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) self-employed individuals (and their eligible employees) who adopt plans (“HR-10 Plans”) meeting the requirements of Sections 401 or 403(a) of the Internal Revenue Code of 1986, as amended (the “Code”) and (ii) employees of corporate employers who adopt pension or profit sharing plans meeting the requirements of Section 401(a) of the Code, or annuity purchase plans meeting the requirements of Section 403(a) of the Code (collectively, “Corporate Plans”). Account A receives payments under individual variable annuity contracts issued by Northwestern Mutual in connection with HR-10 Plans and Corporate Plans. Account C receives payments under group combination variable annuity contracts issued by Northwestern Mutual in connection with HR-10 Plans and Corporate Plans. The variable annuity contracts issued by Northwestern Mutual in connection with HR-10 Plans and Corporate 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 24 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 18 portfolios of Northwestern Mutual Series Fund, Inc. (Small Cap Growth Stock Portfolio, T. Rowe Price Small Cap Value Portfolio, Aggressive Growth Stock Portfolio, International Growth Portfolio, Franklin Templeton International Equity Portfolio, AllianceBernstein Mid Cap Value Portfolio, Index 400 Stock Portfolio, Janus Capital Appreciation Portfolio, Growth Stock Portfolio, Large Cap Core Stock Portfolio, Capital Guardian Domestic Equity Portfolio, T. Rowe Price Equity Income Portfolio, Index 500 Stock Portfolio, Asset Allocation Portfolio, Balanced Portfolio, High Yield Bond Portfolio, Select Bond Portfolio, and Money Market Portfolio), the Fidelity VIP Mid Cap Portfolio (a fund of Variable Insurance Products Fund III), and 5 funds of Russell Investment 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 Investment Funds, which are sponsored by Northwestern Mutual and a Northwestern Mutual affiliate, respectively, and Variable Insurance Products Fund III, which is not affiliated with Northwestern Mutual, are each registered as investment companies under the Investment Company Act of 1940. The Contracts also permit investment on a fixed basis, at rates determined by Northwestern Mutual. 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 company 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 (other than those Contract investments for which the fixed rate option is selected) 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 6 herein for Account A and Account C historical financial information regarding results of operations, changes in equity and total assets. 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 wide range of permanent and term life insurance, disability income insurance and annuities for the personal, business, estate planning and pension markets. Mutual funds, equity and debt securities, long-term care insurance and trust services are offered and/or sold through subsidiaries. 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 7,700 financial representatives at December 31, 2004 located in approximately 330 offices nationwide. At
December 31, 2004, Northwestern Mutual had approximately 4,600 full- and part-time employees. Northwestern Mutual’s website address is www.nmfn.com.
Northwestern Mutual’s principal lines of business are: (i) life insurance, which provides a wide range of individual life insurance products, including traditional whole life, permanent and term combination, 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 line of individual and group products, including individual non-cancelable, guaranteed renewable loss of earnings, buyout, key person, and short-term and long-term group coverages, marketed primarily to middle to upper income individuals, professionals, and small- to medium-sized businesses and their owners; (iii) investment products and services, 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, retail mutual funds (including associated funds offered by Mason Street Funds, Inc. and Frank Russell Investment Company), brokerage services (offered through its subsidiary Northwestern Mutual Investment Services, LLC) and trust services (offered through its subsidiary Northwestern Mutual Trust Company), marketed primarily to middle to upper income individuals, business owners and professionals; and (iv) long-term care insurance, offered through its subsidiary Northwestern Long Term Care Insurance Company, marketed primarily to middle to upper income individuals, small business owners and professionals. For the years ended December 31, 2004, 2003 and 2002, Northwestern Mutual had (a) total premiums of $10.7 billion, $10.3 billion and $10.1 billion, respectively, of which $9.0 billion, $8.7 billion and $8.6 billion, respectively, was attributable to life insurance, $0.7 billion, $0.7 billion and $0.6 billion, respectively, was attributable to disability income insurance, and $1.0 billion, $0.9 billion and $0.9 billion, respectively, was attributable to annuity products in the investment products and services line of business; (b) net income of $817 million, $692 million and $158 million, respectively, of which $597 million, $493 million and $(18) million, respectively, was attributable to life insurance, $186 million, $179 million and $149 million, respectively, was attributable to disability income insurance, $41 million, $29 million and $44 million, respectively, was attributable to annuity products in the investment products and services line of business, and losses of $(7) million, $(9) million and $(17) million, respectively, was attributable to long term care insurance; and (c) total assets of $123.9 billion, $113.8 billion and $102.9 billion, respectively, of which $100.7 billion, $92.2 billion and $82.8 billion, respectively, was attributable to life insurance, $6.5 billion, $6.1 billion and $5.9 billion, respectively, was attributable to disability income insurance, and $16.7 billion, $15.5 billion and $14.2 billion, respectively, was attributable to annuity products in the investment products and services line of business.
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, third party ratings, size and competence of agency force, product pricing and guarantees, range of product lines, customer service, and reputation. Based on total admitted statutory assets at September 30, 2004 (the most recent data available), Northwestern Mutual was the 4th largest U.S. domiciled life insurance company on an individual company basis and the 10th largest on a corporate family basis. During 2004, there were more than 1,000 life insurance companies doing business 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. In the long-term care business, Northwestern Mutual competes primarily with a limited number of national companies. 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. United States Supreme Court decisions have expanded the authority of national banks to sell life insurance products and annuities. In addition, legislation enacted in 1999 to overturn Depression-era restrictions on bank affiliations, the Gramm-Leach-Bliley Act (the “Act”), implemented fundamental changes in the regulation of the financial services industry in the U.S. The Act eliminated 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 are 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. Over time, 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, and its insurance subsidiary Northwestern Long Term Care Insurance Company, are licensed to transact their insurance business in, and are subject to regulation and supervision by, all 50 states of the United States and the District of Columbia. 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 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 are preempted.
Frank Russell Company (“Russell”), a subsidiary of Northwestern Mutual, is a global investment services firm providing multi-manager investment products and services in 39 countries. Together with its subsidiaries, Russell managed $131.2 billion in assets at December 31, 2004 and advised clients representing $2.3 trillion in assets worldwide. Russell is also well known for its family of market indices, including the Russell 2000, which provide sets of performance benchmarks for investors.
NMIS, a wholly-owned company of Northwestern Mutual, is a full-service registered broker-dealer serving the investment planning and product needs of individuals and businesses. Through its registered representatives, NMIS offers mutual funds, variable annuities, variable life insurance products, stocks and bonds to its customers in more than 60 cities nationwide. NMIS is a member of the National Association of Securities Dealers, Inc.
See Item 15 herein for the audited consolidated financial statements of Northwestern Mutual.
PURPOSE OF ANNUAL REPORT
This Annual Report on Form 10-K is filed with respect to Account A and Account C of Northwestern Mutual. 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 and Franklin, Wisconsin. Northwestern Mutual, as lessee, also occupies temporary space in three buildings adjacent to its Milwaukee campus. Northwestern Mutual is the lessee of eight leases covering its real estate regional offices in locations throughout the United States. Russell leases its principal office space located in Tacoma, Washington as well as other office space within and outside the U.S. Northwestern Mutual believes that its owned and leased properties are suitable and adequate for its current operations.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Neither Account A nor Account C are parties to 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, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
As segregated asset accounts, Account A and Account C do not issue common equity securities. As a mutual life insurance company, Northwestern Mutual does not issue common equity securities.
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 financial representatives of Northwestern Mutual who are also registered representatives of NMIS.
During 2004, the following aggregate dollar amounts of such unregistered securities were sold to Corporate Plans, generating the aggregate commissions stated:
(A) Reflects premiums paid by Contract holders, dividend additions and Northwestern Mutual plan contributions, as applicable.
(B) Reflects an estimate of amounts paid to Northwestern Mutual financial representatives for sales to Corporate Plans based on a pro rata allocation of Contract sales generating commissions 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 in good order. Accumulation units are valued as of the close of business on the New York Stock Exchange for each day the Exchange is open, and at any other time required by the Investment Act of 1940.
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, 2004. 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
(IN THOUSANDS)
# Became an investment option under the Contracts effective July 31, 2001.
## Became an investment option under the Contracts effective May 1, 2003.
** To allow comparability certain amounts were reclassified from dividend income to capital gain distributions.
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
CHANGES IN EQUITY FOR ACCOUNT A
(IN THOUSANDS)
TOTAL ASSETS OF ACCOUNT A
(IN THOUSANDS)
# Became an investment option under the Contracts effective July 31, 2001.
## Became an investment option under the Contracts effective May 1, 2003.
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
The following tables set forth selected historical financial data for Account C for the five years in the period ended December 31, 2004. 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.
RESULTS OF OPERATIONS FOR ACCOUNT C
(IN THOUSANDS)
# Became an investment option under the Contracts effective July 31, 2001.
## Became an investment option under the Contracts effective May 1, 2003.
** To allow comparability certain amounts were reclassified from dividend income to capital gain distributions.
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
RESULTS OF OPERATIONS FOR ACCOUNT C
(IN THOUSANDS)
# Became an investment option under the Contracts effective July 31, 2001.
## Became an investment option under the Contracts effective May 1, 2003.
** To allow comparability certain amounts were reclassified from dividend income to capital gain distributions.
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
CHANGES IN EQUITY FOR ACCOUNT C
(IN THOUSANDS)
TOTAL ASSETS OF ACCOUNT C
(IN THOUSANDS)
# Became an investment option under the Contracts effective July 31, 2001.
## Became an investment option under the Contracts effective May 1, 2003.
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The results of operations for Accounts A and C are primarily impacted by the investment results of the underlying Divisions. The investment results of the underlying Divisions are primarily driven by the investment results of the related Portfolio of the Northwestern Mutual Series Fund, Inc., Fidelity Variable Insurance Products Fund III or Russell Investment Funds. The pro-rata portion of the investment results of the related Portfolio attributable to Accounts A and C are reflected in the Statement of Operations and Statement of Changes in Equity as Dividend Income, Realized Gain (Loss) on Investments and Unrealized Appreciation (Depreciation) of Investments. The other item impacting the results of operations is the Annuity Rate and Expense Guarantees, which are owed to Northwestern Mutual and are an expense of the Division.
