ITEM 1. BUSINESS
Accounts A & C
NML Variable Annuity Account A ("Account A") and NML Variable Annuity Account C ("Account C") are segregated asset accounts of The Northwestern Mutual Life Insurance Company ("Northwestern Mutual") formed to provide retirement annuity benefits for (i) employees of corporate employers who adopt pension or profit sharing plans meeting the requirements of Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), or annuity purchase plans meeting the requirements of Section 403(a) of the Code (collectively, "Corporate Plans"), and (ii) for self-employed individuals (and their eligible employees) who adopt plans meeting the requirements of Sections 401 or 403(a) of the Code ("HR-10 Plans"). Account A receives payments under individual variable annuity contracts issued by Northwestern Mutual in connection with Corporate Plans and HR-10 Plans. Account C receives payments under group combination variable annuity contracts issued by Northwestern Mutual in connection with Corporate Plans and HR-10 Plans. The variable annuity contracts issued by Northwestern Mutual in connection with Corporate Plans and HR-10 Plans are hereinafter referred to as the "Contracts." Account A and Account C were established on February 14, 1968 and July 22, 1970, respectively, by action of the Board of Trustees of Northwestern Mutual in accordance with the provisions of Wisconsin insurance law. Neither Account A nor Account C is registered as an investment company under the Investment Company Act of 1940.
The Contracts provide for the accumulation of funds and the payment of retirement benefits to participants and their beneficiaries ("Annuitants"). Account A and Account C each have 16 divisions. Money invested to provide variable benefits under the Contracts is placed in one or more divisions of the applicable Account which are in turn invested in 11 portfolios of Northwestern Mutual Series Fund, Inc. (Small Cap Growth Stock Portfolio, Aggressive Growth Stock Portfolio, International Equity Portfolio, Index 400 Stock Portfolio, Growth Stock Portfolio, Growth and Income Stock Portfolio, Index 500 Stock Portfolio, Balanced Portfolio, High Yield Bond Portfolio, Select Bond Portfolio and Money Market Portfolio) and 5 funds of Russell Insurance Funds (Multi-Style Equity Fund, Aggressive Equity Fund, Non-U.S. Fund, Real Estate Securities Fund and Core Bond Fund), each of which corresponds to one of the Account divisions, all as directed by the Annuitant. Northwestern Mutual Series Fund, Inc. and Russell Insurance Funds, which are affiliates of Northwestern Mutual, are registered as investment companies under the Investment Company Act of 1940. The Contracts are sold through individuals who, in addition to being licensed insurance agents of Northwestern Mutual, are registered representatives of Northwestern Mutual Investment Services, LLC ("NMIS"), a wholly-owned subsidiary of Northwestern Mutual and a registered broker-dealer under the Securities Exchange Act of 1934.
Under Wisconsin law, the investment operations of each of Account A and Account C are kept separate from the operations of Northwestern Mutual. Northwestern Mutual and its creditors cannot reach assets in Account A or Account C to satisfy non-Contract related obligations until all obligations under the Contracts have been satisfied.
See Item 8 herein for the audited financial statements of Account A and Account C.
Northwestern Mutual
Founded in 1857, Northwestern Mutual is a mutual insurance company organized under the laws of the State of Wisconsin. Northwestern Mutual's products consist of a complete range of permanent and term life insurance, disability income insurance, long-term care insurance, mutual funds and annuities for personal, estate, retirement, business and benefits planning. Northwestern Mutual markets its insurance products and services in all 50 states of the United States and in the District of Columbia through an exclusive network of approximately 7,500 agents at December 31, 2000 associated with over 100 general agencies. At December 31, 2000, Northwestern Mutual had approximately 3,900 full- and part-time employees.
Northwestern Mutual's three principal lines of business are: (i) life insurance, which provides a full range of individual life insurance products, including traditional whole life, CompLife, variable life and term policies to meet the needs of middle to upper income individuals, small business owners and professionals, estates and selected large corporations; (ii) disability income insurance, which provides a complete line of individual and group products, including individual non-cancelable, guaranteed renewable loss of earnings, buyout, key person, and short and long-term group coverages, marketed primarily to middle to upper income individuals, professionals, and small- to medium-sized businesses and their owners; and (iii) annuity and accumulation products, which provide individual variable, fixed and immediate annuities offered in conjunction with qualified pension plans, retirement plans for self employed individuals, individual retirement and personal non-tax qualified situations, group annuities and a family of retail mutual funds known as Mason Street Funds, marketed primarily to middle to upper income individuals, small business owners and professionals. A new business line for Northwestern Mutual, long-term care insurance, commenced in August 1998 with the introduction of its QuietCare product. For the years ended December 31, 2000, 1999, and 1998, Northwestern Mutual had total premiums, including annuity considerations and deposit funds, of $8.9 billion, $8.3 billion, and $8.0 billion, respectively, of which $7.3 billion, $6.8 billion, and $6.5 billion, respectively, was attributable to life insurance, $0.6 billion, $0.5 billion, and $0.5 billion, respectively, was attributable to disability income insurance and $1.0 billion, $1.0 billion, and $1.0 billion, respectively, was attributable to annuity and accumulation products.
The life insurance industry is mature and highly competitive. Competitiveness in the life insurance business is affected by various factors including, but not limited to, product quality, financial strength and stability, claims-paying ratings, size and competence of agency force, range of product lines, customer service, and reputation. During 2000, there were approximately 1,500 life insurance companies in the United States and many of these companies offer individual life insurance and annuity products similar to those offered by Northwestern Mutual. In addition, Northwestern Mutual competes with banks, brokerage firms, investment advisers, mutual funds and other financial entities for investment and savings customers. In the individual and group disability markets, Northwestern Mutual competes with a limited number of major national and regional companies offering these specialized products. National banks, with their pre-existing customer bases for financial services products, may pose increasing competition in the future to insurers who sell life insurance and annuity products, including Northwestern Mutual. Recent United States Supreme Court decisions have expanded the authority of national banks to sell life insurance products and annuities. In addition, legislation to overturn Depression-era restrictions on bank affiliations, the Gramm-Leach-Bliley Act (the "Act"), was signed into law on November 12, 1999, implementing fundamental changes in the regulation of the financial services industry in the U.S. Generally effective March 11, 2000, the Act eliminates certain barriers to and restrictions on affiliations between banks, securities firms and insurance companies that were previously contained in the Glass-Steagall Act of 1933, as amended, and the Bank Holding Company Act of 1956, as amended. Under the Act, through the use of two new structures, financial holding companies and financial subsidiaries, qualifying bank holding companies and state and national banks will be allowed to provide a wide variety of financial services, including the authority to engage in certain insurance activities (e.g., the sale and, in the case of qualifying bank holding companies only, the underwriting of insurance and annuities). As a result of the Act, among other things, bank holding companies may acquire insurers and insurance holding companies may acquire banks. While it is too early to assess the effects of the Act on Northwestern Mutual, the Act may change the competitive and regulatory environment in which Northwestern Mutual and its subsidiaries conduct their businesses and may result in additional competition in one or more markets in which they sell their products and services.
