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 currently 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, trust and investment management 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 7,500 financial representatives at December 31, 2005 located in approximately 320 offices nationwide. At December 31, 2005, 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, universal life, 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 Frank Russell Investment Company and Russell Investment Funds), brokerage services (offered through its subsidiary Northwestern Mutual Investment Services, LLC) and trust and other wealth management services (offered through its subsidiary Northwestern Mutual Wealth Management 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, 2005, 2004 and 2003, Northwestern Mutual had (a) total premiums of $11.4 billion, $10.7 billion and $10.3 billion, respectively, of which $9.3 billion, $9.0 billion and $8.7 billion, respectively, was attributable to life insurance, $0.7 billion, $0.7 billion and $0.7 billion, respectively, was attributable to disability income insurance, and $1.4 billion, $1.0 billion and $0.9 billion, respectively, was attributable to annuity products in the investment products and services line of business; (b) net income of $924 million, $817 million and $692 million, respectively, of which $620 million, $597 million and $493 million, respectively, was attributable to life insurance, $225 million, $186 million and $179 million, respectively, was attributable to disability income insurance, $81 million, $41 million and $29 million, respectively, was attributable to annuity products in the investment products and services line of business, and losses of $(2) million, $(7) million and $(9) million, respectively, was attributable to long term care insurance; and (c) total assets of $133.0 billion, $123.9 billion and $113.8 billion, respectively, of which $108.4 billion, $100.7 billion and $92.2 billion, respectively, was attributable to life insurance, $6.8 billion, $6.5 billion and $6.1 billion, respectively, was attributable to disability income insurance, and $17.8 billion, $16.7 billion and $15.5 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, 2005 (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 2005, there were approximately 900 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 more than 40 countries. Together with its subsidiaries, Russell managed $155 billion in assets at December 31, 2005 and advised clients representing more than $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 and registered investment adviser 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 Account A and Account C where relevant.
ITEM 1A.
ITEM 1A. RISK FACTORS
Account A and Account C are segregated asset accounts of Northwestern Mutual. All assets of each division of Account A and Account C are invested in open end investment companies registered under the Investment Company Act of 1940. The assets of the Accounts are subject to inherent risks of changes in market values that may be caused by general economic conditions, performance of the financial markets, the level of interest rates, foreign currency exchange, and circumstances affecting individual credits. The income, gains or losses, realized or unrealized, for the assets placed in Account A and Account C with respect to the Contracts determine the value of Contract benefits. Contract values are not affected by income, gains or losses for the rest of Northwestern Mutual’s business.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
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 seven 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 for its current operations.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Neither Account A nor Account C are named parties in any pending legal proceedings. Northwestern Mutual is subject to various claims and proceedings, including claims or proceedings related to its investments, that occur in the ordinary course of its business. Although the outcome of such claims and proceedings cannot be predicted with certainty, 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 2005, 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, 2005. 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.
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
CHANGES IN NET ASSETS 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, 2005. 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.
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
CHANGES IN NET ASSETS 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 Net Assets as Dividend Income, Realized Gains (Losses) on Investments and Change in Unrealized Appreciation (Depreciation) of Investments. The other item impacting the results of operations is the Mortality and Risk Expense Charges, 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 Net Assets, in the Contract 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 Net Assets.
The primary risks associated with assets of Accounts A and C are investment related risks or market risk. See Item 1A of this Annual Report. 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, 2005, 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, 2005, 2004, and 2003 for each Division, and the percentage change in such values from year to year.
ACCOUNT A
ACCUMULATION UNIT VALUES
CONTRACTS ISSUED PRIOR TO DECEMBER 17, 1981:
## Became an investment option under the Contracts effective May 1, 2003.
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
ACCOUNT A
ACCUMULATION UNIT VALUES
CONTRACTS ISSUED AFTER DECEMBER 16, 1981 AND PRIOR TO MARCH 31, 1995:
## 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.
ACCOUNT A
ACCUMULATION UNIT VALUES
CONTRACTS ISSUED ON OR AFTER MARCH 31, 1995 AND PRIOR TO MARCH 31, 2000 - FRONT LOAD
VERSION:
## Became an investment option under the Contracts effective May 1, 2003.
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
ACCOUNT A
ACCUMULATION UNIT VALUES
CONTRACTS ISSUED ON OR AFTER MARCH 31, 1995 AND PRIOR TO MARCH 31, 2000 - BACK LOAD
VERSION:
## Became an investment option under the Contracts effective May 1, 2003.
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
ACCOUNT A
ACCUMULATION UNIT VALUES
CONTRACTS ISSUED ON OR AFTER MARCH 31, 2000 - FRONT LOAD VERSION AND BACK LOAD VERSION
CLASS A:
## 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.
ACCOUNT A
ACCUMULATION UNIT VALUES
CONTRACTS ISSUED ON OR AFTER MARCH 31, 2000 - BACK LOAD VERSION CLASS B:
## 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.
ACCOUNT A
NET ASSETS
(IN THOUSANDS)
The change in 2005’s Net Assets was attributable primarily to investment activities within the Account: net realized gains of $14,685 led to an increase in net assets resulting from operations of $24,026 for the year ended December 31, 2005. The remaining change in net assets of $(34,502) is attributed to the contract transactions for the year ended December 31, 2005. The change in 2004’s Net Assets was attributable primarily to investment activities within the Account: the net change in unrealized appreciation of $34,868 led to an increase in net assets resulting from operations of $46,588 for the year ended December 31, 2004. The remaining change in net assets of $(39,596) is attributed to the contract transactions for the year ended December 31, 2004.
