UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
COMMISSION FILE NUMBERS 333-72913 AND 2-89905-01
THE NORTHWESTERN MUTUAL LIFE
INSURANCE COMPANY
IN RESPECT OF NML VARIABLE ANNUITY ACCOUNT A & NML VARIABLE ANNUITY ACCOUNT C
(Exact name of registrant as specified in its charter)
WISCONSIN 39-0509570
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
720 EAST WISCONSIN AVENUE
MILWAUKEE, WISCONSIN 53202
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 414/271-1444
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-K or any
amendment to this Form 10-K. |X|
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked price of such common
equity, as of a specified date within the past 60 days.
NOT APPLICABLE
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
NONE
DOCUMENTS INCORPORATED BY REFERENCE
NONE
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
IN RESPECT OF NML VARIABLE ANNUITY
ACCOUNT A AND NML VARIABLE ANNUITY ACCOUNT C
FORM 10-K
PART I
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.
2
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.
3
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. 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. 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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
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.
4
During 2001, the following aggregate dollar amounts of such unregistered
securities were sold to Corporate Plans, generating the aggregate
commissions stated:
ACCOUNT A ACCOUNT C
--------- ---------
AMOUNT SOLD COMMISSIONS AMOUNT SOLD COMMISSIONS
----------- ----------- ----------- -----------
$33,090,418(A) $1,569,278(B) $93,337,097(A) $1,027,006(B)
(A) Reflects premiums paid by Contract holders as well as dividend additions.
(B) Reflects an estimate of amounts paid to Northwestern Mutual financial
representatives for sales to Corporate Plans based on a pro rata
allocation of all Contract sales under the Account.
Accumulation units in Account A and Account C represent the interests of
Contract owners. Purchase payments are applied to credit additional accumulation
units based on the accumulation unit value next determined after each payment is
received. Accumulation units are valued as of the close of business on the New
York Stock Exchange on each business day.
ITEM 6. 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)
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Investment Income
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Small Cap Growth Stock Portfolio**.............. $ 1 $ 379 $ 149 N/A N/A
Dividend Income from Northwestern
Mutual Series Fund, Inc.
T. Rowe Price Small Cap Value Portfolio # ...... 1 N/A N/A N/A N/A
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Aggressive Growth Stock Portfolio............... 19,094 13,412 2,871 $ 3,294 $ 5,047
Dividend Income from Northwestern
Mutual Series Fund, Inc.
International Growth Stock Portfolio #.......... - N/A N/A N/A N/A
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Franklin Templeton International
Equity Portfolio ............................... 3,729 3,228 6,194 2,855 1,628
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Index 400 Stock Portfolio**..................... 97 801 30 N/A N/A
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Growth Stock Portfolio.......................... 1,497 1,855 1,225 461 770
Dividend Income from Northwestern
Mutual Series Fund, Inc.
J.P. Morgan Select Growth and Income
Stock Portfolio................................. 876 1,774 4,191 294 5,155
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Capital Guardian Domestic Equity
Stock Portfolio #............................... 1 N/A N/A N/A N/A
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Index 500 Stock Portfolio....................... 5,168 6,161 3,676 4,267 3,230
5
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Asset Allocation Portfolio #.................... 6 N/A N/A N/A N/A
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Balanced Portfolio.............................. 19,440 24,058 34,011 19,089 13,245
Dividend Income from Northwestern
Mutual Series Fund, Inc.
High Yield Bond Portfolio....................... 529 611 821 951 1,418
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Select Bond Portfolio........................... 1,257 1,463 2,088 1,768 1,557
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Money Market Portfolio.......................... 1,067 1,609 1,410 1,254 1,203
Dividend Income from Russell Insurance
Funds Multi-Style Equity Fund**................. 91 134 76 N/A N/A
Dividend Income from Russell Insurance
Funds Aggressive Equity Fund**.................. 3 261 4 N/A N/A
Dividend Income from Russell Insurance
Funds Non-U.S. Fund**........................... 17 226 37 N/A N/A
Dividend Income from Russell Insurance
Funds Real Estate Securities Fund**............. 93 43 12 N/A N/A
Dividend Income from Russell Insurance
Funds Core Bond Fund**.......................... 78 50 22 N/A N/A
----------- --------- ---------- --------- ---------
Total Dividend Income........................ 53,045 56,065 56,817 34,233 33,253
Annuity Rate and Expense Guarantees................ 7,425 8,884 8,722 8,067 7,047
----------- --------- ---------- --------- ---------
Net Investment Income.............................. $ 45,620 $ 47,181 $ 48,095 $ 26,166 $ 26,206
=========== ========= ========== ========= =========
Realized and Unrealized Gain (Loss) on Investments
Realized Gain on Investments....................... $ 15,197 $ 56,764 $ 51,300 $ 37,625 $ 23,135
Unrealized Appreciation/(Depreciation) of
Investments During the Year........................ (124,257) (120,838) 9,270 36,250 56,364
----------- --------- ---------- --------- ---------
Net Gain/(Loss) on Investments.................. (109,060) (64,074) 60,570 73,875 79,499
Increase/(Decrease) in Equity Derived from
Investment Activity................................... $ (63,440) $ (16,893) $ 108,665 $ 100,041 $ 105,705
=========== ========= ========== ========= =========
**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)
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Operations
Net Investment Income...................... $ 45,620 $ 47,181 $ 48,095 $ 26,166 $ 26,206
Net Realized Gain ......................... 15,197 56,764 51,300 37,625 23,135
Net Change in Unrealized
Appreciation/(Depreciation)................ (124,257) (120,838) 9,270 36,250 56,364
---------- -------- --------- -------- --------
Increase (Decrease) in Equity
Derived From Investment Activities......... (63,440) (16,893) 108,665 100,041 105,705
---------- -------- --------- -------- --------
Equity Transactions
Contract Owners' Net Payments.............. 46,213 54,157 55,489 62,325 61,965
Annuity Payments........................... (1,316) (1,472) (1,469) (1,306) (1,047)
Surrenders and Other (Net)................. (83,649) (121,406) (102,935) (80,848) (64,552)
Transfers from Other Divisions or Sponsor.. 83,322 137,543 125,332 95,967 63,046
Transfers to Other Divisions or Sponsor.... (84,772) (138,779) (126,511) (98,941) (64,242)
---------- -------- --------- -------- --------
Increase (Decrease) in Equity
Derived from Equity Transactions........... (40,202) (69,957) (50,094) (22,803) (4,830)
---------- -------- --------- -------- --------
Net Increase/(Decrease) in Equity.......... (103,642) (86,850) 58,571 77,238 100,875
Equity
Beginning of Year............................. 697,354 784,204 725,633 648,395 547,520
---------- -------- --------- -------- --------
End of Year................................... $ 593,712 $697,354 $ 784,204 $725,633 $648,395
========== ======== ========= ======== ========
6
Total Assets of Account A:
(in thousands)
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Assets
Investments at Market Value:
Northwestern Mutual Series Fund, Inc.
Small Cap Growth Stock Portfolio **.............. $ 15,624 $ 16,293 $ 4,847 N/A N/A
Northwestern Mutual Series Fund, Inc.
T. Rowe Price Small Cap Value Portfolio # ....... 585 N/A N/A N/A N/A
Northwestern Mutual Series Fund, Inc.
Aggressive Growth Stock Portfolio ............... 77,633 106,815 104,344 $ 87,973 $ 89,429
Northwestern Mutual Series Fund, Inc.
International Growth Stock Portfolio # .......... 157 N/A N/A N/A N/A
Northwestern Mutual Series Fund, Inc.
Franklin Templeton International Equity Portfolio 30,810 40,333 45,439 44,995 50,148
Northwestern Mutual Series Fund, Inc.
Index 400 Growth Stock Portfolio **.............. 9,168 7,162 2,205 N/A N/A
Northwestern Mutual Series Fund, Inc.
Growth Stock Portfolio .......................... 32,717 38,037 39,031 26,774 17,261
Northwestern Mutual Series Fund, Inc.
J.P. Morgan Select Growth and Income
Stock Portfolio ................................. 23,058 26,081 35,735 36,440 23,576
Northwestern Mutual Series Fund, Inc.
Capital Guardian Domestic Equity Portfolio # .... 291 N/A N/A N/A N/A
Northwestern Mutual Series Fund, Inc.
Index 500 Stock Portfolio ....................... 104,943 133,526 169,861 143,376 111,141
Northwestern Mutual Series Fund, Inc.
Asset Allocation Portfolio # .................... 800 N/A N/A N/A N/A
Northwestern Mutual Series Fund, Inc.
Balanced Portfolio .............................. 229,239 266,410 319,678 325,287 302,750
Northwestern Mutual Series Fund, Inc.
High Yield Bond Portfolio ....................... 5,018 5,135 6,940 9,287 8,743
Northwestern Mutual Series Fund, Inc.
Select Bond Portfolio ........................... 23,983 20,275 22,162 25,970 25,253
Northwestern Mutual Series Fund, Inc.
Money Market Portfolio .......................... 27,159 25,480 28,975 26,910 21,586
Russell Insurance Funds
Multi-Style Equity Fund **....................... 4,111 4,097 2,500 N/A N/A
Russell Insurance Funds
Aggressive Equity Fund **........................ 2,947 2,497 1,142 N/A N/A
Russell Insurance Funds
Non-U.S. Fund **................................. 2,861 3,244 1,383 N/A N/A
Russell Insurance Funds
Real Estate Securities Fund **................... 1,820 1,328 332 N/A N/A
Russell Insurance Funds
Core Bond Fund **................................ 1,527 1,186 693 N/A N/A
Due from Northwestern Mutual .......................... 8 0 1,012 22 323
Due from Sale of Fund Shares .......................... 39 665 1,329 1,408 1,555
-------- -------- -------- -------- --------
Total Assets .................................... $594,498 $698,564 $787,608 $728,442 $651,765
======== ======== ======== ======== ========
**Became an investment option under the Contracts effective April 30, 1999.
# Became an investment option under the Contracts effective July 31, 2001.
7
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)
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Investment Income
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Small Cap Growth Stock Portfolio **.............. $ 2 $ 99 $ 32 N/A N/A
Dividend Income from Northwestern
Mutual Series Fund, Inc.
T. Rowe Price Small Cap Value Portfolio # ....... -- N/A N/A N/A N/A
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Aggressive Growth Stock Portfolio ............... 27,284 20,221 3,671 $ 4,152 $ 6,050
Dividend Income from Northwestern
Mutual Series Fund, Inc.
International Growth Stock Portfolio # .......... -- N/A N/A N/A N/A
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Franklin Templeton International Equity Portfolio 5,914 5,036 8,184 3,732 1,946
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Index 400 Stock Portfolio **..................... 194 1,180 6 N/A N/A
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Growth Stock Portfolio .......................... 1,614 2,101 1,223 447 712
Dividend Income from Northwestern
Mutual Series Fund, Inc.
J.P. Morgan Select Growth and Income
Stock Portfolio ................................. 957 2,123 4,566 343 5,941
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Capital Guardian Domestic Equity Portfolio # .... -- N/A N/A N/A N/A
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Index 500 Stock Portfolio ....................... 6,550 8,370 4,675 5,271 3,756
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Asset Allocation Portfolio # .................... -- N/A N/A N/A N/A
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Balanced Portfolio .............................. 9,705 12,909 18,031 9,909 6,461
Dividend Income from Northwestern
Mutual Series Fund, Inc.
High Yield Bond Portfolio ....................... 487 558 759 883 1,028
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Select Bond Portfolio ........................... 911 1,093 1,570 1,357 1,058
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Money Market Portfolio .......................... 523 971 1,015 899 739
Dividend Income from Russell Insurance Funds
Multi-Style Equity Fund **....................... 37 79 48 N/A N/A
Dividend Income from Russell Insurance Funds
Aggressive Equity Fund **........................ 1 74 1 N/A N/A
Dividend Income from Russell Insurance Funds
Non-U.S. Fund **................................. 4 61 13 N/A N/A
8
Dividend Income from Russell Insurance Funds
Real Estate Securities Fund **................... 290 52 4 N/A N/A
Dividend Income from Russell Insurance Funds
Core Bond Fund **................................ 48 22 15 N/A N/A
--------- --------- -------- ------- -------
Total Dividend Income ........................ 54,521 54,949 43,813 26,993 27,691
Annuity Rate and Expense Guarantees ................ 2,007 2,896 3,444 3,155 2,502
--------- --------- -------- ------- -------
Net Investment Income .............................. $ 52,514 $ 52,053 $ 40,369 $23,838 $25,189
========= ========= ======== ======= =======
Realized and Unrealized Gain (Loss) on Investments
Realized Gain (Loss) on Investments ................ $ 8,705 $ 54,861 $ 41,106 $29,249 $18,686
Unrealized Appreciation (Depreciation) of
Investments During the Year ...................... (133,527) (121,850) 36,856 37,108 44,242
--------- --------- -------- ------- -------
Net Gain (Loss) on Investments .................. (124,822) (66,989) 77,962 66,357 62,928
Increase (Decrease) in Equity Derived
from Investment Activity ............................ $ (72,308) $ (14,936) $118,331 $90,195 $88,117
========= ========= ======== ======= =======
**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)
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Operations
Net Investment Income ........................... $ 52,514 $ 52,053 $ 40,369 $ 23,838 $ 25,189
Net Realized Gain .............................. 8,705 54,861 41,106 29,249 18,686
Net Change in Unrealized Appreciation (Depreciation) (133,527) (121,850) 36,856 37,108 44,242
--------- --------- --------- --------- ---------
Increase (Decrease) in Equity Derived from
Investment Activity ............................. (72,308) (14,936) 118,331 90,195 88,117
--------- --------- --------- --------- ---------
Equity Transactions
Contract Owners' Net Payments ................... 90,774 103,967 74,900 93,657 91,195
Annuity Payments ................................ (64) (75) (67) (54) (50)
Surrenders and Other (Net) ...................... (140,073) (135,735) (119,041) (87,761) (58,500)
Transfers from Other Divisions or Sponsor ....... 55,326 91,474 70,710 72,485 46,344
Transfers to Other Divisions or Sponsor ......... (53,674) (92,576) (69,203) (71,425) (45,769)
--------- --------- --------- --------- ---------
Increase (Decrease) in Equity Derived
From Equity Transactions ........................ (47,711) (32,945) (42,701) 6,902 33,220
--------- --------- --------- --------- ---------
Net Increase (Decrease) in Equity .................. (120,019) (47,881) 75,630 97,097 121,337
Equity
Beginning of Period ................................ 672,835 720,716 645,086 547,989 426,652
--------- --------- --------- --------- ---------
End of Period ...................................... $ 552,816 $ 672,835 $ 720,716 $ 645,086 $ 547,989
========= ========= ========= ========= =========
9
Total Assets of Account C:
(in thousands)
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Assets
Investments at Market Value:
Northwestern Mutual Series Fund, Inc.
Small Cap Growth Stock Portfolio **......... $ 21,098 $ 20,038 $ 949 N/A N/A
Northwestern Mutual Series Fund, Inc.
T. Rowe Price Small Cap Value Portfolio # .. 165 N/A N/A N/A N/A
Northwestern Mutual Series Fund, Inc.
Aggressive Growth Stock Portfolio .......... 112,232 157,369 139,739 $112,355 $111,587
Northwestern Mutual Series Fund, Inc.
International Growth Stock Portfolio # ..... 38 N/A N/A N/A N/A
Northwestern Mutual Series Fund, Inc.
Franklin Templeton International
Equity Portfolio ........................ 48,902 65,489 64,556 59,265 63,877
Northwestern Mutual Series Fund, Inc.
Index 400 Stock Portfolio **................ 16,849 11,399 473 N/A N/A
Northwestern Mutual Series Fund, Inc.
Growth Stock Portfolio ..................... 33,016 42,696 39,776 27,819 15,850
Northwestern Mutual Series Fund, Inc.
J.P. Morgan Select Growth and Income
Stock Portfolio ......................... 25,473 29,723 41,105 40,354 27,485
Northwestern Mutual Series Fund, Inc.
Capital Guardian Domestic Equity Portfolio # 211 N/A N/A N/A N/A
Northwestern Mutual Series Fund, Inc.
Index 500 Stock Portfolio .................. 131,489 173,398 220,075 183,326 133,928
Northwestern Mutual Series Fund, Inc.
Asset Allocation Portfolio # ............... 46 N/A N/A N/A N/A
Northwestern Mutual Series Fund, Inc.
Balanced Portfolio ......................... 115,972 136,009 167,444 172,972 153,734
Northwestern Mutual Series Fund, Inc.
High Yield Bond Portfolio .................. 4,583 4,239 6,380 8,611 6,568
Northwestern Mutual Series Fund, Inc.
Select Bond Portfolio ...................... 17,379 14,027 17,537 20,755 18,060
Northwestern Mutual Series Fund, Inc.
