<DOCUMENT>
<TYPE>497
<SEQUENCE>1
<FILENAME>d497.txt
<DESCRIPTION>NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT
<TEXT>
<PAGE>
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
<PAGE>
Contents for this Prospectus
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Page
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<S> <C>
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
</TABLE>
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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
</TABLE>
<PAGE>
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
<PAGE>
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.
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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
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Whole Life and Extra Ordinary Life Policies
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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
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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
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Single Premium Life Policy
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Administrative When we issue the $150 $150
Charge Policy
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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
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All Policies
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Administrative When you make a Currently waived The charge will not
Charge for partial surrender of exceed our
Partial the Policy administrative costs.
Surrender
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Fee for When you transfer Currently waived The fee will not exceed
Transfer of assets among the our administrative costs.
Assets Account divisions
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Whole Life and Extra Ordinary Life Policies
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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
-----------------------------------------------------------------------------------------------------
</TABLE>
Prospectus
2
<PAGE>
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.
<TABLE>
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<S> <C> <C> <C>
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
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Extra Ordinary Life Policies
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Charge for Annually, on the Maximum: 17% of the gross annual premium/1/ Same as current amount
Dividends Policy anniversary
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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
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All Policies
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Charge for Daily Annual rate of .50% of the Account assets Annual rate of .50% of the
Mortality and Account Assets
Expense Risks
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All Policies
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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
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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/
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All Policies
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Charge for Daily Annual rate of .85% of the borrowed amount/5/ No maximum specified
Mortality and
Expense Risks
and Expenses
for Loans
</TABLE>
/(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
<PAGE>
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.
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Charge Minimum Maximum
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Total Annual Fund Operating Expenses 0.21% 1.48%
</TABLE>
<TABLE>
<CAPTION>
Total Net Operating
Expenses (Including
Investment Total Contractual Waivers,
Advisory Other 12b-1 Operating Limitations and
Fund or Portfolio Fees Expenses Fees Expenses Reimbursements)
----------------- ---------- -------- ----- --------- --------------------
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
Prospectus
4
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
Excess of
Annual 12 Monthly
Sum of Premiums
Face Annual Monthly Monthly Over Annual
Age at Issue Amount Premium Premium Premiums Premium
------------ -------- --------- ------- --------- -----------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
Prospectus
7
<PAGE>
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.
<TABLE>
<CAPTION>
Excess of
Annual 12 Monthly
Sum of Premiums
Face Annual Monthly Monthly Over Annual
Age at Issue Amount Premium Premium Payments Premium
------------ ------ ------- ------- -------- -----------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
Face
Amount of Gross Single
Age at Issue Insurance Premium
------------ --------- ------------
<S> <C> <C>
15..... $10,000 $ 1,498.40
35..... 25,000 6,443.25
55..... 50,000 23,502.00
</TABLE>
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
<PAGE>
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
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9
<PAGE>
Account at the beginning of each Policy year after the deductions described
above:
Whole Life
<TABLE>
<CAPTION>
Male Age 35--Select Risk
Annual Premium
Beginning of -------------------------
Policy Year $500 $1,000 $5,000
----------- ------- ------- ---------
<S> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
Extra Ordinary Life
Male Age 35--Select Risk
Annual Premium
Beginning of -------------------------
Policy Year $500 $1,000 $5,000
----------- ------- ------- ---------
<S> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
Policy Year End When Deduction as % of
Policy Is Surrendered Tabular Cash Value
--------------------- ------------------
<S> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
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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
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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
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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
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<PAGE>
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
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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
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<PAGE>
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".
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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.
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<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
Financial Statements
Northwestern Mutual Variable Life Account
Statement of Assets and Liabilities
December 31, 2002
(in thousands)
<TABLE>
<S> <C> <C>
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
==========
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements
B-4
<PAGE>
Northwestern Mutual Variable Life Account
Statements of Operations
(in thousands)
<TABLE>
<CAPTION>
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
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
========= ========= ======== ===== ======= ====
<CAPTION>
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
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
======== ========= ===== ====
</TABLE>
#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
<PAGE>
Northwestern Mutual Variable Life Account
Statements of Operations
(in thousands)
<TABLE>
<CAPTION>
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
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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)
======== ======== ======== ===== ======== ========
<CAPTION>
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
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
======== ======== ======= ====
</TABLE>
#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
<PAGE>
Northwestern Mutual Variable Life Account
Statements of Operations
(in thousands)
<TABLE>
<CAPTION>
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
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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)
========= ======== ===== === ======== =======
<CAPTION>
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
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
======= ======= ====== ======= ====== ======
</TABLE>
#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
<PAGE>
Northwestern Mutual Variable Life Account
Statements of Operations
(in thousands)
<TABLE>
<CAPTION>
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
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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)
======== ======= ======= ===== ======= =======
<CAPTION>
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
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
====== ==== ======= =====
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements
B-8
<PAGE>
Northwestern Mutual Variable Life Account
Statements of Changes in Equity
(in thousands)
<TABLE>
<CAPTION>
