies can explain these provisions on request. Deferral of Determination and Payment. So long as premiums have been paid when due, 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 17 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. If a Policy is in force as fixed benefit paid-up insurance, we have the right to defer payment of the cash value for up to six months from the date of a Policy loan or surrender. If payment is deferred for 30 days or more we will pay interest at an annual effective rate of 4%. Voting Rights We are the owner of the mutual fund shares 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 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 shareholders' meeting of the funds. 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 held in our general account in the same proportions as the shares for which voting instructions are received. 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's cash 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 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 therefor 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, we may substitute shares of another Portfolio or Fund or another mutual fund. 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 For each Policy year (unless a Policy is in force as fixed benefit paid-up insurance) you will receive a statement showing the death benefit, cash value and any Policy loan (including interest charged) as of the anniversary date. We will also send you a confirmation statement when you pay the annual premium. The reports and confirmation statements will show the apportionment of invested assets among the Account divisions. The invested assets equal the Policy Value plus the value of any variable paid-up additions. The invested assets may exceed the cash value of your Policy, because the cash value is reduced by the amount of any applicable surrender charge and any premiums due later in the Policy Year. You will also receive annual and semiannual reports for the Account and each of the mutual funds, including financial statements. We will send you an updated prospectus, and updated prospectuses for each of the mutual funds, each year. Special Policy for Employers A reduced minimum amount applies for Policies where the insurance involves an employer sponsored benefit plan or arrangement. The sum of the Minimum Guaranteed Death Benefit and the Additional Protection must be at least $10,000, of which the Minimum Guaranteed Death Benefit must be at least $1,000. The premium for the Additional Protection is two times the cost of term insurance for the insured's age when the Policy is issued. Premium rates for term insurance are set forth in the Policy. These Policies for employers may include a provision to permit the amount of Additional Protection to increase after issue. Any such increase amount must be based on the terms of the benefit plan or arrangement and may not be subject to the discretion of the insured or the insured's beneficiary. A description of the method of determining the amount of any increase is included in the Policy. Changes to the amount of Additional 18 Protection will be effective on Policy anniversaries. The surrender charge and all charges for issue and administrative expenses will be based on the initial amount of Additional Protection. For certain situations where the insurance involves an employer sponsored benefit plan or arrangement, federal law and the laws of certain states may require that premiums and annuity rates be determined without regard to sex. Special Policies are available for this purpose. You are urged to review any questions in this area with qualified counsel. Financial Statements Financial statements of the Account and financial statements of Northwestern Mutual appear in the Statement of Additional Information. The Statement of Additional Information is available at our Website. See p. 23. Legal Proceedings We are engaged in litigation of various kinds which in our judgment is not of material importance in relation to our total assets. There are no legal proceedings pending to which the Account is a party. Illustrations Your financial representative will provide you with illustrations for a Policy upon your request. The illustrations show how the death benefit, invested assets 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 amount of Minimum Guaranteed Death Benefit and amount of Additional Protection as you select. Tax Treatment of Policy Benefits 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. We have designed the Policy to comply with this definition. 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 cash value of the Policy 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 on p. 20, 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. 21. As a general rule, the proceeds from a withdrawal of cash 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 cash value during the first 15 Policy years may be taxable to the extent that the cash 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. 19 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 amount of premiums paid. In extreme situations, policyowners can face what is called the "surrender squeeze". The surrender squeeze occurs when there is neither enough unborrowed cash 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 cash 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 satisfy the new seven-pay limit. A material change could occur as a result of a change in the death benefit, a change in the level of premium payments, 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 making a withdrawal of cash value or, in some cases, by lapsing the Policy, 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 cash value. Any such distributions will be considered taxable income to the extent the cash 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 cash 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 20 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 cash 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 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 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. On July 3, 2002, the Treasury and Internal Revenue Service issued proposed regulations regarding the taxation of split dollar arrangements. The proposed regulations provide that split dollar arrangements must be taxed under one of two mutually exclusive tax regimes depending on the ownership of the underlying life insurance policy. Collateral assignment split dollar arrangements, in which the employee owns the policy, must be taxed under a loan regime. Where such an arrangement imposes a below market or no interest rate, the employee is taxed on the imputed interest under Section 7872 of the Code. Endorsement split dollar arrangements, in which the employer owns the policy, must be taxed under an economic benefit regime. Under this regime, the employee is taxed each year on (i) the current life insurance protection transferred to the employee and (ii) any other economic benefits, including an interest in the cash surrender value of the policy, to which the employee is provided any right or benefit during the taxable year. The proposed regulations have not been finalized and final regulations will apply only to arrangements entered into after their publication in the Federal Register. On July 30, 2002, the Sarbanes-Oxley Act of 2002 was signed into law. One provision of the Act provides that 21 it is a criminal offense for a public employer to extend or arrange a personal loan to a director or executive officer after July 30, 2002. One issue that has not been clarified is whether each premium paid by a public employer under a split dollar arrangement with a director or executive officer is a personal loan subject to the new law. On October 22, 2002, the Treasury and the Internal Revenue Service issued temporary and proposed regulations that require taxpayers to annually report all "reportable transactions" as defined in the regulations. "Reportable transactions" include transactions that are offered under conditions of confidentiality, investments by a public company or a business with assets of $100 million or more that produce a book-tax difference of $10 million or more, or transactions that include a tax indemnity. Although it is expected that a "reportable transaction" will be defined more narrowly in the final regulations, the purchase of certain large life insurance policies by businesses may qualify as a "reportable transaction". 22 BACK COVER PAGE Additional information about Northwestern Mutual Variable Life Account is provided in a Statement of Additional Information which we have filed with the Securities and Exchange Commission. The Statement of Additional Information is incorporated herein by reference. The Statement of Additional Information is available at our Website: www.northwesternmutual.com. A copy is available without charge if you call 1-888-455-2232. 23 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. N o r t h w e s t e r n M u t u a l Northwestern Mutual Variable CompLife(R) Northwestern Mutual Variable Life Account Northwestern Mutual Series Fund, Inc. Fidelity VIP Mid Cap Portfolio Russell Investment Funds P r o s p e c t u s e s Investment Company Act File Nos. 811-3990, Sand 811-5371 ----------------- [LOGO] Northwestern Mutual(TM) PO Box 3095 Milwaukee WI 53201-3095 Change Service Requested STATEMENT OF ADDITIONAL INFORMATION VARIABLE COMPLIFE(R) (Variable Whole Life Policy with Additional Protection) NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT (the "Account"), a separate investment account of The Northwestern Mutual Life Insurance Company ("Northwestern Mutual") - -------------------------------------------------------------------------------- This Statement of Additional Information is not a prospectus but supplements and should be read in conjunction with the prospectus for the Policy. A copy of the prospectus may be obtained from The Northwestern Mutual Life Insurance Company, 720 East Wisconsin Avenue, Milwaukee, Wisconsin 53202, telephone number (414) 271-1444. - -------------------------------------------------------------------------------- TheDate of the Prospectus to which this Statement of Additional kInformation Relates is May 1, 2003. The Date of this Statement of Additional Information is May 1, 2003. B-1 DISTRIBUTION OF THE POLICIES The Policies are offered on a continuous basis exclusively through individuals who, in addition to being life insurance agents of Northwestern Mutual, are registered representatives of Northwestern Mutual Investment Services, LLC ("NMIS"). NMIS is our wholly-owned company. NMIS may be considered the underwriter of the Policies for purposes of the federal securities laws. The following amounts of commissions were paid on sales of variable life insurance policies issued in connection with the Account during each of the last three years: Year Amount - ---- -------- 2002 $ 97,054,099 2001 $120,720,024 2000 $154,396,431 Commissions paid to our agents will not exceed 40% of the premium for the first year, 6% of the premium for the second through tenth years, and 2-3/4% of the premium thereafter. Agents who meet certain productivity and persistency standards receive additional compensation. We may pay new agents differently during a training period. 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. B-2 EXPERTS The financial statements of the Account as of December 31, 2002 and for each of the two years in the period ended December 31, 2002 and of Northwestern Mutual as of December 31, 2002 and 2001 and for each of the three years in the period ended December 31, 2002 included in this Statement of Additional Information 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. PricewaterhouseCoopers LLP provides audit services for the Account. The address of PricewaterhouseCoopers LLP is 100 East Wisconsin Avenue, Suite 1500, Milwaukee, Wisconsin 53202. B-3 Financial Statements Northwestern Mutual Variable Life Account Statement of Assets and Liabilities December 31, 2002 (in thousands) Assets Investments at Market Value: Northwestern Mutual Series Fund, Inc. Small Cap Growth Stock 60,988 shares (cost $109,977)...................................... $ 88,737 T. Rowe Price Small Cap Value 24,810 shares (cost $25,180)....................................... 23,644 Aggressive Growth Stock 112,441 shares (cost $370,716)..................................... 245,459 International Growth Stock 5,596 shares (cost $4,584)......................................... 4,421 Franklin Templeton International Equity 159,554 shares (cost $236,427)..................................... 163,382 Index 400 Stock 75,571 shares (cost $83,113)....................................... 71,944 Growth Stock 117,667 shares (cost $247,216)..................................... 186,856 J.P. Morgan Select Growth and Income Stock 126,706 shares (cost $170,047)..................................... 109,981 Capital Guardian Domestic Equity 24,831 shares (cost $21,334)....................................... 18,822 Index 500 Stock 181,007 shares (cost $514,808)..................................... 392,243 Asset Allocation 9,203 shares (cost $8,491)......................................... 7,897 Balanced 129,031 shares (cost $227,716)..................................... 209,288 High Yield Bond 58,130 shares (cost $43,624)....................................... 32,727 Select Bond 59,452 shares (cost $70,746)....................................... 75,563 Money Market 119,895 shares (cost $119,895)..................................... 119,895 Russell Insurance Funds Multi-Style Equity 6,865 shares (cost $88,572)........................................ 62,056 Aggressive Equity 3,252 shares (cost $37,473)........................................ 30,116 Non-U.S. 4,937 shares (cost $47,060)........................................ 35,546 Core Bond 3,333 shares (cost $33,989)........................................ 34,729 Real Estate Securities 2,750 shares (cost $29,435)........................................ 28,905 $1,942,211 -------- Due from Northwestern Mutual Life Insurance Company.................... 486 ---------- Total Assets..................................................... $1,942,697 ========== Liabilities Due to Northwestern Mutual Life Insurance Company..................... $ 132 ---------- Total Liabilities................................................ 132 ---------- Equity (Note 8) Variable Life Policies Issued Before October 11, 1995............... 382,814 Variable Complife Policies Issued On or After October 11, 1995...... 1,401,357 Variable Executive Life Policies Issued On or After March 2, 1998... 87,373 Variable Joint Life Policies Issued On or After December 10, 1998... 71,021 ---------- Total Equity..................................................... 1,942,565 ---------- Total Liabilities and Equity..................................... $1,942,697 ==========
The Accompanying Notes are an Integral Part of the Financial Statements B-4 Northwestern Mutual Variable Life Account Statements of Operations (in thousands)
T. Rowe Price Small Cap Growth Small Cap Value Combined Stock Division Division# ------------------------ ------------------------ ------------------------ Year Ended Year Ended Year Ended Year Ended Year Ended Period Ended December 31, December 31, December 31, December 31, December 31, December 31, 2002 2001 2002 2001 2002 2001 - ------------------------------------------------------------------------------------------------------------- Investment Income Dividend Income.............. $ 31,707 $ 127,172 $ 131 $ 5 $ 124 $ 15 Mortality and Expense Risks.............. (10,183) (7,362) (487) (276) (86) (6) Taxes........................ (814) (2,636) (18) (93) (6) (1) --------- --------- -------- ----- ------- ---- Net Investment Income (Loss).............. 20,710 117,174 (374) (364) 32 8 --------- --------- -------- ----- ------- ---- Realized and Unrealized Gain (Loss) on Investments Realized Gain (Loss) on Investments................ (11,929) 199 (736) (296) 172 -- Unrealized Appreciation (Depreciation) of Investments During the Period.......... (369,861) (300,285) (17,491) 21 (2,018) 483 --------- --------- -------- ----- ------- ---- Net Gain (Loss) on Investments................ (381,790) (300,086) (18,227) (275) (1,846) 483 --------- --------- -------- ----- ------- ---- Increase (Decrease) in Equity Derived from Investment Activity................... $(361,080) $(182,912) $(18,601) $(639) $(1,814) $491 ========= ========= ======== ===== ======= ==== Aggressive Growth International Growth Stock Division Stock Division# ------------------------ ------------------------ Year Ended Year Ended Year Ended Period Ended December 31, December 31, December 31, December 31, 2002 2001 2002 2001 - ---------------------------------------------------------------------------------- Investment Income Dividend Income.............. $ 238 $ 55,735 $ 23 $ -- Mortality and Expense Risks.............. (1,457) (1,156) (15) (1) Taxes........................ (101) (419) (1) -- -------- --------- ----- ---- Net Investment Income (Loss).............. (1,320) 54,160 7 (1) -------- --------- ----- ---- Realized and Unrealized Gain (Loss) on Investments Realized Gain (Loss) on Investments................ (2,733) 470 (297) -- Unrealized Appreciation (Depreciation) of Investments During the Period.......... (59,041) (113,399) (173) 10 -------- --------- ----- ---- Net Gain (Loss) on Investments................ (61,774) (112,929) (470) 10 -------- --------- ----- ---- Increase (Decrease) in Equity Derived from Investment Activity................... $(63,094) $ (58,769) $(463) $ 9 ======== ========= ===== ====
#The initial investment in this Division was made on July 31, 2001. The Accompanying Notes are an Integral Part of the Financial Statements B-5 Northwestern Mutual Variable Life Account Statements of Operations (in thousands)
Franklin Templeton International Index 400 Equity Division Stock Division Growth 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, (continued) 2002 2001 2002 2001 2002 2001 - ----------------------------------------------------------------------------------------------------------------------- Investment Income Dividend Income ...................... $ 3,431 $ 16,480 $ 502 $ 439 $ 2,122 $ 7,586 Mortality and Expense Risks........... (954) (719) (354) (163) (1,057) (773) Taxes................................. (70) (260) (13) (53) (52) (271) -------- -------- -------- ----- -------- -------- Net Investment Income (Loss).......... 2,407 15,501 135 223 1,013 6,542 -------- -------- -------- ----- -------- -------- Realized and Unrealized Gain (Loss) on Investments Realized Gain (Loss) on Investments....................... (2,938) (282) (236) (7) (1,528) 352 Unrealized Appreciation (Depreciation) of Investments During the Period........ (33,186) (40,155) (11,036) 718 (45,647) (34,280) -------- -------- -------- ----- -------- -------- Net Gain (Loss) on Investments........ (36,124) (40,437) (11,272) 711 (47,175) (33,928) -------- -------- -------- ----- -------- -------- Increase (Decrease) in Equity Derived from Investment Activity..... $(33,717) $(24,936) $(11,137) $ 934 $(46,162) $(27,386) ======== ======== ======== ===== ======== ======== J.P. Morgan Select Capital Guardian Growth and Income Domestic Equity Stock Division Division# ------------------------ ------------------------ Year Ended Year Ended Year Ended Period Ended December 31, December 31, December 31, December 31, (continued) 2002 2001 2002 2001 - -------------------------------------------------------------------------------------------- Investment Income Dividend Income ...................... $ 1,053 $ 4,135 $ 222 $ 23 Mortality and Expense Risks........... (655) (530) (59) (5) Taxes................................. (39) (188) (4) (1) -------- -------- ------- ---- Net Investment Income (Loss).......... 359 3,417 159 17 -------- -------- ------- ---- Realized and Unrealized Gain (Loss) on Investments Realized Gain (Loss) on Investments....................... (2,575) (204) (94) (2) Unrealized Appreciation (Depreciation) of Investments During the Period........ (38,293) (13,126) (2,814) 302 -------- -------- ------- ---- Net Gain (Loss) on Investments........ (40,868) (13,330) (2,908) 300 -------- -------- ------- ---- Increase (Decrease) in Equity Derived from Investment Activity..... $(40,509) $ (9,913) $(2,749) $317 ======== ======== ======= ====
#The initial investment in this Division was made on July 31, 2001. The Accompanying Notes are an Integral Part of the Financial Statements B-6 Northwestern Mutual Variable Life Account Statements of Operations (in thousands)
Index 500 Stock Division Asset Allocation Division# Balanced Division ------------------------ -------------------------- ------------------------ Year Ended Year Ended Year Ended Period Ended Year Ended Year Ended December 31, December 31, December 31, December 31, December 31, December 31, (continued) 2002 2001 2002 2001 2002 2001 - ---------------------------------------------------------------------------------------------------------------------- Investment Income Dividend Income.................... $ 5,269 $ 16,748 $ 129 $15 $ 7,713 $ 15,012 Mortality and Expense Risks.................... (2,191) (1,726) (28) (2) (1,069) (915) Taxes.............................. (181) (633) (3) -- (252) (376) --------- -------- ----- --- -------- -------- Net Investment Income (Loss).................... 2,897 14,389 98 13 6,392 13,721 --------- -------- ----- --- -------- -------- Realized and Unrealized Gain (Loss) on Investments Realized Gain (Loss) on Investments...................... 5,110 2,729 (22) 5 (625) 559 Unrealized Appreciation (Depreciation) of Investments During the Period................ (112,454) (67,629) (654) 60 (23,644) (21,699) --------- -------- ----- --- -------- -------- Net Gain (Loss) on Investments...................... (107,344) (64,900) (676) 65 (24,269) (21,140) --------- -------- ----- --- -------- -------- Increase (Decrease) in Equity Derived from Investment Activity......................... $(104,447) $(50,511) $(578) $78 $(17,877) $ (7,419) ========= ======== ===== === ======== ======= 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) 2002 2001 2002 2001 2002 2001 - -------------------------------------------------------------------------------------------------------------------- Investment Income Dividend Income.................... $ 3,479 $ 2,905 $2,499 $ 1,762 $1,835 $3,627 Mortality and Expense Risks.................... (161) (108) (258) (123) (592) (419) Taxes.............................. (8) (38) (24) (44) (17) (112) ------- ------- ------ ------- ------ ------ Net Investment Income (Loss).................... 3,310 2,759 2,217 1,595 1,226 3,096 ------- ------- ------ ------- ------ ------ Realized and Unrealized Gain (Loss) on Investments Realized Gain (Loss) on Investments...................... (1,107) (1,060) 704 (45) -- -- Unrealized Appreciation (Depreciation) of Investments During the Period................ (3,189) (861) 3,467 1,419 -- -- ------- ------- ------ ------- ------ ------ Net Gain (Loss) on Investments...................... (4,296) (1,921) 4,171 1,374 -- -- ------- ------- ------ ------- ------ ------ Increase (Decrease) in Equity Derived from Investment Activity......................... $ (986) $ 838 $6,388 $ 2,969 $1,226 $3,096 ======= ======= ====== ======= ====== ======
#The initial investment in this Division was made on July 31, 2001. The Accompanying Notes are an Integral Part of the Financial Statements B-7 Northwestern Mutual Variable Life Account Statements 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) 2002 2001 2002 2001 2002 2001 - ---------------------------------------------------------------------------------------------------------------------------- Investment Income Dividend Income . . . . ................... $ 356 $ 1,011 $ -- $ 26 $ 629 $ 195 Mortality and Expense Risks................ (285) (180) (146) (85) (159) (103) Taxes...................................... (6) (60) (5) (28) (5) (35) -------- ------- ------- ----- ------- ------- Net Investment Income (Loss)............... 65 771 (151) (87) 465 57 -------- ------- ------- ----- ------- ------- Realized and Unrealized Gain (Loss) on Investments Realized Gain (Loss) on Investments............................ (1,625) (545) (937) (173) (3,644) (1,972) Unrealized Appreciation (Depreciation) of Investments During the Period............. (14,783) (7,053) (5,584) 217 (2,812) (5,137) -------- ------- ------- ----- ------- ------- Net Gain (Loss) on Investments............. (16,408) (7,598) (6,521) 44 (6,456) (7,109) -------- ------- ------- ----- ------- ------- Increase (Decrease) in Equity Derived from Investment Activity.......... $(16,343) $(6,827) $(6,672) $ (43) $(5,991) $(7,052) ======== ======= ======= ===== ======= ======= Russell Core Russell Real Estate Bond Division Securities Division ------------------------ ------------------------ Year Ended Year Ended Year Ended Year Ended December 31, December 31, December 31, December 31, (continued) 2002 2001 2002 2001 - ------------------------------------------------------------------------------------------------- Investment Income Dividend Income . . . . ................... $ 661 $820 $ 1,291 $ 633 Mortality and Expense Risks................ (52) (25) (118) (47) Taxes...................................... (3) (8) (6) (16) ------ ---- ------- ----- Net Investment Income (Loss)............... 606 787 1,167 570 ------ ---- ------- ----- Realized and Unrealized Gain (Loss) on Investments Realized Gain (Loss) on Investments............................ 976 184 206 486 Unrealized Appreciation (Depreciation) of Investments During the Period............. 573 (46) (1,082) (130) ------ ---- ------- ----- Net Gain (Loss) on Investments............. 1,549 138 (876) 356 ------ ---- ------- ----- Increase (Decrease) in Equity Derived from Investment Activity.......... $2,155 $925 $ 291 $ 926 ====== ==== ======= =====
The Accompanying Notes are an Integral Part of the Financial Statements B-8 Northwestern Mutual Variable Life Account Statements of Changes in Equity (in thousands)
T. Rowe Price Small Cap Growth Small Cap Value Combined Stock Division Division# ------------------------ ------------------------ ------------------------ Year Ended Year Ended Year Ended Year Ended Year Ended Period Ended December 31, December 31, December 31, December 31, December 31, December 31, 2002 2001 2002 2001 2002 2001 - ----------------------------------------------------------------------------------------------------------------------- Operations Net Investment Income (Loss).......... $ 20,710 $ 117,174 $ (374) $ (364) $ 32 $ 8 Net Realized Gain (Loss).............. (11,929) 199 (736) (296) 172 -- Net Change in Unrealized Appreciation (Depreciation)....................... (369,861) (300,285) (17,491) 21 (2,018) 483 ---------- ---------- -------- ------- ------- ------ Increase (Decrease) in Equity........... (361,080) (182,912) (18,601) (639) (1,814) 491 ---------- ---------- -------- ------- ------- ------ Equity Transactions Policyowners' Net Payments............ 671,423 697,763 28,498 23,485 4,209 434 Policy Loans, Surrenders, and Death Benefits............................. (153,434) (112,180) (7,487) (4,593) (708) (67) Mortality and Other (net)............. (109,889) (107,907) (5,498) (4,385) (738) (58) Transfers from Other Divisions........ 396,497 402,319 20,009 26,320 20,173 5,543 Transfers to Other Divisions.......... (396,497) (402,319) (10,825) (7,922) (3,781) (41) ---------- ---------- -------- ------- ------- ------ Increase in Equity Derived from Equity Transactions...... 408,100 477,676 24,697 32,905 19,155 5,811 ---------- ---------- -------- ------- ------- ------ Net Increase (Decrease) in Equity....... 47,020 294,764 6,096 32,266 17,341 6,302 Equity Beginning of Period................... 1,895,545 1,600,781 82,643 50,377 6,302 -- ---------- ---------- -------- ------- ------- ------ End of Period......................... $1,942,565 $1,895,545 $ 88,739 $82,643 $23,643 $6,302 ========== ========== ======== ======= ======= ====== Aggressive Growth International Growth Stock Division Stock Division# ------------------------ ------------------------ Year Ended Year Ended Year Ended Period Ended December 31, December 31, December 31, December 31, 2002 2001 2002 2001 - -------------------------------------------------------------------------------------------- Operations Net Investment Income (Loss).......... $ (1,320) $ 54,160 $ 7 $ (1) Net Realized Gain (Loss).............. (2,733) 470 (297) -- Net Change in Unrealized Appreciation (Depreciation)....................... (59,041) (113,399) (173) 10 -------- --------- ------- ------ Increase (Decrease) in Equity........... (63,094) (58,769) (463) 9 -------- --------- ------- ------ Equity Transactions Policyowners' Net Payments............ 67,922 66,834 808 98 Policy Loans, Surrenders, and Death Benefits............................. (20,224) (18,126) (158) -- Mortality and Other (net)............. (13,292) (13,223) (147) (11) Transfers from Other Divisions........ 30,778 43,394 6,020 1,041 Transfers to Other Divisions.......... (31,416) (23,039) (2,767) (1) -------- --------- ------- ------ Increase in Equity Derived from Equity Transactions...... 33,768 55,840 3,756 1,127 -------- --------- ------- ------ Net Increase (Decrease) in Equity....... (29,326) (2,929) 3,293 1,136 Equity Beginning of Period................... 274,896 277,825 1,136 -- -------- --------- ------- ------ End of Period......................... $245,570 $ 274,896 $ 4,429 $1,136 ======== ========= ======= ======
#The initial investment in this Division was made on July 31, 2001. The Accompanying Notes are in Integral Part of the Financial Statements B-9 Northwestern Mutual Variable Life Account Statements of Changes in Equity (in thousands)
Franklin Templeton International Index 400 Equity Division Stock Division Growth 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, (continued) 2002 2001 2002 2001 2002 2001 - ----------------------------------------------------------------------------------------------------------------------- Operations Net Investment Income (Loss).......... $ 2,407 $ 15,501 $ 135 $ 223 $ 1,013 $ 6,542 Net Realized Gain (Loss).............. (2,938) (282) (236) (7) (1,528) 352 Net Change in Unrealized Appreciation (Depreciation)....................... (33,186) (40,155) (11,036) 718 (45,647) (34,280) -------- -------- -------- ------- -------- -------- Increase (Decrease) in Equity........... (33,717) (24,936) (11,137) 934 (46,162) (27,386) -------- -------- -------- ------- -------- -------- Equity Transactions Policyowners' Net Payments............ 43,862 41,543 20,450 12,735 56,456 52,360 Policy Loans, Surrenders, and Death Benefits............................. (13,590) (10,571) (4,145) (2,168) (15,648) (11,723) Mortality and Other (net)............. (8,065) (7,910) (3,916) (2,455) (10,956) (10,223) Transfers from Other Divisions........ 22,387 26,521 22,086 25,046 24,065 37,491 Transfers to Other Divisions.......... (18,085) (11,896) (6,096) (3,729) (16,982) (16,082) -------- -------- -------- ------- -------- -------- Increase in Equity Derived from Equity Transactions...... 26,509 37,687 28,379 29,429 36,935 51,823 -------- -------- -------- ------- -------- -------- Net Increase (Decrease) in Equity....... (7,208) 12,751 17,242 30,363 (9,227) 24,437 Equity Beginning of Period................... 170,668 157,917 54,677 24,314 196,115 171,678 -------- -------- -------- ------- -------- -------- End of Period......................... $163,460 $170,668 $ 71,919 $54,677 $186,888 $196,115 ======== ======== ======== ======= ======== ======== J.P. Morgan Select Capital Guardian Growth and Income Domestic Equity Stock Division Stock Division# ------------------------ ------------------------ Year Ended Year Ended Year Ended Period Ended December 31, December 31, December 31, December 31, (continued) 2002 2001 2002 2001 - -------------------------------------------------------------------------------------------- Operations Net Investment Income (Loss).......... $ 359 $ 3,417 $ 159 $ 17 Net Realized Gain (Loss).............. (2,575) (204) (94) (2) Net Change in Unrealized Appreciation (Depreciation)....................... (38,293) (13,126) (2,814) 302 -------- -------- ------- ------ Increase (Decrease) in Equity........... (40,509) (9,913) (2,749) 317 -------- -------- ------- ------ Equity Transactions Policyowners' Net Payments............ 34,103 32,889 3,500 420 Policy Loans, Surrenders, and Death Benefits............................. (9,579) (9,380) (338) (62) Mortality and Other (net)............. (6,256) (6,571) (597) (47) Transfers from Other Divisions........ 13,448 20,061 15,134 4,971 Transfers to Other Divisions.......... (12,836) (7,529) (1,690) (28) -------- -------- ------- ------ Increase in Equity Derived from Equity Transactions...... 18,880 29,470 16,009 5,254 -------- -------- ------- ------ Net Increase (Decrease) in Equity....... (21,629) 19,557 13,260 5,571 Equity Beginning of Period................... 131,656 112,099 5,571 -- -------- -------- ------- ------ End of Period......................... $110,027 $131,656 $18,831 $5,571 ======== ======== ======= ======
#The initial investment in this Division was made on July 31, 2001. The Accompanying Notes are an Integral Part of the Financial Statements B-10 Northwestern Mutual Variable Life Account Statements of Changes in Equity (in thousands)
Index 500 Stock Division Asset Allocation Division# Balanced Division ------------------------ -------------------------- ------------------------ Year Ended Year Ended Year Ended Period Ended Year Ended Year Ended December 31, December 31, December 31, December 31, December 31, December 31, (continued) 2002 2001 2002 2001 2002 2001 - ------------------------------------------------------------------------------------------------------------------------ Operations Net Investment Income (Loss).......... $ 2,897 $ 14,389 $ 98 $ 13 $ 6,392 $ 13,721 Net Realized Gain (Loss).............. 5,110 2,729 (22) 5 (625) 559 Net Change in Unrealized Appreciation (Depreciation)....................... (112,454) (67,629) (654) 60 (23,644) (21,699) --------- -------- ------ ------ -------- -------- Increase (Decrease) in Equity........... (104,447) (50,511) (578) 78 (17,877) (7,419) --------- -------- ------ ------ -------- -------- Equity Transactions Policyowners' Net Payments............ 111,260 104,548 1,179 76 32,640 30,367 Policy Loans, Surrenders, and Death Benefits............................. (33,947) (25,831) (269) (15) (14,335) (11,836) Mortality and Other (net)............. (21,509) (20,549) (262) (30) (6,804) (6,614) Transfers from Other Divisions........ 45,341 67,234 6,375 2,086 20,990 21,637 Transfers to Other Divisions.......... (30,043) (29,177) (739) (1) (13,327) (11,057) --------- -------- ------ ------ -------- -------- Increase in Equity Derived from Equity Transactions...... 71,102 96,225 6,284 2,116 19,164 22,497 --------- -------- ------ ------ -------- -------- Net Increase (Decrease) in Equity....... (33,345) 45,714 5,706 2,194 1,287 15,078 Equity Beginning of Period................... 425,707 379,993 2,194 -- 208,026 192,948 --------- -------- ------ ------ -------- -------- End of Period......................... $ 392,362 $425,707 $7,900 $2,194 $209,313 $208,026 ========= ======== ====== ====== ======== ======== 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) 2002 2001 2002 2001 2002 2001 - ---------------------------------------------------------------------------------------------------------------------- Operations Net Investment Income (Loss).......... $ 3,310 $ 2,759 $ 2,217 $ 1,595 $ 1,226 $ 3,096 Net Realized Gain (Loss).............. (1,107) (1,060) 704 (45) -- -- Net Change in Unrealized Appreciation (Depreciation)....................... (3,189) (861) 3,467 1,419 -- -- ------- ------- -------- -------- --------- --------- Increase (Decrease) in Equity........... (986) 838 6,388 2,969 1,226 3,096 ------- ------- -------- -------- --------- --------- Equity Transactions Policyowners' Net Payments............ 7,500 6,831 12,009 8,111 192,709 265,283 Policy Loans, Surrenders, and Death Benefits............................. (2,307) (2,040) (3,313) (1,894) (15,625) (7,403) Mortality and Other (net)............. (1,496) (1,318) (2,922) (1,589) (17,291) (24,561) Transfers from Other Divisions........ 6,166 6,262 30,764 23,459 51,384 35,827 Transfers to Other Divisions.......... (3,757) (3,473) (10,812) (12,147) (199,919) (252,248) ------- ------- -------- -------- --------- --------- Increase in Equity Derived from Equity Transactions...... 6,106 6,262 25,726 15,940 11,258 16,898 ------- ------- -------- -------- --------- --------- Net Increase (Decrease) in Equity....... 5,120 7,100 32,114 18,909 12,484 19,994 Equity Beginning of Period................... 27,597 20,497 43,382 24,473 107,420 87,426 ------- ------- -------- -------- --------- --------- End of Period......................... $32,717 $27,597 $ 75,496 $ 43,382 $ 119,904 $ 107,420 ======= ======= ======== ======== ========= =========