ACCOUNT C
ACCUMULATION UNIT VALUES
CONTRACTS ISSUED PRIOR TO DECEMBER 17, 1981 OR BETWEEN APRIL 30, 1984 AND
DECEMBER 31, 1991:
## Became an investment option under the Contracts effective May 1, 2003.
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
ACCOUNT C
ACCUMULATION UNIT VALUES
CONTRACTS ISSUED AFTER DECEMBER 16, 1981 AND PRIOR TO MAY 1, 1984:
## 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.
ACCOUNT C
ACCUMULATION UNIT VALUES
CONTRACTS ISSUED AFTER DECEMBER 31, 1991 - FRONT LOAD VERSION:
## 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.
ACCOUNT C
ACCUMULATION UNIT VALUES
CONTRACTS ISSUED AFTER DECEMBER 31, 1991 - SIMPLIFIED LOAD VERSION:
## 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.
ACCOUNT C
NET ASSETS
(IN THOUSANDS)
The change in 2005’s Net Assets was attributable primarily to investment activities within the Account: the net change in unrealized appreciation of $14,797 led to an increase in net assets resulting from operations of $33,845 for the year ended December 31, 2005. The remaining decrease in net assets of $14,212 is attributed to the contract transactions for the year ended December 31, 2005. The change in 2004’s Net Assets was attributable primarily to investment activities within the Account: the net change in unrealized appreciation of $47,729 led to an increase in net assets resulting from operations of $55,414 for the year ended December 31, 2004. The remaining change in net assets of $(5,815) is attributed to the contract transactions for the year ended December 31, 2004.
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 mortality and risk expense charges 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. See Note 2 of the Account A and Account C financial statements, respectively, in Item 8 herein.
OFF-BALANCE SHEET ARRANGEMENTS
Each of Account A and Account C had no off-balance sheet arrangement (as defined by S-K 303) during 2005 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, 2005, 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
As of December 31
(in thousands, except accumulation unit values)
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account A
Statements of Assets and Liabilities (continued)
As of December 31
(in thousands, except accumulation unit values)
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account A
Statements of Assets and Liabilities (continued)
As of December 31
(in thousands, except accumulation unit values)
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account A
Statements of Assets and Liabilities (continued)
As of December 31
(in thousands, except accumulation unit values)
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account A
Statements of Assets and Liabilities (continued)
As of December 31
(in thousands, except accumulation unit values)
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account A
Statements of Assets and Liabilities (continued)
As of December 31
(in thousands, except accumulation unit values)
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account A
Statements of Assets and Liabilities (continued)
As of December 31
(in thousands, except accumulation unit values)
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account A
Statements of Assets and Liabilities (continued)
As of December 31
(in thousands, except accumulation unit values)
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account A
Statements of Assets and Liabilities (continued)
As of December 31
(in thousands, except accumulation unit values)
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account A
Statements of Assets and Liabilities (continued)
As of December 31
(in thousands, except accumulation unit values)
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account A
Statements of Assets and Liabilities (continued)
As of December 31
(in thousands, except accumulation unit values)
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account A
Statements of Assets and Liabilities (continued)
As of December 31
(in thousands, except accumulation unit values)
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account A
Statements of Operations
For the Years Ended December 31
(in thousands)
## The initial investment in this Division was made on May 1, 2003.
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account A
Statements of Operations (continued)
For the Years Ended December 31
(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.
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account A
Statements of Operations (continued)
For the Years Ended December 31
(in thousands)
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account A
Statements of Operations (continued)
For the Years Ended December 31
(in thousands)
## The initial investment in this Division was made on May 1, 2003.
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account A
Statements of Changes in Net Assets
For the Years Ended December 31
(in thousands)
* Due to rounding, certain amounts have been restated.
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account A
Statements of Changes in Net Assets (continued)
For the Years Ended December 31
(in thousands)
## The initial investment in this Division was made on May 1, 2003.
* Due to rounding, certain amounts have been restated.
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account A
Statements of Change in Net Assets (continued)
For the Years Ended December 31
(in thousands)
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
* Due to rounding, certain amounts have been restated.
## The initial investment in this Division was made on May 1, 2003.
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account A
Statements of Change in Net Assets (continued)
For the Years Ended December 31
(in thousands)
* Due to rounding, certain amounts have been restated.
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account A
Statements of Change in Net Assets (continued)
For the Years Ended December 31
(in thousands)
## The initial investment in this Division was made on May 1, 2003.
* Due to rounding, certain amounts have been restated.
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account A
Statements of Change in Net Assets (continued)
For the Years Ended December 31
(in thousands)
* Due to rounding, certain amounts have been restated.
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account A
Notes to Financial Statements
1. Organization
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%.
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 Funds are open-end investment companies registered under the Investment Company Act of 1940.
2. Significant Accounting Policies
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.
The shares are valued at the Funds’ offering and redemption prices per share. 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. Dividend income and distributions of net realized gains from the Funds are recorded on the ex-date of the dividends. 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.
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%.
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.
3. Purchases and Sales of Investments
Purchases and sales of the Funds’ shares for the years ended December 31, 2005, 2004 and 2003 by each Division are shown as follows: (in thousands)
The Accompanying Notes are an Integral Part of the Financial Statements.
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.
## The initial Investment in this Division was made on May 1, 2003.
4. Expenses and Related Party Transactions
A deduction for mortality and expense risks 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.
NML Variable Annuity Account A
Notes to Financial Statements (continued)
For contracts issued prior to December 17, 1981, the deduction is at an annual rate of 0.75% 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 mortality and expense risks is determined daily at annual rates of 0.4% 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 mortality and expense risks 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. Under the terms of the back-load version of the contract, Class B, the net assets may be subject to the deduction for the front-load version of the contract after the withdrawal charge period, Class A. Rates may be increased or decreased by the Board of Trustees of Northwestern Mutual not to exceed 0.75% and 1.5% annual rate for the Front Load version and Back Load version, respectively. The current charges will not be increased for five years from the date of the most recent Prospectus.
5. 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) 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.
NML Variable Annuity Account A
Notes to Financial Statements (continued)
(1) Division commenced operations on July 31, 2001.
(2) Division commenced operations on May 1, 2003.
(3) 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.
NML Variable Annuity Account A
Notes to Financial Statements (continued)
(1) Division commenced operations on July 31, 2001.
(2) Division commenced operations on May 1, 2003.
(3) 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.
NML Variable Annuity Account A
Notes to Financial Statements (continued)
(1) Division commenced operations on July 31, 2001.
(2) Division commenced operations on May 1, 2003.
(3) 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.