Money Market Portfolio ..................... 15,185 12,102 19,341 19,629 16,900
Russell Insurance Funds
Multi-Style Equity Fund **.................. 1,403 1,745 1,706 N/A N/A
Russell Insurance Funds
Aggressive Equity Fund **................... 710 643 352 N/A N/A
Russell Insurance Funds
Non-U.S. Fund **............................ 672 818 565 N/A N/A
Russell Insurance Funds
Real Estate Securities Fund **.............. 6,600 2,654 102 N/A N/A
Russell Insurance Funds
Core Bond Fund **........................... 793 486 384 N/A N/A
Due from Northwestern Mutual ..................... 37 16 395 356 197
Due from Sale of Fund Shares ..................... 13 195 798 495 2,927
Due from Participants ............................ 0 0 232 0 0
-------- -------- -------- -------- --------
Total Assets ..................................... $552,866 $673,046 $721,909 $645,937 $551,113
======== ======== ======== ======== ========
**Became an investment option under the Contracts effective April 30, 1999.
# Became an investment option under the Contracts effective July 31, 2001
10
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:
DIVISION 12/31/01 % CHANGE 12/31/00* % CHANGE 12/31/99
- -------- -------- -------- --------- -------- --------
Small Cap Growth Stock .................. $ 1.873388 -4.49% $ 1.961375 5.92% $ 1.851783
T. Rowe Price Small Cap Value # ......... 1.014387 1.44 1.000000 N/A N/A
Aggressive Growth Stock ................. 4.742335 -20.48 5.963354 5.39 5.658407
International Growth Stock # ............ 0.903153 -9.68 1.000000 N/A N/A
Franklin Templeton International Equity . 1.996677 -14.64 2.339241 -1.53 2.375600
Index 400 Stock ......................... 1.287807 -1.40 1.306094 16.34 1.122676
Growth Stock ............................ 2.554121 -14.86 2.999890 -3.21 3.099518
J.P. Morgan Select Growth and
Income Stock ......................... 2.198364 -8.46 2.401649 -7.66 2.600855
Capital Guardian Domestic Equity # ...... 0.975051 -2.49 1.000000 N/A N/A
Index 500 Stock ......................... 3.994853 -12.54 4.567635 -9.43 5.043329
Asset Allocation # ...................... 0.975908 -2.41 1.000000 N/A N/A
Balanced ................................ 7.750204 -3.88 8.062822 -0.91 8.136959
High Yield Bond ......................... 1.543249 4.24 1.480422 -5.30 1.563339
Select Bond ............................. 9.086342 9.54 8.294952 9.39 7.582833
Money Market ............................ 3.004024 3.14 2.912624 5.50 2.760791
Russell Multi-Style Equity .............. 0.793888 -14.85 0.932346 -12.91 1.070614
Russell Aggressive Equity ............... 1.054435 -3.10 1.088117 -1.40 1.103591
Russell Non-U.S ......................... 0.819680 -22.61 1.059216 -15.07 1.247160
Russell Real Estate Securities .......... 1.247315 7.03 1.165389 26.29 0.922768
Russell Core Bond ....................... 1.148123 6.60 1.077032 9.18 0.986452
# 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.
11
Accumulation Unit Values
Contracts Issued After December 16, 1981 and Prior to March 31, 1995:
DIVISION 12/31/01 % CHANGE 12/31/00* % CHANGE 12/31/99
- -------- -------- -------- --------- -------- --------
Small Cap Growth Stock .................. $ 1.848493 -4.97% $ 1.945087 5.39% $ 1.845580
T. Rowe Price Small Cap Value # ......... 1.012260 1.23 1.000000 N/A N/A
Aggressive Growth Stock ................. 4.487184 -20.88 5.671037 4.86 5.407959
International Growth Stock # ............ 0.901258 -9.87 1.000000 N/A N/A
Franklin Templeton International
Equity ............................... 1.911919 -15.07 2.251266 -2.02 2.297694
Index 400 Stock ......................... 1.270690 -1.90 1.295242 15.76 1.118909
Growth Stock ............................ 2.458020 -15.29 2.901600 -3.70 3.012947
J.P. Morgan Select Growth and
Income Stock ......................... 2.115675 -8.92 2.322995 -8.12 2.528256
Capital Guardian Domestic Equity # ...... 0.973004 -2.70 1.000000 N/A N/A
Index 500 Stock ......................... 3.780024 -12.98 4.343830 -9.88 4.820195
Asset Allocation # ...................... 0.973862 -2.61 1.000000 N/A N/A
Balanced ................................ 7.012362 -4.36 7.332002 -1.40 7.436406
High Yield Bond ......................... 1.485164 3.72 1.431888 -5.78 1.519653
Select Bond ............................. 8.219594 8.99 7.541503 8.85 6.928532
Money Market ............................ 2.718250 2.62 2.648821 4.97 2.523294
Russell Multi-Style Equity .............. 0.783335 -15.28 0.924598 -13.35 1.067018
Russell Aggressive Equity ............... 1.040412 -3.58 1.079072 -1.89 1.099895
Russell Non-U.S ......................... 0.808779 -23.00 1.050412 -15.49 1.242993
Russell Real Estate Securities .......... 1.230726 6.49 1.155691 25.66 0.919674
Russell Core Bond ....................... 1.132872 6.07 1.068073 8.64 0.983142
# 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:
DIVISION 12/31/01 % CHANGE 12/31/00* % CHANGE 12/31/99
- -------- -------- -------- --------- -------- --------
Small Cap Growth Stock .................. $ 1.890848 -4.15% $ 1.972747 6.29% $ 1.856086
T. Rowe Price Small Cap Value # ......... 1.015860 1.59 1.000000 N/A N/A
Aggressive Growth Stock ................. 2.246524 -20.20 2.815081 5.75 2.661899
International Growth Stock # ............ 0.904464 -9.55 1.000000 N/A N/A
Franklin Templeton International
Equity ............................... 1.662501 -14.35 1.940943 -1.19 1.964300
Index 400 Stock ......................... 1.299809 -1.06 1.313674 16.74 1.125296
Growth Stock ............................ 2.404787 -14.56 2.814641 -2.88 2.898070
J. P. Morgan Select Growth and
Income Stock ......................... 2.069175 -8.14 2.252648 -7.34 2.431081
Capital Guardian Domestic Equity # ...... 0.976476 -2.35 1.000000 N/A N/A
Index 500 Stock ......................... 2.494890 -12.23 2.842665 -9.12 3.127888
Asset Allocation # ...................... 0.977328 -2.27 1.000000 N/A N/A
Balanced ................................ 2.031286 -3.54 2.105871 -0.57 2.117903
High Yield Bond ......................... 1.474181 4.61 1.409248 -4.98 1.483036
Select Bond ............................. 1.606263 9.92 1.461268 9.77 1.331215
Money Market ............................ 1.379910 3.50 1.333271 5.86 1.259407
Russell Multi-Style Equity .............. 0.801293 -14.55 0.937760 -12.61 1.073107
Russell Aggressive Equity ............... 1.064253 -2.76 1.094433 -1.06 1.106159
Russell Non-U.S ......................... 0.827309 -22.34 1.065355 -14.78 1.250059
Russell Real Estate Securities .......... 1.258915 7.40 1.172137 26.73 0.924920
Russell Core Bond ....................... 1.158815 6.97 1.083276 9.56 0.988747
# 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.
12
Accumulation Unit Values
Contracts Issued On or After March 31, 1995 and Prior to March 31, 2000 - Back
Load Version:
DIVISION 12/31/01 % CHANGE 12/31/00* % CHANGE 12/31/99
- -------- -------- -------- --------- -------- --------
Small Cap Growth Stock .................. $ 1.848493 -4.97% $ 1.945087 5.39% $ 1.845580
T. Rowe Price Small Cap Value # ......... 1.012260 1.23 1.000000 N/A N/A
Aggressive Growth Stock ................. 4.487184 -20.88 5.671037 4.86 5.407959
International Growth Stock # ............ 0.901258 -9.87 1.000000 N/A N/A
Franklin Templeton International
Equity ............................... 1.911919 -15.07 2.251266 -2.02 2.297694
Index 400 Stock ......................... 1.270690 -1.90 1.295242 15.76 1.118909
Growth Stock ............................ 2.458020 -15.29 2.901600 -3.70 3.012947
J.P. Morgan Select Growth and
Income Stock ......................... 2.115675 -8.92 2.322995 -8.12 2.528256
Capital Guardian Domestic Equity # ...... 0.973004 -2.70 1.000000 N/A N/A
Index 500 Stock ......................... 3.780024 -12.98 4.343830 -9.88 4.820195
Asset Allocation # ...................... 0.973862 -2.61 1.000000 N/A N/A
Balanced ................................ 7.012362 -4.36 7.332002 -1.40 7.436406
High Yield Bond ......................... 1.485164 3.72 1.431888 -5.78 1.519653
Select Bond ............................. 8.219594 8.99 7.541503 8.85 6.928532
Money Market ............................ 2.718250 2.62 2.648821 4.97 2.523294
Russell Multi-Style Equity .............. 0.783335 -15.28 0.924598 -13.35 1.067018
Russell Aggressive Equity ............... 1.040412 -3.58 1.079072 -1.89 1.099895
Russell Non-U.S ......................... 0.808779 -23.00 1.050412 -15.49 1.242993
Russell Real Estate Securities .......... 1.230726 6.49 1.155691 25.66 0.919674
Russell Core Bond ....................... 1.132872 6.07 1.068073 8.64 0.983142
# 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:
DIVISION 12/31/01 % CHANGE 12/31/00* % CHANGE 3/31/00
- -------- -------- -------- --------- -------- --------
Small Cap Growth Stock .................. $ 0.865935 -4.25% $ 0.904342 -9.57% $ 1.000000
T. Rowe Price Small Cap Value # ......... 1.015445 1.54 1.000000 N/A N/A
Aggressive Growth Stock ................. 0.719033 -20.28 0.901909 -9.81 1.000000
International Growth Stock # ............ 0.904093 -9.59 1.000000 N/A N/A
Franklin Templeton International Equity . 0.851962 -14.43 0.995643 -0.44 1.000000
Index 400 Stock ......................... 1.023646 -1.15 1.035589 3.56 1.000000
Growth Stock ............................ 0.782628 -14.65 0.916924 -8.31 1.000000
J.P. Morgan Select Growth and Income Stock 0.814020 -8.24 0.887072 -11.29 1.000000
Capital Guardian Domestic Equity # ...... 0.976072 -2.39 1.000000 N/A N/A
Index 500 Stock ......................... 0.779001 -12.32 0.888477 -11.15 1.000000
Asset Allocation # ...................... 0.976926 -2.31 1.000000 N/A N/A
Balanced ................................ 0.937735 -3.64 0.973123 -2.69 1.000000
High Yield Bond ......................... 1.006773 4.50 0.963375 -3.66 1.000000
Select Bond ............................. 1.184790 9.81 1.078901 7.89 1.000000
Money Market ............................ 1.079788 3.40 1.044325 4.43 1.000000
Russell Multi-Style Equity .............. 0.751294 -14.64 0.880119 -11.99 1.000000
Russell Aggressive Equity ............... 0.903873 -2.85 0.930436 -6.96 1.000000
Russell Non-U.S ......................... 0.659991 -22.42 0.850723 -14.93 1.000000
Russell Real Estate Securities .......... 1.331406 7.30 1.240862 24.09 1.000000
Russell Core Bond ....................... 1.148513 6.87 1.074705 7.47 1.000000
# 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.
13
Accumulation Unit Values
Contracts Issued On or After March 31, 2000 - Back Load Version:
DIVISION 12/31/01 % CHANGE 12/31/00* % CHANGE 3/31/00
- -------- -------- -------- --------- -------- --------
Small Cap Growth Stock .................. $ 1.848493 -4.97% $ 1.945087 94.51% $ 1.000000
T. Rowe Price Small Cap Value # ......... 1.012260 1.23 1.000000 N/A N/A
Aggressive Growth Stock ................. 4.487184 -20.88 5.671037 467.10 1.000000
International Growth Stock # ............ 0.901258 -9.87 1.000000 N/A N/A
Franklin Templeton International Equity . 1.911919 -15.07 2.251266 125.13 1.000000
Index 400 Stock ......................... 1.270690 -1.90 1.295242 29.52 1.000000
Growth Stock ............................ 2.458020 -15.29 2.901600 190.16 1.000000
J.P. Morgan Select Growth and Income Stock 2.115675 -8.92 2.322995 132.30 1.000000
Capital Guardian Domestic Equity # ...... 0.973004 -2.70 1.000000 N/A N/A
Index 500 Stock ......................... 3.780024 -12.98 4.343830 334.38 1.000000
Asset Allocation # ...................... 0.973862 -2.61 1.000000 N/A N/A
Balanced ................................ 7.012362 -4.36 7.332002 633.20 1.000000
High Yield Bond ......................... 1.485164 3.72 1.431888 43.19 1.000000
Select Bond ............................. 8.219594 8.99 7.541503 654.15 1.000000
Money Market ............................ 2.718250 2.62 2.648821 164.88 1.000000
Russell Multi-Style Equity .............. 0.783335 -15.28 0.924598 -7.54 1.000000
Russell Aggressive Equity ............... 1.040412 -3.58 1.079072 7.91 1.000000
Russell Non-U.S ......................... 0.808779 -23.00 1.050412 5.04 1.000000
Russell Real Estate Securities .......... 1.230726 6.49 1.155691 15.57 1.000000
Russell Core Bond ....................... 1.132872 6.07 1.068073 6.81 1.000000
# 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)
12/31/01 12/31/00 12/31/99
-------- -------- --------
$593,712 $697,354 $784,204
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.
14
ACCOUNT C
Accumulation Unit Values
Contracts Issued Prior to December 17, 1981 or between April 30, 1984 and
December 31, 1991:
DIVISION 12/31/01 % CHANGE 12/31/00* % CHANGE 12/31/99
- -------- -------- -------- --------- -------- --------
Small Cap Growth Stock .................. $ 19.112629 -3.76% $ 19.859931 6.71% $ 18.610781
T. Rowe Price Small Cap Value # ......... 10.175772 1.76 10.000000 N/A N/A
Aggressive Growth Stock ................. 48.753408 -19.87 60.845203 6.18 57.304251
International Growth Stock # ............ 9.060000 -9.40 10.000000 N/A N/A
Franklin Templeton International
Equity ............................. 2.130553 -14.00 2.477334 -0.79 2.497127
Index 400 Stock ......................... 13.138452 -0.65 13.224995 17.21 11.283278
Growth Stock ............................ 27.049526 -14.22 31.531943 -2.49 32.336967
J.P. Morgan Select Growth and
Income Stock ....................... 23.281928 -7.77 25.243989 -6.97 27.134671
Capital Guardian Domestic Equity # ...... 9.781208 -2.19 10.000000 N/A N/A
Index 500 Stock ......................... 45.228886 -11.88 51.325633 -8.75 56.249780
Asset Allocation # ...................... 9.789803 -2.10 10.000000 N/A N/A
Balanced ................................ 91.372736 -3.15 94.345469 -0.17 94.505378
High Yield Bond ......................... 16.343831 5.03 15.560950 -4.59 16.310402
Select Bond ............................. 108.200259 10.37 98.036463 10.21 88.954059
Money Market ............................ 33.577318 3.92 32.311690 6.29 30.399653
Russell Multi-Style Equity .............. 8.099453 -14.21 9.440627 -12.26 10.760032
Russell Aggressive Equity ............... 10.757522 -2.36 11.017913 -0.66 11.091435
Russell Non-U.S ......................... 8.362558 -22.03 10.725190 -14.43 12.534266
Russell Real Estate Securities .......... 12.725061 7.84 11.800164 27.24 9.274172
Russell Core Bond ....................... 11.713217 7.41 10.905549 10.00 9.914196
# 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:
DIVISION 12/31/01 % CHANGE 12/31/00* % CHANGE 12/31/99
- -------- -------- -------- --------- -------- --------
Small Cap Growth Stock .................. $ 18.858687 -4.25% $ 19.695066 6.18 $ 18.548596
T. Rowe Price Small Cap Value # ......... 10.154423 1.54 10.000000 N/A N/A
Aggressive Growth Stock ................. 46.158193 -20.28 57.897540 5.65 54.800923
International Growth Stock # ............ 9.040958 -9.59 10.000000 N/A N/A
Franklin Templeton International
Equity ............................. 2.040110 -14.43 2.384172 -1.29 2.415234
Index 400 Stock ......................... 12.963870 -1.15 13.115131 16.63 11.245478
Growth Stock ............................ 26.031963 -14.65 30.498976 -2.97 31.433960
J.P. Morgan Select Growth and
Income Stock ....................... 22.405970 -8.24 24.416867 -7.43 26.376796
Capital Guardian Domestic Equity # ...... 9.760679 -2.39 10.000000 N/A N/A
Index 500 Stock ......................... 42.817258 -12.32 48.834231 -9.21 53.786850
Asset Allocation # ...................... 9.769272 -2.31 10.000000 N/A N/A
Balanced ................................ 82.699005 -3.64 85.820221 -0.67 86.395292
High Yield Bond ......................... 15.728914 4.50 15.050970 -5.07 15.854730
Select Bond ............................. 97.881219 9.81 89.133511 9.66 81.280078
Money Market ............................ 30.425952 3.40 29.426661 5.76 27.823703
Russell Multi-Style Equity .............. 7.991801 -14.64 9.362193 -12.70 10.723983
Russell Aggressive Equity ............... 10.614527 -2.85 10.926333 -1.16 11.054275
Russell Non-U.S ......................... 8.251395 -22.42 10.636093 -14.86 12.492336
Russell Real Estate Securities .......... 12.556055 7.30 11.702144 26.60 9.243071
Russell Core Bond ....................... 11.557668 6.87 10.814951 9.45 9.880973
# 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.
15
Accumulation Unit Values
Contracts Issued After December 31, 1991 - Front Load Version:
DIVISION 12/31/01 % CHANGE 12/31/00* % CHANGE 12/31/99
- -------- -------- -------- --------- -------- --------
Small Cap Growth Stock .................. $ 1.878336 -4.39% $ 1.964602 6.02% $ 1.853001
T. Rowe Price Small Cap Value # ......... 1.014805 1.48 1.000000 N/A N/A
Aggressive Growth Stock ................. 3.013165 -20.40 3.785207 5.49 3.588119
International Growth Stock # ........... 0.903525 -9.65 1.000000 N/A N/A
Franklin Templeton International
Equity ............................ 2.013838 -14.56 2.357007 -1.43 2.391284
Index 400 Stock ......................... 1.291211 -1.30 1.308249 16.45 1.123423
Growth Stock ............................ 2.573522 -14.77 3.019678 -3.12 3.116901
J.P. Morgan Select Growth and
Income Stock ...................... 2.215050 -8.37 2.417488 -7.57 2.615436
Capital Guardian Domestic Equity # ...... 0.975455 -2.45 1.000000 N/A N/A
Index 500 Stock ......................... 3.125796 -12.45 3.570426 -9.34 3.938401
Asset Allocation # ...................... 0.976312 -2.37 1.000000 N/A N/A
Balanced ................................ 2.405185 -3.78 2.499718 -0.81 2.520233
High Yield Bond ......................... 1.554978 4.35 1.490196 -5.21 1.572112
Select Bond ............................. 1.871532 9.65 1.706832 9.50 1.558775
Money Market ............................ 1.489628 3.24 1.442872 5.60 1.366307
Russell Multi-Style Equity .............. 0.795993 -14.77 0.933887 -12.83 1.071323
Russell Aggressive Equity ............... 1.057215 -3.00 1.089907 -1.30 1.104316
Russell Non-U.S ......................... 0.821829 -22.54 1.060950 -14.99 1.247967
Russell Real Estate Securities .......... 1.250590 7.14 1.167301 26.42 0.923380
Russell Core Bond ....................... 1.151142 6.71 1.078791 9.29 0.987105
# 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:
DIVISION 12/31/01 % CHANGE 12/31/00* % CHANGE 12/31/99
- -------- -------- -------- --------- -------- --------
Small Cap Growth Stock .................. $ 1.848493 -4.97% $ 1.945087 5.39% $ 1.845580
T. Rowe Price Small Cap Value # ......... 1.012260 1.23 1.000000 N/A N/A
Aggressive Growth Stock ................. 4.503663 -20.88 5.691856 4.86 5.427804
International Growth Stock # ............ 0.901258 -9.87 1.000000 N/A N/A
Franklin Templeton International
Equity ............................. 1.911919 -15.07 2.251266 -2.02 2.297694
Index 400 Stock ......................... 1.270690 -1.90 1.295242 15.76 1.118909
Growth Stock ............................ 2.458020 -15.29 2.901600 -3.70 3.012947
J.P. Morgan Select Growth and
Income Stock ....................... 2.115675 -8.92 2.322995 -8.12 2.528256
Capital Guardian Domestic Equity # ...... 0.973004 -2.70 1.000000 N/A N/A
Index 500 Stock ......................... 3.857114 -12.98 4.432423 -9.88 4.918509
Asset Allocation # ...................... 0.973862 -2.61 1.000000 N/A N/A
Balanced ................................ 7.047000 -4.36 7.368231 -1.40 7.473141
High Yield Bond ......................... 1.485164 3.72 1.431888 -5.78 1.519653
Select Bond ............................. 8.299723 8.99 7.615016 8.85 6.996057
Money Market ............................ 2.724154 2.62 2.654580 4.98 2.528768
Russell Multi-Style Equity .............. 0.783335 -15.28 0.924598 -13.35 1.067018
Russell Aggressive Equity ............... 1.040412 -3.58 1.079072 -1.89 1.099895
Russell Non-U.S ......................... 0.808779 -23.00 1.050412 -15.49 1.242993
Russell Real Estate Securities........... 1.230726 6.49 1.155691 25.66 0.919674
Russell Core Bond ....................... 1.132872 6.07 1.068073 8.64 0.983142
# 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.
16
TOTAL EQUITY:
(in thousands)
12/31/01 12/31/00 12/31/99
-------- -------- --------
$552,816 $672,835 $720,716
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. 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:
SERIES FUND
-----------
UNREALIZED APPRECIATION
DERIVATIVE FINANCIAL INSTRUMENT NOTIONAL VALUE (DEPRECIATION) RISKS REDUCED
- ------------------------------- -------------- -------------- -------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 2001 2000
---- ---- ---- ----
(IN THOUSANDS) (IN THOUSANDS)
Stock Future Contracts $425,880 $455,971 $2,318 $1,664 Stock market price fluctuation
Bond Future Contracts -- 7,237 -- (56) Bond market price fluctuation
RUSSELL FUNDS
-------------
UNREALIZED APPRECIATION
DERIVATIVE FINANCIAL INSTRUMENT NOTIONAL VALUE (DEPRECIATION) RISKS REDUCED
- ------------------------------- -------------- -------------- -------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 2001 2000
---- ---- ---- ----
(IN THOUSANDS) (IN THOUSANDS)
Stock Future Contracts $37,577 $30,801 $639 $(346) Stock market price fluctuation
Bond Future Contracts 22,152 7,960 (45) (130) Bond market price fluctuation
Foreign Currency Forward Contracts 20,041 12,615 (182) 379 Currency exposure on foreign
denominated investments
Foreign Currency Spot Contracts 142 10,346 1 2 Currency exposure on foreign
denominated investments
Written Options 1,224 2,109 372 6 Bond market price fluctuation
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.