Sources of cash for Accounts A and Account C include premium payments which are reflected on the Statement of Changes in Equity, in the Equity Transactions section line item titled Contract Owners’ Net Payments. Uses of cash for Accounts A and C include annuity payments and policy surrenders. These are also reflected on the Statement of Changes in Equity.
The primary risks associated with assets of Accounts A and C are investment related risks or market risk. It should be noted that Accounts A and C represent a small portion of the net assets of the related Portfolio for each Division.
LIQUIDITY
The assets of Accounts A and C are invested solely in shares of Northwestern Mutual Series Fund, Inc. (“Series Fund”), the Fidelity Variable Insurance Products Fund III (“Fidelity Fund”), and the Russell Investment Funds (“Russell Funds,” and collectively with the Series Fund and Fidelity Fund, the “Funds”). The Series Fund consists of the Small Cap Growth Stock Portfolio, T. Rowe Price Small Cap Value Portfolio, Aggressive Growth Stock Portfolio, International Growth Portfolio, Franklin Templeton International Equity Portfolio, AllianceBernstein Mid Cap Value Portfolio, Index 400 Stock Portfolio, Janus Capital Appreciation Portfolio, Growth Stock Portfolio, Large Cap Core Stock Portfolio, Capital Guardian Domestic Equity Portfolio, T. Rowe Price Equity Income Portfolio, Index 500 Stock Portfolio, Asset Allocation Portfolio, Balanced Portfolio, High Yield Bond Portfolio, Select Bond Portfolio, and Money Market Portfolio. The Fidelity Fund consists of the Fidelity VIP Mid Cap Portfolio (for purposes of Account A and C investment). The Russell Funds consist of the Multi-Style Equity Fund, Aggressive Equity Fund, Non-U.S. Fund, Core Bond Fund and Real Estate Securities 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
Accounts A and C have no material commitments for capital expenditures as of December 31, 2004, the end of the most recent fiscal year. All payments from Contract owners of Account A and Account C, less any sales load or installation fee, 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, 2004, 2003, and 2002 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:
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
* Includes accumulation unit values at inception date in 2003 for portfolios becoming effective after December 31, 2002.
## Became an investment option under the Contracts effective May 1, 2003.
ACCUMULATION UNIT VALUES
CONTRACTS ISSUED AFTER DECEMBER 16, 1981 AND PRIOR TO MARCH 31, 1995:
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
* Includes accumulation unit values at inception date in 2003 for portfolios becoming effective after December 31, 2002.
## Became an investment option under the Contracts effective May 1, 2003.
ACCOUNT A
ACCUMULATION UNIT VALUES
CONTRACTS ISSUED ON OR AFTER MARCH 31, 1995 AND PRIOR TO MARCH 31, 2000 - FRONT LOAD VERSION:
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
* Includes accumulation unit values at inception date in 2003 for portfolios becoming effective after December 31, 2002.
## Became an investment option under the Contracts effective May 1, 2003.
ACCUMULATION UNIT VALUES
CONTRACTS ISSUED ON OR AFTER MARCH 31, 1995 AND PRIOR TO MARCH 31, 2000 - BACK LOAD VERSION:
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
* Includes accumulation unit values at inception date in 2003 for portfolios becoming effective after December 31, 2002.
## Became an investment option under the Contracts effective May 1, 2003.
ACCOUNT A
ACCUMULATION UNIT VALUES
CONTRACTS ISSUED ON OR AFTER MARCH 31, 2000 - FRONT LOAD VERSION AND BACK LOAD VERSION CLASS A:
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
* Includes accumulation unit values at inception date in 2003 for portfolios becoming effective after December 31, 2002.
## Became an investment option under the Contracts effective May 1, 2003.
ACCUMULATION UNIT VALUES
CONTRACTS ISSUED ON OR AFTER MARCH 31, 2000 - BACK LOAD VERSION CLASS B:
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
* Includes accumulation unit values at inception date in 2003 for portfolios becoming effective after December 31, 2002.
## Became an investment option under the Contracts effective May 1, 2003.
ACCOUNT A
TOTAL EQUITY:
(IN THOUSANDS)
The change in 2004’s Total Equity was attributable primarily to investment activities within the Account: the net change in unrealized appreciation of $34,868 led to an increase in equity derived from investment activities of $46,588 for the year ended December 31, 2004. The remaining change in equity of $(39,596) is attributed to the equity transactions for the year ended December 31, 2004. The change in 2003’s Total Equity was attributable primarily to investment activities within the Account: the net change in unrealized appreciation of $98,006 led to an increase in equity derived from investment activities of $89,262 for the year ended December 31, 2003. The remaining change in equity of $(35,394) is attributed to the equity transactions for the year ended December 31, 2003.
ACCOUNT C
ACCUMULATION UNIT VALUES
CONTRACTS ISSUED PRIOR TO DECEMBER 17, 1981 OR BETWEEN APRIL 30, 1984 AND
DECEMBER 31, 1991:
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
* Includes accumulation unit values at inception date in 2003 for portfolios becoming effective after December 31, 2002.
## Became an investment option under the Contracts effective May 1, 2003.
ACCOUNT C
ACCUMULATION UNIT VALUES
CONTRACTS ISSUED AFTER DECEMBER 16, 1981 AND PRIOR TO MAY 1, 1984:
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
* Includes accumulation unit values at inception date in 2003 for portfolios becoming effective after December 31, 2002.
## Became an investment option under the Contracts effective May 1, 2003.
ACCUMULATION UNIT VALUES
CONTRACTS ISSUED AFTER DECEMBER 31, 1991 - FRONT LOAD VERSION:
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
* Includes accumulation unit values at inception date in 2003 for portfolios becoming effective after December 31, 2002.
## Became an investment option under the Contracts effective May 1, 2003.
ACCOUNT C
ACCUMULATION UNIT VALUES
CONTRACTS ISSUED AFTER DECEMBER 31, 1991 - SIMPLIFIED LOAD VERSION:
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
* Includes accumulation unit values at inception date in 2003 for portfolios becoming effective after December 31, 2002.
## Became an investment option under the Contracts effective May 1, 2003.
TOTAL EQUITY:
(IN THOUSANDS)
The change in 2004’s Total Equity was attributable primarily to investment activities within the Account: the net change in unrealized appreciation of $47,729 led to a decrease in equity derived from investment activities of $55,414 for the year ended December 31, 2004. The remaining change in equity of $105,013 is attributed to the equity transactions for the year ended December 31, 2004. The change in 2003’s Total Equity was attributable primarily to investment activities within the Account: the net change in unrealized appreciation of $103,646 led to a decrease in equity derived from investment activities of $86,530 for the year ended December 31, 2003. The remaining change in equity of $138,640 is attributed to the equity transactions for the year ended December 31, 2003.
CRITICAL ACCOUNTING POLICIES
Dividend income and distributions of net realized gains received from the Funds are recorded on the ex-date of the dividends. Transactions in the Funds’ shares are accounted for on the trade date. Annuity reserves are based on published annuity tables. A deduction for annuity rate and expense guarantees is determined daily. Under current law, no federal income taxes are payable with respect to Accounts A and C. Accordingly, no provisions for any such liability has been made.
OFF-BALANCE SHEET ARRANGEMENTS
Each of Account A and Account C had no off-balance sheet arrangement (as defined by S-K 303) during 2004 that have or are reasonably likely to have a current or future effect on the respective Account’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to Contract holders.
CONTRACTUAL OBLIGATIONS
At December 31, 2004, neither Account A nor Account C had any contractual obligations classified as long-term debt obligations, capital (finance) lease obligations, operating lease obligations, purchase obligations or other long-term liabilities reflected on their respective balance sheets.
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 18 portfolios of the Series Fund, the Fidelity VIP Mid Cap Portfolio (the “Fidelity Portfolio”), and 5 funds of the Russell Funds, together with current amounts due from the sale of Series Fund, Fidelity Portfolio, 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, Fidelity Portfolio, 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.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NML VARIABLE ANNUITY ACCOUNT A
STATEMENTS OF ASSETS AND LIABILITIES
(IN THOUSANDS)
NML VARIABLE ANNUITY ACCOUNT A
STATEMENTS OF ASSETS AND LIABILITIES CONTINUED
(IN THOUSANDS)
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
## The initial investment was made May 1, 2003.
NML VARIABLE ANNUITY ACCOUNT A
STATEMENTS OF ASSETS AND LIABILITIES CONTINUED
(IN THOUSANDS)
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
## The initial investment was made May 1, 2003.
NML VARIABLE ANNUITY ACCOUNT A
STATEMENTS OF ASSETS AND LIABILITIES CONTINUED
(IN THOUSANDS)
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
## The initial investment was made May 1, 2003.
NML VARIABLE ANNUITY ACCOUNT A
STATEMENTS OF ASSETS AND LIABILITIES CONTINUED
(IN THOUSANDS)
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
## The initial investment was made May 1, 2003.
NML VARIABLE ANNUITY ACCOUNT A
STATEMENTS OF ASSETS AND LIABILITIES CONTINUED
(IN THOUSANDS)
EQUITY
Contracts Issued:
Prior to December 17, 1981
Contracts Issued:
After December 16, 1981 and
Prior to March 31, 1995
NML VARIABLE ANNUITY ACCOUNT A
STATEMENTS OF ASSETS AND LIABILITIES CONTINUED
(IN THOUSANDS)
Contracts Issued:
On or After March 31, 1995
and Prior to March 31, 2000
Front Load Version
Contracts Issued:
On or After March 31, 1995
and Prior to March 31, 2000
Back Load Version
NML VARIABLE ANNUITY ACCOUNT A
STATEMENTS OF ASSETS AND LIABILITIES CONTINUED
(IN THOUSANDS)
Contracts Issued:
On or After March 31, 2000
Front Load Version
Contracts Issued:
On or After March 31, 2000
Back Load Version
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
## The initial investment was made May 1, 2003.
The Accompanying Notes are an Integral Part of the Financial Statements.