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 net assets and the financial highlights present fairly, in all material respects, the financial position of the 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 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, 2005 and 2004, and the results of each of their operations, the changes in each of their net assets 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, 2005 with Northwestern Mutual Series Fund, Inc., Fidelity Variable Insurance Products Fund III and the Russell Investment Funds, provide a reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
Milwaukee, Wisconsin
February 7, 2006
NML Variable Annuity Account C
Statements of Assets and Liabilities
As of December 31
(in thousands, except accumulation unit values)
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account C
Statements of Assets and Liabilities (continued)
As of December 31
(in thousands, except accumulation unit values)
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account C
Statements of Assets and Liabilities (continued)
As of December 31
(in thousands, except accumulation unit values)
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account C
Statements of Assets and Liabilities (continued)
As of December 31
(in thousands, except accumulation unit values)
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account C
Statements of Assets and Liabilities (continued)
As of December 31
(in thousands, except accumulation unit values)
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account C
Statements of Assets and Liabilities (continued)
As of December 31
(in thousands, except accumulation unit values)
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account C
Statements of Assets and Liabilities (continued)
As of December 31
(in thousands, except accumulation unit values)
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account C
Statements of Assets and Liabilities (continued)
As of December 31
(in thousands, except accumulation unit values)
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account C
Statements of Assets and Liabilities (continued)
As of December 31
(in thousands, except accumulation unit values)
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account C
Statements of Assets and Liabilities (continued)
As of December 31
(in thousands, except accumulation unit values)
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account C
Statements of Assets and Liabilities (continued)
As of December 31
(in thousands, except accumulation unit values)
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account C
Statements of Assets and Liabilities (continued)
As of December 31
(in thousands, except accumulation unit values)
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account C
Statements of Operations
For the Years Ended December 31
(in thousands)
## The initial investment in this Division 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 (continued)
For the Years Ended December 31
(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.
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account C
Statements of Operations (continued)
For the Years Ended December 31
(in thousands)
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account C
Statements of Operations (continued)
For the Years Ended December 31
(in thousands)
## The initial investment in this Division was made on May 1, 2003.
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account C
Statements of Changes in Net Assets
For the Years Ended December 31
(in thousands)
* Due to rounding, certain amounts have been restated.
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account C
Statements of Changes in Net Assets (continued)
For the Years Ended December 31
(in thousands)
## The initial investment in this Division was made on May 1, 2003.
* Due to rounding, certain amounts have been restated.
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account C
Statements of Changes in Net Assets (continued)
For the Years Ended December 31
(in thousands)
^ Prior to January 31, 2003 this Division was named the J.P. Morgan Select Growth and Income Stock Division.
* Due to rounding, certain amounts have been restated.
## The initial investment in this Division was made on May 1, 2003.
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account C
Statements of Changes in Net Assets (continued)
For the Years Ended December 31
(in thousands)
* Due to rounding, certain amounts have been restated.
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account C
Statements of Changes in Net Assets (continued)
For the Years Ended December 31
(in thousands)
## The initial investment in this Division was made on May 1, 2003.
* Due to rounding, certain amounts have been restated.
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account C
Statements of Changes in Net Assets (continued)
For the Years Ended December 31
(in thousands)
* Due to rounding, certain amounts have been restated.
The Accompanying Notes are an Integral Part of the Financial Statements.
NML Variable Annuity Account C
Notes to Financial Statements
1. Organization
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.
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 Funds are open-end investment companies registered under the Investment Company Act of 1940.
2. Significant Accounting Policies
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.
The shares are valued at the Funds’ offering and redemption prices per share. 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. Dividend income and distributions of net realized gains from the Funds are recorded on the ex-date of the dividends. Since 1996, Northwestern Mutual has paid a dividend to certain contracts. The dividend is re-invested in the Account and has been reflected as a Contract Owners’ Net Payment in the accompanying financial statements.
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%.
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.
3. Purchases and Sales of Investments
Purchases and sales of the Funds’ shares for the years ended December 31, 2005, 2004 and 2003 by each Division are shown as follows: (in thousands)
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.
4. Expenses and Related Party Transactions
A deduction for mortality and expense risks 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 or between April 30, 1984 and December 31, 1991, there is no deduction for mortality and expense risks.
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.
NML Variable Annuity Account C
Notes to Financial Statements (continued)
Generally, for contracts issued after December 31, 1991, for the Front Load version and the Simplified Load version, the deduction for mortality and expense risks 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.
5. 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) 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.
NML Variable Annuity Account C
Notes to Financial Statements (continued)
(1) Division commenced operations on July 31, 2001.
(2) Division commenced operations on May 1, 2003.
(3) 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.
NML Variable Annuity Account C
Notes to Financial Statements (continued)
(1) Division commenced operations on July 31, 2001.
(2) Division commenced operations on May 1, 2003.
(3) 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.
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 net assets and the financial highlights present fairly, in all material respects, the financial position of the 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 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, 2005 and 2004, and the results of each of their operations, the changes in each of their net assets 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, 2005 with Northwestern Mutual Series Fund, Inc., Fidelity Variable Insurance Products Fund III and the Russell Investment Funds, provide a reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
Milwaukee, Wisconsin
February 7, 2006
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, 2005, 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, 2006, 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 2006 Annual meeting of Policyowners. If re-elected, the terms for Mr. Bremer, Mr. Hackett, Ms. King, Mr. Lewis, Mr. Payne and Mr. Sommerhauser will expire in May 2010. If re-elected, the terms for Messrs. Drury and Helmerich will expire in May 2008.
(2) Messrs. Ericson, Gallegos and McKeithan are retiring from the Board of Trustees effective May 24, 2006.
The business experience and public company directorships of Northwestern Mutual’s Trustees as of March 1, 2006 are as follows:
TRUSTEE
PRINCIPAL OCCUPATION
DURING PAST FIVE YEARS
DIRECTORSHIPS
Hans Helmerich
President and Chief Executive Officer, Helmerich & Payne, Inc. (contract oil drilling), Tulsa, Oklahoma, since 1989.
Helmerich & Payne, Inc.
Cimarex Energy Co.
Atwood Oceanics, 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), Washington, D.C., 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 & CEO, Addison-Clifton, LLC (global trade compliance advisors), Brookfield, Wisconsin, 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.
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.
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, Arkansas, since 2001; Chairman, 1997-2001. Prior thereto, Retired Chairman and Chief Executive Officer, ALLTEL Information Services, Inc., Little Rock, Arkansas.
John J. Stollenwerk
President and Chief Executive Officer, Allen-Edmonds Shoe Corporation, Port Washington, Wisconsin, since 1998. Prior thereto, President and Owner, 1980-1998.
Badger Meter, Inc.