17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NML VARIABLE ANNUITY ACCOUNT A
STATEMENTS OF ASSETS AND LIABILITIES
(IN THOUSANDS)
DECEMBER 31
2001 2000
---- ----
ASSETS
Investments at market value:
Northwestern Mutual Series Fund, Inc.
Small Cap Growth Stock
2001: 8,748 shares (cost $17,350) $ 15,624
2000: 8,778 shares (cost $17,681) $ 16,293
T. Rowe Price Small Cap Value #
2001: 576 shares (cost $543) 585
Aggressive Growth Stock
2001: 27,500 shares (cost $96,370) 77,633
2000: 23,891 shares (cost $84,660) 106,815
International Growth Stock #
2001: 173 shares (cost $165) 157
Franklin Templeton International Equity
2001: 24,394 shares (cost $39,250) 30,810
2000: 24,699 shares (cost $39,875) 40,333
Index 400 Stock
2001: 8,172 shares (cost $9,465) 9,168
2000: 6,260 shares (cost $7,422) 7,162
Growth Stock
2001: 16,139 shares (cost $37,094) 32,717
2000: 15,411 shares (cost $34,938) 38,037
J.P. Morgan Select Growth and Income Stock
2001: 18,915 shares (cost $27,776) 23,058
2000: 19,051 shares (cost $28,136) 26,081
Capital Guardian Domestic Equity #
2001: 298 shares (cost $277) 291
Index 500 Stock
2001: 36,502 shares (cost $93,314) 104,943
2000: 39,192 shares (cost $92,331) 133,526
Asset Allocation #
2001: 822 shares (cost $787) 800
Balanced
2001: 125,956 shares (cost $218,603) 229,239
2000: 130,979 shares (cost $221,089) 266,410
High Yield Bond
2001: 7,733 shares (cost $6,179) 5,018
2000: 7,432 shares (cost $6,677) 5,135
Select Bond
2001: 19,936 shares (cost $23,404) 23,983
2000: 17,524 shares (cost $20,615) 20,275
Money Market
2001: 27,159 shares (cost $27,159) 27,159
2000: 25,480 shares (cost $25,480) 25,480
Russell Insurance Funds
Multi Style Equity
2001: 341 shares (cost $5,063) 4,111
2000: 290 shares (cost $4,600) 4,097
Aggressive Equity
2001: 258 shares (cost $3,182) 2,947
2000: 213 shares (cost $2,739) 2,497
Non-U.S
2001: 328 shares (cost $3,838) 2,861
2000: 291 shares (cost $3,769) 3,244
18
Real Estate Securities
2001: 169 shares (cost $1,794) 1,820
2000: 124 shares (cost $1,240) 1,328
Core Bond
2001: 151 shares (cost $1,497) 1,527
2000: 118 shares (cost $1,142) 1,186
-------- --------
594,451 697,899
Due from Sales of Fund Shares 39 665
Due from The Northwestern Mutual Life Insurance Company 8 0
-------- --------
Total Assets $594,498 $698,564
======== ========
LIABILITIES
Due to Participants ...................................... $ 739 545
Due to The Northwestern Mutual Life Insurance Company 39 665
Due on Purchase of Fund Shares ........................... 8 0
-------- --------
Total Liabilities ........................................... $ 786 $ 1,210
======== ========
EQUITY
Contracts Issued Prior to December 17, 1981: ................ 46,841 59,961
Contracts Issued After December 16, 1981 and Prior to
March 31, 1995: .......................................... 421,383 504,557
Contracts Issued On or After March 31, 1995 and Prior to
March 31, 2000:
Back Load Version ........................................ 96,699 108,157
Front Load Version ....................................... 20,123 22,698
Contracts Issued On or After March 31, 2000:
Back Load Version: ....................................... 6,604 1,478
Front Load Version ....................................... 2,062 503
-------- --------
Total Equity ................................................ $593,712 $697,354
-------- --------
Total Liabilities and Equity ................................ $594,498 $698,564
======== ========
# The initial investment was made July 31, 2001.
The Accompanying Notes are an Integral Part of the Financial Statements.
19
NML VARIABLE ANNUITY ACCOUNT A
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
Combined Small Cap Growth Stock Division**
-------------------------------------------- -------------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended Period Ended
December 31, December 31, December 31, December 31, December 31, December 31,
2001 2000 1999 2001 2000 1999
-------------------------------------------- -------------------------------------------
Investment Income
Dividend Income $ 53,045 $ 56,065 $ 56,817 $ 1 $ 379 $ 149
Annuity Rate and
Expense Guarantees 7,425 8,884 8,722 179 153 13
---------------------------------------- ----------------------------------------
Net Investment Income (Loss) 45,620 47,181 48,095 (178) 226 136
---------------------------------------- ----------------------------------------
Realized and Unrealized
Gain (Loss) on Investments
Realized Gain (Loss) on
Investments 15,197 56,764 51,300 (343) 827 550
Unrealized Appreciation
(Depreciation) During the Year (124,257) (120,838) 9,270 (338) (1,850) 464
---------------------------------------- ----------------------------------------
Net Gain (Loss) on Investments (109,060) (64,074) 60,570 (681) (1,023) 1,014
---------------------------------------- ----------------------------------------
Increase (Decrease) in Equity
Derived from Investment Activity ($ 63,440) ($ 16,893) $108,665 ($859) ($ 797) $1,150
======================================== ========================================
**The initial investment in this Division was made on April 30, 1999.
The Accompanying Notes are an Integral Part of the Financial Statements.
20
NML VARIABLE ANNUITY ACCOUNT A
STATEMENTS OF OPERATIONS CONTINUED
(IN THOUSANDS)
T. Rowe Price
Small Cap International
Value Growth Stock
Division # Aggressive Growth Stock Division Division #
-------------- ------------------------------------------------ ------------------
Period Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, Period Ended
2001 2001 2000 1999 December 31, 2001
-------------- ------------------------------------------------ ------------------
Investment Income
Dividend Income $ 1 $ 19,094 $ 13,412 $ 2,871 $ --
Annuity Rate and
Expense Guarantees 1 1,021 1,395 1,001 --
-------------- ------------------------------------------------ ------------------
Net Investment Income (Loss) -- 18,073 12,017 1,870 --
-------------- ------------------------------------------------ ------------------
Realized and Unrealized
Gain (Loss) on Investments
Realized Gain (Loss) on
Investments -- 906 11,257 10,360 (8)
Unrealized Appreciation
(Depreciation) During the Year 41 (40,892) (18,313) 18,776 --
-------------- ------------------------------------------------ ------------------
Net Gain (Loss) on Investments 41 (39,986) (7,056) 29,136 (8)
-------------- ------------------------------------------------ ------------------
Increase (Decrease) in Equity
Derived from Investment Activity $ 41 $(21,913) $ 4,961 $ 31,006 $ (8)
============== ================================================ ==================
# The initial investment in this Division was made on July 31, 2001.
Franklin Templeton International
Equity Division Index 400 Stock Division**
------------------------------------- ---------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended Period Ended
December December December December December December
31, 2001 31, 2000 31, 1999 31, 2001 31, 2000 31, 1999
------------------------------------- ---------------------------------------
Investment Income
Dividend Income $3,729 $3,228 $6,194 $ 97 $801 $30
Annuity Rate and
Expense Guarantees 415 515 520 94 55 8
------------------------------------- ---------------------------------------
Net Investment Income
(Loss) 3,314 2,713 5,674 3 746 22
------------------------------------- ---------------------------------------
Realized and Unrealized
Gain (Loss) on Investments
Realized Gain (Loss) on
Investments (245) 2,247 2,516 (41) 207 18
Unrealized Appreciation
(Depreciation)
During the Year (8,897) (5,914) 193 (36) (414) 154
------------------------------------- ---------------------------------------
Net Gain (Loss) on Investments (9,142) (3,667) 2,709 (77) (207) 172
------------------------------------- ---------------------------------------
Increase (Decrease) in
Equity Derived from
Investment Activity $(5,828) $(954) $8,383 $(74) $539 $194
===================================== =======================================
**The initial investment in this Division was made on April 30, 1999.
21
J.P. Morgan Select Growth and Income
Growth Stock Division Stock Division
------------------------------------- ---------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended
December December December December December December
31, 2001 31, 2000 31, 1999 31, 2001 31, 2000 31, 1999
------------------------------------- ---------------------------------------
Investment Income
Dividend Income $1,497 $1,855 $1,225 $876 $1,774 $4,191
Annuity Rate and
Expense Guarantees 403 473 397 286 362 442
------------------------------------- ---------------------------------------
Net Investment Income
(Loss) 1,094 1,382 828 590 1,412 3,749
------------------------------------- ---------------------------------------
Realized and Unrealized
Gain (Loss) on Investments
Realized Gain (Loss) on
Investments 464 3,581 2,300 (278) (2) 1,705
Unrealized Appreciation
(Depreciation)
During the Year (7,478) (6,543) 3,411 (2,664) (3,775) (3,315)
------------------------------------- ---------------------------------------
Net Gain (Loss) on Investments (7,014) (2,962) 5,711 (2,942) (3,777) (1,610)
------------------------------------- ---------------------------------------
Increase (Decrease) in
Equity Derived from
Investment Activity $(5,920) $(1,580) $6,539 $(2,352) $(2,365) $2,139
===================================== =======================================
Capital
Guardian
Domestic Asset
Equity Allocation
Division # Index 500 Stock Division Division #
------------ -------------------------------------- -------------
Period Ended Year Ended Year Ended Year Ended Period Ended
December 31, December December December 31, December 31,
2001 31, 2001 31, 2000 1999 2001
------------ -------------------------------------- -------------
Investment Income
Dividend Income $ 1 $ 5,168 $ 6,161 $ 3,676 $ 6
Annuity Rate and
Expense Guarantees -- 1,297 1,722 1,766 2
-------- -------------------------------------- --------
Net Investment Income (Loss) 1 3,871 4,439 1,910 4
-------- -------------------------------------- --------
Realized and Unrealized
Gain (Loss) on Investments
Realized Gain (Loss) on
Investments -- 8,880 19,865 13,204 --
Unrealized Appreciation
(Depreciation)
During the Year 12 (29,565) (39,225) 13,045 11
-------- -------------------------------------- --------
Net Gain (Loss) on
Investments 12 (20,685) (19,360) 26,249 11
-------- -------------------------------------- --------
Increase (Decrease) in
Equity Derived from
Investment Activity $ 13 $(16,814) $(14,921) $ 28,159 $ 15
======== ====================================== ========
# The initial investment in this Division was made on July 31, 2001.
22
Balanced Division High Yield Bond Division
-------------------------------------- --------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended
December December December December December December 31,
31, 2001 31, 2000 31, 1999 31, 2001 31, 2000 1999
-------------------------------------- --------------------------------------
Investment Income
Dividend Income $ 19,440 $ 24,058 $ 34,011 $ 529 $ 611 $ 821
Annuity Rate and
Expense Guarantees 2,955 3,494 3,881 62 68 94
------------------------------------ -------------------------------------
Net Investment Income (Loss) 16,485 20,564 30,130 467 543 727
------------------------------------ -------------------------------------
Realized and Unrealized
Gain (Loss) on Investments
Realized Gain (Loss) on
Investments 6,981 19,864 21,154 (655) (756) (847)
Unrealized Appreciation
(Depreciation)
During the Year (34,686) (44,078) (21,022) 381 (119) (22)
------------------------------------ -------------------------------------
Net Gain (Loss) on Investments (27,705) (24,214) 132 (274) (875) (869)
------------------------------------ -------------------------------------
Increase (Decrease) in
Equity Derived from
Investment Activity $(11,220) $ (3,650) $ 30,262 $ 193 $ (332) $ (142)
==================================== =====================================
Select Bond Division Money Market Division
-------------------------------------- --------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended
December December December December December December 31,
31, 2001 31, 2000 31, 1999 31, 2001 31, 2000 1999
-------------------------------------- --------------------------------------
Investment Income
Dividend Income $ 1,257 $ 1,463 $ 2,088 $ 1,067 $ 1,609 $ 1,410
Annuity Rate and
Expense Guarantees 248 228 265 318 296 315
----------------------------------- -------------------------------------
Net Investment Income (Loss) 1,009 1,235 1,823 749 1,313 1,095
----------------------------------- -------------------------------------
Realized and Unrealized
Gain (Loss) on Investments
Realized Gain (Loss) on
Investments (65) (333) 370 -- -- --
Unrealized Appreciation
(Depreciation)
During the Year 919 830 (2,715) -- -- --
----------------------------------- -------------------------------------
Net Gain (Loss) on Investments 854 497 (2,345) -- -- --
----------------------------------- -------------------------------------
Increase (Decrease) in
Equity Derived from
Investment Activity $ 1,863 $ 1,732 $ (522) $ 749 $ 1,313 $ 1,095
=================================== =====================================
23
Russell Multi-Style Equity Division ** Russell Aggressive Equity Division**
------------------------------------ -------------------------------------
Year Ended Year Ended Period Ended Year Ended Year Ended Period Ended
December December December December December December
31, 2001 31, 2000 31, 1999 31, 2001 31, 2000 31, 1999
------------------------------------ -------------------------------------
Investment Income
Dividend Income $ 91 $ 134 $ 76 $ 3 $ 261 $ 4
Annuity Rate and
Expense Guarantees 44 43 9 29 26 4
----------------------------------- ----------------------------------
Net Investment Income (Loss) 47 91 67 (26) 235 --
----------------------------------- ----------------------------------
Realized and Unrealized
Gain (Loss) on Investments
Realized Gain (Loss) on
Investments (154) (74) (3) (69) 43 (34)
Unrealized Appreciation
(Depreciation)
During the Year (517) (564) 62 6 (359) 118
----------------------------------- ----------------------------------
Net Gain (Loss) on Investments (671) (638) 59 (63) (316) 84
----------------------------------- ----------------------------------
Increase (Decrease) in
Equity Derived from
Investment Activity $(624) $(547) $ 126 $ (89) $ (81) $ 84
=================================== ==================================
**The initial investment in this Division was made on April 30, 1999.
Russell Non-U.S. Division ** Russell Real Estate Securities Division**
------------------------------------ -----------------------------------------
Year Ended Year Ended Period Ended Year Ended Year Ended Period Ended
December December December December December December
31, 2001 31, 2000 31, 1999 31, 2001 31, 2000 31, 1999
------------------------------------ -----------------------------------------
Investment Income
Dividend Income $ 17 $ 226 $ 37 $ 93 $ 43 $ 12
Annuity Rate and
Expense Guarantees 34 33 4 21 9 1
----------------------------------- ----------------------------------
Net Investment Income (Loss) (17) 193 33 72 34 11
----------------------------------- ----------------------------------
Realized and Unrealized
Gain (Loss) on Investments
Realized Gain (Loss) on
Investments (287) 21 10 95 40 (2)
Unrealized Appreciation
(Depreciation)
During the Year (480) (679) 154 (61) 97 (10)
----------------------------------- ----------------------------------
Net Gain (Loss) on Investments (767) (658) 164 34 137 (12)
----------------------------------- ----------------------------------
Increase (Decrease) in
Equity Derived from
Investment Activity $(784) $(465) $ 197 $ 106 $ 171 $ (1)
=================================== ==================================
**The initial investment in this Division was made on April 30, 1999.
24
Russell Core Bond Division**
----------------------------------------
Year Ended Year Ended Period Ended
December December December
31, 2001 31, 2000 31, 1999
----------------------------------------
Investment Income
Dividend Income $ 78 $ 50 $ 22
Annuity Rate and
Expense Guarantees 16 12 2
----------------------------------------
Net Investment Income (Loss) 62 38 20
----------------------------------------
Realized and Unrealized
Gain (Loss) on Investments
Realized Gain (Loss) on
Investments 16 (23) (1)
Unrealized Appreciation
(Depreciation)
During the Year (13) 68 (23)
----------------------------------------
Net Gain (Loss) on Investments 3 45 (24)
----------------------------------------
Increase (Decrease) in
Equity Derived from
Investment Activity $ 65 $ 83 $ (4)
========================================
**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)
Combined Small Cap Growth Stock Division**
--------------------------------------- ----------------------------------------
Year Ended Year Ended Period Ended Year Ended Year Ended Period Ended
December December December December December December
31, 2001 31, 2000 31, 1999 31, 2001 31, 2000 31, 1999
--------------------------------------- ----------------------------------------
Operations:
Net Investment Income $ 45,620 $ 47,181 $ 48,095 $ (178) $ 226 $ 136
Net Realized Gain (Loss) 15,197 56,764 51,300 (343) 827 550
Net Change in Unrealized
Appreciation (Depreciation) (124,257) (120,838) 9,270 (338) (1,850) 464
-------------------------------------- ----------------------------------------
Increase (Decrease) in Equity
Derived from
Investment Activity (63,440) (16,893) 108,665 (859) (797) 1,150
-------------------------------------- ----------------------------------------
Equity Transactions:
Contract Owners' Net Payment 46,213 54,157 55,489 1,932 2,791 398
Annuity Payments (1,316) (1,472) (1,469) (7) (13) --
Surrenders and Other (Net) (83,649) (121,406) (102,935) (1,362) (1,308) (85)
Transfers from Other
Divisions or Sponsors 83,322 137,543 125,332 4,029 19,138 7,491
Transfers to Other Divisions
or Sponsors (84,772) (138,779) (126,511) (4,403) (8,365) (4,107)
-------------------------------------- ----------------------------------------
Increase (Decrease) in Equity
Derived from Equity Transactions (40,202) (69,957) (50,094) 189 12,243 3,697
-------------------------------------- ----------------------------------------
Net Increase (Decrease) in Equity (103,642) (86,850) 58,571 (670) 11,446 4,847
Equity:
Beginning of Period 697,354 784,204 725,633 16,293 4,847 --
End of Period $ 593,712 $ 697,354 784,204 $ 15,623 $ 16,293 $ 4,847
====================================== ========================================
**The initial investment in this Division was made on April 30, 1999.
25
T. Rowe
Price Small International
Cap Value Growth Stock
Division # Aggressive Growth Stock Division Division #
------------ ----------------------------------------- ------------
Period Ended Year Ended Year Ended Year Ended Period Ended
December 31, December 31, December 31, December 31, December 31,
2001 2001 2000 1999 2001
------------ ----------------------------------------- ------------
Operations:
Net Investment Income $ -- $ 18,073 $ 12,017 $ 1,870 $ --
Net Realized Gain (Loss) -- 906 11,257 10,360 (8)
Net Change in Unrealized
Appreciation (Depreciation) 41 (40,892) (18,313) 18,776 --
--------- ----------------------------------------- ------------
Increase (Decrease) in Equity
Derived from Investment Activity 41 (21,913) 4,961 31,006 (8)
--------- ----------------------------------------- ------------
Equity Transactions:
Contract Owners' Net Payment 87 6,978 8,119 6,945 24
Annuity Payments -- (37) (49) (36) --
Surrenders and Other (Net) -- (10,388) (19,221) (12,324) --
Transfers from Other Divisions
or Sponsors 490 7,243 26,450 13,400 154
Transfers to Other Divisions
or Sponsors (34) (10,995) (17,887) (22,500) (13)
--------- ----------------------------------------- ------------
Increase (Decrease) in Equity
Derived from Equity Transactions 543 (7,199) (2,588) (14,515) 165
--------- ----------------------------------------- ------------
Net Increase (Decrease) in Equity 584 (29,112) 2,373 16,491 157
Equity:
Beginning of Period -- 106,743 104,370 87,879 --
End of Period $ 584 $ 77,631 $ 106,743 $ 104,370 $ 157
========= ========================================= ============
# The initial investment in this Division was made on July 31, 2001
Franklin Templeton
International Equity Division Index 400 Stock Division**
------------------------------------- ---------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended Period Ended
December December December December December December
31, 2001 31, 2000 31, 1999 31, 2001 31, 2000 31, 1999
------------------------------------- ---------------------------------------
Operations:
Net Investment Income $ 3,314 $ 2,713 $ 5,674 $ 3 $ 746 $ 22
Net Realized Gain (Loss) (245) 2,247 2,516 (41) 207 18
Net Change in Unrealized
Appreciation (Depreciation) (8,897) (5,914) 193 (36) (414) 154
------------------------------------ ------------------------------------
Increase (Decrease) in
Equity Derived from
Investment Activity (5,828) (954) 8,383 (74) 539 194
------------------------------------ ------------------------------------
Equity Transactions:
Contract Owners' Net Payment 2,894 3,890 3,455 1,347 1,061 410
Annuity Payments (17) (19) (25) (16) (22) --
Surrenders and Other (Net) (4,910) (6,674) (6,125) (708) 28 (93)
Transfers from Other Divisions
or Sponsors 3,316 7,129 3,673 4,453 5,651 2,621
Transfers to Other Divisions
or Sponsors (4,969) (8,486) (8,861) (3,006) (2,290) (937)
------------------------------------ ------------------------------------
Increase (Decrease) in Equity
Derived from Equity Transactions (3,686) (4,160) (7,883) 2,070 4,428 2,001
------------------------------------ ------------------------------------
Net Increase (Decrease) in Equity (9,514) (5,114) 500 1,996 4,967 2,195
Equity:
Beginning of Period 40,298 45,412 44,912 7,162 2,195 --
End of Period $ 30,784 $ 40,298 $ 45,412 $ 9,158 $ 7,162 $ 2,195
==================================== ====================================
**The initial investment in this Division was made on April 30, 1999.
26
J.P. Morgan Select Growth
Growth Stock Division and Income Stock Division
------------------------------------- ---------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended
December December December December December December
31, 2001 31, 2000 31, 1999 31, 2001 31, 2000 31, 1999
------------------------------------- ---------------------------------------
Operations:
Net Investment Income $ 1,094 $ 1,382 $ 828 $ 590 $ 1,412 $ 3,749
Net Realized Gain (Loss) 464 3,581 2,300 (278) (2) 1,705
Net Change in Unrealized
Appreciation (Depreciation) (7,478) (6,543) 3,411 (2,664) (3,775) (3,315)
------------------------------------- ---------------------------------------
Increase (Decrease) in Equity
Derived from Investment Activity (5,920) (1,580) 6,539 (2,352) (2,365) 2,139
------------------------------------- ---------------------------------------
Equity Transactions:
Contract Owners' Net Payment 3,713 4,161 3,966 2,138 2,864 3,728
Annuity Payments (5) (5) (6) (66) (77) (71)
Surrenders and Other (Net) (3,538) (6,808) (3,594) (3,087) (5,329) (3,578)
Transfers from Other Divisions
or Sponsors 5,424 14,158 13,108 3,370 3,239 8,139
Transfers to Other Divisions
or Sponsors (4,981) (10,930) (7,589) (3,033) (7,981) (10,849)
------------------------------------- ---------------------------------------
Increase (Decrease) in Equity
Derived from Equity Transactions 613 576 5,885 (678) (7,284) (2,631)
------------------------------------- ---------------------------------------
Net Increase (Decrease) in Equity (5,307) (1,004) 12,424 (3,030) (9,649) (492)
Equity:
Beginning of Period 38,024 39,028 26,604 26,087 35,736 36,228
End of Period $ 32,717 $ 38,024 $ 39,028 $ 23,057 $ 26,087 $ 35,736
===================================== =======================================
Capital
Guardian
Domestic Asset
Equity Allocation
Division # Index 500 Stock Division Division #
------------ -------------------------------------- -------------
Period Ended Year Ended Year Ended Year Ended Period Ended
December 31, December December December 31, December 31,
2001 31, 2001 31, 2000 1999 2001
------------ -------------------------------------- -------------
Operations:
Net Investment Income $ 1 $ 3,871 $ 4.439 $ 1,910 $ 4
Net Realized Gain (Loss) -- 8,880 19,865 13,204 --
Net Change in Unrealized
Appreciation (Depreciation) 12 (29,565) (39,225) 13,045 11
------------ -------------------------------------- -------------
Increase (Decrease) in Equity
Derived from Investment Activity 13 (16,814) (14,921) 28,159 15
------------ -------------------------------------- -------------
Equity Transactions:
Contract Owners' Net Payment 25 7,565 9,486 11,822 86
Annuity Payments -- (337) (468) (489) --
Surrenders and Other (Net) (2) (15,093) (24,033) (19,188) 2
Transfers from Other Divisions
or Sponsors 254 9,028 16,159 24,383 699
Transfers to Other Divisions
or Sponsors -- (12,955) (22,419) (18,154) (2)
------------ -------------------------------------- -------------
Increase (Decrease) in Equity
Derived from Equity Transactions 277 (11,792) (21,275) (1,626) 785
------------ -------------------------------------- -------------
Net Increase (Decrease) in Equity 290 (28,606) (36,196) 26,533 800
Equity:
Beginning of Period -- 133,513 169,709 143,176 --
End of Period $ 290 $ 104,907 $ 133,513 $ 169,709 $ 800
============ ====================================== =============
# The initial investment in this Division was made on July 31, 2001.
27
Balanced Division High Yield Bond Division
-------------------------------------- ---------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended
December December December December December December
31, 2001 31, 2000 31, 1999 31, 2001 31, 2000 31, 1999
-------------------------------------- ---------------------------------------
Operations:
Net Investment Income $ 16,485 $ 20,564 $ 30,130 $ 467 $ 543 $ 727
Net Realized Gain (Loss) 6,981 19,864 21,154 (655) (756) (847)
Net Change in Unrealized
Appreciation (Depreciation) (34,686) (44,078) (21,022) 381 (119) (22)
-------------------------------------- ---------------------------------------
Increase (Decrease) in Equity
Derived from Investment Activity (11,220) (3,650) 30,262 193 (332) (142)
-------------------------------------- ---------------------------------------
Equity Transactions:
Contract Owners' Net Payment 12,043 13,081 15,663 523 765 989
Annuity Payments (684) (715) (742) (11) (4) (5)
Surrenders and Other (Net) (32,253) (44,386) (45,409) (888) (968) (1,234)
Transfers from Other Divisions
or Sponsors 9,588 8,372 17,537 1,921 746 1,293
Transfers to Other Divisions
or Sponsors (14,552) (25,634) (23,181) (1,860) (2,016) (3,220)
-------------------------------------- ---------------------------------------
Increase (Decrease) in Equity
Derived from Equity Transactions (25,858) (49,282) (36,132) (315) (1,477) (2,177)
-------------------------------------- ---------------------------------------
Net Increase (Decrease) in Equity (37,078) (52,932) (5,870) (122) (1,809) (2,319)
Equity:
Beginning of Period 266,001 318,933 324,803 5,130 6,939 9,258
End of Period $ 228,923 $ 266,001 $ 318,933 $ 5,008 $ 5,130 $ 6,939
====================================== =======================================
Select Bond Division Money Market Division
-------------------------------------- ---------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended
December December December December December December
31, 2001 31, 2000 31, 1999 31, 2001 31, 2000 31, 1999
-------------------------------------- ---------------------------------------
Operations:
Net Investment Income $ 1,009 $ 1,235 $ 1,823 $ 749 $ 1,313 $ 1,095
Net Realized Gain (Loss) (65) (333) 370 -- -- --
Net Change in Unrealized
Appreciation (Depreciation) 919 830 (2,715) -- -- --
-------------------------------------- ---------------------------------------
Increase (Decrease) in Equity
Derived from Investment Activity 1,863 1,732 (522) 749 1,313 1,095
-------------------------------------- ---------------------------------------
Equity Transactions:
Contract Owners' Net Payment 1,760 1,609 1,638 2,973 3,498 5,147
Annuity Payments (84) (54) (55) (42) (44) (40)
Surrenders and Other (Net) (3,070) (3,755) (4,343) (7,417) (8,367) (6,872)
Transfers from Other Divisions
or Sponsors 5,887 1,998 2,826 19,263 21,967 24,985
Transfers to Other Divisions
or Sponsors (2,868) (3,403) (3,264) (13,859) (21,732) (22,381)
-------------------------------------- ---------------------------------------
Increase (Decrease) in Equity
Derived from Equity Transactions 1,625 (3,605) (3,198) 918 (4,678) 839
-------------------------------------- ---------------------------------------
Net Increase Decrease) in Equity 3,488 (1,873) (3,720) 1,667 (3,365) 1,934
Equity:
Beginning of Period 20,269 22,142 25,862 25,480 28,845 26,911
End of Period $ 23,757 $ 20,269 $ 22,142 $ 27,147 $ 25,480 $ 28,845
====================================== =======================================
28
Russell Multi-Style Equity Division ** Russell Aggressive Equity Division**
-------------------------------------- ---------------------------------------
Year Ended Year Ended Period Ended Year Ended Year Ended Period Ended
December December December December December December
31, 2001 31, 2000 31, 1999 31, 2001 31, 2000 31, 1999
-------------------------------------- ---------------------------------------
Operations:
Net Investment Income $ 47 $ 91 $ 67 $ (26) $ 235 $ --
Net Realized Gain (Loss) (154) (74) (3) (69) 43 (34)
Net Change in Unrealized
Appreciation (Depreciation) (517) (564) 62 6 (359) 118
-------------------------------------- ---------------------------------------
Increase (Decrease) in Equity
Derived from Investment Activity (624) (547) 126 (89) (81) 84
-------------------------------------- ---------------------------------------
Equity Transactions:
Contract Owners' Net Payment 675 1,088 750 447 556 285
Annuity Payments (6) (2) -- -- -- --
Surrenders and Other (Net) (216) (119) (36) (200) (198) (22)
Transfers from Other Divisions
or Sponsors 2,557 2,889 1,993 1,011 1,921 1,498
Transfers to Other Divisions
or Sponsors (2,372) (1,712) (333) (792) (842) (703)
-------------------------------------- ---------------------------------------
Increase (Decrease) in Equity
Derived from Equity Transactions 638 2,144 2,374 466 1,437 1,058
-------------------------------------- ---------------------------------------
Net Increase (Decrease) in Equity 14 1,597 2,500 377 1,356 1,142
Equity:
Beginning of Period 4,097 2,500 -- 2,498 1,142 --
End of Period $ 4,111 $ 4,097 $ 2,500 $ 2,875 $ 2,498 $ 1,142
====================================== =======================================
**The initial investment in this Division was made on April 30, 1999.
Russell Non-U.S. Division ** Russell Real Estate Securities Division**
-------------------------------------- ---------------------------------------
Year Ended Year Ended Period Ended Year Ended Year Ended Period Ended
December December December December December December
31, 2001 31, 2000 31, 1999 31, 2001 31, 2000 31, 1999
-------------------------------------- ---------------------------------------
Operations:
Net Investment Income $ (17) $ 193 $ 33 $ 72 $ 34 $ 11
Net Realized Gain (Loss) (287) 21 10 95 40 (2)
Net Change in Unrealized
Appreciation (Depreciation) (480) (679) 154 (61) 97 (10)
-------------------------------------- ---------------------------------------
Increase (Decrease) in Equity
Derived from Investment Activity (784) (465) 197 106 171 (1)
Equity Transactions:
Contract Owners' Net Payment 505 712 189 316 234 33
Annuity Payments -- -- -- (4) -- --
Surrenders and Other (Net) (270) (203) (31) (127) (17) (1)
Transfers from Other Divisions
or Sponsors 1,782 3,039 1,372 2,039 3,101 324
Transfers to Other Divisions
or Sponsors (1,616) (1,221) (344) (1,838) (2,492) (24)
-------------------------------------- ---------------------------------------
Increase (Decrease) in Equity
Derived from Equity Transactions 401 2,327 1,186 386 826 332
-------------------------------------- ---------------------------------------
Net Increase (Decrease) in Equity (383) 1,862 1,383 492 997 331
Equity:
Beginning of Period 3,245 1,383 -- 1,328 331 --
End of Period $ 2,862 $ 3,245 $ 1,383 $ 1,820 $ 1,328 $ 331
====================================== =======================================
**The initial investment in this Division was made on April 30, 1999.
29
Russell Core Bond Division**
--------------------------------------
Year Ended Year Ended Period Ended
December December December
31, 2001 31, 2000 31, 1999
--------------------------------------
Operations:
Net Investment Income $ 62 $ 38 $ 20
Net Realized Gain/(Loss) 16 (23) (1)
Net Change in Unrealized
Appreciation/(Depreciation) (13) 68 (23)
--------------------------------------
Increase/(Decrease) in Equity
Derived from Investment Activity 65 83 (4)
--------------------------------------
Equity Transactions:
Contract Owners' Net Payment 182 242 71
Annuity Payments -- -- --
Surrenders and Other (Net) (122) (48) --
Transfers from Other Divisions
or Sponsors 814 1,586 689
Transfers to Other Divisions
or Sponsors (624) (1,369) (64)
--------------------------------------
Increase/(Decrease) in Equity
Derived from Equity Transactions 250 411 696
--------------------------------------
Net Increase/(Decrease) in Equity 315 494 692
Equity:
Beginning of Period 1,186 692 --
End of Period $ 1,501 $ 1,186 $ 692
======================================
**The initial investment in this Division was made on April 30, 1999.
The Accompanying Notes are an Integral Part of the Financial Statements.
30
FINANCIAL HIGHLIGHTS
NML VARIABLE ANNUITY ACCOUNT A
(For a unit outstanding
during the period)
Year or Unit Value Increase
Period Beginning of (Decrease) Unit Value End Total Expense
Division Ended Period in Equity of Period Return(2) Ratio(3)
- ------------------------------------------------------------------------------------------------------------------------
Front Load Contract (Series QQ)
Small Cap Growth Stock ........... 12/31/01 $1.972747 $(0.081899) $1.890848 -4.15% 0.40%
T. Rowe Price Small Cap Value(1).. 12/31/01 1.000000 0.015860 1.015860 1.59% 0.40%
Aggressive Growth Stock .......... 12/31/01 2.815081 (0.568557) 2.246524 -20.20% 0.40%
International Growth Stock(1)..... 12/31/01 1.000000 (0.095536) 0.904464 -9.55% 0.40%
Franklin Templeton
International Equity ............. 12/31/01 1.940943 (0.278442) 1.662501 -14.35% 0.40%
Index 400 Stock .................. 12/31/01 1.313674 (0.013865) 1.299809 -1.06% 0.40%
Growth Stock ..................... 12/31/01 2.814641 (0.409854) 2.404787 -14.56% 0.40%
J.P. Morgan Select Growth
and Income Stock ................. 12/31/01 2.252648 (0.183473) 2.069175 -8.14% 0.40%
Capital Guardian Domestic
Equity(1) ........................ 12/31/01 1.000000 (0.023524) 0.976476 -2.35% 0.40%
Index 500 Stock .................. 12/31/01 2.842665 (0.347775) 2.494890 -12.23% 0.40%
Asset Allocation(1) .............. 12/31/01 1.000000 (0.022672) 0.977328 -2.27% 0.40%
Balanced ......................... 12/31/01 2.105871 (0.074585) 2.031286 -3.54% 0.40%
High Yield Bond .................. 12/31/01 1.409248 0.064933 1.474181 4.61% 0.40%
Select Bond ...................... 12/31/01 1.461268 0.144995 1.606263 9.92% 0.40%
Money Market ..................... 12/31/01 1.333271 0.046639 1.379910 3.50% 0.40%
Russell Multi-Style Equity ....... 12/31/01 0.937760 (0.136467) 0.801293 -14.55% 0.40%
Russell Aggressive Equity ........ 12/31/01 1.094433 (0.030180) 1.064253 -2.76% 0.40%
Russell Non-U.S .................. 12/31/01 1.065355 (0.238046) 0.827309 -22.34% 0.40%
Russell Real Estate Securities.... 12/31/01 1.172137 0.086778 1.258915 7.40% 0.40%
Russell Core Bond ................ 12/31/01 1.083276 0.075539 1.158815 6.97% 0.40%
Year or Unit Value Increase
Period Beginning of (Decrease) Unit Value End Total Expense
Division Ended Period in Equity of Period Return(2) Ratio(3)
- ------------------------------------------------------------------------------------------------------------------------
Back Load Contract (Series QQ)
Small Cap Growth Stock 12/31/01 $1.945087 $(0.096594) $1.848493 -4.97% 1.25%
T. Rowe Price Small Cap Value(1) 12/31/01 1.000000 0.012260 1.012260 1.23% 1.25%
Aggressive Growth Stock 12/31/01 5.671037 (1.183853) 4.487184 -20.88% 1.25%
International Growth Stock(1) 12/31/01 1.000000 (0.098742) 0.901258 -9.87% 1.25%
Franklin Templeton
International Equity 12/31/01 2.251266 (0.339347) 1.911919 -15.07% 1.25%
Index 400 Stock 12/31/01 1.295242 (0.024552) 1.270690 -1.90% 1.25%
Growth Stock 12/31/01 2.901600 (0.443580) 2.458020 -15.29% 1.25%
J.P. Morgan Select Growth
and Income Stock 12/31/01 2.322995 (0.207320) 2.115675 -8.92% 1.25%
Capital Guardian Domestic
Equity(1) 12/31/01 1.000000 (0.026996) 0.973004 -2.70% 1.25%
Index 500 Stock 12/31/01 4.343830 (0.563806) 3.780024 -12.98% 1.25%
Asset Allocation(1) 12/31/01 1.000000 (0.026138) 0.973862 -2.61% 1.25%
Balanced 12/31/01 7.332002 (0.319640) 7.012362 -4.36% 1.25%
High Yield Bond 12/31/01 1.431888 0.053276 1.485164 3.72% 1.25%
Select Bond 12/31/01 7.541503 0.678091 8.219594 8.99% 1.25%
Money Market 12/31/01 2.648821 0.069429 2.718250 2.62% 1.25%
Russell Multi-Style Equity 12/31/01 0.924598 (0.141263) 0.783335 -15.28% 1.25%
Russell Aggressive Equity 12/31/01 1.079072 (0.038660) 1.040412 -3.58% 1.25%
Russell Non-U.S 12/31/01 1.050412 (0.241633) 0.808779 -23.00% 1.25%
Russell Real Estate Securities 12/31/01 1.155691 0.075035 1.230726 6.49% 1.25%
Russell Core Bond 12/31/01 1.068073 0.064799 1.132872 6.07% 1.25%
(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.