NML VARIABLE ANNUITY ACCOUNT A
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
## The initial investment in this Division was made on May 1, 2003.
NML VARIABLE ANNUITY ACCOUNT A
STATEMENTS OF OPERATIONS CONTINUED
(IN THOUSANDS)
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
## The initial investment in this Division was made on May 1, 2003.
NML VARIABLE ANNUITY ACCOUNT A
STATEMENTS OF OPERATIONS CONTINUED
(IN THOUSANDS)
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
The Accompanying Notes are an Integral Part of the Financial Statements
NML VARIABLE ANNUITY ACCOUNT A
STATEMENTS OF CHANGES IN EQUITY
(IN THOUSANDS)
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
## The initial investment in this Division was made on May 1, 2003.
NML VARIABLE ANNUITY ACCOUNT A
STATEMENTS OF CHANGES IN EQUITY CONTINUED
(IN THOUSANDS)
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
## The initial investment in this Division was made on May 1, 2003.
NML VARIABLE ANNUITY ACCOUNT A
STATEMENTS OF CHANGES IN EQUITY CONTINUED
(IN THOUSANDS)
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
## The initial investment in this Division was made on May 1, 2003.
NML VARIABLE ANNUITY ACCOUNT A
STATEMENTS OF CHANGES IN EQUITY CONTINUED
(IN THOUSANDS)
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
NML VARIABLE ANNUITY ACCOUNT A
STATEMENTS OF CHANGES IN EQUITY CONTINUED
(IN THOUSANDS)
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
The Accompanying Notes are an Integral Part of the Financial Statements
NML VARIABLE ANNUITY ACCOUNT A
FINANCIAL HIGHLIGHTS
(FOR A UNIT OUTSTANDING DURING THE PERIOD)
NML VARIABLE ANNUITY ACCOUNT A
FINANCIAL HIGHLIGHTS CONTINUED
(FOR A UNIT OUTSTANDING DURING THE PERIOD)
(1) Division commenced operations on July 31, 2001.
(2) Division commenced operations on May 1, 2003.
(3) Year ended 12/31/03 unit value ranges revised from previous annual report.
(4) Year ended 12/31/01 revised from previous reports. To allow comparability certain amounts were reclassified from dividend income to capital gain distributions.
(5) 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.
(6) Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Division.
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”) 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. Currently, two versions of the contract are offered: Front Load contracts with a sales charge up to 4.5% of purchase payments and Back Load contracts with a withdrawal charge of 0-6%.
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., Fidelity Variable Insurance Products Fund III and the Russell Investment Funds (collectively known as “the Funds”). The shares are valued at the Funds’ offering and redemption prices 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, 1985, annuity reserves are based on the 1971 Individual Annuity Mortality Table with assumed interest rates of 3.5% or 5%. For variable payment plans issued on or after January 1, 1985 and before January 1, 2002, annuity reserves are based on the 1983 Annuity Table a adjusted, with assumed interest rates of 3.5% or 5%. For variable payment plans issued on or after January 1, 2002, annuity reserves are based on the 2000 Annuity Table with assumed interest rates of 3.5% or 5%.
Note 5 - Dividend income and distributions of net realized gains from the Funds are recorded on the ex-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 year ended December 31, 2004 by each Division are shown as follows: (in thousands)
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
## Initial Investment in this Division was made on May 1, 2003.
NML VARIABLE ANNUITY ACCOUNT A
NOTES TO FINANCIAL STATEMENTS CONTINUED
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
## Initial Investment in this Division was made on May 1, 2003.
NML VARIABLE ANNUITY ACCOUNT A
NOTES TO FINANCIAL STATEMENTS CONTINUED
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 prior to December 17, 1981, the deduction is at an annual rate of .75% 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.
For contracts issued after December 16, 1981 and prior to March 31, 1995, the deduction is at an annual rate of 1.25% 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 1.5% annual rate.
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% and 1.25%, 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 0.75% and 1.5%, respectively.
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 0.5% and 1.25%, 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 0.75% and 1.5% annual rate, respectively. The current charges will not be increased for five years from the date of the most recent Prospectus.
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.
NML VARIABLE ANNUITY ACCOUNT A
NOTES TO FINANCIAL STATEMENTS CONTINUED
Note 8 - The changes in units outstanding for the years ended December 31, 2004, 2003, 2002 by each Division are shown as follows: (in thousands)
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
## Initial Investment in this Division was made on May 1, 2003.
NML VARIABLE ANNUITY ACCOUNT A
NOTES TO FINANCIAL STATEMENTS CONTINUED
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
NML VARIABLE ANNUITY ACCOUNT A
NOTES TO FINANCIAL STATEMENTS CONTINUED
Note 9 - Equity Values by Division for the year ended December 31, 2004 are shown below:
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
## Initial Investment in this Division was made on May 1, 2003.
NML VARIABLE ANNUITY ACCOUNT A
NOTES TO FINANCIAL STATEMENTS CONTINUED
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
## Initial Investment in this Division was made on May 1, 2003.
NML VARIABLE ANNUITY ACCOUNT A
NOTES TO FINANCIAL STATEMENTS CONTINUED
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
## Initial Investment in this Division was made on May 1, 2003.
NML VARIABLE ANNUITY ACCOUNT A
NOTES TO FINANCIAL STATEMENTS CONTINUED
Equity Values by Division for the year ended December 31, 2003 are shown below:
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
## Initial Investment in this Division was made on May 1, 2003.
NML VARIABLE ANNUITY ACCOUNT A
NOTES TO FINANCIAL STATEMENTS CONTINUED
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
## Initial Investment in this Division was made on May 1, 2003.
NML VARIABLE ANNUITY ACCOUNT A
NOTES TO FINANCIAL STATEMENTS CONTINUED
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
## Initial Investment in this Division was made on May 1, 2003.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Northwestern Mutual Life Insurance Company and Contract Owners of NML Variable Annuity Account A
In our opinion, the accompanying statements of assets and liabilities, the related statements of operations, and of changes in equity and the financial highlights present fairly, in all material respects, the financial position of NML Variable Annuity Account A 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, AllianceBernstein Mid Cap Value Division, Index 400 Stock Division, Janus Capital Appreciation Division, Growth Stock Division, Large Cap Core Stock Division, Capital Guardian Domestic Equity Division, T. Rowe Price Equity Income Division, Index 500 Stock Division, Asset Allocation Division, Balanced Division, High Yield Bond Division, Select Bond Division, Money Market Division, Fidelity VIP Mid Cap 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, 2004 and 2003, and the results of each of their operations, the changes in each of their equity and their financial highlights for the periods presented, 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 the standards of the Public Company Accounting Oversight Board (United States). 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, 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, 2004 with Northwestern Mutual Series Fund, Inc., Fidelity VIP Mid Cap Portfolio and the Russell Investment Funds, provide a reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
Milwaukee, Wisconsin
February 3, 2005
NML VARIABLE ANNUITY ACCOUNT C
STATEMENTS OF ASSETS AND LIABILITIES
(IN THOUSANDS)
NML VARIABLE ANNUITY ACCOUNT C
STATEMENTS OF ASSETS AND LIABILITIES
(IN THOUSANDS)
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
## The initial investment was made on May 1, 2003.
NML VARIABLE ANNUITY ACCOUNT C
STATEMENTS OF ASSETS AND LIABILITIES CONTINUED
(IN THOUSANDS)
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
## The initial investment was made on May 1, 2003.
NML VARIABLE ANNUITY ACCOUNT C
STATEMENTS OF ASSETS AND LIABILITIES CONTINUED
(IN THOUSANDS)
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
## The initial investment was made on May 1, 2003.
NML VARIABLE ANNUITY ACCOUNT C
STATEMENTS OF ASSETS AND LIABILITIES CONTINUED
(IN THOUSANDS)
EQUITY
Contracts Issued:
Prior to December 17, 1981 or between
April 30, 1984 and December 31, 1991
Contracts Issued:
After December 16, 1981 and
Prior to May 1, 1984
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
## The initial investment was made on May 1, 2003.
NML VARIABLE ANNUITY ACCOUNT C
STATEMENTS OF ASSETS AND LIABILITIES CONTINUED
(IN THOUSANDS)
EQUITY CONTINUED
Contracts Issued:
After December 31, 1991
Front Load Version
Contracts Issued:
After December 31, 1991
Simplified Load Version
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
## The initial investment was made on May 1, 2003.
The Accompanying Notes are an Integral Part of the Financial Statements.
NML VARIABLE ANNUITY ACCOUNT C
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
## The initial investment in this Division was made on May 1, 2003.
NML VARIABLE ANNUITY ACCOUNT C
STATEMENTS OF OPERATIONS CONTINUED
(IN THOUSANDS)
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
## The initial investment in this Division was made on May 1, 2003.
NML VARIABLE ANNUITY ACCOUNT C
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
The Accompanying Notes are an Integral Part of the Financial Statements.
NML VARIABLE ANNUITY ACCOUNT C
STATEMENTS OF CHANGES IN EQUITY
(IN THOUSANDS)
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
## The initial investment in this Division was made on May 1, 2003.
NML VARIABLE ANNUITY ACCOUNT C
STATEMENTS OF CHANGES IN EQUITY CONTINUED
(IN THOUSANDS)
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
## The initial investment in this Division was made on May 1, 2003.
NML VARIABLE ANNUITY ACCOUNT C
STATEMENTS OF CHANGES IN EQUITY CONTINUED
(IN THOUSANDS)
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
## The initial investment in this Division was made on May 1, 2003.
NML VARIABLE ANNUITY ACCOUNT C
STATEMENTS OF CHANGES IN EQUITY CONTINUED
(IN THOUSANDS)
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
NML VARIABLE ANNUITY ACCOUNT C
STATEMENTS OF CHANGES IN EQUITY CONTINUED
(IN THOUSANDS)
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
The Accompanying Notes are an Integral Part of the Financial Statements.
NML VARIABLE ANNUITY ACCOUNT C
FINANCIAL HIGHLIGHTS
(FOR A UNIT OUTSTANDING DURING THE PERIOD)
NML VARIABLE ANNUITY ACCOUNT C
FINANCIAL HIGHLIGHTS
(FOR A UNIT OUTSTANDING DURING THE PERIOD)
(1) Division commenced operations on July 31, 2001.
(2) Division commenced operations on May 1, 2003.
(3) Year ended 12/31/03 unit value ranges revised from previous annual report.