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
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
========== ========== ======== ======= ======= ======
<CAPTION>
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
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
======== ========= ======= ======
</TABLE>
#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
<PAGE>
Northwestern Mutual Variable Life Account
Statements of Changes in Equity
(in thousands)
<TABLE>
<CAPTION>
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
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
======== ======== ======== ======= ======== ========
<CAPTION>
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
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
======== ======== ======= ======
</TABLE>
#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
<PAGE>
Northwestern Mutual Variable Life Account
Statements of Changes in Equity
(in thousands)
<TABLE>
<CAPTION>
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
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
========= ======== ====== ====== ======== ========
<CAPTION>
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
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
======= ======= ======== ======== ========= =========
</TABLE>
#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
<PAGE>
Northwestern Mutual Variable Life Account
Statements of Changes in Equity
(in thousands)
<TABLE>
<CAPTION>
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
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
======== ======= ======= ======= ======== ========
<CAPTION>
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
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
======= ======= ======= =======
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements
B-12
<PAGE>
Financial Highlights
Northwestern Mutual Variable Life Account
(For a unit outstanding during the period)
<TABLE>
<CAPTION>
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
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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%
</TABLE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
Notes to Financial Statements
Note 8 -- Equity Values by Division are shown below:
(in thousands, except accumulation unit values)
<TABLE>
<CAPTION>
Variable Life
Policies Issued
Before
October 11, 1995
Equity of:
--------------------- Total
Division Policyowners NML Equity
-------- ------------ -------- ----------
<S> <C> <C> <C>
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
========== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
Variable Life
Policies Issued
On or After
October 11, 1995
Equity of:
----------------------- Total
Division Policyowners NML Equity
-------- ------------ ---------- ----------
<S> <C> <C> <C>
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
========== ========== ==========
</TABLE>
B-16
<PAGE>
Notes to Financial Statements
<TABLE>
<CAPTION>
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
-------- --------------- -----------------
<S> <C> <C>
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
======= =======
</TABLE>
B-17
<PAGE>
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
<PAGE>
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
<PAGE>
FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL
The Northwestern Mutual Life Insurance Company
Consolidated Statement of Operations
(in millions)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the year ended
December 31,
-------------------------------------------
2002 2001 2000
-------- -------- --------
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
B-20
<PAGE>
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
<PAGE>
FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL
The Northwestern Mutual Life Insurance Company
Consolidated Statement of Cash Flows
(in millions)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the year ended
December 31,
--------------------------------
2002 2001 2000
-------- -------- --------
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
B-22
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
December 31, 2002 Reconciliation to Estimated Fair Value
----------------- -----------------------------------------------------------
Gross Gross Estimated
Statement Unrealized Unrealized Fair
Value Gains Losses Value
------------- ---------- ----------- -----------
(in millions)
<S> <C> <C> <C> <C>
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
============= ========== =========== =============
<CAPTION>
December 31, 2001 Reconciliation to Estimated Fair Value
----------------- -------------------------------------------------------------
Gross Gross Estimated
Statement Unrealized Unrealized Fair
Value Gains Losses Value
------------- ---------- ----------- -------------
(in millions)
<S> <C> <C> <C> <C>
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
============= ========== =========== =============
</TABLE>
B-28
<PAGE>
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.
<TABLE>
<CAPTION>
Statement Estimated
Value Fair Value
--------- -----------
(in millions)
<S> <C> <C>
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
========= =========
</TABLE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
======== ======== ==========
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
December 31, 2002 December 31, 2001
------------------------------ -----------------------------
Carrying Notional Fair Carrying Notional Fair
Derivative Instrument Value Amount Value Value Amount Value
------------------------------------ ------------------------------ -----------------------------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
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 -
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
December 31, 2002 December 31, 2001
------------------------ ------------------------
Amount Percent Amount Percent
----------- ---------- --------- ----------
(in millions)
<S> <C> <C> <C> <C>
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%
=========== =========
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
December 31, 2002 December 31, 2001
---------------------------- ---------------------------
Type of Business Gross Net Gross Net
----------------------- ------------ -------------- ----------- ------------
(in millions)
<S> <C> <C> <C> <C>
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
============ ============== =========== ============
</TABLE>
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:
<TABLE>
<CAPTION>
December 31,
------------------------------
2002 2001
------------ -------------
(in millions)
<S> <C> <C>
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
============ =============
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
For the year ended December 31,
-----------------------------------
2002 2001
--------------- --------------
(in millions)
<S> <C> <C>
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
=============== ==============
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Defined Benefit Plans Postretirement Benefits
---------------------- -------------------------
2002 2001 2002 2001
--------- ------------ ----------- -------------
(in millions)
<S> <C> <C> <C> <C>
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
========= ============= ========= ==============
</TABLE>
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:
<TABLE>
<CAPTION>
Defined Benefit Plans Postretirement Benefits
------------------------- --------------------------
2002 2001 2002 2001
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
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%
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Defined Benefit Plans Postretirement Benefits
-------------------------- -------------------------
2002 2001 2002 2001
------------- ------------ ------------ ------------
(in millions)
<S> <C> <C> <C> <C>
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
============= ============ ============ ============
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
For the year ended December 31,
----------------------------------------
2002 2001 2000
----------- ---------------- -----------
(in millions)
<S> <C> <C> <C>
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
=========== ============ ===========
</TABLE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
December 31,
-------------------------------
2002 2001 Change
-------------- -------------- --------------
(in millions)
<S> <C> <C> <C>
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
================================================
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
December December
31, 2002 31, 2001
-------------------------- ----------------------------
Statement Fair Statement Fair
Value Value Value Value
----------- ----------- ----------- -----------
(in millions)
<S> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE>
[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
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
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)
</TABLE>
B-49
</TEXT>
</DOCUMENT>