#The initial investment in this Division was made on July 31, 2001. The Accompanying Notes are an Integral Part of the Financial Statements B-11 Northwestern Mutual Variable Life Account Statements of Changes in Equity (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) 2002 2001 2002 2001 2002 2001 - ----------------------------------------------------------------------------------------------------------------------- Operations Net Investment Income (Loss).......... $ 65 $ 771 $ (151) $ (87) $ 465 $ 57 Net Realized Gain (Loss).............. (1,625) (545) (937) (173) (3,644) (1,972) Net Change in Unrealized Appreciation (Depreciation)....................... (14,783) (7,053) (5,584) 217 (2,812) (5,137) -------- ------- ------- ------- -------- -------- Increase (Decrease) in Equity........... (16,343) (6,827) (6,672) (43) (5,991) (7,052) -------- ------- ------- ------- -------- -------- Equity Transactions Policyowners' Net Payments............ 22,082 21,720 9,224 8,802 11,645 12,021 Policy Loans, Surrenders, and Death Benefits............................. (4,487) (2,510) (2,165) (1,295) (2,408) (1,528) Mortality and Other (net)............. (3,993) (3,622) (1,852) (1,605) (1,943) (1,813) Transfers from Other Divisions........ 11,287 16,182 8,160 8,226 13,956 15,996 Transfers to Other Divisions.......... (7,331) (5,154) (5,758) (4,141) (12,413) (10,603) -------- ------- ------- ------- -------- -------- Increase in Equity Derived from Equity Transactions...... 17,558 26,616 7,609 9,987 8,837 14,073 -------- ------- ------- ------- -------- -------- Net Increase (Decrease) in Equity....... 1,215 19,789 937 9,944 2,846 7,021 Equity Beginning of Period................... 60,864 41,075 29,181 19,237 32,708 25,687 -------- ------- ------- ------- -------- -------- End of Period......................... $ 62,079 $60,864 $30,118 $29,181 $ 35,554 $ 32,708 ======== ======= ======= ======= ======== ======== Russell Core Russell Real Estate Bond Division Securities Division ------------------------ ------------------------ Year Ended Year Ended Year Ended Year Ended December 31, December 31, December 31, December 31, (continued) 2002 2001 2002 2001 - -------------------------------------------------------------------------------------------- Operations Net Investment Income (Loss).......... $ 606 $ 787 $ 1,167 $ 570 Net Realized Gain (Loss).............. 976 184 206 486 Net Change in Unrealized Appreciation (Depreciation)....................... 573 (46) (1,082) (130) ------- ------- ------- ------- Increase (Decrease) in Equity........... 2,155 925 291 926 ------- ------- ------- ------- Equity Transactions Policyowners' Net Payments............ 5,412 6,006 5,955 3,200 Policy Loans, Surrenders, and Death Benefits............................. (804) (305) (1,897) (833) Mortality and Other (net)............. (1,096) (663) (1,256) (660) Transfers from Other Divisions........ 13,069 6,903 14,905 8,119 Transfers to Other Divisions.......... (3,048) (1,554) (4,872) (2,497) ------- ------- ------- ------- Increase in Equity Derived from Equity Transactions...... 13,533 10,387 12,835 7,329 ------- ------- ------- ------- Net Increase (Decrease) in Equity....... 15,688 11,312 13,126 8,255 Equity Beginning of Period................... 19,035 7,723 15,767 7,512 ------- ------- ------- ------- End of Period......................... $34,723 $19,035 $28,893 $15,767 ======= ======= ======= =======
The Accompanying Notes are an Integral Part of the Financial Statements B-12 Financial Highlights Northwestern Mutual Variable Life Account (For a unit outstanding during the period)
Dividend Income as a % of Expense Ratio, Unit Value, Average Net Lowest to Total Return (2), Division Lowest to Highest Assets Highest Lowest to Highest - ------------------------------------------------------------------------------------------------------------------------- Small Cap Growth Stock Year Ended 12/31/02........................... $1.258323 to $ 15.591407 0.15% 0.20% to 0.75% (18.99%) to (18.42%) Year Ended 12/31/01........................... $1.553320 to $ 19.112629 0.01% 0.20% to 0.75% (4.44%) to (3.76%) T. Rowe Price Small Cap Value (1) Year Ended 12/31/02........................... $0.951303 to $ 9.607906 0.72% 0.20% to 0.75% (6.24%) to (5.58%) Period Ended 12/31/01......................... $1.014592 to $ 10.175772 0.42% 0.20% to 0.75% 1.46% to 1.76% Aggressive Growth Stock Year Ended 12/31/02........................... $1.464237 to $ 38.441232 0.09% 0.20% to 0.75% (21.70%) to (21.15%) Year Ended 12/31/01........................... $1.868189 to $ 48.753408 21.57% 0.20% to 0.75% (20.44%) to (19.87%) International Growth Stock (1) Year Ended 12/31/02........................... $0.786402 to $ 7.942434 0.78% 0.20% to 0.75% (12.95%) to (12.34%) Period Ended 12/31/01......................... $0.903343 to $ 9.060000 0.00% 0.20% to 0.75% (9.67%) to (9.40%) Franklin Templeton International Equity Year Ended 12/31/02........................... $1.216308 to $ 1.759773 1.99% 0.20% to 0.75% (17.98%) to (17.40%) Year Ended 12/31/01........................... $1.481423 to $ 2.130553 10.20% 0.20% to 0.75% (14.60%) to (14.00%) Index 400 Stock Year Ended 12/31/02........................... $1.038438 to $ 11.227976 0.75% 0.20% to 0.75% (15.14%) to (14.54%) Year Ended 12/31/01........................... $1.223656 to $ 13.138452 1.13% 0.20% to 0.75% (1.35%) to (0.65%) Growth Stock Year Ended 12/31/02........................... $1.645371 to $ 21.414901 1.10% 0.20% to 0.75% (21.38%) to (20.83%) Year Ended 12/31/01........................... $2.090785 to $ 27.049526 4.25% 0.20% to 0.75% (14.82%) to (14.22%) J.P. Morgan Select Growth and Income \ Stock Year Ended 12/31/02........................... $1.296529 to $ 16.717038 0.90% 0.20% to 0.75% (28.70%) to (28.20%) Year Ended 12/31/01........................... $1.816535 to $ 23.281928 3.45% 0.20% to 0.75% (8.42%) to (7.77%) Capital Guardian Domestic Equity (1) Year Ended 12/31/02........................... $0.762737 to $ 7.703469 1.77% 0.20% to 0.75% (21.79%) to (21.24%) Period Ended 12/31/01......................... $0.975250 to $ 9.781208 0.73% 0.20% to 0.75% (2.48%) to (2.19%) Index 500 Stock Year Ended 12/31/02........................... $1.630187 to $ 35.246385 1.30% 0.20% to 0.75% (22.61%) to (22.07%) Year Ended 12/31/01........................... $2.104460 to $ 45.228886 4.26% 0.20% to 0.75% (12.50%) to (11.88%) Asset Allocation (1) Year Ended 12/31/02........................... $0.869901 to $ 8.785751 2.35% 0.20% to 0.75% (10.88%) to (10.26%) Period Ended 12/31/01......................... $0.976111 to $ 9.789803 1.19% 0.20% to 0.75% (2.39%) to (2.10%) Balanced Year Ended 12/31/02........................... $1.640075 to $ 84.486469 3.70% 0.20% to 0.75% (8.18%) to (7.54%) Year Ended 12/31/01........................... $1.784400 to $ 91.372736 7.58% 0.20% to 0.75% (3.83%) to (3.15%) High Yield Bond Year Ended 12/31/02........................... $1.276280 to $ 15.870922 11.64% 0.20% to 0.75% (3.57%) to (2.89%) Year Ended 12/31/01........................... $1.322201 to $ 16.343831 11.57% 0.20% to 0.75% 4.29% to 5.03% Select Bond Year Ended 12/31/02........................... $1.624374 to $121.279756 4.23% 0.20% to 0.75% 11.31% to 12.09% Year Ended 12/31/01........................... $1.457873 to $108.200259 5.07% 0.20% to 0.75% 9.59% to 10.37% Money Market Year Ended 12/31/02........................... $1.339422 to $ 34.132616 1.63% 0.20% to 0.75% 0.95% to 1.65% Year Ended 12/31/01........................... $1.325528 to $ 33.577318 3.73% 0.20% to 0.75% 3.19% to 3.92% Russell Multi-Style Equity Year Ended 12/31/02........................... $0.589495 to $ 6.221208 0.58% 0.20% to 0.75% (23.72%) to (23.19%) Year Ended 12/31/01........................... $0.772852 to $ 8.099453 2.00% 0.20% to 0.75% (14.81%) to (14.21%) Russell Aggressive Equity Year Ended 12/31/02........................... $0.804447 to $ 8.707578 0.00% 0.20% to 0.75% (19.62%) to (19.06%) Year Ended 12/31/01........................... $1.000805 to $ 10.757522 0.11% 0.20% to 0.75% (3.05%) to (2.36%) Russell Non-U.S. Year Ended 12/31/02........................... $0.688244 to $ 7.095865 1.79% 0.20% to 0.75% (15.74%) to (15.15%) Year Ended 12/31/01........................... $0.816787 to $ 8.362558 0.67% 0.20% to 0.75% (22.58%) to (22.03%) Russell Core Bond Year Ended 12/31/02........................... $1.261197 to $ 12.748590 2.67% 0.20% to 0.75% 3.08% to 3.80% Year Ended 12/31/01........................... $1.166871 to $ 11.713217 5.52% 0.20% to 0.75% 7.08% to 7.84% Russell Real Estate Securities Year Ended 12/31/02........................... $1.308500 to $ 13.208871 5.44% 0.20% to 0.75% 8.08% to 8.84% Year Ended 12/31/01........................... $1.269394 to $ 12.725061 5.23% 0.20% to 0.75% 6.65% to 7.41%
(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. The Accompanying Notes are an Integral Part of the Financial Statements B-13 Notes to Financial Statements Northwestern Mutual Variable Life Account December 31, 2002 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 accounting principles generally accepted in the United States of America 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 and distributions of net realized gains from the Funds are 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 period ended December 31, 2002 by each Division are shown below: Division Purchases Sales - -------- ------------ ------------ Small Cap Growth Stock ......................... $ 34,043,299 $ 9,722,770 T. Rowe Price Small Cap Value .................. 20,382,966 1,188,788 Aggressive Growth Stock ........................ 61,832,611 24,205,263 International Growth Stock ..................... 3,987,596 231,555 Franklin Templeton International Equity ........ 45,458,635 16,619,794 Index 400 Stock ................................ 34,210,532 5,672,107 Growth Stock ................................... 57,290,950 19,375,293 J.P. Morgan Select Growth and Income Stock ..... 30,997,265 11,804,760 Capital Guardian Domestic Equity ............... 16,848,196 688,642 Index 500 Stock ................................ 124,130,408 41,476,724 Asset Allocation ............................... 6,735,736 356,878 Balanced ....................................... 42,828,391 17,297,112 High Yield Bond ................................ 12,274,052 2,848,592 Select Bond .................................... 33,076,658 4,710,128 Money Market ................................... 78,016,176 65,432,842 Russell Multi-Style Equity ..................... 24,085,977 6,485,367 Russell Aggressive Equity ...................... 10,381,195 2,925,476 Russell Non-U.S ................................ 12,693,867 3,399,985 Russell Core Bond .............................. 16,654,392 1,600,641 Russell Real Estate Securities ................. 16,814,887 2,671,527 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 Variable Executive Life policies issued on or after March 2, 1998 is 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 .32% thereafter for policies with the Cash Value Amendment, or .30% thereafter for policies without the Cash Value Amendment. A deduction for the mortality and expense risks for Variable Joint Life policies issued on or after December 10, 1998 is determined monthly at an annual rate of .20% of the amounts invested in the Account for the Policy. 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 for Variable Life and Variable Complife policies, and monthly for Variable Executive Life and Variable Joint Life policies, and are paid to Northwestern Mutual to cover the cost of providing insurance protection. For Variable Life and Variable Complife policies 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. For Variable Executive Life and Variable Joint Life policies the cost reflects expected mortality costs based upon actual experience. 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. Generally, for Variable Complife policies issued on or after October 11, B-14 Notes to Financial Statements 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. B-15 Notes to Financial Statements 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 ......................................... $ 7,183 $ 417 $ 7,600 T. Rowe Price Small Cap Value .................................. 2,961 155 3,116 Aggressive Growth Stock ........................................ 42,159 2,841 45,000 International Growth Stock ..................................... 369 21 390 Franklin Templeton International Equity ........................ 29,911 2,076 31,987 Index 400 Stock ................................................ 5,758 295 6,053 Growth Stock ................................................... 22,121 1,341 23,462 J.P. Morgan Select Growth and Income Stock ..................... 15,746 1,144 16,890 Capital Guardian Domestic Equity ............................... 3,018 205 3,223 Index 500 Stock ................................................ 77,690 3,927 81,617 Asset Allocation ............................................... 1,840 79 1,919 Balanced ....................................................... 119,027 3,538 122,565 High Yield Bond ................................................ 4,174 246 4,420 Select Bond .................................................... 13,685 424 14,109 Money Market ................................................... 8,135 276 8,411 Russell Multi-Style Equity ..................................... 2,832 147 2,979 Russell Aggressive Equity ...................................... 2,039 103 2,142 Russell Non-U.S ................................................ 2,323 119 2,442 Russell Core Bond .............................................. 1,612 70 1,682 Russell Real Estate Securities ................................. 2,699 108 2,807 ---------- -------- ---------- $ 365,282 $ 17,532 $ 382,814 ========== ======== ==========
Variable Life Policies Issued On or After October 11, 1995 Equity of: ----------------------- Total Division Policyowners NML Equity - -------- ------------ ---------- ---------- Small Cap Growth Stock ......................................... $ 58,132 $ 17,776 $ 75,908 T. Rowe Price Small Cap Value .................................. 13,996 4,291 18,287 Aggressive Growth Stock ........................................ 157,812 35,683 193,495 International Growth Stock ..................................... 2,494 953 3,447 Franklin Templeton International Equity ........................ 101,886 23,399 125,285 Index 400 Stock ................................................ 45,611 13,944 59,555 Growth Stock ................................................... 121,581 30,399 151,980 J.P. Morgan Select Growth and Income Stock ..................... 71,371 16,592 87,963 Capital Guardian Domestic Equity ............................... 10,028 3,190 13,218 Index 500 Stock ................................................ 231,059 55,981 287,040 Asset Allocation ............................................... 4,222 1,213 5,435 Balanced ....................................................... 64,964 14,555 79,519 High Yield Bond ................................................ 21,376 4,401 25,777 Select Bond .................................................... 38,936 8,427 47,363 Money Market ................................................... 70,720 27,663 98,383 Russell Multi-Style Equity ..................................... 35,241 11,391 46,632 Russell Aggressive Equity ...................................... 17,882 5,455 23,337 Russell Non-U.S ................................................ 19,535 5,956 25,491 Russell Core Bond .............................................. 7,945 2,238 10,183 Russell Real Estate Securities ................................. 17,845 5,214 23,059 ---------- ---------- ---------- $1,112,636 $ 288,721 $1,401,357 ========== ========== ==========
B-16 Notes to Financial Statements
Variable Variable Executive Life Joint Life Policies Issued Policies Issued On or After On or After March 2, 1998 December 10, 1998 --------------- ----------------- Division Total Equity Total Equity - -------- --------------- ----------------- Small Cap Growth Stock............................................ $ 1,187 $ 4,044 T. Rowe Price Small Cap Value..................................... 617 1,624 Aggressive Growth Stock........................................... 3,172 3,903 International Growth Stock........................................ 125 467 Franklin Templeton International Equity........................... 2,647 3,540 Index 400 Stock................................................... 2,329 3,982 Growth Stock...................................................... 5,492 5,954 J.P. Morgan Select Growth and Income Stock........................ 2,206 2,967 Capital Guardian Domestic Equity.................................. 834 1,556 Index 500 Stock................................................... 7,065 16,641 Asset Allocation.................................................. 150 396 Balanced.......................................................... 2,657 4,572 High Yield Bond................................................... 1,662 858 Select Bond....................................................... 10,247 3,778 Money Market...................................................... 6,560 6,550 Russell Multi-Style Equity........................................ 8,375 4,092 Russell Aggressive Equity......................................... 3,157 1,483 Russell Non-U.S................................................... 5,468 2,153 Russell Core Bond................................................. 22,058 800 Russell Real Estate Securities ................................... 1,365 1,661 ------- ------- $87,373 $71,021 ======= =======
B-17 Accountants' Report [LOGO] PRICEWATERHOUSECOOPERS 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 statement of assets and liabilities and the related statements of operations and of changes in equity and the 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 and 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 Core Bond Division, and Russell Real Estate Securities Division at December 31, 2002, and the results of each of their operations, the changes in each of their equity and their financial highlights for the periods indicated, 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 securities owned at December 31, 2002 with Northwestern Mutual Series Fund, Inc. and the Russell Insurance Funds, provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Milwaukee, Wisconsin January 30, 2003 B-18 FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL The Northwestern Mutual Life Insurance Company Consolidated Statement of Financial Position (in millions) - -------------------------------------------------------------------------------- The following financial statements of Northwestern Mutual should be considered only as bearing upon the ability of Northwestern Mutual to meet its obligations under the Policies. December 31, --------------------- 2002 2001 -------- -------- Assets: Bonds $ 50,597 $ 44,306 Common and preferred stocks 4,902 5,369 Mortgage loans 15,692 15,164 Real estate 1,503 1,671 Policy loans 9,292 9,028 Other investments 4,242 4,817 Cash and temporary investments 1,814 2,018 -------- -------- Total investments 88,042 82,373 Due and accrued investment income 1,100 1,048 Net deferred tax assets 1,887 1,602 Deferred premium and other assets 1,660 1,583 Separate account assets 10,246 11,786 -------- -------- Total assets $102,935 $ 98,392 ======== ======== Liabilities and Surplus: Reserves for policy benefits $ 74,880 $ 68,432 Policyowner dividends payable 3,765 3,650 Interest maintenance reserve 521 375 Asset valuation reserve 1,268 2,034 Income taxes payable 777 1,329 Other liabilities 4,261 3,894 Separate account liabilities 10,246 11,786 -------- -------- Total liabilities 95,718 91,500 Surplus 7,217 6,892 -------- -------- Total liabilities and surplus $102,935 $ 98,392 ======== ======== The accompanying notes are an integral part of these financial statements. B-19 FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL The Northwestern Mutual Life Insurance Company Consolidated Statement of Operations (in millions) - --------------------------------------------------------------------------------
For the year ended December 31, ------------------------------------------- 2002 2001 2000 -------- -------- -------- Revenue: Premiums $ 10,108 $ 9,447 $ 8,966 Net investment income 5,477 5,431 5,229 Other income 439 467 1,187 -------- -------- -------- Total revenue 16,024 15,345 15,382 -------- -------- -------- Benefits and expenses Benefit payments to policyowners and beneficiaries 3,902 3,808 4,541 Net additions to policy benefit reserves 6,186 5,367 4,815 Net transfers to separate accounts 242 502 469 -------- -------- -------- Total benefits 10,330 9,677 9,825 Commissions and operating expenses 1,580 1,453 1,416 -------- -------- -------- Total benefits and expenses 11,910 11,130 11,241 -------- -------- -------- Gain from operations before dividends and taxes 4,114 4,215 4,141 Policy owner dividends 3,792 3,651 3,334 -------- -------- -------- Gain from operations before taxes 322 564 807 Income tax expense (benefit) (442) 173 125 -------- -------- -------- Net gain from operations 764 391 682 Net realized capital gains (losses) (606) 259 1,147 -------- -------- -------- Net income $ 158 $ 650 $ 1,829 ======== ======== ========
The accompanying notes are an integral part of these financial statements. B-20 FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL The Northwestern Mutual Life Insurance Company Consolidated Statement of Changes in Surplus (in millions) - -------------------------------------------------------------------------------- For the year ended December 31, --------------------------- 2002 2001 2000 ------- ------- ------- Beginning of year balance $ 6,892 $ 5,896 $ 5,069 Net income 158 650 1,829 Change in net unrealized capital gains (losses) (517) (555) (1,043) Increase in net deferred tax assets 44 73 - Increase in nonadmitted assets and other (126) (124) (32) Change in reserve valuation bases (Note 5) - (61) - Change in asset valuation reserve 766 264 73 Cumulative effect of changes in accounting principles (Note 1) - 749 - ------- ------- ------- Net increase in surplus 325 996 827 ------- ------- ------- End of year balance $ 7,217 $ 6,892 $ 5,896 ======= ======= ======= The accompanying notes are an integral part of these financial statements. B-21 FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL The Northwestern Mutual Life Insurance Company Consolidated Statement of Cash Flows (in millions) - --------------------------------------------------------------------------------
For the year ended December 31, -------------------------------- 2002 2001 2000 -------- -------- -------- Cash flows from operating activities: Premiums and other income received $ 6,947 $ 6,607 $ 6,149 Investment income received 5,224 5,328 5,000 Disbursement of policy loans, net of repayments (264) (524) (566) Payments to policyowners and beneficiaries (4,130) (3,996) (3,967) Net transfers to separate accounts (257) (534) (469) Commissions, expenses and taxes paid (1,855) (1,698) (1,845) -------- -------- -------- Net cash provided by operating activities 5,665 5,183 4,302 -------- -------- -------- Cash flows from investing activities: Proceeds from investments sold or matured: Bonds 60,865 35,318 29,539 Common and preferred stocks 1,766 15,465 9,437 Mortgage loans 1,532 1,174 1,198 Real estate 468 244 302 Other investments 1,646 494 659 -------- -------- ------- 66,277 52,695 41,135 -------- -------- -------- Cost of investments acquired: Bonds 67,398 38,915 33,378 Common and preferred stocks 2,003 15,014 8,177 Mortgage loans 2,005 2,003 2,261 Real estate 191 353 224 Other investments 748 1,106 1,535 -------- -------- -------- 72,345 57,391 45,575 -------- -------- -------- Net cash applied in investing activities (6,068) (4,696) (4,440) -------- -------- -------- Cash flows from financing and miscellaneous sources: Proceeds from deposit-type contract funds and other liabilities without life or disability contingencies 990 996 907 Withdrawals from deposit-type contract funds and other liabilities without life or disability contingencies (741) (793) (777) Other cash provided (applied) (50) 111 66 -------- -------- -------- Net cash provided by financing and other activities: 199 314 196 -------- -------- -------- Net increase (decrease) in cash and temporary investments (204) 801 58 Cash and temporary investments, beginning of year 2,018 1,217 1,159 -------- -------- -------- Cash and temporary investments, end of year $ 1,814 $ 2,018 $ 1,217 ======== ======== ========
The accompanying notes are an integral part of these financial statements. B-22 FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL The Northwestern Mutual Life Insurance Company Notes to Consolidated Statutory Financial Statements December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 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 were eliminated. The Company offers life, annuity, disability income and long-term care insurance products to the personal, business, and estate 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"). Beginning January 1, 2001, insurance companies domiciled in Wisconsin were 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 variations prescribed or permitted by the Office of the Commissioner of Insurance of the State of Wisconsin ("OCI"). These new requirements differed from those used prior to January 1, 2001, primarily because under the new statutory accounting principles: (1) deferred tax balances were established for temporary differences between book and tax bases of certain assets and liabilities, (2) investment valuation adjustments on impaired assets were measured differently and were reported as realized losses, (3) pension and other employee benefit obligations were accounted for based on the funded status of the related plans, (4) recognition of earnings from unconsolidated subsidiaries and affiliates as net investment income was limited to dividends received, (5) certain software costs were capitalized and amortized to expense over a maximum of five years, and (6) premiums, benefits and reserve changes for policies without significant mortality or morbidity risks ("deposit-type contracts") were 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 B-23 FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL The Northwestern Mutual Life Insurance Company Notes to Consolidated Statutory Financial Statements December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- amortized, (2) investment valuations and policy benefit 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 required management to use assumptions or make estimates that affected 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 value of the related policies. They are reported in the financial statements at unpaid principal balance. Other Investments Other investments consist primarily of real estate joint ventures, partnership investments, including real estate, venture capital and leveraged buyout fund limited partnerships, leveraged leases and subsidiaries, controlled and affiliated entities. These investments are valued based on the equity method of accounting, which approximated fair value. Other investments also include derivative financial instruments. See Note 4 regarding the Company's use of derivatives. Temporary Investments Temporary investments represent securities that have maturities of one year or less at purchase, and are reported at amortized cost, which approximated 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. Accrued investment income more than 90 days past due is nonadmitted and reported as a direct reduction of surplus. Accrued investment income that is ultimately deemed uncollectible is reported as a reduction of net investment income in the period that such determination is made. Beginning January 1, 2001, net investment income also includes dividends paid to the Company from accumulated earnings of unconsolidated B-24 FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL The Northwestern Mutual Life Insurance Company Notes to Consolidated Statutory Financial Statements December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 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 income tax, on fixed income investments that result from changes in interest rates. Net realized gains and losses deferred to the IMR are amortized into investment income over the estimated remaining life of the investment sold. Investment Capital Gains and Losses Realized capital gains and losses are recognized based upon specific identification of securities sold. Beginning January 1, 2001, realized capital losses also include valuation adjustments for impairment of bonds, stocks, mortgage loans, real estate and other investments with a decline in fair value that management considers to be other-than-temporary. Factors considered in evaluating whether a decline in value is other-than-temporary include: (1) whether the decline is substantial, (2) the Company's ability and intent to retain the investment for a period of time sufficient to allow for an anticipated recovery in value, (3) the duration and extent to which the market value has been less than cost, and (4) the financial condition and near-term prospects of the issuer. Prior to 2001, these valuation adjustments were classified as unrealized capital losses and only reported as 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 realized capital gains and losses. Unrealized capital 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 changes in unrealized capital gains and losses. Asset Valuation Reserve The Company is required to maintain an asset valuation reserve ("AVR"). The AVR represents 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 B-25 FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL The Northwestern Mutual Life Insurance Company Notes to Consolidated Statutory Financial Statements December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- when received by the Company. Premium revenue is reported net of ceded reinsurance, see Note 9. Other Income Other income includes 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 and included in other income. 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 assets of $20 million and $18 million at December 31, 2002 and 2001, respectively, were net of accumulated depreciation of $48 million and $44 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 $27 million, $14 million and $8 million for the years ended December 31, 2002, 2001 and 2000, respectively. Policyowner Dividends Almost all life insurance and disability income policies and certain annuity contracts and long-term care 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 B-26 FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL The Northwestern Mutual Life Insurance Company Notes to Consolidated Statutory Financial Statements December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 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 assets related to pension funding, 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 a direct adjustment to surplus. Reclassifications Certain financial statement balances for 2001 and 2000 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, less any valuation adjustment. The interest method is used to amortize any purchase premium or discount. Use of the interest method for loan-backed bonds and structured securities includes anticipated prepayments obtained from independent sources. Prepayment assumptions are updated at least annually, with the prospective adjustment method used to recognize related changes in the yield-to-maturity of such securities. 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. B-27 FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL The Northwestern Mutual Life Insurance Company Notes to Consolidated Statutory Financial Statements December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- Valuation adjustments are made for bonds in or near default, which are reported at the lower of amortized cost or fair value, or for bonds with a decline in fair value that management considers to be other-than-temporary. Statement value and estimated fair value of bonds at December 31, 2002 and 2001 were as follows:
December 31, 2002 Reconciliation to Estimated Fair Value ----------------- ----------------------------------------------------------- Gross Gross Estimated Statement Unrealized Unrealized Fair Value Gains Losses Value ------------- ---------- ----------- ----------- (in millions) U.S. Government $ 8,932 $ 531 $ (21) $ 9,442 States, territories and possessions 396 61 - 457 Special revenue and assessments 7,576 400 (1) 7,975 Public utilities 2,501 251 (25) 2,727 Banks, trust and insurance companies 1,355 71 (15) 1,411 Industrial and miscellaneous 29,836 2,150 (688) 31,298 Parent, subsidiaries and affiliates 1 - - 1 ------------- ---------- ----------- ------------- Total $ 50,597 $ 3,464 $ (750) $ 53,311 ============= ========== =========== ============= December 31, 2001 Reconciliation to Estimated Fair Value ----------------- ------------------------------------------------------------- Gross Gross Estimated Statement Unrealized Unrealized Fair 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 ============= ========== =========== =============
B-28 FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL The Northwestern Mutual Life Insurance Company Notes to Consolidated Statutory Financial Statements December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- Statement value and estimated fair value of bonds by contractual maturity at December 31, 2002 are 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 $ 1,165 $ 1,193 Due after one year through five years 9,858 10,202 Due after five years through ten years 13,362 14,235 Due after ten years 11,877 12,747 --------- --------- 36,262 38,377 Structured securities 14,335 14,934 --------- --------- Total $ 50,597 $ 53,311 ========= =========
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 stocks without quoted market prices, fair value is estimated using independent pricing services or internally developed pricing models. Investments in common stock of unconsolidated subsidiaries and affiliates are included in the consolidated statement of financial position using the equity method. 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. Mortgage Loans Mortgage loans are reported in the financial statements at unpaid principal balance, less any valuation allowance or unamortized commitment or origination fee. 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 2002 were 8.2% and 5.0%, respectively, while these rates during 2001 were 9.8% and 6.4%, respectively. The aggregate average ratio of amounts loaned to the value of collateral for mortgage loans originated B-29 FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL The Northwestern Mutual Life Insurance Company Notes to Consolidated Statutory Financial Statements December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- during 2002 and 2001 were 65% and 68%, respectively, with a maximum of 100% for any single loan during each of 2002 and 2001. 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 valuation adjustment is classified as an unrealized loss. Beginning January 1, 2001 valuation adjustments for impairments considered to be other-than-temporary were reported as realized losses. Prior to 2001, all changes in valuation adjustments were reported as unrealized gains or losses. At December 31, 2002 and 2001, the reported value of mortgage loans was reduced by $44 million and $99 million, respectively, in valuation adjustments. Real Estate Real estate investments are reported in the financial statements at cost, less any valuation adjustment, encumbrances and accumulated depreciation of buildings and 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. The valuation adjustment is included in realized losses. At December 31, 2002 and 2001, the reported value of real estate investments was reduced by $0 and $52 million, respectively, in valuation adjustments. Leveraged Leases Leveraged leases are reported in the financial statements at the present value of minimum lease payments, plus the residual value of the leased asset. At December 31, 2002 and 2001, the reported value of leveraged leases was $532 million and $669 million, respectively. The reported value of leveraged leases was reduced by $108 million at December 31, 2002 to reflect a decline in value of certain aircraft leases that management considers to be other-than-temporary. The decline in value was charged against an existing valuation allowance and is not included as a component of net realized capital losses for 2002. Leveraged leases are included in other investments and primarily represent investments in commercial aircraft or real estate property that are leased to third parties and serve as collateral for non-recourse borrowings. B-30 FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL The Northwestern Mutual Life Insurance Company Notes to Consolidated Statutory Financial Statements December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- Capital Gains and Losses Realized investment gains and losses for the years ended December 31, 2002, 2001 and 2000 were as follows:
For the year ended For the year ended For the year ended December 31, 2002 December 31, 2001 December 31, 2000 ---------------------------- ----------------------------- ------------------------------- Net Net Net Realized Realized Realized Realized Realized Gains Realized Realized Gains Realized Realized Gains Gains Losses (Losses) Gains Losses (Losses) Gains Losses (Losses) -------- --------- -------- --------- --------- --------- -------- -------- ---------- (in millions) Bonds $ 950 $ (1,237) $ (287) $ 537 $ (674) $ (137) $ 369 $ (416) $ (47) Common and preferred stocks 356 (619) (263) 863 (569) 294 1,534 (333) 1,201 Mortgage loans - (4) (4) - (10) (10) - (25) (25) Real estate 121 (3) 118 85 (11) 74 101 - 101 Other invested assets 158 (258) (100) 296 (149) 147 395 (177) 218 -------- -------- -------- -------- -------- -------- -------- -------- ---------- $ 1,585 $ (2,121) (536) $ 1,781 $ (1,413) 368 $ 2,399 $ (951) 1,448 ======== ======== ======== ======== ======== ======== Less: Capital gains taxes (194) 98 353 Less: IMR gains (losses) 264 11 (52) -------- -------- ---------- Net realized capital gains (losses) $ (606) $ 259 $ 1,147 ======== ======== ==========