(4) Year ended 12/31/01 revised from previous annual reports. To allow comparability certain amounts were reclassified from dividend income to capital gain distributions.
(5) 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.
(6) Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Division.
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”) 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. Currently, 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 installment fee of $750.
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., Fidelity Variable Insurance Products Fund III and the Russell Investment Funds (collectively known as “the Funds”). The shares are valued at the Funds’ offering and redemption prices 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. Annuity reserves are based on the 1983 Annuity Table a adjusted, with assumed interest rates of 3.5% or 5%.
Note 5 - Dividend income and distributions of net realized gains from the Funds are recorded on the ex-date of the dividends. Transactions in 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 year ended December 31, 2004 by each Division are shown as follows: (in thousands)
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
## Initial Investment in this Division was made on May 1, 2003.
NML VARIABLE ANNUITY ACCOUNT C
NOTES TO FINANCIAL STATEMENTS CONTINUED
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
## Initial Investment in this Division was made on May 1, 2003.
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 before December 17, 1981 or between April 30, 1984 and December 31, 1991, there is no deduction for annuity rate and expense guarantees.
For contracts issued after December 16, 1981, and prior to May 1, 1984, the deduction is determined daily at an annual rate of 0.5% 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 0.75% annual rate.
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 0.65% and 1.25%, 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 1.5% annual rates, respectively.
Since 1996, 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.
NML VARIABLE ANNUITY ACCOUNT C
NOTES TO FINANCIAL STATEMENTS CONTINUED
Note 8 - The changes in units outstanding for the years ended December 31, 2004, 2003 and 2002 by each Division are shown as follows: (in thousands)
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
## Initial Investment in this Division was made on May 1, 2003.
NML VARIABLE ANNUITY ACCOUNT C
NOTES TO FINANCIAL STATEMENTS CONTINUED
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
NML VARIABLE ANNUITY ACCOUNT C
NOTES TO FINANCIAL STATEMENTS CONTINUED
Note 9 - Equity Values by Division for the year ended December 31, 2004 are shown below:
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
## Initial Investment in this Division was made on May 1, 2003.
NML VARIABLE ANNUITY ACCOUNT C
NOTES TO FINANCIAL STATEMENTS CONTINUED
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
## Initial Investment in this Division was made on May 1, 2003.
NML VARIABLE ANNUITY ACCOUNT C
NOTES TO FINANCIAL STATEMENTS CONTINUED
Equity Values by Division for the year ended December 31, 2003 are shown below:
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
## Initial Investment in this Division was made on May 1, 2003.
NML VARIABLE ANNUITY ACCOUNT C
NOTES TO FINANCIAL STATEMENTS CONTINUED
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
## Initial Investment in this Division was made on May 1, 2003.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Northwestern Mutual Life Insurance Company and Contract Owners of NML Variable Annuity Account C
In our opinion, the accompanying statements of assets and liabilities, the related statements of operations, and of changes in equity and the financial highlights present fairly, in all material respects, the financial position of NML Variable Annuity Account C 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, AllianceBernstein Mid Cap Value Division, Index 400 Stock Division, Janus Capital Appreciation Division, Growth Stock Division, Large Cap Core Stock Division, Capital Guardian Domestic Equity Division, T. Rowe Price Equity Income Division, Index 500 Stock Division, Asset Allocation Division, Balanced Division, High Yield Bond Division, Select Bond Division, Money Market Division, Fidelity VIP Mid Cap 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, 2004 and 2003, and the results of each of their operations, the changes in each of their equity and their financial highlights for the periods presented, 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 the standards of the Public Company Accounting Oversight Board (United States). 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, 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, 2004 with Northwestern Mutual Series Fund, Inc., Fidelity VIP Mid Cap Portfolio and the Russell Investment Funds, provide a reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
Milwaukee, Wisconsin
February 3, 2005
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
The registrant’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the registrant’s disclosure controls and procedures (as such term is defined in Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the registrant’s Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2004, those disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by the registrant in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
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, 2005, is provided with respect to each director, including persons nominated or chosen to become directors, of Northwestern Mutual. Northwestern Mutual uses the title of Trustee to denote the directors.
(1) Candidates proposed for re-election by the Board of Trustees for the election to be held at the May 2005 Annual meeting of Policyowners. If re-elected, these Trustees’ terms will expire in May 2009.
(2) Mr. du Pont, Mr. Graff, Ms. Graham and Mr. Smith are retiring from the Board of Trustees effective May 25, 2005.
The business experience and public company directorships of Northwestern Mutual’s Trustees as of March 1, 2005 are as follows:
J. E. Gallegos
Attorney, Gallegos Law Firm, Santa Fe, New Mexico, since 1988.
Stephen N. Graff
Office Managing Partner (retired), Arthur Andersen LLP, Milwaukee, Wisconsin, 1981-1994.
Regal-Beloit Corporation
Patricia Albjerg Graham
Professor, Graduate School of Education, Harvard University, Cambridge, Massachusetts, since 1974; President, Spencer Foundation (social and behavioral sciences), Chicago, Illinois, 1991-2000.
Apache Corporation
James P. Hackett
President and Chief Executive Officer, Steelcase Inc. (office furniture manufacturer), Grand Rapids, Michigan, since 1994.
Fifth Third Bancorp Steelcase Inc.
Stephen F. Keller
Attorney, Los Angeles, California, since 1962. Chairman, The Santa Anita Companies, Arcadia, California, 1993-1996.
Barbara A. King
President, Landscape Structures, Inc. (manufacturer of playground equipment), Delano, Minnesota, since 1973.
Margery Kraus
President and CEO, APCO Worldwide (global communication consultancy), since 1984.
J. Thomas Lewis
Attorney, New Orleans, Louisiana, since 1998. Prior thereto, associated with Monroe & Lemann (law firm), New Orleans, Louisiana, 1965-1998.
Daniel F. McKeithan, Jr.
President, Tamarack Petroleum Co., Inc. (operator of oil and gas wells), Milwaukee, Wisconsin, since 1982.
The Marcus Corporation
Ulice Payne, Jr.
President, Addison-Clifton, LLC (global trade compliance advisors) since 2004. President and Chief Executive Officer of the Milwaukee Brewers Baseball Club from 2002-2003. Prior thereto, Managing Partner of the Milwaukee, Wisconsin office of Foley & Lardner (law firm).
Wisconsin Energy Corporation
Badger Meter, Inc.
State Financial Services Corporation
Midwest Air Group, Inc.
H. Mason Sizemore, Jr.
Retired President and Chief Operating Officer, The Seattle Times, Seattle, Washington, since 2001. Prior thereto, President and Chief Operating Officer since 1985.
Sherwood H. Smith, Jr.
Chairman Emeritus, Carolina Power & Light Company, Raleigh, North Carolina, since 1999. Prior thereto, Chairman, 1996-1999.
Nortel Networks Corporation
Peter M. Sommerhauser
Attorney, Godfrey & Kahn, SC (law firm), Milwaukee, Wisconsin, since 1969.
Kohl’s Corporation
John E. Steuri
Retired Chairman and Chief Executive Officer, Advanced Thermal Technologies, Inc. (heating, air conditioning, humidity control), Little Rock,
Neither Account A nor Account C have Boards of Directors or Audit Committees. Northwestern Mutual’s Board of Trustees has determined that its Audit Committee has at least one “Audit Committee Financial Expert” serving on the Audit Committee. In 2004 Northwestern Mutual’s Board determined Mr. Stephen N. Graff to be the Audit Committee Financial Expert and concurrently determined that he was independent (applying the NASD definition of independent director then in effect).
The following information as of March 1, 2005, 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, 2005.
NAME
AGE
CURRENT POSITION AND YEAR ASSUMED
Edward J. Zore
President and Chief Executive Officer (2001)
John M. Bremer
Chief Operating Officer (Chief Compliance Officer) (2001)
Peter W. Bruce
Chief Insurance Officer (2002)
Deborah A. Beck
Executive Vice President (Planning and Technology) (2000)
William H. Beckley
Executive Vice President (Agencies) (2000)
Mason G. Ross
Executive Vice President and Chief Investment Officer (2001)
Mark G. Doll
Senior Vice President (Public Markets) (1996)
Richard L. Hall
Senior Vice President (Life Product) (2004)
William C. Koenig
Senior Vice President and Chief Actuary (1995)
Gregory C. Oberland
Senior Vice President (Insurance Operations) (2004)
Barbara F. Piehler
Senior Vice President and Chief Information Officer (2002)
Gary A. Poliner
Senior Vice President and Chief Financial Officer (2001)
Marcia Rimai
Senior Vice President (Marketing) (2004)
Charles D. Robinson
Senior Vice President (Investment Products and Services) (2001)
John E. Schlifske
Senior Vice President (Investment Products and Services and Affiliates) (2004)
Leonard F. Stecklein
Senior Vice President (Investment Product Operations) (2004)
Frederic H. Sweet
Senior Vice President (Corporate and Government Relations) (1998)
Robert J. Berdan
Vice President, General Counsel and Secretary (2001)
Michael G. Carter
Vice President (Policyowner Services) (2004)
Steven T. Catlett
Vice President (Investment Products) (2004)
David D. Clark
Vice President (Real Estate) (2004)
Gloster B. Current
Vice President (Corporate Planning) (2004)
Thomas E. Dyer
Vice President (Corporate Services) (1998)
Christine H. Fiasca
Vice President (Field System Administration) (2002)
John M. Grogan
John C. Kelly
John L. Kordsmeier
Vice President (Field Services and Support) (2004)
Vice President and Controller (2004)
Vice President (New Business) (2004)
Susan A. Lueger
Vice President (Human Resources) (1994)
Jeffrey J. Lueken
Vice President (Securities) (2004)
Jean M. Maier
Vice President (Compliance/Best Practices ) (2004)
Meridee J. Maynard
Vice President (Disability Income and Long Term Care) (2004)
Brenda F. Skelton
Vice President (Communications) (2003)
J. Edward Tippetts
Vice President (Field Development) (2002)
Martha M. Valerio
Vice President (Technology Research and Web Resources) (2001)
Michael L. Youngman
Vice President (Government Relations) (2001)
All of the Executive Officers, except Charles D. Robinson, Gloster B. Current and Brenda F. Skelton, have been employed by Northwestern Mutual in an executive or management position for more than five years. Mr. Robinson joined Northwestern Mutual in 2001. 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. Prior to joining Northwestern Mutual in 2003, Mr. Current was Vice President and Chief Marketing Officer for Lincoln Financial Group from 1995 to 2003. Prior to Lincoln Financial, Mr. Current served as Vice President at Citibank, North America in a variety of operations and marketing management assignments, and in key leadership roles at Kentucky Fried Chicken Co., Canadian Canners Ltd., Del Monte Corp., R.J. Reynolds Foods, Inc., Procter and Gamble Co. and AT&T Long Lines. Ms. Skelton joined Northwestern Mutual in 2002. Prior to Northwestern Mutual, Ms. Skelton worked for the Milwaukee Wave professional soccer team from 2001 to 2002 as the general manager of business operations. Ms. Skelton also headed up the marketing function for Midwest Airlines from 1987 to 2000. During her tenure at Midwest Airlines, Ms. Skelton held the positions of Senior Vice President of Marketing, Vice President of Marketing and Director of Marketing Programs. She also served on the Midwest Air Group, Inc. Board of Directors from 1995 until her departure in 2000. Prior to Midwest Air Group, Ms. Skelton held a variety of other marketing and product management positions of progressive responsibility.