Northwestern Mutual is licensed to transact its insurance business in, and is subject to regulation and supervision by, all 50 states of the United States and the District of Columbia. Northwestern Long Term Care Insurance Company, Northwestern Mutual's only insurance subsidiary, is authorized and regulated in all jurisdictions in which it conducts its long-term care business. The extent of such regulation varies, but most jurisdictions have laws and regulations governing the financial aspects of insurance companies, including standards of solvency, reserves, reinsurance, capital adequacy and the business conduct of insurance companies. In addition, statutes and regulations usually require the licensing of insurers and their agents, the approval of policy forms and related materials and, for certain lines of insurance, the approval of rates. Such statutes and regulations also prescribe the permitted types and concentration of investments. The Act reaffirms that the states are to remain responsible for regulating the business of insurance. However, subject to certain exceptions, no state authority can prevent or restrict depository institutions and their affiliates from affiliating with insurance companies as permitted under the Act. In addition, certain state laws and regulations that place restrictions on a depository institution's insurance sales activities would be preempted.
Robert W. Baird & Co. Incorporated ("Baird"), a subsidiary of Northwestern Mutual, is one of the nation's largest investment banking firms headquartered outside New York based on dollar volume of underwritings, amount of equity capital, and the number of financial advisors and branch offices. Baird, a member of the New York Stock Exchange, Inc., provides broker-dealer, asset management, equity research, investment banking, merchant banking and public finance services for individuals, corporations, municipalities and institutional investors.
On January 1, 1999, Northwestern Mutual acquired all the outstanding common stock of Frank Russell Company ("Frank Russell"). Founded in 1936, Frank Russell is a leading investment management and consulting firm, providing investment advice, analytical tools and funds to institutional and individual investors in more than 30 countries. Through its subsidiaries, at December 31, 2000, Frank Russell managed approximately $66 billion in assets. Frank Russell is also well known for its family of market indices, including the Russell 2000, which provide complete sets of performance benchmarks for investors in Canada, Japan, the United Kingdom and the United States.
See Item 14 herein for the audited consolidated financial statements of Northwestern Mutual.
Purpose of Annual Report
This Annual Report on Form 10-K of Northwestern Mutual is filed with respect to its Account A and Account C. While certain information in this Form 10-K relates to Northwestern Mutual as a whole, this Form 10-K is intended to provide information with respect to such Account A and Account C where relevant.
ITEM 2.
ITEM 2. PROPERTIES
Account A and Account C own no physical properties. Northwestern Mutual owns and occupies all of the space in its home office complex in Milwaukee, Wisconsin. Northwestern Mutual is the lessee of nine leases covering its real estate regional offices in locations throughout the United States.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Neither Account A nor Account C are involved in any pending legal proceedings. Northwestern Mutual is subject to various claims and proceedings, including claims or proceedings related to its investments, that occur in the ordinary course of its business. Based on information currently available to Northwestern Mutual, Northwestern Mutual believes that none of these current claims or proceedings, either individually or in the aggregate, will have a material adverse effect on the financial position of Northwestern Mutual.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As segregated asset accounts, Account A and Account C have no common equity securities issued by them. As a mutual life insurance company, Northwestern Mutual has no common equity securities issued by it.
The Contracts issued in connection with Account A and Account C, and interests in those Contracts, are offered on a continuous basis to Corporate Plans and HR-10 Plans. The Contracts for Corporate Plans are not registered under the Securities Act of 1933, in reliance on the exemption provided by Section 3(a)(2) thereof. All of the Contracts are offered exclusively by agents of the Northwestern Mutual who are also registered representatives of NMIS.
During 2000, the following aggregate dollar amounts of such unregistered securities were sold to Corporate Plans, generating the aggregate commissions stated:
ACCOUNT A ACCOUNT C
AMOUNT SOLD COMMISSIONS AMOUNT SOLD COMMISSIONS --------------- -------------- ---------------- -------------- $38,241,379 (A) $1,397,072 (B) $105,609,072 (A) $1,232,674 (B)
- ----------
(A) Reflects premiums paid by Contract holders as well as dividend additions.
(B) Reflects an estimate of amounts paid to Northwestern Mutual financial representatives for sales to Corporate Plans based on a pro rata allocation of all Contract sales under the Account.
Accumulation units in Account A and Account C represent the interests of Contract owners. Purchase payments are applied to credit additional accumulation units based on the accumulation unit value next determined after each payment is received. Accumulation units are valued as of the close of business on the New York Stock Exchange on each business day.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected historical financial data for Account A for the five years in the period ended December 31, 2000. The data should be read in conjunction with the financial statements and notes thereto of Account A contained in Item 8 of this Annual Report.
Results of Operations for Account A for each of the five years ending December 31, follows:
- -------------------- # Became an investment option under the Contracts effective April 30, 1999.
Changes in Equity for Account A for each of the five years ending December 31, follows:
Total Assets of Account A at December 31, follows:
- ------------ # Became an investment option under the Contracts effective April 30, 1999.
The following tables set forth selected historical financial data for Account C for the five years in the period ended December 31, 2000. The data should be read in conjunction with the financial statements and notes thereto of Account C contained in Item 8 of this Annual Report.
- ------------------ # Became an investment option under the Contracts effective April 30, 1999.
Changes in Equity for Account C for each of the five years ending December 31, follows:
Total Assets of Account C at December 31, follows:
- -------------------- # Became an investment option under the Contracts effective April 30, 1999.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity
The assets of Account A and Account C are invested solely in shares of Northwestern Mutual Series Fund, Inc. ("Series Fund") and the Russell Insurance Funds ("Russell Funds," and collectively with the Series Fund, the "Funds"). The Series Fund consists of the Small Cap Growth Stock Portfolio, Aggressive Growth Stock Portfolio, International Equity Portfolio, Index 400 Stock Portfolio, Growth Stock Portfolio, Growth and Income Stock Portfolio, Index 500 Stock Portfolio, Balanced Portfolio, High Yield Bond Portfolio, Select Bond Portfolio and the Money Market Portfolio. The Russell Funds consist of the Multi-Style Equity Fund, Aggressive Equity Fund, Non-U.S. Fund, Real Estate Securities Fund and Core Bond Fund. The Funds are open-end investment companies registered under the Investment Company Act of 1940. In order to pay annuity benefits and expenses, the Accounts redeem shares in the Funds.
Capital Resources
All payments from Contract owners of Account A and Account C are invested in shares of the Funds. The capital resources of Account A and Account C are the equity in the respective Accounts. This consists of payments from the Contract owners, plus unrealized and realized appreciation on the investment of these payments, plus investment income received from the Funds, minus payment of annuity benefits and expenses.
Results of Operations
Accumulation units in Account A and Account C represent the interests of Contract owners. The value of an accumulation unit in each division varies with the investment experience of the division, which in turn is determined by the investment experience of the corresponding portfolio or fund. Set forth below for each of Account A and Account C are accumulation unit values at December 31, 2000, 1999, and 1998 for each division, and the percentage change in such values from year to year.
ACCOUNT A
Accumulation Unit Values Contracts Issued Prior to December 17, 1981:
- -------------------- # Became an investment option under the Contracts effective April 30, 1999. * Includes accumulation unit values at inception date in 1999 for portfolios becoming effective after December 31, 1998.
Accumulation Unit Values Contracts Issued After December 16, 1981 and Prior to March 31, 1995:
- -------------------- # Became an investment option under the Contracts effective April 30, 1999. * Includes accumulation unit values at inception date in 1999 for portfolios becoming effective after December 31, 1998.
Accumulation Unit Values Contracts Issued On or After March 31, 1995 and Prior to March 31, 2000 - Front Load Version:
- -------------------- # Became an investment option under the Contracts effective April 30, 1999. * Includes accumulation unit values at inception date in 1999 for portfolios becoming effective after December 31, 1998.