Koss Corporation
Barry L. Williams
President and Chief Executive Officer, Williams Pacific Ventures, Inc. (venture capital), San Francisco, California, since 1993.
CH2M Hill, Inc.
R. H. Donnelley Corporation
Pacific Gas & Electric Company
PG&E Corporation
Simpson Manufacturing Co., Inc.
Kathryn D. Wriston
Trustee of the John A. Hartford Foundation (health care philanthropy), New York, New York, since 1991 and the Practicing Law Institute (continuing legal education provider), New York, New York, since 1975; Director of The Stanley Works (producer of tools and security products), New Britain, Connecticut, since 1996.
The Stanley Works
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 2005 Northwestern Mutual’s Board determined Mr. David J. Drury 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, 2006, 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, 2006.
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)
Christine H. Fiasca
Senior Vice President (Agency Services) (2006)
Richard L. Hall
Senior Vice President (Life Product) (2004)
William C. Koenig
Senior Vice President and Chief Actuary (1995)
Jean M. Maier
Senior Vice President (Insurance Operations) (2006)
Meridee J. Maynard
Senior Vice President (2006)
Gregory C. Oberland
Senior Vice President and Chief Information Officer (2006)
Gary A. Poliner
Senior Vice President and Chief Financial Officer (2001)
Marcia Rimai
Senior Vice President (Business Integration Services) (2006)
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 Products and Services) (2004)
Robert J. Berdan
Vice President, General Counsel and Secretary (2001)
Michael G. Carter
Vice President (Field Compensation and Planning) (2006)
Steven T. Catlett
Vice President (Investment Products) (2004)
Eric P. Christophersen
Vice President (Compliance/Best Practices) (2006)
David D. Clark
Vice President (Real Estate) (2004)
Gloster B. Current
Vice President (Policyowner Services) (2006)
Thomas E. Dyer
Vice President (Corporate Services) (1998)
John M. Grogan
Vice President (Disability Income) (2006)
John C. Kelly
Vice President and Controller (2004)
John L. Kordsmeier
Vice President (New Business) (2004)
Susan A. Lueger
Vice President (Human Resources) (1994)
Jeffrey J. Lueken
Vice President (Securities) (2004)
Raymond J. Manista
Vice President (Corporate Planning) (2006)
David W. Simbro
Vice President (Long Term Care) (2005)
Brenda F. Skelton
Vice President (Communications) (2003)
Calvin R. Schmidt
Vice President (Investment Products Operations) (2006)
J. Edward Tippetts
Vice President (Wealth Management) (2006)
Donald G. Tyler
Vice President (Investment Products and Services Sales and Products) (2006)
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, Brenda F. Skelton and Donald G. Tyler, 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. Mr. Tyler joined Northwestern Mutual in 2003. Prior thereto he was the President of Precision Marketing Partners and The Academy of Financial Services Studies, two consulting firms dedicated to assisting mutual fund companies in distribution, marketing and training capabilities, since 1999. Mr. Tyler has also held positions at Strong Capital Management and Thrivent Financial.
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. Each member of Northwestern Mutual is entitled to one vote, regardless of the amount of coverage or number of Contracts or insurance policies held. 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 2005 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.
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 2005. 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.
Mr. Peter M. Sommerhauser, a Northwestern Mutual Trustee since May 1999, is a shareholder of Godfrey & Kahn, S.C. Godfrey & Kahn, S.C. provided legal services to Northwestern Mutual and/or certain related entities during 2005. 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.
Mr. Hans Helmerich, a Northwestern Mutual Trustee since January 2006, is President and CEO of Helmerich & Payne, Inc. In 2002, Northwestern Mutual lent as part of its normal portfolio investment activities to Helmerich & Payne International Drilling Co., a subsidiary of Helmerich & Payne, Inc., a total of $30,000,000 and received privately placed 6.46% Senior Notes, Series C due August 15, 2012. The principal amount of such indebtedness remained at $30,000,000 at February 28, 2006.
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
In fiscal year 2005, audit-related fees totaling $142,107 were billed by the principal accountant for internal control services related to Sarbanes-Oxley. 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 and are not reported under the caption “Audit Fees” above.
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 2005, 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 statutory consolidated statement of financial position of The Northwestern Mutual Life Insurance Company and its subsidiary (“the Company”) as of December 31, 2005 and 2004, and the related consolidated statutory statements of operations, of changes in surplus and of cash flows for each of the three years in the period ended December 31, 2005. 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 generally accepted auditing standards as established by the Auditing Standards Board (United States) and in accordance with the auditing 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. 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, because of the effects of the matter discussed in the preceding paragraph, the consolidated financial statements referred to above do not present fairly in conformity with accounting principles generally accepted in the United States of America, the financial position of The Northwestern Mutual Life Insurance Company and its subsidiary as of December 31, 2005 and 2004, or the results of their operations or their cash flows for each of the three years in the period ended December 31, 2005. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Northwestern Mutual Life Insurance Company and its subsidiary as of December 31, 2005 and 2004 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, on the basis of accounting described in Note 1.
/s/ PRICEWATERHOUSECOOPERS LLP
Milwaukee, Wisconsin
January 24, 2006
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 Financial Statements
December 31, 2005, 2004 and 2003
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 3 and 12. 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. New Accounting and Reporting Pronouncements
Following is a summary of new statutory basis accounting or disclosure requirements that were adopted by the Company for the first time during 2005.
Investments in Subsidiary, Controlled and Affiliated Entities
Statement of Statutory Accounting Principles No. 88 requires that the Company’s equity method investments in any non-insurance subsidiary, controlled or affiliated entity (“SCA”) be supported by audited GAAP financial statements of the SCA. Any equity method investment in an SCA that is not supported by audited GAAP financial statements must be nonadmitted and thereby excluded from reported assets and surplus. Prior to the adoption of this new guidance, the GAAP financial statements on which equity method investments in SCAs were based were not required to be audited. As required by the new guidance, this change was adopted prospectively beginning in 2005.
In preparation for adoption of the new guidance, the Company made capital contributions during 2005 of its investment interest in certain unaudited SCAs to another wholly-owned subsidiary for which audited GAAP financial statements are prepared annually. The aggregate equity method statement value and fair value of the investment interests transferred were $987 million and $1.3 billion, respectively. These capital contributions were made at statement value, and no capital gain or loss was reported as a result of these transfers.