As indicated above, neither Account A nor Account C have executive officers and thus do not have a “Code of Ethics.” However, Northwestern Mutual has adopted a “Code of Ethics” that applies to Northwestern Mutual’s Chief Executive Officer, Chief Financial Officer and Controller, as well as to the rest of its employees. A copy of Northwestern Mutual’s Guidelines for Business Conduct, which satisfy the Code of Ethics requirements, were filed as Exhibit 14.1 to the Annual Report on Form 10-K for the year ended December 31, 2003 and are incorporated by reference herein.
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, such persons receive no compensation tied specifically to any services provided 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 AND RELATED STOCKHOLDER MATTERS
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. No Contract owner is the beneficial owner of more than 5% of Account A, Account C or Northwestern Mutual’s voting securities. Neither Accounts A or C, nor Northwestern Mutual, maintain equity compensation plans under which equity securities are authorized for issuance.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Northwestern Mutual’s subsidiary, Mason Street Advisors, LLC (“MSA”), serves as the investment adviser to the Series Fund. Various Trustees and Executive Officers of Northwestern Mutual serve as directors and officers of the Series Fund and/or MSA and may be deemed to have a direct or indirect material interest in the existence of the investment advisory agreement.
Northwestern Mutual’s subsidiary, Frank Russell Company, provides the Russell Funds and its investment adviser, Frank Russell Investment Management Company (“FRIMCo”), a subsidiary of Frank Russell Company, with asset management consulting services that it provides to its other consulting clients. The Russell Funds do not compensate Russell for these services. FRIMCo is party to an investment advisory agreement with the Russell Funds. Certain Trustees and Executive Officers of Northwestern Mutual serve as directors of Frank Russell Company 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 (and their family members and associates) may have securities accounts with NMIS and may have effected transactions through such accounts during 2004 and through the date hereof, including transactions in mutual funds sponsored by Northwestern Mutual and 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, in accordance with applicable law and are administered solely pursuant to the terms of such policies.
In the ordinary course of its business, Northwestern Mutual makes loans to its field force Managing Partners 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 Managing Partner who has received such a loan may assume an Executive Officer position at Northwestern Mutual. In such circumstances, historically the outstanding loans have remained in place and are satisfied in accordance with the terms of the underlying loan documentation.
At December 31, 2004, Mr. Peter M. Sommerhauser, a Northwestern Mutual Trustee since May 1999, was the beneficial owner of approximately 8.5% 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 stood at $6,666,667 at January 1, 2004 and was paid in full at March 31, 2004.
In the ordinary course of business, Northwestern Mutual engages law firms to assist it on various matters. From time to time, an engaged law firm may employ, or have as a partner or shareholder, a family member of a Northwestern Mutual executive officer or trustee. Any such executive officer or trustee would not participate in the selection of such law firm for such matter.
Mr. David A. Erne, a Northwestern Mutual Trustee since July 2002, is a shareholder of Reinhart Boerner Van Deuren s.c. Reinhart Boerner Van Deuren s.c. provided legal services to Northwestern Mutual and/or certain related entities during 2004. The aggregate amount of such legal services billed to Northwestern Mutual or related entities is less than 1% of the law firm’s gross revenues for its last fiscal year.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
PricewaterhouseCoopers LLP is Account A’s and Account C’s principal accountant. Set forth below are the aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for the audit or review of Account A’s and Account C’s financial statements or other services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years.
AUDIT-RELATED FEES
Neither Account A nor Account C had any fees billed for fiscal year 2003 for assurance and related services by the principal accountant that are reasonably related to the performance of the audit or review of Account A’s and Account C’s financial statements and that are not reported under the caption “Audit Fees” above. In fiscal year 2004, audit-related fees totaling $55,760 were billed by the principal accountant for internal control services related to Sarbanes-Oxley. These fees were paid by the sponsor.
TAX FEES
Neither Account A nor Account C had any fees billed for each of the last two fiscal years for tax compliance, tax advice or tax planning services rendered by their principal accountant.
ALL OTHER FEES
Neither Account A nor Account C had any fees billed for each of the last two fiscal years for products and services provided by their principal accountant that are not otherwise reported under the captions “Audit Fees,” “Audit-Related Fees” and “Tax Fees” above.
PRE-APPROVAL POLICIES AND PROCEDURES
Neither Account A nor Account C have a Board of Directors or Audit Committee and have therefore not adopted pre-approval policies and procedures for audit and non-audit services. However, Northwestern Mutual’s Audit Committee has adopted an Audit and Non-Audit Services Pre-Approval Policy that does apply to Account A and Account C (the “Policy”).
Under the Policy, the Audit Committee must pre-approve all audit and permissible non-audit services provided by the independent accountant. The Policy requires certain services to be approved on a case-by-case basis by the Audit Committee. Such services that must be approved on a case-by-case basis include the annual financial statement audits of Northwestern Mutual and its subsidiaries. The Policy also provides that other audit services (e.g., services associated with statements, reports and other documents filed with the Commission), audit-related services (e.g., employee benefit plan audits and internal control reviews), tax services (e.g., U.S. federal, state and local tax planning and advice) and all other permissible services may be pre-approved through the adoption by the Audit Committee of a list of authorized services along with specific budgeted amounts for such services. The Audit Committee has established such a list of authorized services. Audit and non-audit services to be provided by Northwestern Mutual’s independent accountant not on such list, or that would exceed the budgeted amount for such service, must
be pre-approved by the Audit Committee on a case-by-case basis. The Policy requires the Northwestern Mutual Audit Committee to be informed on a timely basis of any services rendered by the independent accountant pursuant to such authorized list of services.
The Policy also permits the Audit Committee to delegate to one or more of its members pre-approval authority, which the Audit Committee has done. Those Audit Committee members are required to report any pre-approval decisions to the Audit Committee at its next scheduled meeting.
In 2004, there were no fees paid to Account A’s and Account C’s independent accountant under a de minimis exception to the rules that waives the pre-approval requirements for certain non-audit services.
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements and Exhibits
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004 and 2003, 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, 2004. 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 of the Public Company Oversight Board (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 of America. 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 of America, 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, 2004 and 2003, or the results of their operations or their cash flows for each of the three years in the period ended December 31, 2004 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, 2004 and 2003 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, on the basis of accounting described in Note 1.
/s/PRICEWATERHOUSECOOPERS LLP
Milwaukee, Wisconsin
January 24, 2005
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, 2004, 2003 AND 2002
1. BASIS OF PRESENTATION AND CHANGES IN ACCOUNTING PRINCIPLES
The accompanying consolidated statutory financial statements include the accounts of The Northwestern Mutual Life Insurance Company and its wholly-owned subsidiary, Northwestern Long Term Care Insurance Company (together, “the Company”). All intercompany balances and transactions have been eliminated. The Company offers life, annuity, disability income and long-term care insurance products to the personal, business and estate markets.
The consolidated financial statements were prepared in accordance with accounting practices prescribed or permitted by the Office of the Commissioner of Insurance of the State of Wisconsin (“statutory basis of accounting”). See Notes 2 and 11. Financial statements prepared on the statutory basis of accounting differ from financial statements prepared in accordance with generally accepted accounting principles (“GAAP”), primarily because on a GAAP basis: (1) certain policy acquisition costs are deferred and amortized, (2) investment valuations and policy benefit reserves are established using 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 investment gains and losses is permitted. The effects on the financial statements of the Company attributable to the differences between the statutory basis of accounting and GAAP are material.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in accordance with the statutory basis of accounting requires management to make estimates or 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 periods then ended. Actual future results could differ from these estimates and assumptions.
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, and are reported in the financial statements at unpaid principal balance.
OTHER INVESTMENTS
Other investments consist primarily of partnership investments (including real estate, venture capital and leveraged buyout fund limited partnerships), real estate joint ventures, leveraged leases and unconsolidated non-insurance subsidiaries organized as limited liability companies. These investments are valued based on the equity method of accounting. Other investments also include derivative financial instruments. See Note 4 regarding the Company’s use of derivatives and their presentation in the financial statements.
Other investments include $104 million and $103 million of interests in oil and natural gas production at December 31, 2004 and 2003, respectively. These oil and gas interests are accounted for using the full cost method, a method permitted by the Office of the Commissioner of Insurance of the State of Wisconsin. The NAIC “Accounting Practices and Procedures Manual” does not provide accounting guidance for oil and gas interests.
TEMPORARY INVESTMENTS
Temporary investments represent securities that had maturities of one year or less at purchase and are reported at amortized cost, which approximates fair value.
NET INVESTMENT INCOME
Net investment income primarily represents interest and dividends received or accrued on bonds, mortgage loans, policy loans and other investments. It also includes amortization of any purchase premium or discount using the interest method,
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
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. Net investment income also includes dividends paid to the Company from accumulated earnings of joint ventures, partnerships and unconsolidated non-insurance subsidiaries and prepayment fees on bonds and mortgages. 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 and derivatives that are attributable to changes in interest rates. Net realized gains and losses deferred to the IMR are amortized into investment income over the estimated remaining term to maturity of the investment sold or the asset/liability hedged by the derivative.
