ITEM 1. BUSINESS
Accounts A & C
NML Variable Annuity Account A ("Account A") and NML Variable Annuity Account C ("Account C") are segregated asset accounts of The Northwestern Mutual Life Insurance Company ("Northwestern Mutual") formed to provide retirement annuity benefits for (i) self-employed individuals (and their eligible employees) who adopt plans ("HR-10 Plans") meeting the requirements of Sections 401 or 403(a) of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) employees of corporate employers who adopt pension or profit sharing plans meeting the requirements of Section 401(a) of the Code, or annuity purchase plans meeting the requirements of Section 403(a) of the Code (collectively, "Corporate Plans"). Account A receives payments under individual variable annuity contracts issued by Northwestern Mutual in connection with HR-10 Plans and Corporate Plans. Account C receives payments under group combination variable annuity contracts issued by Northwestern Mutual in connection with HR-10 Plans and Corporate Plans. The variable annuity contracts issued by Northwestern Mutual in connection with HR-10 Plans and Corporate Plans are hereinafter referred to as the "Contracts." Account A and Account C were established on February 14, 1968 and July 22, 1970, respectively, by action of the Board of Trustees of Northwestern Mutual in accordance with the provisions of Wisconsin insurance law. Neither Account A nor Account C is registered as an investment company under the Investment Company Act of 1940.
The Contracts provide for the accumulation of funds and the payment of retirement benefits to participants and their beneficiaries ("Annuitants"). Account A and Account C each have 20 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 15 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, Index 400 Stock Portfolio, Growth Stock Portfolio, J. P. Morgan Select Growth and Income Stock Portfolio, Capital Guardian Domestic Equity Portfolio, Index 500 Stock Portfolio, Asset Allocation Portfolio, Balanced Portfolio, High Yield Bond Portfolio, Select Bond Portfolio and Money Market Portfolio) and 5 funds of Russell Insurance Funds (Multi-Style Equity Fund, Aggressive Equity Fund, Non-U.S. Fund, Real Estate Securities Fund and Core Bond Fund), each of which corresponds to one of the Account divisions, all as directed by the Annuitant. Northwestern Mutual Series Fund, Inc. and Russell Insurance Funds, which are affiliates of Northwestern Mutual, are registered as investment companies under the Investment Company Act of 1940. The Contracts are sold through individuals who, in addition to being licensed insurance agents of Northwestern Mutual, are registered representatives of Northwestern Mutual Investment Services, LLC ("NMIS"), a wholly-owned 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 are kept separate from the operations of Northwestern Mutual. Northwestern Mutual and its creditors cannot reach assets in Account A or Account C to satisfy non-Contract related obligations until all obligations under the Contracts have been satisfied.
See Item 8 herein for the audited financial statements of Account A and Account C.
Northwestern Mutual
Founded in 1857, Northwestern Mutual is a mutual insurance company organized under the laws of the State of Wisconsin. Northwestern Mutual's products consist of a complete range of permanent and term life insurance, disability income insurance and annuities for the personal, business, estate planning and pension markets. Mutual funds, equity and debt securities, long-term care insurance and trust services are offered and/or sold through subsidiaries. Northwestern Mutual markets its insurance products and services in all 50 states of the United States and in the District of Columbia through an exclusive network of approximately 7,800 financial representatives at December 31, 2001 associated with over 100 general agencies. At December 31, 2001, Northwestern Mutual had approximately 4,100 full- and part-time employees.
Northwestern Mutual's principal lines of business are: (i) life insurance, which provides a full range of individual life insurance products, including traditional whole life, CompLife, variable life and term policies to meet the needs of middle to upper income individuals, small business owners and professionals, estates and selected large corporations; (ii) disability income insurance, which provides a complete line of individual and group products, including individual non-cancelable, guaranteed renewable loss of earnings, buyout, key person, and short and long-term group coverages, marketed primarily to middle to upper income individuals, professionals, and small- to medium-sized businesses and their owners; (iii) annuity and accumulation products, which provide individual variable, fixed and immediate annuities offered in conjunction with qualified pension plans, retirement plans for self-employed individuals, individual retirement and personal non-tax qualified situations, group annuities and a family of retail mutual funds known as Mason Street Funds, marketed primarily to middle to upper income individuals, small business owners and professionals; and (iv) long-term care insurance, commenced in 1998 with the introduction of the QuietCare product, offered through its subsidiary Northwestern Long Term Care Insurance Company. For the years ended December 31, 2001, 2000, and 1999, Northwestern Mutual had total premiums of $9.4 billion, $8.9 billion, and $8.3 billion, respectively, of which $7.9 billion, $7.3 billion, and $6.8 billion, respectively, was attributable to life insurance, $.06 billion, $0.6 billion, and $0.5 billion, respectively was attributable to disability income insurance and $0.9 billion, $1.0 billion, and $1.0 billion, respectively, was attributable to annuity and accumulation products.
The life insurance industry is mature and highly competitive. Competitiveness in the life insurance business is affected by various factors including, but not limited to, product quality, financial strength and stability, claims-paying ratings, size and competence of agency force, range of product lines, customer service, and reputation. During 2001, there were more than 1,000 life insurance companies in the United States and many of these companies offer individual life insurance and annuity products similar to those offered by Northwestern Mutual. In addition, Northwestern Mutual competes with banks, brokerage firms, investment advisers, mutual funds and other financial entities for investment and savings customers. In the individual and group disability markets, Northwestern Mutual competes with a limited number of major national and regional companies offering these specialized products. National banks, with their pre-existing customer bases for financial services products, may pose increasing competition in the future to insurers who sell life insurance and annuity products, including Northwestern Mutual. Recent United States Supreme Court decisions have expanded the authority of national banks to sell life insurance products and annuities. In addition, legislation to overturn Depression-era restrictions on bank affiliations, the Gramm-Leach-Bliley Act (the "Act"), was signed into law on November 12, 1999, implementing fundamental changes in the regulation of the financial services industry in the U.S. Generally effective March 11, 2000, the Act 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. The Act may change the competitive and regulatory environment in which Northwestern Mutual and its subsidiaries conduct their businesses and may result in additional competition in one or more markets in which they sell their products and services.
Northwestern Mutual is licensed to transact its insurance business in, and is subject to regulation and supervision by, all 50 states of the United States and the District of Columbia. Northwestern Long Term Care Insurance Company, Northwestern Mutual's only insurance subsidiary, is authorized and regulated in all jurisdictions in which it conducts its long-term care business. The extent of such regulation varies, but most jurisdictions have laws and regulations governing the financial aspects of insurance companies, including standards of solvency, reserves, reinsurance, capital adequacy and the business conduct of insurance companies. In addition, statutes and regulations usually require the licensing of insurers and their agents, the approval of policy forms and related materials and, for certain lines of insurance, the approval of rates. Such statutes and regulations also prescribe the permitted types and concentration of investments. The Act reaffirms that the states are to remain responsible for regulating the business of insurance. However, subject to certain exceptions, no state authority can prevent or restrict depository institutions and their affiliates from affiliating with insurance companies as permitted under the Act. In addition, certain state laws and regulations that place restrictions on a depository institution's insurance sales activities would be preempted.
Robert W. Baird & Co. Incorporated ("Baird"), a subsidiary of Northwestern Mutual, is an international asset management, investment banking, wealth management and private equity firm with operations in 16 states and five countries. Baird serves individuals, corporations, institutional investors and municipalities as financial advisor, asset manager, equity research specialist, investment banker, private equity and public finance specialist. It is a member of the New York Stock Exchange and other principal exchanges.
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 35 countries. Together with its subsidiaries, Russell managed $68.5 billion in assets at December 31, 2001 and advises clients representing more than $1.8 trillion worldwide. Frank Russell is also well known for its family of market indices, including the Russell 2000, which provide complete sets of performance benchmarks for investors in Canada, Japan, the United Kingdom and the United States.
See Item 14 herein for the audited consolidated financial statements of Northwestern Mutual, including footnote 1 thereto which describes changes to statutory accounting rules required to be adopted effective January 1, 2001 that affect the comparability of certain financial information from prior periods.
Purpose of Annual Report
This Annual Report on Form 10-K of Northwestern Mutual is filed with respect to its Account A and Account C. While certain information in this Form 10-K relates to Northwestern Mutual as a whole, this Form 10-K is intended to provide information with respect to such Account A and Account C where relevant.
ITEM 2.