31
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:
Purchases 2001 2000 1999
- --------- ---- ---- ----
Small Cap Growth Stock Division .................... $ 3,119,762 $17,753,003 $ 7,208,705
T. Rowe Price Small Cap Value Division# ............ 544,334 N/A N/A
Aggressive Growth Division ......................... 23,504,270 28,757,540 9,958,208
International Growth Stock Division# ............... 164,575 N/A N/A
Franklin Templeton International Equity Division.... 5,754,067 7,202,129 7,974,310
Index 400 Stock Division ........................... 4,038,686 6,518,127 2,853,810
Growth Stock Division .............................. 6,550,789 10,541,938 11,793,727
J.P. Morgan Select Growth & Income Stock Division... 3,711,176 3,648,384 9,919,814
Capital Guardian Domestic Equity Division# ......... 277,299 N/A N/A
Index 500 Stock Division ........................... 11,216,245 12,680,244 20,410,794
Asset Allocation# .................................. 787,179 N/A N/A
Balanced Division .................................. 27,209,702 27,444,656 44,419,512
High Yield Bond Division ........................... 1,951,937 1,229,855 2,095,955
Select Bond Division ............................... 6,619,324 3,277,738 4,931,954
Money Market Division .............................. 15,154,072 17,944,328 20,905,226
Russell Multi-Style Division ....................... 1,097,267 3,100,268 2,666,402
Russell Aggressive Equity Division ................. 871,028 2,220,376 1,593,605
Russell Non-U.S. Division .......................... 973,304 3,003,918 1,498,221
Russell Real Estate Securities Division ............ 1,738,713 2,492,535 357,723
Russell Core Bond Division ......................... 586,923 1,780,876 758,431
# Initial investment in this division was made on July 31, 2001.
32
SALES 2001 2000 1999
- ----- ---- ---- ----
Small Cap Growth Stock Division .................... $ 3,107,912 $ 5,283,832 $ 3,374,541
T. Rowe Price Small Cap Value Division# ............ 1,251 N/A N/A
Aggressive Growth Division ......................... 12,700,645 19,230,800 22,717,778
International Growth Stock Division# ............... 1 N/A N/A
Franklin Templeton International Equity Division.... 6,134,228 8,640,998 10,228,782
Index 400 Stock Division ........................... 1,955,209 1,353,450 821,170
Growth Stock Division .............................. 4,859,534 8,573,786 5,237,895
J.P. Morgan Select Growth & Income Stock Division... 3,793,450 9,525,030 9,006,288
Capital Guardian Domestic Equity Division# ......... 36 N/A N/A
Index 500 Stock Division ........................... 19,112,689 29,656,415 20,135,029
Asset Allocation Division# ......................... 8 N/A N/A
Balanced Division .................................. 36,676,777 56,250,284 50,211,717
High Yield Bond Division ........................... 1,795,043 2,157,663 3,579,846
Select Bond Division ............................... 3,765,014 5,660,540 6,390,659
Money Market Division .............................. 13,474,404 21,431,894 18,848,756
Russell Multi-Style Division ....................... 483,989 864,610 225,476
Russell Aggressive Equity Division ................. 364,836 548,989 535,192
Russell Non-U.S. Division .......................... 616,921 484,146 279,802
Russell Real Estate Securities Division ............ 1,297,610 1,636,969 13,625
Russell Core Bond Division ......................... 249,167 1,332,763 41,756
# 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.
33
Note 8--Equity Values by Division for the year ended December 31, 2001 are shown
below:
(in thousands, except accumulation unit values)
Contracts Issued:
Contracts Issued: After December 16, 1981 and
Prior to December 17, 1981 Prior to March 31, 1995
----------------------------------------------------------------------------------------
Accumulation Accumulation
Division Unit Units Unit Units
Value Outstanding Equity Value Outstanding Equity
----------------------------------------------------------------------------------------
Small Cap Growth Stock $1.873388 243 $ 454 $1.848493 5,700 $ 10,537
T. Rowe Price Small Cap Value 1.014387 11 11 1.012260 293 296
Aggressive Growth Stock 4.742335 305 1,444 4.487184 12,273 55,072
International Growth Stock 0.903153 11 10 0.901258 91 82
Franklin Templeton International
Equity 1.996677 340 679 1.911919 11,504 21,995
Index 400 Stock 1.287807 335 431 1.270690 4,225 5,368
Growth Stock 2.554121 311 795 2.458020 8,243 20,262
J.P. Morgan Select Growth and
Income 2.198364 182 400 2.115675 6,685 14,144
Capital Guardian Domestic Equity 0.975051 11 11 0.973004 193 188
Index 500 Equity 3.994853 4,934 19,712 3.780024 15,617 59,034
Asset Allocation 0.975908 11 11 0.973862 477 464
Balanced 7.750204 1,566 12,135 7.012362 26,333 184,658
High Yield Bond 1.543249 74 114 1.485164 1,881 2,794
Select Bond 9.086342 515 4,675 8.219594 1,651 13,573
Money Market 3.004024 766 2,301 2.718250 6,010 16,336
Russell Multi-Style Equity 0.793888 27 21 0.783335 2,727 2,136
Russell Aggressive Equity 1.054435 64 67 1.040412 1,623 1,689
Russell Non-U.S 0.819680 52 42 0.808779 2,184 1,767
Russell Real Estate Securities 1.247315 23 28 1.230726 812 999
Russell Core Bond 1.148123 17 19 1.132872 793 898
------- --------
Equity 43,360 412,292
Annuity Reserves 3,481 9,091
------- --------
Total Equity $46,841 $421,383
======= ========
34
Contracts Issued: Contracts Issued:
On or After March 31, 1995 and On or After March 31, 1995 and
Prior to March 31, 2000 Prior to March 31, 2000
Front Load Version Back Load Version
----------------------------------------------------------------------------------------
Accumulation Accumulation
Division Unit Units Unit Units
Value Outstanding Equity Value Outstanding Equity
----------------------------------------------------------------------------------------
Small Cap Growth Stock $1.890848 324 $ 612 $1.848493 1,809 $3,344
T. Rowe Small Cap Value 1.015860 96 98 1.012260 151 153
Aggressive Growth Stock 2.246524 1,271 2,856 4.487184 3,733 16,752
International Growth Stock 0.904464 8 7 0.901258 31 28
Franklin Templeton International
Equity 1.662501 870 1,446 1.911919 3,194 6,106
Index 400 Stock 1.299809 253 329 1.270690 1,706 2,167
Growth Stock 2.404787 677 1,628 2.458020 3,786 9,305
J.P. Morgan Select Growth and
Income 2.069175 657 1,359 2.115675 2,910 6,156
Capital Guardian Domestic Equity 0.976476 7 6 0.973004 71 69
Index 500 Equity 2.494890 1,234 3,078 3.780024 5,051 19,091
Asset Allocation 0.977328 83 81 0.973862 215 209
Balanced 2.031286 1,745 3,545 7.012362 2,779 19,490
High Yield Bond 1.474181 211 312 1.485164 1,073 1,593
Select Bond 1.606263 301 483 8.219594 437 3,595
Money Market 1.379910 2,064 2,848 2.718250 1,759 4,782
Russell Multi-Style Equity 0.801293 609 488 0.783335 1,505 1,179
Russell Aggressive Equity 1.064253 278 296 1.040412 685 713
Russell Non-U.S. 0.827309 254 210 0.808779 820 663
Russell Real Estate Securities 1.258915 97 122 1.230726 395 486
Russell Core Bond 1.158815 21 24 1.132872 367 416
------- --------
Equity 19,828 96,297
Annuity Reserves 295 402
------- --------
Total Equity $20,123 $96,699
======= ========
35
Contracts Issued: Contracts Issued:
On or After March 31, 2000 On or After March 31, 2000
Front Load Version Back Load Version
----------------------------------------------------------------------------------------
Accumulation Accumulation
Division Unit Units Unit Units
Value Outstanding Equity Value Outstanding Equity
----------------------------------------------------------------------------------------
Small Cap Growth Stock $0.865935 140 $122 $1.848493 284 $525
T. Rowe Small Cap Value 1.015445 - - 1.012260 26 26
Aggressive Growth Stock 0.719033 168 120 4.487184 243 1,093
International Growth Stock 0.904093 18 16 0.901258 15 14
Franklin Templeton International
Equity 0.851962 93 79 1.911919 146 279
Index 400 Stock 1.023646 164 167 1.270690 362 460
Growth Stock 0.782628 66 52 2.458020 253 622
J.P. Morgan Select Growth and
Income 0.814020 138 113 2.115675 124 263
Capital Guardian Domestic Equity 0.976072 8 8 0.973004 8 8
Index 500 Equity 0.779001 231 180 3.780024 277 1,049
Asset Allocation 0.976926 - - 0.973862 35 34
Balanced 0.937735 819 768 7.012362 143 1,000
High Yield Bond 1.006773 70 71 1.485164 52 77
Select Bond 1.184790 96 114 8.219594 26 214
Money Market 1.079788 1 1 2.718250 180 489
Russell Multi-Style Equity 0.751294 77 58 0.783335 137 107
Russell Aggressive Equity 0.903873 48 43 1.040412 64 67
Russell Non-U.S. 0.659991 92 61 0.808779 114 92
Russell Real Estate Securities 1.331406 35 46 1.230726 69 85
Russell Core Bond 1.148513 38 43 1.132872 89 100
------ --------
Equity 2,062 6,604
Annuity Reserves - -
------ --------
Total Equity $2,062 $6,604
====== ========
36
Equity Values by Division for the year ended December 31, 2000 are shown below:
CONTRACTS ISSUED:
CONTRACTS ISSUED: AFTER DECEMBER 16, 1981 AND
PRIOR TO DECEMBER 17, 1981 PRIOR TO MARCH 31, 1995
--------------------------------------------------------------------
ACCUMULATION UNITS ACCUMULATION UNITS
DIVISION UNIT VALUE OUTSTANDING EQUITY UNIT VALUE OUTSTANDING EQUITY
- -------- -------------------------------------------------------------------------------
Small Cap Growth Stock........... $1.961375 261,141 $ 512,195 $1.945087 5,885,472 $ 11,447,755
Aggressive Growth Stock.......... 5.963354 388,193 2,314,933 5.671037 13,812,637 78,331,974
International Equity............. 2.339241 375,719 878,897 2.251266 13,283,821 29,905,413
Index 400 Stock.................. 1.306094 288,383 376,655 1.295242 3,499,606 4,532,837
Growth Stock..................... 2.999890 334,831 1,004,457 2.901600 8,296,584 24,073,369
Growth and Income................ 2.401649 180,854 434,349 2.322995 6,946,403 16,136,459
Index 500 Stock.................. 4.567635 5,706,738 26,066,296 4.343830 17,587,215 76,395,873
Balanced......................... 8.062822 2,213,090 17,843,753 7.332002 29,328,998 215,040,269
High Yield Bond.................. 1.480422 80,510 119,189 1.431888 2,029,262 2,905,676
Select Bond...................... 8.294952 495,713 4,111,913 7.541503 1,634,871 12,329,386
Money Market..................... 2.912624 732,845 2,134,502 2.648821 6,248,637 16,551,521
Russell Multi-Style Equity....... 0.932346 60,602 55,998 0.924598 2,365,883 2,187,490
Russell Aggressive Equity........ 1.088117 58,734 63,909 1.079072 1,455,003 1,570,053
Russell Non-U.S.................. 1.059216 51,562 54,615 1.050412 2,019,287 2,121,083
Russell Real Estate Securities... 1.165389 25,462 29,673 1.155691 652,555 754,152
Russell Core Bond................ 1.077032 22,616 24,358 1.068073 728,086 777,649
------------ ------------
Equity........................... 56,025,692 495,060,959
============ ============
Annuity Reserves................. 3,935,428 9,496,138
------------ ------------
Total Equity..................... $ 59,961,120 $504,557,097
============ ============
CONTRACTS ISSUED: ON OR AFTER MARCH 31, 1995 CONTRACTS ISSUED: ON OR AFTER MARCH 31, 1995
AND PRIOR TO MARCH 31, 2000 AND PRIOR TO MARCH 31, 2000
FRONT LOAD VERSION BACK LOAD VERSION
------------------ -----------------
ACCUMULATION UNITS ACCUMULATION UNITS
DIVISION UNIT VALUE OUTSTANDING EQUITY UNIT VALUE OUTSTANDING EQUITY
- -------- ---------- ----------- ------ ---------- ----------- ------
Small Cap Growth Stock........... $1.972747 321,211 $ 633,669 $1.945087 1,675,122 $ 3,258,259
Aggressive Growth Stock.......... 2.815081 1,322,419 3,722,716 5.671037 3,831,806 21,730,312
International Equity............. 1.940943 950,116 1,844,122 2.251266 3,242,296 7,299,271
Index 400 Stock.................. 1.313674 226,675 297,777 1.295242 1,069,393 1,385,123
Growth Stock..................... 2.814641 688,920 1,939,063 2.901600 3,697,631 10,729,045
Growth and Income................ 2.252648 721,964 1,626,331 2.322995 3,046,744 7,077,571
Index 500 Stock.................. 2.842665 1,267,405 3,602,808 4.343830 5,436,581 23,615,584
Balanced......................... 2.105871 1,936,776 4,078,602 7.332002 2,907,554 21,318,188
High Yield Bond.................. 1.409248 278,582 392,591 1.431888 1,154,997 1,653,826
Select Bond...................... 1.461268 352,753 515,467 7.541503 353,449 2,665,540
Money Market..................... 1.333271 1,852,761 2,470,232 2.648821 1,397,046 3,700,525
Russell Multi-Style Equity....... 0.937760 653,396 612,729 0.924598 1,250,824 1,156,510
Russell Aggressive Equity........ 1.094433 205,450 224,852 1.079072 558,206 602,345
Russell Non-U.S.................. 1.065355 239,460 255,110 1.050412 734,746 771,786
Russell Real Estate Securities... 1.172137 73,595 86,263 1.155691 324,452 374,967
Russell Core Bond................ 1.083276 35,410 38,359 1.068073 310,796 331,953
------------ ------------
Equity........................ 22,340,691 107,670,805
Annuity Reserves.............. 357,122 485,706
------------ ------------
Total Equity.................. $ 22,697,813 $108,156,511
============ ============
37
CONTRACTS ISSUED: CONTRACTS ISSUED:
ON OR AFTER MARCH 31, 2000 ON OR AFTER MARCH 31, 2000
FRONT LOAD VERSION BACK LOAD VERSION
------------------ -----------------
ACCUMULATION UNITS ACCUMULATION UNITS
DIVISION UNIT VALUE OUTSTANDING EQUITY UNIT VALUE OUTSTANDING EQUITY
- -------- ---------- ----------- ------ ---------- ----------- ------
Small Cap Growth Stock........... $0.904342 87,187 $ 78,847 $1.945087 69,946 $ 136,052
Aggressive Growth Stock.......... 0.901909 54,097 48,790 5.671037 35,017 198,585
International Equity............. 0.995643 24,076 23,971 2.251266 42,413 95,483
Index 400 Stock.................. 1.035589 114,473 118,547 1.295242 48,800 63,208
Growth Stock..................... 0.916924 30,267 27,752 2.901600 63,702 184,837
Growth and Income................ 0.887072 31,528 27,968 2.322995 15,035 34,927
Index 500 Stock.................. 0.888477 24,617 21,872 4.343830 54,215 235,499
Balanced......................... 0.973123 52,519 51,107 7.332002 46,538 341,214
High Yield Bond.................. 0.963375 - - 1.431888 6,687 9,576
Select Bond...................... 1.078901 537 580 7.541503 4,112 31,009
Money Market..................... 1.044325 538 562 2.648821 22,631 59,945
Russell Multi-Style Equity....... 0.880119 1,678 1,477 0.924598 17,408 16,096
Russell Aggressive Equity........ 0.930436 17,481 16,265 1.079072 18,584 20,053
Russell Non-U.S.................. 0.850723 11,781 10,022 1.050412 30,216 31,739
Russell Real Estate Securities... 1.240862 60,731 75,359 1.155691 5,539 6,401
Russell Core Bond................ 1.074705 - - 1.068073 12,988 13,872
------------ ----------
Equity........................ 503,119 1,478,496
Annuity Reserves.............. - -
------------ ----------
Total Equity.................. $ 503,119 $1,478,496
============ ==========
38
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
39
NML VARIABLE ANNUITY ACCOUNT C
STATEMENTS OF ASSETS AND LIABILITIES
(IN THOUSANDS)
DECEMBER 31
-----------
ASSETS 2001 2000
---- ----
Investments at Market Value:
Northwestern Mutual Series Fund, Inc.
