-----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, C20Fvxgpx+7AIoKUI0c2k5/SF1bHpZ5SVyLCQXbMLiLn7o4tKJtBergEtDppgVEs ySkZX8TBZ5tEZNehX1Ri6g== 0000950131-03-002650.txt : 20030507 0000950131-03-002650.hdr.sgml : 20030507 20030507100500 ACCESSION NUMBER: 0000950131-03-002650 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 20030507 EFFECTIVENESS DATE: 20030507 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: 497 SEC ACT: 1933 Act SEC FILE NUMBER: 002-89972 FILM NUMBER: 03685274 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 497 1 d497.txt NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT VariableLife Whole Life Extra Ordinary Life Single Premium Life May 1, 2003 Prospectuses [photo here] Northwestern Mutual Series Fund, Inc., Fidelity VIP Mid Cap Portfolio and Russell Investment Funds MAY 1, 2003 The Northwestern Mutual Life Insurance Company 720 East Wisconsin Avenue [LOGO] Northwestern Mutual(R) Milwaukee, WI 53202 www.northwesternmutual.com (414) 271-1444 Contents for this Prospectus
Page ---- Prospectus........................................ 1 Northwestern Mutual Variable Life................. 1 Summary of Benefits and Risks..................... 1 Benefits of the Policies......................... 1 Death Benefit.................................. 1 Access to Your Values.......................... 1 Flexibility.................................... 1 Tax Benefits................................... 1 Risks of the Policies............................ 1 Investment Risk................................ 1 Policy as Long-Term Investment................. 1 Policy Lapse................................... 1 Limitations on Access to Your Values........... 1 Adverse Tax Consequences....................... 1 Fee Tables........................................ 2 Transaction Fees................................. 2 Periodic Charges Other Than Fund Operating Expenses....................................... 3 Annual Fund Operating Expenses................... 4 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................................ 6 Northwestern Mutual.............................. 6 The Account...................................... 6 The Funds........................................ 6 Northwestern Mutual Series Fund, Inc........... 6 Fidelity VIP Mid Cap Portfolio................. 6 Russell Investment Funds....................... 6 Information about the Policies.................... 7 Requirements for Insurance....................... 7 Premiums......................................... 7 Grace Period..................................... 8 Allocations to the Account....................... 8 Transfers Between Divisions...................... 9 Deductions and Charges........................... 9 Deductions from Premiums for Whole Life and Extra Ordinary Life Policies............. 9
Page ---- Deductions for Single Premium Life Policies. 10 Charges Against the Account Assets.......... 10 Guarantee of Premiums, Deductions and Charges................................... 10 Death Benefit............................... 11 Variable Insurance Amount................. 11 Whole Life Policy and Single Premium Life Policy.................................. 11 Extra Ordinary Life Policy................ 12 Cash Value.................................. 13 Annual Dividends............................ 13 Policy Loans................................ 14 Extended Term and Paid-Up Insurance......... 14 Reinstatement............................... 14 Right to Exchange for a Fixed Benefit Policy 15 Other Policy Provisions..................... 15 Owner..................................... 15 Beneficiary............................... 15 Incontestability.......................... 15 Suicide................................... 15 Misstatement of Age or Sex................ 15 Collateral Assignment..................... 15 Payment Plans............................. 15 Deferral of Determination and Payment..... 15 Voting Rights............................... 15 Substitution of Fund Shares and Other Changes................................... 15 Reports..................................... 16 Special Policy for Employers................ 16 Financial Statements........................ 16 Legal Proceedings........................... 16 Illustrations............................... 16 Tax Treatment of Policy Benefits............ 16 General................................... 16 Life Insurance Qualifications............. 16 Tax Treatment of Life Insurance........... 16 Modified Endowment Contracts.............. 17 Other Tax Considerations.................. 18
PROSPECTUS Northwestern Mutual Variable Life .. Whole Life .. Extra Ordinary Life .. Single Premium Life Summary of Benefits and Risks The following summary identifies some of the benefits and risks of the three Policies described in this prospectus. It omits important information which is included elsewhere in this prospectus, in the attached mutual fund prospectuses and in the terms of the Policies. Benefits of the Policies Death Benefit The primary benefit of each Policy is the life insurance protection that it provides. For each Policy the death benefit includes a guaranteed amount which will not be reduced during the lifetime of the insured so long as you pay premiums when they are due and no Policy debt is outstanding. The remainder of the death benefit is the variable insurance amount which fluctuates in response to actual investment results and is not guaranteed. The Extra Ordinary Life Policy also provides some term insurance during the early Policy years. The death benefit is increased by the amount of any paid-up additions which you have purchased with any dividends that we pay. The relationships among the guaranteed and variable amounts and any paid-up additions and term insurance depend on the design of the particular Policy. 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 a partial surrender so long as the Policy that remains meets our regular size requirements. You may borrow up to 90% of your Policy's cash value using the Policy as security. The limit is 75% of the cash value during the first two Policy years. Flexibility 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 six divisions at any time. You may transfer accumulated amounts from one division to another as often as four times in a Policy year. Tax Benefits You are generally not taxed on your Policy's investment gains until you surrender the Policy. Risks of the Policies Investment Risk Your Policy allows you to participate in the investment experience of the Account divisions you select. You bear the corresponding investment risks. You may find a comprehensive discussion of these risks in the attached prospectuses for the Funds. Policy as Long-Term Investment Your Policy is designed to serve your need for long-term life insurance protection. It is not a suitable investment for short-term goals. We have not designed the Policies for frequent trading. Policy Lapse Your Whole Life or Extra Ordinary Life Policy will lapse unless you pay the premiums when they are due, unless the Policy is continued as extended term insurance or a reduced amount of paid-up insurance. Limitations on Access to Your Values A partial surrender of your Policy will reduce the death benefit. The Policies include no provision for withdrawal of the cash value. For the Single Premium Life Policy we will deduct a surrender charge if you request a surrender or partial surrender of your Policy during the first 10 Policy years. 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. Prospectus 1 Fee Tables The following tables describe the fees and expenses that you will pay when buying, owning, and surrendering a Policy. For a more detailed description, see "Deductions and Charges", p. 9, "Deductions from Premiums for Whole Life and Extra Ordinary Life Policies", p. 9, and "Deductions for Single Premium Life Policies", p. 10. Transaction Fees This table describes the fees and expenses you will pay when you pay premiums, surrender the Policy or transfer amounts between the Account divisions.