ITEM 2. PROPERTIES
Account A and Account C own no physical properties. Northwestern Mutual owns and occupies all of the space in its home office complex in Milwaukee, Wisconsin. Northwestern Mutual owns vacant land in Franklin, Wisconsin on which it will construct and occupy an additional home office campus. Until the Franklin Campus is completed, Northwestern Mutual, as lessee, is occupying temporary space in three buildings adjacent to its Milwaukee complex. Northwestern Mutual is the lessee of nine leases covering its real estate regional offices in locations throughout the United States.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Neither Account A nor Account C are parties to any pending legal proceedings. Northwestern Mutual is subject to various claims and proceedings, including claims or proceedings related to its investments, that occur in the ordinary course of its business. Based on information currently available to Northwestern Mutual, Northwestern Mutual believes that none of these current claims or proceedings, either individually or in the aggregate, will have a material adverse effect on the financial position of Northwestern Mutual.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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 the Northwestern Mutual who are also registered representatives of NMIS.
During 2001, 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 as well as dividend additions.
(B) Reflects an estimate of amounts paid to Northwestern Mutual financial representatives for sales to Corporate Plans based on a pro rata allocation of all Contract sales under the Account.
Accumulation units in Account A and Account C represent the interests of Contract owners. Purchase payments are applied to credit additional accumulation units based on the accumulation unit value next determined after each payment is received. Accumulation units are valued as of the close of business on the New York Stock Exchange on each business day.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected historical financial data for Account A for the five years in the period ended December 31, 2001. 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 April 30, 1999.
# Became an investment option under the Contracts effective July 31, 2001.
Changes in Equity for Account A: (in thousands)
Total Assets of Account A: (in thousands)
**Became an investment option under the Contracts effective April 30, 1999.
# Became an investment option under the Contracts effective July 31, 2001.
The following tables set forth selected historical financial data for Account C for the five years in the period ended December 31, 2001. 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 April 30, 1999.
# Became an investment option under the Contracts effective July 31, 2001.
Changes in Equity for Account C: (in thousands)
Total Assets of Account C: (in thousands)
**Became an investment option under the Contracts effective April 30, 1999.
# Became an investment option under the Contracts effective July 31, 2001
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity
The assets of Account A and Account C are invested solely in shares of Northwestern Mutual Series Fund, Inc. ("Series Fund") and the Russell Insurance Funds ("Russell Funds," and collectively with the Series Fund, the "Funds"). The Series Fund consists of the Small Cap Growth Stock Portfolio, T. Rowe Price Small Cap Value Portfolio, Aggressive Growth Stock Portfolio, International Growth Stock Portfolio, Franklin Templeton International Equity Portfolio, Index 400 Stock Portfolio, Growth Stock Portfolio, J.P. Morgan Select Growth and Income Stock Portfolio, Capital Guardian Domestic Equity Portfolio, Index 500 Stock Portfolio, Asset Allocation Portfolio, Balanced Portfolio, High Yield Bond Portfolio, Select Bond Portfolio and the Money Market Portfolio. The Russell Funds consist of the Multi-Style Equity Fund, Aggressive Equity Fund, Non-U.S. Fund, Real Estate Securities Fund and Core Bond Fund. The Funds are open-end investment companies registered under the Investment Company Act of 1940. In order to pay annuity benefits and expenses, the Accounts redeem shares in the Funds.
Capital Resources
All payments from Contract owners of Account A and Account C are invested in shares of the Funds. The capital resources of Account A and Account C are the equity in the respective Accounts. This consists of payments from the Contract owners, plus unrealized and realized appreciation on the investment of these payments, plus investment income received from the Funds, minus payment of annuity benefits and expenses.
Results of Operations
Accumulation units in Account A and Account C represent the interests of Contract owners. The value of an accumulation unit in each division varies with the investment experience of the division, which in turn is determined by the investment experience of the corresponding portfolio or fund. Set forth below for each of Account A and Account C are accumulation unit values at December 31, 2001, 2000, and 1999 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 July 31, 2001.
* Includes accumulation unit values at inception date in 2001 for portfolios becoming effective after December 31, 2000.
Accumulation Unit Values Contracts Issued After December 16, 1981 and Prior to March 31, 1995:
# Became an investment option under the Contracts effective July 31, 2001
* Includes accumulation unit values at inception date in 2001 for portfolios becoming effective after December 31, 2000.
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 July 31, 2001.
* Includes accumulation unit values at inception date in 2001 for portfolios becoming effective after December 31, 2000.
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 Contract effective July 31, 2001.
* Includes accumulation unit values at inception date in 2001 for portfolios becoming effective after December 31, 2000.
Accumulation Unit Values Contracts Issued On or After March 31, 2000 - Front Load Version:
# Became an investment option under the Contracts effective July 31, 2001.
* Includes accumulation unit values at inception date in 2001 for portfolios becoming effective after December 31, 2000.
Accumulation Unit Values Contracts Issued On or After March 31, 2000 - Back Load Version:
# Became an investment option under the Contracts effective July 31, 2001.
* Includes accumulation unit values at inception date in 2001 for portfolios becoming effective after December 31, 2000.
TOTAL EQUITY: (in thousands)
The decline in 2001's Total Equity was attributable primarily to investment activities within the Account: the net change in unrealized depreciation of $124,257 led to a decrease in equity derived from investment activities of $63,440 for the year ended December 31, 2001. The change in 2000's Total Equity was attributable primarily to equity transactions within the Account: a $69,957 decrease for the year ended December 31, 2000 was primarily driven by transfers to other divisions or sponsor and net surrenders and other.
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 July 31, 2001.
* Includes accumulation unit values at inception date in 2001 for portfolios becoming effective after December 31, 2000.
Accumulation Unit Values Contracts Issued After December 16, 1981 and Prior to May 1, 1984:
# Became an investment option under the Contracts effective July 31, 2001.
* Includes accumulation unit values at inception date in 2001 for portfolios becoming effective after December 31, 2000.
Accumulation Unit Values Contracts Issued After December 31, 1991 - Front Load Version:
# Became an investment option under the Contracts effective July 31, 2001.
* Includes accumulation unit values at inception date in 2001 for portfolios becoming effective after December 31, 2000.
Accumulation Unit Values Contracts Issued After December 31, 1991 - Simplified Load Version:
# Became an investment option under the Contracts effective July 31, 2001.
* Includes accumulation unit values at inception date in 2001 for portfolios becoming effective after December 31, 2000.
TOTAL EQUITY: (in thousands)
The changes in 2001's Total Equity was attributable primarily to investment activities within the Account: the net change in unrealized depreciation of $133,527 led to a decrease in equity derived from investment activities of $72,308 for the year ended December 31, 2001. The change in 2000's Total Equity was attributable primarily to equity transactions within the Account: a $32,945 decrease for the year ended December 31, 2000 was primarily driven by surrenders and other (net) and transfers to other divisions or sponsor.
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 15 portfolios of the Series Fund and 5 portfolios of the Russell Funds, together with current amounts due from the sale of Series Fund and Russell Funds shares and due from Northwestern Mutual. The liabilities of each of Account A and Account C consist of current amounts due to Contract owners, due to Northwestern Mutual and due on purchase of Series Fund and Russell Funds shares. Neither of the Accounts enters into any market risk sensitive instruments, either for trading purposes or for purposes other than trading purposes.
Derivative Financial Instruments
In the normal course of business, the Series Fund and the Russell Funds enter into transactions to reduce their exposure to fluctuations in interest rates, foreign currency exchange rates and market volatility. These hedging strategies include the use of forwards, futures, and written options.
The Series Fund and Russell Funds held the following positions for hedging purposes at December 31, 2001 and 2000:
The notional or contractual amounts of derivative financial instruments are used to denominate these types of transactions and do not represent the amounts exchanged between the parties. Stock and bond futures, foreign currency forwards and spot contracts, and written options are reported at fair value on a daily basis. Resulting gains and losses on these contracts are unrealized until expiration of the contract. All of the stock and bond futures, foreign currency forwards and spot contracts, and written options of the Funds at December 31, 2001 will expire or settle in 2002. Changes in the value of derivative investments are expected to offset gains and losses on the hedged investments. The effect of derivative instruments in 2001 and 2000 was not material to the Funds' results of operations.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NML VARIABLE ANNUITY ACCOUNT A STATEMENTS OF ASSETS AND LIABILITIES (IN THOUSANDS)
# The initial investment was made July 31, 2001.
The Accompanying Notes are an Integral Part of the Financial Statements.
NML VARIABLE ANNUITY ACCOUNT A STATEMENTS OF OPERATIONS (IN THOUSANDS)
**The initial investment in this Division was made on April 30, 1999.
The Accompanying Notes are an Integral Part of the Financial Statements.
NML VARIABLE ANNUITY ACCOUNT A STATEMENTS OF OPERATIONS CONTINUED (IN THOUSANDS)
# The initial investment in this Division was made on July 31, 2001.
**The initial investment in this Division was made on April 30, 1999.
# The initial investment in this Division was made on July 31, 2001.
**The initial investment in this Division was made on April 30, 1999.
**The initial investment in this Division was made on April 30, 1999.
**The initial investment in this Division was made on April 30, 1999.
The Accompanying Notes are an Integral Part of the Financial Statements.