Accumulation Unit Values Contracts Issued On or After March 31, 1995 and Prior to March 31, 2000 - Back Load Version:
# Became an investment option under the Contracts effective April 30, 1999. * Includes accumulation unit values at inception date in 1999 for portfolios becoming effective after December 31, 1998.
Accumulation Unit Values Contracts Issued On or After March 31, 2000 - Front Load Version:
Accumulation Unit Values Contracts Issued On or After March 31, 2000 - Back Load Version:
TOTAL EQUITY:
The changes in Total Equity are largely derived from investment activities within the Account: A $16,892,956 decrease for the year ended December 31, 2000, a $108,667,147 increase for the year ended December 31, 1999, and a $100,041,767 increase for the year ended December 31, 1998. Net contributions (surrenders) from Contract owners amounted to ($69,957,303) for the year ended December 31, 2000, ($50,096,231) for the year ended December 31, 1999, and ($22,802,357) for the year ended December 31, 1998.
ACCOUNT C
Accumulation Unit Values Contracts Issued Prior to December 17, 1981 or between April 30, 1984 and December 31, 1991:
- -------------------- # Became an investment option under the Contracts effective April 30, 1999. * Includes accumulation unit values at inception date in 1999 for portfolios becoming effective after December 31, 1998.
Accumulation Unit Values Contracts Issued After December 16, 1981 and Prior to May 1, 1984:
- -------------------- # Became an investment option under the Contracts effective April 30, 1999. * Includes accumulation unit values at inception date in 1999 for portfolios becoming effective after December 31, 1998.
Accumulation Unit Values Contracts Issued After December 31, 1991 - Front Load Version:
- -------------------- # Became an investment option under the Contracts effective April 30, 1999. * Includes accumulation unit values at inception date in 1999 for portfolios becoming effective after December 31, 1998.
Accumulation Unit Values Contracts Issued After December 31, 1991 - Simplified Load Version:
- -------------------- # Became an investment option under the Contracts effective April 30, 1999. * Includes accumulation unit values at inception date in 1999 for portfolios becoming effective after December 31, 1998.
The changes in Total Equity are largely derived from investment activities within the Account: A $14,936,698 decrease for the year ended December 31, 2000, a $118,331,523 increase for the year ended December 31, 1999, and an $90,196,632 increase for the year ended December 31, 1998. Net contributions (surrenders) from Contract owners amounted to ($32,945,023) for the year ended December 31, 2000, ($42,701,746) for the year ended December 31, 1999, and $6,901,342 for the year ended December 31, 1998.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The assets of Account A and Account C consist entirely of shares of the 11 portfolios of the Series Fund and 5 portfolios of the Russell Funds, together with current amounts due from the sale of Series Fund and Russell Funds shares and due from Northwestern Mutual. The liabilities of each of Account A and Account C consist of current amounts due to Contract owners, due to Northwestern Mutual and due on purchase of Series Fund and Russell Funds shares. Neither of the Accounts enters into any market risk sensitive instruments, either for trading purposes or for purposes other than trading purposes.
Derivative Financial Instruments
In the normal course of business, the Series Fund and the Russell Funds enter into transactions to reduce their exposure to fluctuations in interest rates, foreign currency exchange rates and market volatility. These hedging strategies include the use of forwards, futures, and written options.
The Series Fund and Russell Funds held the following positions for hedging purposes at December 31, 2000 and 1999:
The notional or contractual amounts of derivative financial instruments are used to denominate these types of transactions and do not represent the amounts exchanged between the parties. Stock and bond futures, foreign currency forwards and spot contracts, and written options are reported at fair value on a daily basis. Resulting gains and losses on these contracts are unrealized until expiration of the contract. All of the stock and bond futures, foreign currency forwards and spot contracts, and written options of the Funds at December 31, 2000 will expire or settle in 2001. Changes in the value of derivative investments are expected to offset gains and losses on the hedged investments. The effect of derivative instruments in 2000 and 1999 was not material to the Funds' results of operations.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NML VARIABLE ANNUITY ACCOUNT A STATEMENT OF ASSETS AND LIABILITIES
NML VARIABLE ANNUITY ACCOUNT A STATEMENT OF ASSETS AND LIABILITIES CONTINUED
The Accompanying Notes are an Integral Part of the Financial Statements.
NML VARIABLE ANNUITY ACCOUNT A COMBINED STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31
The Accompanying Notes are an Integral Part of the Financial Statements.
NML VARIABLE ANNUITY ACCOUNT A COMBINED STATEMENT OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31
The Accompanying Notes are an Integral Part of the Financial Statements.
NML VARIABLE ANNUITY ACCOUNT A NOTES TO FINANCIAL STATEMENTS
Note 1--NML Variable Annuity Account A (the "Account") is a segregated asset account of The Northwestern Mutual Life Insurance Company ("Northwestern Mutual" or "Sponsor") used to fund variable annuity contracts ("contracts") for HR-10 and corporate pension and profit-sharing plans which qualify for special tax treatment under the Internal Revenue Code. Beginning March 31, 1995, two versions of the contract are offered: Front Load contracts with a sales charge up to 4% of purchase payments and Back Load contracts with a withdrawal charge of 0-8%.
Note 2--The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Principal accounting policies are summarized below.
Note 3--All assets of each Division of the Account are invested in shares of the corresponding Portfolio of Northwestern Mutual Series Fund, Inc. and the Russell Insurance Funds (collectively known as the "Funds"). The shares are valued at the Funds' offering and redemption price per share.
The Funds are open-end investment companies registered under the Investment Company Act of 1940.
Note 4--Annuity reserves are based on published annuity tables with age adjustment and benefit payments, which reflect actual investment experience. For variable payment plans issued prior to January 1, 1974, annuity reserves are based on the 1955 American Annuity Table with assumed interest rates of 3% or 5%. For variable payment plans issued on or after January 1, 1974 and before January 1, 1995, annuity reserves are based on the 1971 Individual Annuity Table with assumed interest rates of 3-1/2% or 5%. For variable payment plans issued on or after January 1, 1985, annuity reserves are based on the 1985 Individual Annuity Table with assumed interest rates of 3-1/2% or 5%.
Note 5--Dividend income from the Funds is recorded on the record date of the dividends. Transactions in the Funds shares are accounted for on the trade date. The basis for determining cost on sale of the Funds shares is identified cost. Purchases and sales of the Funds shares for the years ended December 31 by each Division are shown below:
Note 6--A deduction for annuity rate and expense guarantees is determined daily and paid to Northwestern Mutual as compensation for assuming the risk that annuity payments will continue for longer periods than anticipated because the annuitants as a group live longer than expected, and the risk that the charges made by Northwestern Mutual may be insufficient to cover the actual costs incurred in connection with the contracts.
For contracts issued on or after March 31, 2000, for the Front Load version and the Back Load version, the deduction for annuity rate and expense guarantees is determined daily at annual rates of 5/10 of 1% and 1-1/4%, respectively, of the net assets of each Division attributable to these contracts and is paid to Northwestern Mutual. For these contracts, the rates may be increased or decreased by the Board of Trustees of Northwestern Mutual not to exceed 3/4 of 1% and 1-1/2% annual rates, respectively. The current charges will not be increased for five years from the date of the most recent Prospectus.