At December 31, 2005, the equity method statement value of the SCA investments transferred continue to be admitted in the reported value of the Company’s investment assets and surplus. Certain other SCA investments with an aggregate equity method statement value of $85 million did not meet the requirements of the new guidance and were nonadmitted at December 31, 2005. This increase in nonadmitted assets is included as a direct reduction of surplus in the consolidated statement of changes in surplus for the year ended December 31, 2005.
Impact of Medicare Modernization Act on Postretirement Benefits
Statutory Accounting Principles Interpretation No. 04-17 requires the Company to evaluate the impact of Medicare Prescription Drug Improvement and Modernization Act of 2003 (“the Act”) on its liability for postretirement health benefits. The Act introduces a voluntary prescription drug benefit under Medicare Part D, effective January 1, 2006. Under the Act, employers can receive subsidy payments from the federal government if they provide equivalent drug benefits to qualified plan participants who do not elect to enroll in Medicare Part D.
The Company has determined that the drug benefits provided by its existing postretirement health plan are actuarially equivalent to the new Medicare benefit, and as a result the Company is eligible for the government subsidy. Accordingly, the plan’s projected benefit obligation was reduced by $22 million upon the adoption of this new guidance on January 1, 2005. This reduction was treated as a deferred experience gain, which will be amortized as a reduction of net periodic postretirement cost over a period of up to 18 years, the average remaining years of service for active plan participants. For the year ended December 31, 2005, this amortization reduced net periodic postretirement cost by $3 million. See Note 9.
Pension and Postretirement Benefit Disclosures
Statutory Accounting Principles Working Group Issue No. 2005-1 requires that certain additional disclosures be made regarding the Company’s pension and postretirement benefits provided to employees and financial representatives. These additional disclosures include a summary of plan investment assets, a description of the related investment policy, expected plan contributions to be made by the Company during the upcoming fiscal year and an estimate of the benefits to be paid to plan participants over the next ten years. See Note 9.
Other Than Temporary Declines in the Value of Investments
Statutory Accounting Principles Interpretation No. 02-07 requires that a decline in the value of an investment security due to an increase in market interest rates be recognized as other-than-temporary only if management has the intent to sell the security as of the reporting date. This interpretation has been incorporated into the Company’s impairment policy but did not have a material effect on the impairments recognized in 2005.
3. 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 Notes 4 and 15 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 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 $97 million and $104 million of interests in oil and natural gas production at December 31, 2005 and 2004, 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 (“OCI”). The NAIC “Accounting Practices and Procedures Manual” does not provide accounting guidance for oil and gas interests.
Other investments also include leveraged leases and derivative financial instruments. See Note 4 for a description of the Company’s investments in leveraged leases and Note 5 regarding the Company’s use of derivatives and their presentation in the financial statements.
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, adjusted retrospectively 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) the duration and extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer in relation to the anticipated recovery, and (3) the Company’s ability and intent to retain the investment for a period of time sufficient to allow for an anticipated recovery in value. Realized capital gains and losses as reported in the consolidated statement of operations exclude any IMR deferrals. See Note 4 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 4 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
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. See Note 8.
Premium Revenue
Life insurance premiums are recognized as revenue at the beginning of each policy year. Disability income and long-term care insurance premiums are recognized as revenue when due to the Company. Annuity premiums are recognized as revenue when received. 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 10.
Other Income
Other income primarily represents ceded reinsurance expense allowances and various insurance policy charges. See Note 10.
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 10.
Reserves for Policy Benefits
Reserves for policy benefits represent the net present value of future policy benefits, less future policy premiums, estimated using actuarial methods based on mortality and morbidity experience tables and valuation interest rates prescribed or permitted by the OCI. 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. See Note 6.
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 $33 million and $37 million at December 31, 2005 and 2004, respectively, are classified as other assets in the consolidated statement of financial
position and are net of accumulated depreciation of $88 million and $68 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 $71 million, $56 million and $42 million for the years ended December 31, 2005, 2004 and 2003, respectively.
Furniture, Fixtures 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, $7 million and $6 million for the years ended December 31, 2005, 2004 and 2003, respectively.
Policyowner Dividends
Nearly all life, disability income and long-term care insurance policies and certain annuity contracts 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 financial representatives, furniture, fixtures, equipment and non-operating software (net of accumulated depreciation) and certain invested assets 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 in the consolidated statement of changes in surplus.
Reclassifications
Certain prior year footnote disclosures have been reclassified to conform to the current year presentation.
4. 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, using the retrospective adjustment method 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 3 regarding investment capital gains and losses. At December 31, 2005 and 2004, the reported value of bonds was reduced by $174 million and $121 million, respectively, of valuation adjustments.
Disclosure of 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.
Statement value and estimated fair value of bonds at December 31, 2005 and 2004 were as follows:
Statement value and estimated fair value of bonds by contractual maturity at December 31, 2005 are presented below. Estimated maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
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 12 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” (low quality), “5” (lower quality) or “6” (lowest quality) by the SVO, 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, 2005 and 2004, the reported value of common and preferred stocks was reduced by $172 million and $108 million, respectively, of 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 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. The reported value of mortgage loans was reduced by $2 million for valuation adjustments at each of December 31, 2005 and 2004.
The maximum and minimum interest rates for mortgage loans originated during 2005 were 7.8% and 3.7%, respectively, while these rates during 2004 were 8.8% and 2.3%, respectively. The aggregate ratio of amounts loaned to the value of collateral for mortgage loans originated during 2005 and 2004 were 59% and 65%, respectively, with a maximum of 100% for any single loan during each of 2005 and 2004.
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. The reported value of real estate investments was reduced by $27 million for valuation adjustments at each of December 31, 2005 and 2004.
At December 31, 2005 and 2004, the reported value of real estate included $185 million and $190 million, respectively, of real estate properties occupied by the Company.
Leveraged Leases
Leveraged leases primarily represent investments in commercial aircraft or real estate properties 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, 2005 and 2004, the reported value of leveraged leases was $342 million and $458 million, respectively. When the Company determines that an investment in leveraged leases is impaired, the lease value is recalculated with a valuation adjustment made to reduce the statement value. Valuation adjustments are reported as a realized loss. At December 31, 2005 and 2004, the reported value of leveraged leases was reduced by $106 million and $98 million, respectively, of valuation adjustments.