INVESTMENT CAPITAL GAINS AND LOSSES
Realized capital gains and losses are recognized based upon specific identification of securities sold. Realized capital losses also include valuation adjustments for impairment of bonds, stocks, mortgage loans, real estate and other investments that have experienced 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 fair value has been less than cost, and (4) the financial condition and near-term prospects of the issuer in relation to the anticipated recovery period. Realized capital gains and losses as reported in the consolidated statement of operations exclude any IMR deferrals. See Note 3 regarding realized capital gains and losses.
Unrealized capital gains and losses primarily represent changes in the reported fair value of common stocks and changes in valuation adjustments made for bonds in or near default. Changes in the Company’s share of undistributed earnings of joint ventures, partnerships and unconsolidated non-insurance subsidiaries are also classified as changes in unrealized capital gains and losses. See Note 3 regarding 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 reserve liability for invested asset valuation using a formula prescribed by the National Association of Insurance Commissioners (“NAIC”). The AVR is designed to protect surplus against potential declines in the value of the Company’s investments. Increases or decreases in AVR are reported as direct adjustments to surplus.
SEPARATE ACCOUNTS
See Note 7 regarding separate account assets and liabilities reported by the Company.
PREMIUM REVENUE
Life insurance premiums are recognized as revenue at the beginning of each policy year. Annuity, disability income and long-term care insurance premiums are recognized as revenue when received by the Company. Considerations received on supplementary insurance contracts without life contingencies are deposit-type transactions and thereby excluded from revenue in the consolidated statement of operations. Premium revenue is reported net of ceded reinsurance, see Note 9.
OTHER INCOME
Other income primarily represents ceded reinsurance expense allowances and various insurance policy charges.
NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
BENEFIT PAYMENTS TO POLICYOWNERS AND BENEFICIARIES
Benefit payments to policyowners and beneficiaries include death, surrender, disability and long-term care benefits, as well as matured endowments and payments on supplementary insurance contracts that include life contingencies. Benefit payments on supplementary insurance contracts without life contingencies are deposit-type transactions and thereby excluded from benefits in the consolidated statement of operations. 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
The cost of electronic data processing (“EDP”) equipment and operating system software used in the Company’s business is generally capitalized and depreciated over three years using the straight-line method. Non-operating system software is generally capitalized and depreciated over a maximum of five years. EDP equipment and operating software assets of $37 million and $25 million at December 31, 2004 and 2003, respectively, are classified as other assets in the consolidated statement of financial position and are net of accumulated depreciation of $68 million and $56 million, respectively. Non-operating software costs, net of accumulated depreciation, are nonadmitted assets and thereby excluded from reported assets and surplus in the consolidated statement of financial position. Depreciation expense for EDP equipment and software totaled $56 million, $42 million and $27 million for the years ended December 31, 2004, 2003 and 2002, respectively.
FURNITURE AND EQUIPMENT
The cost of furniture, fixtures and equipment, including leasehold improvements, is generally capitalized and depreciated over the useful life of the assets using the straight-line method. Furniture, fixtures and equipment costs, net of accumulated depreciation, are nonadmitted assets and thereby excluded from reported assets and surplus in the consolidated statement of financial position. Depreciation expense for furniture, fixtures and equipment totaled $7 million, $6 million and $6 million for the years ended December 31, 2004, 2003 and 2002, 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 during the subsequent 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. Dividends used by policyowners to purchase additional insurance are reported as premiums in the consolidated statement of operations, but are not included in premiums received or benefit payments in the consolidated statement of cash flows.
NONADMITTED ASSETS
Certain assets are designated as nonadmitted on the statutory basis of accounting. Such assets, principally related to pension funding, amounts advanced to or due from the Company’s field representatives, furniture, fixtures, equipment and non-
NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
operating software (net of accumulated depreciation) are excluded from reported assets and surplus in the consolidated statement of financial position. Changes in nonadmitted assets are reported as a direct adjustment to surplus.
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 estimates of future prepayments obtained from independent sources. Prepayment assumptions are updated at least annually. During 2004, the retrospective adjustment method was used to recognize related changes in the estimated yield-to-maturity of such securities. Prior to 2004, the prospective adjustment method was used. The cumulative effect of this change in method as of January 1, 2004 was immaterial.
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. See Note 2. At December 31, 2004 and 2003, the reported value of bonds was reduced by $42 million and $277 million, respectively, in valuation adjustments.
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.
NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
Statement value and estimated fair value of bonds at December 31, 2004 and 2003 were as follows:
December 31, 2004
December 31, 2003
Statement value and estimated fair value of bonds by contractual maturity at December 31, 2004 are presented below. Estimated maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
COMMON AND PREFERRED STOCKS
Common stocks are generally 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. The equity method is generally used to value investments in common stock of unconsolidated non-insurance subsidiaries. See note 11 regarding the statement value of the Company’s investment in Frank Russell Company.
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 amortized 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.
Valuation adjustments are made for preferred stocks rated 4 or less, which are reported at the lower of cost or fair value, or for common and preferred stocks with a decline in fair value that management considers to be other-than-temporary. At December 31, 2004 and 2003, the reported value of common and preferred stocks was reduced by $74 million and $182 million, respectively, in valuation adjustments.
MORTGAGE LOANS
Mortgage loans are reported in the financial statements at unpaid principal balance, less any valuation allowance or unamortized commitment or origination fee. Such fees are generally deferred upon receipt 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 2004 were 8.8% and 2.3%, respectively, while these rates during 2003 were 8.5% and 3.6%, respectively. The aggregate ratio of amounts loaned to the value of collateral for mortgage loans originated during 2004 and 2003 were 65% and 66%, respectively, with a maximum of 100% for any single loan during each of 2004 and 2003.
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 reported as an unrealized loss. Valuation adjustments for impairments considered to be other- than-temporary are reported as realized losses. At December 31, 2004 and 2003, the reported value of mortgage loans was reduced by $1 and $13 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 lives of the improvements. An investment in real estate is considered impaired when, based on current information, the estimated fair value of the property is lower than depreciated cost. The estimated fair value is primarily based upon the present value of future cash flow (for commercial properties) or the capitalization of stabilized net operating income (for multi-family residential properties). 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, net of encumbrances. Valuation adjustments are reported as a realized loss. At December 31, 2004 and 2003, the reported value of real estate investments was reduced by $4 million and $0, respectively, in valuation adjustments.
At December 31, 2004 and 2003, the reported value of real estate included $190 million and $180 million, respectively, of real estate properties occupied by the Company.
NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
LEVERAGED LEASES
Leveraged leases primarily represent investments in commercial aircraft or real estate property that are leased to third parties and serve as collateral for non-recourse borrowings. Leveraged leases are valued at the present value of future minimum lease payments, plus the residual value of the leased asset and classified as other investments in the consolidated statement of financial position. At December 31, 2004 and 2003, the reported value of leveraged leases was $458 million and $513 million, respectively. During 2004, the Company reported realized capital losses of $4 million upon renegotiation of leveraged leases on certain commercial aircraft and realized capital losses of $14 million upon a change in the estimated timing of tax benefits for certain real property leases. During 2002, the Company utilized $108 million in existing valuation allowances to absorb losses on declines in value of certain commercial aircraft leases that were considered to be other-than-temporary.
CAPITAL GAINS AND LOSSES
Realized investment gains and losses for the years ended December 31, 2004, 2003 and 2002 were as follows:
Proceeds from the sale of bond investments totaled $47 billion, $83 billion and $53 billion for the years ended December 31, 2004, 2003, and 2002, respectively.
Realized losses (before capital gains taxes) included $116 million, $405 million and $588 million for the years ended December 31, 2004, 2003, and 2002, respectively, of valuation adjustments for declines in fair value of investments that were considered to be other-than-temporary.
NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
The amortized cost and estimated fair value of bonds and common and preferred stocks for which the estimated fair value had temporarily declined and remained below cost as of December 31, 2004 and 2003, were as follows:
Changes in net unrealized investment gains and losses for the years ended December 31, 2004, 2003 and 2002 were as follows:
SECURITIES LENDING
The Company has entered into securities lending agreements whereby certain investment securities are loaned to third parties, primarily major brokerage firms. The aggregate statement value of loaned securities was $2.5 billion and $2.4 billion at December 31, 2004 and 2003, respectively. 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, 2004 and 2003, unrestricted cash collateral held by the Company of $2.6 billion and $2.5 billion, respectively, is classified as cash and invested assets and the offsetting collateral liability of $2.6 billion and $2.5 billion, respectively, is classified as other liabilities in the consolidated statement of financial position. At December 31, 2004 and 2003, additional non-cash collateral of $359 million and $482 million respectively, was held on the Company’s behalf by a trustee and is not included in the consolidated statement of financial position.
NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
4. DERIVATIVE FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into derivative transactions, generally to mitigate the risk to assets and surplus from fluctuations in interest rates, foreign currency exchange rates and other market risks.
Cash flow and fair value hedges that qualify for hedge accounting are reported in a manner consistent with the item being hedged (e.g., at amortized cost or fair value). Cash flow and fair value hedges that do not qualify for hedge accounting 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 derivative contract as of the reporting date. The reported statement value of derivatives is classified as other investments in the consolidated statement of financial position.
Gains or losses realized upon maturity or termination of derivative positions are generally reported as realized capital gains or losses, net of tax. For derivatives that qualify for hedge accounting, gains or losses realized due to changes in market interest rates are deferred to the IMR, net of tax, and amortized into investment income over the estimated remaining term to maturity of the item being hedged. Gains or losses resulting from reporting open derivative positions at fair value are reported as unrealized capital gains or losses.
In addition to cash flow and fair value hedges, the Company entered into replication transactions during 2004 and 2003. A replication transaction is a derivative transaction entered into in conjunction with other investment transactions to replicate the investment characteristics of otherwise permissible investments.
The Company does not take positions in derivatives for income generation purposes.