Charge When Charge is Current Amount Deducted Maximum Amount Deducted Deducted - ----------------------------------------------------------------------------------------------------- Premium When you pay 2% of the basic premium 2% of the basic premium Taxes premiums - ----------------------------------------------------------------------------------------------------- Whole Life and Extra Ordinary Life Policies - ----------------------------------------------------------------------------------------------------- Sales Load When you pay Year 1: 30% of basic Same as the current premiums premium amount Years 2-4: 10% of basic premium Years 5-on: Not more than 7% of basic premium - ----------------------------------------------------------------------------------------------------- Charge for When you pay Not more than $5 for each Same as the current Issuance premiums - first $1,000 of insurance amount Expenses Policy year only - ----------------------------------------------------------------------------------------------------- Single Premium Life Policy - ----------------------------------------------------------------------------------------------------- Administrative When we issue the $150 $150 Charge Policy - ----------------------------------------------------------------------------------------------------- Surrender When you surrender, or Not more than 9% of the Same as the current Charge partially surrender, premium paid for the Policy amount the Policy during the first ten Policy years - ----------------------------------------------------------------------------------------------------- All Policies - ----------------------------------------------------------------------------------------------------- Administrative When you make a Currently waived The charge will not Charge for partial surrender of exceed our Partial the Policy administrative costs. Surrender - ----------------------------------------------------------------------------------------------------- Fee for When you transfer Currently waived The fee will not exceed Transfer of assets among the our administrative costs. Assets Account divisions - ----------------------------------------------------------------------------------------------------- Whole Life and Extra Ordinary Life Policies - ----------------------------------------------------------------------------------------------------- Extra Premium When you pay The amount depends on the Same as current amount for Insureds premiums risk classification. Who Do Not Qualify as Select Risks - -----------------------------------------------------------------------------------------------------
Prospectus 2 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.
Charge When Charge Current Amount Deducted Maximum Amount Deducted is Deducted - ---------------------------------------------------------------------------------------------------------------------------------- Whole Life and Extra Ordinary Life Policies - ---------------------------------------------------------------------------------------------------------------------------------- Charge for Annually, on the $35 $35 Administrative Policy anniversary Costs - ---------------------------------------------------------------------------------------------------------------------------------- Charge for Death Annually, on the 1-1/2% of the basic premium 1-1/2% of the basic premium Benefit Guarantee Policy anniversary - ---------------------------------------------------------------------------------------------------------------------------------- Extra Ordinary Life Policies - ---------------------------------------------------------------------------------------------------------------------------------- Charge for Annually, on the Maximum: 17% of the gross annual premium/1/ Same as current amount Dividends Policy anniversary - ---------------------------------------------------------------------------------------------------------------------------------- Extra Premium Annually, after Minimum: $2.18 per $1,000 of term insurance/3/ Minimum: $6.27 per $1,000 for Extra Life the expiry of the Maximum: $256.72 per $1,000 of term insurance/3/ of term insurance, Protection guaranteed period, without the current dividend on the Policy Maximum: $1,000 per $1,000 anniversary/2/ of term insurance, without the current dividend - ---------------------------------------------------------------------------------------------------------------------------------- All Policies - ---------------------------------------------------------------------------------------------------------------------------------- Charge for Daily Annual rate of .50% of the Account assets Annual rate of .50% of the Mortality and Account Assets Expense Risks - ---------------------------------------------------------------------------------------------------------------------------------- All Policies - ---------------------------------------------------------------------------------------------------------------------------------- Charge for Daily Annual rate of .20% of the Account assets A rate which reflects that portion Federal Income of our actual tax expenses Taxes which is fairly allocable to the Policies - ---------------------------------------------------------------------------------------------------------------------------------- All Policies - ---------------------------------------------------------------------------------------------------------------------------------- Cost of Insurance Calculated at least Minimum: $0.69 per $1,000 of net amount at Same as current amount, without annually on the risk/4/ the current dividend Policy anniversary Maximum: $1,000 per $1,000 of net amount at risk/4/ - ---------------------------------------------------------------------------------------------------------------------------------- All Policies - ---------------------------------------------------------------------------------------------------------------------------------- Charge for Daily Annual rate of .85% of the borrowed amount/5/ No maximum specified Mortality and Expense Risks and Expenses for Loans