NML VARIABLE ANNUITY ACCOUNT A STATEMENTS OF CHANGES IN EQUITY (in thousands)
**The initial investment in this Division was made on April 30, 1999.
# The initial investment in this Division was made on July 31, 2001
**The initial investment in this Division was made on April 30, 1999.
# The initial investment in this Division was made on July 31, 2001.
**The initial investment in this Division was made on April 30, 1999.
**The initial investment in this Division was made on April 30, 1999.
**The initial investment in this Division was made on April 30, 1999.
The Accompanying Notes are an Integral Part of the Financial Statements.
FINANCIAL HIGHLIGHTS NML VARIABLE ANNUITY ACCOUNT A
(For a unit outstanding during the period)
(1) Portfolio commenced operations on July 31, 2001.
(2) Total Return includes deductions for management and other expenses; excludes deductions for sales loads and other charges. Returns are not annualized for periods less than one year.
(3) Computed on an annualized basis. Does not include expenses of the underlying portfolio.
The Accompanying Notes are an Integral Part of the Financial Statements.
NML VARIABLE ANNUITY ACCOUNT A NOTES TO FINANCIAL STATEMENTS
Note 1--NML Variable Annuity Account A (the "Account") is a segregated asset account of The Northwestern Mutual Life Insurance Company ("Northwestern Mutual") used to fund variable annuity contracts ("contracts") for HR-10 and corporate pension and profit-sharing plans which qualify for special tax treatment under the Internal Revenue Code. Currently, two versions of the contract are offered: Front Load contracts with a sales charge up to 4% of purchase payments and Back Load contracts with a withdrawal charge of 0-8%.
Note 2--The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Principal accounting policies are summarized below.
Note 3--All assets of each Division of the Account are invested in shares of the corresponding Portfolio of Northwestern Mutual Series Fund, Inc. and the Russell Insurance Funds (collectively known as the "Funds"). The shares are valued at the Funds' offering and redemption price per share. The Funds are diversified open-end investment companies registered under the Investment Company Act of 1940.
Note 4--Annuity reserves are based on published annuity tables with age adjustment and benefit payments which reflect actual investment experience. For variable payment plans issued prior to January 1, 1974, annuity reserves are based on the 1955 American Annuity Table with assumed interest rates of 3% or 5%. For variable payment plans issued on or after January 1, 1974 and before January 1, 1985, annuity reserves are based on the 1971 Individual Annuity Table with assumed interest rates of 3-1/2% or 5%. For variable payment plans issued on or after January 1, 1985, annuity reserves are based on the 1983 Annuity Table a adjusted with assumed interest rates of 3-1/2% or 5%.
Note 5--Dividend income from the Funds is recorded on the ex-date of the dividends. Transactions in the Funds' shares are accounted for on the trade date. The basis for determining cost on sale of the Funds' shares is identified cost. Purchases and sales of the Funds' shares for the years ended December 31 by each Division are shown below:
# Initial investment in this division was made on July 31, 2001.
# Initial Investment in this division was made on July 31, 2001.
Note 6--A deduction for annuity rate and expense guarantees is determined daily and paid to Northwestern Mutual as compensation for assuming the risk that annuity payments will continue for longer periods than anticipated because the annuitants as a group live longer than expected, and the risk that the charges made by Northwestern Mutual may be insufficient to cover the actual costs incurred in connection with the contracts.
For contracts issued prior to December 17, 1981, the deduction is at an annual rate of 3/4 of 1% of the net assets of each Division attributable to these contracts. For these contracts, the rate may be increased or decreased by the Board of Trustees of Northwestern Mutual not to exceed a 1% annual rate.
For contracts issued after December 16, 1981 and prior to March 31, 1995, the deduction is at an annual rate of 1-1/4% of the net assets of each Division attributable to these contracts. For these contracts, the rate may be increased or decreased by the Board of Trustees of Northwestern Mutual not to exceed a 1-1/2% annual rate.
For contracts issued on or after March 31, 1995 and prior to March 31, 2000, for the Front Load version and the Back Load version, the deduction for annuity rate and expense guarantees is determined daily at annual rates of 4/10 of 1% and 1-1/4%, respectively, of the net assets of each Division attributable to these contracts and is paid to Northwestern Mutual. For these contracts, the rates may be increased or decreased by the Board of Trustees of Northwestern Mutual not to exceed 3/4 of 1% and 1-1/2%, respectively.
For contracts issued on or after March 31, 2000, for the Front Load version and the Back Load version, the deduction for annuity rate and expense guarantees is determined daily at annual rates of 5/10 of 1% and 1-1/4%, respectively, of the net assets of each Division attributable to these contracts and is paid to Northwestern Mutual. For these contracts, the rates may be increased or decreased by the Board of Trustees of Northwestern Mutual not to exceed 3/4 of 1% and 1-1/2% annual rates, respectively. The current charges will not be increased for five years from the date of the most recent Prospectus.
Since 1995, Northwestern Mutual has paid a dividend to certain contracts. The dividend is reinvested in the Account and has been reflected as a Contract Owners' Net Payment in the accompanying financial statements.
Note 7--Northwestern Mutual is taxed as a "life insurance company" under the Internal Revenue Code and the operations of the Account form a part of and are taxed with those of Northwestern Mutual. Under current law, no federal income taxes are payable with respect to the Account. Accordingly, no provision for any such liability has been made.
Note 8--Equity Values by Division for the year ended December 31, 2001 are shown below:
(in thousands, except accumulation unit values)
Equity Values by Division for the year ended December 31, 2000 are shown below:
REPORT OF INDEPENDENT ACCOUNTANTS
To The Northwestern Mutual Life Insurance Company and Contract Owners of NML Variable Annuity Account A
In our opinion, the accompanying combined statements of assets and liabilities and the related combined and separate statements of operations and of changes in equity and the financial highlights, present fairly, in all material respects, the financial position of NML Variable Annuity Account A and its Small Cap Growth Stock Division, T. Rowe Price Small Cap Value Division, Aggressive Growth Stock Division, International Growth Stock Division, Franklin Templeton International Equity Division, Index 400 Stock Division, Growth Stock Division, J.P. Morgan Select Growth & Income Stock Division, Capital Guardian Domestic Equity Division, Index 500 Stock Division, Asset Allocation Division, Balanced Division, High Yield Bond Division, Select Bond Division, Money Market Division, Russell Multi-Style Equity Division, Russell Aggressive Equity Division, Russell Non-U.S. Division, Russell Real Estate Securities Division and Russell Core Bond Division thereof at December 31, 2001 and 2000, the results of each of their operations and the changes in each of their equity for each of the three years or the periods ended December 31, 2001 and each of their financial highlights for the year or period then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of The Northwestern Mutual Life Insurance Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included direct confirmation of the number of shares owned at December 31, 2001 and 2000 with Northwestern Mutual Series Fund, Inc., and the Russell Insurance Funds, provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP Milwaukee, Wisconsin January 25, 2002
NML VARIABLE ANNUITY ACCOUNT C STATEMENTS OF ASSETS AND LIABILITIES (IN THOUSANDS)
# The initial investment was made on July 31, 2001.
The Accompanying Notes are an Integral Part of the Financial Statements.
NML VARIABLE ANNUITY ACCOUNT C STATEMENTS OF OPERATIONS (IN THOUSANDS)
**The initial investment in this Division was made on July 31, 2001.
# The initial investment in this Division was made on July 31, 2001
**The initial investment in this Division was made on April 30, 1999.
# The initial investment in this Division was made on July 31, 2001
**The initial investment in this Division was made on April 30, 1999.
**The initial investment in this Division was made on April 30, 1999.
**The initial investment in this Division was made on April 30, 1999.
The Accompanying Notes are an Integral Part of the Financial Statements.
NML VARIABLE ANNUITY ACCOUNT C STATEMENTS OF CHANGES IN EQUITY (IN THOUSANDS)
**The initial investment in this Division was made on April 30, 1999.
# The initial investment in this Division was made on July 31, 2001
**The initial investment in this Division was made on April 30, 1999.
# The initial investment in this Division was made on July 31, 2001.
**The initial investment in this Division was made on April 30, 1999.
**The initial investment in this Division was made on April 30, 1999.
**The initial investment in this Division was made on April 30, 1999.
The Accompanying Notes are an Integral Part of the Financial Statements.
FINANCIAL HIGHLIGHTS NML VARIABLE ANNUITY ACCOUNT C
(1) Portfolio commenced operations on July 31, 2001.