Proceeds on the sale of bond investments totaled $53 billion, $30 billion and $25 billion for the years ended December 31, 2002, 2001 and 2000, respectively. Realized losses included $588 million and $457 million for the years ended December 31, 2002 and 2001, respectively, of pretax valuation adjustments for declines in fair value of investments that were considered to be other-than-temporary. Other-than-temporary declines in fair value of $508 million for the year ended December 31, 2000 are included in net unrealized losses. B-31 FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL The Northwestern Mutual Life Insurance Company Notes to Consolidated Statutory Financial Statements December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- Changes in net unrealized investment gains and losses for the years ended December 31, 2002, 2001 and 2000 were as follows: For the year ended December 31, ----------------------------------- 2002 2001 2000 ---------- ---------- ---------- (in millions) Bonds $ (150) $ (15) $ (208) Common and preferred stocks (436) (699) (851) Mortgage loans - - (2) Real estate - - (4) Other investments (172) (193) 22 ---------- ---------- ---------- (758) (907) $ (1,043) ========== Change in deferred taxes 241 352 ---------- ---------- $ (517) $ (555) ========== ========== See Note 10 regarding the accounting change in 2001 for deferred taxes as regards to unrealized gains and losses. Securities Lending The Company has entered into securities lending agreements whereby certain investment 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, calculated on a daily basis, as collateral in the form of either cash or securities held by the Company or a trustee. At December 31, 2002 and 2001, unrestricted cash collateral held by the Company of $1.6 billion and $1.3 billion, respectively, is included in cash and invested assets and the offsetting collateral liability of $1.6 billion and $1.3 billion, respectively, is included in other liabilities. Additional non-cash collateral of $389 million and $823 million is held on the Company's behalf by a trustee at December 31, 2002 and 2001, respectively, and is not included in the Consolidated Statement of Financial Position. Mortgage Dollar Rolls The Company has also entered into reverse repurchase agreements whereby the Company agrees to sell and repurchase various mortgage-backed securities. At December 31, 2002 and 2001, the book value of securities subject to these agreements and included in bonds were $1,042 million and $964 million, respectively, while fair values were $1,057 million and $966 million, respectively. The repurchase obligation liability of $1,042 million and $964 million were included in the other liabilities at December 31, 2002 and 2001, respectively. Securities subject to these agreements had contractual maturities of 30 years at each of December 31, 2002 and 2001 and weighted average interest rates of 5.8% and 6.8%, respectively. B-32 FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL The Northwestern Mutual Life Insurance Company Notes to Consolidated Statutory Financial Statements December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 4. Derivative Financial Instruments In the normal course of business, the Company enters into derivative transactions, generally to mitigate the risk to Company assets and liabilities of fluctuations in interest rates, foreign currency exchange rates and other market risks. Derivative investments are reported as other investments in the consolidated statement of financial position. Derivatives 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. B-33 FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL The Northwestern Mutual Life Insurance Company Notes to Consolidated Statutory Financial Statements December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- The Company held the following positions for hedging purposes at December 31, 2002 and 2001:
December 31, 2002 December 31, 2001 ------------------------------ ----------------------------- Carrying Notional Fair Carrying Notional Fair Derivative Instrument Value Amount Value Value Amount Value ------------------------------------ ------------------------------ ----------------------------- (in millions) Specific Hedges: ---------------- Foreign currency swaps $ - $ 68 $ 7 $ 1 $ 70 $ 11 Forward purchase agreements - - - - 200 3 Interest rate swaps (3) 442 (8) 1 88 6 Swaptions 12 358 12 8 304 13 Interest rate floors 8 625 41 6 525 19 Credit default swaps - 67 - - 57 - Commodity swaps - 5 (1) - - - Portfolio Hedges: ----------------- Equity futures and swaps - - - 9 221 9 Fixed income futures - 365 - (2) 203 (2) Foreign currency forward contracts (19) 567 (17) - 502 -
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. Foreign currency swaps are used to hedge exposure to variable U.S. dollar cash flows from certain bonds 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. Forward purchase agreements are used to fix the price of a security purchase or sale to be settled on a future date, reducing or eliminating the risk of price fluctuation prior to settlement. Forward purchase agreements fix the price, quantity and settlement date for a future purchase or sale. Interest rate swaps are used to hedge exposure to variable interest payments on certain floating rate bonds. An interest rate swap is a contractual agreement to pay a floating rate of interest, based upon a reference index, in exchange for a fixed rate of interest established at the origination of the contract. Swaptions are used to hedge the asset/liability risks of a significant and sustained increase or decrease in interest rates for certain of the Company's insurance products. Swaptions are a contractual agreement whereby one party holds an option to enter into an interest rate swap with another party on predefined terms. B-34 FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL The Northwestern Mutual Life Insurance Company Notes to Consolidated Statutory Financial Statements December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- Interest rate floors are used to hedge the asset/liability risks of a significant and sustained decrease in interest rates. Floors entitle the Company to receive settlement payments from the counterparties if interest rates decline below a specified level. Credit default swaps are used to hedge against a drop in bond prices due to credit concerns for certain bond issuers. A credit default swap allows the Company to put the bond to a counterparty at par upon a "credit event" sustained by the bond issuer. A credit event is defined as bankruptcy, failure to pay, or obligation acceleration. Commodity swaps are used to hedge the forward sale of crude oil and natural gas production. Commodity swaps are agreements whereby one party pays a floating commodity price in exchange for a specified fixed commodity price. Equity index futures contracts and equity total return swaps are used to mitigate exposure to market fluctuations for the Company's portfolio of common stocks. Futures contracts obligate the Company to buy or sell a financial instrument at a specified future date for a specified price. 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. Fixed income futures contracts are used to hedge interest rate risks for a portion of its fixed maturity investment portfolio. These futures contracts obligate the Company to buy or sell a financial instrument at a specified future date for a specified price. Foreign currency forward contracts are used to hedge the foreign exchange risk for portfolios of investments denominated in foreign currencies. Foreign currency forward contracts obligate the Company to deliver a specified amount of foreign currency at a future date at a specified exchange rate. In addition to derivatives used for hedging purposes, the Company entered into replication transactions during 2002. A replication transaction means a derivative transaction is entered into in conjunction with other investment transactions in order to "replicate" the investment characteristics of otherwise permissible investments. During 2002, the Company entered into two replication transactions; a $15 million par equivalent fixed income replication comprised of a credit default swap, an interest rate swap and an asset-backed security purchase; and a $25 million par equivalent fixed income replication comprised of a credit default swap and an asset-backed security purchase. These replication transactions, including their derivative components, are carried at amortized cost. The Company also entered into long equity and fixed income futures replication transactions during 2002. The average fair value of replications during 2002 was $72 million, with an ending fair value of $8 million at December 31, 2002. B-35 FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL The Northwestern Mutual Life Insurance Company Consolidated Statement of Cash Flows (in millions) - -------------------------------------------------------------------------------- 5. Reserves for Policy Benefits Reserves for policy benefits represent the net present value of future policy benefits, less future policy premiums, estimated using actuarial methods based on mortality and morbidity experience tables and valuation interest rates prescribed or permitted by the OCI. Use of these actuarial tables and methods involved assumptions regarding 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% and the 1958 or 1980 CSO mortality tables. Other life policy reserves are primarily based on the net level premium method, using various mortality tables at interest rates ranging from 2% to 4 1/2%. As of December 31, 2002, the Company has $750 billion of total life insurance in-force, including $8 billion of life insurance in-force for which gross premiums are less than net premiums according to the standard valuation methods and assumptions prescribed 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 was 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 cost 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 an 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 based on 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 value 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. B-36 FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL The Northwestern Mutual Life Insurance Company Consolidated Statement of Cash Flows (in millions) - -------------------------------------------------------------------------------- At December 31, 2002 and 2001, the withdrawal characteristics of the Company's annuity reserves and deposit liabilities were as follows:
December 31, 2002 December 31, 2001 ------------------------ ------------------------ Amount Percent Amount Percent ----------- ---------- --------- ---------- (in millions) Subject to discretionary withdrawal - with market value adjustment $ 7,539 58.5% $ 8,936 63.5% Subject to discretionary withdrawal - without market value adjustment 2,620 20.3% 2,260 16.1% Not subject to discretionary withdrawal 2,738 21.2% 2,869 20.4% ----------- --------- --------- --------- $ 12,897 100.0% $ 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, with 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 value 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%. Active life reserves for long-term care policies consist of mid-terminal reserves and unearned premium. Mid-terminal reserves are based on the one-year preliminary term method, industry-based experience morbidity, total terminations based on the 1983 Individual Annuity Mortality table with no lapse, and an interest rate of either 4% or the minimum rate allowable for tax purposes. When the tax interest rate is used, reserves are compared in the aggregate to the statutory minimum and the greater of the two is held. Disabled life reserves for long-term care policies are based on the present values of expected benefit payments using industry-based long-term care experience with a 4.5% interest rate. B-37 FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL The Northwestern Mutual Life Insurance Company Consolidated Statement of Cash Flows (in millions) - -------------------------------------------------------------------------------- 6. Premium and Annuity Considerations Deferred and Uncollected Gross deferred and uncollected insurance premiums represent life insurance premiums due to be received from policyowners through the next respective policy anniversary dates. 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, 2002 and 2001 were as follows:
December 31, 2002 December 31, 2001 ---------------------------- --------------------------- Type of Business Gross Net Gross Net ----------------------- ------------ -------------- ----------- ------------ (in millions) Ordinary new business $ 149 $ 69 $ 145 $ 77 Ordinary renewal 1,409 1,145 1,351 1,103 ------------ -------------- ----------- ------------ $ 1,558 $ 1,214 $ 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 variable 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 rate annuity issued by the general account of the Company. Separate account assets are reported at fair value based primarily on quoted market prices. Following is a summary of separate account liabilities by withdrawal characteristic at December 31, 2002 and 2001:
December 31, ------------------------------ 2002 2001 ------------ ------------- (in millions) At market value $ 8,442 $ 9,780 Not subject to discretionary withdrawal 1,550 1,762 Non-policy liabilities 254 244 ------------ ------------- Total $ 10,246 $ 11,786 ============ =============
While separate account liability values are not guaranteed by the Company, the variable annuity and variable life insurance products represented in the separate accounts do include guaranteed minimum death benefits underwritten by the Company. At December 31, 2002 and 2001, general account reserves for policy benefits included $11 million and $6 million, respectively, in reserves for these benefits. Separate account premiums and other considerations received during the years ended December 31, 2002 and 2001 were $1,341 million and $1,419 million, respectively. Following is a B-38 FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL The Northwestern Mutual Life Insurance Company Consolidated Statement of Cash Flows (in millions) - -------------------------------------------------------------------------------- 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 consolidated statement of operations for the years ended December 31, 2002 and 2001:
For the year ended December 31, ----------------------------------- 2002 2001 --------------- -------------- (in millions) From Separate Account Annual Statement: Transfers to Separate Accounts $ 1,341 $ 1,419 Transfers from Separate Accounts (1,300) (1,128) --------------- -------------- 41 291 Reconciling adjustments: Investment management and administrative charges 65 72 Mortality, breakage and taxes 136 139 --------------- -------------- Net transfers to separate accounts $ 242 502 =============== ==============
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 annual periods during which the participant provides services to the Company, including recognition of pension assets and liabilities based on the funded status of the related plans. Prior to 2001, the Company recognized pension expense only in the periods in which contributions were made to plan assets. In addition to pension benefits, the Company provides certain health care and life insurance benefits ("postretirement benefits") to retired employees, field representatives and eligible dependents. Substantially all employees and field representatives will become eligible for these benefits if they reach retirement age while working for the Company. B-39 FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL The Northwestern Mutual Life Insurance Company Notes to Consolidated Statutory Financial Statements December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- Aggregated assets and projected benefit obligations of the defined benefit plans and for postretirement benefits at December 31, 2002 and 2001, and changes in assets and obligations for the years then ended, were as follows:
Defined Benefit Plans Postretirement Benefits ---------------------- ------------------------- 2002 2001 2002 2001 --------- ------------ ----------- ------------- (in millions) Fair value of plan assets at January 1 $1,612 $1,694 $ 20 $23 Changes in plan assets: Actual return on plan assets (161) (54) (2) (2) Actual plan benefits paid (31) (28) (1) (1) --------- ------------- ---------- -------------- Fair value of plan assets at December 31 $1,420 $1,612 $ 17 $20 ========= ============= ========== ============== Projected benefit obligation at January 1 $1,367 $1,261 $ 96 $89 Changes in benefit obligation: Service cost of benefits earned 54 50 11 7 Interest cost on projected obligations 95 86 8 6 Projected plan benefits paid (34) (30) (8) (6) Experience (gains) losses 17 - 24 - --------- ------------- --------- ------------- Projected benefit obligation at December 31 $1,499 $1,367 $131 $96 ========= ============= ========= ==============
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 values. The projected benefit obligation represents the actuarial net present value of future benefit obligations, which is calculated annually by the Company. The following table summarizes assumptions used in estimating the projected benefit obligation at December 31, 2002 and 2001:
Defined Benefit Plans Postretirement Benefits ------------------------- -------------------------- 2002 2001 2002 2001 ------------ ------------ ------------ ------------- Discount rate 7.0% 7.0% 7.0% 7.0% Long-term rate of return on plan assets 8.5% 9.0% 8.5% 9.0% Annual increase in compensation 5.0% 5.0% 5.0% 5.0%
The projected benefit obligations at December 31, 2002 and 2001 also assumed an annual increase in future retiree medical costs of 10%, grading down to 5% over 5 years and remaining level thereafter. 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, 2002 by $13 million and net periodic postretirement benefit expense during 2002 by $2 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, 2002 by $13 million and net periodic postretirement benefit expense during 2002 by $2 million. B-40 FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL The Northwestern Mutual Life Insurance Company Notes to Consolidated Statutory Financial Statements December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- Projected benefit obligations included $12 million and $11 million for non-vested employees at December 31, 2002 and 2001, respectively. An aggregated reconciliation of the funded status of the plans to the net liability recorded by the Company at December 31, 2002 and 2001, as well as the components of net periodic benefit costs for the years then ended, were as follows:
Defined Benefit Plans Postretirement Benefits -------------------------- ------------------------- 2002 2001 2002 2001 ------------- ------------ ------------ ------------ (in millions) Fair value of plan assets at December 31 $1,420 $1,612 $ 17 $ 20 Projected benefit obligation at December 31 1,499 1,367 131 96 ------------- ------------ ------------ ------------ Funded status (79) 245 (114) (76) Unrecognized net experience losses 516 207 29 4 Unrecognized initial net asset (644) (657) - - Nonadmitted asset (58) (38) - - ------------- ------------ ------------ ------------ Net pension liability ($265) ($243) ($85) ($72) ============= ============ ============ ============ Components of net periodic benefit cost: Service cost of benefits earned $ 54 $ 50 $ 11 $ 7 Interest cost on projected obligations 95 86 9 6 Amortization of experience gains and losses 5 - 1 - Amortization of initial net asset (13) - - - Expected return on plan assets (136) (151) (2) (2) ------------- ------------ ------------ ------------ Net periodic expense (benefit) $ 5 ($15) $ 19 $ 11 ============= ============ ============ ============
Unrecognized net experience gains or losses represent cumulative amounts by which plan experience for return on plan assets or benefit costs has been more or less favorable than assumed. These net differences accumulate without recording in the Company's financial statements unless they exceed ten percent of plan assets or projected benefit obligation, whichever is greater. If they exceed this limit, they are amortized into net periodic benefit costs over the remaining average years of service until retirement of the employee base, which is currently seventeen years. Unrecognized initial net assets represent the amount by which the fair value of plan assets exceeded the projected benefit obligation for funded pension plans upon the adoption of new statutory accounting principles at January 1, 2001. The Company has elected not to record an initial asset for this excess, rather it will establish the asset through amortization of this initial asset as a credit to net periodic benefit cost. Any net pension assets for funded plans are nonadmitted under statutory accounting and are thereby excluded from surplus. B-41 FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL The Northwestern Mutual Life Insurance Company Notes to Consolidated Statutory Financial Statements December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 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, 2002, 2001 and 2000 the Company expensed total contributions to these plans of $22 million, $20 million and $19 million, respectively. 9. Reinsurance In the normal course of business, the Company limits its exposure to life insurance death benefits on any single insured 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 issued prior to 1999 with retention limits varying based upon coverage type. Amounts shown in the consolidated financial statements are reported net of reinsurance. Reserves for policy benefits at December 31, 2002 and 2001 were net of ceded reserves of $877 million and $757 million, respectively. The effect of reinsurance on premium revenue and benefits expense for the years ended December 31, 2002, 2001 and 2000 was as follows:
For the year ended December 31, ---------------------------------------- 2002 2001 2000 ----------- ---------------- ----------- (in millions) Direct premium revenue $ 10,706 $ 9,995 $ 9,460 Premiums ceded (598) (548) (494) ----------- ------------ ----------- Net premium revenue $ 10,108 $ 9,447 $ 8,966 =========== ============ =========== Direct benefit expense 10,749 10,109 10,140 Benefits ceded (419) (432) (315) ----------- ------------ ----------- Net benefit expense $ 10,330 $ 9,677 $ 9,825 =========== ============ ===========
In addition, the Company received $172 million, $161 million and $146 million for the years ended December 31, 2002, 2001 and 2000, 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 reinsurance coverage among a number of reinsurers that meet its standards for strong financial condition. There were no reinsurance B-42 FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL The Northwestern Mutual Life Insurance Company Consolidated Statement of Cash Flows (in millions) - -------------------------------------------------------------------------------- recoverables at December 31, 2002 and 2001, which were considered by management to be uncollectible. 10. Income Taxes The Company files a consolidated federal income tax return including the following entities: Northwestern Mutual Investment Services, LLC Baird Holding Company Northwestern International Holdings, Inc. Frank Russell Company NML Real Estate Holdings, LLC and subsidiaries Bradford, Inc. NML Securities Holdings, LLC and subsidiaries Network Planning Advisors, Northwestern Investment Management Company, LLC LLC Northwestern Securities Holdings, LLC Mason Street Advisors, LLC Northwestern Mutual Trust Company NML - CBO, LLC JYD, LLC The Company collects from or refunds to these subsidiaries their share of consolidated income taxes determined under written tax-sharing agreements. Federal income tax returns for years through 1999 are closed as to further assessment of tax. The liability for income taxes payable in the financial statements includes a provision for any additional taxes that may become due with respect to the open tax years. B-43 FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL The Northwestern Mutual Life Insurance Company Consolidated Statement of Cash Flows (in millions) - -------------------------------------------------------------------------------- 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 admitted deferred tax asset at December 31, 2002 and 2001 were as follows:
December 31, ------------------------------- 2002 2001 Change -------------- -------------- -------------- (in millions) Deferred tax assets: Policy acquisition costs $ 673 $ 626 $ 47 Investment asset 664 360 304 Policy benefit liabilities 1,769 1,728 41 Benefit plan obligations 223 202 21 Guaranty fund assessment 14 14 - Nonadmitted assets 67 54 13 Other 61 69 (8) ------------------------------------------------ Gross deferred tax assets $ 3,471 $ 3,053 $ 418 Deferred tax liabilities: Premium and other receivables $ 425 $ 416 $ 9 Investment asset 1,156 1,034 122 Other 3 1 2 ------------------------------------------------ Gross deferred tax liabilities $ 1,584 $ 1,451 $ 133 ------------------------------------------------ Net admitted deferred tax asset $ 1,887 $ 1,602 $ 285 ================================================
Statutory accounting principles limit the amount of gross deferred tax assets that can be included in Company surplus. This limit is based on a formula that takes into consideration available loss carryback capacity, expected timing of reversal for existing temporary differences, gross deferred tax liabilities and the level of Company surplus. At December 31, 2002 and 2001, the Company's gross deferred tax assets did not exceeded this limitation. Changes in deferred tax assets and liabilities related to 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 net changes in deferred tax assets and liabilities are direct adjustments to surplus and separately reported in the consolidated statement of changes in surplus. B-44 FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL The Northwestern Mutual Life Insurance Company Consolidated Statement of Cash Flows (in millions) - -------------------------------------------------------------------------------- The major components of current income tax expense (benefit) were as follows: December 31, -------------------------- 2002 2001 ---------- ---------- (in millions) Current year income tax $ 26 $ 170 Tax credits (15) (11) Equity tax (credit) (453) 14 ---------- ---------- Total current tax expense (benefit) $ (442) $ 173 ========== ========== The Company's taxable income can vary significantly from gain from operations before taxes due to differences in revenue recognition and expense deduction between book and tax. The Company is subject to an "equity tax" that is assessed only on mutual life insurance companies. At December 31, 2001, the liability for income taxes payable included $453 million related to the Company's estimated liability for equity tax, primarily with respect to the 2001 tax year. In March 2002, Congress passed legislation that suspended assessments of equity tax for tax years 2001 through 2003. As a result, this liability was released as a credit to current tax expense during 2002. The Company's effective tax rates were 299% and 21% for the years ended December 31, 2002 and 2001. The effective rate is not the statutory rate applied to the Company's taxable income or loss by the Internal Revenue Service. It is a financial statement relationship that represents 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 or losses. These financial statement effective rates were different than the applicable federal tax rate of 35% due primarily to differences between book and tax recognition of net investment income and realized capital gains and losses, prior year adjustments and the impact the of equity tax in 2002. The effective tax rate for the year ended December 31, 2000 was 16%, based only on tax expense attributed to net gain from operations and its relationship to gain from operations before taxes. The effective rate was less than the applicable federal rate of 35% due primarily to differences between book and tax recognition of investment income and realized capital gains and losses and prior year adjustments. Income taxes incurred in the current and prior years of $1.7 billion are available at December 31, 2002 for recoupment in the event of future net losses. B-45 FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL The Northwestern Mutual Life Insurance Company Consolidated Statement of Cash Flows (in millions) - -------------------------------------------------------------------------------- 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 plus contingent consideration. Russell, a global leader in multi-manger investment services, provides investment products and services in more than 35 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. Since the date of acquisition, the Company charged-off directly from surplus approximately $882 million, representing the goodwill associated with the acquisition. The Company has received permission from the OCI for this statutory accounting treatment, which is different than the NAIC "Accounting Practices and Procedures Manual". 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 $112 million at December 31, 2002 and are generally supported by the underlying net asset values of the affiliates. In addition, the Company routinely makes commitments to fund mortgage loans or other investments in the normal course of business. These commitments aggregated to $2.2 billion at December 31, 2002 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, losses that may result from such actions would not have a material effect on the Company's financial position at December 31, 2002. 13. Related Party Transactions During 2001 and 2000, the Company transferred appreciated equity investments to wholly-owned subsidiaries as a capital contribution to the subsidiaries. Realized capital gains of $244 million and $220 million for 2001 and 2000, respectively, were reported based on the fair value of the assets at transfer. B-46 FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL The Northwestern Mutual Life Insurance Company Consolidated Statement of Cash Flows (in millions) - -------------------------------------------------------------------------------- 14. Fair Value of Financial Instruments The fair value of investment assets, including derivatives, and certain policy liabilities at December 31, 2002 and 2001 were as follows:
December December 31, 2002 31, 2001 -------------------------- ---------------------------- Statement Fair Statement Fair Value Value Value Value ----------- ----------- ----------- ----------- (in millions) Assets: Bonds $ 50,597 $ 53,311 $ 44,306 $ 45,200 Common and preferred stocks 4,902 6,373 5,369 7,072 Mortgage loans 15,692 17,485 15,164 15,875 Real estate 1,503 2,181 1,671 2,406 Policy loans 9,292 9,628 9,028 9,375 Other investments 4,242 4,802 4,817 5,244 Cash and short-term investments 1,814 1,814 2,018 2,018 Liabilities: Investment-type insurance reserves $ 3,737 $ 3,562 $ 3,417 $ 3,191
Fair value of bonds, common d preferred stocks and derivative financial instruments are based upon quoted market prices, when available. For those not actively traded, fair values are estimated using independent pricing services or internally developed pricing models. The fair value of mortgage loans is estimated by discounting estimated future cash flows using market interest rates for debt with comparable credit risk and maturities. Real estate fair value is determined by discounting estimated future cash flows using market interest rates. Policy loan fair value is estimated based on discounted projected cash flows using market interest rates and assumptions regarding future loan repayments based on Company experience. Other investments primarily represent joint ventures and partnerships, for which the equity method approximates fair value. The fair value of investment-type insurance reserves is estimated by discounting estimated future cash flows at market interest rates for similar instruments with comparable maturities. B-47 [LETTERHEAD OF PRICEWATERHOUSECOOPERS LLP] 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, 2002 and 2001, 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, 2002. 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 accounting principles generally accepted in the United States. The effects on the consolidated financial statements of the variances between the statutory basis of accounting and accounting principles generally accepted in the United States, 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, 2002 and 2001, or the results of their operations or their cash flows for each of the three years in the period ended December 31, 2002 because of the effects of the variances between the statutory basis of accounting and accounting principles generally accepted in the United States of America 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, 2002 and 2001 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, 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 21, 2003 B-48 TABLE OF CONTENTS
Page DISTRIBUTION OF THE POLICIES .............................................. B-2 UNDERWRITING PROCEDURES ................................................... B-2 EXPERTS ................................................................... B-3 FINANCIAL STATEMENTS OF THE ACCOUNT ....................................... B-4 (as of December 31, 2002 and for each of the two years in the period ended December 31, 2002) Report of Independent Accountants B-18 (as of December 31, 2002 and for each of the two years in the period ended December 31, 2002) FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL ............................... B-19 (as of December 31, 2002 and 2001 and for each of the three years in the period ended December 31, 2002) Report of Independent Accountants ....................................... B-48 (as of December 31, 2002 and 2001 and for each of the three years in the period ended December 31, 2002)
B-49 PART C OTHER INFORMATION Item 27. Exhibits (a) Resolution of Board of Trustees of The Northwestern Mutual Life Insurance Company establishing the Account. Previously filed as Exhibit A(1) with the Registration Statement on Form S-6 for Northwestern Mutual Variable Life Account, File No. 333-36865, CIK 0000742277, dated October 1, 1997, and incorporated herein by reference. (b) Not Applicable. (c) Distribution Agreement between NML Equity Services, Inc. (now Northwestern Mutual Investment Services, LLC) and The Northwestern Mutual Life Insurance Company. Previously filed as Exhibit A(3)(a)with the Registration Statement on Form S-6 for Northwestern Mutual Variable Life Account, File No. 2-89972, dated March 12, 1984 - Attached hereto. (d) Form of each contract - The following exhibits were previously filed as Exhibits A(5)(a), A(5)(b), A(5)(c), and A(5)(d), respectively, with Post-Effective Amendment No. 7 to the Registration Statement on Form S-6 for Northwestern Mutual Variable Life Account, File No. 33-89188, CIK 0000742277, dated May 31, 2001, and are incorporated herein by reference: (1) Variable Whole Life Insurance Policy With Additional Protection, QQ.VCL, including Policy amendment (sex distinct) (2) Variable Whole Life Insurance Policy With Additional Protection, QQ.VCL,including Policy amendment (sex neutral for employers) (3) Forms of Optional Riders to Variable Whole Life Insurance Policy QQ.VCL: (i) Waiver of Premium Benefit (ii) Additional Purchase Benefit (4) Form of notice of short-term cancellation right (e) Amended Application forms included in Exhibits (d)(1) and (d)(2) above. Previously filed as Exhibit A(5)(e) with Post-Effective Amendment No. 7 to the Registration Statement on Form S-6 for Northwestern Mutual Variable Life Account, File No. 33-89188, CIK 0000742277, dated May 31, 2001, and incorporated herein by reference. (f) Articles of Incorporation of The Northwestern Mutual Life Insurance Company. Previously filed as Exhibit A(6)(a) with Post-Effective Amendment No. 18 to the Registration Statement on Form S-6 for Northwestern Mutual Variable Life Account, File No. 2-89972, CIK 0000742277, dated April 26, 1996, and incorporated herein by reference. (f) Amended By-Laws of The Northwestern Mutual Life Insurance Company dated January 28, 1998. Previously filed as Exhibit A(6)(b) with the Registration Statement on Form S-6 for Northwestern Mutual Variable Life Account, File No. 333-59103, CIK 0000742277, dated July 15, 1998, and incorporated herein by reference. (f) Amendment to By-Laws of The Northwestern Mutual Life Insurance Company dated December 4, 2002 - Attached hereto. (g) Form of Reinsurance Agreement - Attached hereto. (h)(1)Form of Participation Agreement Among Russell Insurance Funds, Russell Fund Distributors, Inc. and The Northwestern Mutual Life Insurance Company. Previoulsy filed as Exhibit A(9)(a) with Post-Effective C-1 Amendment No. 4 to the Registration Statement on Form S-6 for Northwestern Mutual Variable Life Account, File No. 33-89188, CIK 0000742277, dated February 25, 1999, and incorporated herein by reference. (h)(2)Form of Participation Agreement among Variable Insurance Products Funds, Fidelity Distributors Corporation and The Northwestern Mutual Life Insurance Company - Attached hereto. (i) Not Applicable. (j) Agreement among the Account and its Co-Depositors. Previously filed as Exhibit A(8) with the Registration Statement on Form S-6 for Northwestern Mutual Variable Life Account, File No. 333-36865, CIK 0000742277, dated October 1, 1997, and incorporated herein by reference. (k) Opinion and Consent of John M. Bremer, Esq. Previously filed as Exhibit 99.2 with Pre-Effective Amendment No. 1 to the Registration Statement on Form S-6 for Northwestern Mutual Variable Life Account, File No. 33-89188, CIK 0000742277, dated September 29, 1995, and incorporated herein by reference. (l) Not Applicable. (m) Not Applicable. (n) Consent of PricewaterhouseCoopers LLP - Attached hereto. (o) Not Applicable. (p) Not Applicable. (q) Memorandum describing issuance, transfer and redemption procedures pursuant to Rule 6e-2(b)(12)(ii) and method of computing cash adjustment upon exercise of right to exchange for fixed-benefit insurance pursuant to Rule 6e-2(b)(13)(v)(B). Previously filed as Exhibit 1.A.(12) with the Registration Statement on Form S-6 for Northwestern Mutual Variable Life Account, File No. 33-89188, CIK 0000742277, dated February 8, 1995 - Attached hereto. Item 28. Directors and Officers of the Depositor The following lists include all of the Trustees, executive officers and other officers of The Northwestern Mutual Life Insurance Company without regard to their activities relating to variable life insurance policies or their authority to act or their status as "officers" as that term is used for certain purposes of the federal securities laws and rules thereunder. C-2 TRUSTEES Name Business Address - ---- ---------------- Edward E. Barr Sun Chemical Corporation 222 Bridge Plaza South Fort Lee, NJ 07024 John M. Bremer The Northwestern Mutual Life Insurance Company 720 East Wisconsin Avenue Milwaukee, WI 53202 Peter W. Bruce The Northwestern Mutual Life Insurance Company 720 East Wisconsin Avenue Milwaukee, WI 53202 Robert C. Buchanan Fox Valley Corporation 100 West Lawrence Street P.O. Box 727 Appleton, WI 54911 George A. Dickerman 68 Normandy Road Longmeadow, MA 01106-1259 Pierre S. du Pont Richards, Layton & Finger P.O. Box 551 1 Rodney Square Wilmington, DE 19899 James D. Ericson 777 East Wisconsin Avenue Suite 3010 Milwaukee, WI 53202 David A. Erne Reinhart Boener Van Deuren sc 1000 North Water Street Suite 2100 Milwaukee, WI 53202 J. E. Gallegos Gallegos Law Firm 460 St. Michaels Drive Building 300 Santa Fe, NM 87505 Stephen N. Graff 805 Lone Tree Road Elm Grove, WI 53122-2014 Patricia Albjerg Graham Graduate School of Education Harvard University 420 Gutman Cambridge, MA 02138 C-3 James P. Hackett Steelcase Inc. 901 - 44th Street Grand Rapids, MI 49508 Stephen F. Keller 101 South Las Palmas Avenue Los Angeles, CA 90004 Barbara A. King Landscape Structures, Inc. Route 3 601-7th Street South Delano, MN 55328 J. Thomas Lewis 228 St. Charles Avenue Suite 1024 New Orleans, LA 70130 Daniel F. McKeithan, Jr. Tamarack Petroleum Company, Inc. Suite 1920 777 East Wisconsin Avenue Milwaukee, WI 53202 H. Mason Sizemore, Jr. 2054 N.W. Blue Ridge Drive Seattle, WA 98177 Harold B. Smith, Jr. Illinois Tool Works, Inc. 3600 West Lake Avenue Glenview, IL 60625-5811 Sherwood H. Smith, Jr. CP&L 421 Fayetteville Street Mall P.O. Box 1551 Raleigh, NC 27602 Peter M. Sommerhauser Godfrey & Kahn, S.C. 780 North Water Street Milwaukee, WI 53202-3590 John E. Steuri 52 River Ridge Road Little Rock, AR 72227-1518 John J. Stollenwerk Allen-Edmonds Shoe Corporation 201 East Seven Hills Road P.O. Box 998 Port Washington, WI 53074-0998 Barry L. Williams Williams Pacific Ventures, Inc. 109 Stevenson Street - 5th Floor San Francisco, CA 94105-3409 Kathryn D. Wriston c/o Shearman & Sterling 599 Lexington Avenue, Room 1064 New York, NY 10022 C-4 Edward J. Zore The Northwestern Mutual Life Insurance Company 720 East Wisconsin Avenue Milwaukee, WI 53202 EXECUTIVE OFFICERS