Small Cap Growth Stock
2001: 11,812 shares (cost $22,806) .............. $ 21,098
2000: 10,796 shares (cost $21,732) .............. $ 20,038
T. Rowe Price Small Cap Value#
2001: 162 shares (cost $159) .................... 165
Aggressive Growth Stock
2001: 39,756 shares (cost $140,948) ............. 112,232
2000: 35,198 shares (cost $127,672) ............. 157,369
International Growth Stock#
2001: 41 shares (cost $39) ...................... 38
Franklin Templeton International Equity
2001: 38,694 shares (cost $58,397) .............. 48,902
2000: 40,104 shares (cost $66,609) .............. 65,489
Index 400 Stock
2001: 15,015 shares (cost $17,465) .............. 16,849
2000: 9,964 shares (cost $12,291) ............... 11,399
Growth Stock
2001: 16,290 shares (cost $37,853) .............. 33,016
2000: 17,300 shares (cost $39,131) .............. 42,696
J.P. Morgan Select Growth and Income Stock
2001: 20,895 shares (cost $30,763) .............. 25,473
2000: 21,712 shares (cost $32,369) .............. 29,723
Capital Guardian Domestic Equity#
2001: 216 shares (cost $204) .................... 211
Index 500 Stock
2001: 47,737 shares (cost $124,634) ............. 131,489
2000: 50,895 shares (cost $127,244) ............. 173,398
Asset Allocation#
2001: 47 shares (cost $45) ...................... 46
Balanced
2001: 63,722 shares (cost $122,051) ............. 115,972
2000: 66,868 shares (cost $124,703) ............. 136,009
High Yield Bond
2001: 7,061 shares (cost $5,126) ................ 4,583
2000: 6,135 shares (cost $5,231) ................ 4,239
Select Bond
2001: 14,446 shares (cost $16,739) .............. 17,379
2000: 12,124 shares (cost $13,965) .............. 14,027
Money Market
2001: 15,185 shares (cost $15,185) .............. 15,185
2000: 12,102 shares (cost $12,102) .............. 12,102
Russell Insurance Funds
Multi-Style Equity
2001: 118 shares (cost $1,766) .................. 1,403
2000: 124 shares (cost $1,964) .................. 1,745
Aggressive Equity
2001: 62 shares (cost $778) ..................... 710
2000: 55 shares (cost $720) ..................... 643
Non-U.S
2001: 78 shares (cost $957) ..................... 672
2000: 73 shares (cost $945) ..................... 818
Real Estate Securities
2001: 614 shares (cost $6,485) .................. 6,600
2000: 248 shares (cost $2,534) .................. 2,654
Core Bond
2001: 78 shares (cost $798) ..................... 793
2000: 48 shares (cost $477) ..................... 486
-------- --------
552,816 672,835
Due from Sales of Fund Shares ......................... 13 195
Due from Northwestern Mutual Life Insurance Company ... 37 16
-------- --------
Total Assets .................................... $552,866 $673,046
======== ========
LIABILITIES
Due to Northwestern Mutual Life Insurance Company .. $ 13 $ 195
Due on Purchase of Fund Shares ..................... 37 16
-------- --------
Total Liabilities ............................... $ 50 $ 211
======== ========
EQUITY
Group Variable Annuity Contracts Issued:
Before December 17, 1981 or between April 30, 1984
and December 31, 1991 ........................... 390,128 459,963
After December 16, 1981 and Prior to May 1, 1984 ... 3,636 4,160
After December 31, 1991 - Front Load Version ....... 29,953 42,946
After December 31, 1991 - Simplified Load Version .. 129,099 165,766
-------- --------
Total Equity .................................... $552,816 $672,835
-------- --------
Total Liabilities and Equity .................... $552,866 $673,046
======== ========
# The initial investment was made on July 31, 2001.
The Accompanying Notes are an Integral Part of the Financial Statements.
40
NML VARIABLE ANNUITY ACCOUNT C
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
Combined Small Cap Growth Stock Division**
-------------------------------------------- --------------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended Period Ended
December 31, December 31, December 31, December 31, December 31, December 31,
2001 2000 1999 2001 2000 1999
-------------------------------------------- --------------------------------------------
Investment Income
Dividend Income $54,521 $54,949 $43,813 $2 $99 $32
Annuity Rate and
Expense Guarantees 2,007 2,896 3,444 28 26 2
-------------------------------------------- --------------------------------------------
Net Investment Income (Loss) 52,514 52,053 40,369 (26) 73 30
-------------------------------------------- --------------------------------------------
Realized and Unrealized
Gain (Loss) on Investments
Realized Gain (Loss) on
Investments 8,705 54,861 41,106 (886) 295 1
Unrealized Appreciation
(Depreciation) During the Year (133,527) (121,850) 36,856 (14) (1,897) 202
-------------------------------------------- --------------------------------------------
Net Gain (Loss) on Investments (124,822) (66,989) 77,962 (900) (1,602) 203
-------------------------------------------- --------------------------------------------
Increase (Decrease) in Equity
Derived from Investment Activity $72,308 $(14,936) $118,331 $(926) $(1,529) $233
============================================ ============================================
**The initial investment in this Division was made on July 31, 2001.
41
T. Rowe Price
Small Cap International
Value Growth Stock
Division # Aggressive Growth Stock Division Division #
------------- -------------------------------------------- -------------
Period Ended Year Ended Year Ended Year Ended Period Ended
December 31, December 31, December 31, December 31, December 31,
2001 2001 2000 1999 2001
------------ -------------------------------------------- --------------
Investment Income
Dividend Income $-- $27,284 $20,221 $3,671 $--
Annuity Rate and
Expense Guarantees -- 358 614 576 --
------------ -------------------------------------------- -------------
Net Investment Income (Loss) -- 26,926 19,607 3,095 --
------------ -------------------------------------------- -------------
Realized and Unrealized
Gain (Loss) on Investments
Realized Gain (Loss) on
Investments -- 511 9,000 10,070 --
Unrealized Appreciation
(Depreciation) During the Year 5 (58,412) (20,677) 28,576 (2)
------------ -------------------------------------------- -------------
Net Gain (Loss) on Investments 5 (57,901) (11,677) 38,646 (2)
------------ -------------------------------------------- -------------
Increase (Decrease) in Equity
Derived from Investment Activity $5 $(30,975) $7,930 $41,741 $(2)
============ ============================================ =============
# The initial investment in this Division was made on July 31, 2001
Franklin Templeton International
Equity Division Index 400 Stock Division**
-------------------------------------------- --------------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended Period Ended
December 31, December 31, December 31, December 31, December 31, December 31,
2001 2000 1999 2001 2000 1999
-------------------------------------------- --------------------------------------------
Investment Income
Dividend Income $5,914 $5,036 $8,184 $194 $1,180 $6
Annuity Rate and
Expense Guarantees 121 186 254 19 11 2
-------------------------------------------- --------------------------------------------
Net Investment Income (Loss) 5,793 4,850 7,930 175 1,169 4
-------------------------------------------- --------------------------------------------
Realized and Unrealized
Gain (Loss) on Investments
Realized Gain (Loss) on
Investments (6,258) 3,131 3,203 (575) 98 1
Unrealized Appreciation
(Depreciation) During the Year (8,375) (8,616) 837 275 (923) 31
-------------------------------------------- --------------------------------------------
Net Gain (Loss) on Investments (14,633) (5,485) 4,040 (300) (825) 32
-------------------------------------------- --------------------------------------------
Increase (Decrease) in Equity
Derived from Investment Activity $(8,840) $(635) $11,970 $(125) $344 $36
============================================ ============================================
**The initial investment in this Division was made on April 30, 1999.
42
J.P. Morgan Select Growth and Income
Growth Stock Division Stock Division
-------------------------------------------- --------------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31, December 31,
2001 2000 1999 2001 2000 1999
-------------------------------------------- ---------------------------------------------
Investment Income
Dividend Income $1,614 $2,101 $1,223 $957 $2,123 $4,566
Annuity Rate and
Expense Guarantees 111 152 137 124 178 208
-------------------------------------------- ---------------------------------------------
Net Investment Income (Loss) 1,503 1,949 1,086 833 1,945 4,358
-------------------------------------------- ---------------------------------------------
Realized and Unrealized
Gain (Loss) on Investments
Realized Gain (Loss) on
Investments 777 2,717 2,143 (545) (276) 1,267
Unrealized Appreciation
(Depreciation) During the Year (8,402) (5,875) 3,567 (2,643) (4,224) (3,007)
-------------------------------------------- ---------------------------------------------
Net Gain (Loss) on Investments (7,625) (3,158) 5,710 (3,188) (4,500) (1,740)
-------------------------------------------- ---------------------------------------------
Increase (Decrease) in Equity
Derived from Investment Activity $(6,122) $(1,209) $6,796 $(2,355) $(2,555) $2,618
============================================ =============================================
Capital
Guardian
Domestic Asset
Equity Allocation
Division # Index 500 Stock Division Division #
------------ -------------------------------------------- ------------
Period Ended Year Ended Year Ended Year Ended Period Ended
December 31, December 31, December 31, December 31, December 31,
2001 2001 2000 1999 2001
------------ -------------------------------------------- ------------
Investment Income
Dividend Income $-- $6,550 $8,370 $4,675 $--
Annuity Rate and
Expense Guarantees -- 420 688 895 --
------------ -------------------------------------------- ------------
Net Investment Income (Loss) -- 6,130 7,682 3,780 --
------------ -------------------------------------------- ------------
Realized and Unrealized
Gain (Loss) on Investments
Realized Gain (Loss) on
Investments -- 12,916 27,391 13,954 --
Unrealized Appreciation
(Depreciation) During the Year 6 (39,298) (53,361) 19,628 --
------------ -------------------------------------------- ------------
Net Gain (Loss) on Investments 6 (26,382) (25,970) 33,582 --
------------ -------------------------------------------- ------------
Increase (Decrease) in Equity
Derived from Investment Activity $6 $(20,252) $(18,288) $37,362 $--
============ ============================================ ============
# The initial investment in this Division was made on July 31, 2001
43
Balanced Division High Yield Bond Division
-------------------------------------------- --------------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31, December 31,
2001 2000 1999 2001 2000 1999
--------------------------------------------- ---------------------------------------------
Investment Income
Dividend Income $9,705 $12,909 $18,031 $487 $558 $759
Annuity Rate and
Expense Guarantees 497 688 954 22 30 35
--------------------------------------------- ---------------------------------------------
Net Investment Income (Loss) 9,208 12,221 17,077 465 528 724
--------------------------------------------- ---------------------------------------------
Realized and Unrealized
Gain (Loss) on Investments
Realized Gain (Loss) on
Investments 3,486 14,398 11,189 (737) (1,290) (775)
Unrealized Appreciation
(Depreciation) During the Year (17,384) (27,427) (11,272) 448 501 (39)
--------------------------------------------- ---------------------------------------------
Net Gain (Loss) on Investments (13,898) (13,029) (83) (289) (789) (814)
--------------------------------------------- ---------------------------------------------
Increase (Decrease) in Equity
Derived from Investment Activity $(4,690) $(808) $16,994 $176 $(261) $(90)
============================================= =============================================
Select Bond Division Money Market Division
--------------------------------------------- --------------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31, December 31,
2001 2000 1999 2001 2000 1999
--------------------------------------------- --------------------------------------------
Investment Income
Dividend Income $911 $1,093 $1,570 $523 $971 $1,015
Annuity Rate and
Expense Guarantees 99 109 136 163 174 236
--------------------------------------------- --------------------------------------------
Net Investment Income (Loss) 812 984 1,434 360 797 779
--------------------------------------------- --------------------------------------------
Realized and Unrealized
Gain (Loss) on Investments
Realized Gain (Loss) on
Investments 32 (655) 48 -- -- --
Unrealized Appreciation
(Depreciation) During the Year 578 1,084 (1,810) -- -- --
--------------------------------------------- --------------------------------------------
Net Gain (Loss) on Investments 610 429 (1,762) -- -- --
--------------------------------------------- --------------------------------------------
Increase (Decrease) in Equity
Derived from Investment Activity $1,422 $1,413 $(328) $360 $797 $779
============================================= ============================================
44
Russell Multi-Style Equity Division ** Russell Aggressive Equity Division**
-------------------------------------------- --------------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended Period Ended
December 31, December 31, December 31, December 31, December 31, December 31,
2001 2000 1999 2001 2000 1999
-------------------------------------------- --------------------------------------------
Investment Income
Dividend Income $37 $79 $48 $1 $74 $1
Annuity Rate and
Expense Guarantees 14 19 5 7 7 1
-------------------------------------------- --------------------------------------------
Net Investment Income (Loss) 23 60 43 (6) 67 --
-------------------------------------------- --------------------------------------------
Realized and Unrealized
Gain (Loss) on Investments
Realized Gain (Loss) on
Investments (120) (20) -- (17) 24 5
Unrealized Appreciation
(Depreciation) During the Year (144) (282) 64 9 (103) 26
-------------------------------------------- --------------------------------------------
Net Gain (Loss) on Investments (264) (302) 64 (8) (79) 31
-------------------------------------------- --------------------------------------------
Increase (Decrease) in Equity
Derived from Investment Activity $(241) $(242) $107 $(14) $(12) $31
============================================ ============================================
**The initial investment in this Division was made on April 30, 1999.
Russell Non-U.S. Division ** Russell Real Estate Securities Division**
-------------------------------------------- ---------------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended Period Ended
December 31, December 31, December 31, December 31, December 31, December 31,
2001 2000 1999 2001 2000 1999
-------------------------------------------- ---------------------------------------------
Investment Income
Dividend Income $4 $61 $13 $290 $52 $4
Annuity Rate and
Expense Guarantees 8 8 2 9 2 --
-------------------------------------------- ---------------------------------------------
Net Investment Income (Loss) (4) 53 11 281 50 4
-------------------------------------------- ---------------------------------------------
Realized and Unrealized
Gain (Loss) on Investments
Realized Gain (Loss) on
Investments (33) 15 -- 140 36 --
Unrealized Appreciation
(Depreciation) During the Year (158) (199) 73 (4) 126 (6)
-------------------------------------------- ---------------------------------------------
Net Gain (Loss) on Investments (191) (184) 73 136 162 (6)
-------------------------------------------- ---------------------------------------------
Increase (Decrease) in Equity
Derived from Investment Activity $(195) $(131) $84 $417 $212 $(2)
============================================ =============================================
**The initial investment in this Division was made on April 30, 1999.
45
Russell Core Bond Division**
---------------------------------------------
Year Ended Year Ended Period Ended
December 31, December 31, December 31,
2001 2000 1999
---------------------------------------------
Investment Income
Dividend Income $48 $22 $15
Annuity Rate and
Expense Guarantees 7 4 1
---------------------------------------------
Net Investment Income (Loss) 41 18 14
---------------------------------------------
Realized and Unrealized
Gain (Loss) on Investments
Realized Gain (Loss) on
Investments 14 (3) --
Unrealized Appreciation
(Depreciation) During the Year (12) 23 (14)
---------------------------------------------
Net Gain (Loss) on Investments 2 20 (14)
---------------------------------------------
Increase (Decrease) in Equity
Derived from Investment Activity $43 $38 $--
=============================================
**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)
Combined Small Cap Growth Stock Division**
--------------------------------------------- ---------------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended Period Ended
December 31, December 31, December 31, December 31, December 31, December 31,
2001 2000 1999 2001 2000 1999
--------------------------------------------- ---------------------------------------------
Operations:
Net Investment Income $52,514 $52,053 $40,369 $(26) $73 $30
Net Realized Gain (Loss) 8,705 54,861 41,106 (886) 295 1
Net Change in Unrealized
Appreciation (Depreciation) (133,527) (121,850) 36,856 (14) (1,897) 202
--------------------------------------------- ---------------------------------------------
Increase (Decrease) in
Equity Derived from
Investment Activity (72,308) (14,936) 118,331 (926) (1,529) 233
--------------------------------------------- ---------------------------------------------
Equity Transactions:
Contract Owners' Net Payment 90,774 103,967 74,900 3,160 4,045 184
Annuity Payments (64) (75) (67) -- -- --
Surrenders and Other (Net) (140,073) (135,735) (119,041) (3,044) (373) 1
Transfers from Other Divisions
or Sponsors 55,326 91,474 70,710 4,837 17,508 581
Transfers to Other Divisions
or Sponsors (53,674) (92,576) (69,203) (2,967) (562) (50)
--------------------------------------------- ---------------------------------------------
Increase (Decrease) in
Equity Derived from
Equity Transactions (47,711) (32,945) (42,701) 1,986 20,618 716
--------------------------------------------- ---------------------------------------------
Net Increase (Decrease) in Equity (120,019) (47,881) 75,630 1,060 19,089 949
Equity:
Beginning of Period 672,835 720,716 645,086 20,038 949 --
End of Period $552,816 $672,835 $720,716 $21,098 $20,038 $949
============================================= =============================================
**The initial investment in this Division was made on April 30, 1999.
46
T. Rowe Price
Small Cap International
Value Growth Stock
Division # Aggressive Growth Stock Divisions Division #
------------ --------------------------------------------- -------------
Period Ended Year Ended Year Ended Year Ended Period Ended
December 31, December 31, December 31, December 31, December 31,
2001 2001 2000 1999 2001
------------ --------------------------------------------- -------------
Operations:
Net Investment Income $-- $26,926 $19,607 $3,095 --
Net Realized Gain (Loss) -- 511 9,000 10,070 --
Net Change in Unrealized
Appreciation (Depreciation) 5 (58,412) (20,677) 28,576 (2)
------------ --------------------------------------------- -------------
Increase (Decrease) in
Equity Derived from
Investment Activity 5 (30,975) 7,930 41,741 (2)
------------ --------------------------------------------- -------------
Equity Transactions:
Contract Owners' Net Payment 94 13,427 23,615 13,136 11
Annuity Payments -- (3) (5) (3) --
Surrenders and Other (Net) -- (23,656) (20,763) (22,025) --
Transfers from Other Divisions
or Sponsors 66 4,001 16,356 4,719 29
Transfers to Other Divisions
or Sponsors -- (7,931) (9,504) (10,185) --
------------ --------------------------------------------- -------------
Increase (Decrease) in
Equity Derived from
Equity Transactions 160 (14,162) 9,699 (14,358) 40
------------ --------------------------------------------- -------------
Net Increase (Decrease) in Equity 165 (45,137) 17,629 27,383 38
Equity:
Beginning of Period -- 157,369 139,740 112,357 --
End of Period $165 $112,232 $157,369 $139,740 $38
============ ============================================= =============
# The initial investment in this Division was made on July 31, 2001
Franklin Templeton International
Equity Division Index 400 Stock Division**
--------------------------------------------- --------------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31, December 31,
2001 2000 1999 2001 2000 1999
--------------------------------------------- --------------------------------------------
Operations:
Net Investment Income $5,793 $4,850 $7,930 $175 $1,169 $4
Net Realized Gain (Loss) (6,258) 3,131 3,203 (575) 98 1
Net Change in Unrealized
Appreciation (Depreciation) (8,375) (8,616) 837 275 (923) 31
--------------------------------------------- --------------------------------------------
Increase (Decrease) in
Equity Derived from
Investment Activity (8,840) (635) 11,970 (125) 344 36
--------------------------------------------- --------------------------------------------
Equity Transactions:
Contract Owners' Net Payment 27,273 22,162 6,164 3,343 881 174
Annuity Payments (2) (2) (2) -- -- --
Surrenders and Other (Net) (32,422) (22,407) (9,838) (2,104) (366) (9)
Transfers from Other Divisions
or Sponsors 2,545 9,389 3,026 6,318 10,283 273
Transfers to Other Divisions
or Sponsors (5,144) (7,571) (6,029) (1,982) (217) --
--------------------------------------------- --------------------------------------------
Increase (Decrease) in
Equity Derived from
Equity Transactions (7,750) 1,571 (6,679) 5,575 10,581 438
--------------------------------------------- --------------------------------------------
Net Increase (Decrease) in Equity (16,590) 936 5,291 5,450 10,925 474
Equity:
Beginning of Period 65,492 64,556 59,265 11,399 474 --
End of Period $48,902 $65,492 $64,556 $16,849 $11,399 $474
============================================= ============================================