Capital Gains and Losses
Realized investment gains and losses for the years ended December 31, 2005, 2004 and 2003 were as follows:
Proceeds from the sale of bond investments totaled $72 billion, $47 billion and $83 billion for the years ended December 31, 2005, 2004 and 2003, respectively.
Realized losses (before capital gains taxes) included $276 million, $116 million and $405 million of valuation adjustments for declines in fair value of investments that were considered to be other-than-temporary for the years ended December 31, 2005, 2004 and 2003, respectively.
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, 2005 and 2004, were as follows:
Changes in net unrealized investment gains and losses for the years ended December 31, 2005, 2004 and 2003 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 $2.9 billion and $2.5 billion at December 31, 2005 and 2004, 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, 2005 and 2004, unrestricted cash collateral held by the Company of $2.9 billion and $2.6 billion, respectively, is classified as cash and invested assets and the offsetting collateral liability of $2.9 billion and $2.6 billion, respectively, is classified as other liabilities in the consolidated statement of financial position. At December 31, 2005 and 2004, additional non-cash collateral of $539 million and $359 million, respectively, was held on the Company’s behalf by a trustee and is not included in the consolidated statement of financial position.
5. 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. On the statutory basis of accounting, derivatives used for hedging purposes are classified as “cash flow” hedges, which mitigate the risk of variability in future cash flows from the position being hedged, or “fair value” hedges, which mitigate the risk of changes in fair value of the position being hedged. Derivatives classified as hedges that meet the specific requirements for hedge accounting are accounted for in a manner that is consistent with the item being hedged (e.g., at amortized cost or fair value). Derivatives used as hedges, but that do not meet the specific requirements for hedge accounting, are accounted for at fair value.
In addition to hedging, the Company uses derivatives for the purpose of investment “replication.” A replication is a derivative transaction that, when entered into in conjunction with other investments, serves to replicate in the aggregate the characteristics of otherwise permissible investments. Derivatives used as part of a replication are accounted for in a manner consistent with the replicated asset (e.g., at amortized cost or fair value).
The reported statement value of derivatives is classified as other investments in the consolidated statement of financial position.
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. Changes in fair value on open derivative positions accounted for at fair value are reported as unrealized capital gains or losses. Upon maturity or termination of derivative positions accounted for at fair value, capital gains and losses are reported as realized.
The Company does not take positions in derivatives for income generation purposes.
The Company held the following derivative positions at December 31, 2005 and 2004:
The notional amounts of derivative financial instruments are used to contractually denominate the transactions and do not represent the amounts exchanged between the parties.
Cash Flow Hedges:
Interest rate floors are 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. Interest rate floors qualify for hedge accounting.
Swaptions are 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. Swaptions qualify for hedge accounting.
Foreign currency swaps are 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. Foreign currency swaps qualify for hedge accounting.
Construction loan forwards are entered into to mitigate exposure to market fluctuations for the forecasted purchase of GNMA loan certificates. Construction loan forwards entitle the Company to purchase
GNMA loan certificates at a predetermined price at a date in the future that does not exceed 10 years. Construction loan forwards qualify for hedge accounting.
Foreign currency covers are used to mitigate the foreign exchange risk on trades of investments denominated in foreign currencies. Foreign currency covers obligate the Company to pay or receive a specified amount of foreign currency at a future date at a specified exchange rate. Foreign currency covers qualify for hedge accounting.
Interest rate swaps are 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. Certain of the Company’s interest rate swaps qualify for hedge accounting, while others do not. Unrealized gains of $2 million and $1 million were recognized during 2005 and 2004, respectively, on contracts that did not qualify for hedge accounting.
Interest rate basis swaps are 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. Interest rate basis swaps do not qualify for hedge accounting. No unrealized gains or losses were recognized during 2005 or 2004 on these contracts.
Commodity swaps are used to mitigate exposure to market fluctuations for the forward sale of crude oil and natural gas production. They are contractual agreements whereby one party pays a floating commodity price in exchange for a specified fixed commodity price. Commodity swaps do not qualify for hedge accounting. An unrealized gain of $1 million and unrealized losses of $400 thousand were recognized during 2005 and 2004, respectively, on these contracts.
Fair Value Hedges:
Credit default swaps are 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. Certain of the Company’s credit default swaps qualify for hedge accounting, while others do not. Unrealized gains of $1 million and unrealized losses of $3 million were recognized during 2005 and 2004, respectively, on contracts that did not qualify for hedge accounting.
Foreign currency forwards are 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. Foreign currency forward contracts do not qualify for hedge accounting. Unrealized gains of $85 million and unrealized losses of $29 million were recognized during 2005 and 2004, respectively, on these contracts.
Fixed income futures are used to mitigate interest rate risk for a portion of the Company’s fixed maturity investment portfolio. Fixed income futures contracts obligate the Company to buy or sell a financial instrument at a specified future date for a specified price. Fixed income futures contracts do not qualify for hedge accounting. Unrealized losses of $9 million and $2 million were recognized during 2005 and 2004, respectively, on these contracts.
Short equity index futures are used to mitigate exposure to market fluctuations for the Company’s portfolio of common stocks. Futures contracts obligate the Company to buy or sell a financial instrument at a specified future date for a specified price. These futures contracts do not qualify for hedge accounting. Unrealized losses of $1 million and $0 were recognized during 2005 and 2004, respectively, on these contracts.
Purchased put options are used to mitigate exposure to credit risk associated with a specific security. Purchased put options give the Company the ability to sell a financial instrument at a specified future date for a specified price. These options do not qualify for hedge accounting. No unrealized gains or losses were recognized during 2005 or 2004 on these contracts.
Replications:
Fixed income replications are used to replicate a bond investment through the use of credit default swaps, interest rate swaps, credit default indexes and cash market instruments. These replication transactions, including the derivative components, are reported at amortized cost. The average fair value of such contracts was ($4) million and $3 million during 2005 and 2004, respectively. A realized loss of $10 million and a realized gain of $300 thousand were recognized during 2005 and 2004, respectively, 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. The average fair value of such contracts was $230 million and $141 million during 2005 and 2004, respectively. Realized losses of $2 million and realized gains of $15 million were recognized during 2005 and 2004, respectively, 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. The average fair value of such contracts was $342 million and $384 million during 2005 and 2004, respectively. Realized gains of $7 million and $6 million were recognized during 2005 and 2004, respectively, on the termination of these contracts.