Name Title ---- ----- Edward J. Zore President and Chief Executive Officer John M. Bremer Senior Executive Vice President and Chief Compliance Officer Peter W. Bruce Senior Executive Vice President (Insurance) 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) Robert J. Berdan Vice President, General Counsel and Secretary Steven T. Catlett Vice President and Controller Thomas E. Dyer Vice President (Corporate Services) Christine H. Fiasca Vice President (Field Systems Administration) Susan A. Lueger Vice President (Human Resources) Jean M. Maier Vice President (Field Services Support) Meridee J. Maynard Vice President (Disability Income) Gregory C. Oberland Vice President (New Business) Barbara F. Piehler Vice President (Information Systems) Marcia Rimai Vice President (Policyowner Services) Lora A. Rosenbaum Vice President (Compliance/Best Practices) J. Edward Tippetts Vice President (Field Development) Martha M. Valerio Vice President (Information Systems) David B. Wescoe Vice President (Northwestern Mutual Investment Services) W. Ward White Vice President (Communications) Michael L. Youngman Vice President (Government Relations)
OTHER OFFICERS Name Title ---- ----- Abbott, John Director DI Special Invest Unit/Field Benefit Reps Amerell, Jac Director Investment Accounting Backe, Mark Asst. General Counsel & Asst. Secretary Barlow, Walter Assistant Director Education Berger, Beth Asst. General Counsel & Asst. Secretary Bessette, Frederick Asst. General Counsel & Asst. Secretary Bleidorn, Melissa Asst. General Counsel & Asst. Secretary Bluhm, Rodney Asst. General Counsel & Asst. Secretary Botcher, Sandra Asst. General Counsel & Asst. Secretary C-5 Brower, Anne Asst. General Counsel & Asst. Secretary Bula, Michael Asst. General Counsel & Asst. Secretary Cain, John Assistant Director Policyowner Services Canady, Gwen Assistant Director Corporate Reporting Carter, Michael Vice President Policyowner Services Christianson, Thomas Director Advanced Business Services Close, Alan Director Accounting Policy Courtney, Barbara Director Mutual Fund Accounting Darland, Dennis Assistant Director DI Benefit Dunn, John Asst. General Counsel & Asst. Secretary Eben, James Asst. General Counsel & Asst. Secretary Fleming, Kate Asst. General Counsel & Asst. Secretary Forecki, Donald Director Investment Operations Frasher, James Asst. General Counsel & Asst. Secretary Garofani, John Asst. General Counsel & Asst. Secretary Garthwait, Richard Vice President System Administration Gavin, Sheila Asst. General Counsel & Asst. Secretary Gleeson, Robert Vice President & Medical Director Goetze, Jason Assistant Director Long Term Care Compliance/Sales Greene, C. Claibourne Asst. General Counsel & Asst. Secretary Grogan, John Vice President DI Benefits Gurlik, Gregory Director Long Term Care Product Development Hagen, Ronald Vice President Long Term Care Heaton, Paul Vice President & Litigation Counsel Hewitt, Gary Vice President Treasury & Investment Operations Hillmann, Patricia Assistant Director Annuity Accumulation Products Hoffman, Richard Vice President Audit Horn, Diane Director Field Compliance Idleman, Elizabeth Asst. General Counsel & Asst. Secretary Kaprelian, Mark Asst. General Counsel & Asst. Secretary Kern, James Director DI Underwriting Knuth, Daniel Director Koelbl, James Asst. General Counsel & Asst. Secretary Kowalsky, Robert Vice President & Chief Architect Kracht, Carol Vice President & Investment Counsel-Securities Krueger, Patricia Director Annuity Customer Service Kuzminski, Todd Assistant Director Investment Accounting Kuznacic, James Assistant Director Policyowner Services Landry, Dean Assistant Director Investment Accounting Lemanczyk, Donna Director Investment Processing Lentini, Elizabeth Asst. General Counsel & Asst. Secretary Levy, Teresa Asst. General Counsel & Asst. Secretary Lewis, Sally Asst. General Counsel & Asst. Secretary Lofgren, Kurt Asst. General Counsel & Asst. Secretary Loxton, George Asst. General Counsel & Asst. Secretary Lundberg, Merrill Asst. General Counsel & Asst. Secretary Mabie, Dean Asst. General Counsel & Asst. Secretary Magalska, Jon Actuary Marks, Jeffrey Director ES-INS & Res Martinie, Steve Asst. General Counsel & Asst. Secretary Matchulat, Ted Director Product Compliance McCown, William Vice President & Investment Counsel - Real Estate McElwee, Paul Asst. General Counsel & Asst. Secretary C-6 McFarland, James L. Asst. General Counsel & Asst. Secretary McGinley, Daniel Director Field Management Development McKeown, Patrick Investment Research Consultant McLennon, Mark Director Annuity Accumulation Product Sales Support Meihsner, Larry Asst. General Counsel & Asst. Secretary Menting, Christopher Asst. General Counsel & Asst. Secretary Meyers, Richard Asst. General Counsel & Asst. Secretary Milewski, Lynn Director Annuity New Business Compliance Miller, Sara Vice President Specialty Markets Moakley, Daniel Asst. General Counsel & Asst. Secretary Mocarski, Jill Medical Director Molloy, Karen Director Banking & Cash Management Moro-Goane, Diana Director Marketing Materials Review Morris, Scott J. Asst. General Counsel & Asst. Secretary Nelson, David K. Asst. General Counsel & Asst. Secretary Nelson, Mary S. Asst. General Counsel & Asst. Secretary Nelson, Ronald C. Dir Product Development & Strategy Nelson, Timothy Director Market Conduct Niehaus, Jeffrey Director Product & Systems Niessing, Karen Director Policyowner Services Otto, Timothy Asst. General Counsel & Asst. Secretary Panighetti, Arthur Vice President Tax Perez, David Asst. General Counsel & Asst. Secretary Perkins, Judith Asst. General Counsel & Asst. Secretary Peterson, Peter Director Long Term Care Administration Pickering, William Asst. General Counsel & Asst. Secretary Pogoriler, Harvey Asst. General Counsel & Asst. Secretary Porter, Rebecca Director Policyowner Services Powell, Randolph Medical Director Rabenn, Thomas Asst. General Counsel & Asst. Secretary Remstad, David Vice President Life Product Richards, Thomas Vice President Agency Development Richter, Richard Vice President System Administration Riedl, Daniel Vice President & Financial Services Counsel Rivera, Kathleen Vice President & Insurance Counsel Rodenkirk, Faith Assistant Director Business Markets Roou, Tammy Asst. General Counsel & Asst. Secretary Ruys, Stephen Director Information Systems Schachtner, Mary Ann Director Field Training & Development Schaefer, Linda Director Policyowner Services Schattschneider, Cal Assistant Director Corporate Development Scheer, Thomas Asst. General Counsel & Asst. Secretary Schenk, Carlen Director Compliance Support Schluter, Kathleen Vice President & Tax Counsel Schmidt, Calvin Vice President Information Systems Schneider, Rodd Asst. General Counsel & Asst. Secretary Seguin, Norman Director Ad Valorem Tax Shaw, Catherine Asst. General Counsel & Asst. Secretary Sheaffer, John Director Agent Services Silber, David Asst. General Counsel & Asst. Secretary Silverman, Stephen M. Asst. General Counsel & Asst. Secretary Skalecki, Paul Sr Actuary Smith, Mark Associate General Counsel & Asst. Secretary C-7 Smith, Warren Assistant Director Architecture Snyder, Richard Assistant Director Mutual Funds Spellman, Robert Vice President & Chief Medical Director Sternman, William Director Corporate Development & Research Stevens, Karen Asst. General Counsel & Asst. Secretary Svehlek, Cheryl Assistant Director DI Underwriting Large Case Taknint, Rachel Asst. General Counsel & Asst. Secretary Talajkowski, Thomas Assistant Director Tax Taylor, Earl Asst. General Counsel & Asst. Secretary Tews, Paul Director Investment Planning Van Groll, Mary Beth Vice President Information Systems Versnik, Natalie Assistant Director DI Benefits Warner, Kathleen Director Weiner, Joel Medical Director Wilbert, Catherine Asst. General Counsel & Asst. Secretary Wilkinson, Donald Vice President Agency Administration Williams, Jeffrey Director Corporate Risk Management Wills, Anne Assistant Director Policyowner Services Woodcock, Penny Assistant Director DI Quality Assurance Young, Catherine Asst. General Counsel & Asst. Secretary Zimmermann, Patricia Director Investment Technology & Development Zwieg, Phillip Vice President Information Systems Zysk, Robert Director Tax Compliance The business addresses for all of the executive officers and other officers is 720 East Wisconsin Avenue, Milwaukee, Wisconsin 53202. Item 29. Persons Controlled By or Under Common Control with the Depositor or Registrant The subsidiaries of The Northwestern Mutual Life Insurance Company ("Northwestern Mutual"), as of December 31, 2002 are set forth on pages C-9 through C-11. In addition to the subsidiaries set forth on pages C-9 through C-11, the following separate investment accounts (which include the Registrant) may be deemed to be either controlled by, or under common control with, Northwestern Mutual: 1. NML Variable Annuity Account A 2. NML Variable Annuity Account B 3. NML Variable Annuity Account C 4. Northwestern Mutual Variable Life Account Northwestern Mutual Series Fund, Inc. and Russell Insurance Funds (the "Funds"), shown on page C-9 as subsidiaries of Northwestern Mutual, are investment companies, registered under the Investment Company Act of 1940, offering their shares to the separate accounts identified above; and the shares of the Funds held in connection with certain of the accounts are voted by Northwestern Mutual in accordance with voting instructions obtained from the persons who own, or are receiving payments under, variable annuity contracts or variable life insurance policies issued in connection with the accounts, or in the same proportions as the shares which are so voted. C-8 NORTHWESTERN MUTUAL CORPORATE STRUCTURE/1/ (as of December 31, 2002)
The Northwestern Mutual Life Insurance Company/2/ Jurisdiction of Incorporation - ------------------------------------------------- ----------------------------- General Account................................................................................Wisconsin NML Variable Annuity Account A*................................................................Wisconsin NML Variable Annuity Account B*................................................................Wisconsin NML Variable Annuity Account C*................................................................Wisconsin NML Variable Life Account*.....................................................................Wisconsin NML Group Annuity Separate Account.............................................................Wisconsin Frank Russell Company and its subsidiaries - 96%..............................................Washington Bradford, Inc. - 100%...........................................................................Delaware NML/Tallahassee, Inc. - 100%.....................................................................Florida Northwestern Investment Management Company, LLC - 100%..........................................Delaware Northwestern Mutual Las Vegas, Inc. - 100%........................................................Nevada Northwestern Long Term Care Insurance Company - 100%............................................Illinois Northwestern Mutual Trust Company - 100% ...........................................Federal Savings Bank Northwestern International Holdings, Inc. - 100%................................................Delaware Northwestern Foreign Holdings B.V. - 100%....................................................Netherlands Saskatoon Centre, Limited - 100% (inactive)..............................................Ontario, Canada Network Planning Advisors, LLC - 100%..........................................................Wisconsin Northwestern Mutual Series Fund, Inc. (and its 15 portfolios) - 100%/3/.........................Maryland Russell Insurance Funds (and its 5 funds) - 81%...........................................Massachusetts Mason Street Advisors, LLC - 100%...............................................................Delaware Mason Street Funds, Inc. (and its 11 funds) - 67%/4/...........................................Maryland Baird Holding Company - 80 %...................................................................Wisconsin Baird Holding Company owns 80% of Baird Financial Corporation. ................................Wisconsin Baird Financial Corporation holds 80% of the voting stock of Robert W. Baird & Co., Incorporated and various subsidiaries. Northwestern Mutual Investment Services, LLC - 100%............................................Wisconsin Northwestern Reinsurance Holdings N.V. - 100%................................................Netherlands Northwestern Securities Holdings, LLC - 100%....................................................Delaware NML - CBO, LLC - 100%...........................................................................Delaware JYD, LLC - 100%.................................................................................Delaware
/(1)/Except for certain real estate partnerships/LLCs, includes all NM mutual funds and other corporations of which more than 50% ownership is controlled by NM. /(2)/The foregoing subsidiaries in NM are unconsolidated and do not file financial statements, except for those marked with an asterisk. /(3)/Aggressive Growth Stock, Balanced, Large Cap Core Stock, Growth Stock, High Yield Bond, Index 400 Stock, Index 500 Stock, Franklin Templeton International Equity, Money Market, Select Bond, Small Cap Growth Stock, T. Rowe Price Small Cap Value, International Growth, Capital Guardian Domestic Equity and Asset Allocation. /(4)/Aggressive Growth Stock, Asset Allocation, Large Cap Core Stock, Growth Stock, High Yield Bond, Index 400 Stock, Index 500 Stock, International Equity, Municipal Bond, Select Bond and Small Cap Growth Stock. C-9 NORTHWESTERN MUTUAL CORPORATE STRUCTURE/1/ (as of December 31, 2002)
NML Securities Holdings, LLC/2/ - 100% Jurisdiction of Incorporation - -------------------------------------- ----------------------------- NW Pipeline, Inc. - 100%..............................................................................Texas Painted Rock Development Corporation - 100%.........................................................Arizona NML Development Corporation - 100%.................................................................Delaware Stadium and Arena Management, Inc. - 100%..........................................................Delaware Carlisle Ventures, Inc. - 100%.....................................................................Delaware Park Forest Northeast, Inc. - 100%.................................................................Delaware Travers International Sales, Inc. - 100%.....................................................Virgin Islands Highbrook International Sales, Inc. - 100%...................................................Virgin Islands Elderwood International Sales, Inc. - 100%...................................................Virgin Islands Mallon International Sales, Inc. - 100%......................................................Virgin Islands Higgins, Inc. - 100%...............................................................................Delaware Hobby, Inc. - 100%.................................................................................Delaware Baraboo, Inc. - 100% ..............................................................................Delaware Elizabeth International Sales, Inc. - 100%...................................................Virgin Islands Alexandra International Sales, Inc. - 100% ..................................................Virgin Islands Jack International Sales, Inc. - 100%........................................................Virgin Islands Justin International FSC, Inc. - 100%........................................................Virgin Islands North Van Buren, Inc. - 100%.......................................................................Delaware Northwestern Mutual Life International, Inc. - 100%......................................................................Delaware Kristiana International Sales, Inc. - 100%...................................................Virgin Islands NML/Mid Atlantic, Inc. - 100%....................................................................New Jersey KerryAnne International Sales, Inc. - 100%...................................................Virgin Islands Regina International Sales, Inc. - 100%......................................................Virgin Islands Maroon, Inc. - 100%................................................................................Delaware Coral, Inc. - 100%.................................................................................Delaware Lydell, Inc. - 100%................................................................................Delaware Klode, Inc. - 100%.................................................................................Delaware Lake Bluff, Inc. - 100% (inactive).................................................................Delaware Nicolet, Inc. - 100%...............................................................................Delaware Tupelo, Inc. - 100% (inactive).....................................................................Delaware Sean International Sales, Inc. - 100%........................................................Virgin Islands Brian International Sales, Inc. - 100%.......................................................Virgin Islands Brendan International Sales, Inc. - 100%.....................................................Virgin Islands Mason & Marshall, Inc. - 100%......................................................................Delaware White Oaks, Inc. - 100%............................................................................Delaware Hazel, Inc. - 100%.................................................................................Delaware Northwestern Securities Partnership...............................................................Delaware Holdings, LLC - 100%
/(1)/Except for certain real estate partnerships/LLCs, includes all NM mutual funds and other corporations of which more than 50% ownership is controlled by NM. /(2)/The foregoing subsidiaries in NML Securities Holdings, LLC are unconsolidated and do not file financial statements. C-10 NORTHWESTERN MUTUAL CORPORATE STRUCTURE/1/ (as of December 31, 2002)
NML Real Estate Holdings, LLC/2/ - 100% Jurisdiction of Incorporation - --------------------------------------- ----------------------------- The Grand Avenue Corporation - 99.18%.............................................................Wisconsin Solar Resources, Inc. - 100%......................................................................Wisconsin Rocket Sports, Inc. - 100% (inactive).................................................................Texas St. James Apartments, LLC - 100% ..................................................................Delaware RE Corporation - 100%..............................................................................Delaware INV Corp. - 100%...................................................................................Delaware Elizabeth Lakes Associates - 100% (inactive).......................................................Michigan Logan, Inc. - 100%.................................................................................Delaware Green Room Properties, LLC - 100%..................................................................Delaware Summerhill Management, LLC - 100%..................................................................Delaware New Arcade Parking, LLC - 100%....................................................................Wisconsin NMIS Alabama Agency, LLC - 100%.....................................................................Alabama NMIS Massachusetts Insurance Agency, LLC - 100%...............................................Massachusetts Northwestern Real Estate Partnership Holdings, LLC - 100%..........................................Delaware NML Buffalo Agency, Inc. - 100%....................................................................New York Mitchell, Inc. - 100%..............................................................................Delaware Cass Corporation - 100%............................................................................Delaware Burgundy, Inc. - 100%..............................................................................Delaware Amber, Inc. - 100%.................................................................................Delaware Olive, Inc. - 100%.................................................................................Delaware Bayridge, Inc. - 100%..............................................................................Delaware Ryan, Inc. - 100%..................................................................................Delaware Pembrook, Inc. - 100%..............................................................................Delaware PBClub, Inc. - 100%................................................................................Delaware Diversey, Inc. - 100%..............................................................................Delaware Russet, Inc. - 100% ...............................................................................Delaware Summerhill Property, LLC - 100%....................................................................Delaware New Arcade, LLC - 100%............................................................................Wisconsin Summit Mall, LLC - 100%............................................................................Delaware NMIS Georgia Agency, LLC - 100%.....................................................................Georgia Chateau, Inc. - 100%...............................................................................Delaware
/(1)/ Except for certain real estate partnerships/LLCs, includes all NM mutual funds and other corporations of which more than 50% ownership is controlled by NM. /(2)/The foregoing investment subsidiaries in NML Real Estate Holdings, LLC are unconsolidated and do not file financial statements. C-11 Item 30. Indemnification That portion of the By-laws of Northwestern Mutual relating to indemnification of Trustees and officers is set forth in full in Article VII of the By-laws of Northwestern Mutual, amended by resolution and previously filed as an exhibit to the registration statement for Northwestern Mutual Variable Life Account on July 15, 1998. Item 31. Principal Underwriters (a) Northwestern Mutual Investment Services, LLC ("NMIS"), the co-depositor of the Registrant, may be considered the principal underwriter currently distributing securities of the Registrant. NMIS is also co-depositor, and may be considered the principal underwriter, for NML Variable Annuity Account B, a separate investment account of Northwestern Mutual registered under the Investment Company Act of 1940 as a unit investment trust. In addition, NMIS is the principal underwriter for Mason Street Funds, Inc., a management investment company registered as such under the Investment Company Act of 1940. (b) The directors and officers of NMIS are as follows: Name Position - ---- -------- Theresa H. Ambord Vice President William H. Beckley Director and Executive Vice President, Sales Lisa M. Belli-Fuchs Assistant Treasurer Stephanie H. Breit Assistant Vice President Walter J. Chossek Treasurer Eric P. Christophersen Senior Vice President Steven J. Dryer First Vice President, Business Development Susan M. Emmer Vice President, Field Training Manager Bradley L. Eull Assistant Vice President William J. Flood Assistant Vice President John E. Gawelski Vice President Don P. Gehrke First Vice President, Systems Administration and Reporting Richard L. Hall Senior Vice President, Variable Life Insurance Diane B. Horn Senior Vice President and Chief Compliance Officer Mark A. Kaprelian Secretary John C. Kelly Assistant Treasurer Beatrice C. Kmiec Vice President, Variable Life Administration Michelle D. Kovacevic Vice President, Account Information Services Manager LeAnn F. Kuhagen Assistant Vice President Steven J. LaFore Vice President, Retirement Plans Support Jennifer L. Manderfield Assistant Vice President, Transaction Support Services Manager Allan J. McDonell First Vice President, Order Entry Desk Brian M. Moran Vice President, Field Inspections Lisa L. North Assistant Vice President Evelyn M. Rewolinski Assistant Vice president, Trade Correction Support Richard R. Richter Regional Vice President, Field Management Lora A. Rosenbaum Executive Vice President, Compliance and Best Practices Stephanie M. Sanders Assistant Vice president, Internal Trainer Alexander D. Schneble Vice President, Transaction Support Services Project C-12 Leader Jacquelyn L. Sklenar First Vice President, Sales Support and Promotion Leonard F. Stecklein Senior Vice President, Variable Annuities Julie A. Stenzel First Vice President, Investment Client Services Lisa Teuteberg Vice President Kellen A. Thiel First Vice President, Investment Products Preston J. Turner Vice President, Field Training and Development David B. Wescoe Director, President and CEO Donald R. Wilkinson Regional Vice President, Field Management Robert E. Zysk Assistant Treasurer The address for each director and officer of NMIS is 611 East Wisconsin Avenue, Milwaukee, Wisconsin 53202. (c) During 2002 life insurance agents of Northwestern Mutual who are also registered representatives of NMIS received commissions, including general agent overrides, in the aggregate amount of $97,054,099 for sales of variable life insurance policies, and interests therein, issued in connection with the Registrant. Item 32. Location of Accounts and Records All accounts, books or other documents required to be maintained in connection with the Registrant's operations are maintained in the physical possession of Northwestern Mutual at 720 East Wisconsin Avenue, Milwaukee, Wisconsin 53202. Item 33. Management Services There are no management-related service contracts, other than those referred to in Part A or Part B of this Registration Statement, under which management-related services are provided to the Registrant and pursuant to which total payments of $5,000 or more were made during any of the last three fiscal years. Item 34. Fee Representation The Northwestern Mutual Life Insurance Company hereby represents that the fees and charges deducted under the variable life insurance policies which are the subject of this registration statement, in the aggregate, are reasonable in relation to the services rendered, the expenses expected to be incurred, and the risks assumed by the insurance company. C-13 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, and the Investment Company Act of 1940, the Registrant, Northwestern Mutual Variable Life Account, has duly caused this Amended Registration Statement to be signed on its behalf by the undersigned, duly authorized, in the City of Milwaukee, and State of Wisconsin, on the 28th day of February, 2003. NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT (Registrant) By THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY (Depositor) Attest: ROBERT J. BERDAN By: EDWARD J. ZORE -------------------------------- ----------------------------- Robert J. Berdan Edward J. Zore, President Vice President, General Counsel and Chief Executive Officer and Secretary By NORTHWESTERN MUTUAL INVESTMENT SERVICES, LLC (Depositor) Attest: MARK A. KAPRELIAN By: DAVID B. WESCOE -------------------------------- ----------------------------- Mark A. Kaprelian, Secretary David B. Wescoe, President and CEO Pursuant to the requirements of the Securities Act of 1933, this Amended Registration Statement has been signed by the depositors on the 28th day of February 2003. THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY (Depositor) Attest: ROBERT J. BERDAN By: EDWARD J. ZORE -------------------------------- ----------------------------- Robert J. Berdan Edward J. Zore, President Vice President, General Counsel and Chief Executive Officer and Secretary NORTHWESTERN MUTUAL INVESTMENT SERVICES, LLC (Depositor) Attest: MARK A. KAPRELIAN By: DAVID B. WESCOE -------------------------------- ----------------------------- Mark A. Kaprelian, Secretary David B. Wescoe, President and CEO Pursuant to the requirements of the Securities Act of 1933, this Amended Registration Statement has been signed below by the following persons in the capacities with the depositor and on the dates indicated:
Signature Title - --------- ----- EDWARD J. ZORE Trustee, President and Dated - ------------------------------ Principal Executive Officer February 28, 2003 Edward J. Zore GARY A. POLINER Senior Vice President and - ------------------------------ Principal Financial Officer Gary A. Poliner STEVEN T. CATLETT Vice President, Controller - ------------------------------ and Principal Accounting Officer Steven T. Catlett
C-14 HAROLD B. SMITH* Trustee - ------------------------------ Harold B. Smith J. THOMAS LEWIS* Trustee - ------------------------------ J. Thomas Lewis PATRICIA ALBJERG GRAHAM* Trustee - ------------------------------ Patricia Albjerg Graham STEPHEN F. KELLER* Trustee Dated - ------------------------------ February 28, 2003 Stephen F. Keller PIERRE S. du PONT* Trustee - ------------------------------ Pierre S. du Pont J. E. GALLEGOS* Trustee - ------------------------------ J. E. Gallegos KATHRYN D. WRISTON* Trustee - ------------------------------ Kathryn D. Wriston BARRY L. WILLIAMS* Trustee - ------------------------------ Barry L. Williams DANIEL F. MCKEITHAN, JR.* Trustee - ------------------------------ Daniel F. McKeithan, Jr. JAMES D. ERICSON* Trustee - ------------------------------ James D. Ericson EDWARD E. BARR* Trustee - ------------------------------ Edward E. Barr ROBERT C. BUCHANAN* Trustee - ------------------------------ Robert C. Buchanan SHERWOOD H. SMITH, JR.* Trustee - ------------------------------ Sherwood H. Smith, Jr. H. MASON SIZEMORE, JR.* Trustee - ------------------------------ H. Mason Sizemore, Jr. JOHN J. STOLLENWERK* Trustee - ------------------------------ John J. Stollenwerk GEORGE A. DICKERMAN* Trustee - ------------------------------ George A. Dickerman C-15 JOHN E. STEURI* Trustee - ------------------------------ John E. Steuri STEPHEN N. GRAFF* Trustee - ------------------------------ Stephen N. Graff BARBARA A. KING* Trustee - ------------------------------ Barbara A. King PETER M. SOMMERHAUSER* Trustee - ------------------------------ Peter M. Sommerhauser JAMES P. HACKETT* Trustee Dated - ------------------------------ February 28, 2003 James P. Hackett JOHN M. BREMER* Trustee - ----------------------------- John M. Bremer PETER W. BRUCE* Trustee - ------------------------------ Peter W. Bruce Trustee - ------------------------------ David A. Erne *By: EDWARD J. ZORE --------------------------------- Edward J. Zore, Attorney in fact, pursuant to the Power of Attorney attached hereto C-16 POWER OF ATTORNEY The undersigned Trustees of THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY hereby constitute and appoint Edward J. Zore and John M. Bremer, or either of them, their true and lawful attorneys and agents to sign the names of the undersigned Trustees to (1) the registration statement or statements to be filed under the Securities Act of 1933 and to any instrument or document filed as part thereof or in connection therewith or in any way related thereto, and any and all amendments thereto in connection with variable contracts issued or sold by The Northwestern Mutual Life Insurance Company or any separate account credited therein and (2) the Form 10-K Annual Report or Reports of The Northwestern Mutual Life Insurance Company and/or its separate accounts for its or their fiscal year ended December 31, 2002 to be filed under the Securities Exchange Act of 1934 and to any instrument or document filed as part thereof or in connection therewith or in any way related thereto, and any and all amendments thereto. "Variable contracts" as used herein means any contracts providing for benefits or values which may vary according to the investment experience of any separate account maintained by The Northwestern Mutual Life Insurance Company, including variable annuity contracts and variable life insurance policies. Each of the undersigned hereby ratifies and confirms all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, each of the undersigned has subscribed these presents this 24th day of July, 2002. EDWARD E. BARR Trustee ---------------------------- Edward E. Barr JOHN M. BREMER Trustee ---------------------------- John M. Bremer PETER W. BRUCE Trustee ---------------------------- Peter W. Bruce ROBERT C. BUCHANAN Trustee ---------------------------- Robert C. Buchanan GEORGE A. DICKERMAN Trustee ---------------------------- George A. Dickerman PIERRE S. du PONT Trustee ---------------------------- Pierre S. du Pont JAMES D. ERICSON Trustee ---------------------------- James D. Ericson C-17 J. E. GALLEGOS Trustee ---------------------------- J. E. Gallegos STEPHEN N. GRAFF Trustee ---------------------------- Stephen N. Graff PATRICIA ALBJERG GRAHAM Trustee ---------------------------- Patricia Albjerg Graham JAMES P. HACKETT Trustee ---------------------------- James P. Hackett STEPHEN F. KELLER Trustee ---------------------------- Stephen F. Keller BARBARA A. KING Trustee ---------------------------- Barbara A. King J. THOMAS LEWIS Trustee ---------------------------- J. Thomas Lewis DANIEL F. McKEITHAN, JR. Trustee ---------------------------- Daniel F. McKeithan, Jr. H. MASON SIZEMORE, JR. Trustee ---------------------------- H. Mason Sizemore, Jr. HAROLD B. SMITH Trustee ---------------------------- Harold B. Smith SHERWOOD H. SMITH, JR. Trustee ---------------------------- Sherwood H. Smith, Jr. C-18 PETER M. SOMMERHAUSER Trustee ---------------------------- Peter M. Sommerhauser JOHN E. STEURI Trustee ---------------------------- John E. Steuri JOHN J. STOLLENWERK Trustee ---------------------------- John J. Stollenwerk BARRY L. WILLIAMS Trustee ---------------------------- Barry L. Williams KATHRYN D. WRISTON Trustee ---------------------------- Kathryn D. Wriston EDWARD J. ZORE Trustee ---------------------------- Edward J. Zore C-19 EXHIBIT INDEX EXHIBITS FILED WITH FORM N-6 POST-EFFECTIVE AMENDMENT NO. 9 TO REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 FOR NORTHWESTERN MUTUAL VARIABLE COMPLIFE Exhibit Number Exhibit Name - -------------- ------------ (a) Resolution of Board of Trustees of The Northwestern Mutual Life Insurance Company establishing the Account. Previously filed as Exhibit A(1) with the Registration Statement on Form S-6 for Northwestern Mutual Variable Life Account, File No. 333-36865, CIK 0000742277, dated October 1, 1997, and incorporated herein by reference. (b) Not Applicable. (c) Distribution Agreement between NML Equity Services, Inc. (now Northwestern Mutual Investment Services, LLC) and The Northwestern Mutual Life Insurance Company. Previously filed as Exhibit A(3)(a)with the Registration Statement on Form S-6 for Northwestern Mutual Variable Life Account, File No. 2-89972, dated March 12, 1984 - Attached hereto. (d) Form of each contract - The following exhibits were previously filed as Exhibits A(5)(a), A(5)(b), A(5)(c), and A(5)(d), respectively, with Post-Effective Amendment No. 7 to the Registration Statement on Form S-6 for Northwestern Mutual Variable Life Account, File No. 33-89188, CIK 0000742277, dated May 31, 2001, and are incorporated herein by reference: (1) Variable Whole Life Insurance Policy With Additional Protection, QQ.VCL, including Policy amendment (sex distinct) (2) Variable Whole Life Insurance Policy With Additional Protection, QQ.VCL,including Policy amendment (sex neutral for employers) (3) Forms of Optional Riders to Variable Whole Life Insurance Policy QQ.VCL: (i) Waiver of Premium Benefit (ii) Additional Purchase Benefit (4) Form of notice of short-term cancellation right (e) Amended Application forms included in Exhibits (d)(1) and (d)(2) above. Previously filed as Exhibit A(5)(e) with Post-Effective Amendment No. 7 to the Registration Statement on Form S-6 for Northwestern Mutual Variable Life Account, File No. 33-89188, CIK 0000742277, dated May 31, 2001, and incorporated herein by reference. (f) Articles of Incorporation of The Northwestern Mutual Life Insurance Company. Previously filed as Exhibit A(6)(a) with Post-Effective Amendment No. 18 to the Registration Statement on Form S-6 for Northwestern Mutual Variable Life Account, File No. 2-89972, CIK 0000742277, dated April 26, 1996, and incorporated herein by reference. (f) Amended By-Laws of The Northwestern Mutual Life Insurance Company dated January 28, 1998. Previously filed as Exhibit A(6)(b) with the Registration Statement on Form S-6 for Northwestern Mutual Variable Life Account, File No. 333-59103, CIK 0000742277, dated July 15, 1998, and incorporated herein by reference. (f) Amendment to By-Laws of The Northwestern Mutual Life Insurance Company dated December 4, 2002 - Attached hereto. (g) Form of Reinsurance Agreement - Attached hereto. (h)(1) Form of Participation Agreement Among Russell Insurance Funds, Russell Fund Distributors, Inc. and The Northwestern Mutual Life Insurance Company. Previously filed as Exhibit A(9)(a) with Post-Effective Amendment No. 4 to the Registration Statement on Form S-6 for Northwestern Mutual Variable Life Account, File No. 33-89188, CIK 0000742277, dated February 25, 1999, and incorporated herein by reference. (h)(2) Form of Participation Agreement among Variable Insurance Product Funds, Fidelity Distributors Corporation and The Northwestern Mutual Life Insurance Company - Attached hereto. (i) Not Applicable. (j) Agreement among the Account and its Co-Depositors. Previously filed as Exhibit A(8) with the Registration Statement on Form S-6 for Northwestern Mutual Variable Life Account, File No. 333-36865, CIK 0000742277, dated October 1, 1997, and incorporated herein by reference. (k) Opinion and Consent of John M. Bremer, Esq. Previously filed as Exhibit 99.2 with Pre-Effective Amendment No. 1 to the Registration Statement on Form S-6 for Northwestern Mutual Variable Life Account, File No. 33-89188, CIK 0000742277, dated September 29, 1995, and incorporated herein by reference. (l) Not Applicable. (m) Not Applicable. (n) Consent of PricewaterhouseCoopers LLP - Attached hereto. (o) Not Applicable. (p) Not Applicable. (q) Memorandum describing issuance, transfer and redemption procedures pursuant to Rule 6e-2(b)(12)(ii) and method of computing cash adjustment upon exercise of right to exchange for fixed-benefit insurance pursuant to Rule 6e-2(b)(13)(v)(B). Previously filed as Exhibit 1.A.