/(1)/The charge for dividends is approximately 7% to 17% of the gross annual premium. /(2)/After the guaranteed period expires, if the sum of positive variable insurance amount plus the paid-up additions is less than the initial amount of Extra Life Protection, we may reduce the amount of term insurance for the Policy year. This amount is an extra amount of premium you may choose to pay in order to keep the initial amount of insurance inforce. Your right to continue to purchase term insurance on this basis will terminate as of the first Policy anniversary when you fail to pay the additional premium when due. /(3)/Reduced by the estimated year-end dividend. /(4)/The Policies include no provisions for explicit deductions or charges for the cost of insurance, but this cost is reflected in the table of cash values at the front of the Policy and in the table of net single premiums we use to determine the variable insurance amount. The variable insurance amount is used to calculate both the death benefit and the cash value. The cost of insurance is based on the insured's attained age, the 1980 CSO Mortality Table and the net insurance amount at risk. The amount you pay for the cost of insurance is effectively reduced by the dividends we currently pay on your policy. You may ask your Northwestern Mutual financial representative for the current dividend amount. Future dividends are not guaranteed. /(5)/The charge is applied to the Policy debt. We add unpaid interest to the amount of the loan. Interest on a Policy loan accrues and is payable on a daily basis at an annual effective rate of 8% or an alternative variable rate you select. The amount of the Policy loan will be transferred from the Account divisions to our general account and credited on a daily basis with an annual earnings rate equal to the Policy loan interest rate less the charge shown. Prospectus 3 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 the Russell Insurance Funds has been restated to reflect current fee waivers and expense reimbursement as set forth in the footnotes for those funds. 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 0.21% 1.48%
Total Net Operating Expenses (Including Investment Total Contractual Waivers, Advisory Other 12b-1 Operating Limitations and Fund or Portfolio Fees Expenses 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/........... 0.80% 0.38% -- 1.18% 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% 0.12% 0.25% 0.95% 0.95% Russell Insvestment 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% 0.14% -- 0.99% 0.99% Core Bond Fund/14/................................ 0.60% 0.20% -- 0.80% 0.70%
Prospectus 4 1.T. Rowe Price Small Cap Value Portfolio Northwestern Mutual Series Funds' advisor, Mason Street Advisors, LLC ("MSA") has contractually agreed to waive, at least until December 31, 2006, a portion of its 0.85% management fee, up to the full amount of that fee, equal to the amount by which the Portfolio's total operating expenses exceed 1.00% of the Fund's average daily net assets on an annual basis and to reimburse the Portfolio for all remaining expenses after fee waivers which exceed 1.00% of the average daily net assets on an annual basis. Taking the fee waivers into account, the annual total operating expenses were 1.00% of the average net assets of the T. Rowe Price Small Cap Value Portfolio. 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 0.80% 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 0.43% and total operating expenses would have been 0.44%. 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. 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 0.65% 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 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 30, 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. Prospectus 5 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 income 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, we also use the Account for other variable life insurance policies which are described in other prospectuses. We no longer offer the three Policies described in this prospectus. 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. Prospectus 6 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. - -------------------------------------------------------------------------------- Information About the Policies Requirements for Insurance The minimum face amount we require for a Whole Life Policy is $20,000. If the insured is below age 15 or over age 49 the minimum amount is $10,000. The insured may not be older than age 70 on the date of issue. For an Extra Ordinary Life Policy the minimum initial amount of insurance is $50,000; if the insured is over age 70, the minimum amount is $25,000. The minimum face amount of insurance we require for a Single Premium Life Policy is $5,000. For an Extra Ordinary Life Policy the insured may not be younger than age l5 on the date of issue. For the Extra Ordinary Life Policy and the Single Premium Life Policy, the insured may not be older than age 75 on the date of issue. Before issuing a Policy, we will require satisfactory evidence of insurability. We consider non-smokers who meet preferred underwriting requirements select risks. We charge a higher premium for insureds who do not qualify as select risks. The amount of additional premium depends on the risk classification in which we place the insured. We consider non-smokers in the second best classification standard plus risks. We consider the best class of smokers standard risks. Premiums You must pay the first premium to put a Whole Life Policy or an Extra Ordinary Life Policy in effect. Premiums are level, fixed and payable in advance during the insured's lifetime on a monthly, quarterly, semiannual or annual basis. You may change the premium frequency. The change will be effective when we accept the premium on the new frequency. The amount of the premium depends on the amount of insurance for which the Policy was issued and 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 the owner of a Policy not less than two weeks before each premium is due. If you select the monthly premium frequency, we may require that you make premium payments through an automatic payment plan arranged with your bank. Premiums you pay other than on annual basis are increased to (1) reflect the time value of money, based on a 12% interest rate, and (2) cover the administrative costs to process the additional premium payments. You may obtain information about annual percentage rate (APR) calculations for premiums paid other than annually from your Northwestern Mutual Financial Representative. The APR calculation is also available through www.northwesternmutual.com. The following table for Whole Life Policies shows representative premiums for male select, standard plus, and standard risks for various face amounts of insurance.
Excess of Annual 12 Monthly Sum of Premiums Face Annual Monthly Monthly Over Annual Age at Issue Amount Premium Premium Premiums Premium ------------ -------- --------- ------- --------- ----------- SELECT 15..... $ 50,000 $ 382.50 $ 33.60 $ 403.20 $ 20.70 35..... 100,000 1,536.00 135.10 1,621.20 85.20 55..... 100,000 3,766.00 331.10 3,973.20 207.20 STANDARD PLUS 15..... 50,000 406.00 35.60 427.20 21.20 35..... 100,000 1,683.00 148.10 1,777.20 94.20 55..... 100,000 4,125.00 363.10 4,357.20 232.20 STANDARD 15..... 50,000 491.50 43.10 517.20 25.70 35..... 100,000 1,912.00 168.10 2,017.20 105.20 55..... 100,000 4,587.00 404.10 4,849.20 262.20
Prospectus 7 The following table for Extra Ordinary Life Policies shows representative annual premiums for male select and standard risks for various amounts of insurance. The amounts of insurance shown in the table are the total amounts in effect when the Extra Ordinary Life Policy is issued, including both the Minimum Death Benefit which we guarantee for the lifetime of the insured and the Extra Life Protection which we guarantee for a shorter period. See "Death Benefit", p. 11, and "Extra Ordinary Life Policy", p. 12.