6. Reserves for Policy Benefits
General account reserves for policy benefits at December 31, 2005 and 2004 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, 1980 or 2001 CSO mortality tables with interest rates ranging from 3.5% to 5.5%. Other life insurance reserves are primarily based on the net level premium method, using various mortality tables at interest rates ranging from 2% to 4.5%. As of December 31, 2005, the Company had $930 billion of total life insurance in-force, including $12 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 3.5% to 6.25%. 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 3.5% to 7.5%. 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, 2005 and 2004, 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 5.5%. 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 4.5% interest rate.
Reserves for unpaid claims, losses and loss adjustment expenses on disability income and long-term care insurance were $3.4 billion and $3.2 billion at December 31, 2005 and 2004, respectively. The table below provides a summary of the changes in these reserves for the years ended December 31, 2005 and 2004.
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 4.0% 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 3.0% to 4.0%.
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 4.0% 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.
7. 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, and are reported as an asset in the consolidated statement of financial position.
Deferred and uncollected premiums at December 31, 2005 and 2004 were as follows:
8. Separate Accounts
Following is a summary of separate account liabilities by withdrawal characteristic at December 31, 2005 and 2004:
While separate account liability values are not guaranteed by the Company, variable annuity and variable life insurance products do include guaranteed minimum death benefits underwritten by the Company. General account reserves for policy benefits included $8 million attributable to these benefits at each of December 31, 2005 and 2004.
Premiums and other considerations received from variable life and variable annuity policyowners during the years ended December 31, 2005 and 2004 were $1.6 billion and $1.3 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, 2005, 2004 and 2003:
9. Employee and Representative Benefit Plans
The Company sponsors noncontributory defined benefit retirement plans (“plans”) for all eligible employees and financial representatives. These include tax-qualified plans, as well as nonqualified plans that provide benefits to certain participants in excess of ERISA limits for qualified plans. The Company’s funding policy for the tax qualified plans is to make annual contributions that are no less than the minimum amount needed to comply with the requirements of ERISA and no greater than the maximum amount deductible for federal income tax purposes. The Company contributed $180 million and $38 million to the qualified employee retirement plan during 2005 and 2004, respectively, and expects to contribute $38 million in 2006.
In addition to defined pension benefits, the Company provides certain health care and life insurance benefits (“postretirement benefits”) to retired employees, financial representatives and eligible dependents. Substantially all employees and financial 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, 2005 and 2004, 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 plans 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 plans’ participants.
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 plans’ participants. 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 rebalanced 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, 2005 and 2004 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 was $1.8 billion and $1.6 billion at December 31, 2005 and 2004, respectively.
The following table summarizes assumptions used in estimating the projected benefit obligations at December 31, 2005, 2004 and 2003:
The long-term rates of return on plan assets are estimated assuming an allocation of plan assets among asset classes consistent with December 31, 2005. Returns are estimated by asset class based on the current risk free interest rate plus a risk premium. The risk premium is based on historical returns and other factors such as expected reinvestment returns and anticipated asset manager performance.
The projected benefit obligation for postretirement benefits at December 31, 2005 and 2004 assumed an annual increase in future retiree medical costs of 10%, grading down to 5% over five 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, 2005 by $19 million and net periodic postretirement benefit expense during 2005 by $3 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, 2005 and net periodic postretirement benefit expense during 2005 by the same amounts.
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, 2005 and 2004:
Unrecognized net experience gains or losses represent cumulative amounts by which plan experience for return on plan assets or growth in benefit liabilities have varied from related assumptions. 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 asset represents 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 a direct credit to surplus for this excess, electing instead to amortize this unrecognized initial asset as a credit to net periodic benefit cost in a systematic manner until exhausted.
An additional minimum liability is required if a plan’s accumulated benefit obligation exceeds plan assets or accrued pension liabilities. This liability was $10 million, $16 million and $7 million at December 31, 2005, 2004 and 2003, respectively. Changes in the liability are reported as a direct adjustment to surplus in the consolidated statement of changes in surplus.
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, 2005, 2004 and 2003 were as follows:
The expected benefit payments by the defined benefit plans and the postretirement plans for the years 2006 through 2015 are as follows:
The Company also sponsors a contributory 401(k) plan for eligible employees and a noncontributory defined contribution plan for financial representatives. For the years ended December 31, 2005, 2004 and 2003 the Company expensed total contributions to these plans of $25 million, $24 million and $23 million, respectively.
10. Reinsurance
The Company limits its exposure to life insurance death benefits by ceding insurance coverage to various reinsurers. The Company retains a maximum of $35 million of coverage per individual life and a maximum of $50 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, 2005 and 2004 were reported net of ceded reserves of $1.3 billion and $1.2 billion, respectively.
The effects of reinsurance on premium revenue and benefits expense for the years ended December 31, 2005, 2004 and 2003 were as follows:
In addition, the Company reported $182 million, $207 million and $184 million in allowances from reinsurers for reimbursement of commissions and other expenses on ceded business for the years ended December 31, 2005, 2004 and 2003, respectively. 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. There were no reinsurance recoverables at December 31, 2005 and 2004 that were considered by management to be uncollectible.
11. Income Taxes
The Company files a consolidated federal income tax return including the following entities:
Northwestern Mutual Investment Services, LLC
Frank Russell Company
Northwestern International Holdings, Inc.
Bradford, Inc.
NML Real Estate Holdings, LLC and subsidiaries
Network Planning Advisors, LLC
NML Securities Holdings, LLC and subsidiaries
Mason Street Advisors, LLC
Northwestern Investment Management Company, LLC
NML - CBO, LLC
Northwestern Mutual Wealth Management Company
JYD Assets, 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 14). Prior to the sale, Baird Holding Company was included in the Company’s consolidated income tax return. Federal income tax returns for years through 2001 are closed as to further assessment of tax. The liability for income taxes payable in the consolidated statement of financial position reflects taxes payable at the reporting date plus 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, 2005 and 2004 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, 2005 and 2004, 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 tax and financial statement bases of reporting.
In previous years the Company was subject to an “equity tax” that was applied only to mutual life insurance companies. In March 2002, Congress passed legislation that suspended the equity tax for tax years 2001 through 2003. While the Company was subject to the equity tax in 2004, no related expense recognition was considered necessary. Legislation was enacted in April 2004 that permanently repealed the equity tax effective January 1, 2005.