(12) with the Registration Statement on Form S-6 for Northwestern Mutual Variable Life Account, File No. 33-89188, CIK 0000742277, dated February 8, 1995 - Attached hereto. EX-99.C 3 dex99c.txt DISTRIBUTION AGREEMENT Exhibit (c) AGREEMENT THIS AGREEMENT entered into this 13th day of February, 1984, by and between The Northwestern Mutual Life Insurance Company, a mutual life insurance company organized under the laws of the State of Wisconsin, having its principal office at 720 E. Wisconsin Avenue, Milwaukee, Wisconsin (the "Company") and NML Equity Services, Inc., a Wisconsin corporation, having its principal office at 720 E. Wisconsin Avenue, Milwaukee, Wisconsin (the "Broker"). WHEREAS, the Company is engaged in the issuance of life insurance policies and annuity contracts, including variable annuity contracts, pursuant to insurance laws in the District of Columbia and in all states of the United States through its licensed life insurance agents (including General Agents, District Agents, Field Directors, Special Agents, Soliciting Agents and Emeritus Agents) and desires to issue and sell variable life insurance policies (the "Policies") through all or some of the same persons; and WHEREAS the Policies may be deemed to be securities under the Securities Act of 1933, and the sale of such securities may be deemed to be through an instrumentality of interstate commerce within the meaning of Section 15(a) of the Securities Exchange Act of 1934 (the "Act"); and WHEREAS, the Broker is a wholly-owned subsidiary of NML Corporation, a wholly-owned subsidiary of the Company; is registered as a broker-dealer under Section 15(b) of the Act; and is a member of the National Association of Securities Dealers, Inc. ("NASD"); and WHEREAS, the Broker and the Company are partners to an Agreement dated October 3, 1968, pursuant to which the agents of the Company who are engaged in the sale of variable annuity contracts on behalf of the Company are associated persons of the Broker and the Broker is responsible for selecting, training and supervising the agents for the purpose; and WHEREAS, it is the desire of the parties hereto to enter into an agreement pursuant to which the agents of the Company who are to be involved in the sale of the Policies will also be associated persons of the Broker, which will be responsible for selecting, training, and supervising them for that purpose, all as more particularly described herein. NOW, THEREFORE, IT IS MUTUALLY AGREED AS FOLLOWS: 1. The Company will supply to the Broker the names of agents who indicate a willingness to sell the Policies. 2. The Broker will, after careful investigation, select the agents who are to be trained and qualified to make such sales, will train such agents in the sale of variable life insurance policies and will use its best efforts to qualify such agents under federal and state laws to engage in the sale of the Policies. Agents so trained and qualified ("Agents") will be persons associated with the Broker for purposes of Section 15(b) and other applicable provisions of the Act and applicable requirements of the NASD and, in addition to all other requirements for such qualification, will be required to comply with applicable examination requirements before being permitted to engage in the sale of the Policies. -2- 3. Upon qualification of an Agent under applicable federal and state laws, this fact will be certified in writing to the Company by the Broker. 4. Prior to permitting any Agent to sell the Policies, the Company, the Broker and the Agent will enter into a mutually satisfactory agreement pursuant to which the Agent will acknowledge that he will be an associated person of the Broker in connection with his selling activities related to the Policies, that such activities will be under the supervision and control of the Broker and the supervisor designated by the Broker, and that the Agent's right to continue to sell the Policies is subject to his continued compliance with such agreement and the rules and procedures established by the Broker. 5. The Broker will fully comply with the requirements of the NASD and of the Act and will establish and administer such rules and procedures as may be necessary to supervise diligently the securities activities of the Agents with respect to the Policies. Upon request by the Broker, the Company will furnish or require the Agents to furnish (at the Company's or the Agent's expense) such appropriate records as may be necessary to insure such diligent supervision. 6. In the event any Agent fails or refuses to submit to supervision of the Broker in accordance with this Contract, or otherwise fails to meet the rules and standards imposed by the Broker on its associated persons, the Broker shall certify such fact to the Company and shall immediately notify such Agent that he is no longer authorized to sell the Policies, and the Broker and the Company shall take whatever additional -3- action may be necessary to terminate the sales activities of such Agent relating to the Policies. 7. All or some of the General Agents of the Company are or will become qualified as associated persons of the Broker, will become fully qualified to engage in selling the Policies, and in that capacity will supervise the selling activities of Agents under agreement with them relating to the Policies. In the event any such General Agent shall fail or refuse to provide such supervision to the satisfaction of the Broker, the Broker (with the cooperation of the Company) shall furnish a qualified person to perform such supervision or, if the Broker is unable to furnish proper supervision, the authority of the unsupervised Agents to sell the Policies shall be withdrawn. 8. Commissions payable to Agents in connection with sales of the Policies shall be paid by the Company to the Agents through the General Agents or otherwise in the amounts and on such terms as the Company and the Broker shall determine; provided that such terms, conditions and commissions shall be as are set forth in, or as are not inconsistent with, a current prospectus for the Policies included as part of the Registration Statement for the Policies effective under the Securities Act of 1933. Nothing contained herein shall obligate the Broker to pay any commissions or other remuneration to the Agents or to reimburse any such Agents for expenses incurred by them, nor shall the Broker have any interest whatsoever in any commissions or other remuneration payable to Agents by the Company. However, commissions so paid by the Company shall be appropriately reflected in the books and records maintained by or on behalf of the Broker. -4- 9. The Broker will assume full responsibility for the sales activities of the Agents relating to the Policies and for compliance by itself and the Agents with applicable rules of the NASD and federal securities laws, and in connection therewith may demand and receive such assurances from the Company as it deems appropriate demonstrating compliance with the Securities Act of 1933 and the Investment Company Act of 1940. 10. The Broker may request that all or some of the books and records required to be maintained by it, as a registered broker-dealer, in connection with the sale of the Policies, be prepared and maintained by the Company as agent for the Broker. The Company agrees that such books and records are the property of the Broker, will be made and preserved in accordance with Rules 17a-3 and 17a-4 under the Act, and will be subject to examination by the Securities and Exchange Commission in accordance with Section 17(a) of the Act. 11. In payment of the services to be performed under this Agreement, the Company shall pay the Broker an annual fee based upon the Broker's actual expenses incurred in the performance of such services or reasonably and properly allocated thereto, as certified to the Company by the Broker or, at the option of the Company, by an independent public accounting firm selected by the Company. 12. This Agreement may not be assigned by either party except by mutual consent and shall continue for a period of one year and from year to year thereafter subject to termination by either party at any time upon 60 days written notice to the other party and to the Securities and -5- Exchange Commission, except that in the event the Broker shall cease to be a registered broker-dealer under the Act, this Agreement shall immediately terminate. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written. THE NORTHWESTERN MUTUAL LIFE ATTEST: INSURANCE COMPANY PETER W. BRUCE By: DONALD J. SCHUENKE - ----------------------------- ----------------------------- Peter W. Bruce, Secretary Donald J. Schuenke, President ATTEST: NML EQUITY SERVICES, INC. MERRILL C. LUNDBERG By: HAROLD E. BREWSTER - ----------------------------- ----------------------------- Merrill C. Lundberg, Harold E. Brewster, President Assistant Secretary -6- EX-99.F 4 dex99f.txt AMENDMENT TO THE BY-LAWS OF THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY Exhibit (f) AMENDMENT TO THE BY-LAWS ADOPTED BY THE BOARD OF TURSTEES OF THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY ON DECEMBER 4, 2002 RESOLVED, that pursuant to Section 11.1(b) of the By-Laws, Section 2.2 Composition is hereby amended by adding thereto subsection (d) to read in its entirety as follows: (d) Limits on Tenure. The Board may by resolution provide for limitations on the tenure in office of trustees. EX-99.G 5 dex99g.txt FORM OF REINSURANCE AGREEMENT Exhibit (g) SAMPLE SUBSTANDARD POOL REINSURANCE AGREEMENT Effective ---------------- Between THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY Milwaukee, Wisconsin and REINSURANCE COMPANY City, State This Agreement of yearly renewable term reinsurance is effective by and between The Northwestern Mutual Life Insurance - ------------------ Company, Milwaukee, Wisconsin ("NML") and Reinsurance Company ("Pool Reinsurer"). As between NML and Pool Reinsurer, this Agreement is referred to as the "Agreement." This Agreement is a pooling reinsurance arrangement whereby NML cedes risk to various reinsurers, including the Pool Reinsurer. The distribution of the pooling is set forth in Exhibit B. The term "Pool Reinsurers" refers to all of the reinsurers participating in the pool, including the Pool Reinsurer. NML and Pool Reinsurer agree as follows: 1. Automatic Yearly Renewable Term Reinsurance 1.1 NML shall retain no mortality risk on policies in the pool. NML agrees to cede and Pool Reinsurers agree to accept (as set forth in Exhibit B), on the terms and conditions set forth in this Agreement, equal shares of the risk specified in Exhibit A on qualifying policies evaluated within the classification range specified in Exhibit A, as subject to this Agreement. 1.2 NML policies qualify for automatic yearly renewable term reinsurance under this Agreement only if: 1.2.1 The proposed insured applies for single-life fixed or single-life variable insurance while this Agreement is in force and submits evidence of insurability appropriate for personal applications at his/her age and amount according to NML's usual underwriting requirements; 1.2.2 The proposed insured's insurance age is within the range specified in Exhibit A; 1.2.3 NML has not sought to improve its classification on the life of the proposed insured through facultative reinsurance at any time in the last five years; 1.2.4 The face amount of the application satisfies the Minimum Risk Amount requirements provided in Exhibit A; 1.2.5 The current application will not cause the aggregate amount of insurance in force in the pool to exceed the Maximum Risk Amount specified in Exhibit A; 1.2.6 The proposed insured is not a jumbo risk as defined in Exhibit A; 1 1.2.7 Applying NML's usual underwriting rules and standards, the classification of the proposed insured as of the application signed date satisfies the range specified in Exhibit A; and 1.2.8 The proposed insured resides in a locale acceptable to NML under its regular underwriting standards applicable to residents. 2. Inforce Substandard Policies on Qualifying Lives 2.1 Inforce single-life policies on the life of any insured newly qualifying for reinsurance under this Agreement that meet all of the qualifications of Section 1, are not otherwise reinsured, and would obtain a more favorable retail classification from the change will also be reinsured under this Agreement, effective as of their next monthly anniversary dates. The reinsurance premiums for such policies will be based upon the original policy date and issue age of the insured life. 2.2 NML shall have the authority to reinsure previously retained substandard policies under this Agreement upon their reinstatement if the life meets all of the qualifications of Section 1 of this Agreement. 3. Liability of Pool Reinsurer 3.1 The liability of each Pool Reinsurer shall begin and end simultaneously with that of NML except as otherwise expressly stated in this Agreement. 3.2 Each Pool Reinsurer shall establish and hold statutory reserves, including required deficiency reserves, at the level established by NML for its share of the risks reinsured. Any Pool Reinsurer not authorized to write reinsurance in all jurisdictions where NML operates will establish and maintain a letter of credit or other security acceptable to NML to allow NML to reflect its full statutory reserve credit in its statutory statements. 3.3 The reinsurance provided under this Agreement is indemnity reinsurance. No right or legal relation whatsoever exists between Pool Reinsurer and the insured, owner, or beneficiary of any insurance policy or contract of NML. Further, the participation of each Pool Reinsurer in this Agreement shall be separate and apart from the participation of all other Pool Reinsurers and shall not be joint with other Pool Reinsurers. 2 3.4 Whenever NML becomes liable for a death benefit under the provisions of a Conditional Life Insurance Agreement, as shown in Exhibit D, Pool Reinsurer will assume liability for its proportionate share of cumulative benefits up to $2 million, provided the insured qualifies for automatic reinsurance under this Agreement. 3.5 NML will provide Pool Reinsurer with notice of any change in NML's Conditional Life Insurance Agreement and the practices and procedures respecting the same. 3.6 Pool Reinsurer does not reinsure the Accidental Death or Waiver of Premium benefits and does not participate in policy loans, dividends, or surrender values. 4. Risk Amounts 4.1 NML shall retain no mortality risk on policies in the pool. Pool Reinsurers shall share equally in the net amount at risk so long as the policy is in force including by reinstatement and operation of a nonforfeiture option, except as otherwise expressly provided in Section 5, Section 6, Exhibit G, and as follows: 4.1.1 Contractual Increases. Pool Reinsurers shall assume increases in risk of reinsured policies arising through contractual provisions, including but not limited to, additional premium deposits, scheduled increases in coverage, and corridor risk amounts on variable insurance contracts. 4.1.2 Noncontractual Increases. NML shall have the authority to approve noncontractual increases in coverage to policies reinsured in the pool, subject to all of the provisions of Section 1 of this Agreement. 4.1.3 Reductions. If the face amount of a policy reinsured under this Agreement is reduced, the amount reinsured in the pool shall be reduced proportionately. Neither reduction nor termination of an NML policy other than a policy reinsured under this Agreement will affect the amount of reinsurance on a policy reinsured under this Agreement. 4.1.4 Conversions. Policies arising from conversions of term policies reinsured under this Agreement shall also be reinsured under this Agreement. The reinsurance pricing for such policies will be based upon the original policy date and issue age of the insured life. 3 4.1.5 Reinstatements. NML shall have sole authority to reinstate policies reinsured under this Agreement according to its usual reinstatement practices and procedures. When a policy reinsured under this Agreement is reinstated, reinsurance under this Agreement is reinstated concurrently. NML will pay all reinsurance premiums in arrears for that period for which NML receives premiums in arrears under the reinsured policy. 4.1.6 Reconsiderations. NML shall have the right to improve the classification of insureds under this Agreement only with respect to smoking habits. For this purpose, NML shall apply its normal smoker reconsideration rules. 4.1.7 Plan Changes. If a policy reinsured under this Agreement is changed to another single-life plan of insurance, the reinsurance shall continue from the original policy date. 5. Changes in Retention Limits 5.1 In the event NML changes its limits of retention, it will provide prompt written notice of the new retention limits and the effective date of the change. 6. Recapture 6.1 In the event NML increases its limits of retention for business eligible for this Agreement, it may recapture reinsurance under this Agreement as follows: 6.1.1 NML may reduce the reinsurance on all policies reinsured under this Agreement so long as its remaining proportionate retention is no more than its proportionate retention on otherwise similar new issues. 6.1.2 If NML elects to recapture reinsurance under Section 6, it must do so such that its total retention on the policy reinsured under this Agreement equals its new retention as indicated in Exhibit C after the increase in its limits of retention. Further, in the event of any such recapture, Pool Reinsurer shall continue to reinsure automatically the excess over NML's new retention following recapture, each Pool Reinsurer bearing risk in the same proportion to total reinsurance on the policy as it did immediately before recapture. 6.1.3 If NML elects to recapture reinsurance under Section 6, it must exercise its option by giving written notice of its election to all affected Pool Reinsurers within ninety (90) days of the effective date of any increase in its limits of retention. Such recapture will 4 become effective only on the later of the following: the anniversary date of the affected policy immediately following the notice of election, or the tenth anniversary of the policy. 7. Reinsurance Premiums 7.1 Reinsurance premiums for business reinsured under this Agreement shall be at the classification specified in Exhibit A, using the appropriate premium schedule shown in Exhibit E. 7.2 Flat extra premiums assessed on policies reinsured under this Agreement shall be coinsured. Pool Reinsurer will pay NML allowances. 7.3 With the exception of certain plans as determined by NML, reinsurance premiums for fixed dollar coverages shall be paid on an annual basis for all reinsured policies newly issued or experiencing anniversary processing dates within a calendar month. In the case of new issues, such premiums are due by the fifteenth (15) day of the month following the first month in which the policy is both issued and paid for. In the case of renewals, such premiums are due by the fifteenth (15) day of the month following the anniversary processing date of the policy. 7.4 For variable coverages and certain fixed-dollar plans (as determined by NML) reinsured under this Agreement, NML shall calculate and pay reinsurance premiums each month for each reinsured policy based on the net amount at risk as of the last working day of the month. Such premiums are due by the fifteenth (15) day of the following month. To offset Pool Reinsurer's loss of interest because reinsurance premiums are not paid annually in advance, the monthly premium shall be 8.63 percent of the otherwise applicable annual premium. 7.5 NML and Pool Reinsurer anticipate that the premium rates specified in Exhibits A and E for individual reinsured policies will remain in effect so long as those policies are reinsured under this Agreement. Pool Reinsurer guarantees to provide the coverage at rates no higher than the yearly renewable term net premium on the valuation mortality basis of the underlying policies. If Pool Reinsurer does increase the reinsurance premium rates, NML has the right to recapture the coverage immediately at no cost or penalty. 5 7.6 The payment of net reinsurance premiums due is a condition precedent to the continuing liability of the Pool Reinsurer under this Agreement. If any reinsurance premium is not paid when due, the Pool Reinsurer or Pool Reinsurers to which it is owed may terminate the corresponding reinsurance upon sixty (60) days prior written notice to NML. If all overdue premiums are paid within the notice period, the reinsurance will not terminate. 7.7 There shall be no experience refunds paid with respect to reinsurance effected under this Agreement. 8. Currency 8.1 All amounts reinsured under this Agreement and all payments by NML and Pool Reinsurer shall be in United States dollars. 9. Administration and Expenses 9.1 NML will self-administer all reinsurance provided under this Agreement by providing: (a) a monthly accounting statement indicating the net amount of reinsurance premium due; (b) a monthly policy exhibit indicating the amounts of reinsurance in force at the beginning and end of the month and the interim changes; (c) periodic electronic records of reinsured policies in force, as well as new issues, terminations, and other changes; and (d) periodic summaries and electronic records of statutory reserves on reinsured policies. 9.2 NML will furnish Pool Reinsurer with specimen copies of its application, policy and rider forms, and such tables of rates and values as are reasonably required for proper administration of the business reinsured under this Agreement. 9.3 NML shall bear the expense of all medical examinations, inspection fees, commissions, and other charges incurred in connection with the issuance and maintenance of its policies reinsured under this Agreement. 10. Claims 10.1 NML shall give Pool Reinsurer prompt notice of each claim submitted on a policy reinsured under this Agreement. Claim proofs accepted by NML will be deemed accepted by and binding upon Pool Reinsurer. In administering claims on policies reinsured under this Agreement, NML shall employ its customary practices and procedures. Pool Reinsurer will 6 abide by all claim payments and settlements of NML. Upon request, NML will give affected Pool Reinsurer copies of proofs and other documents bearing on a claim. 10.2 Each Pool Reinsurer shall pay its respective share of each claim (including interest, if any) in one lump sum, regardless of the method of settlement employed by NML under its reinsured policy. Pool Reinsurers' shares shall be due within twenty (20) days of receipt by the Pool Reinsurer of notification by NML that the claim has been settled. 10.3 Each Pool Reinsurer shall pay its respective share of such interest as is credited or paid by NML on the principal amount of a claim. 10.4 In the event of adjustment by NML in the amount of any claim due to misstatement of age or sex of the insured, reinsurance under this Agreement will be reinstituted as of the original policy date based upon the correct age and sex, and reinsurance premiums shall be adjusted retroactively to reflect the correct age and sex. Pool Reinsurers will then participate in the adjusted claim amount, each in the same share as it held before discovery of the misstatement. 10.5 In the event of misstatement of smoking habits, NML shall have sole authority to rescind the policy or to adjust the policy premium accordingly. In the event the policy premium is adjusted, reinsurance premiums shall be retroactively adjusted accordingly; and each Pool Reinsurer shall pay its respective share of the net settlement made by NML. In the event of rescission, NML shall recover from Pool Reinsurer all net reinsurance premiums on the policy rescinded. 10.6 NML and Pool Reinsurers shall bear, each Pool Reinsurer according to its share of the risk on the affected policy, related claims expenses incurred in connection with settling claims, including, by way of description only and not limited to, fees and expenses of third parties utilized by NML in connection with claims investigation and litigation (including litigation concerning policy rescission), but not including overhead expenses and compensation of NML's salaried officers and employees allocated to regular claim procedures, and not including expenses resulting from disputes over the entitlement of beneficiaries to proceeds NML admits are payable. NML may request each Pool Reinsurer to pay its share of expenses on a periodic basis before a case is finally resolved. 7 10.7 NML shall not be required to notify Pool Reinsurer of its intention to contest a claim or assert defenses to a claim under a policy reinsured under this Agreement. Pool Reinsurers shall pay their respective shares of the costs of any such contest or defense, including their shares of any costs of a rescission action, but Pool Reinsurers shall not be liable for any extra-contractual damages, exemplary, compensatory or punitive, awarded under statute or otherwise as a result of NML's actions. 11. Error and Oversight 11.1 If, through unintentional error, oversight, omission, or misunderstanding (collectively referred to as "errors"), Pool Reinsurer or NML fails to comply with the terms of this Agreement and if, upon discovery of the error by either party, the other is promptly notified, each will be restored to the position it would have occupied if the error had not occurred, including the effect of the time value of money, using the 13-week U.S. Treasury Bill rate or such other rate to which the parties may agree. 11.2 If it is not possible to restore each party to the position it would have occupied but for the error, the parties will endeavor in good faith to fashion a prompt resolution to the situation created by the error that is fair and reasonable and most closely approximates the intent of the parties as evidenced by this Agreement. However, Pool Reinsurer will not provide reinsurance for policies that do not satisfy the parameters of this Agreement. If either party discovers that NML has failed to cede reinsurance as provided in this Agreement, or failed to comply with its reporting requirements, Pool Reinsurer may require NML to audit its records for similar errors and to take the actions necessary to avoid similar errors in the future. 12. Offset 12.1 Any amount which either NML or any Pool Reinsurer is obligated to pay the other under this Agreement may be paid net of any amount then due and unpaid by the other under this or any other reinsurance agreement between them. 13. Inspection of Records 13.1 At any reasonable time during normal business hours and upon prior reasonable written notice, Pool Reinsurers, or any of them, may inspect, at their own expense, at 8 the Home Office of NML, all existing records of applications for policies reinsured under this Agreement and any and all records pertaining to reinsurance under this Agreement. 13.2 At any reasonable time during normal business hours and upon prior reasonable written notice, NML may inspect, at its own expense, at the Home Office of any one or more Pool Reinsurers, any and all records pertaining to reinsurance under this Agreement. 14. Insolvency of NML 14.1 In the event of the insolvency of NML, the reinsurance under this Agreement will be payable by Pool Reinsurer directly to NML or its liquidator, receiver or statutory successor, on the basis of the liability of NML under the policy or policies reinsured, without diminution because of the insolvency of NML. It is agreed, however, that the liquidator, receiver or statutory successor of the insolvent NML shall give written notice to each Pool Reinsurer of the pendency of a claim against the insolvent NML on a policy reinsured under this Agreement within a reasonable time after such claim is filed in the insolvency proceedings and that during the pendency of such claim Pool Reinsurers, or any of them, may investigate such claim and interpose, in the proceeding where such claim is to be adjudicated, any defense which they or it may deem available to NML or its liquidator, receiver or statutory successor. The expense thus incurred by Pool Reinsurer or any of them shall be chargeable, subject to court approval, against the insolvent NML as part of the expense of liquidation or receivership to the extent that any benefit accrues to the insolvent NML as a result of the defense undertaken by the Pool Reinsurers or any of them. 15. Arbitration 15.1 It is the intention of NML and each Pool Reinsurer that the customs and practices of the insurance and reinsurance industry shall be given full effect in the operation and interpretation of this Agreement. The parties agree to act in all things with the highest good faith; however, if NML and Pool Reinsurers, or any of them, cannot mutually resolve a dispute which arises out of, or relates to this Agreement, the dispute shall be decided through arbitration in accordance with the Arbitration Rules attached as Exhibit F. The parties agree that the threshold questions of whether an issue is arbitrable shall be decided by the arbitrators, not a court, and said question shall also be subject to the final and binding arbitration provisions set 9 forth in this Agreement. The arbitrators shall base their decision on the terms and conditions of this Agreement, and on applicable law, but may also refer, as necessary to decide the matter, to the course of dealings between the parties and the customs and practices of the insurance and reinsurance industries. 15.2 The decision of the arbitrators shall be final and binding on NML and the Pool Reinsurer(s) involved in the arbitration process. There shall be no appeal from the arbitrators' decision, except that any party to the arbitration may petition a court having jurisdiction over the parties and the subject matter to reduce the arbitrators' decision to judgment. 15.3 The parties intend this article to be enforceable in accordance with the Federal Arbitration Act (9 U.S.C. (S)(S) 1 et seq.), including amendments and successors to that Act. In the event that any party to a dispute refuses to submit to arbitration as required by Section 15.1, the other party to the dispute may request the United States District Court for the Eastern District of Wisconsin to compel arbitration in accordance with the Federal Arbitration Act. NML and Pool Reinsurer hereby consent to the jurisdiction of such court to enforce Section 15 and to confirm and enforce the performance of any arbitration award obtained hereunder. 15.4 Notwithstanding anything in this Agreement to the contrary, however, Pool Reinsurer may not require arbitration of a dispute under this Agreement if NML has been made the subject of delinquency proceedings under Chapter 645 of the Wisconsin Statutes. 16. Premium Taxes 16.1 Each Pool Reinsurer will reimburse NML for state premium taxes NML is required to pay on gross reinsurance premiums paid to the Pool Reinsurer. Premium tax reimbursement will be at NML's average premium tax rate and may be deducted from its periodic reinsurance premium payments or reimbursed on an annual basis. In the latter case, it is NML's responsibility to notify each Pool Reinsurer of the amount of its liability for premium taxes paid by NML and to request reimbursement within six months of the close of the calendar year to which the taxes apply. 17. Changes in Circumstances of Pool Reinsurer 17.1 In view of the importance of financially sound reinsurers to the financial security of NML's policyholders, NML and Pool Reinsurer agree to the information, security, 10 transfer of risk, and other provisions set forth in attached Exhibit G, Changes in Circumstances of Pool Reinsurer. 18. Choice of Law 18.1 This Agreement shall be construed in accordance with and shall be governed by the laws of the State of Wisconsin, without giving effect to the choice-of-law principles of such state. 19. Assignment and Transfer 19.1 This Agreement may not be assigned or transferred by NML without the prior written consent of Pool Reinsurer; and this Agreement, any rights or duties under this Agreement, or any reinsurance under this Agreement may not be sold, assigned, or transferred in any manner by any Pool Reinsurer without the prior written consent of NML. Included among the transfers prohibited by this provision are bulk transfers of the reinsurance under this Agreement without NML's prior consent, but this provision shall not be interpreted to prohibit retrocessions made in the ordinary course of business by Pool Reinsurer. 20. Publication Prohibited 20.1 Pool Reinsurers shall not publish (whether orally or in writing) or otherwise use their reinsurance relationships with NML in connection with their direct insurance operations, if any; provided, however, that Pool Reinsurers may disclose their reinsurance relationships with NML, and facts pertinent thereto, to regulatory authorities and in material filed with regulatory authorities as required by law. 21. Severability 21.1 If any provision of this Agreement is found by a court of competent jurisdiction to violate any applicable law, statute, or regulation, such provision shall be deemed void and unenforceable. However, the parties shall abide by the remainder of this Agreement in accordance with its terms. 21.2 If the operation of any provision of Exhibit G of this Agreement is determined, by any regulatory authority having jurisdiction, to foreclose NML from taking credit on its annual statement for reinsurance ceded under this Agreement, NML may at its election 11 declare such provision to be null and void as to one or more Pool Reinsurers, whereupon it shall be so, the parties to abide by the remainder of this Agreement in accordance with its terms. 22. Execution, Duration, and Termination of Agreement 22.1 This Reinsurance Pool Agreement may be executed in counterparts, each of which shall be deemed an original but all of which shall together constitute one and the same instrument. 22.2 This Agreement shall be of unlimited duration. It may be amended at any time as to all parties upon written agreement of all parties; it may be amended at any time as to NML and any Pool Reinsurer upon written agreement, signed by NML and the Pool Reinsurer. In addition to termination afforded by Exhibit G, this Agreement may be terminated as to any one or more Pool Reinsurers, for purposes of new business only, upon one hundred twenty (120) days prior written notice to NML, by each terminating Pool Reinsurer; and it may be terminated by NML as to any one or more Pool Reinsurers, upon ninety (90) days prior written notice to the affected Pool Reinsurer(s). In any case of termination under this Section 22.2, however, the terminating or terminated Pool Reinsurer shall continue to accept reinsurance during the notice period, and shall remain liable on all existing reinsurance effected under this Agreement, in accordance with this Agreement, until such existing reinsurance under this Agreement ceases. 23. DAC Tax. 23.1 NML and Pool Reinsurer each represents and warrants that it is subject to taxation under subchapter L or subpart F of part III of subchapter N of Chapter 1 of the Internal Revenue Code of 1986, as amended (the "Code"). 23.2 NML and Pool Reinsurer (for purposes of this section each, singularly, a "party" and collectively, the "parties") agree and elect as follows pursuant to Section 1.848-2 (g)(8) of the Income Tax Regulations issued December 29, 1992 under Section 848 of the Code ("Regulations"): 23.2.1 The party with a positive net consideration for the Agreement for each taxable year will capitalize specified policy acquisition expenses with respect to the Agreement without regard to the general deductions limitation of Section 848 (c)(1) of the Code. 12 23.2.2 For purposes of this section, "consideration" shall be determined in accordance with Section 1.848-2(f) of the Regulations. 