Excess of Annual 12 Monthly Sum of Premiums Face Annual Monthly Monthly Over Annual Age at Issue Amount Premium Premium Payments Premium ------------ ------ ------- ------- -------- ----------- SELECT 15.......... $ 50,000 $ 261.50 $ 23.10 $ 277.20 $ 15.70 35.......... 100,000 1,014.00 89.10 1,069.20 55.20 55.......... 100,000 2,612.00 230.10 2,761.20 149.20 STANDARD PLUS 15.......... 50,000 285.00 25.10 301.20 16.20 35.......... 100,000 1,161.00 102.10 1,225.20 64.20 55.......... 100,000 2,971.00 261.10 3,133.20 162.20 STANDARD 15.......... 50,000 357.50 31.60 379.20 21.70 35.......... 100,000 1,377.00 121.10 1,453.20 76.20 55.......... 100,000 3,425.00 301.10 3,613.20 188.20
For a Single Premium Life Policy you may choose either a face amount of insurance or the amount which a given amount of premium will provide. The Single Premium Life Policy is available only for applicants who meet select or standard plus underwriting criteria as we determine. The premiums for these Policies are the same for both select and standard plus risks, but we expect that the dividends will be lower for Policies issued to insureds in the standard plus classification. The following table for Single Premium Life Policies shows representative gross single premiums for male select and standard plus risks for various face amounts of Insurance:
Face Amount of Gross Single Age at Issue Insurance Premium ------------ --------- ------------ 15..... $10,000 $ 1,498.40 35..... 25,000 6,443.25 55..... 50,000 23,502.00
Grace Period For the Whole Life and Extra Ordinary Life Policies there is a grace period of 31 days for any premium that is not paid when due. The Policy remains inforce during this period. If you do not pay the premium within the grace period the Policy will terminate as of the date when the premium was due and will no longer be inforce, unless it is continued as extended term or paid-up insurance. See "Extended Term and Paid-Up Insurance", p. 14. If you surrender a Policy, we will pay its cash value. See "Cash Value", p. 13. If the insured dies during the grace period we will deduct any overdue premium from the proceeds of the Policy. If the insured dies after payment of the premium for the period which includes the date of death, we will refund the portion of the premium for the remainder of that period as part of the Policy proceeds. Allocations to the Account We place the net annual premium for a Whole Life Policy or an Extra Ordinary Life Policy in the Account on the Policy date and on the Policy anniversary each year. The net annual premium is the annual premium less the deductions described below. You determine how the net annual premium for a Whole Life or an Extra Ordinary Life Policy is apportioned among the divisions of the Account. If you direct any portion of a premium to a division, the division must receive at least 10% of that premium. You may change the apportionment for future premiums by written request at any time, but the change will be effective only when we place the net annual premium in the Account on the next Policy anniversary, even if you are paying premiums on an other than annual basis. For a Single Premium Policy we place the entire single premium, less an administrative charge of $150, in the Account on the Policy date and we apportion the amount among the divisions of the Account as you determine. You may apportion the Account assets supporting your Policy among as many as six divisions of the Account at any time. Prospectus 8 Transfers Between Divisions You may transfer accumulated amounts from one division of the Account to another as often as four 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 reserve the right to charge a fee to cover administrative costs of transfers. We presently charge no fee. Deductions and Charges The net premiums we place in the Account for Whole Life, Extra Ordinary Life and Single Premium Life Policies are the gross premiums after the deductions described in the next two sections below. The net premiums for Whole Life and Extra Ordinary Life Policies exclude any extra premium we charge for insureds who do not qualify as select risks and the extra premium for any optional benefits. We make a charge for mortality and expense risks against the assets of the Account. There is also a charge for taxes. See "Charges Against the Account Assets", p. 10. In addition, the mutual funds in which the Account assets are invested pay an investment advisory fee and certain other expenses. Mutual fund expenses are briefly described on page 4, and in more detail in the attached prospectuses for the mutual funds. Deductions from Premiums for Whole Life and Extra Ordinary Life Policies The deductions described in this section are for Whole Life and Extra Ordinary Life Policies only. The deductions for Single Premium Life Policies are described under the next caption below. For the first Policy year there is a one-time deduction of not more than $5 for each $1,000 of insurance, based on the face amount for Whole Life or the Minimum Death Benefit stated in the Policy for Extra Ordinary Life. This is for the costs of processing applications, medical examinations, determining insurability and establishing records. There is an annual deduction of $35 for administrative costs to maintain the Policy. Expenses include costs of premium billing and collection, processing claims, keeping records and communicating with Policyowners. There is a deduction each year for sales costs. This amount may be considered a "sales load". The deduction will be not more than 30% of the basic premium (as defined below) for the first Policy year, not more than 10% for each of the next three years and not more than 7% each year thereafter. The basic premium for a Policy is the gross premium which would be payable if you paid the premium annually, less the annual deduction of $35 for administrative costs. The basic premium is based on the cost of insurance for insureds who qualify as select risks and does not include any extra premium amounts for insureds whom we place in other risk classifications. The basic premium does not include the extra premium for any optional benefits. For an Extra Ordinary Life Policy, the basic premium does not include any extra premium for the Extra Life Protection; the amount of term insurance included in the Extra Life Protection affects the dividends payable on the Extra Ordinary Life Policies. The amount of the deduction for sales costs for any Policy year is not specifically related to sales costs we incur for that year. We expect to recover our total sales expenses from the amounts we deduct for sales costs over the period while the Policies are inforce. 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 assume. See "Charges Against the Account Assets", p. 10. To the extent that the amounts deducted for sales costs exceed the amounts needed, we will realize a gain. We make a deduction equal to 2% of each basic premium 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% rate is an average. The tax rate for a particular state may be lower, higher or equal to the 2% deduction. We guarantee that the death benefit for a Whole Life Policy will never be less than the face amount of the Policy, regardless of the investment experience of the Account. For an Extra Ordinary Life Policy, we guarantee that the death benefit will never be less than the Minimum Death Benefit stated in the Policy. For both Policies, there is a deduction of 1- 1/2% from each basic premium to compensate us for the risk that the insured may die at a point in time when the death benefit that would ordinarily be paid is less than this guaranteed minimum amount. For an Extra Ordinary Life Policy there is a deduction for dividends to be paid or credited in accordance with the dividend scale in effect on the issue date of the Policy. This deduction will vary by age of the insured and duration of the Policy, and we expect it to be in the range of approximately 7-17% of the gross annual premium. The following tables illustrate the amount of net annual premium, for select and standard risks, to be placed in the Prospectus 9 Account at the beginning of each Policy year after the deductions described above: Whole Life