(2) Total Return includes deductions for management and other expenses; excludes deductions for sales loads and other charges. Returns are not annualized for periods less than one year.
(3) Computed on an annualized basis. Does not include expenses of the underlying portfolio.
The Accompanying Notes are an Integral Part of the Financial Statements.
NML VARIABLE ANNUITY ACCOUNT C NOTES TO FINANCIAL STATEMENTS
Note 1 -- NML Variable Annuity Account C (the "Account") is a segregated asset account of The Northwestern Mutual Life Insurance Company ("Northwestern Mutual") used to fund variable annuity contracts ("contracts") for HR-10 and corporate pension and profit-sharing plans which qualify for special tax treatment under the Internal Revenue Code. Currently, two versions of the contract are offered: Front Load contracts with a sales charge up to 4.5% of purchase payments and Simplified Load contracts with an installation fee of $750.
Note 2 -- The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Principal accounting policies are summarized below.
Note 3 -- All assets of each Division of the Account are invested in shares of the corresponding Portfolio of Northwestern Mutual Series Fund, Inc. and the Russell Insurance Funds (collectively know as the "Funds"). The shares are valued at the Funds' offering and redemption price per share. The Funds are open-end investment companies registered under the Investment Company Act of 1940.
Note 4 -- Annuity reserves are based on published annuity tables with age adjustments and benefit payments which reflect actual investment experience. Annuity reserves are based on the 1983 Table a adjusted with assumed interest rates of 3-1/2% or 5%.
Note 5 -- Dividend income from the Funds is recorded on the ex-date of the dividends. Transactions in the Funds' shares are accounted for on the trade date. The basis for determining cost on sale of the Funds' shares is identified cost. Purchases and sales of the Funds' shares for the years ended December 31 by each Division are shown below:
PURCHASES
# The initial investment made in this division was made on July 31, 2001.
SALES
# The initial investment made in this division was on July 31, 2001.
Note 6 -- A deduction for annuity rate and expense guarantees is determined daily and paid to Northwestern Mutual as compensation for assuming the risk that annuity payments will continue for longer periods than anticipated because the annuitants as a group live longer than expected and the risk that the charges made by Northwestern Mutual may be insufficient to cover the actual costs incurred in connection with the contracts.
For contracts issued after December 16, 1981, and prior to May 1, 1984, the deduction is determined daily at an annual rate of 1/2 of 1% of the net assets of each Division attributable to these contracts and is paid to Northwestern Mutual. For these contracts, the rate may be increased or decreased by the Board of Trustees of Northwestern Mutual not to exceed a 3/4 of 1% annual rate.
Generally, for contracts issued after December 31, 1991, for the Front Load Version and the Simplified Load Version, the deduction for annuity rate and expense guarantees is determined daily at annual rates of 6.5/10 of 1% and 1-1/4%, respectively, of the net assets of each Division attributable to these contracts and is paid to Northwestern Mutual. For these contracts, the rates may be increased or decreased by the Board of Trustees of Northwestern Mutual not to exceed 1% and 1-1/2% annual rates, respectively.
Since 1996, Northwestern Mutual has paid a dividend to certain contracts. The dividend is re-invested in the Account and has been reflected as a Contract Owners' Net Payment in the accompanying financial statements.
Note 7 -- Northwestern Mutual is taxed as a "life insurance company" under the Internal Revenue Code and the operations of the Account form a part of and are taxed with those of Northwestern Mutual. Under current law, no federal income taxes are payable with respect to the Account. Accordingly, no provision for any such liability has been made.
Note 8 -- Equity Values by Division for the year ended December 31, 2001 are shown below:
(in thousands, except accumulation unit values)
Equity Values by Division for the year ended December 31, 2000 are shown below:
REPORT OF INDEPENDENT ACCOUNTANTS
To The Northwestern Mutual Life Insurance Company and Contract Owners of NML Variable Annuity Account C
In our opinion, the accompanying combined statements of assets and liabilities and the related combined and separate statements of operations and of changes in equity and the financial highlights, present fairly, in all material respects, the financial position of NML Variable Annuity Account C and its Small Cap Growth Stock Division, T. Rowe Price Small Cap Value Division, Aggressive Growth Stock Division, International Growth Stock Division, Franklin Templeton International Equity Division, Index 400 Stock Division, Growth Stock Division, J.P. Morgan Select Growth & Income Stock Division, Capital Guardian Domestic Equity Division, Index 500 Stock Division, Asset Allocation Division, Balanced Division, High Yield Bond Division, Select Bond Division, Money Market Division, Russell Multi-Style Equity Division, Russell Aggressive Equity Division, Russell Non-U.S. Division, Russell Real Estate Securities Division and Russell Core Bond Division thereof at December 31, 2001 and 2000, the results of each of their operations and the changes in each of their equity for each of the three years or the periods ended December 31, 2001 and each of their financial highlights for the year or period then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of The Northwestern Mutual Life Insurance Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included direct confirmation of the number of shares owned at December 31, 2001 and 2000 with Northwestern Mutual Series Fund, Inc., and the Russell Insurance Funds, provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP Milwaukee, Wisconsin January 25, 2002
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Neither Account A nor Account C have any directors or executive officers. The following information, as of March 1, 2002, is provided with respect to each director, including persons chosen to become directors, of Northwestern Mutual. Northwestern Mutual uses the title of Trustee to denote the directors.
(1) Mr. Beaham is retiring from the Board of Trustees effective May 22, 2002.
(2) Candidate proposed for re-election by the Board of Trustees for the election to be held at the May 2002 Annual meeting of Policyowners. If re-elected, these Trustees' terms will expire in May 2006, except that Mr. Bruce's term will expire in May 2004.
The business experience and directorships of Northwestern Mutual's Trustees as of March 1, 2002 are as follows:
The following information as of March 1, 2002, 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, 2002.
All of the Executive Officers, except David B. Wescoe and Charles D. Robinson, have been associated with Northwestern Mutual, although not necessarily in their present positions, for more than five years. Mr. Wescoe joined Northwestern Mutual in August 1999 and was named to his current position in March 2000. Mr. Wescoe is also currently President and CEO of Northwestern Mutual Investment Services LLC, the broker-dealer subsidiary of Northwestern Mutual. From 1994 to 1999, Mr. Wescoe was employed by Manpower, Inc. as Vice President and General Counsel. Mr. Robinson joined Northwestern Mutual in February 2001 as Senior Vice President (Investment Products and Services). Prior thereto he was with AIG, Global Retirement Services Division as Chief Marketing Officer and Senior Vice President from 1999 to 2000. From 1980 to 1999, Mr. Robinson served in various positions of increasing responsibility with VALIC/American General Group, most recently as Senior Vice President, Institutional Marketing.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Not applicable. Account A and Account C have no directors or executive officers, the Executive Officers and Trustees of Northwestern Mutual spend no substantial portion of their time on matters relating to Accounts A and C, and the amounts of compensation received by the Executive Officers and Trustees of Northwestern Mutual have no bearing on the values associated with the Contracts issued in connection with Accounts A and C.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Not applicable. As segregated asset accounts, Account A and Account C have no shareholders. As a mutual life insurance company, Northwestern Mutual has no shareholders.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective January 1, 2002, Northwestern Mutual's subsidiary, Mason Street Advisors, LLC ("MSA"), commenced serving as the investment advisor to the Series Fund. The Board of the Series Fund approved the assignment of the investment advisory agreement to MSA in 2001. 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, the renewal of which was approved in 2001. 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 Baird and/or NMIS and may have effected transactions through such accounts during 2001 and through the date hereof, including transactions in mutual funds sponsored by Russell.
Trustees and executive officers of Northwestern Mutual (and their family members and associates) own insurance policies and/or other contracts issued by Northwestern Mutual or an insurance affiliate in the ordinary course of business. Loans are made to Northwestern Mutual's Trustees and Executive Officers (and their family members and associates) in accordance with the provisions of insurance policies or other contracts which they may own. Such loans are made in the ordinary course of business and are administered solely in accordance with the terms of such policies.
In the ordinary course of its business, Northwestern Mutual makes loans to its general agents in connection with their business operations. Interest on such loans is tied to Northwestern Mutual's cost of funds or the prime rate, depending upon the purpose of the loan. On occasion, a general agent who has incurred such loans may assume an Executive Officer position at Northwestern Mutual. In such circumstances, the outstanding loans remain in place and are satisfied in accordance with the terms of the underlying loan documentation.