23.2.3 The parties agree to exchange information pertaining to the amount of net consideration under the Agreement to effect this election and to ensure consistency in the computation of net consideration. 23.2.4 NML will submit a Schedule to Pool Reinsurer by April 1 of each year of its calculation of the net consideration under the Agreement for the preceding calendar year. Pool Reinsurer may contest the calculation of net consideration by submitting an alternative to NML in writing within sixty (60) days of receipt of the Schedule. If Pool Reinsurer does not do so, the amounts shown on the Schedule shall be presumed, conclusively, to be correct. If Pool Reinsurer does contest the calculation of net consideration, the parties will act in good faith to reach an agreement as to the correct amount within thirty (30) days of submission by Pool Reinsurer, of this alternative calculation. Each party shall then report the amount agreed upon on its respective tax return for the preceding calendar year. 23.2.5 This election shall be effective for all taxable years for which the Agreement remains in effect. 24. Entire Agreement 24.1 This Agreement, including the Exhibits, constitutes the entire agreement between NML and Pool Reinsurer with respect to the business that is the subject of this Agreement, and there are no understandings between the parties with respect to the business reinsured under this Agreement, other than as expressed in this Agreement. 24.2 The parties have negotiated this Agreement and agree that it should not be construed against either party as the drafter of this Agreement. This Agreement is executed in duplicate by NML and Pool Reinsurer by their respective officers duly authorized to do so on the date below. THE NORTHWESTERN MUTUAL REINSURANCE COMPANY LIFE INSURANCE COMPANY By: By: ---------------------------- ------------------------------ 13 Title: Title: ------------------------ -------------------------- Attest: Attest: By: By: -------------------------- ---------------------------- Title: Ass Title: --------------------- -------------------------- Date Signed: Date Signed: ------------------- --------------------- 14 Exhibit A Qualifications for the Pool [This Exhibit sets forth the parameters for the policies reinsured by this pool.] Exhibit B Allocation of Reinsurance [This Exhibit defines the portion of each risk that is ceded to each reinsurer.] Exhibit C NORTHWESTERN MUTUAL RETENTION LIMITS [This Exhibit sets forth NML's retention limits.] Exhibit D Conditional Life Insurance Agreement [Exhibit D consists of a sample of Northwestern Mutual's current Conditional Life Insurance Agreement.] Exhibit E Reinsurance Premium Rates [This Exhibit sets forth the reinsurance premium rates.] EXHIBIT F ARBITRATION RULES To initiate arbitration, either NML or a Pool Reinsurer engaged in the dispute shall notify the other in writing of its desire to arbitrate, stating the nature of the dispute and the remedy sought. The party to whom the notice is sent shall respond to the notification in writing within ten (10) business days of its receipt. The arbitration hearing shall be before a panel of three arbitrators, each of whom must be a current or former officer of a life insurance or life reinsurance company domiciled in North America. NML, as one party, and the Pool Reinsurer or Pool Reinsurers engaged in dispute, collectively, as the other party, shall each name three (3) candidates to serve as arbitrator. No candidate so named may be a present officer, attorney, or consultant of NML or any Pool Reinsurer, or any of their affiliates, and if any candidate so named is a former officer, attorney, or consultant of NML or any Pool Reinsurer, or any of their affiliates, that fact and the dates of service and titles held in such capacity shall be disclosed and, upon the objection of the other party, such candidate shall be removed from the list of the party naming such candidate and replaced with another candidate within two business days. After formulation of the lists in this fashion, the two parties shall each choose one candidate from the other's list and these two candidates shall serve as the first two arbitrators. If one or more candidates so chosen shall decline to serve as an arbitrator, the party who named such candidate shall add an additional candidate to its list, subject to the limitations stated above, and the other party shall again choose one candidate from the list. This process shall continue until two arbitrators have been chosen and have accepted. The parties shall each present their initial lists of three (3) candidates by written notification to the other within twenty-five (25) business days of the date of the mailing of the notification initiating the arbitration. Any subsequent additions to the list which are required (except for replacements upon objection to a former officer, attorney or consultant which shall be made within two (2) business days as indicated above) shall be presented within ten (10) business days of the date the naming party receives notice that a chosen candidate has declined to serve. If either party refuses or neglects to present its initial list of arbitrators within the twenty-five (25) business days allotted, or to make any subsequent additions to the list within the time allotted, the other party may appoint both arbitrators. The two arbitrators shall then select the third arbitrator from the four (4) candidates remaining on the lists of the parties within fourteen (14) days of the acceptance of their positions as arbitrators. If the two arbitrators cannot agree on the choice of the third, then this choice shall be referred back to the parties. The parties shall take turns striking the name of one of the remaining candidates from the initial six (6) candidates until only one candidate remains. If the candidate so chosen shall decline to serve as the third arbitrator, the candidate whose name was stricken last shall be nominated as the third arbitrator. This process shall continue until a candidate has been chosen and has accepted. This candidate shall serve as the third arbitrator. The first turn at striking the name of a candidate shall belong to the party that is initiating the arbitration. Once chosen, the arbitrators are empowered to decide all substantive and procedural issues by a majority of votes. It is agreed that each of the three arbitrators should be impartial regarding the dispute and should resolve the dispute on the basis set forth in the Agreement. Therefore, at no time will NML or any Pool Reinsurer contact or otherwise communicate with any person who has been designated as a candidate to serve as an arbitrator concerning the dispute. Likewise, any written or oral arguments provided to the arbitrators concerning the dispute shall be provided simultaneously to the other party or shall take place in the presence of the other party. The arbitration hearing shall be held in Milwaukee, Wisconsin, or such other place as is agreed to by the parties, on the date fixed by the arbitrators. In no event shall this date be later than six (6) months after the appointment of the third arbitrator. As soon as possible, the arbitrators shall establish pre-arbitration procedures as warranted by the facts and issues of the particular case. At least ten (10) business days prior to the arbitration hearing, each party shall provide the other party and the arbitrators with a detailed statement of the facts and arguments it will present at the arbitration hearing. The arbitrators may consider any relevant evidence; they shall give the evidence such weight as they deem it entitled to after consideration of any objections raised concerning it. The party initiating the arbitration shall have the burden of proving its case by a preponderance of the evidence. Each party may examine any witnesses who testify at the arbitration hearing. Within twenty (20) business days after the end of the arbitration hearing, the arbitrators shall issue a written decision. In their decision the arbitrators shall apportion the costs of arbitration, which shall include, but not be limited to, their own fees and expenses, as they deem appropriate. EXHIBIT G Changes in Circumstances of Pool Reinsurers [This Exhibit sets forth detailed financial parameters for NML's reinsurers.] EX-99.H.2 6 dex99h2.txt FORM OF PARTICIPATION AGREEMENT EXHIBIT (h)(2) PARTICIPATION AGREEMENT Among VARIABLE INSURANCE PRODUCTS FUNDS, FIDELITY DISTRIBUTORS CORPORATION and THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY THIS AGREEMENT, made and entered into as of the day of , ----- ----- 2003 by and among THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY, (hereinafter the "Company"), a Wisconsin corporation, on its own behalf and on behalf of each segregated asset account of the Company set forth on Schedule A hereto as may be amended from time to time (each such account hereinafter referred to as the "Account"); and FIDELITY DISTRIBUTORS CORPORATION (hereinafter the "Underwriter"), a Massachusetts corporation; and each of VARIABLE INSURANCE PRODUCTS FUND, VARIABLE INSURANCE PRODUCTS FUND II and VARIABLE INSURANCE PRODUCTS FUND III, each an unincorporated business trust organized under the laws of the Commonwealth of Massachusetts (each referred to hereinafter as the "Fund"). RECITALS WHEREAS, each Fund engages in business as an open-end management investment company and is available to act as the investment vehicle for separate accounts established for variable life insurance policies and variable annuity contracts (collectively, the "Variable Insurance Products") to be offered by insurance companies which have entered into participation agreements with the Fund and the Underwriter (hereinafter "Participating Insurance Companies"); and WHEREAS, the beneficial interest in each Fund is divided into several series of shares, each representing the interest in a particular managed portfolio of securities and other assets, any one or more of which may be made available under this Agreement, as may be amended from time to time by mutual agreement of the parties hereto (each such series hereinafter referred to as a "Portfolio"); and WHEREAS, each Fund has obtained an order from the Securities and Exchange Commission, dated October 15, 1985 (File No. 812-6102) or September 17, 1986 (File No. 812-6422), granting Participating Insurance Companies and variable annuity and variable life 1 insurance separate accounts exemptions from the provisions of sections 9(a), 13(a), 15(a), and 15(b) of the Investment Company Act of 1940, as amended, (hereinafter the "1940 Act") and Rules 6e-2(b) (15) and 6e-3(T) (b) (15) thereunder, to the extent necessary to permit shares of the Fund to be sold to and held by variable annuity and variable life insurance separate accounts of both affiliated and unaffiliated life insurance companies (hereinafter the "Shared Funding Exemptive Order"); and WHEREAS, each Fund is registered as an open-end management investment company under the 1940 Act and its shares are registered under the Securities Act of 1933, as amended (hereinafter the "1933 Act"); and WHEREAS, Fidelity Management & Research Company (the "Adviser") is duly registered as an investment adviser under the federal Investment Advisers Act of 1940 and any applicable state securities law; and WHEREAS, the variable life insurance and/or variable annuity products identified on Schedule A hereto ("Contracts") have been or will be registered by the Company under the 1933 Act, unless such Contracts are exempt from registration thereunder; and WHEREAS, each Account is a duly organized, validly existing segregated asset account, established by resolution of the Board of Directors of the Company, on the date shown for such Account on Schedule A hereto, to set aside and invest assets attributable to the aforesaid Contracts; and WHEREAS, the Company has registered or will register each Account as a unit investment trust under the 1940 Act, unless such Account is exempt from registration thereunder; and WHEREAS, the Underwriter is registered as a broker dealer with the Securities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934, as amended, (hereinafter the "1934 Act"), and is a member in good standing of the National Association of Securities Dealers, Inc. (hereinafter "NASD"); and WHEREAS, to the extent permitted by applicable insurance laws and regulations, the Company intends to purchase shares in the Portfolios on behalf of each Account to fund certain of the aforesaid Contracts and the Underwriter is authorized to sell such shares to each Account at net asset value; 2 AGREEMENT NOW, THEREFORE, in consideration of their mutual promises, the Company, the Underwriter and each Fund agree as follows: ARTICLE A. Form of Agreement Although the parties have executed this Agreement in the form of a Master Participation Agreement for administrative convenience, this Agreement shall create a separate participation agreement for each Fund, as though the Company and the Distributor had executed a separate, identical form of participation agreement with each Fund. No rights, responsibilities or liabilities of any Fund shall be attributed to any other Fund. ARTICLE I. Sale of Fund Shares 1.1. The Underwriter agrees to sell to the Company those shares of the Fund which each Account orders, executing such orders on a daily basis at the net asset value next computed after receipt by the Fund or its designee of the order for the shares of the Fund. For purposes of this Section 1.1, the Company shall be the designee of the Fund for receipt of such orders from each Account and receipt by such designee shall constitute receipt by the Fund; provided that the Fund receives notice of such order by 9:00 a.m. Boston time on the next following Business Day. Beginning within three months of the effective date of this Agreement, the Company agrees that all order for the purchase and redemption of Fund shares on behalf of the Accounts will be placed by the Company with the Funds or their transfer agent by electronic transmission. "Business Day" shall mean any day on which the New York Stock Exchange is open for trading and on which the Fund calculates its net asset value pursuant to the rules of the Securities and Exchange Commission. 1.2. The Fund agrees to make its shares available indefinitely for purchase at the applicable net asset value per share by the Company and its Accounts on those days on which the Fund calculates its net asset value pursuant to rules of the Securities and Exchange Commission and the Fund shall use reasonable efforts to calculate such net asset value on each day which the New York Stock Exchange is open for trading. Notwithstanding the foregoing, the Board of Trustees of the Fund (hereinafter the "Board") may refuse to sell shares of any Portfolio to any person, or suspend or terminate the offering of shares of any Portfolio if such action is required by law or by regulatory authorities having jurisdiction or is, in the sole discretion of the Board acting in good faith and in light of their fiduciary duties under federal and any applicable state laws, necessary in the best interests of the shareholders of such Portfolio. 1.3. The Fund and the Underwriter agree that shares of the Fund will be sold only to Participating Insurance Companies and their separate accounts. No shares of any Portfolio will be sold to the general public. 1.4. The Fund and the Underwriter will not sell Fund shares to any insurance company or separate account unless an agreement containing provisions substantially the same as Articles I, III, V, VII and Section 2.5 of Article II of this Agreement is in effect to govern such sales. 3 1.5. The Fund agrees to redeem for cash, on the Company's request, any full or fractional shares of the Fund held by the Company, executing such requests on a daily basis at the net asset value next computed after receipt by the Fund or its designee of the request for redemption. For purposes of this Section 1.5, the Company shall be the designee of the Fund for receipt of requests for redemption from each Account and receipt by such designee shall constitute receipt by the Fund; provided that the Fund receives notice of such request for redemption on the next following Business Day. 1.6. The Company agrees that purchases and redemptions of Portfolio shares offered by the then current prospectus of the Fund shall be made in accordance with the provisions of such prospectus. The Company agrees that all net amounts available under the Contracts shall be invested in the Fund, in such other Funds advised by the Adviser as may be mutually agreed to in writing by the parties hereto, or in the Company's general account, provided that such amounts may also be invested in an investment company other than the Fund if (a) such other investment company, or series thereof, has investment objectives or policies that are substantially different from the investment objectives and policies of all the Portfolios of the Fund; or (b) the Company gives the Fund and the Underwriter 45 days written notice of its intention to make such other investment company available as a funding vehicle for the Contracts; or (c) such other investment company was available as a funding vehicle for the Contracts prior to the date of this Agreement and the Company so informs the Fund and Underwriter prior to their signing this Agreement (a list of such funds appearing on Schedule C to this Agreement); or (d) the Fund or Underwriter consents to the use of such other investment company. 1.7. The Company shall pay for Fund shares on the next Business Day after an order to purchase Fund shares is made in accordance with the provisions of Section 1.1 hereof. Payment shall be in federal funds transmitted by wire. For purpose of Section 2.10 and 2.11, upon receipt by the Fund of the federal funds so wired, such funds shall cease to be the responsibility of the Company and shall become the responsibility of the Fund. 1.8. Issuance and transfer of the Fund's shares will be by book entry only. Stock certificates will not be issued to the Company or any Account. Shares ordered from the Fund will be recorded in an appropriate title for each Account or the appropriate subaccount of each Account. 1.9. The Fund shall furnish same day notice (by wire or telephone, followed by written confirmation) to the Company of any income, dividends or capital gain distributions payable on the Fund's shares. The Company hereby elects to receive all such income dividends and capital gain distributions as are payable on the Portfolio shares in additional shares of that Portfolio. The Company reserves the right to revoke this election and to receive all such income dividends and capital gain distributions in cash. The Fund shall notify the Company of the number of shares so issued as payment of such dividends and distributions. 1.10. The Fund shall make the net asset value per share for each Portfolio available to the Company on a daily basis as soon as reasonably practical after the net asset value per share is calculated (normally by 6:30 p.m. Boston time) and shall use its best efforts to make such net asset value per share available by 7 p.m. Boston time. 4 ARTICLE II. Representations and Warranties 2.1. The Company represents and warrants that the Contracts are or will be registered under the 1933 Act or are exempt from registration thereunder; that the Contracts will be issued and sold in compliance in all material respects with all applicable Federal and State laws and that the sale of the Contracts shall comply in all material respects with state insurance suitability requirements. The Company further represents and warrants that it is an insurance company duly organized and in good standing under applicable law and that it has legally and validly established each Account prior to any issuance or sale thereof as a segregated asset account under Section of the --- Wisconsin Insurance Code and that each Account is either registered or exempt from registration as a unit investment trust in accordance with the provisions of the 1940 Act to serve as a segregated investment account for the Contracts. 2.2. The Fund represents and warrants that Fund shares sold pursuant to this Agreement shall be registered under the 1933 Act, duly authorized for issuance and sold in compliance with the laws of the State of Wisconsin and all applicable federal and state securities laws and that the Fund is and shall remain registered under the 1940 Act. The Fund shall amend the Registration Statement for its shares under the 1933 Act and the 1940 Act from time to time as required in order to effect the continuous offering of its shares. The Fund shall register and qualify the shares for sale in accordance with the laws of the various states only if and to the extent deemed advisable by the Fund or the Underwriter. 2.3. The Fund represents that it is currently qualified as a Regulated Investment Company under Subchapter M of the Internal Revenue Code of 1986, as amended, (the "Code") and that it will make every effort to maintain such qualification (under Subchapter M or any successor or similar provision) and that it will notify the Company immediately upon having a reasonable basis for believing that it has ceased to so qualify or that it might not so qualify in the future. 2.4. The Company represents that the Contracts are currently treated as endowment, life insurance or annuity insurance contracts, under applicable provisions of the Code and that it will make every effort to maintain such treatment and that it will notify the Fund and the Underwriter immediately upon having a reasonable basis for believing that the Contracts have ceased to be so treated or that they might not be so treated in the future. 2.5. (a) With respect to Initial Class shares, the Fund currently does not intend to make any payments to finance distribution expenses pursuant to Rule 12b-1 under the 1940 Act or otherwise, although it may make such payments in the future. The Fund has adopted a "no fee" or "defensive" Rule 12b-1 Plan under which it makes no payments for distribution expenses. To the extent that it decides to finance distribution expenses pursuant to Rule 12b-1, the Fund undertakes to have a board of trustees, a majority of whom are not interested persons of the Fund, formulate and approve any plan under Rule 12b-1 to finance distribution expenses. (b) With respect to Service Class shares and Service Class 2 shares, the Fund has adopted Rule 12b-1 Plans under which it makes payments to finance distribution expenses. The Fund represents and warrants that it has a board of trustees, a majority of whom are not 5 interested persons of the Fund, which has formulated and approved each of its Rule 12b-1 Plans to finance distribution expenses of the Fund and that any changes to the Fund's Rule 12b-1 Plans will be approved by a similarly constituted board of trustees. 2.6. The Fund makes no representation as to whether any aspect of its operations (including, but not limited to, fees and expenses and investment policies) complies with the insurance laws or regulations of the various states except that the Fund represents that the Fund's investment policies, fees and expenses are and shall at all times remain in compliance with the laws of the State of Wisconsin and the Fund and the Underwriter represent that their respective operations are and shall at all times remain in material compliance with the laws of the State of Wisconsin to the extent required to perform this Agreement. 2.7. The Underwriter represents and warrants that it is a member in good standing of the NASD and is registered as a broker-dealer with the SEC. The Underwriter further represents that it will sell and distribute the Fund shares in accordance with the laws of the Commonwealth of Massachusetts and all applicable state and federal securities laws, including without limitation the 1933 Act, the 1934 Act, and the 1940 Act. 2.8. The Fund represents that it is lawfully organized and validly existing under the laws of the Commonwealth of Massachusetts and that it does and will comply in all material respects with the 1940 Act. 2.9. The Underwriter represents and warrants that the Adviser is and shall remain duly registered in all material respects under all applicable federal and state securities laws and that the Adviser shall perform its obligations for the Fund in compliance in all material respects with the laws of the Commonwealth of Massachusetts and any applicable state and federal securities laws. 2.10. The Fund and Underwriter represent and warrant that all of their directors, officers, employees, investment advisers, and other individuals/entities dealing with the money and/or securities of the Fund are and shall continue to be at all times covered by a blanket fidelity bond or similar coverage for the benefit of the Fund in an amount not less than the minimal coverage as required currently by Rule 17g-(1) of the 1940 Act or related provisions as may be promulgated from time to time. The aforesaid Bond shall include coverage for larceny and embezzlement and shall be issued by a reputable bonding company. 2.11. The Company represents and warrants that all of its directors, officers, employees, investment advisers, and other individuals/entities dealing with the money and/or securities of the Fund are covered by a blanket fidelity bond or similar coverage for the benefit of the Fund, and that said bond is issued by a reputable bonding company, includes coverage for larceny and embezzlement, and is in an amount not less than $5 million. The Company agrees to make all reasonable efforts to see that this bond or another bond containing these provisions is always in effect, and agrees to notify the Fund and the Underwriter in the event that such coverage no longer applies. ARTICLE III. Prospectuses and Proxy Statements; Voting 6 3.1. The Underwriter shall provide the Company with as many printed copies of the Fund's current prospectus and Statement of Additional Information as the Company may reasonably request. If requested by the Company in lieu thereof, the Fund shall provide camera-ready film containing the Fund's prospectus and Statement of Additional Information, and such other assistance as is reasonably necessary in order for the Company once each year (or more frequently if the prospectus and/or Statement of Additional Information for the Fund is amended during the year) to have the prospectus, private offering memorandum or other disclosure document ("Disclosure Document") for the Contracts and the Fund's prospectus printed together in one document, and to have the Statement of Additional Information for the Fund and the Statement of Additional Information for the Contracts printed together in one document. Alternatively, the Company may print the Fund's prospectus and/or its Statement of Additional Information in combination with other fund companies' prospectuses and statements of additional information. Except as provided in the following three sentences, all expenses of printing and distributing Fund prospectuses and Statements of Additional Information shall be the expense of the Company. For prospectuses and Statements of Additional Information provided by the Company to its existing owners of Contracts in order to update disclosure annually as required by the 1933 Act and/or the 1940 Act, the cost of printing shall be borne by the Fund. If the Company chooses to receive camera-ready film in lieu of receiving printed copies of the Fund's prospectus, the Fund will reimburse the Company in an amount equal to the product of A and B where A is the number of such prospectuses distributed to owners of the Contracts, and B is the Fund's per unit cost of typesetting and printing the Fund's prospectus. The same procedures shall be followed with respect to the Fund's Statement of Additional Information. The Company agrees to provide the Fund or its designee with such information as may be reasonably requested by the Fund to assure that the Fund's expenses do not include the cost of printing any prospectuses or Statements of Additional Information other than those actually distributed to existing owners of the Contracts. 3.2. The Fund's prospectus shall state that the Statement of Additional Information for the Fund is available from the Underwriter or the Company (or in the Fund's discretion, the Prospectus shall state that such Statement is available from the Fund). 3.3. The Fund, at its expense, shall provide the Company with copies of its proxy statements, reports to shareholders, and other communications (except for prospectuses and Statements of Additional Information, which are covered in Section 3.1) to shareholders in such quantity as the Company shall reasonably require for distributing to Contract owners. 3.4. If and to the extent required by law the Company shall: (i) solicit voting instructions from Contract owners; (ii) vote the Fund shares in accordance with instructions received from Contract owners; and (iii) vote Fund shares for which no instructions have been received in a particular separate account in the same proportion as Fund shares of such portfolio for which instructions have been received in that separate account, so long as and to the extent that the Securities and Exchange Commission continues to interpret the 1940 Act to require pass-through voting privileges for variable contract owners. The 7 Company reserves the right to vote Fund shares held in any segregated asset account in its own right, to the extent permitted by law. Participating Insurance Companies shall be responsible for assuring that each of their separate accounts participating in the Fund calculates voting privileges in a manner consistent with the standards set forth on Schedule B attached hereto and incorporated herein by this reference, which standards will also be provided to the other Participating Insurance Companies. 3.5. The Fund will comply with all provisions of the 1940 Act requiring voting by shareholders, and in particular the Fund will either provide for annual meetings or comply with Section 16(c) of the 1940 Act (although the Fund is not one of the trusts described in Section 16(c) of that Act) as well as with Sections 16(a) and, if and when applicable, 16(b). Further, the Fund will act in accordance with the Securities and Exchange Commission's interpretation of the requirements of Section 16(a) with respect to periodic elections of trustees and with whatever rules the Commission may promulgate with respect thereto. ARTICLE IV. Sales Material and Information 4.1. The Company shall furnish, or shall cause to be furnished, to the Fund or its designee, each piece of sales literature or other promotional material in which the Fund or its investment adviser or the Underwriter is named, at least fifteen Business Days prior to its use. No such material shall be used if the Fund or its designee reasonably objects to such use within fifteen Business Days after receipt of such material. 4.2. The Company shall not give any information or make any representations or statements on behalf of the Fund or concerning the Fund in connection with the sale of the Contracts other than the information or representations contained in the registration statement or prospectus for the Fund shares, as such registration statement and prospectus may be amended or supplemented from time to time, or in reports or proxy statements for the Fund, or in sales literature or other promotional material approved by the Fund or its designee or by the Underwriter, except with the permission of the Fund or the Underwriter or the designee of either. 4.3. The Fund, Underwriter, or its designee shall furnish, or shall cause to be furnished, to the Company or its designee, each piece of sales literature or other promotional material in which the Company and/or its separate account(s), is named at least fifteen Business Days prior to its use. No such material shall be used if the Company or its designee reasonably objects to such use within fifteen Business Days after receipt of such material. 4.4. The Fund and the Underwriter shall not give any information or make any representations on behalf of the Company or concerning the Company, each Account, or the Contracts other than the information or representations contained in a registration statement or Disclosure Document for the Contracts, as such registration statement or Disclosure Document may be amended or supplemented from time to time, or in published reports for each Account which are in the public domain or approved by the Company for distribution to Contract owners, or in sales literature or other promotional material approved by the Company or its designee, except with the permission of the Company. 8 4.5. The Fund will provide to the Company at least one complete copy of all registration statements, prospectuses, Statements of Additional Information, reports, proxy statements, sales literature and other promotional materials, applications for exemptions, requests for no-action letters, and all amendments to any of the above, that relate to the Fund or its shares, contemporaneously with the filing of such document with the Securities and Exchange Commission or other regulatory authorities. 4.6. The Company will provide to the Fund at least one complete copy of all registration statements, Disclosure Documents, Statements of Additional Information, reports, solicitations for voting instructions, sales literature and other promotional materials, applications for exemptions, requests for no action letters, and all amendments to any of the above, that relate to the Contracts or each Account, contemporaneously with the filing of such document with the SEC or other regulatory authorities or, if a Contract and its associated Account are exempt from registration, at the time such documents are first published. 4.7. For purposes of this Article IV, the phrase "sales literature or other promotional material" includes, but is not limited to, any of the following that refer to the Fund or any affiliate of the Fund: advertisements (such as material published, or designed for use in, a newspaper, magazine, or other periodical, radio, television, telephone or tape recording, videotape display, signs or billboards, motion pictures, or other public media), sales literature (i.e., any written communication distributed or made generally available to customers or the public, including brochures, circulars, research reports, market letters, form letters, seminar texts, reprints or excerpts of any other advertisement, sales literature, or published article), educational or training materials or other communications distributed or made generally available to some or all agents or employees, and registration statements, Disclosure Documents, Statements of Additional Information, shareholder reports, and proxy materials. ARTICLE V. Fees and Expenses 5.1. The Fund and Underwriter shall pay no fee or other compensation to the Company under this agreement, except that if the Fund or any Portfolio adopts and implements a plan pursuant to Rule 12b-1 to finance distribution expenses, then the Underwriter may make payments to the Company or to the underwriter for the Contracts if and in amounts agreed to by the Underwriter in writing and such payments will be made out of existing fees otherwise payable to the Underwriter, past profits of the Underwriter or other resources available to the Underwriter. No such payments shall be made directly by the Fund. 5.2. All expenses incident to performance by the Fund under this Agreement shall be paid by the Fund. The Fund shall see to it that all its shares are registered and authorized for issuance in accordance with applicable federal law and, if and to the extent deemed advisable by the Fund, in accordance with applicable state laws prior to their sale. The Fund shall bear the expenses for the cost of registration and qualification of the Fund's shares, preparation and filing of the Fund's prospectus and registration statement, proxy materials and reports, setting the prospectus in type, setting in type and printing the proxy materials and reports to shareholders (including the costs of printing a prospectus that constitutes an annual report), the preparation of all statements and notices required by any federal or state law, and all taxes on the issuance or transfer of the Fund's shares. 9 5.3. The Company shall bear the expenses of distributing the Fund's prospectus and reports to owners of Contracts issued by the Company. The Fund shall bear the costs of soliciting Fund proxies from Contract owners, including the costs of mailing proxy materials and tabulating proxy voting instructions, not to exceed the costs charged by any service provider engaged by the Fund for this purpose. The Fund and the Underwriter shall not be responsible for the costs of any proxy solicitations other than proxies sponsored by the Fund. ARTICLE VI. Diversification 6.1. The Fund will at all times invest money from the Contracts in such a manner as to ensure that the Contracts will be treated as variable contracts under the Code and the regulations issued thereunder. Without limiting the scope of the foregoing, the Fund will at all times comply with Section 817(h) of the Code and Treasury Regulation 1.817-5, relating to the diversification requirements for variable annuity, endowment, or life insurance contracts and any amendments or other modifications to such Section or Regulations. In the event of a breach of this Article VI by the Fund, it will take all reasonable steps (a) to notify Company of such breach and (b) to adequately diversify the Fund so as to achieve compliance within the grace period afforded by Regulation 1.817-5. ARTICLE VII. Potential Conflicts 7.1. The Board will monitor the Fund for the existence of any material irreconcilable conflict between the interests of the contract owners of all separate accounts investing in the Fund. An irreconcilable material conflict may arise for a variety of reasons, including: (a) an action by any state insurance regulatory authority; (b) a change in applicable federal or state insurance, tax, or securities laws or regulations, or a public ruling, private letter ruling, no-action or interpretative letter, or any similar action by insurance, tax, or securities regulatory authorities; (c) an administrative or judicial decision in any relevant proceeding; (d) the manner in which the investments of any Portfolio are being managed; (e) a difference in voting instructions given by variable annuity contract and variable life insurance contract owners; or (f) a decision by an insurer to disregard the voting instructions of contract owners. The Board shall promptly inform the Company if it determines that an irreconcilable material conflict exists and the implications thereof. 