For contracts issued on or after March 31, 1995 and prior to March 31, 2000, for the Front Load version and the Back Load version, the deduction for annuity rate and expense guarantees is determined daily at annual rates of 4/10 of 1% and a 1-1/4%, respectively, of the net assets of each Division attributable to these contracts and is paid to Northwestern Mutual. For these contracts, the rates may be increased or decreased by the Board of Trustees of Northwestern Mutual not to exceed 3/4 of 1% and 1-1/2%, respectively.
For contracts issued after December 16, 1981 and prior to March 31, 1995, the deduction is at an annual rate of 1-1/4% of the net assets of each Division attributable to these contracts. For these contracts, the rate may be increased or decreased by the Board of Trustees of Northwestern Mutual not to exceed a 1-1/2% annual rate.
For contracts issued prior to December 17, 1981, the deduction is at an annual rate of 3/4 of 1% of the net assets of each Division attributable to these contracts. For these contracts, the rate may be increased or decreased by the Board of Trustees of Northwestern Mutual not to exceed a 1% annual rate.
Since 1995, Northwestern Mutual has paid a dividend to certain contracts. The dividend is reinvested in the Account and has been reflected as a Contract Owners' Net Payment in the accompanying financial statements.
Note 7--Northwestern Mutual is taxed as a "life insurance company" under the Internal Revenue Code and the operations of the Account form a part of and are taxed with those of Northwestern Mutual. Under current law, no federal income taxes are payable with respect to the Account. Accordingly, no provision for any such liability has been made.
Note 8--Equity Values by Division for the year ended December 31, 2000 are shown below:
Equity Values by Division for the year ended December 31, 1999 are shown below:
Report of Independent Accountants
To The Northwestern Mutual Life Insurance Company and Contract Owners of NML Variable Annuity Account A
In our opinion, the statements appearing on pages 16 through 21 present fairly, in all material respects, the financial position of NML Variable Annuity Account A at December 31, 2000 and 1999, and the results of its operations and the changes in its equity for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of The Northwestern Mutual Life Insurance Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included direct confirmation of the number of shares owned at December 31, 2000 with Northwestern Mutual Series Fund, Inc., and the Russell Insurance Funds, provide a reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP Milwaukee, Wisconsin January 26, 2001
NML VARIABLE ANNUITY ACCOUNT C STATEMENT OF ASSETS AND LIABILITIES
NML VARIABLE ANNUITY ACCOUNT C STATEMENT OF ASSETS AND LIABILITIES CONTINUED
The Accompanying Notes are an Integral Part of the Financial Statements.
NML VARIABLE ANNUITY ACCOUNT C COMBINED STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31
The Accompanying Notes are an Integral Part of the Financial Statements.
NML VARIABLE ANNUITY ACCOUNT C COMBINED STATEMENT OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31
The Accompanying Notes are an Integral Part of the Financial Statements.
NML VARIABLE ANNUITY ACCOUNT C NOTES TO FINANCIAL STATEMENTS
Note 1-- NML Variable Annuity Account C (the "Account") is a segregated asset account of The Northwestern Mutual Life Insurance Company ("Northwestern Mutual" or "Sponsor") used to fund variable annuity contracts ("contracts") for HR-10 and corporate pension and profit-sharing plans which qualify for special tax treatment under the Internal Revenue Code. Beginning December 31, 1991, two versions of the contract are offered: Front Load contracts with a sales charge up to 4.5% of purchase payments and Simplified Load contracts with an installation fee of $750.
Note 2-- The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Principal accounting policies are summarized below.
Note 3-- All assets of each Division of the Account are invested in shares of the corresponding Portfolio of Northwestern Mutual Series Fund, Inc. and the Russell Insurance Funds (collectively know as the "Funds"). The shares are valued at the Funds' offering and redemption price per share.
The Funds are open-end investment companies registered under the Investment Company Act of 1940.
Note 4-- Annuity reserves are based on published annuity tables with age adjustments and benefit payments which reflect actual investment experience. Annuity reserves are based on the 1983 Table with assumed interest rates of 3-1/2% or 5%.
Note 5-- Dividend income from the Funds is recorded on the record date of the dividends. Transactions in the Funds shares are accounted for on the trade date. The basis for determining cost on sale of the Funds shares is identified cost. Purchases and sales of the Funds shares for the years ended December 31 by each Division are shown below:
Note 6-- A deduction for annuity rate and expense guarantees is determined daily and paid to Northwestern Mutual as compensation for assuming the risk that annuity payments will continue for longer periods than anticipated because the annuitants as a group live longer than expected and the risk that the charges made by Northwestern Mutual may be insufficient to cover the actual costs incurred in connection with the contracts.
Generally, for contracts issued after December 31, 1991, for the Front Load Version and the Simplified Load Version, the deduction for annuity rate and expense guarantees is determined daily at annual rates of 6.5/10 of 1% and 1-1/4%, respectively, of the net assets of each Division attributable to these contracts and is paid to Northwestern Mutual. For these contracts, the rates may be increased or decreased by the Board of Trustees of Northwestern Mutual not to exceed 1% and 1-1/2% annual rates, respectively.
For contracts issued after December 16, 1981, and prior to May 1, 1984, the deduction is determined daily at an annual rate of 1/2 of 1% of the net assets of each Division attributable to these contracts and is paid to Northwestern Mutual. For these contracts, the rate may be increased or decreased by the Board of Trustees of Northwestern Mutual not to exceed a 3/4 of 1% annual rate.
Since 1996, Northwestern Mutual has paid a dividend to certain contracts. The dividend is re-invested in the Account and has been reflected as a Contract Owners' Net Payment in the accompanying financial statements.
Note 7-- Northwestern Mutual is taxed as a "life insurance company" under the Internal Revenue Code and the operations of the Account form a part of and are taxed with those of Northwestern Mutual. Under current law, no federal income taxes are payable with respect to the Account. Accordingly, no provision for any such liability has been made.
Note 8-- Equity Values by Division for the year ended December 31, 2000 are shown below:
Equity Values by Division for the year ended December 31, 1999 are shown below:
Report of Independent Accountants
To The Northwestern Mutual Life Insurance Company and Contract Owners of NML Variable Annuity Account C
In our opinion, the statements appearing on pages 23 through 28 present fairly, in all material respects, the financial position of NML Variable Annuity Account C at December 31, 2000 and 1999, and the results of its operations and the changes in its equity for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of The Northwestern Mutual Life Insurance Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included direct confirmation of the number of shares owned at December 31, 2000 with Northwestern Mutual Series Fund, Inc., and the Russell Insurance Funds, provide a reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP Milwaukee, Wisconsin January 26, 2001
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Neither Account A nor Account C have any directors or executive officers. The following information as of March 1, 2001, is provided with respect to each director, including persons chosen to become directors, of Northwestern Mutual. Northwestern Mutual uses the title of Trustee to denote the directors.
(1) Mr. Anderson is retiring from the Board of Trustees effective May 23, 2001. (2) Candidate proposed for re-election by the Board of Trustees for the election to be held at the May 2001 Annual meeting of Policyowners. If re-elected, these Trustees' terms will expire in May 2005, except that Mr. Hackett's term will expire in May 2002.
The business experience and directorships of Northwestern Mutual's Trustees are as follows:
The following information as of March 1, 2001, is provided with respect to each Executive Officer of Northwestern Mutual. The term of office for all Executive Officers is one year expiring May 31, 2001.