At December 31, 2001, Peter M. Sommerhauser, a Northwestern Mutual Trustee since May 1999, was the beneficial owner of approximately 10.8% of the outstanding common stock of Kohl's Corporation, primarily by virtue of his serving as a trustee of several trusts for the benefit of the families of current and former executive officers of Kohl's Corporation and as a director of charitable foundations established by executive officers of Kohl's Corporation. While Mr. Sommerhauser has sole or shared voting and investment power over such shares held in the trusts and foundations, he has no pecuniary interest in those shares. In 1994, a number of years prior to Mr. Sommerhauser becoming a Northwestern Mutual Trustee, Northwestern Mutual lent as part of its normal portfolio investment activities to Kohl's Department Stores, Inc., a subsidiary of Kohl's Corporation, $40,000,000 and received a 6.57% Senior Note, guaranteed by Kohl's Corporation, due March 31, 2004. The principal amount of such indebtedness was reduced to $23,333,333 during 2001, which remains outstanding at March 1, 2002.
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Exhibits
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Policyowners of The Northwestern Mutual Life Insurance Company
We have audited the accompanying consolidated statement of financial position of The Northwestern Mutual Life Insurance Company and its subsidiary ("the Company") as of December 31, 2001 and 2000, and the related consolidated statements of operations, of changes in surplus and of cash flows for each of the three years in the period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, the Company prepared these consolidated financial statements using accounting practices prescribed or permitted by the Office of the Commissioner of Insurance of the State of Wisconsin (statutory basis of accounting), which practices differ from accounting principles generally accepted in the United States of America. Accordingly, the consolidated financial statements are not intended to represent a presentation in accordance with generally accepted accounting principles. The effects on the consolidated financial statements of the variances between the statutory basis of accounting and generally accepted accounting principles, although not reasonably determinable, are presumed to be material.
In our opinion, the consolidated financial statements audited by us (1) do not present fairly in conformity with generally accepted accounting principles, the financial position of The Northwestern Mutual Life Insurance Company and its subsidiary as of December 31, 2001 and 2000, or the results of their operations or their cash flows for each of the three years in the period ended December 31, 2001 because of the effects of the variances between the statutory basis of accounting and generally accepted accounting principles referred to in the preceding paragraph, and (2) do present fairly, in all material respects, the financial position of The Northwestern Mutual Life Insurance Company and its subsidiary as of December 31, 2001 and 2000 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, on the basis of accounting described in Note 1.
As discussed in Note 1 to the financial statements, the Company adopted the accounting policies in the revised National Association of Insurance Commissioners "Accounting Practices and Procedures Manual" - Effective January 1, 2001, as required by the Office of the Commissioner of Insurance of the State of Wisconsin. The effect of adoption is recorded as an adjustment to surplus as of January 1, 2001.
/S/ PRICEWATERHOUSECOOPERS LLP
January 22, 2002
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF FINANCIAL POSITION (IN MILLIONS)
The accompanying notes are an integral part of these financial statements.
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF OPERATIONS (IN MILLIONS)
The accompanying notes are an integral part of these financial statements.
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF CHANGES IN SURPLUS (IN MILLIONS)
The accompanying notes are an integral part of these financial statements.
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS (IN MILLIONS)
The accompanying notes are an integral part of these financial statements.
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999
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, estate and tax-qualified markets.
The consolidated financial statements were prepared in conformity with accounting practices prescribed or permitted by the Office of the Commissioner of Insurance of the State of Wisconsin ("statutory basis of accounting"). Effective January 1, 2001, insurance companies domiciled in Wisconsin are required to prepare statutory basis financial statements in accordance with the new National Association of Insurance Commissioners ("NAIC") Accounting Practices and Procedures Manual, subject to any deviations prescribed or permitted by the Office of the Commissioner of Insurance of the State of Wisconsin ("OCI").
These new requirements differ from those used prior to January 1, 2001, primarily because under the new statutory accounting principles: (1) deferred tax balances are established for temporary differences between book and tax bases of certain assets and liabilities, (2) investment valuation adjustments on impaired assets are measured differently and are reported as realized losses, (3) pension and other employee benefit obligations are accounted for based on the funded status of the related plans, (4) recognition of earnings from unconsolidated subsidiaries and affiliates as net investment income is limited to dividends received, (5) certain software costs can be capitalized and amortized to expense over a maximum of five years, and (6) premiums, benefits and reserve changes for policies that do not have significant mortality or morbidity risks ("deposit-type contracts") are not included in revenue or benefits as reported in the consolidated statement of operations.
The cumulative effect of adoption of these new accounting principles was reported as an adjustment to surplus as of January 1, 2001, with no restatement of prior periods permitted. This cumulative effect was the difference in the amount of surplus that would have been reported at that date if the new accounting principles had been retroactively applied to all prior periods. The cumulative effect of these accounting changes increased surplus by $749 million at that date, and included the following (in millions):
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 insurance reserves use different methods and assumptions, (3) deposit-type contracts, for which premiums, benefits and reserve changes are not included in revenue or benefits as reported in the statement of operations, are defined differently, (4) majority-owned, non-insurance subsidiaries are consolidated, (5) changes in deferred taxes are reported as a component of net income, and (6) no deferral of realized gains and losses is permitted. The effects on the financial statements of the Company from the differences between the statutory basis of accounting and GAAP are material.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with the statutory basis of accounting requires management to use assumptions or make estimates that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual future results could differ from these assumptions and estimates.
INVESTMENTS
See Note 3 regarding the reported statement value and estimated fair value of the Company's investments in bonds, common and preferred stocks, mortgage loans and real estate.
POLICY LOANS
Policy loans primarily represent amounts borrowed from the Company by life insurance policyowners, secured by the cash value of the related policies. They are reported in the financial statements at unpaid principal balance.
OTHER INVESTMENTS
Other investments consist primarily of joint venture and partnership investments. These investments are valued at the Company's share of equity in the partnerships' or ventures' net assets, which approximates fair value. Other investments also include derivative financial instruments. See Note 4 regarding the Company's use of derivatives.
TEMPORARY INVESTMENTS
Temporary investments represent debt securities that have maturities of one year or less at purchase. They 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 prospectively for any change in estimated yield-to-maturity. Investment income due and accrued that is deemed uncollectible is charged against net investment income in the period such determination is made, while investment income greater than 90 days past due is nonadmitted and charged directly to surplus. Beginning January 1, 2001, net investment income also includes dividends paid to the Company from accumulated earnings of unconsolidated subsidiaries, affiliates, partnerships and joint ventures. Prior to 2001, the Company's share of undistributed earnings in these entities was recognized as net investment income using the equity method. Net investment income is reduced by investment management expenses, real estate depreciation, depletion related to energy assets and interest costs associated with securities lending.
INTEREST MAINTENANCE RESERVE
The Company is required to maintain an interest maintenance reserve ("IMR"). The IMR is used to defer realized gains and losses, net of tax, on fixed income investments resulting from changes in interest rates. Net realized gains and losses deferred to the IMR are amortized into investment income over the estimated remaining term-to-maturity of the investment sold.
INVESTMENT CAPITAL GAINS AND LOSSES
Realized investment gains and losses are recognized based upon specific identification of securities sold. Beginning January 1, 2001 realized investment gains and losses also include valuation adjustments for impairment of bonds, stocks, mortgage loans and other investments with a decline in value that management considers to be other than temporary. Prior to 2001, these valuation adjustments were classified as unrealized investment losses and only realized upon disposition. Realized capital gains and losses as reported in the consolidated statement of operations are net of any IMR deferrals and current income tax expense. See Note 3 regarding details of reported realized capital gains and losses.
Unrealized investment gains and losses primarily represent changes in the reported fair value of common stocks. Beginning January 1, 2001 changes in the Company's share of undistributed earnings in unconsolidated subsidiaries, affiliates, partnerships and joint ventures are classified as changes in unrealized capital gains and losses. Prior to 2001, the Company's share of undistributed earnings in these entities was recognized as net investment income using the equity method. See Note 3 regarding details of reported changes in unrealized capital gains and losses.
ASSET VALUATION RESERVE
The Company is required to maintain an asset valuation reserve ("AVR"). The AVR establishes a general reserve for invested asset valuation using a formula prescribed by the NAIC. The AVR is designed to protect surplus against potential declines in the value of the Company's investments. Increases or decreases in AVR are reported as direct adjustments to surplus.
SEPARATE ACCOUNTS
See Note 7 regarding separate account assets and liabilities reported by the Company.
PREMIUM REVENUE
Life insurance premiums are recognized as revenue at the beginning of each policy year. Annuity, disability income and long-term care insurance premiums are recognized as revenue when received by the Company. Premium revenue is reported net of ceded reinsurance, see Note 9.
OTHER INCOME
Other income includes considerations received on supplementary annuity contracts, ceded reinsurance expense allowances and various insurance policy charges. Beginning January 1, 2001, considerations received on supplementary contracts without life contingencies are classified as deposit-type transactions and thereby excluded from revenue. Prior to 2001, these considerations were reported as revenue.