7.2. The Company will report any potential or existing conflicts of which it is aware to the Board. The Company will assist the Board in carrying out its responsibilities under the Shared Funding Exemptive Order, by providing the Board with all information reasonably necessary for the Board to consider any issues raised. This includes, but is not limited to, an obligation by the Company to inform the Board whenever contract owner voting instructions are disregarded. 7.3. If it is determined by a majority of the Board, or a majority of its disinterested trustees, that a material irreconcilable conflict exists, the Company and other Participating Insurance Companies shall, at their expense and to the extent reasonably practicable (as determined by a majority of the disinterested trustees), take whatever steps are necessary to 10 remedy or eliminate the irreconcilable material conflict, up to and including: (1), withdrawing the assets allocable to some or all of the separate accounts from the Fund or any Portfolio and reinvesting such assets in a different investment medium, including (but not limited to) another Portfolio of the Fund, or submitting the question whether such segregation should be implemented to a vote of all affected Contract owners and, as appropriate, segregating the assets of any appropriate group (i.e., annuity contract owners, life insurance contract owners, or variable contract owners of one or more Participating Insurance Companies) that votes in favor of such segregation, or offering to the affected contract owners the option of making such a change; and (2), establishing a new registered management investment company or managed separate account. 7.4. If a material irreconcilable conflict arises because of a decision by the Company to disregard contract owner voting instructions and that decision represents a minority position or would preclude a majority vote, the Company may be required, at the Fund's election, to withdraw the affected Account's investment in the Fund and terminate this Agreement with respect to such Account; provided, however that such withdrawal and termination shall be limited to the extent required by the foregoing material irreconcilable conflict as determined by a majority of the disinterested members of the Board. Any such withdrawal and termination must take place within six (6) months after the Fund gives written notice that this provision is being implemented, and until the end of that six month period the Underwriter and Fund shall continue to accept and implement orders by the Company for the purchase (and redemption) of shares of the Fund. 7.5. If a material irreconcilable conflict arises because a particular state insurance regulator's decision applicable to the Company conflicts with the majority of other state regulators, then the Company will withdraw the affected Account's investment in the Fund and terminate this Agreement with respect to such Account within six months after the Board informs the Company in writing that it has determined that such decision has created an irreconcilable material conflict; provided, however, that such withdrawal and termination shall be limited to the extent required by the foregoing material irreconcilable conflict as determined by a majority of the disinterested members of the Board. Until the end of the foregoing six month period, the Underwriter and Fund shall continue to accept and implement orders by the Company for the purchase (and redemption) of shares of the Fund. 7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a majority of the disinterested members of the Board shall determine whether any proposed action adequately remedies any irreconcilable material conflict, but in no event will the Fund be required to establish a new funding medium for the Contracts. The Company shall not be required by Section 7.3 to establish a new funding medium for the Contracts if an offer to do so has been declined by vote of a majority of Contract owners materially adversely affected by the irreconcilable material conflict. In the event that the Board determines that any proposed action does not adequately remedy any irreconcilable material conflict, then the Company will withdraw the Account's investment in the Fund and terminate this Agreement within six (6) months after the Board informs the Company in writing of the foregoing determination, provided, however, that such withdrawal and termination shall be limited to the extent required by any such material irreconcilable conflict as determined by a majority of the disinterested members of the Board. 11 7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the Act or the rules promulgated thereunder with respect to mixed or shared funding (as defined in the Shared Funding Exemptive Order) on terms and conditions materially different from those contained in the Shared Funding Exemptive Order, then (a) the Fund and/or the Participating Insurance Companies, as appropriate, shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable; and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement shall continue in effect only to the extent that terms and conditions substantially identical to such Sections are contained in such Rule(s) as so amended or adopted. ARTICLE VIII. Indemnification 8.1. Indemnification By The Company 8.1(a). The Company agrees to indemnify and hold harmless the Fund and each trustee of the Board and officers and each person, if any, who controls the Fund within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this Section 8.1) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of the Company) or litigation (including legal and other expenses), to which the Indemnified Parties may become subject under any statute, regulation, at common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements are related to the sale or acquisition of, or investment in, the Fund's shares or the Contracts and: (i) arise out of or are based upon any untrue statements or alleged untrue statements of any material fact contained in the Disclosure Documents for the Contracts or contained in the Contracts or sales literature for the Contracts (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, provided that this agreement to indemnify shall not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished to the Company by or on behalf of the Fund for use in any Disclosure Document relating to the Contracts or in the Contracts or sales literature (or any amendment or supplement) or otherwise for use in connection with the sale of the Contracts or Fund shares; or (ii) arise out of or as a result of statements or representations (other than statements or representations contained in the registration statement, prospectus or sales literature of the Fund not supplied by the Company, or persons under its control) or wrongful conduct of the Company or persons under its control, with respect to the sale or distribution of the Contracts or Fund Shares; or (iii) arise out of any untrue statement or alleged untrue statement of a material fact contained in a Registration Statement, prospectus, or sales literature of the 12 Fund or any amendment thereof or supplement thereto or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading if such a statement or omission was made in reliance upon and in conformity with information furnished to the Fund by or on behalf of the Company; or (iv) arise as a result of any failure by the Company to provide the services and furnish the materials under the terms of this Agreement; or (v) arise out of or result from any material breach of any representation and/or warranty made by the Company in this Agreement or arise out of or result from any other material breach of this Agreement by the Company, as limited by and in accordance with the provisions of Sections 8.1(b) and 8.1(c) hereof. 8.1(b). The Company shall not be liable under this indemnification provision with respect to any losses, claims, damages, liabilities or litigation incurred or assessed against an Indemnified Party as such may arise from such Indemnified Party's willful misfeasance, bad faith, or gross negligence in the performance of such Indemnified Party's duties or by reason of such Indemnified Party's reckless disregard of obligations or duties under this Agreement or to the Fund, whichever is applicable. 8.1(c). The Company shall not be liable under this indemnification provision with respect to any claim made against an Indemnified Party unless such Indemnified Party shall have notified the Company in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon such Indemnified Party (or after such Indemnified Party shall have received notice of such service on any designated agent), but failure to notify the Company of any such claim shall not relieve the Company from any liability which it may have to the Indemnified Party against whom such action is brought otherwise than on account of this indemnification provision. In case any such action is brought against the Indemnified Parties, the Company shall be entitled to participate, at its own expense, in the defense of such action. The Company also shall be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action. After notice from the Company to such party of the Company's election to assume the defense thereof, the Indemnified Party shall bear the fees and expenses of any additional counsel retained by it, and the Company will not be liable to such party under this Agreement for any legal or other expenses subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation. 8.1(d). The Indemnified Parties will promptly notify the Company of the commencement of any litigation or proceedings against them in connection with the issuance or sale of the Fund Shares or the Contracts or the operation of the Fund. 8.2. Indemnification by the Underwriter 8.2(a). The Underwriter agrees to indemnify and hold harmless the Company and each of its directors and officers and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of 13 this Section 8.2) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of the Underwriter) or litigation (including legal and other expenses) to which the Indemnified Parties may become subject under any statute, at common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements are related to the sale or acquisition of, or investment in, the Fund's shares or the Contracts and: (i) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the registration statement or prospectus or sales literature of the Fund (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, provided that this agreement to indemnify shall not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished to the Underwriter or Fund by or on behalf of the Company for use in the registration statement or prospectus for the Fund or in sales literature (or any amendment or supplement) or otherwise for use in connection with the sale of the Contracts or Fund shares; or (ii) arise out of or as a result of statements or representations (other than statements or representations contained in the Registration Statement, prospectus or sales literature for the Contracts not supplied by the Underwriter or persons under its control) or wrongful conduct of the Fund, Adviser or Underwriter or persons under their control, with respect to the sale or distribution of the Contracts or Fund shares; or (iii) arise out of any untrue statement or alleged untrue statement of a material fact contained in a Registration Statement, prospectus, or sales literature of the Fund or any amendment thereof or supplement thereto or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading if such a statement or omission was made in reliance upon and in conformity with information furnished to the Fund by or on behalf of the Company; or (iv) arise as a result of any failure by the Fund to provide the services and furnish the materials under the terms of this Agreement (including a failure, whether unintentional or in good faith or otherwise, to comply with the diversification requirements specified in Article VI of this Agreement); or (v) arise out of or result from any material breach of any representation and/or warranty made by the Underwriter in this Agreement or arise out of or result from any other material breach of this Agreement by the Underwriter; 14 as limited by and in accordance with the provisions of Sections 8.2(b) and 8.2(c) hereof. 8.2(b). The Underwriter shall not be liable under this indemnification provision with respect to any losses, claims, damages, liabilities or litigation to which an Indemnified Party would otherwise be subject by reason of such Indemnified Party's willful misfeasance, bad faith, or gross negligence in the performance of such Indemnified Party's duties or by reason of such Indemnified Party's reckless disregard of obligations and duties under this Agreement or to each Company or the Account, whichever is applicable. 8.2(c). The Underwriter shall not be liable under this indemnification provision with respect to any claim made against an Indemnified Party unless such Indemnified Party shall have notified the Underwriter in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon such Indemnified Party (or after such Indemnified Party shall have received notice of such service on any designated agent), but failure to notify the Underwriter of any such claim shall not relieve the Underwriter from any liability which it may have to the Indemnified Party against whom such action is brought otherwise than on account of this indemnification provision. In case any such action is brought against the Indemnified Parties, the Underwriter will be entitled to participate, at its own expense, in the defense thereof. The Underwriter also shall be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action. After notice from the Underwriter to such party of the Underwriter's election to assume the defense thereof, the Indemnified Party shall bear the fees and expenses of any additional counsel retained by it, and the Underwriter will not be liable to such party under this Agreement for any legal or other expenses subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation. 8.2(d). The Company agrees promptly to notify the Underwriter of the commencement of any litigation or proceedings against it or any of its officers or directors in connection with the issuance or sale of the Contracts or the operation of each Account. 8.3. Indemnification By the Fund 8.3(a). The Fund agrees to indemnify and hold harmless the Company, and each of its directors and officers and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this Section 8.3) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of the Fund) or litigation (including legal and other expenses) to which the Indemnified Parties may become subject under any statute, at common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements result from the gross negligence, bad faith or willful misconduct of the Board or any member thereof, are related to the operations of the Fund and: (i) arise as a result of any failure by the Fund to provide the services and furnish the materials under the terms of this Agreement (including a failure to comply with the diversification requirements specified in Article VI of this Agreement);or 15 (ii) arise out of or result from any material breach of any representation and/or warranty made by the Fund in this Agreement or arise out of or result from any other material breach of this Agreement by the Fund; as limited by and in accordance with the provisions of Sections 8.3(b) and 8.3(c) hereof. 8.3(b). The Fund shall not be liable under this indemnification provision with respect to any losses, claims, damages, liabilities or litigation incurred or assessed against an Indemnified Party as such may arise from such Indemnified Party's willful misfeasance, bad faith, or gross negligence in the performance of such Indemnified Party's duties or by reason of such Indemnified Party's reckless disregard of obligations and duties under this Agreement or to the Company, the Fund, the Underwriter or each Account, whichever is applicable. 8.3(c). The Fund shall not be liable under this indemnification provision with respect to any claim made against an Indemnified Party unless such Indemnified Party shall have notified the Fund in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon such Indemnified Party (or after such Indemnified Party shall have received notice of such service on any designated agent), but failure to notify the Fund of any such claim shall not relieve the Fund from any liability which it may have to the Indemnified Party against whom such action is brought otherwise than on account of this indemnification provision. In case any such action is brought against the Indemnified Parties, the Fund will be entitled to participate, at its own expense, in the defense thereof. The Fund also shall be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action. After notice from the Fund to such party of the Fund's election to assume the defense thereof, the Indemnified Party shall bear the fees and expenses of any additional counsel retained by it, and the Fund will not be liable to such party under this Agreement for any legal or other expenses subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation. 8.3(d). The Company and the Underwriter agree promptly to notify the Fund of the commencement of any litigation or proceedings against it or any of its respective officers or directors in connection with this Agreement, the issuance or sale of the Contracts, with respect to the operation of either Account, or the sale or acquisition of shares of the Fund. ARTICLE IX. Applicable Law 9.1. This Agreement shall be construed and the provisions hereof interpreted under and in accordance with the laws of the Commonwealth of Massachusetts. 9.2. This Agreement shall be subject to the provisions of the 1933, 1934 and 1940 acts, and the rules and regulations and rulings thereunder, including such exemptions from those statutes, rules and regulations as the Securities and Exchange Commission may grant (including, but not limited to, the Shared Funding Exemptive Order) and the terms hereof shall be interpreted and construed in accordance therewith. ARTICLE X. Termination 16 10.1. This Agreement shall continue in full force and effect until the first to occur of: (a) termination by any party for any reason by sixty (60) days advance written notice delivered to the other parties; or (b) termination by the Company by written notice to the Fund and the Underwriter with respect to any Portfolio based upon the Company's determination that shares of such Portfolio are not reasonably available to meet the requirements of the Contracts; or (c) termination by the Company by written notice to the Fund and the Underwriter with respect to any Portfolio in the event any of the Portfolio's shares are not registered, issued or sold in accordance with applicable state and/or federal law or such law precludes the use of such shares as the underlying investment media of the Contracts issued or to be issued by the Company; or (d) termination by the Company by written notice to the Fund and the Underwriter with respect to any Portfolio in the event that such Portfolio ceases to qualify as a Regulated Investment Company under Subchapter M of the Code or under any successor or similar provision, or if the Company reasonably believes that the Fund may fail to so qualify; or (e) termination by the Company by written notice to the Fund and the Underwriter with respect to any Portfolio in the event that such Portfolio fails to meet the diversification requirements specified in Article VI hereof; or (f) termination by either the Fund or the Underwriter by written notice to the Company, if either one or both of the Fund or the Underwriter respectively, shall determine, in their sole judgment exercised in good faith, that the Company and/or its affiliated companies has suffered a material adverse change in its business, operations, financial condition or prospects since the date of this Agreement or is the subject of material adverse publicity; or (g) termination by the Company by written notice to the Fund and the Underwriter, if the Company shall determine, in its sole judgment exercised in good faith, that either the Fund or the Underwriter has suffered a material adverse change in its business, operations, financial condition or prospects since the date of this Agreement or is the subject of material adverse publicity; or (h) termination by the Fund or the Underwriter by written notice to the Company, if the Company gives the Fund and the Underwriter the written notice specified in Section 1.6(b) hereof and at the time such notice was given there was no notice of termination outstanding under any other provision of this Agreement; provided, however any termination under this Section 10.1(h) shall be effective forty five (45) days after the notice specified in Section 1.6(b) was given. 17 10.2. Notwithstanding any termination of this Agreement, the Fund and the Underwriter shall at the option of the Company, continue to make available additional shares of the Fund pursuant to the terms and conditions of this Agreement, for all Contracts in effect on the effective date of termination of this Agreement (hereinafter referred to as "Existing Contracts"). Specifically, without limitation, the owners of the Existing Contracts shall be permitted to reallocate investments in the Fund, redeem investments in the Fund and/or invest in the Fund upon the making of additional purchase payments under the Existing Contracts. The parties agree that this Section 10.2 shall not apply to any terminations under Article VII and the effect of such Article VII terminations shall be governed by Article VII of this Agreement. 10.3. The provisions of Articles II (Representations and Warranties), VIII (Indemnification), IX (Applicable Law) and XII (Miscellaneous) shall survive termination of this Agreement. In addition, all other applicable provisions of this Agreement shall survive termination as long as shares of the Fund are held on behalf of Contract owners in accordance with section 10.2, except that the Fund and Underwriter shall have no further obligation to make Fund shares available in Contracts issued after termination. 10.4. The Company shall not redeem Fund shares attributable to the Contracts (as opposed to Fund shares attributable to the Company's assets held in the Account) except (i) as necessary to implement Contract Owner initiated or approved transactions, or (ii) as required by state and/or federal laws or regulations or judicial or other legal precedent of general application (hereinafter referred to as a "Legally Required Redemption") or (iii) as permitted by an order of the SEC pursuant to Section 26(b) of the 1940 Act. Upon request, the Company will promptly furnish to the Fund and the Underwriter the opinion of counsel for the Company (which counsel shall be reasonably satisfactory to the Fund and the Underwriter) to the effect that any redemption pursuant to clause (ii) above is a Legally Required Redemption. Furthermore, except in cases where permitted under the terms of the Contracts, the Company shall not prevent Contract Owners from allocating payments to a Portfolio that was otherwise available under the Contracts without first giving the Fund or the Underwriter 90 days notice of its intention to do so. ARTICLE XI. Notices Any notice shall be sufficiently given when sent by registered or certified mail to the other party at the address of such party set forth below or at such other address as such party may from time to time specify in writing to the other party. If to the Fund: 82 Devonshire Street Boston, Massachusetts 02109 Attention: Treasurer If to the Company: The Northwestern Mutual Life Insurance Company 720 East Wisconsin Ave Milwaukee, WI 53202 Attention: Jeff S. Zanella 18 If to the Underwriter: 82 Devonshire Street Boston, Massachusetts 02109 Attention: Treasurer ARTICLE XII. Miscellaneous 12.1 All persons dealing with the Fund must look solely to the property of the Fund for the enforcement of any claims against the Fund as neither the Board, officers, agents or shareholders assume any personal liability for obligations entered into on behalf of the Fund. 12.2 Subject to the requirements of legal process and regulatory authority, each party hereto shall treat as confidential the names and addresses of the owners of the Contracts and all information reasonably identified as confidential in writing by any other party hereto and, except as permitted by this Agreement, shall not disclose, disseminate or utilize such names and addresses and other confidential information until such time as it may come into the public domain without the express written consent of the affected party. 12.3 The captions in this Agreement are included for convenience of reference only and in no way define or delineate any of the provisions hereof or otherwise affect their construction or effect. 12.4 This Agreement may be executed simultaneously in two or more counterparts, each of which taken together shall constitute one and the same instrument. 12.5 If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of the Agreement shall not be affected thereby. 12.6 Each party hereto shall cooperate with each other party and all appropriate governmental authorities (including without limitation the SEC, the NASD and state insurance regulators) and shall permit such authorities reasonable access to its books and records in connection with any investigation or inquiry relating to this Agreement or the transactions contemplated hereby. Notwithstanding the generality of the foregoing, each party hereto further agrees to furnish the California Insurance Commissioner with any information or reports in connection with services provided under this Agreement which such Commissioner may request in order to ascertain whether the insurance operations of the Company are being conducted in a manner consistent with the California Insurance Regulations and any other applicable law or regulations. 12.7 The rights, remedies and obligations contained in this Agreement are cumulative and are in addition to any and all rights, remedies and obligations, at law or in equity, which the parties hereto are entitled to under state and federal laws. 12.8. This Agreement or any of the rights and obligations hereunder may not be assigned by any party without the prior written consent of all parties hereto; provided, however, that the Underwriter may assign this Agreement or any rights or obligations hereunder to any 19 affiliate of or company under common control with the Underwriter, if such assignee is duly licensed and registered to perform the obligations of the Underwriter under this Agreement. The Company shall promptly notify the Fund and the Underwriter of any change in control of the Company. 12.9. The Company shall furnish, or shall cause to be furnished, to the Fund or its designee copies of the following reports: (a) the Company's annual statement (prepared under statutory accounting principles) and annual report (prepared under generally accepted accounting principles ("GAAP"), if any), as soon as practical and in any event within 90 days after the end of each fiscal year; (b) the Company's quarterly statements (statutory) (and GAAP, if any), as soon as practical and in any event within 45 days after the end of each quarterly period: (c) any financial statement, proxy statement, notice or report of the Company sent to stockholders and/or policyholders, as soon as practical after the delivery thereof to stockholders; (d) any registration statement (without exhibits) and financial reports of the Company filed with the Securities and Exchange Commission or any state insurance regulator, as soon as practical after the filing thereof; (e) any other report submitted to the Company by independent accountants in connection with any annual, interim or special audit made by them of the books of the Company, as soon as practical after the receipt thereof. 20 IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed in its name and on its behalf by its duly authorized representative. THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY By: ------------------------- Name: ------------------------- Its: ------------------------- VARIABLE INSURANCE PRODUCTS FUND, VARIABLE INSURANCE PRODUCTS FUND II, and VARIABLE INSURANCE PRODUCTS FUND III By: ------------------------- Name: Maria Dwyer Their:Treasurer FIDELITY DISTRIBUTORS CORPORATION By: ------------------------- Name: Don Holborn Its: Executive Vice President 21 Schedule A Separate Accounts and Associated Contracts
- --------------------------------------------------------------------------------------------------------------- Separate Account Name; Date Established by Board of Directors Contract Form No. Product Name - --------------------------------------------------------------------------------------------------------------- Name Northwestern Mutual Variable Life RR. VLJ. (1298) RR series Variable Joint Life Account - --------------------------------------------- Date 11/23/1983 - --------------------------------------------------------------------------------------------------------------- RR. VEL. (0398) RR Series Variable Executive Life - --------------------------------------------- - --------------------------------------------------------------------------------------------------------------- QQ. VCL QQ Series Variable CompLife - --------------------------------------------- - --------------------------------------------------------------------------------------------------------------- MM 15 MM Series Variable Whole Life - --------------------------------------------- - --------------------------------------------------------------------------------------------------------------- MM 16 MM Series Variable Single Premium Life - --------------------------------------------- - --------------------------------------------------------------------------------------------------------------- MM 17 MM Series Variable Extraordinary Life - --------------------------------------------- - --------------------------------------------------------------------------------------------------------------- Name NML Variable Annuity Account A and NML RR.V.B.BK. (032000), RR Series VAs Variable Annuity Account B RR.V.A.BK. (032000), - --------------------------------------------- RR.V.B.FR (032000), Date 2/14/1968 RR. V. A. FR (032000), RR.V.B.MS NST (032000) - --------------------------------------------------------------------------------------------------------------- QQV.ACCT.AQQV.AC. QQ Series VAs CT.B - --------------------------------------------------------------------------------------------------------------- MM V 1A MM Series VAs - --------------------------------------------- MM V 1B MM V 1 - --------------------------------------------------------------------------------------------------------------- LL V 1A LL V 1B LL V LL Series VAs - --------------------------------------------- 1 - --------------------------------------------------------------------------------------------------------------- KK V 1A KK V 1B KK KK Series VAs - --------------------------------------------- V 1 - --------------------------------------------------------------------------------------------------------------- JJ V 1A JJ V 1B JJ Series VAs - --------------------------------------------- - --------------------------------------------------------------------------------------------------------------- Name NML Variable Annuity Account C NPV. 1C NN Series GPA - --------------------------------------------------------------------------------------------------------------- Date 7/22/1970 - --------------------------------------------------------------------------------------------------------------- MP V 1C MM Series GPA - --------------------------------------------- - ---------------------------------------------------------------------------------------------------------------
1 Schedule A (continued) Separate Accounts and Associated Contracts
- --------------------------------------------------------------------------------------------------------------- Separate Account Name; Date Established by Board of Directors Contract Form No. Product Name - --------------------------------------------------------------------------------------------------------------- Name NML Variable Annuity Account C LL V 1C LL Series GPA (continued) - --------------------------------------------- Date 7/22/1970 - --------------------------------------------------------------------------------------------------------------- KK V 1C KK Series GPA - --------------------------------------------- - --------------------------------------------------------------------------------------------------------------- JJ V 1C JJ Series GPA - --------------------------------------------- - ---------------------------------------------------------------------------------------------------------------