Male Age 35--Select Risk Annual Premium Beginning of ------------------------- Policy Year $500 $1,000 $5,000 ----------- ------- ------- --------- 1........... $154.28 $320.16 $1,647.28 2 through 4. 402.11 834.48 4,293.51 5 and later. 416.05 863.41 4,442.36 Male Age 35--Standard Risk Annual Premium Beginning of ------------------------- Policy Year $500 $1,000 $5,000 ----------- ------- ------- --------- 1........... $123.37 $256.03 $1,317.30 2 through 4. 321.57 667.33 3,433.44 5 and later. 332.71 690.46 3,552.48
Extra Ordinary Life Male Age 35--Select Risk Annual Premium Beginning of ------------------------- Policy Year $500 $1,000 $5,000 ----------- ------- ------- --------- 1........... $134.23 $278.56 $1,433.21 2 through 4. 369.62 767.07 3,946.64 5 and later. 383.58 796.05 4,095.74 Male Age 35--Standard Risk Annual Premium Beginning of ------------------------- Policy Year $500 $1,000 $5,000 ----------- ------- ------- --------- 1........... $ 97.92 $203.21 $1,045.54 2 through 4. 269.65 559.59 2,879.11 5 and later. 279.83 580.73 2,987.88
Deductions for Single Premium Life Policies For a Single Premium Life Policy the only deduction from the single premium is an administrative charge of $150.00. The administrative costs for issuing and maintaining a Single Premium Life Policy are similar to those we incur with a Whole Life Policy or an Extra Ordinary Life Policy, except for the costs of premium billing and collection. See "Deductions from Premiums for Whole Life and Extra Ordinary Life Policies", p. 9. We place the entire premium for a Single Premium Life Policy, after this deduction of $150, in the Account when we issue the Policy without any of the other deductions which apply to premiums for Whole Life and Extra Ordinary Life Policies. There is no annual fee for a Single Premium Life Policy. For a Single Premium Life Policy during the first ten Policy years, the cash value payable on surrender of the Policy is reduced by a deduction for sales costs. The deduction during the first Policy year is not more than 9% of the Policy's tabular cash value. See "Cash Value", p. 13. The deduction decreases over time until it is eliminated at the end of the tenth Policy year. We intend the deduction to recover the costs we incur in distributing Single Premium Life Policies which are surrendered in their early years. The deduction will never be more than 9% of the single premium paid for the Policy, excluding the administrative charge of $150.00. The following table illustrates the schedule for the decreasing deduction for sales costs for a policy surrendered at the end of each of the first ten Policy years. The illustration is for a Single Premium Life Policy, male age 35. The schedule varies slightly by age and sex and amount of insurance:
Policy Year End When Deduction as % of Policy Is Surrendered Tabular Cash Value --------------------- ------------------ 1...................... 7.9% 2...................... 7.1 3...................... 6.3 4...................... 5.4 5...................... 4.6 6...................... 3.7 7...................... 2.8 8...................... 1.9 9...................... 0.9 10 and subsequent years 0
Since the maximum Policy loan limit for a Single Premium Life Policy is based on the cash value payable on surrender, the amount you may borrow during the first ten years is reduced to reflect the deduction for sales costs which we would make if you surrendered the Policy on the date of the Policy loan. See "Policy Loans", p. 14. Charges Against the Account Assets There is a daily charge to the Account for the mortality and expense risks we assume. The charge is at the annual rate of .50% 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 issuing and administering the Policies may exceed the costs we estimated. 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. 13. The Policies provide that we may make a charge for taxes against the assets of the Account. Currently, we are making a daily charge for federal income taxes we incur at the annual rate of .20% of the assets of the Account. We may increase, decrease or eliminate the charge for taxes in the future. In no event will the charge for taxes exceed that portion of our actual tax expenses which is fairly allocable to the Policies. Guarantee of Premiums, Deductions and Charges We guarantee and may not increase the premiums, the amounts we deduct from premiums and the charge for mortality and expense risks. These amounts will not increase regardless of future changes in longevity or increases in expenses. The Extra Ordinary Life Policy provides an opportunity to pay an additional amount of premium after the Prospectus 10 guaranteed period for the Extra Life Protection has expired if the Total Death Benefit would otherwise fall below the initial amount of insurance. See "Extra Ordinary Life Policy", p. 12. We accept premium payment by various means, including check and electronic funds transfer (EFT). Death Benefit The death benefit for a variable life insurance policy is, in part, a guaranteed amount which will not be reduced during the lifetime of the insured so long as you pay premiums when they are due and no policy debt is outstanding. The remainder of the death benefit is the variable insurance amount which fluctuates in response to actual investment results and is not guaranteed. The amount of any paid-up additions which you have purchased with dividends is also included in the total death benefit and, in addition, the Extra Ordinary Life Policy provides some term insurance during the early Policy years. The relationships among the guaranteed and variable amounts and any paid-up additions and term insurance depend on the design of the particular Policy. See "Whole Life Policy and Single Premium Life Policy", p. 11, and "Extra Ordinary Life Policy", p. 12. Variable Insurance Amount. The variable insurance amount reflects, on a cumulative basis, the investment experience of the Account divisions in which the Policy has participated. We adjust the variable insurance amount annually on each Policy anniversary. For the first Policy year the variable insurance amount is zero. For any subsequent year it may be either positive or negative. If the variable insurance amount is positive, subsequent good investment results will produce a larger variable insurance amount and therefore an increase in the death benefit. If the variable insurance amount is negative, subsequent good investment results will first have to offset the negative amount before the death benefit will increase. In setting the premium rates for each Policy we have assumed that investment results will cause the Account assets supporting the Policy to grow at a net annual rate of 4%. If the assets grow at a net rate of exactly 4% for a Policy year, the variable insurance amount will neither increase nor decrease on the following anniversary. If the net rate of growth exceeds 4%, the variable insurance amount will increase. If it is less than 4%, the variable insurance amount will decrease. The method for calculating the changes in the death benefit is described in the Policy. The