The Company implemented Statement of Statutory Accounting Principles (“SSAP”) No. 86, Accounting for Derivative Instruments and Hedging Activities, which superceded SSAP 31 effective January 1, 2003. Upon implementation, the Company had the option of applying the new guidance to all derivatives as of January 1, 2003 or continuing to use the existing guidance of SSAP 31 for all derivatives held as of December 31, 2002. The Company chose to apply SSAP 86 guidance retroactively to derivatives held prior to January 1, 2003. The impact on surplus from the adoption of SSAP 86 was immaterial.
NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
The Company held the following derivative positions at December 31, 2004 and 2003:
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 cash flow hedges used to mitigate 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.
Interest rate swaps are cash flow hedges used to mitigate exposure to interest rate risk on certain floating and fixed rate bonds. An interest rate swap is a contractual agreement to pay a rate of interest based upon a reference index in exchange for a fixed rate of interest established at the origination of the contract.
Interest rate basis swaps are cash flow hedges used to mitigate the basis risk on certain hedges of variable rate preferred stocks. An interest rate basis swap is a contractual agreement to pay a rate of return based upon one reference index in exchange for receiving a rate of return based upon a different reference index.
Commodity swaps are cash flow hedges used to mitigate exposure to market fluctuations for the forward sale of crude oil and natural gas production. Commodity swaps are contractual agreements whereby one party pays a floating commodity price in exchange for a specified fixed commodity price.
Swaptions are cash flow hedges used to mitigate the asset/liability risks of a significant and sustained increase or decrease in interest rates for certain of the Company’s insurance products. A swaption is a contractual agreement whereby one party holds an option to enter into an interest rate swap with another party on predefined terms.
Interest rate floors are cash flow hedges used to mitigate the asset/liability risks of a significant and sustained decrease in interest rates for certain of the Company’s insurance products. Floors entitle the Company to receive settlement payments from the counterparties if interest rates decline below a specified level.
Short equity index futures are fair value hedges 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.
Fixed income futures are fair value hedges used to mitigate interest rate risk for a portion of the Company’s 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. Unrealized losses of $2 million and unrealized gains of $8 million were recognized during 2004 and 2003, respectively, on contracts that were excluded from the assessment of hedge effectiveness.
Foreign currency forwards are fair value hedges used to mitigate 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. Unrealized losses of $29 million and $24 million were recognized during 2004 and 2003, respectively, on contracts that were excluded from the assessment of hedge effectiveness.
Foreign currency covers are fair value hedges used to mitigate the foreign exchange risk on trades of investments denominated in foreign currencies. Foreign currency forward contracts obligate the Company to pay or receive a specified amount of foreign currency at a future date at a specified exchange rate.
Credit default swaps are fair value hedges used to mitigate the credit risk associated with investments in bonds of specific 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.
Fixed income replications are used to replicate a bond investment through the use of credit default swaps, interest rate swaps and cash market instruments. These replication transactions, including the derivative components, are reported at amortized cost. During each of 2004 and 2003, the average fair value of such contracts was less than $1 million. No realized gains or losses were recognized during 2004 or 2003 on the termination of these contracts.
Long fixed income futures replications are used to manage the duration of the fixed income portfolio and mitigate exposure to interest rate changes. These replication transactions are reported at fair value, with changes in fair value reflected as a component of unrealized gains and losses until such time as the contracts are terminated. During each of 2004 and 2003, the average fair value of such contracts was less than $1 million. Realized gains of $6 million and $29 million were recognized during 2004 and 2003 on the termination of these contracts.
Long equity futures replications are used to gain equity market investment exposure. These replication transactions are reported at fair value, with changes in fair value reflected as a component of unrealized gains and losses until such time as the contracts are terminated. During each of 2004 and 2003, the average fair value of such contracts was less than $1 million. Realized gains of $15 million and $28 million were recognized during 2004 and 2003, respectively, on the termination of these contracts.
Construction loan forward replications are used to gain GNMA market investment exposure. These replication transactions are reported at amortized cost. During each of 2004 and 2003, the average fair value of such contracts was less than $1 million. No realized gains or losses were recognized during 2004 and 2003 on the termination of these contracts.
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 Office of the Commissioner of Insurance of the State of Wisconsin (“OCI”). These actuarial tables and methods include assumptions regarding future mortality and morbidity. Actual future experience could differ from the assumptions used to make these reserve estimates.
NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
General account reserves for policy benefits at December 31, 2004 and 2003 are summarized below:
Life insurance reserves on substantially all policies issued since 1978 are based on the Commissioner’s Reserve Valuation Method (“CRVM”) using the 1958 or 1980 CSO mortality tables with interest rates ranging from 3½% to 5½%. Other life insurance reserves are primarily based on the net level premium method, using various mortality tables at interest rates ranging from 2% to 4½%. As of December 31, 2004, the Company had $870 billion of total life insurance in-force, including $7.7 billion of life insurance in-force for which gross premiums were less than net premiums according to the standard valuation methods and assumptions prescribed by the OCI.
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 multiples of 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. Cash 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 3½% to 6¼%. Other deferred annuity reserves are based on contract value. Immediate annuity reserves are based on present value of expected benefit payments with interest rates ranging from 3½% to 7½%. 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.
At December 31, 2004 and 2003, the withdrawal characteristics of the Company’s general account annuity reserves and deposit liabilities were as follows:
Unpaid claims and claim reserves for disability income policies are based on the present value of expected benefit payments, primarily using the 1985 Commissioner’s Individual Disability Table A (“CIDA”), modified for Company experience in the first four years of disability, with interest rates ranging from 3% to 5½%. Unpaid claims and claim reserves for long-term care policies are based on the present value of expected benefit payments using industry-based long-term care experience with a 4½% interest rate.
Reserves for unpaid claims, losses and loss adjustment expenses on disability income and long-term care insurance were $3.2 billion and $3.1 billion at December 31, 2004 and 2003, respectively. The table below provides a summary of the changes in these reserves for the years ended December 31, 2004 and 2003.
The changes in reserves for incurred claims related to prior years are generally the result of ongoing analysis of recent loss development trends.
Active life reserves for disability income policies issued since 1987 are primarily based on the two-year preliminary term method using the 1985 CIDA for morbidity with a 4% interest rate. Active life reserves for prior disability income policies are based on the net level premium method, using the 1964 Commissioner’s Disability Table for morbidity with interest rates ranging from 3% to 4%.
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 morbidity experience, total terminations based on the 1983 Individual Annuity Mortality table without lapses or the 1983 Group Annuity Mortality table with lapses, with an interest rate of either 4% or 4.5%. For reserves using lapse assumptions, a separate calculation is performed using interest rates ranging from 5.2% to 6.0% and excluding lapses. Reserves resulting from the separate calculation are compared in the aggregate to the statutory minimum and the greater of the two is held.
NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
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, 2004 and 2003 were as follows:
7. SEPARATE ACCOUNTS
Separate account assets and related policy liabilities represent the segregation of balances attributable to variable life insurance and variable annuity products. 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, 2004 and 2003:
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, 2004 and 2003, general account reserves for policy benefits included $8 million and $11 million, respectively, that were attributable to these benefits.
NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
Premiums and other considerations received from variable life and variable annuity policyowners during the years ended December 31, 2004 and 2003 were $1.3 billion and $1.2 billion, respectively. These amounts are reported as premiums in the consolidated statement of operations. The subsequent transfer of these receipts to the separate accounts is reported in transfers to separate accounts in the consolidated statement of operations, net of amounts received from the separate accounts to provide for policy benefit payments to variable product policyowners.
Following is a summary reconciliation of amounts reported as transfers to and from separate accounts in the summary of operations of the Company’s NAIC Separate Account Annual Statement with the amount reported as net transfers to separate accounts in the accompanying consolidated statement of operations for the years ended December 31, 2004, 2003 and 2002:
8. EMPLOYEE AND REPRESENTATIVE BENEFIT PLANS
The Company sponsors noncontributory defined benefit retirement plans for all eligible employees and field representatives (“Plans”). 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. The Company contributed $38 million and $28 million to the qualified employee retirement plan during 2004 and 2003, respectively, and expects to contribute $37 million in 2005.
In addition to defined 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.
Aggregate assets and projected benefit obligations of the defined benefit plans and for postretirement benefits at December 31, 2004 and 2003, and changes in assets and obligations for the years then ended, were as follows:
Plan assets are invested primarily in common stocks and corporate debt securities through a separate account of the Company. The investment objective of the Plan is to maximize long-term total rate of return, consistent with prudent investment risk management and in accordance with ERISA requirements. Investments are made for the sole interest of the beneficiaries of the Plan. While significant exposure to publicly traded equity securities is warranted by the long-term nature of expected benefit payments, diversification across asset classes is maintained to provide a risk/reward profile consistent with the objectives of the Plan beneficiaries. Diversified equity investments are subject to an aggregate maximum exposure of 75%, with holdings in any one corporate issuer not to exceed 3% of total assets. Asset mix is re-balanced regularly to maintain holdings within target asset allocation ranges. The measurement date for plan assets is December 31, with the fair value of plan assets based primarily on quoted market values.
Plan assets by asset class at December 31, 2004 and December 31, 2003 were as follows:
The projected benefit obligation (“PBO”) represents the actuarial net present value of future benefit obligations. For defined benefit plans, PBO includes assumptions as to future salary increases. This measure is consistent with the ongoing concern assumption and is mandated for measuring pension obligations. The accumulated benefit obligation (“ABO”) is similar to the calculation of the PBO, but is based only on current salaries, with no assumption of future salary increases. The aggregate ABO for the defined benefit plans of the Company were $1.6 billion and $1.4 billion at December 31, 2004 and 2003, respectively.
Projected benefit obligations included $37 million and $28 million for non-vested employees at December 31, 2004 and 2003, respectively.
NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
The following table summarizes assumptions used in estimating the projected benefit obligations at December 31, 2004, 2003 and 2002:
The long term rates of return on plan assets are estimated assuming an allocation of plan assets among asset classes consistent with December 31, 2004. Returns are estimated by asset class based on the current risk free interest rate environment plus a risk premium. The risk premium is based on historical returns and other factors such as expected reinvestment returns and asset manager performance.