2 SCHEDULE B PROXY VOTING PROCEDURE The following is a list of procedures and corresponding responsibilities for the handling of proxies relating to the Fund by the Underwriter, the Fund and the Company. The defined terms herein shall have the meanings assigned in the Participation Agreement except that the term "Company" shall also include the department or third party assigned by the Insurance Company to perform the steps delineated below. 1. The number of proxy proposals is given to the Company by the Underwriter as early as possible before the date set by the Fund for the shareholder meeting to facilitate the establishment of tabulation procedures. At this time the Underwriter will inform the Company of the Record, Mailing and Meeting dates. This will be done verbally approximately two months before meeting. 2. Promptly after the Record Date, the Company will perform a "tape run", or other activity, which will generate the names, addresses and number of units which are attributed to each contractowner/policyholder (the "Customer") as of the Record Date. Allowance should be made for account adjustments made after this date that could affect the status of the Customers' accounts as of the Record Date. Note: The number of proxy statements is determined by the activities described in Step #2. The Company will use its best efforts to call in the number of Customers to Fidelity, as soon as possible, but no later than two weeks after the Record Date. 3. The Fund's Annual Report no longer needs to be sent to each Customer by the Company either before or together with the Customers' receipt of a proxy statement. Underwriter will provide the last Annual Report to the Company pursuant to the terms of Section 3.3 of the Agreement to which this Schedule relates. 4. The text and format for the Voting Instruction Cards ("Cards" or "Card") is provided to the Company by the Fund. The Company, at its expense, shall produce and personalize the Voting Instruction Cards. The Legal Department of the Underwriter or its affiliate ("Fidelity Legal") must approve the Card before it is printed. Allow approximately 2-4 business days for printing information on the Cards. Information commonly found on the Cards includes: a. name (legal name as found on account registration) b. address c. Fund or account number d. coding to state number of units e. individual Card number for use in tracking and verification of votes (already on Cards as printed by the Fund) (This and related steps may occur later in the chronological process due to possible uncertainties relating to the proposals.) 3 5. During this time, Fidelity Legal will develop, produce, and the Fund will pay for the Notice of Proxy and the Proxy Statement (one document). Printed and folded notices and statements will be sent to Company for insertion into envelopes (envelopes and return envelopes are provided and paid for by the Insurance Company). Contents of envelope sent to Customers by Company will include: a. Voting Instruction Card(s) b. One proxy notice and statement (one document) c. return envelope (postage pre-paid by Company) addressed to the Company or its tabulation agent d. "urge buckslip" - optional, but recommended. (This is a small, single sheet of paper that requests Customers to vote as quickly as possible and that their vote is important. One copy will be supplied by the Fund.) e. cover letter - optional, supplied by Company and reviewed and approved in advance by Fidelity Legal. 6. The above contents should be received by the Company approximately 3-5 business days before mail date. Individual in charge at Company reviews and approves the contents of the mailing package to ensure correctness and completeness. Copy of this approval sent to Fidelity Legal. 7. Package mailed by the Company. * The Fund must allow at least a 15-day solicitation time to the Company as the shareowner. (A 5-week period is recommended.) Solicitation time is calculated as calendar days from (but not including) the meeting, counting backwards. 8. Collection and tabulation of Cards begins. Tabulation usually takes place in another department or another vendor depending on process used. An often used procedure is to sort Cards on arrival by proposal into vote categories of all yes, no, or mixed replies, and to begin data entry. Note: Postmarks are not generally needed. A need for postmark information would be due to an insurance company's internal procedure and has not been required by Fidelity in the past. 9. Signatures on Card checked against legal name on account registration which was printed on the Card. Note: For Example, If the account registration is under "Bertram C. Jones, Trustee," then that is the exact legal name to be printed on the Card and is the signature needed on the Card. 4 10. If Cards are mutilated, or for any reason are illegible or are not signed properly, they are sent back to Customer with an explanatory letter, a new Card and return envelope. The mutilated or illegible Card is disregarded and considered to be not received for purposes of vote tabulation. Any Cards that have "kicked out" (e.g. mutilated, illegible) of the procedure are "hand verified," i.e., examined as to why they did not complete the system. Any questions on those Cards are usually remedied individually. 11. There are various control procedures used to ensure proper tabulation of votes and accuracy of that tabulation. The most prevalent is to sort the Cards as they first arrive into categories depending upon their vote; an estimate of how the vote is progressing may then be calculated. If the initial estimates and the actual vote do not coincide, then an internal audit of that vote should occur. This may entail a recount. 12. The actual tabulation of votes is done in units which is then converted to shares. (It is very important that the Fund receives the tabulations stated in terms of a percentage and the number of shares.) Fidelity Legal must review and approve tabulation format. 13. Final tabulation in shares is verbally given by the Company to Fidelity Legal on the morning of the meeting not later than 10:00 a.m. Boston time. Fidelity Legal may request an earlier deadline if required to calculate the vote in time for the meeting. 14. A Certification of Mailing and Authorization to Vote Shares will be required from the Company as well as an original copy of the final vote. Fidelity Legal will provide a standard form for each Certification. 15. The Company will be required to box and archive the Cards received from the Customers. In the event that any vote is challenged or if otherwise necessary for legal, regulatory, or accounting purposes, Fidelity Legal will be permitted reasonable access to such Cards. 16. All approvals and "signing-off" may be done orally, but must always be followed up in writing. 5 SCHEDULE C Other investment companies currently available under variable annuities or variable life insurance issued by the Company: 6 SUB-LICENSE AGREEMENT Agreement effective as of this th of , 2003, by and between -- ------- Fidelity Distributors Corporation (hereinafter called "Fidelity"), a corporation organized and existing under the laws of the Commonwealth of Massachusetts, with a principal place of business at 82 Devonshire Street, Boston, Massachusetts, and The Northwestern Mutual Life Insurance Company (hereinafter called "Company"), a company organized and existing under the laws of the State of WI, with a principal place of business at 720 East Wisconsin Ave Milwaukee, WI 53202. WHEREAS, FMR Corp., a Massachusetts corporation, the parent company of Fidelity, is the owner of the trademark and the tradename "FIDELITY INVESTMENTS" and is the owner of a trademark in a pyramid design (hereinafter, collectively the "Fidelity Trademarks"), a copy of each of which is attached hereto as Exhibit "A"; and WHEREAS, FMR Corp. has granted a license to Fidelity (the "Master License Agreement") to sub-license the Fidelity Trademarks to third parties for their use in connection with Promotional Materials as hereinafter defined; and WHEREAS, Company is desirous of using the Fidelity Trademarks in connection with distribution of "sales literature and other promotional material" with information, including the Fidelity Trademarks, printed in said material (such material hereinafter called the Promotional Material). For the purpose of this Agreement, "sales literature and other promotional material" shall have the same meaning as in the certain Participation Agreement dated as of the day of -- , 2001, among Fidelity, Company and the Variable Insurance Products Funds - ------ (hereinafter "Participation Agreement"); and WHEREAS, Fidelity is desirous of having the Fidelity Trademarks used in connection with the Promotional Material. NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and adequacy whereof is hereby acknowledged, and of the mutual promises hereinafter set forth, the parties hereby agree as follows: 1. Fidelity hereby grants to Company a non-exclusive, non-transferable license to use the Fidelity Trademarks in connection with the promotional distribution of the Promotional Material and Company accepts said license, subject to the terms and conditions set forth herein. 2. Company acknowledges that FMR Corp. is the owner of all right, title and interest in the Fidelity Trademarks and agrees that it will do nothing inconsistent with the ownership of the Fidelity Trademarks by FMR Corp., and that it will not, now or hereinafter, contest any registration or application for registration of the Fidelity Trademarks by FMR Corp., nor will it, now or hereafter, aid anyone in contesting any registration or application for registration of the Fidelity Trademarks by FMR Corp. 1 3. Company agrees to use the Fidelity Trademarks only in the form and manner approved by Fidelity and not to use any other trademark, service mark or registered trademark in combination with any of the Fidelity Trademarks without approval by Fidelity. 4. Company agrees that it will place all necessary and proper notices and legends in order to protect the interests of FMR Corp. and Fidelity therein pertaining to the Fidelity Trademarks on the Promotional Material including, but not limited to, symbols indicating trademarks, service marks and registered trademarks. Company will place such symbols and legends on the Promotional Material as requested by Fidelity or FMR Corp. upon receipt of notice of same from Fidelity or FMR Corp. 5. Company agrees that the nature and quality of all of the Promotional Material distributed by Company bearing the Fidelity Trademarks shall conform to standards set by, and be under the control of, Fidelity. 6. Company agrees to cooperate with Fidelity in facilitating Fidelity's control of the use of the Fidelity Trademarks and of the quality of the Promotional Material to permit reasonable inspection of samples of same by Fidelity and to supply Fidelity with reasonable quantities of samples of the Promotional Material upon request. 7. Company shall comply with all applicable laws and regulations and obtain any and all licenses or other necessary permits pertaining to the distribution of said Promotional Material. 8. Company agrees to notify Fidelity of any unauthorized use of the Fidelity Trademarks by others promptly as it comes to the attention of Company. Fidelity or FMR Corp. shall have the sole right and discretion to commence actions or other proceedings for infringement, unfair competition or the like involving the Fidelity Trademarks and Company shall cooperate in any such proceedings if so requested by Fidelity or FMR Corp. 9. This agreement shall continue in force until terminated by Fidelity. This agreement shall automatically terminate upon termination of the Master License Agreement. In addition, Fidelity shall have the right to terminate this agreement at any time upon notice to Company, with or without cause. Upon any such termination, Company agrees to cease immediately all use of the Fidelity Trademarks and shall destroy, at Company's expense, any and all materials in its possession bearing the Fidelity Trademarks, and agrees that all rights in the Fidelity Trademarks and in the goodwill connected therewith shall remain the property of FMR Corp. Unless so terminated by Fidelity, or extended by written agreement of the parties, this agreement shall expire on the termination of that certain Participation Agreement. 10. Company shall indemnify Fidelity and FMR Corp. and hold each of them harmless from and against any loss, damage, liability, cost or expense of any nature whatsoever, including without limitation, reasonable attorneys' fees and all court costs, arising out of use of the Fidelity Trademarks by Company. 2 11. In consideration for the promotion and advertising of Fidelity as a result of the distribution by Company of the Promotional Material, Company shall not pay any monies as a royalty to Fidelity for this license. 12. This agreement is not intended in any manner to modify the terms and conditions of the Participation Agreement. In the event of any conflict between the terms and conditions herein and thereof, the terms and conditions of the Participation Agreement shall control. 13. This agreement shall be interpreted according to the laws of the Commonwealth of Massachusetts. IN WITNESS WHEREOF, the parties hereunto set their hands and seals, and hereby execute this agreement, as of the date first above written. FIDELITY DISTRIBUTORS CORPORATION By: ------------------------------- Name: Don Holborn Title: Executive Vice President COMPANY By: ------------------------------- Name: ---------------------------- Title: ---------------------------- 3 EXHIBIT A Int. Cl.: 36 Prior U.S. Cls.: 101 and 102 Reg. No. 1,481,040 United States Patent and Trademark Office Registered Mar. 15, 1988 SERVICE MARK PRINCIPAL REGISTER [LOGO Fidelity Investments] FMR CORP. (MASSACHUSETTS FIRST USE 2-22-1984; IN COMMERCE 2- CORPORATION) 22-1984. 82 DEVONSHIRE STREET BOSTON, MA 02109, ASSIGNEE OF NO CLAIM IS MADE TO THE FIDELITY DISTRIBUTORS EXCLUSIVE RIGHT TO USE CORPORATION(MASSACHUSETTS "INVESTMENTS",APART FROM THE CORPORATION) BOSTON, MA 02109 MARK AS SHOWN. FOR: MUTUAL FUND AND STOCK SER. NO. 641,707, FILED 1-28-1987 BROKERAGE SERVICES, IN CLASS 36 (U.S.CLS. 101 AND 102) RUSS HERMAN, EXAMINING ATTORNEY 4 EX-99.N 7 dex99n.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP Exhibit (n) CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Statement of Additional Information constituting part of this Post-Effective Amendment No. 9 to the registration statement on Form N-6 (the "Registration Statement") of our report dated January 21, 2003, relating to the financial statements of The Northwestern Mutual Life Insurance Company, and of our report dated January 30, 2003, relating to the financial statements of Northwestern Mutual Variable Life Account, which appear in such Statement of Additional Information, and to the incorporation by reference of such reports into the Prospectus which constitutes part of this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Statement of Additional Information. PricewaterhouseCoopers LLP Milwaukee, Wisconsin February 28, 2003 EX-99.Q 8 dex99q.txt MEMORANDUM DESCRIBING ISSUANCE Exhibit (q) NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT Description of Issuance, Transfer and Redemption Procedures for Variable Life Insurance Contracts Pursuant to Rule 6e-2(b)(12)(ii) and Method of Computing the Adjustment in Payments and Cash Values for Conversions Pursuant to Rule 6e-2(b)(13)(v)(B). INTRODUCTION 1. Rule 6e-2(b)(12) under the Investment Company Act provides exemption from Sections 22(d), 22(e) and 27(c)(1) of the Act and Rule 22c-1 thereunder for variable life insurance policies which meet the conditions of the Rule. Rule 6e-2(b)(13)(v) provides exemption from Section 27(f) of the Act for variable life insurance policies which, among other conditions, provide for the right to convert the policies to fixed benefit life insurance within twenty-four months after the policies are issued. Both Rules refer to materials which must be included in the separate account's filing with the Commission pursuant to paragraph (b)(3)(ii) of Rules 6e-2. 2. Rule 6c-3 provides exemptions for a registered variable life insurance separate account which registers under Section 8 of the Act, except for exemption from the registration requirements, "under the same terms and conditions as a separate account claiming exemption under Rule 6e-2." Therefore a separate account with registers as contemplated by Rule 6c-3 may be required to include the materials referred to in Rules 6e-2(b)(12)(ii) and 6e-2(b)(13)(v) as exhibits to its registration statement filed under the Act. The purpose of this memorandum is to fulfill this requirement with respect to the Variable Whole Life Policy with Additional Protection ("Policy") proposed to be offered in connection with Northwestern Mutual Variable Life Account ("Account"), a separate investment account of The Northwestern Mutual Life Insurance Company ("Northwestern"). 1 RULE 6e-2(b)(12)(ii) 3. Rule 6e-2(b)(12)(ii) provides exemptions from the sections and rule cited above to the extent "necessary for compliance with . . . Rule 6e-2 or with insurance laws and regulations and established administrative procedures of the life insurer with respect to issuance, transfer and redemption procedures for variable life insurance contracts funded by the separate account including, but not limited to, premium rate structure and premium processing, insurance underwriting standards, and the particular benefit afforded by the contract. . . .. The Rule thus recognizes that the established procedures of the insurance company itself, founded on the requirements of the state insurance law, have a principal role in defining the requirements which apply for variable life insurance offered by the same company. ISSUANCE PROCEDURES A. Premium Rate Structure and Insurance Underwriting Standards 4. Premiums for the Policies, like premiums for Northwestern's established series of conventional, fixed benefit life insurance policies, will depend on the age, sex and insurance risk classification of the proposed insured, as well as the amount of insurance being purchased. Thus the price of the insurance will differ, reflecting established insurance procedures and state law, in order to fairly take into account the differences in risks. 5. The premiums for a Policy will be set forth in the Policy itself. Premiums for Policies at illustrative ages and amounts are included in the prospectus. The prospectus illustrations, like those in the prospectuses for variable life insurance policies offered by Northwestern's competitors, are based on premium rates for the best risk classification of nonsmokers, which Northwestern refers to as select. It is expected that about 80% of applicants for the Policies will qualify for premiums offered to nonsmokers in the select classification. Smaller percentages will qualify only for one of several classifications less favorable than select, and will pay higher premiums. 2 6. For the best risk classification of nonsmokers (select) and the best risk classification of smokers (standard), premiums are based on the 1980 Commissioner's Standard Ordinary Smoker and Nonsmoker Mortality Tables. For other risk classifications, premiums are based on the 1980 Commissioner's Standard Ordinary Mortality Table. The 1980 CSO Tables are used notwithstanding the reference to the 1958 Commissioner's Standard Ordinary Mortality Table in the definition of "sales load" in Rule 6e-2(c)(4). Use of 1980 CSO Tables is required by state law in Wisconsin, Northwestern's domiciliary state, and in other states. The cost of insurance is lower under the 1980 CSO Tables reflecting improvements in longevity since the 1958 CSO Table was developed. Use of the 1980 CSO Table is permitted for contracts filed under Rule 6e-3(T). 7. As a mutual life insurance company organized in Wisconsin, Northwestern is also required to offer its insurance contracts as participating policies which share equitably in Northwestern's divisible surplus. The Policies accordingly have been designed on a participating basis. It is anticipated, based on Northwestern's current experience with other life insurance policies, that significant dividends will be paid on the Policies. Dividends provide the mechanism whereby the insurance company's policyholders share in the company's experience. Since the pricing assumptions which underlie life insurance policies can be quite conservative, actual experience as it emerges is often significantly more favorable than what was assumed. The greater part of dividends paid under Northwestern's fixed benefit policies arises from investment rates of return which are substantially greater than the assumed rates of 2% to 5.5% on the policies presently outstanding. This investment aspect of dividends does not relate to the Policies because the design of a variable life insurance policy provides a direct mechanism for reflection of investment results. The other factors for dividends, including the dividends for fixed benefit policies, are the mortality and expense results. While these provide less than one-half of the dividend amounts for fixed benefit policies, they will be the entire source of the dividends paid on the Policies. 8. Notwithstanding the documented differences between male and female mortality rates, a 1983 decision of the U.S. Supreme Count/1/ has created legal liability issues for employers - ---------- /1/ Arizona Governing Committee, Etc. v. Norris, 103 S. Ct. 3492 (1983). 3 who purchase, or are otherwise involved in the purchases of, insurance products which are priced so as to reflect these differences. Similarly, the laws of individual states (currently only Montana) require that policies offered there use a sex-neutral pricing basis. The Policies will accordingly be offered on a sex-neutral pricing basis for use as required in such situations. B. Procedures for Placing a Policy in Effect 9. When a proposed insured applies for a Policy, Northwestern will begin the same process of risk evaluation which takes place when an application for a fixed benefit insurance policy is received. Several days or weeks may elapse from the date of the application until this underwriting procedure is completed and, if insurability is established, the Policy is issued and delivered to the owner. However, when the Policy is issued, the insurance coverage and investment experience relate back to the Policy Date. If the insured dies in the interim, after at least one month's premium has been paid, Northwestern pays the death benefit to the beneficiary unless it is determined that the application would have been rejected. 10. If the applicant for insurance pays at least one month's premium when the application is submitted, the Policy Date will be the date when Northwestern received the latest of (1) the premium amount, (2) the application and (3) medical evidence of insurability. 11. If the application is submitted without any premium, the underwriting procedure will be carried out and the Policy will be issued and delivered in due course. In that case the Policy Date will be 7 days after the date on which the application is finally approved and the Policy is issued, provided that the Policy is in fact delivered within 30 days after the approval date and the premium is paid at that time. If more than 30 days elapse, the Policy Date will be the date when the premium is paid. 12. For life insurance purposes, one's age is reckoned as the age at the last or next birthday, depending on which is closer. The Policy Date may be backdated for a maximum of 11 months if backdating results in a lower insurance age and if backdating is permitted by applicable state insurance law. 4 13. Upon request, the Policy Date may be a future date. In that case, term insurance is available for the interim period, to the extent permitted by applicable state insurance law. 14. In any case, the Policy Date is the date as of which investment experience begins. For all purposes under the Policies, the Account values for any date are determined as of the close of business on that date, or whenever the assets of the Account are next valued. Assets of the Account consist entirely of shares of Northwestern Mutual Series Fund, Inc., ("Fund") and shares of each series of the Fund are valued daily as of the close of trading on the New York Stock Exchange. 15. The suicide and incontestability periods under a Policy will run from the Issue Date. The Issue Date will not necessarily coincide with the Policy Date, for the reasons indicated above. C. Premium Processing 16. The Policies are structured as annual premium contracts, even though semiannual, quarterly and monthly premium frequencies will be available. The net annual premium, after the deductions described in the prospectus, will be placed in the Account on the Policy Date or the Policy anniversary each year. The Policy anniversary will be the anniversary of the Policy Date. The amount of any dividend will be paid annually as of the Policy anniversary, and placed in the Account on that date, unless the Policy owner has elected to use the dividend other than to either increase Policy Value or purchase variable paid-up additional insurance. 17. Since the net annual premium is placed in the Account on the Policy Date and each Policy anniversary, regardless of the premium frequency elected and regardless of the timeliness of premium payments, so long as the Policy does not lapse, the actual date on which a scheduled premium is received will not affect the Policy's investment experience. Northwestern will transfer the net annual premium amount from its general account to the Account as of the 5 Policy Date and as of each Policy anniversary. Receipt of a scheduled premium by Northwestern represents a transaction between the Policy owner and Northwestern's general account. 18. Unscheduled additional premiums may be paid at any time prior to the Policy anniversary nearest to the insured's 85th birthday, subject to evidence of insurability. Any unscheduled premiums, less the deduction described in the prospectus, will be placed in the Account as of the date received by Northwestern in its Home Office. 19. Transactions between the Account and the general account of Northwestern will be effected as of the dates determined in accordance with the terms of the Policies but the transactions will not in all cases be physically processed on those dates. For example, as described above, the Policy Date will often not be determined until several days or weeks after that date, but the first annual premium will nevertheless be placed in the Account as of that date when it is subsequently determined. Similarly, as described below, the death of an insured will mark the date on which the Policy ceases to participate in the Account, with interest being paid on Policy proceeds from that date until the Policy is settled, but several days may elapse before Northwestern received notification. Because of the timing discrepancies the total asset of the Account will not always exactly match the sum of the interests in the Account represented by all of the Policies outstanding. An accounting routine will be established to reconcile these amounts at least once each year, as of December 31, and the amount of assets in the Account will be adjusted as required. 20. The sum of premiums paid more frequently than annually is greater than the amount of the annual premium, reflecting the additional administrative costs of processing more premiums and the time value of money at 8% interest. TRANSFER PROCEDURES 21. The Account consists of nine divisions, corresponding to the nine Portfolios of the Fund. All assets of each division are invested in shares of the corresponding Fund Portfolio. Anytime following the initial allocation date, the Policy owner may direct that accumulated 6 amounts under the Policy be transferred from one division to another. The Policy provides for up to 12 transfers in a Policy year. Northwestern does not intend to enforce this limitation but reserves the right to do so if the volume of transfers exceeds expectations or if a particular Policy owner inappropriately attempts to use a Policy as a short-term investment trading vehicle. The Policy also reserves the right to charge an administrative fee for transfers. The amount of the fee win not exceed $25. No fee is presently contemplated. Transfers will be effected as of the date when a written request in received at Northwestern's Home Office. 22. In order to minimize the investment risk to Northwestern during the period when the Policy owner has the right to return the Policy for a full refund of premiums paid, premiums placed into the Account prior to the initial allocation date are placed in the Money Market Division of the Account. The initial allocation date is described in the prospectus and identified in the Policy. The initial allocation date is the latest of the Policy date, 45 days after the date of the completed application or 32 days after the application is approved by Northwestern. On the initial allocation date amounts in the Money Market division of the Account are transferred to other divisions based on the instructions in the application for the Policy. REDEMPTION PROCEDURES A. Surrender for Cash Value 23. The owner of a Policy may surrender it for the cash value of the Policy at any time upon written request during the lifetime of the insured. Northwestern will affix a date and time stamp when the request is received at its Home Office and pay the cash value computed as of that day. 24. For its conventional fixed benefit insurance, Northwestern has developed performance goals for the timeliness of responses to requests for payment of policy benefits, including payment of cash and loan values. Performance is closely monitored and data are compiled on a periodic basis. The data for 1994 show that 80% of surrender requests and 96% of loan applications were processed within five days. For these Policies, Northwestern will 7 implement special handling procedures to assure that benefits are paid within seven days after a request with the necessary information is received. 25. When a surrender of a Policy is effected, Northwestern will pay the cash value out of its general assets. An amount equal to the interest of the Policy in the Account will be transferred from the Account to Northwestern's general account as of the effective date of the surrender. 26. By administrative practice, Northwestern will permit the owner of a Policy to surrender a part of the Policy. Calculations will be performed as if the Policy were split into two Policies, and one of them were surrendered. The Policy which continues in force must meet the regular minimum size requirements. 27. A withdrawal of Policy Value may be made under certain conditions specified in the prospectus. The withdrawal may not be greater than the smaller of (1) the Excess Amount less the surrender charge or (2) an amount which would reduce the maximum loan value to less than any outstanding Policy loan. The minimum amount for withdrawals is $250 and no more than four withdrawals may be made in a Policy year. The Policy reserves the right to charge an administrative free of up to $25 per withdrawal. No fee is presently contemplated. 28. Withdrawals will be made upon written request at either the Northwestern's Home Office or at the offices of its agents. In either case, the request will be processed in the Home Office. The maximum allowable withdrawal will be determined by reference to computations as of the close of business on the day the request is received. The check for the amount withdrawn will be mailed from the Home Office. Special handling procedures will be implemented to assure that withdrawal benefits are paid within seven days after a request is received. 8 B. Payment of Death Benefit 29. Northwestern will pay the death benefit to the beneficiary or other payee in accordance with the terms of the Policy following receipt at its Home Office of proof of the death of the insured. Payment of the death benefit is subject to the suicide and incontestability provisions of the Policy and any applicable state law requirements. Payment will be made promptly and in any case within seven days after the last of the conditions is met. 30. The death benefit for a Policy on any date when premiums have been timely paid will be equal to the sum of (1) the minimum guaranteed death benefit of the Policy, (2) any Additional Protection, (3) any Excess Amount, (4) any variable benefit paid-up additions, and (5) the amount of any dividend accumulations and any dividend at death, less the amount of any Policy loan outstanding. The death benefit is adjusted to reflect any premium due if the insured dies during the grace period. The death benefit will not be less than the amount of insurance calculated by applying the Policy Value as a net single premium at the insured's attained age plus any variable paid-up additional insurance and any dividend accumulations and dividend at death, less the amount of any Policy loan outstanding. 31. Northwestern will pay the death benefit for a Policy out of its general assets. The amount payable will include interest from the date of death. An amount equal to the interest of the Policy in the Account as of the date of death will be transferred from the Account to Northwestern's general account. C. Lapse and Reinstatement 32. The Policy provides a grace period of 31 days/2/ for payment of any premium not paid when due. If the premium is paid during the grace period, the policy values will not be - ---------- /2/ In administering the Policies Northwestern intends to use a 66-day period, instead of 31 days, before the lapse routine is implemented. The longer period is used simply to reduce the volume of lapse and reinstatement transactions occasioned by miscalculation when Policy owners attempt to pay the overdue premium on the last day of the grace period. The 66-day period is used for Northwestern's fixed benefit insurance policies and will be administered consistently. It does not appear in the prospectus for the Policies because its purpose would be defeated if Policy owners know that the extra time would be allowed. When the 66 days have transpired and the 9 affected by the delay in paying the premium. If the insured dies during the grace period, the death proceeds will be reduced by the amount of the unpaid premium as described in the description of the death benefit above. 33. If a periodic premium is not paid within the grace period, the policy will lapse. If the cash value on the last day of the grace period is at least $1,000, the lapsed policy will continue in force as fixed benefit paid-up insurance. The amount of paid-up insurance will be determined by applying the amount of cash value, determined as of the last day of the grace period, as a net single premium at the attained age of the insured. If the cash value is less than $1,000 on the last day of the grace period, the Policy will be treated as surrendered. 34. In lieu of fixed benefit paid-up insurance the owner of a lapsed Policy may elect a variable benefit paid-up insurance if the Policy has a cash value of at least $5,000 on the last day of the grace period. As of the due date of the unpaid premium, the Policy Value is set equal to the cash value (including the value of any existing paid-up additions) plus the amount of any Policy loan outstanding. Any existing variable paid-up additional insurance is set at zero. The Policy loan then remains outstanding. The amount of variable paid-up additional insurance, at any time, is determined by applying its cash value plus the amount of any Policy loan as a net single premium at the attained age of the insured. 35. When a Policy lapses and fixed benefit paid-up insurance goes into effect, the Policy ceases to have any interest in the Account. An amount equal to the interest of the Policy in the Account, determined as of the last day of the grace period, will be transferred from the Account to Northwestern's general account as of the due date of the unpaid premium. 36. A lapsed Policy may be reinstated while the insured is alive within three years (longer if required by state law) after the premium due date unless the Policy had been surrendered for its cash value. Reinstatement is conditional upon evidence of insurability and - ---------- Policy lapses, the values will be computed as though the Policy had lapsed after the grace period of 31 days. Notwithstanding the postponement of internal procedures to reflect the fact of a lapse, the Policy does lapse upon the expiration of the grace period and the death benefit is determined accordingly if the insured dies thereafter regardless of whether the internal procedures have been implemented prior to the date of death. 10 payment of the greater of (a) all unpaid minimum premiums plus interest at 5%, or (2) 110% of the increase in cash value which results from reinstatement plus unpaid premiums, with interest at 5%, for any optional riders attached to the Policy. Reinstatement will be effected as of the date when the request is received or any future date requested, and investment experience in the Account will continue from that date. Northwestern will calculate the cash amount required upon request. Following reinstatement, the Policy will have the cash value, death benefit and loan value which it would have had if the Policy has not lapsed and if a 4% rate of investment earnings were credited for the period from the due date of the overdue premium to the date of reinstatement. The cash amount required to reinstate a Policy will be paid into Northwestern's general account and the amount required for the Policy's separate account reserve will be placed in the Account as of the reinstatement date. Any Policy loan outstanding, with interest thereon, must be either repaid or reinstated. D. Policy Loans and Loan Repayments 37. The Policies provide that the owner may borrow from Northwestern using the Policy as collateral security. The maximum loan value is 90% of the cash value of the Policy. If a Policy loan is already outstanding, these limitations are applied to the amount of cash value which the Policy would have if there were no loan. 38. The Policy provides that loans will be made upon written request. Northwestern also intends to honor requests made at the offices of its agents in accordance with procedures presently in place for fixed benefit policies. In that case the request will be transmitted to the Home Office for processing. In any event, the check for the loan proceeds will be mailed from the Home Office, usually the next business day after the request is received. The date of the loan will be the date on which the check for the loan proceeds is issued. The maximum loan value of the Policy will be determined by reference to computations at the close of business the preceding day after the request for the loan was submitted but before processing took place and interest will accrue on the loan from the date of the check. 11 39. The owner of a Policy may elect an automatic premium loan feature whereby the loan value of the Policy will be available to pay any overdue premium. The feature may be elected or revoked at any time by written request. 40. Interest on a Policy loan accrues and is payable on a daily basis. Unpaid interest is added to the principal. The Policy will terminate if the cash value of the Policy falls to zero, but written notice will be mailed to the owner of the Policy at least 31 days before the termination date. The notice will state the amount which must be repaid to keep the Policy in force. 41. The owner of the Policy may choose between two Policy loan interest rates. One is a fixed rate of 5% and the other is a variable rate based on a corporate bond index with an annual adjustment and minimum of 5%. The choice of rates is made on the application form and may be changed as of January 1 any year upon written request. 42. When a Policy loan is effected, the loan amount is taken from the divisions of the Account in proportion to the amounts in the divisions. The amounts withdrawn from the Account are credited with an earnings rate equal to the Policy loan interest rate in effect less an amount for expenses, including taxes. The amount deducted for expenses is disclosed in the prospectus. This earnings rate is in lieu of the investment experience of the Account. The amounts of any loan repayments will be transferred from Northwestern's general account to the divisions of the Account, in proportion to the amounts in the divisions, and will thereafter participate in the Account's investment experience. E. Optional Payment Plans 43. The Policies describe several fixed benefit installment payment plans, including fixed annuities with life contingencies, pursuant to which death proceeds or the cash value of a surrendered Policy may be paid at the option of the owner or beneficiary. The Policy sets forth the terms and limitations for each plan, defines the persons who are entitled to make the selections and receive benefits, and refers to procedural rules. 12 METHOD OF COMPUTING ADJUSTMENT UPON EXCHANGE OF POLICY 44. In accordance with Rule 6e-2(b)(13)(v), the Policy provides that the owner may exchange the Policy for a conventional whole life insurance policy with benefits that do not vary with the investment experience of a separate account. The fixed benefit policy will be issued by Northwestern, will be on the life of the same insured, and will have the same initial guaranteed death benefit, Policy Date and issue age as the Policy being exchanged. The premiums and cash values for the new policy will be the same as those for fixed benefit policies issued by Northwestern on the Issue Date of the Policy. The exchange must be made within twenty-four months after the Issue Date. No evidence of insurability is required. 45. The exchange will be subject to an equitable cash adjustment, as required by the Rule. The amount of cash adjustment will be equal to the difference between the premiums on the Policy and the premiums on the new policy for the period from the Policy Date to the date of the exchange, plus or minus the amount by which actual net investment results for the Policy differ from the results which would have been produced if actual investment results had coincided with: (1) for the current policy year, the interest rate used in the calculation of dividends on the new policy, and (2) for any prior year, the interest rate used in the construction of the new policy. 46. The effective date of the exchange will be the date when Northwestern received the request together with the Policy and any amount due for the cash adjustment. The owner of the Policy may request a later date. An amount equal to the interest of the Policy in the Account will be transferred from the Account to Northwestern's general account on the effective date of the exchange. 13 -----END PRIVACY-ENHANCED MESSAGE-----