BENEFIT PAYMENTS TO POLICYOWNERS AND BENEFICIARIES
Benefit payments to policyowners and beneficiaries include death, surrender and disability benefits, as well as matured endowments and supplementary contract payments. Beginning January 1, 2001 benefit payments on supplementary contracts without life contingencies are classified as deposit-type transactions and thereby excluded from expense. Prior to 2001, these payments were reported as benefit expense. Benefit payments are reported net of ceded reinsurance recoveries, see Note 9.
RESERVES FOR POLICY BENEFITS
See Note 5 regarding the methods and assumptions used to establish the Company's reserves for future insurance policy benefits.
COMMISSIONS AND OPERATING EXPENSES
Commissions and other operating costs, including costs of acquiring new insurance policies, are generally charged to expense as incurred.
ELECTRONIC DATA PROCESSING EQUIPMENT AND SOFTWARE
Electronic data processing ("EDP") equipment and software used in the Company's business are reported at cost less accumulated depreciation. Beginning January 1, 2001 certain software costs are capitalized and depreciated over a maximum of five years, while EDP equipment is capitalized and depreciated over three years. Most unamortized software costs are nonadmitted assets and thereby excluded from surplus. Prior to 2001, the Company expensed all software costs, while EDP equipment was capitalized and amortized over its useful life. EDP equipment and software of $18 million and $16 million at December 31, 2001 and 2000, respectively, were net of accumulated depreciation of $44 million and $43 million, respectively, and included in other assets in the consolidated statement of financial position. Depreciation expense is recorded using the straight-line method and totaled $14 million, $8 million and $9 million for the years ended December 31, 2001, 2000 and 1999, respectively.
POLICYOWNER DIVIDENDS
Almost all life insurance policies and certain annuity and disability income policies issued by the Company are participating. Annually, the Company's Board of Trustees approves dividends payable on participating policies in the following fiscal year, which are accrued and charged to operations when approved. Participating policyowners generally have the option to direct their dividends to be paid in cash, used to reduce future premiums due or used to purchase additional insurance. A majority of dividends are used by policyowners to purchase additional insurance and are reported as premiums in the consolidated statement of operations, but are not included in premiums received or policy benefits paid in the consolidated statement of cash flows.
NONADMITTED ASSETS
Certain assets are designated as nonadmitted and thereby not permitted as a component of surplus on the statutory basis of accounting. Such assets, principally pension-related assets, amounts advanced to or due from the Company's financial representatives, and fixed assets, EDP equipment and software net of accumulated depreciation, are excluded from the consolidated statement of financial position. Changes in nonadmitted assets are reported as direct adjustments to surplus.
RECLASSIFICATION
Certain financial statement balances for 2000 and 1999 have been reclassified to conform to the current year presentation.
3. INVESTMENTS
BONDS
Investments in bonds are reported in the financial statements at amortized cost, except for bonds in default, which are reported at the lower of amortized cost or fair value. Statement value and estimated fair value of these securities at December 31, 2001 and 2000 were as follows:
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 by contractual maturity at December 31, 2001 is shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
COMMON AND PREFERRED STOCKS
Common stocks are reported in the financial statements at fair value, which is based upon quoted market prices, if available. For common stock without quoted market prices, fair value is estimated using independent pricing services or internally developed pricing models.
Preferred stocks rated "1" (highest quality), "2" (high quality), or "3" (medium quality) by the SVO are reported in the financial statements at amortized cost. All other preferred stock is reported at the lower of cost or fair value. Estimated fair value is based upon quoted market prices, if available. For preferred stock without quoted market prices, fair value is estimated using independent pricing services or internally developed pricing models.
For any decline in the fair value of a common or preferred stock that is considered to be other than temporary, a valuation adjustment is made to reduce the cost of the security to fair value and recognized as a realized capital loss.
MORTGAGE LOANS AND REAL ESTATE
Mortgage loans are reported in the financial statements at unpaid principal balance, less any valuation allowance or unamortized commitment or origination fees. These fees are generally deferred and amortized into investment income using the interest method. Mortgage loans are collateralized by properties located throughout the United States and Canada. The Company attempts to minimize mortgage loan investment risk by diversification of borrowers, geographic locations and types of collateral properties.
The maximum and minimum interest rates for mortgage loans originated during 2001 were 9.8% and 6.4%, respectively. The aggregate average ratio of loaned amounts to the value of collateral for mortgage loans originated during 2001 was 68%, with a maximum of 100% for any single loan.
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 change in valuation adjustment is classified as an unrealized gain or loss. Beginning January 1, 2001 valuation adjustments for impairments considered to be other than temporary are classified as realized losses. Prior to 2001, all changes in valuation adjustments were classified as unrealized gains and losses. At December 31, 2001, reported value of mortgage loans was reduced by $112 million in valuation adjustments.
Real estate investments are reported in the financial statements at cost, less encumbrances and accumulated depreciation of buildings or other improvements using a straight-line method over the estimated useful life of the improvements. An investment in real estate is considered impaired when the projected undiscounted net cash flow from the investment is less than depreciated cost. When the Company determines that an investment in real estate is impaired, a valuation adjustment is made to reduce the carrying value to estimated fair value, after encumbrances, based on appraisal of the property. At December 31, 2001, reported value of real estate investments was reduced by $52 million in valuation adjustments.
CAPITAL GAINS AND LOSSES
Realized investment gains and losses for the years ended December 31, 2001, 2000 and 1999 were as follows:
Proceeds on the sale of securities totaled $30 billion, $25 billion, and $16 billion for the years ended December 31, 2001, 2000 and 1999, respectively.
Changes in net unrealized investment gains and losses for the years ended December 31, 2001, 2000 and 1999 were as follows:
See Note 10 regarding the accounting change in 2001 for deferred taxes.
SECURITIES LENDING
The Company has entered into securities lending agreements whereby certain securities are loaned to third parties, primarily major brokerage firms. The Company's policy requires a minimum of 102% of the fair value of the loaned securities as collateral, calculated on a daily basis in the form of either cash or securities. Collateral assets held and the related liability due to counterparties of $1.3 billion and $1.4 billion are included in the consolidated statement of financial position at December 31, 2001 and 2000, respectively, and approximate the statement value of securities loaned at those dates.
4. DERIVATIVE FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into transactions to reduce its exposure to fluctuations in interest rates, foreign currency exchange rates and market volatility. Market risk arises from changes in the fair value of the underlying instruments. The Company is also exposed to credit risk in the event of nonperformance of the counterparties.
Derivative investments are classified as other investments in the consolidated statement of financial position. Derivative financial instruments that hedge specific assets and liabilities are reported in a manner consistent with the hedged item (e.g. at amortized cost or fair value), while derivative financial instruments that hedge a portfolio of assets or liabilities are reported at fair value. Fair value is estimated as the amount that the Company would expect to receive or pay upon termination of the contract at the reporting date. Changes in the carrying value of derivatives that hedge a portfolio of assets or liabilities are reported as realized capital gains and losses.
The Company held the following positions for hedging purposes at December 31, 2001 and 2000:
The carrying value of derivative financial instruments includes receivables of $9 million and $23 million at December 31, 2001 and 2000, respectively. The notional or contractual amounts of derivative financial instruments are used to denominate the transactions and do not represent the amounts exchanged between the parties.
The Company uses foreign currency swaps, which are traded over-the-counter, to hedge its exposure to bond cash-flows 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.
The Company uses forward contracts to buy or sell a financial instrument at a specified future date. Forward contracts fix the price, quantity, quality and date of the purchase and sale. Some forward contracts involve the initial payment of cash and may be settled in cash instead of physical delivery of the underlying instrument.
The Company uses interest rate swap agreements to hedge its exposure to floating rate bond coupon payments. An interest rate swap is a contractual agreement to exchange payments based on the actual or expected price level, performance or value of one or more underlying interest rates. The Company is required to pay the counterparty the stream of variable interest payments based on the coupon payments from the hedged bonds, and in turn, receives a fixed payment from the counterparty, at a predetermined interest rate. The net receipts/payments from these interest rate swaps are recorded in net investment income.
The Company uses swaptions and interest rate floors to hedge against the negative impact of a significant and sustained increase or decrease in interest rates. The purpose of the Company's swaption program is to protect against the effect of rising interest rates. Swaptions entitle the Company to receive settlement payments from the counterparties on specified expiration date, contingent on future interest rates. For each swaption, the amount of such settlement payments, if any, is determined by the present value of the difference between the fixed rate on a market rate swap and the strike rate multiplied by the notional amount. The premium paid for the swaptions is included in other investments and is amortized into interest income over the term of the agreements. Floors are option contracts in which the floor seller, in return for a premium, agrees to limit the risk associated with a decline in a reference rate or index.