**The initial investment in this Division was made on April 30, 1999.
47
J.P. Morgan Select Growth and Income
Growth Stock Division Stock Division
--------------------------------------------- ---------------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31, December 31,
2001 2000 1999 2001 2000 1999
--------------------------------------------- ---------------------------------------------
Operations:
Net Investment Income $1,503 $1,949 $1,086 $ 833 $1,945 $4,358
Net Realized Gain (Loss) 777 2,717 2,143 (545) (276) 1,267
Net Change in Unrealized
Appreciation (Depreciation) (8,402) (5,875) 3,567 (2,643) (4,224) (3,007)
--------------------------------------------- ---------------------------------------------
Increase (Decrease) in
Equity Derived from
Investment Activity (6,122) (1,209) 6,796 (2,355) (2,555) 2,618
--------------------------------------------- ---------------------------------------------
Equity Transactions:
Contract Owners' Net Payment 4,918 6,941 3,912 3,353 4,010 5,168
Annuity Payments (4) (4) (4) -- -- --
Surrenders and Other (Net) (6,927) (6,269) (3,980) (5,302) (6,461) (7,856)
Transfers from Other Divisions
or Sponsors 2,504 6,640 10,514 2,133 2,472 7,271
Transfers to Other Divisions
or Sponsors (4,049) (3,179) (5,282) (2,079) (8,848) (6,450)
--------------------------------------------- ---------------------------------------------
Increase (Decrease) in
Equity Derived from
Equity Transactions (3,558) 4,129 5,160 (1,895) (8,827) (1,867)
--------------------------------------------- ---------------------------------------------
Net Increase (Decrease) in Equity (9,680) 2,920 11,956 (4,250) (11,382) 751
Equity:
Beginning of Period 42,696 39,776 27,820 29,723 41,105 40,354
End of Period $33,016 $42,696 $39,776 $25,473 $29,723 $41,105
============================================= =============================================
Capital
Guardian
Domestic Asset
Equity Allocation
Division # Index 500 Stock Division Division #
------------- --------------------------------------------- -------------
Period Ended Year Ended Year Ended Year Ended Period Ended
December 31, December 31, December 31, December 31, December 31,
2001 2001 2000 1999 2001
------------ --------------------------------------------- ------------
Operations:
Net Investment Income $-- $6,130 $7,682 $3,780 $--
Net Realized Gain (Loss) -- 12,916 27,391 13,954 --
Net Change in Unrealized
Appreciation (Depreciation) 6 (39,298) (53,361) 19,628 --
------------ --------------------------------------------- ------------
Increase (Decrease) in
Equity Derived from
Investment Activity 6 (20,252) (18,288) 37,362 --
------------ --------------------------------------------- ------------
Equity Transactions:
Contract Owners' Net Payment 103 15,810 20,521 20,768 15
Annuity Payments -- (4) (5) (5) --
Surrenders and Other (Net) -- (31,233) (31,320) (23,604) --
Transfers from Other Divisions
or Sponsors 102 4,024 6,728 12,396 31
Transfers to Other Divisions
or Sponsors -- (10,254) (24,313) (10,168) --
------------ --------------------------------------------- ------------
Increase (Decrease) in
Equity Derived from
Equity Transactions 205 (21,657) (28,389) (613) 46
------------ --------------------------------------------- ------------
Net Increase (Decrease) in Equity 211 (41,909) (46,677) 36,749 46
Equity:
Beginning of Period -- 173,398 220,075 183,326 --
End of Period $211 $131,489 $173,398 $220,075 $46
============ ============================================= ============
# The initial investment in this Division was made on July 31, 2001.
48
Balanced Division High Yield Bond Division
--------------------------------------------- ---------------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31, December 31,
2001 2000 1999 2001 2000 1999
--------------------------------------------- ---------------------------------------------
Operations:
Net Investment Income $9,208 $12,221 $17,077 $465 $528 $ 724
Net Realized Gain (Loss) 3,486 14,398 11,189 (737) (1,290) (775)
Net Change in Unrealized
Appreciation (Depreciation) (17,384) (27,427) (11,272) 448 501 (39)
--------------------------------------------- ---------------------------------------------
Increase (Decrease) in
Equity Derived from
Investment Activity (4,690) (808) 16,994 176 (261) (90)
--------------------------------------------- ---------------------------------------------
Equity Transactions:
Contract Owners' Net Payment 8,917 13,295 12,945 1,643 698 947
Annuity Payments (28) (37) (46) (1) (1) (1)
Surrenders and Other (Net) (18,268) (26,734) (31,240) (2,091) (1,212) (652)
Transfers from Other Divisions
or Sponsors 3,462 2,847 7,114 2,647 669 516
Transfers to Other Divisions
or Sponsors (9,430) (19,997) (11,295) (2,030) (2,034) (2,951)
--------------------------------------------- ---------------------------------------------
Increase (Decrease) in
Equity Derived from
Equity Transactions (15,347) (30,626) (22,522) 168 (1,880) (2,141)
--------------------------------------------- ---------------------------------------------
Net Increase (Decrease) in Equity (20,037) (31,434) (5,528) 344 (2,141) (2,231)
Equity:
Beginning of Period 136,009 167,443 172,971 4,239 6,380 8,611
End of Period $115,972 $136,009 $167,443 $4,583 $4,239 $6,380
============================================= =============================================
Select Bond Division Money Market Division
--------------------------------------------- ---------------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31, December 31,
2001 2000 1999 2001 2000 1999
--------------------------------------------- ---------------------------------------------
Operations:
Net Investment Income $812 $984 $1,434 $360 $797 $779
Net Realized Gain (Loss) 32 (655) 48 -- -- --
Net Change in Unrealized
Appreciation (Depreciation) 578 1,084 (1,810) -- -- --
--------------------------------------------- ---------------------------------------------
Increase (Decrease) in
Equity Derived from
Investment Activity 1,422 1,413 (328) 360 797 779
--------------------------------------------- ---------------------------------------------
Equity Transactions:
Contract Owners' Net Payment 2,126 2,655 2,929 4,807 4,448 7,746
Annuity Payments (5) (4) (4) (17) (17) (2)
Surrenders and Other (Net) (3,607) (4,440) (4,651) (10,053) (14,734) (15,180)
Transfers from Other Divisions
or Sponsors 5,722 2,504 1,606 12,104 11,630 20,425
Transfers to Other Divisions
or Sponsors (2,306) (5,638) (2,769) (4,118) (9,596) (13,822)
--------------------------------------------- ---------------------------------------------
Increase (Decrease) in
Equity Derived from
Equity Transactions 1,930 (4,923) (2,889) 2,723 (8,269) (833)
--------------------------------------------- ---------------------------------------------
Net Increase (Decrease) in Equity 3,352 (3,510) (3,217) 3,083 (7,472) (54)
Equity:
Beginning of Period 14,027 17,537 20,754 12,102 19,574 19,628
End of Period $17,379 $14,027 $17,537 $15,185 $12,102 $19,574
============================================= =============================================
49
Russell Multi-Style Equity Division ** Russell Aggressive Equity Division**
--------------------------------------------- ---------------------------------------------
Year Ended Year Ended Period Ended Year Ended Year Ended Period Ended
December 31, December 31, December 31, December 31, December 31, December 31,
2001 2000 1999 2001 2000 1999
--------------------------------------------- ---------------------------------------------
Operations:
Net Investment Income $23 $60 $43 ($6) $67 $--
Net Realized Gain (Loss) (120) (20) -- (17) 24 5
Net Change in Unrealized
Appreciation (Depreciation) (144) (282) 64 9 (103) 26
--------------------------------------------- ---------------------------------------------
Increase (Decrease) in
Equity Derived from
Investment Activity (241) (242) 107 (14) (12) 31
--------------------------------------------- ---------------------------------------------
Equity Transactions:
Contract Owners' Net Payment 228 210 485 120 133 96
Annuity Payments -- -- -- -- -- --
Surrenders and Other (Net) (119) (243) 1 (72) (170) (5)
Transfers from Other Divisions
or Sponsors 61 672 1,230 84 472 244
Transfers to Other Divisions
or Sponsors (271) (357) (118) (51) (131) (15)
--------------------------------------------- ---------------------------------------------
Increase (Decrease) in
Equity Derived from
Equity Transactions (101) 282 1,598 81 304 320
--------------------------------------------- ---------------------------------------------
Net Increase (Decrease) in Equity (342) 40 1,705 67 292 351
Equity:
Beginning of Period 1,745 1,705 -- 643 351 --
End of Period $1,403 $1,745 $1,705 $710 $643 $351
============================================= =============================================
**The initial investment in this Division was made on April 30, 1999.
Russell Non-U.S. Division ** Russell Real Estate Securities Division**
--------------------------------------------- ---------------------------------------------
Year Ended Year Ended Period Ended Year Ended Year Ended Period Ended
December 31, December 31, December 31, December 31, December 31, December 31,
2001 2000 1999 2001 2000 1999
--------------------------------------------- ---------------------------------------------
Operations:
Net Investment Income ($4) $53 $11 $281 $50 $4
Net Realized Gain (Loss) (33) 15 -- 140 36 --
Net Change in Unrealized
Appreciation (Depreciation) (158) (199) 73 (4) 126 (6)
--------------------------------------------- ---------------------------------------------
Increase (Decrease) in
Equity Derived from
Investment Activity (195) (131) 84 417 212 (2)
--------------------------------------------- ---------------------------------------------
Equity Transactions:
Contract Owners' Net Payment 114 125 124 1,245 151 16
Annuity Payments -- -- -- -- -- --
Surrenders and Other (Net) (86) (152) -- (1,081) (48) --
Transfers from Other Divisions
or Sponsors 21 516 405 4,382 2,707 109
Transfers to Other Divisions
or Sponsors -- (105) (48) (1,014) (473) (21)
--------------------------------------------- ---------------------------------------------
Increase (Decrease) in
Equity Derived from
Equity Transactions 49 384 481 3,532 2,337 104
--------------------------------------------- ---------------------------------------------
Net Increase (Decrease) in Equity (146) 253 565 3,949 2,549 102
Equity:
Beginning of Period 818 565 -- 2,651 102 --
End of Period $672 $818 $565 $6,600 $2,651 $102
============================================= =============================================
**The initial investment in this Division was made on April 30, 1999.
50
Russell Core Bond Division**
---------------------------------------------
Year Ended Year Ended Period Ended
December 31, December 31, December 31,
2001 2000 1999
---------------------------------------------
Operations:
Net Investment Income $41 $18 $14
Net Realized Gain (Loss) 14 (3) --
Net Change in Unrealized
Appreciation (Depreciation) (12) 23 (14)
---------------------------------------------
Increase (Decrease) in
Equity Derived from
Investment Activity 43 38 --
---------------------------------------------
Equity Transactions:
Contract Owners' Net Payment 67 77 106
Annuity Payments -- -- --
Surrenders and Other (Net) (8) (43) (3)
Transfers from Other Divisions
or Sponsors 253 81 281
Transfers to Other Divisions
or Sponsors (48) (51) --
---------------------------------------------
Increase (Decrease) in
Equity Derived from
Equity Transactions 264 64 384
---------------------------------------------
Net Increase (Decrease) in Equity 307 102 384
Equity:
Beginning of Period 486 384 --
End of Period $793 $486 $384
=============================================
**The initial investment in this Division was made on April 30, 1999.
The Accompanying Notes are an Integral Part of the Financial Statements.
51
FINANCIAL HIGHLIGHTS
NML VARIABLE ANNUITY ACCOUNT C
(For a unit outstanding during the Year or Unit Value Increase Unit Value
period) Period Beginning (Decrease) of End Total Expense
Division Ended of Period in Equity Period Return(2) Ratio(3)
- -----------------------------------------------------------------------------------------------------------------------
Front Load Contract (Series QQ)
Small Cap Growth Stock 12/31/01 $1.964602 $(0.086266) $1.878336 -4.39% 0.65%
T. Rowe Price Small Cap Value(1) 12/31/01 1.000000 0.014805 1.014805 1.48% 0.65%
Aggressive Growth Stock 12/31/01 3.785207 (0.772042) 3.013165 -20.40% 0.65%
International Growth Stock(1) 12/31/01 1.000000 (0.096475) 0.903525 -9.65% 0.65%
Franklin Templeton
International Equity 12/31/01 2.357007 (0.343169) 2.013838 -14.56% 0.65%
Index 400 Stcok 12/31/01 1.308249 (0.017038) 1.291211 -1.30% 0.65%
Growth Stock 12/31/01 3.019678 (0.446156) 2.573522 -14.77% 0.65%
J.P. Morgan Select Growth and
Income Stock 12/31/01 2.417488 (0.202438) 2.215050 -8.37% 0.65%
Capital Guardian Domestic
Equity(1) 12/31/01 1.000000 (0.024545) 0.975455 -2.45% 0.65%
Index 500 Stock 12/31/01 3.570426 (0.444630) 3.125796 -12.45% 0.65%
Asset Allocation(1) 12/31/01 1.000000 (0.023688) 0.976312 -2.37% 0.65%
Balanced 12/31/01 2.499718 (0.094533) 2.405185 -3.78% 0.65%
High Yield Bond 12/31/01 1.490196 0.064782 1.554978 4.35% 0.65%
Select Bond 12/31/01 1.706832 0.164700 1.871532 9.65% 0.65%
Money Market 12/31/01 1.442872 0.046756 1.489628 3.24% 0.65%
Russell Multi-Style Equity 12/31/01 0.933887 (0.137894) 0.795993 -14.77% 0.65%
Russell Aggressive Equity 12/31/01 1.089907 (0.032692) 1.057215 -3.00% 0.65%
Russell Non-U.S 12/31/01 1.060950 (0.239121) 0.821829 -22.54% 0.65%
Russell Real Estate Securities 12/31/01 1.167301 0.083289 1.250590 7.14% 0.65%
Russell Core Bond 12/31/01 1.078791 0.072351 1.151142 6.71% 0.65%
Year or Unit Value Increase Unit Value
Period Beginning (Decrease) of End Total Expense
Division Ended of Period in Equity Period Return(2) Ratio(3)
- -----------------------------------------------------------------------------------------------------------------------
Simplified Load Contract (Series QQ)
Small Cap Growth Stock 12/31/01 $1.945087 $(0.096594) $1.848493 -4.97% 1.25%
T. Rowe Price Small Cap Value(1) 12/31/01 1.000000 0.012260 1.012260 1.23% 1.25%
Aggressive Growth Stock 12/31/01 5.691856 (1.188193) 4.503663 -20.88% 1.25%
International Growth Stock(1) 12/31/01 1.000000 (0.098742) 0.901258 -9.87% 1.25%
Franklin Templeton
International Equity 12/31/01 2.251266 (0.339347) 1.911919 -15.07% 1.25%
Index 400 Stcok 12/31/01 1.295242 (0.024552) 1.270690 -1.90% 1.25%
Growth Stock 12/31/01 2.901600 (0.443580) 2.458020 -15.29% 1.25%
J.P. Morgan Select Growth and
Income Stock 12/31/01 2.322995 (0.207320) 2.115675 -8.92% 1.25%
Capital Guardian Domestic
Equity(1) 12/31/01 1.000000 (0.026996) 0.973004 -2.70% 1.25%
Index 500 Stock 12/31/01 4.432423 (0.575309) 3.857114 -12.98% 1.25%
Asset Allocation(1) 12/31/01 1.000000 (0.026138) 0.973862 -2.61% 1.25%
Balanced 12/31/01 7.368231 (0.321231) 7.047000 -4.36% 1.25%
High Yield Bond 12/31/01 1.431888 0.053276 1.485164 3.72% 1.25%
Select Bond 12/31/01 7.615016 0.684707 8.299723 8.99% 1.25%
Money Market 12/31/01 2.654580 0.069574 2.724154 2.62% 1.25%
Russell Multi-Style Equity 12/31/01 0.924598 (0.141263) 0.783335 -15.28% 1.25%
Russell Aggressive Equity 12/31/01 1.079072 (0.038660) 1.040412 -3.58% 1.25%
Russell Non-U.S 12/31/01 1.050412 (0.241633) 0.808779 -23.00% 1.25%
Russell Real Estate Securities 12/31/01 1.155691 0.075035 1.230726 6.49% 1.25%
Russell Core Bond 12/31/01 1.068073 0.064799 1.132872 6.07% 1.25%
(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.