The projected benefit obligation for postretirement benefits at December 31, 2004 and 2003 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, 2004 by $22 million and net periodic postretirement benefit expense during 2004 by $4 million. A decrease in the assumed healthcare cost trend of 1% in each year would reduce the accumulated postretirement benefit obligation as of December 31, 2004 and net periodic postretirement benefit expense during 2004 by the same amounts.
On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“the Act”) was enacted. The Act introduces a prescription drug benefit under Medicare Part D beginning in 2006. Under the Act, employers who sponsor postretirement plans that provide prescription drug benefits that are actuarially equivalent to Medicare qualify to receive subsidy payments from the federal government. The Company has not determined whether the benefits under its existing postretirement plan are actuarially equivalent to the new Medicare benefit. As such, neither the projected benefit obligation nor the net periodic benefit cost for postretirement benefits reflects any amount associated with this Medicare subsidy.
Following is an aggregate reconciliation of the funded status of the plans to the related financial statement liability reported by the Company at December 31, 2004 and 2003:
Unrecognized net experience gains or losses represent cumulative amounts by which plan experience for return on plan assets or service costs have been more or less favorable than assumed. These differences accumulate without recognition in the Company’s financial statements unless they exceed 10% 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 plan participants, which is currently fourteen years for employee plans and twelve years for field representative plans.
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 the statutory basis of accounting for pensions as of January 1, 2001.
The Company has elected not to record an initial asset for this excess, electing instead to amortize this initial asset as a credit to net periodic benefit cost in a systematic manner until exhausted.
Any net pension assets for funded plans are nonadmitted and are thereby excluded from reported assets and surplus in the consolidated statement of financial position.
The components of net periodic benefit costs for the years ended December 31, 2004, 2003 and 2002 were as follows:
The expected benefit payments under the defined benefit plans and the postretirement plans are as follows:
The Company also sponsors a contributory 401(k) plan for eligible employees and a noncontributory defined contribution plan for field representatives. For the years ended December 31, 2004, 2003 and 2002 the Company expensed total contributions to these plans of $24 million, $23 million and $22 million, respectively.
9. REINSURANCE
The Company limits its exposure to life insurance death benefits by ceding insurance coverage to various reinsurers. The Company retains a maximum of $30 million of coverage per individual life and a maximum of $45 million of coverage per joint life. The Company also cedes a portion of its exposure to group disability benefits on a coinsurance basis and has an excess reinsurance contract for certain individual disability income policies issued prior to 1999 with retention limits varying based upon coverage type. The Company also participates in catastrophic risk sharing pools.
Amounts shown in the consolidated financial statements are reported net of the impact of reinsurance. Reserves for policy benefits at December 31, 2004 and 2003 were reported net of ceded reserves of $1.2 billion and $1.0 billion, respectively.
NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
The effect of reinsurance on premium revenue and benefits expense for the years ended December 31, 2004, 2003 and 2002 was as follows:
In addition, the Company reported $207 million, $184 million and $172 million for the years ended December 31, 2004, 2003 and 2002, respectively, in allowances from reinsurers for reimbursement of commissions and other expenses on ceded business. These amounts are classified as 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 recoverables at December 31, 2004 and 2003 that 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, LLC
Northwestern Investment Management Company, LLC
Mason Street Advisors, LLC
Northwestern Securities Holdings, LLC
NML - CBO, LLC
Northwestern Mutual Trust Company
JYD Assets, LLC
Chateau, LLC
Health Invest, LLC
The Company collects from or refunds to these subsidiaries their share of consolidated income taxes determined under written tax-sharing agreements. During 2004, the Company sold its majority interest in Baird Holding Company (see Note 13) and intends to consolidate Baird’s taxable income for the portion of 2004 prior to the sale. Federal income tax returns for years through 2001 are closed as to further assessment of tax. The liability for income taxes payable in the financial statements includes a provision for additional taxes that may become due with respect to the open tax years.
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. The significant components of the net deferred tax asset at December 31, 2004 and 2003 were as follows:
The statutory basis of accounting limits 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, 2004 and 2003, the Company’s gross deferred tax assets did not exceed 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.
The major components of current income tax expense (benefit) were as follows:
The Company’s taxable income can vary significantly from gain from operations before taxes due to temporary and permanent 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. In March 2002, Congress passed legislation that suspended assessments of equity tax for tax years 2001 through 2003. As a result, the related liability was released as a current tax benefit during 2002. While the Company was subject to the equity tax in 2004, legislation was enacted in April 2004 that permanently repealed the equity tax effective January 1, 2005.
The Company’s effective tax rates were 12%, 13% and 299% for the years ended December 31, 2004, 2003 and 2002, respectively. 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 ratio between the sum of total taxes, including
NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
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 during 2002.
Income taxes paid in the current and prior years of $1.3 billion are available at December 31, 2004 for recoupment in the event of future tax losses.
11. FRANK RUSSELL COMPANY ACQUISITION AND GOODWILL
The Company acquired Frank Russell Company (“Russell”) effective January 1, 1999. Russell, a global leader in multi-manager investment services, provides investment products and services in more than 35 countries. The initial purchase price of approximately $1.0 billion was funded with a combination of cash, senior notes issued by Russell and bank debt. The purchase agreement also called for additional contingent consideration to be paid to the former owners of Russell based upon the financial performance of Russell during the five year period ended December 31, 2003.
The acquisition was accounted for using the statutory purchase method, whereby the excess of the acquisition price over the fair value of Russell net assets at the time of the acquisition was attributed to goodwill reported in the accounts of Russell. Further, the statutory purchase method required that the Company’s cost basis of its investment in Russell be reduced, through a direct reduction of Company surplus, for the amount by which Russell goodwill exceeded 10% of the Company’s surplus at the time of the acquisition.
The Company applied for, and was granted, permission by the OCI for an alternative accounting treatment (“permitted practice”), whereby all Russell goodwill, including any subsequent additions to goodwill resulting from payment of contingent purchase consideration, be charged off as a direct reduction of Company surplus. This permitted practice differs from that required by the NAIC “Accounting Practices and Procedures Manual,” which requires that any goodwill not in excess of 10% of the Company’s surplus be amortized using a straight-line method over the period during which the acquiring entity benefits economically or ten years, whichever is shorter.
At December 31, 2004, the Company had made cumulative direct reductions of its surplus for goodwill associated with the Russell acquisition of $981 million. These charge-offs exceeded the Company’s equity basis investment in Russell by $581 million, which is classified as a reduction of the Company’s total investment in common stocks at that date.
If the Company had not received permission for this alternative accounting treatment, Company surplus as reported in the statement of financial position would have been greater by $320 million, $358 million and $335 million at December 31, 2004, 2003 and 2002, respectively, and net income as reported in the statement of operations would have been lower by $61 million, $53 million and $52 million for the years then ended, respectively.
12. CONTINGENCIES AND GUARANTEES
The Company has unconditionally guaranteed repayment of $350 million of senior notes and up to $50 million of bank borrowings owed by Russell.
In the normal course of business, the Company has guaranteed certain obligations of other affiliates and made guarantees of operating leases or future minimum compensation payments on behalf of its field management. The maximum exposure under these guarantees totaled approximately $406 million at December 31, 2004. The Company believes that the likelihood is remote that payments will be required under these guarantees and therefore has not accrued a contingent liability in the consolidated statement of financial position. In addition, the Company routinely makes commitments to fund mortgage loans or other investments in the normal course of business. These commitments aggregated to $2.8 billion at December 31, 2004 and were extended at market interest rates and terms.
NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
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 ultimately result from such actions would not have a material effect on the Company’s financial position at December 31, 2004.
13. RELATED PARTY TRANSACTIONS
On May 13, 2004 the Company sold its majority interest in Baird Holding Company (“Baird”) to Baird management and employees. At the time of the sale, the Company owned approximately 51% of Baird common stock, with Baird management and employees owning the remainder. The Company realized a $30 million gain on the sale of its remaining interest in Baird, which is reported in realized capital gains in the consolidated statement of operations. The Company financed a substantial portion of the sales price through the purchase, at par, of $240 million of subordinated notes, with attached warrants, issued by Baird. Notes in the amount of $215 million remain outstanding at December 31, 2004 and are classified as bonds in the consolidated statement of financial position.
During 2004, the Company refinanced a credit facility owed by Russell and provided additional capital through the purchase, at par, of $258 million of notes issued by Russell. Notes in the amount of $218 million remain outstanding at December 31, 2004 and are classified as bonds in the consolidated statement of financial position.
During 2004, the Company transferred investments to a wholly-owned subsidiary as a capital contribution. The fair value of these securities was $222 million at the time of transfer. Realized capital gains of $2 million were recognized during 2004 upon the transfer of these assets.
During 2003, the Company transferred investments to a majority-owned investment subsidiary as a capital contribution. The fair value of these securities was $219 million at the time of the transfer. Realized capital losses of $7 million were recognized during 2003 upon the transfer of these assets.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of investment assets, including derivatives, and certain policy liabilities at December 31, 2004 and 2003 were as follows:
Fair value of bonds, common and preferred stocks and derivative financial instruments are based upon quoted market prices, when available. For those not actively traded fair value is estimated using independent pricing services or internally developed pricing models. See Note 11 regarding the statement value of the Company’s investment in Russell. 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 include real estate joint ventures, which are valued by discounting estimated future cash flows using market interest rates, as well as other joint ventures and partnerships, for which the equity accounting basis 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.
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/ EDWARD J. ZORE
Edward J. Zore
President and Chief Executive Officer
Date: March 24, 2005
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.
Each of the above signatures is affixed as of March 24, 2005
*By
/s/ EDWARD J. ZORE
Edward J. Zore, Attorney in Fact,
pursuant to the Power of Attorney
attached as exhibit 24.1 hereto.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED PURSUANT TO SECTION 12 OF THE ACT
As supplemental information, the Commission is separately being furnished with four copies of each of the following documents: (1) 2004 Annual Report for NML Variable Annuity Account A; and (2) 2004 Annual Report for NML Variable Annuity Account C.
No proxy material is prepared specifically for contract holders under NML Variable Annuity Account A or NML Variable Annuity Account C. The Northwestern Mutual Life Insurance Company, a mutual company with no shareholders, does prepare a proxy statement and proxy for each policyholder of a company-issued insurance policy or annuity contract.
INDEX TO EXHIBITS