Policy includes a table of net single premiums used to convert the investment results for a Policy into increases or decreases in the variable insurance amount. The insurance rates in the table depend on the sex and the attained age of the insured for each Policy year. For a Whole Life Policy, the changes in the death benefit will be smaller for a Policy issued with a higher premium for extra mortality risk. The net single premium for a particular variable insurance amount is the price for that amount of paid-up whole life insurance based on the insured's age at the Policy anniversary. Because the variable insurance amount is adjusted only on the Policy anniversary, we bear the risk that the insured may die before the next anniversary after an interim period of adverse investment experience. If investment experience during the interim period is favorable, you will forego the benefit and we will realize a gain, unless the insured survives to the next Policy anniversary. However, if at the date of death of the insured the value of the Policy, considered as a net single premium, would buy more death benefit than the amount otherwise determined under the Policy, we will pay this increased death benefit. The cost of life insurance increases with the advancing age of the insured, and therefore a larger dollar amount of investment earnings is required to produce the same increase in the death benefit in the later Policy years. In general, however, the effect of investment results on the death benefit will tend to be greater in the later Policy years because the amount of assets invested for the Policy will tend to increase as the Policy remains inforce. The cost of providing insurance protection under a Policy is reflected in the cash value of the Policy. See "Cash Value", p. 13. The cost is actuarially computed for each Policy each year, based on the insured's attained age, the l980 Commissioners Standard Ordinary Mortality Table and the net insurance amount at risk under the Policy. The net insurance amount at risk is the total death benefit for the Policy minus the cash value plus any Policy debt. The cost of insurance differs each year because the probability of death increases as the insured advances in age and the net insurance amount at risk decreases or increases from year to year depending on investment experience. The cost assumes that all insureds are in the select underwriting risk classification. The differences in the mortality rates of the various underwriting classifications are reflected in the different premiums (or different dividend scales) for those underwriting classifications. The cost of insurance is based on the mortality table identified above and we guarantee it for the life of a Policy regardless of any future changes in mortality experience. Whole Life Policy and Single Premium Life Policy. For a Whole Life Policy or a Single Premium Life Policy the death benefit is the face amount of the Policy plus any positive variable insurance amount inforce. We adjust the death benefit on each Policy anniversary when we determine the variable insurance amount for the following year. The total death benefit also includes the amount of insurance provided by any paid-up additions which you have purchased with dividends and is reduced by the amount of any Policy debt outstanding. The death benefit for a Whole Life Policy will Prospectus 11 not be less than the face amount so long as you pay premiums when they are due and no Policy debt is outstanding. For a Single Premium Life Policy the death benefit will not be less than the face amount so long as no Policy debt is outstanding. Paid-up additions you have purchased with dividends are not counted for purposes of the guarantee that the death benefit of a Whole Life Policy or a Single Premium Life Policy will never be less than the face amount of the Policy. If the variable insurance amount is negative, the total death benefit will be the guaranteed face amount plus the amount of insurance provided by any paid-up additions less any Policy debt. Paid-up additions are amounts of permanent insurance, paid for with dividends and added to a basic life insurance policy, for which the premium for the entire lifetime of the insured has been paid. Paid-up additions have cash surrender value and loan value. Extra Ordinary Life Policy. The Total Death Benefit for an Extra Ordinary Life Policy is the sum of the Minimum Death Benefit plus the amount of Extra Life Protection inforce. The Minimum Death Benefit is 60% of the total amount of insurance for which the Policy is issued. We guarantee the Minimum Death Benefit for the lifetime of the insured so long as you pay premiums when they are due and no Policy debt is outstanding. The amount of Extra Life Protection is initially 40% of the total amount of insurance. It may increase but it will not decrease during the guaranteed period, so long as you pay premiums when they are due, no Policy debt is outstanding, all dividends are applied to purchase paid-up additions and no paid-up additions are surrendered for their cash value. Extra Life Protection consists of one year term insurance, positive variable insurance amount and paid-up additions which have been purchased with dividends. Term insurance is life insurance which pays a death benefit only if the insured dies during the term for which the insurance has been purchased. Term insurance is ordinarily purchased on an annual basis at a cost which rises with the increasing age of the insured. It has no cash surrender value or loan value. The variable insurance amount and paid-up additions have been described; see "Variable Insurance Amount", p. 11 and "Whole Life Policy and Single Premium Life Policy", p. 11. Initially the entire amount of Extra Life Protection is one year term insurance. As the Policy remains inforce one year term insurance is reduced by any positive variable insurance amount and paid-up additions, so that the term insurance is reduced to the amount that will maintain the Total Death Benefit at the amount for which the Policy was issued. The term insurance is eliminated at any time when the sum of positive variable insurance amount plus the paid-up additions equals or exceeds the initial amount of Extra Life Protection. We guarantee that the amount of Extra Life Protection will not be reduced during the guaranteed period, regardless of the Account's investment experience or the amount of any dividends paid on the Policy, so long as you pay premiums when they are due, no Policy debt is outstanding, all dividends are applied to purchase paid-up additions and no paid-up additions are surrendered for their cash value. The length of the guaranteed period depends on the age of the insured when we issued the Policy, and ranges from 37 years at age 15 to 7 years at age 75. At age 35 the guaranteed period is 27 years. The length of the guaranteed period is set forth in Your Policy. For an insured age 40 or younger, the sum of positive variable insurance amount plus paid-up additions will exceed the initial amount of Extra Life Protection at or before the end of the guaranteed period if the mutual fund assets which support the Policy produce a gross investment rate of return of 8% or better and dividends are at least equal to those we are paying on the current dividend scale. However, neither the actual investment results nor the dividends to be paid on the Policy are guaranteed. You may request an inforce illustration to illustrate the effect of various future rates of return on the amount of Extra Life Protection. After the guaranteed period expires, if the sum of positive variable insurance amount plus the paid-up