All of the Executive Officers, except Bruce L. Miller, David B. Wescoe and Charles D. Robinson, have been associated with Northwestern Mutual, although not necessarily in their present positions, for more than five years. Bruce L. Miller has been Executive Vice President (Marketing) since March 2000. He joined Northwestern Mutual as a Senior Vice President in July, 1996. Prior thereto he participated in private equity investing, operating and serving as a consultant to various firms in the financial services and healthcare industries since 1989. Mr. Wescoe joined Northwestern Mutual in August 1999 as a Vice President and was named Vice President (Northwestern Mutual Investment Services) in March 2000. From 1994 to 1999, Mr. Wescoe was employed with Manpower, Inc. as Vice President and General Counsel. Mr. Robinson joined Northwestern Mutual in February 2001 as Senior Vice President (Investment Products and Services). Prior thereto he was with AIG, Global Retirement Services Division as Chief Marketing Officer and Senior Vice President from 1999 to 2000. From 1980 to 1999, Mr. Robinson served in various positions of increasing responsibility with VALIC/American General Group, most recently as Senior Vice President, Institutional Marketing.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Not applicable. Account A and Account C have no directors or executive officers, the Executive Officers and Trustees of Northwestern Mutual spend no substantial portion of their time on matters relating to Accounts A and C, and the amounts of compensation received by the Executive Officers and Trustees of Northwestern Mutual have no bearing on the values associated with the Contracts issued in connection with Accounts A and C.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Not applicable. As segregated asset accounts, Account A and Account C have no shareholders. As a mutual life insurance company, Northwestern Mutual has no shareholders.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Northwestern Mutual's subsidiary, NMIS, serves as the investment advisor to the Series Fund. Northwestern Mutual is party to investment advisory agreements with the Series Fund. The Board of the Series Fund approved the continuation of the investment advisory agreements during 2000. Various Trustees and Executive Officers of Northwestern Mutual serve as directors and officers of the Series Fund and may be deemed to have a direct or indirect material interest in the existence of the investment advisory agreements.
Northwestern Mutual's subsidiary, Frank Russell, provides the Russell Funds and its investment adviser, Frank Russell Investment Management Company ("FRIMCo"), a subsidiary of Frank Russell, with asset management consulting services that it provides to its other consulting clients. The Russell Funds do not compensate Frank Russell for these services. FRIMCo is party to an investment advisory agreement with the Russell Funds, the renewal of which was approved in 2000. Certain Trustees and Executive Officers of Northwestern Mutual serve as directors of Frank Russell and may be deemed to have a direct or indirect material interest in the existence of the investment management agreement.
Various Trustees and Executive Officers of Northwestern Mutual have securities accounts with Baird and effected transactions through such accounts during the fiscal year, including transactions in mutual funds sponsored by Frank Russell.
Trustees and executive officers of Northwestern Mutual (and their family members and associates) own insurance policies and/or other contracts issued by Northwestern Mutual or an insurance affiliate in the ordinary course of business. Loans are made to Northwestern Mutual's Trustees and Executive Officers (and their family members and associates) in accordance with the provisions of insurance policies or other contracts which they may own. Such loans are made in the ordinary course of business and are administered solely in accordance with the terms of such policies.
In the ordinary course of its business, Northwestern Mutual makes loans to its general agents in connection with their business operations. Interest on such loans is tied to Northwestern Mutual's cost of funds or the prime rate, depending upon the purpose of the loan. On occasion, a general agent who has incurred such loans may assume an Executive Officer position at Northwestern Mutual. In such circumstances, the outstanding loans remain in place and are satisfied in accordance with the terms of the underlying loan documentation.
Peter M. Sommerhauser, a Northwestern Mutual Trustee since May 1999, is a Shareholder, Vice President and a Member of the Management Committee of Godfrey & Kahn, S.C. Godfrey & Kahn provided a de minimis amount of legal services to Northwestern Mutual during 2000 with respect to a matter that dates to 1996, when the firm was retained by Northwestern Mutual.
Mr. Sommerhauser is the beneficial owner of approximately 12.1% of the outstanding common stock of Kohl's Corporation, primarily by virtue of his serving as a trustee of several trusts for the benefit of the families of current and former executive officers of Kohl's Corporation and as a director of charitable foundations established by executive officers of Kohl's Corporation. While Mr. Sommerhauser has sole or shared voting and investment power over such shares held in the trusts and foundations, he has no pecuniary interest in those shares. In 1994, a number of years prior to Mr. Sommerhauser becoming a Northwestern Mutual Trustee, Northwestern Mutual lent (as part of its normal portfolio investment activities) to Kohl's Department Stores, Inc., a subsidiary of Kohl's Corporation, $40,000,000 and received a 6.57% Senior Note, guaranteed by Kohl's Corporation, due March 31, 2004. The principal amount of such indebtedness was reduced to $33,333,333 during 2000, which remains outstanding at March 1, 2001.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Policyowners of The Northwestern Mutual Life Insurance Company
We have audited the accompanying consolidated statement of financial position of The Northwestern Mutual Life Insurance Company and its subsidiary as of December 31, 2000 and 1999, 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, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, the Company prepared these consolidated financial statements using accounting practices prescribed or permitted by the Office of the Commissioner of Insurance of the State of Wisconsin (statutory basis of accounting), which practices differ from accounting principles generally accepted in the United States of America. Accordingly, the consolidated financial statements are not intended to represent a presentation in accordance with generally accepted accounting principles. The effects on the consolidated financial statements of the variances between the statutory basis of accounting and generally accepted accounting principles, although not reasonably determinable, are presumed to be material.
In our opinion, the consolidated financial statements audited by us (1) do not present fairly in conformity with generally accepted accounting principles, the financial position of The Northwestern Mutual Life Insurance Company and its subsidiary as of December 31, 2000 and 1999, or the results of their operations or their cash flows for each of the three years in the period ended December 31, 2000 because of the effects of the variances between the statutory basis of accounting and generally accepted accounting principles referred to in the preceding paragraph, and (2) do present fairly, in all material respects, the financial position of The Northwestern Mutual Life Insurance Company and its subsidiary as of December 31, 2000 and 1999 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, on the basis of accounting described in Note 1.
/s/ PRICEWATERHOUSECOOPERS LLP
January 23, 2001
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF FINANCIAL POSITION (IN MILLIONS)
The accompanying notes are an integral part of these financial statements.
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF OPERATIONS (IN MILLIONS)
The accompanying notes are an integral part of these financial statements.
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF CHANGES IN SURPLUS (IN MILLIONS)
The accompanying notes are an integral part of these financial statements.
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS (IN MILLIONS)
The accompanying notes are an integral part of these financial statements.
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated statutory financial statements include the accounts of The Northwestern Mutual Life Insurance Company ("Company") and its wholly-owned subsidiary, Northwestern Long Term Care Insurance Company ("Subsidiary"). The Company and its Subsidiary offer life, annuity, disability income and long-term care products to the personal, business, estate and tax-qualified markets.
The consolidated financial statements have been prepared using accounting policies prescribed or permitted by the Office of the Commissioner of Insurance ("OCI") of the State of Wisconsin ("statutory basis of accounting").