The Company uses default swaps to hedge against a drop in bond prices due to credit concerns of certain bond issuers. A credit swap allows the Company to put the bond back to the counterparty at par upon a credit event by the bond issuer. A credit event is defined as bankruptcy, failure to pay, or obligation acceleration.
The Company uses common stock futures and equity swaps to mitigate its exposure to equity market fluctuations. Futures are standardized forward contracts traded on organized exchanges. Swaps are contracts to exchange, for a period of time, the investment performance of one underlying instrument for the investment performance of another underlying instrument, typically without exchanging the instruments themselves.
The Company uses financial futures contracts to hedge against interest rate risks on a portion of its fixed maturity securities. These contracts obligate the Company to buy or sell a financial instrument at a specified future date for a specified price. They may be settled in cash or through delivery of the financial instrument. Cash settlements on the change in market value of financial futures contracts are made daily.
The Company uses foreign currency forward contracts, which are traded over-the-counter, to hedge some of the foreign exchange risk of investments denominated in foreign currencies. The foreign currency forward contracts obligate the Company to deliver a specified amount of foreign currency at a future date at a specified exchange rate.
5. RESERVES FOR POLICY BENEFITS
Reserves for policy benefits represent the estimated net present value of future policy benefits, less future policy premiums, established using actuarial methods based on mortality and morbidity experience tables and valuation interest rates prescribed by the OCI. Use of these actuarial tables and methods involves estimation of future mortality and morbidity. Actual future experience could differ from the assumptions used to make these estimates.
Life insurance reserves on substantially all policies issued since 1978 are based on the Commissioner's Reserve Valuation Method ("CRVM") with interest rates ranging from 3-1/2% to 5-1/2%. Other life policy reserves are primarily based on the net level premium method, employing various mortality tables at interest rates ranging from 2% to 4-1/2%. As of December 31, 2001, the Company has $690 billion of total life insurance in-force, including $7 billion of life insurance in-force for which the gross premiums are less than the net premiums according to the standard valuation methods and assumptions set by the OCI.
As of January 1, 2001, the Company changed the valuation basis for reserves on certain term life insurance policies. The impact of this change increased policy benefit reserves by $61 million, and is reported as a direct reduction of surplus for the year ended December 31, 2001.
Tabular cost has been determined from the basic data for the calculation of policy reserves. Tabular less actual reserves released has been determined from the basic data for the calculation of reserves and reserves released. Tabular interest has been determined from the basic data for the calculation of policy reserves. Tabular interest on funds not involving life contingencies is calculated as the product of the valuation rate of interest times the mean of the amount of funds subject to such rate held at the beginning and end of the year of valuation.
Additional premiums are charged for substandard lives for policies issued after January 1, 1956. Net level premium or CRVM mean reserves are based on multiple mortality tables or one-half the net flat or other extra mortality charge. The Company waives deduction of fractional premiums upon death of insured and returns any portion of the final premium beyond the date of death. Surrender values are not promised in excess of the legally computed reserves.
Deferred annuity reserves on contracts issued since 1985 are primarily valued using the Commissioner's Annuity Reserve Valuation Method with interest rates ranging from 3-1/2% to 6-1/4%. Other deferred annuity reserves are based on contract value. Immediate annuity reserves are based on present values of expected benefit payments at interest rates ranging from 3-1/2% to 7-1/2%. Beginning January 1, 2001 changes in future policy benefits on supplementary contracts without life contingencies are classified as deposit-type transactions and thereby excluded from net additions to policy benefit reserves in the consolidated statement of operations. Prior to 2001, these reserve changes were reported as a component of operations.
At December 31, 2001, the withdrawal characteristics of the Company's annuity reserves and deposit liabilities were as follows:
Active life reserves for disability income ("DI") policies issued since 1987 are primarily based on the two-year preliminary term method using a 4% interest rate and the 1985 Commissioner's Individual Disability Table A ("CIDA") for morbidity. Active life reserves for prior DI policies are based on the net level premium method, interest rates ranging from 3% to 4% and the 1964 Commissioner's Disability Table for morbidity. Disabled life reserves for DI policies are based on the present values of expected benefit payments, primarily using the 1985 CIDA (modified for Company experience in the first four years of disability) and interest rates ranging from 3% to 5-1/2%.
6. PREMIUM AND ANNUITY CONSIDERATIONS DEFERRED AND UNCOLLECTED
Gross deferred and uncollected insurance premiums represent premiums due to be received from policyowners through the next policy anniversary date. Net deferred and uncollected premiums represent only the portion of gross premiums related to mortality charges and interest. Deferred and uncollected premiums at December 31, 2001 were as follows:
7. SEPARATE ACCOUNTS
Separate account assets and related policy liabilities represent the segregation of funds deposited by variable life insurance and annuity policyowners. Policyowners bear the investment performance risk associated with variable products. Separate account assets are invested at the direction of the policyowner in a variety of mutual fund options. Variable annuity policyowners also have the option to invest in a fixed interest rate annuity in the general account of the Company. Separate account assets are reported at fair value based primarily on quoted market prices.
All separate accounts liabilities are non-guaranteed. Following is a summary of separate account liabilities by withdrawal characteristic at December 31, 2001 (in millions):
Separate account premiums and other considerations received during the year ended December 31, 2001 were $1,419 million and reported as revenues in the consolidated statement of operations. 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 and the amount reported as net transfers to separate accounts in the accompanying statement of operations for the year ended December 31, 2001 (in millions):
8. EMPLOYEE AND REPRESENTATIVE BENEFIT PLANS
The Company sponsors noncontributory defined benefit retirement plans for all eligible employees and field representatives. These include tax-qualified plans, as well as nonqualified plans that provide benefits to certain participants in excess of ERISA limits for qualified plans. The Company's policy is to fully fund the obligations of qualified plans in accordance with ERISA requirements.
Beginning January 1, 2001 the costs associated with these retirement benefits are expensed over the period that the participant provides services to the Company, including recognition of pension assets and liabilities based on the funded status of the related plans. Pension assets are nonadmitted and thereby excluded from surplus. Prior to 2001, the Company recognized pension expense only in the periods in which contributions to plan assets were made.
In addition to pension benefits, the Company provides certain health care and life insurance benefits ("postretirement benefits") to retired employees, representatives and eligible dependents. Substantially all employees and representatives will become eligible for these benefits if they reach retirement age while working for the Company.
The funded status of the Company's defined benefit plans, both funded and unfunded, and postretirement benefits at December 31, 2001 were as follows:
The projected benefit obligations were estimated using a discount rate of 7%, an assumed long-term rate of return on plan assets of 9%, and assumptions regarding future employee turnover and compensation trends based on Company experience. Plan assets are invested primarily in common stocks and corporate debt securities through a separate account of the Company. Fair value of plan assets is based primarily on quoted market value.
Changes in projected benefit obligations and plan assets during the year ended December 31, 2001 were as follows:
The components of net periodic pension expense (benefit) for the year ended December 31, 2001 were as follows (in millions):
The components of net periodic postretirement expense (benefit) for the year ended December 31, 2001 were as follows (in millions):
The accumulated postretirement benefit obligation was estimated using a discount rate of 7%, an assumed rate of return on plan assets of 9%, and assumptions regarding participant retirement, morbidity and mortality based on Company experience. The estimate also assumes a health care cost rate increase of 10% per year, grading down 1% to an ultimate rate of 5% after 5 years. 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, 2001 by $8 million and net periodic postretirement benefit expense during 2001 by $1 million. A decrease in the assumed healthcare cost trend of 1% in each year would decrease the accumulated postretirement benefit obligation as of December 31, 2001 by $8 million and net periodic postretirement benefit expense during 2001 by $1 million.
The Company also sponsors a contributory 401(k) plan for eligible employees and a noncontributory defined contribution plan for full-time representatives. For the years ended December 31, 2001, 2000 and 1999 the Company expensed total contributions to these plans of $20 million, $19 million and $18 million, respectively.
9. REINSURANCE
In the normal course of business, the Company seeks to limit its life insurance exposure to loss on any single insured and to recover a portion of benefits paid by ceding insurance coverage to reinsurers under excess and coinsurance contracts. The Company retains a maximum of $25 million of coverage per individual life and $35 million maximum of coverage per joint life. The Company also has an excess reinsurance contract for certain disability income policies with retention limits varying based upon coverage type.
The amounts shown in the consolidated financial statements are reported net of reinsurance. Reserves for policy benefits at December 31, 2001 and 2000 were reported net of ceded reserves of $757 million and $663 million, respectively.