additions is less than the initial amount of Extra Life Protection on any Policy anniversary, we may reduce the amount of term insurance for the Policy year. We will give you notice of the reduction and you will have an opportunity to pay an additional amount of premium in order to keep the initial amount of insurance inforce. The maximum premium rate is set forth in the Policy. Your right to continue to purchase term insurance on this basis will terminate as of the first Policy anniversary when you fail to pay the additional premium when due. The Total Death Benefit is not affected by either investment results or the amount of dividends paid, so long as the Policy is within the guaranteed period of Extra Life Protection unless the term insurance has been eliminated by positive variable insurance amount and paid-up additions. But the components of Extra Life Protection are affected by both factors. Good investment results and increases in dividends increase the likelihood that the Total Death Benefit will begin to rise before the guaranteed period of Extra Life Protection expires. Adverse investment results or decreases in dividends could cause the Total Death Benefit to fall below the amount of insurance which was initially inforce, after the guaranteed period of Extra Life Protection expires, but it cannot fall below the Minimum Death Benefit so long as you pay premiums when they are due and no Policy debt is outstanding. We have designed the Extra Ordinary Life Policy for a purchaser who intends to use all dividends to purchase paid-up additions. If you use dividends for any other purpose, or if any paid-up additions are surrendered for their cash value, the term insurance inforce will immediately terminate, any remaining guaranteed period of Extra Life Protection will Prospectus 12 terminate and your right to purchase term insurance will terminate. The amount of Extra Life Protection thereafter will be the sum of positive variable insurance amount plus any paid-up additions which remain inforce. Cash Value The cash value for the Whole Life Policy, the Extra Ordinary Life Policy and the Single Premium Life Policy will change daily in response to investment results. No minimum cash value is guaranteed. Calculation of the cash value for any date requires three steps. First, we note the amount shown for the preceding anniversary in the table of cash values at the front of the Policy and we adjust it for the time elapsed since the last Policy anniversary. The tabular cash values are based on the assumed net investment rate of 4%, the 1980 Commissioners Standard Ordinary Mortality Table and the deductions from the premiums. See "Deductions from Premiums for Whole Life and Extra Ordinary Life Policies", p.9. For the Single Premium Life Policy the calculation begins with the adjusted tabular cash value, which reflects the deduction for sales costs if the Policy is surrendered during the first ten years. See "Deductions for Single Premium Life Policies", p.10. Second, we add the net single premium for the variable insurance amount to the tabular cash value. See the discussion of net single premiums under "Variable Insurance Amount", p. 11. If the variable insurance amount is negative, the net single premium is a negative amount. A table of net single premiums for the insured at each Policy anniversary is in the Policy. Third, we adjust the algebraic sum of the tabular cash value and the net single premium for the variable insurance amount to reflect investment results from the last Policy anniversary to the date for which the calculation is being made. The cash value is increased by the value of any paid-up additions which have been purchased with dividends. If a portion of the premium for the current Policy year has not been paid, the cash value of a Whole Life Policy or an Extra Ordinary Life Policy will be reduced. There is not likely to be any cash value for a Whole Life Policy or an Extra Ordinary Life Policy during the early part of the first year because of the first year deductions. The cash value for the Whole Life Policy, the Extra Ordinary Life Policy and the Single Premium Life Policy will be reduced by the amount of any Policy debt outstanding. 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 a Policy for the cash value at any time during the lifetime of the insured. Alternatively, you may use the cash value of a Whole Life Policy or an Extra Ordinary Life Policy to provide extended term insurance or a reduced amount of fixed or variable paid-up insurance. See "Extended Term and Paid-Up Insurance", p. 14. The Policies do not include any provision for a partial surrender. By administrative practice we will permit you to split a Policy into two Policies and surrender one of them, so long as the new Policy meets the regular minimum size requirements. The Policy which continues inforce will be based on the age and risk classification of the insured at the time of issuance of the original Policy. 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. 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 beginning at the end of the second year. For Single Premium Life Policies, and some other Policies, the first distribution will be at the end of the first year. We will not pay a dividend on a Whole Life Policy or an Extra Ordinary Life Policy which is inforce as extended term insurance. 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 actual 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. Prospectus 13 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. You may use dividends to purchase variable paid-up additions. We will also pay dividends in cash, or you may use them to pay premiums or leave them to accumulate with interest; but unless you use all dividends we pay on an Extra Ordinary Life Policy to purchase paid-up additions, the term insurance portion of the Extra Life Protection will be terminated. See "Extra Ordinary Life Policy", p. 12. We hold dividends you leave to accumulate with interest in our general account and we will credit them with a rate of interest we determine annually. The interest rate will not be less than an annual effective rate of 3- 1/2%. If a Whole Life Policy or an Extra Ordinary Life Policy is inforce as reduced fixed benefit paid-up insurance, dividends to purchase fixed benefit paid-up additions. See "Extended Term and Paid-Up Insurance", p. 14. Policy Loans You may borrow up to 90% of a Policy's cash value using the Policy as security. The limit is 75% of the cash value during the first two Policy years. If a Policy loan is already outstanding, we determine the maximum amount for any new loan by applying these percentage limitations to the amount of cash value, which the Policy would have if there were no loan. You may take loan proceeds in cash, or, for the Whole Life and Extra Ordinary Life Policies, you may use 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's 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 inforce. You select the Policy loan interest rate. A specified annual effective rate of 8% is one choice. The other choice is a variable rate based on a corporate bond yield index. We will adjust the variable rate annually. 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 .85% for the 8% specified Policy loan interest rate and .85% for the variable Policy loan interest rate. For example, the earnings rate corresponding to the specified 8% Policy loan interest rate is currently 7.15%. A Policy loan, even if you repay it, will have a permanent effect on the Policy's variable insurance amount and cash value because the amounts you have 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. 