In 1998, the National Association of Insurance Commissioners ("NAIC") adopted the Codification of Statutory Accounting Principles guidance ("Codification"), which replaces the current Accounting Practices and Procedures manual as the NAIC's primary guidance on statutory accounting as of January 1, 2001. Codification provides guidance regarding matters where statutory accounting has been silent and changes current statutory accounting regarding some matters. The OCI has adopted Codification effective January 1, 2001. The effect of adoption on the Company's statutory surplus is expected to be an increase, primarily as a result of deferred tax accounting and investment valuations.
Financial statements prepared on the statutory basis of accounting vary from financial statements prepared on the basis of generally accepted accounting principles ("GAAP") primarily because on a GAAP basis: (1) policy acquisition costs are deferred and amortized, (2) investment valuations and insurance reserves are based on different assumptions, (3) funds received under deposit-type contracts are not reported as premium revenue, (4) deferred taxes are provided for temporary differences between book and tax basis of certain assets and liabilities and (5) majority-owned non-insurance subsidiaries are consolidated. The effects on the financial statements of the differences between the statutory basis of accounting and GAAP are material to the Company.
The preparation of financial statements in conformity with the statutory basis of accounting requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual future results could differ from these estimates.
INVESTMENTS The Company's investments are valued on the following bases:
Bonds - Amortized cost using the interest method; loan-backed and structured securities are amortized using estimated prepayment rates and, generally, the prospective adjustment method Common and preferred stocks - Common stocks are carried at fair value, preferred stocks are generally carried at lower of cost or market, and unconsolidated subsidiaries and affiliates are recorded using the equity method Mortgage loans - Amortized cost Real estate - Lower of cost (less depreciation and encumbrances) or estimated net realizable value Policy loans - Unpaid principal balance, which approximates fair value Other investments - Consists primarily of joint venture investments which are valued at equity in ventures' net assets Cash and temporary investments - Amortized cost, which approximates fair value
TEMPORARY INVESTMENTS Temporary investments consist of debt securities that have maturities of one year or less at acquisition.
NET INVESTMENT INCOME AND CAPITAL GAINS Net investment income includes interest and dividends received or due and accrued on investments, equity in unconsolidated subsidiaries and affiliates' earnings and the Company's share of joint venture income. Net investment income is reduced by investment management expenses, real estate depreciation, depletion related to energy assets and costs associated with securities lending.
Realized investment gains and losses are reported in income based upon specific identification of securities sold. Unrealized investment gains and losses include changes in the fair value of common stocks and changes in valuation allowances made for bonds, preferred stocks, mortgage loans and other investments considered by management to be impaired.
INTEREST MAINTENANCE RESERVE The Company is required to maintain an interest maintenance reserve ("IMR"). The IMR is used to defer realized gains and losses, net of tax, on fixed income investments resulting from changes in interest rates. Net realized gains and losses deferred to the IMR are amortized into investment income over the approximate remaining term to maturity of the investment sold.
ASSET VALUATION RESERVE The Company is required to maintain an asset valuation reserve ("AVR"). The AVR establishes a general reserve for invested asset valuation using a formula prescribed by state regulations. The AVR is designed to stabilize surplus against potential declines in the value of investments. Increases or decreases in AVR are recorded directly to surplus.
SEPARATE ACCOUNTS Separate account assets and related policy liabilities represent the segregation of funds deposited by variable life insurance and annuity policyowners. Policyowners bear the investment performance risk associated with variable products. Separate account assets are invested at the direction of the policyowner in a variety of Company-managed mutual funds. Variable product policyowners also have the option to invest in a fixed interest rate annuity in the general account of the Company. Separate account assets are reported at fair value.
PREMIUM REVENUE AND OPERATING EXPENSES Life insurance premiums are recognized as revenue at the beginning of each policy year. Annuity and disability income premiums are recognized when received by the Company. Operating expenses, including costs of acquiring new policies, are charged to operations as incurred.
OTHER INCOME Other income includes considerations on supplementary contracts, ceded reinsurance expense allowances and miscellaneous policy charges.
BENEFIT PAYMENTS TO POLICYOWNERS AND BENEFICIARIES Benefit payments to policyowners and beneficiaries include death, surrender, annuity and disability benefits, matured endowments and supplementary contract payments.
RESERVES FOR POLICY BENEFITS Reserves for policy benefits are determined using actuarial estimates based on mortality and morbidity experience tables and valuation interest rates prescribed by the OCI. (See Note 3.)
POLICYOWNER DIVIDENDS Almost all life insurance policies, and certain annuity and disability income policies issued by the Company are participating. Annually, the Company's Board of Trustees approves dividends payable on participating policies in the following fiscal year, which are accrued and charged to operations when approved. Participating policy owners 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. The vast majority of dividends are used by policy owners to purchase additional insurance and are reported as premiums in the Statement of Operations. These dividends are reported as a reduction of premium cash inflow in the Statement of Cash Flows.
2. INVESTMENTS
DEBT SECURITIES Debt securities consist of all bonds and fixed-maturity preferred stocks. The estimated fair values of debt securities are based upon quoted market prices, if available. For securities not actively traded, fair values are estimated using independent pricing services or internally developed pricing models.
Statement value, which principally represents amortized cost, and estimated fair value of the Company's debt securities at December 31, 2000 and 1999 were as follows:
The statement value and estimated fair value of debt securities by contractual maturity at December 31, 2000 is shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
STOCKS The estimated fair values of common and perpetual preferred stocks are based upon quoted market prices, if available. For securities not actively traded, fair values are estimated using independent pricing services or internally developed pricing models.
The adjusted cost of common and preferred stock held by the Company at December 31, 2000 and 1999 was $4.7 billion and $4.9 billion, respectively.
MORTGAGE LOANS AND REAL ESTATE Mortgage loans are collateralized by properties located throughout the United States and Canada. The Company attempts to minimize mortgage loan investment risk by diversification of geographic locations and types of collateral properties.
The fair value of mortgage loans as of December 31, 2000 and 1999 was $14.7 billion and $13.2 billion, respectively. The fair value of the mortgage loan portfolio is estimated by discounting the future estimated cash flows using current interest rates of debt securities with similar credit risk and maturities, or utilizing net realizable values.
At December 31, 2000 and 1999, real estate includes $29 million and $39 million, respectively, acquired through foreclosure and $109 million and $114 million, respectively, of home office real estate.
REALIZED AND UNREALIZED GAINS AND LOSSES Realized investment gains and losses for the years ended December 31, 2000, 1999 and 1998 were as follows:
Changes in net unrealized investment gains and losses for the years ended December 31, 2000, 1999 and 1998 were as follows:
SECURITIES LENDING The Company has entered into securities lending agreements whereby certain securities are loaned to third parties, primarily major brokerage firms. The Company's policy requires a minimum of 102% of the fair value of the loaned securities as collateral, calculated on a daily basis in the form of either cash or securities. Collateral assets received and related liability due to counterparties of $1.4 billion and $2.1 billion, respectively, are included in the consolidated statements of financial position at December 31, 2000 and 1999, and approximate the statement value of securities loaned at those dates.
DERIVATIVE FINANCIAL INSTRUMENTS In the normal course of business, the Company enters into transactions to reduce its exposure to fluctuations in interest rates, foreign currency exchange rates and market volatility. These hedging strategies include the use of forwards, futures, options, floors and swaps.
The Company held the following positions for hedging purposes at December 31, 2000 and 1999:
The notional or contractual amounts of derivative financial instruments are used to denominate these types of transactions and do not represent the amounts exchanged between the parties.