The effect of reinsurance on premium revenue and benefits expense for the years ended December 31, 2001, 2000 and 1999 was as follows:
In addition, the Company received $161 million, $146 million and $133 million for the years ended December 31, 2001, 2000 and 1999, respectively, from reinsurers as allowances for reimbursement of commissions and other expenses on ceded business. These amounts are included in other income in the consolidated statement of operations.
Reinsurance contracts do not relieve the Company from its obligations to policyowners. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company attempts to minimize this risk by diversifying its reinsurance coverage among a number of reinsurers that meet its standards for strong financial condition.
10. INCOME TAXES
The Company files a consolidated federal income tax return with the following entities: Northwestern Mutual Investment Services, LLC Northwestern International Holdings, Inc. NML Real Estate Holdings, LLC and subsidiaries NML Securities Holdings, LLC and subsidiaries Northwestern Investment Management Company, LLC Northwestern Securities Holdings, LLC Northwestern Mutual Trust Company Baird Holding Company Frank Russell Company Bradford, Inc. Network Planning Advisors, LLC Mason Street Advisors, LLC NML - CBO, LLC
Under written tax sharing agreements, the Company collects from or refunds to these subsidiaries income taxes determined as if the subsidiaries filed separate tax returns. Federal income tax returns for years through 1997 are closed as to further assessment of tax. Adequate provision has been made in the financial statements for any additional taxes that may become due with respect to the open years.
Beginning January 1, 2001 the Company accounts for deferred tax assets and liabilities, which reflect the financial statement impact of cumulative temporary differences between the tax and financial statement bases of assets and liabilities. Prior to 2001, no deferred tax balances were reported. The components of the net deferred tax asset at December 31, 2001 were as follows (in millions):
Deferred tax assets relate primarily to temporary differences between the tax and financial statement bases of policy benefit liabilities, as well as the temporary difference created by unamortized policy acquisition costs capitalized for tax purposes. Deferred tax assets increased by $374 million for the year ended December 31, 2001 due primarily to increases in these same temporary differences. Deferred tax liabilities relate primarily to temporary differences between the tax and financial statement bases of investments. Deferred tax liabilities decreased by $51 million for the year ended December 31, 2001 due primarily to changes in temporary differences relating to investments.
Changes in deferred tax assets and liabilities related to changes in 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 changes in deferred tax assets and liabilities are direct adjustments to surplus and separately reported in the consolidated statement of changes in surplus.
The Company's taxable income can vary significantly from gain from operations before taxes due to differences between book and tax valuation of assets and liabilities. Also, the Company must capitalize and amortize for tax purposes, as opposed to immediately deducting, an amount deemed to represent the cost of acquiring new business ("DAC tax"). Further, the Company pays an "equity tax" that is assessed only on the surplus of mutual life insurance companies.
The Company's effective tax rate of 21%, for the year ended December 31, 2001, is determined as the relationship between the sum of total taxes, including those that affect net income and changes in deferred taxes not related to unrealized gains and losses on investments, to the sum of gain from operations before taxes and pretax net realized gains. This rate was less than the federal corporate tax rate of 35% due primarily to differences between book and tax basis amounts of net investment income and realized capital gains and losses. Prior to 2001, the Company's effective tax rate was based only on tax expense attributed to net gain from operations and its relationship to gain from operations before taxes.
Effective tax rates for the years ended December 31, 2000, and 1999 were 16% and 29%, respectively. The effective rates were less than the federal corporate rate of 35% due primarily to differences between book and tax investment income and, in 2000, prior year adjustments.
11. FRANK RUSSELL COMPANY ACQUISITION AND GOODWILL
The Company acquired Frank Russell Company ("Russell") effective January 1, 1999 for a purchase price of approximately $955 million. Russell is a leading investment management and consulting firm, providing investment advice, analytical tools and investment vehicles to institutional and individual investors in more than 30 countries. This investment is accounted for using the equity method, adjusted for the charge-off of acquisition goodwill, and is included in common stocks in the consolidated statement of financial position. During the three years ended December 31, 2001, the Company charged-off directly from surplus approximately $863 million, representing the goodwill associated with the acquisition. The Company has received permission from the OCI for this charge-off.
As part of the acquisition, the Company has unconditionally guaranteed certain debt obligations of Russell, including $350 million of senior notes and up to $150 million of other credit facilities.
12. CONTINGENCIES
The Company has also guaranteed certain obligations of other affiliates. These guarantees totaled approximately $135 million at December 31, 2001 and are generally supported by the underlying net asset values of the affiliates. In addition, the Company routinely makes commitments to fund mortgage loans or other investments in the normal course of business. These commitments aggregated to $1.9 billion at December 31, 2001 and were extended at market interest rates and terms.
The Company is engaged in various legal actions in the normal course of its investment and insurance operations. In the opinion of management, any losses resulting from such actions would not have a material effect on the Company's results of operations or financial position.
13. RELATED PARTY TRANSACTIONS
During 2001, 2000 and 1999, the Company transferred appreciated equity investments to wholly-owned subsidiaries as a capital contribution to the subsidiaries. Realized capital gains of $244 million, $220 million and $287 million for 2001, 2000 and 1999, respectively, were reported based on the fair value of the assets at transfer.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments, represented by investment assets (including derivatives) and certain policy liabilities at December 31, 2001 was as follows (in millions):
Fair value of bonds, common and preferred stocks and derivative financial instruments were based upon quoted market prices, when available. For those not actively traded, fair values were estimated using independent pricing services or internally developed pricing models. The fair value of mortgage loans was estimated by discounting estimated future cash flows using market interest rates for debt with comparable credit risk and maturities. Real estate fair value was determined by discounting estimated future cash flows using market interest rates. Policy loan fair value was estimated based on discounted projected cash flows using market interest rates and assumptions regarding future loan repayments based on Company experience. Other investments include joint ventures and partnerships, valued using the equity method, which approximates fair value.
The fair value of investment-type insurance reserves was 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 25, 2002
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 - -------------------------------------------- Trustee, President and Edward J. Zore Chief Executive Officer
/s/ GARY A. POLINER - -------------------------------------------- Senior Vice President and Gary A. Poliner Chief Financial Officer
/s/ STEVEN T. CATLETT - -------------------------------------------- Vice President and Steven T. Catlett Controller
/s/ JOHN M. BREMER - -------------------------------------------- Trustee John M. Bremer
/s/ PETER W. BRUCE - -------------------------------------------- Trustee Peter W. Bruce
EDWARD E. BARR* - -------------------------------------------- Trustee Edward E. Barr
GORDON T. BEAHAM, III* - -------------------------------------------- Trustee Gordon T. Beaham, III
ROBERT C. BUCHANAN* - -------------------------------------------- Trustee Robert C. Buchanan
GEORGE A. DICKERMAN* - -------------------------------------------- Trustee George A. Dickerman
PIERRE S. DU PONT* - -------------------------------------------- Trustee Pierre S. du Pont
JAMES D. ERICSON* - -------------------------------------------- Trustee James D. Ericson
J.E. GALLEGOS* - -------------------------------------------- Trustee J. E. Gallegos
STEPHEN N. GRAFF* - -------------------------------------------- Trustee Stephen N. Graff
PATRICIA ALBJERG GRAHAM* - -------------------------------------------- Trustee Patricia Albjerg Graham
JAMES P. HACKETT* - -------------------------------------------- Trustee James P. Hackett
STEPHEN F. KELLER* - -------------------------------------------- Trustee Stephen F. Keller
BARBARA A. KING* - -------------------------------------------- Trustee Barbara A. King
J. THOMAS LEWIS* - -------------------------------------------- Trustee J. Thomas Lewis
DANIEL F. MCKEITHAN, JR.* - -------------------------------------------- Trustee Daniel F. McKeithan, Jr.
GUY A. OSBORN* - -------------------------------------------- Trustee Guy A. Osborn
- ------------------------------------------- Trustee Timothy D. Proctor
H. MASON SIZEMORE, JR.* - -------------------------------------------- Trustee H. Mason Sizemore, Jr.
HAROLD B. SMITH* - -------------------------------------------- Trustee Harold B. Smith
- -------------------------------------------- Trustee Sherwood H. Smith, Jr.
PETER M. SOMMERHAUSER* - -------------------------------------------- Trustee Peter M. Sommerhauser
JOHN E. STEURI* - -------------------------------------------- Trustee John E. Steuri
JOHN J. STOLLENWERK* - -------------------------------------------- Trustee John J. Stollenwerk
BARRY L. WILLIAMS* - -------------------------------------------- Trustee Barry L. Williams
KATHRYN D. WRISTON* - -------------------------------------------- Trustee Kathryn D. Wriston
Each of the above signatures is affixed as of March 25, 2002
*By /s/ EDWARD J. ZORE ------------------- Edward J. Zore, Attorney in Fact, pursuant to the Power of Attorney attached as exhibit 24.1 hereto.