The Company’s effective tax rates were 16%, 12% and 13% for the years ended December 31, 2005, 2004 and 2003, 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 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, as well as prior year adjustments.
Income taxes paid in 2005 and prior years of $1.1 billion are available at December 31, 2005 for recoupment in the event of future tax losses.
12. 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 39 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, 2005 and 2004, the Company had made cumulative direct reductions of surplus for goodwill associated with the Russell acquisition of $981 million. These charge-offs exceeded the Company’s equity method investment basis in Russell by $531 million and $581 million at December 31, 2005 and 2004, respectively, which is classified as a reduction of the Company’s total investment in common stocks.
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 $257 million, $320 million and $358 million at December 31, 2005, 2004 and 2003, respectively, and net income as reported in the statement of operations would have been lower by $63 million, $61 million and $53 million for the years then ended, respectively.
13. 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 financial representatives. The maximum exposure under these guarantees totaled approximately $386 million at December 31, 2005. 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 $3.7 billion at December 31, 2005 and were extended at market interest rates and terms.
The Company is engaged in various legal actions in the normal course of its investment and insurance operations. In the opinion of management, losses that may ultimately result from such actions would not have a material effect on the Company’s financial position at December 31, 2005.
14. Related Party Transactions
During 2005, the Company and other affiliates redeemed $94 million of seed money from mutual funds within the Company’s Mason Street Funds, Inc. subsidiary. The Company recognized $6 million of losses on these redemptions.
The Company has agreed to combine the Mason Street mutual funds with new or existing mutual funds of two competitors. These transactions are subject to approval by fund shareholders at a meeting that is anticipated to take place at the end of March 2006. The financial statement impact on the Company during 2006 of these combinations is expected to be immaterial. Following the exchange of Mason Street fund shares for shares in the respective competitor funds, the Company will be required to maintain investments of up to $900 million in the funds for up to three years following the closing of the transaction. At December 31, 2005 the Company held investments in Mason Street funds totaling $971 million, which are reported at fair value as common stocks in the consolidated statement of financial position.
See Note 2 regarding certain related party transactions made during 2005 in conjunction with the adoption of new accounting guidance for investments in subsidiary, controlled or affiliated entities.
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 was included in realized capital gains in the consolidated statement of operations during 2004. The Company financed a substantial portion of the sale price through the purchase of $240 million of subordinated notes, with attached warrants, issued by Baird. These notes have interest rates of between 6.50% and 8.25% and maturities of between ten and twelve years. Notes in the amount of $210 million remain outstanding at December 31, 2005 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. These notes have interest rates of between 4.19% and 6.35% and maturities of between five and ten years. Notes in the amount of $191 million remain outstanding at December 31, 2005 and are classified as bonds in the consolidated statement of financial position.
During 2004, the Company transferred certain investments to a wholly-owned subsidiary as a capital contribution. The fair value of these securities was $222 million at the time of the transfer. Realized capital gains of $2 million were recognized during 2004 upon the transfer of these assets.
During 2003, the Company transferred certain investments to a majority-owned 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.
15. Fair Value of Financial Instruments
The fair value of investment assets, including derivatives, and certain policy liabilities at December 31, 2005 and 2004 were as follows:
The fair value of bonds is generally based upon values published by the SVO of the NAIC and upon quoted market prices when no SVO value is available. The estimated fair value of common and preferred stocks are based upon quoted market prices if available. For those not actively traded, fair value is estimated using independent pricing services or internally developed pricing models. See Note 12 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 estimated 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. Other investments also include derivative financial instruments, for which 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 estimated 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, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
TITLE
/S/ EDWARD J. ZORE
Edward J. Zore
Trustee, President and Chief Executive Officer
/S/ GARY A. POLINER
Gary A. Poliner
Senior Vice President and Chief Financial Officer
/S/ JOHN C. KELLY
John C. Kelly
Vice President and Controller
/S/ EDWARD E. BARR*
Edward E. Barr
Trustee
/S/ JOHN M. BREMER*
John M. Bremer
Trustee
/S/ PETER W. BRUCE*
Peter W. Bruce
Trustee
/S/ ROBERT C. BUCHANAN*
Robert C. Buchanan
Trustee
/S/ GEORGE A. DICKERMAN*
George A. Dickerman
Trustee
/S/ DAVID J. DRURY*
David J. Drury
Trustee
/S/ CONNIE K. DUCKWORTH*
Connie K. Duckworth
Trustee
/S/ JAMES D. ERICSON*
James D. Ericson
Trustee
/S/ DAVID A. ERNE*
David A. Erne
Trustee
/S/ J. E. GALLEGOS*
J. E. Gallegos
Trustee
/S/ JAMES P. HACKETT*
James P. Hackett
Trustee
/S/ HANS HELMERICH*
Hans Helmerich
Trustee
/S/ STEPHEN F. KELLER*
Stephen F. Keller
Trustee
/S/ BARBARA A. KING*
Barbara A. King
Trustee
/S/ MARGERY KRAUS*
Margery Kraus
Trustee
/S/ J. THOMAS LEWIS*
J.Thomas Lewis
Trustee
/S/ DANIEL F. MCKEITHAN, JR.*
Daniel F. McKeithan, Jr.
Trustee
/S/ ULICE PAYNE, JR.*
Ulice Payne, Jr.
Trustee
/S/ H. MASON SIZEMORE, JR.*
H. Mason Sizemore, Jr.
Trustee
/S/ PETER M. SOMMERHAUSER*
Peter M. Sommerhauser
Trustee
/S/ JOHN E. STEURI*
John E. Steuri
Trustee
/S/ JOHN J. STOLLENWERK*
John J. Stollenwerk
Trustee
/S/ BARRY L. WILLIAMS*
Barry L. Williams
Trustee
/S/ KATHRYN D. WRISTON*
Kathryn D. Wriston
Trustee
*By
/s/ EDWARD J. ZORE
Edward J. Zore, Attorney in Fact,
pursuant to the Power of Attorney
attached as exhibit 24.1 hereto.
Each of the above signatures is affixed as of March 24, 2006
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) 2005 Annual Report for NML Variable Annuity Account A; and (2) 2005 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