In addition to the use of derivatives for hedging purposes, equity swaps were held for investment purposes during 2000 and 1999. The notional amount of equity swaps outstanding at December 31, 2000 and 1999 was $0 and $136 million, respectively.
Foreign currency forwards, foreign currency swaps, stock futures and equity swaps are reported at fair value. Resulting gains and losses on these contracts are unrealized until expiration of the contract. Fair valuation adjustments for interest rate swaps, bond futures and options to acquire interest rate swaps are deferred to IMR. Changes in the value of derivative instruments are expected to offset gains and losses on the hedged investments. During 2000, 1999 and 1998, net realized and unrealized gains on investments were partially offset by net realized gains (losses) of $117 million, $(55) million and $(104) million, respectively, and net unrealized gains (losses) of $42 million, $17 million and $(58) million, respectively, on derivative instruments.
3. RESERVES FOR POLICY BENEFITS
Life insurance reserves on substantially all policies issued since 1978 are based on the Commissioner's Reserve Valuation Method with interest rates ranging from 3-1/2% to 5-1/2%. Other life policy reserves are primarily based on the net level premium method employing various mortality tables at interest rates ranging from 2% to 4-1/2%.
Deferred annuity reserves on contracts issued since 1985 are valued primarily using the Commissioner's Annuity Reserve Valuation Method with interest rates ranging from 3-1/2% to 6-1/4%. Other deferred annuity reserves are based on contract value. Immediate annuity reserves are based on present values of expected benefit payments at interest rates ranging from 3-1/2% to 7-1/2%.
Active life reserves for disability income ("DI") policies issued since 1987 are primarily based on the two-year preliminary term method using a 4% interest rate and the 1985 Commissioner's Individual Disability Table A ("CIDA") for morbidity. Active life reserves for prior DI policies are based on the net level premium method, a 3% to 4% interest rate and the 1964 Commissioner's Disability Table for morbidity. Disabled life reserves for DI policies are based on the present values of expected benefit payments primarily using the 1985 CIDA (modified for Company experience in the first four years of disability) with interest rates ranging from 3% to 5-1/2%.
Use of these actuarial tables and methods involves estimation of future mortality and morbidity. Actual future experience could differ from these estimates.
4. EMPLOYEE AND AGENT BENEFIT PLANS
The Company sponsors noncontributory defined benefit retirement plans for all eligible employees and agents. The expense associated with these plans is generally recorded by the Company in the period contributions are funded. As of January 1, 2000, the most recent actuarial valuation date available, the qualified defined benefit plans were fully funded. The Company recorded a liability of $122 million and $109 million for nonqualified defined benefit plans at December 31, 2000 and 1999, respectively. In addition, the Company has a contributory 401(k) plan for eligible employees and a noncontributory defined contribution plan for all full-time agents. The Company's contributions are expensed in the period contributions are made to the plans. The Company recorded $32 million, $31 million and $29 million of total expense related to its defined benefit and defined contribution plans for the years ended December 31, 2000, 1999 and 1998, respectively. The defined benefit and defined contribution plans' assets of $2.3 billion and $2.2 billion at December 31, 2000 and 1999, respectively, were primarily invested in the separate accounts of the Company.
In addition to pension and retirement benefits, the Company provides certain health care and life insurance benefits ("postretirement benefits") for retired employees. Substantially all employees may become eligible for these benefits if they reach retirement age while working for the Company. Postretirement benefit costs for the years ended December 31, 2000, 1999 and 1998 were a net expense of $6.8 million, $5.0 million and $1.8 million, respectively.
If the health care cost trend rate assumptions were increased by 1%, the accrued postretirement benefit obligation as of December 31, 2000 and 1999 would have been increased by $7 million and $6 million, respectively.
At December 31, 2000 and 1999, the recorded postretirement benefit obligation was reduced by $22 million and $28 million, respectively, for health care benefit plan assets. These assets were primarily invested in the separate accounts of the Company.
5. REINSURANCE
In the normal course of business, the Company seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by ceding to reinsurers under excess coverage and coinsurance contracts. The Company retains a maximum of $25 million of coverage per individual life and $35 million maximum of coverage per joint life. The Company has an excess reinsurance contract for disability income policies with retention limits varying based upon coverage type.
The amounts shown in the accompanying consolidated financial statements are net of reinsurance. Reserves for policy benefits at December 31, 2000 and 1999 were reported net of ceded reserves of $663 million and $584 million, respectively. The effect of reinsurance on premiums and benefits for the years ended December 31, 2000, 1999 and 1998 was as follows:
In addition, the Company received $146 million, $133 million and $121 million for the years ended December 31, 2000, 1999 and 1998, respectively, from reinsurers representing allowances for reimbursement of commissions and other expenses. These amounts are included in other income in the consolidated statement of operations.
Reinsurance contracts do not relieve the Company from its obligations to policyowners. Failure of reinsurers to honor their obligations could result in losses to the Company; consequently, allowances are established for amounts deemed uncollectible. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies.
6. INCOME TAXES
Provisions for income taxes are based on current income tax payable without recognition of deferred taxes. The Company files a consolidated life-nonlife federal income tax return. Federal income tax returns for years through 1995 are closed as to further assessment of tax. Adequate provision has been made in the financial statements for any additional taxes, which may become due with respect to the open years.
The Company's taxable income can vary significantly from gain from operations before taxes due to differences between book and tax valuation of assets and liabilities (e.g., investments and policy benefit reserves). The Company pays a tax that is assessed only on the surplus of mutual life insurance companies ("equity tax"), and also, the Company must capitalize and amortize, as opposed to immediately deducting, an amount deemed to represent the cost of acquiring new business ("DAC tax").
The Company's effective tax rate on gains from operations before taxes for the years ended December 31, 2000, 1999 and 1998 was 16%, 29%, and 48% respectively. In 2000 and 1999, the effective rates were less than the federal corporate rate of 35% due primarily to differences between book and tax investment income and, in 2000, prior year adjustments. In 1998, the effective rate was greater than 35% due primarily to the equity tax and DAC tax.
7. RELATED PARTY TRANSACTIONS
The Company acquired Frank Russell Company ("Frank Russell") effective January 1, 1999 for a purchase price of approximately $955 million. Frank Russell is a leading investment management and consulting firm, providing investment advice, analytical tools and investment vehicles to institutional and individual investors in more than 30 countries. This investment is accounted for using the equity method and is included in common stocks in the consolidated statement of financial position. In 2000 and 1999, the Company charged-off directly from surplus approximately $12 million and $842 million respectively, representing the goodwill associated with the acquisition. The Company has received permission from the OCI for this charge-off. The Company has unconditionally guaranteed certain debt obligations of Frank Russell, including $350 million of senior notes and up to $150 million of other credit facilities.
During 2000 and 1999, the Company transferred appreciated equity investments to wholly-owned subsidiaries as a capital contribution to the subsidiaries. Realized capital gains of $220 million and $287 million for 2000 and 1999, respectively, were recorded on this transaction, based on the fair value of the assets upon transfer.
8. CONTINGENCIES
The Company has guaranteed certain obligations of its affiliates. These guarantees totaled approximately $101 million at December 31, 2000 and are generally supported by the underlying net asset values of the affiliates. In addition, the Company routinely makes commitments to fund mortgage loans or other investments in the normal course of business. These commitments aggregated to $1.8 billion at December 31, 2000 and were extended at market interest rates and terms.