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 we will transfer those amounts from our general account to the Account divisions, in proportion to the amounts in the divisions, as of the same date. Extended Term and Paid-Up Insurance If a premium for a Whole Life Policy or an Extra Ordinary Life Policy is not paid within the 31-day grace period (see "Grace Period", p. 8), you may use the cash value to provide a reduced amount of either fixed or variable benefit paid-up insurance. If you choose neither of these options, and do not surrender the Policy, the insurance will remain inforce as extended term insurance. If you use the cash value to provide a reduced amount of fixed benefit paid-up insurance or for extended term 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. 14. You may select variable benefit paid-up insurance only if the Policy meets a $1,000 cash value minimum test. You must select paid-up insurance within three months after the due date of the first unpaid premium. We determine the amount of paid-up insurance by the amount of cash value and the age and sex of the insured, using the table of net single premiums at the attained age. Fixed benefit paid-up insurance has guaranteed cash and loan values. Paid-up insurance remains inforce for the lifetime of the insured unless the Policy is surrendered. If the Policy remains inforce as extended term insurance the amount of insurance will equal the Total Death Benefit prior to the date the premium was due. The amount of cash value and the age and sex of the insured will determine how long the insurance continues. We will, upon your request, tell you the amount of insurance and how long the term will be. Extended term insurance is not available if the Policy was issued with a higher premium for extra mortality risk. Extended term insurance has a cash value but no loan value. Reinstatement If a premium for a Whole Life Policy or an Extra Ordinary Life Policy is due and remains unpaid after the grace period Prospectus 14 expires, the Policy may be reinstated within five years after the premium due date. The insured must provide satisfactory evidence of insurability. We may require substantial payment. The Policy may not be reinstated if you have surrendered it for its cash value. Right to Exchange for a Fixed Benefit Policy You may 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. We will give you notice of any such change and you 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 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 inforce 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. 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. Any 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 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 Whole Life Policy or an Extra Ordinary Life Policy is continued in force as extended term or reduced 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 Prospectus 15 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 Whole Life Policy or an Extra Ordinary Life Policy is inforce as extended term or 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. You will also receive annual and semiannual reports for the Account and both of the mutual funds, including financial statements. Special Policy for Employers The premium for the standard Policy is based in part on the sex of the insured. The standard annuity rates for payment plans which last for the lifetime of the payee are also based, in part, on the sex of the payee. 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 Whole Life Policies, Extra Ordinary Life Policies and Single Premium Life 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. 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 an illustration for your Policy upon request. The illustration will reflect the performance of your Policy to date and will show how the death benefit and cash value would vary based on hypothetical future investment results. 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 inforce , 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 below, a loan received under a Policy will not be treated as a distribution subject to current federal income tax. Interest paid by individual owners of the Policies will Prospectus 16 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.18. 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. 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 inforce 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 inforce, 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. 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, 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 Prospectus 17 will be taxed as described in the two preceding paragraphs. In addition, distributions from a Policy within two years before it becomes a modified endowment contract will be subject to tax in this manner. This means that a distribution made from a Policy that is not a modified endowment contract could later become taxable as a distribution from a modified endowment contract. The Secretary of the Treasury has been authorized to prescribe rules which would treat similarly other distributions made in anticipation of a policy becoming a modified endowment contract. Other Tax Considerations Business-owned life insurance may be subject to certain additional rules. Section 264(a)(1) of the Code generally disallows a deduction for premiums paid on Policies by anyone who is directly or indirectly a beneficiary under the Policy. Increases in 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 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 Prospectus 18 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 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". Prospectus 19 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 without charge if you call 1-888-455-2232. Prospectus 20 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 Commissions (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 the information may be obtained upon payment of a duplicating fee, by writing the Public Reference Section of the SEC, Washington, DC 20549-6009. Northwestern Mutual Northwestern Mutual Variable Life Northwestern Mutual Variable Life Account Northwestern Mutual Series Fund, Inc. Fidelity VIP Mid Cap Portfolio Russell Investment Funds The Northwestern Mutual Prospectuses Life Insurance Company Investment Company Act . Milwaukee, WI File Nos. 811-3990, 811-7205 and 811-5371 www.northwesternmutual.com 90-1898 (0386)(REV 0503) [LOGO] Northwestern Mutual(R) P.O. Box 3095 Milwaukee, WI 53201-3095 STATEMENT OF ADDITIONAL INFORMATION VARIABLE LIFE (Variable Whole Life Policy, Extra Ordinary Life Policy, and Single Premium Life Policy 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. - -------------------------------------------------------------------------------- The Date of the Prospectus to which this Statement of Additional Information 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. The principal business address of NMIS is 720 East Wisconsin Avenue, Milwaukee, Wisconsin 53202. 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 on sales of the Whole Life and Extra Ordinary Life Policies will not exceed 55% of the premium for the first year, 9% of the premium for the second and third years, 6% of the premium for the fourth through seventh years and 3% of the premium for the eighth through tenth years. Thereafter a persistency fee of 2% of premiums may be paid to the agent. For the Single Premium Life Policies commissions are 2-3/4% of the premium. 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)
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