The Company is engaged in various legal actions in the normal course of its investment and insurance operations. In the opinion of management, any losses resulting from such actions would not have a material effect on the Company's results of operations or financial position.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY In respect of NML Variable Annuity Account A and NML Variable Annuity Account C (Registrant)
By /s/ James D. Ericson ---------------------------------------- James D. Ericson Chairman and Chief Executive Officer
Date: March 23, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
TITLE ----- /s/ JAMES D. ERICSON Trustee, Chairman and -------------------- Chief Executive Officer James D. Ericson
/s/ GARY A. POLINER Senior Vice President and ------------------- Chief Financial Officer Gary A. Poliner
/s/ GARY E. LONG Vice President and ---------------- Controller Gary E. Long
R. QUINTUS ANDERSON* Trustee -------------------- R. Quintus Anderson
EDWARD E. BARR* Trustee --------------- Edward E. Barr
GORDON T. BEAHAM, III* Trustee ---------------------- Gordon T. Beaham, III
ROBERT C. BUCHANAN* Trustee ------------------- Robert C. Buchanan
GEORGE A. DICKERMAN* Trustee -------------------- George A. Dickerman
PIERRE S. DU PONT* Trustee ------------------ Pierre S. du Pont
J. E. GALLEGOS* Trustee --------------- J. E. Gallegos
STEPHEN N. GRAFF* Trustee ----------------- Stephen N. Graff
PATRICIA ALBJERG GRAHAM* Trustee ------------------------ Patricia Albjerg Graham
---------------- Trustee James P. Hackett
STEPHEN F. KELLER* Trustee ------------------ Stephen F. Keller
BARBARA A. KING* Trustee ---------------- Barbara A. King
J. THOMAS LEWIS* Trustee ---------------- J. Thomas Lewis
DANIEL F. McKEITHAN, JR.* Trustee ------------------------- Daniel F. McKeithan, Jr.
GUY A. OSBORN* Trustee -------------- Guy A. Osborn
------------------ Trustee Timothy D. Proctor
H. MASON SIZEMORE, JR.* Trustee ----------------------- H. Mason Sizemore, Jr.
HAROLD B. SMITH* Trustee ---------------- Harold B. Smith
SHERWOOD H. SMITH, JR.* Trustee ----------------------- Sherwood H. Smith, Jr.
PETER M. SOMMERHAUSER* Trustee ---------------------- Peter M. Sommerhauser
JOHN E. STEURI* Trustee --------------- John E. Steuri
JOHN J. STOLLENWERK* Trustee -------------------- John J. Stollenwerk
BARRY L. WILLIAMS* Trustee ------------------ Barry L. Williams
KATHRYN D. WRISTON* Trustee ------------------- Kathryn D. Wriston
EDWARD J. ZORE* Trustee --------------- Edward J. Zore
Each of the above signatures is affixed as of March 23, 2001
*By /s/ JAMES D. ERICSON ------------------------------------------------- James D. Ericson, Attorney in Fact, pursuant to the Power of Attorney attached as exhibit 24.1 hereto.
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION PAGE - ------- ----------- ---- 3.1 Restated Articles of Incorporation of The Northwestern Mutual Life Insurance Company. (This exhibit was filed in electronic format with Post-Effective Amendment No. 6 on Form N-4 for NML Variable Annuity Account A, File No. 33-58476, CIK 0000790162, dated November 13, 1995, and is incorporated herein by reference.)
3.2 Amended By-Laws of The Northwestern Mutual Life Insurance Company. (This exhibit was filed in electronic format with the Registration Statement on Form S-6 for Northwestern Mutual Variable Life Account, File No. 333-59103, CIK 0000742277, dated July 15, 1998, and is incorporated herein by reference.)
3.3 Resolution of the Board of Trustees of The Northwestern Mutual Life Insurance Company creating "Northwestern Mutual Variable Annuity Account A". (This exhibit was filed in electronic format with the Registration Statement on Form N-4 for NML Variable Annuity Account A, File No. 333-22455, CIK 0000790162, dated February 27, 1997, and is incorporated herein by reference.)
3.4 Resolution of the Board of Trustees of The Northwestern Mutual Life Insurance Company creating Separate Account C. (This exhibit was filed in electronic format with the Annual Report on Form 10-K for the fiscal year ended December 31, 1999 of The Northwestern Mutual Life Insurance Company in respect of NML Variable Annuity Account A and NML Variable Annuity Account C, dated March 28, 2000 ("1999 Form 10-K"), and is incorporated herein by reference.)
3.5 Resolution of the Board of Trustees of The Northwestern Mutual Life Insurance Company to use Separate Account C to facilitate the issuance and maintenance of the Contracts and renaming the Account "NML Variable Annuity Account C". (This exhibit was filed in electronic format with the 1999 Form 10-K and is incorporated herein by reference.)
10.1 Flexible Payment Variable Annuity Front Load Contract, RR.V.A. (032000) (sex neutral). (This exhibit was filed in electronic format with the Registration Statement on Form N-4 for NML Variable Annuity Account A, File No. 333-72913, CIK 0000790162, dated January 27, 2000, and is incorporated herein by reference.)
10.2 Flexible Payment Variable Annuity Back Load Contract, RR.V.A. (032000) (sex neutral). (This exhibit was filed in electronic format with the Registration Statement on Form N-4 for NML Variable Annuity Account A, File No. 333-72913, CIK 0000790162, dated January 27, 2000, and is incorporated herein by reference.)
10.3 Variable Annuity Front Load and Back Load Contract Payment Rate Tables, RR.V.A.B (032000), included in Exhibits 10.1 and 10.2 above (sex distinct).
10.4 Enhanced Death Benefit for Front Load and Back Load Contracts, VA. EDB. (032000), included in Exhibits 10.1 and 10.2 above.
10.5 Waiver of Withdrawal Charge for Back Load Contract, VA.WWC. (032000), included in Exhibit 10.2 above.
10.6 Application forms for Front Load and Back Load Contracts, included in Exhibits 10.1 and 10.2 above.
10.7 Form of Participation Agreement Among Russell Insurance Funds, Russell Fund Distributors, Inc. and The Northwestern Mutual Life Insurance Company. (This exhibit was filed in electronic format with the Registration Statement on Form N-4 for NML Variable Annuity Account A, File No. 333-72913, CIK 0000790162, dated February 25, 1999, and is incorporated herein by reference.)
10.8 Form of Administrative Service Fee Agreement between The Northwestern Mutual Life Insurance Company and Frank Russell Company. (This exhibit was filed in electronic format with the Registration Statement on Form N-4 for NML Variable Annuity Account A, File No. 333-72913, CIK 0000790162, dated February 25, 1999, and is incorporated herein by reference.)
10.9 Distribution Contract. (This exhibit was filed in electronic format with the Registration Statement on Form N-4 for NML Variable Annuity Account A, File No. 333-22455, CIK 0000790162, dated February 27, 1997, and is incorporated herein by reference.)
10.10 Group Combination Annuity Contract, NVP.1C.(0594), with amended application, including Contract amendment (sex neutral). (This exhibit was filed in electronic format with Post-Effective Amendment No. 19 on Form N-4 for NML Variable Annuity Account C, File No. 2-89905-01, CIK 0000790163, dated February 25, 1999, and is incorporated herein by reference.)
10.11 Application Form for Group Combination Annuity Contract, included in Exhibit 10.10 above.
21.1 Subsidiaries of The Northwestern Mutual Life Insurance Company 55
24.1 Power of Attorney 57