52
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
2001 2000 1999
---- ---- ----
Small Cap Growth Division ............................ $ 6,233,394 $21,822,710 $ 759,215
T. Rowe Price Small Cap Value Division# .............. 159,645 N/A N/A
Aggressive Growth Division ........................... 36,767,770 47,835,326 12,206,930
International Growth Stock Division# ................. 39,524 N/A N/A
Franklin.Templeton International Equity Division...... 31,683,628 31,939,632 13,196,712
Index 400 Stock Division ............................. 8,666,766 12,366,486 468,108
Growth Stock Division ................................ 6,414,454 12,950,757 11,622,415
J.P. Morgan Select Growth & Income Stock Division..... 4,403,338 5,847,806 12,666,073
Capital Guardian Domestic Equity Division# ........... 204,575 N/A N/A
Index 500 Stock Division ............................. 17,138,782 21,135,615 24,489,112
Asset Allocation Division# ........................... 45,385 N/A N/A
Balanced.Division .................................... 15,734,227 19,926,273 27,037,531
High Yield Bond Division ............................. 4,182,589 2,046,585 1,696,507
Select Bond Division ................................. 7,322,244 5,061,775 3,699,428
Money Market Division ................................ 14,787,625 14,029,450 22,540,096
Russell Multi-Style Division ......................... 401,949 851,426 1,676,900
Russell Aggressive Equity Division ................... 183,388 646,095 763,162
Russell Non-U.S. Division ............................ 134,575 646,150 494,961
Russell Real Estate Securities Division .............. 5,224,573 3,116,036 109,105
Russell Core Bond Division ........................... 752,848 179,473 403,049
# The initial investment made in this division was made on July 31, 2001.
53
SALES
2001 2000 1999
---- ---- ----
Small Cap Growth Stock Division .................... $ 4,295,263 $ 1,131,840 $ 13,802
T. Rowe Price Small Cap Value Division# ............ 176 N/A N/A
Aggressive Growth Division ......................... 24,003,411 18,536,546 23,468,462
International Growth Stock Division# ............... 123 N/A N/A
Franklin Templeton International Equity Division.... 33,668,396 25,522,098 11,938,339
Index 400 Stock Division ........................... 2,918,757 615,601 26,390
Growth Stock Division .............................. 8,466,155 6,871,377 5,373,768
J.P. Morgan Select Growth & Income Stock Division... 5,467,056 12,730,171 10,170,106
Capital Guardian Domestic Equity Division# ......... 145 N/A N/A
Index 500 Stock Division ........................... 32,662,751 42,005,726 21,511,153
Asset Allocation Division# ......................... 83 N/A N/A
Balanced Division .................................. 21,870,333 38,332,517 32,467,107
High Yield Bond Division ........................... 3,549,767 3,398,369 3,114,104
Select Bond Division ............................... 4,580,899 9,000,392 5,152,171
Money Market Division .............................. 11,701,602 21,273,753 22,822,933
Russell Multi-Style Division ....................... 485,832 510,026 35,224
Russell Aggressive Equity Division ................. 114,505 276,105 443,034
Russell Non-U.S. Division .......................... 89,282 208,804 2,369
Russell Real Estate Securities Division ............ 1,382,753 736,889 569
Russell Core Bond Division ......................... 441,607 97,425 4,229
# 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.
54
Note 8 -- Equity Values by Division for the year ended December 31, 2001 are
shown below:
(in thousands, except accumulation unit values)
CONTRACTS ISSUED: CONTRACTS ISSUED:
PRIOR TO DECEMBER 17, 1981 OR BETWEEN AFTER DECEMBER 16, 1981 AND
APRIL 30, 1984 AND DECEMBER 31, 1991 PRIOR TO MAY 1, 1984
------------------------------------ --------------------
ACCUMULATION ACCUMULATION
UNIT UNITS UNIT UNITS
DIVISION VALUE OUTSTANDING EQUITY VALUE OUTSTANDING EQUITY
- -------- ------------- ----------- ------------ ------------ ----------- -------------
Small Cap Growth Stock ................ $ 19.112629 974 $ 18,614 $ 18.858687 1 $ 10
T. Rowe Price Small Cap Value ......... 10.175772 1 15 10.154423 -- --
Aggressive Growth Stock ............... 48.753408 1,744 85,024 46.158193 2 95
International Growth Stock ............ 9.060000 2 15 9.040958 -- --
Franklin Templeton International
Equity ............................. 2.130553 18,588 39,603 2.040110 34 70
Index 400 Stock ....................... 13.138452 1,137 14,937 12.963870 -- 4
Growth Stock .......................... 27.049526 903 24,420 26.031963 -- 3
J.P. Morgan Select Growth and
Income Stock .......................... 23.281928 660 15,365 22.405970 2 55
Capital Guardian Domestic Equity....... 9.781208 3 31 9.760679 -- --
Index 500 Stock ....................... 45.228886 2,199 99,439 42.817258 9 390
Asset Allocation ...................... 9.789803 3 31 9.769272 -- --
Balanced .............................. 91.372736 814 74,381 82.699005 27 2,234
High Yield Bond ....................... 16.343831 177 2,893 15.728914 1 8
Select Bond ........................... 108.200259 81 8,810 97.881219 -- 23
Money Market .......................... 33.577318 14 466 30.425952 -- --
Russell Multi-Style Equity ............ 8.099453 24 197 7.991800 -- --
Russell Aggressive Equity ............. 10.757522 1 10 10.614527 -- --
Russell Non-U.S ....................... 8.362558 3 24 8.251395 -- --
Russell Real Estate Securities ........ 12.725061 460 5,853 12.556055 -- --
Russell Core Bond ..................... 11.713217 -- -- 11.557668 -- --
------------ ------------
Equity ............................. 390,128 2,892
Annuity Reserves ................... -- 744
------------ ------------
Total Equity ....................... $ 390,128 $ 3,636
============ ============
CONTRACTS ISSUED: CONTRACTS ISSUED:
AFTER DECEMBER 31, 1991 AFTER DECEMBER 31, 1991
FRONT LOAD VERSION SIMPLIFIED LOAD VERSION
------------------ -----------------------
ACCUMULATION ACCUMULATION
UNIT UNITS UNIT UNITS
DIVISION VALUE OUTSTANDING EQUITY VALUE OUTSTANDING EQUITY
- -------- ------------- ----------- ------------ ------------ ----------- -------------
Small Cap Growth Stock ............... $ 1.878336 267 $ 502 $ 1.848493 1,067 $ 1,972
T. Rowe Price Small Cap Value ........ 1.014805 7 7 1.012260 141 142
Aggressive Growth Stock .............. 3.013165 1,501 4,522 4.503663 5,015 22,584
International Growth Stock ........... 0.903525 -- -- 0.901258 25 22
Franklin Templeton International
Equity ............................ 2.013838 1,090 2,194 1.911919 3,670 7,017
Index 400 Stock ...................... 1.291211 301 389 1.270690 1,182 1,503
Growth Stock ......................... 2.573522 558 1,435 2.458020 2,897 7,120
J.P. Morgan Select Growth and
Income Stock ...................... 2.215050 1,013 2,244 2.115675 3,691 7,810
Capital Guardian Domestic Equity...... 0.975455 66 64 0.973004 119 116
Index 500 Stock ...................... 3.125796 1,895 5,922 3.857114 6,662 25,694
Asset Allocation ..................... 0.976312 5 5 0.973862 11 10
Balanced ............................. 2.405185 3,594 8,644 7.047000 4,314 30,398
High Yield Bond ...................... 1.554978 148 230 1.485164 967 1,437
Select Bond .......................... 1.871532 573 1,072 8.299723 892 7,404
Money Market ......................... 1.489628 927 1,380 2.724154 4,816 13,120
Russell Multi-Style Equity ........... 0.795993 476 379 0.783335 1,056 827
Russell Aggressive Equity ............ 1.057215 173 183 1.040412 497 517
Russell Non-U.S ...................... 0.821829 205 168 0.808779 592 479
Russell Real Estate Securities ....... 1.250590 180 225 1.230726 424 522
Russell Core Bond .................... 1.151142 337 388 1.132872 358 405
------------ ------------
Equity ............................ 29,953 129,099
Annuity Reserves ............. -- --
------------ ------------
Total Equity ...................... $ 29,953 $ 129,099
============ ============
55
Equity Values by Division for the year ended December 31, 2000 are shown below:
CONTRACTS ISSUED: CONTRACTS ISSUED:
PRIOR TO DECEMBER 17, 1981 OR BETWEEN AFTER DECEMBER 16, 1981 AND
APRIL 30, 1984 AND DECEMBER 31, 1991 PRIOR TO MAY 1, 1984
------------------------------------ --------------------
ACCUMULATION ACCUMULATION
UNIT UNITS UNIT UNITS
DIVISION VALUE OUTSTANDING EQUITY VALUE OUTSTANDING EQUITY
- -------- ------------- ----------- ------------ ------------ ----------- -------------
Small Cap Growth Stock .......... $ 19.859931 859,005 $ 17,059,771 $ 19.695066 420 $ 8,276
Aggressive Growth Stock ......... 60.845203 1,855,240 112,882,454 57.897540 1,574 91,112
International Equity ............ 2.477334 20,581,223 50,986,564 2.384172 26,354 62,833
Index 400 Stock ................. 13.224995 756,727 10,007,706 13.115131 -- --
Growth Stock .................... 31.531943 978,021 30,838,902 30.498976 104 3,159
Growth and Income ............... 25.243989 650,867 16,430,474 24.416867 1,820 44,438
Index 500 Stock ................. 51.325633 2,463,257 126,428,232 48.834231 9,467 462,299
Balanced ........................ 94.345469 884,725 83,469,825 85.820221 30,736 2,637,770
High Yield Bond ................. 15.560950 151,658 2,359,941 15.050970 342 5,151
Select Bond ..................... 98.036463 59,938 5,876,077 89.133511 229 20,403
Money Market .................... 32.311690 33,651 1,087,330 29.426661 -- --
Russell Multi-Style Equity ...... 9.440627 24,295 229,356 9.362193 -- --
Russell Aggressive Equity ....... 11.017913 939 10,341 10.926333 -- --
Russell Non-U.S ................. 10.725190 2,822 30,262 10.636093 -- --
Russell Real Estate Securities .. 11.800164 191,981 2,265,407 11.702144 -- --
Russell Core Bond ............... 10.905549 -- -- 10.814951 -- --
------------ ------------
Equity ....................... 459,962,642 3,335,441
Annuity Reserves ............. -- 825,048
------------ ------------
Total Equity ................. $459,962,642 $ 4,160,489
============ ============
CONTRACTS ISSUED: CONTRACTS ISSUED:
AFTER DECEMBER 31, 1991 AFTER DECEMBER 31, 1991
FRONT LOAD VERSION SIMPLIFIED LOAD VERSION
------------------ -----------------------
ACCUMULATION ACCUMULATION
UNIT UNITS UNIT UNITS
DIVISION VALUE OUTSTANDING EQUITY VALUE OUTSTANDING EQUITY
- -------- ------------- ----------- ------------ ------------ ----------- -------------
Small Cap Growth Stock .......... $ 1.964602 326,150 $ 640,755 $ 1.945087 1,197,387 $ 2,329,022
Aggressive Growth Stock ......... 3.785207 2,114,652 8,004,397 5.691856 6,384,710 36,340,852
International Equity ............ 2.357007 1,653,777 3,897,964 2.251266 4,672,038 10,517,999
Index 400 Stock ................. 1.308249 295,347 386,387 1.295242 775,791 1,004,838
Growth Stock .................... 3.019678 814,788 2,460,397 2.901600 3,220,718 9,345,235
Growth and Income ............... 2.417488 1,319,721 3,190,410 2.322995 4,329,641 10,057,734
Index 500 Stock ................. 3.570426 2,724,196 9,726,539 4.432423 8,286,039 36,727,230
Balanced ........................ 2.499718 4,447,958 11,118,640 7.368231 5,215,778 38,431,060
High Yield Bond ................. 1.490196 166,175 247,633 1.431888 1,125,550 1,611,661
Select Bond ..................... 1.706832 736,742 1,257,494 7.615016 895,503 6,819,270
Money Market .................... 1.442872 640,788 924,575 2.654580 3,715,872 9,864,080
Russell Multi-Style Equity ...... 0.933887 381,014 355,824 0.924598 1,254,417 1,159,831
Russell Aggressive Equity ....... 1.089907 139,940 152,522 1.079072 444,666 479,827
Russell Non-U.S ................. 1.060950 207,716 220,377 1.050412 540,064 567,290
Russell Real Estate Securities .. 1.167301 69,412 81,025 1.155691 263,698 304,753
Russell Core Bond ............... 1.078791 259,803 280,274 1.068073 192,428 205,527
------------ ------------
Equity ....................... 42,945,213 165,766,209
Annuity Reserves ............. -- --
------------ ------------
Total Equity ................. $ 42,945,213 $165,766,209
============ ============
56
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
57
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
58
PART III
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.
YEAR EXPIRATION OF OTHER POSITIONS PRESENTLY
TRUSTEE AGE ELECTED TERM OF OFFICE HELD WITH REGISTRANT
- ------- --- ------- -------------- --------------------
Edward E. Barr................. 65 1991 May 2003 Member, Human Resources and Public Policy Committee
Gordon T. Beaham, III.......... 70 1988 May 2005(1) Member, Operations and Technology Committee
John M. Bremer................. 54 2001 May 2002(2) Member, Executive Committee
Peter W. Bruce................. 56 2001 May 2002(2) Member, Executive Committee
Robert C. Buchanan............. 61 1991 May 2003 Member, Audit, Executive and Finance Committees
George A. Dickerman............ 63 1994 May 2004 Member, Agency and Marketing Committee
Pierre S. du Pont.............. 67 1985 May 2002(2) Member, Agency and Marketing Committee
James D. Ericson............... 66 1989 May 2004 Member, Agency and Marketing, Executive and Finance
Committees
J. E. Gallegos................. 66 1985 May 2004 Member, Audit Committee
Stephen N. Graff............... 67 1996 May 2004 Member, Audit, Executive, and Finance Committees
Patricia Albjerg Graham........ 67 1980 May 2004 Member, Human Resources and Public Policy Committee
James P. Hackett............... 46 2000 May 2002(2) Member, Operations and Technology Committee
Stephen F. Keller.............. 63 1984 May 2003 Member, Human Resources and Public Policy Committee
Barbara A. King................ 55 1996 May 2002(2) Member, Agency and Marketing Committee
J. Thomas Lewis................ 65 1978 May 2002(2) Chair, Human Resources and Public Policy Committee
Daniel F. McKeithan, Jr........ 66 1988 May 2003 Member, Executive, Finance, and Human Resources and
Public Policy Committees
Guy A. Osborn.................. 66 1994 May 2005 Member, Executive, Finance, and Operations and
Technology Committees
Timothy D. Proctor............. 52 1997 May 2005 Member, Audit Committee
H. Mason Sizemore, Jr.......... 60 1993 May 2003 Member, Agency and Marketing Committee
Harold B. Smith................ 68 1973 May 2004 Member, Operations and Technology Committee
Sherwood H. Smith, Jr.......... 67 1992 May 2002(2) Chair, Agency and Marketing Committee
Peter M. Sommerhauser.......... 59 1999 May 2002(2) Member, Executive, Finance, and Human Resources and
Public Policy Committees
John E. Steuri................. 62 1994 May 2003 Chair, Operations and Technology Committee
John J. Stollenwerk............ 62 1993 May 2005 Member, Agency and Marketing, Executive and Finance
Committees
Barry L. Williams.............. 57 1987 May 2005 Member, Audit Committee
Kathryn D. Wriston............. 63 1986 May 2005 Chair, Audit Committee
Edward J. Zore................. 56 2000 May 2005 President and CEO; Member, Agency and Marketing,
Operations and Technology Committees; Chair, Executive
and Finance Committees
(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.
59
The business experience and directorships of Northwestern Mutual's Trustees as
of March 1, 2002 are as follows:
PRINCIPAL OCCUPATION
TRUSTEE DURING PAST FIVE YEARS DIRECTORSHIPS
------- ---------------------- -------------
Edward E. Barr Chairman, Sun Chemical Group, B.V. (graphic
arts), Fort Lee, New Jersey, since 1998.
Chairman and CEO, 1997-1998. Prior
thereto, President and Chief Executive
Officer, 1987-1997.
Gordon T. Beaham, III Chairman and Chief Executive Officer, Faultless
Starch/Bon Ami Company (consumer products
manufacturer), Kansas City, MO, since 2001.
Prior thereto, Chairman and President.
John M. Bremer Senior Executive Vice President and Chief Operating
Officer (Chief Compliance Officer) of Northwestern Mutual
since June 2001; from March 2000 to June 2001, Senior
Executive Vice President and Secretary; from February
1998 to March 2000, Executive Vice President, General
Counsel and Secretary. Senior Vice President, General
Counsel and Secretary from 1995-1998.
Peter W. Bruce Senior Executive Vice President (Insurance) of Northwestern
Mutual since March 2000. From February 1998 to March 2000,
Executive Vice President (Accumulation Products and Long
Term Care). Prior thereto, Executive Vice President
(Operations and Administration).
Robert C. Buchanan President and Chief Executive Officer, Fox Brady Corporation
Valley Corporation (manufacturer of gift
wrap and writing paper), Appleton,
Wisconsin, since 1980.
George A. Dickerman Chairman Emeritus, Spalding Sports
Worldwide (manufacturer of sporting equipment),
Chicopee, Massachusetts, since 1999. Prior
thereto, Chairman, 1997-1998, and President,
1981-1997.
Pierre S. du Pont Partner with Richards, Layton & Finger PepsiAmericas, Inc
(law firm); Wilmington, Delaware, since 1985
James D. Ericson Retired Chairman of Northwestern Mutual since Green Bay Packaging, Inc.
2001; Chairman, 2001; Chairman and Chief Kohl's Corporation
Executive Officer from 2000 to 2001. Prior thereto, Mason Street Funds, Inc.
President and Chief Executive Officer. Northwestern Mutual Series
Fund, Inc.
The Marcus Corporation
J. E. Gallegos Attorney, Gallegos Law Firm, Santa Fe,
New Mexico, since 1988.
Stephen N. Graff Office Managing Partner (retired), Arthur Mason Street Funds, Inc.
Andersen LLP, Milwaukee, Wisconsin, Northwestern Mutual Series
1981-1994. Fund, Inc.
Regal-Beloit Corporation
60
PRINCIPAL OCCUPATION
TRUSTEE DURING PAST FIVE YEARS DIRECTORSHIPS
------- ---------------------- -------------
Patricia Albjerg Professor of the History of American
Graham Education, Harvard University, Cambridge,
Massachusetts, since 1974; President, Spencer
Foundation (social and behavioral sciences),
Chicago, Illinois, 1991-2000.
James P. Hackett President and Chief Executive Officer of Fifth Third Bancorp
Steelcase Inc. since 1994. Steelcase, Inc.
Stephen F. Keller Attorney, Los Angeles, California, since
1962. Chairman, The Santa Anita Companies,
Arcadia, California, 1993-1996.
Barbara A. King President, Landscape Structures, Inc.
(manufacturer of playground equipment),
Delano, Minnesota, since 1973.
J. Thomas Lewis Attorney (sole practitioner), New Orleans,
Louisiana, since 1998. Prior thereto,
associated with Monroe & Lemann (law firm),
New Orleans, Louisiana, 1965-1998.
Daniel F. McKeithan, Jr. President, Tamarack Petroleum Co., Inc. The Marcus Corporation
(operator of oil and gas wells), U.S. Bancorp
Milwaukee, Wisconsin, since 1982.
Guy A. Osborn Retired Chairman, Universal Foods Corp., Fleming Companies, Inc.
Milwaukee, Wisconsin, since 1997.
Chairman, 1996-1997.
Timothy D. Proctor Group General Counsel, Diageo PLC
(manufacturer, marketer and distributor of
food and beverage products), London, England,
since 2000. Prior thereto, Director,
Worldwide Human Resources, Glaxo Wellcome
plc, 1998-1999; Senior Vice President
Human Resources, General Counsel and
Secretary, Glaxo Wellcome Inc., 1996-1998.
H. Mason Sizemore, Jr. President and Chief Operating Officer, The
Seattle Times, Seattle, Washington, since
1985.
Harold B. Smith Chairman, Executive Committee, Illinois Illinois Tool Works Inc.
Tool Works Inc. (engineered components Northern Trust Corporation
and industrial systems and consumables), W. W. Grainger, Inc.
Glenview, Illinois, since 1982.
Sherwood H. Smith, Jr. Chairman Emeritus, Carolina Power & Light Nortel Networks Corporation
Company, Raleigh, North Carolina, since
May 1999. Prior thereto, Chairman,
1996-1999.
Peter M. Sommerhauser Attorney, Shareholder, Vice President and Kohl's Corporation
Member of the Management Committee,
Godfrey & Kahn, S.C. (law firm), Milwaukee,
Wisconsin, since 1969.
61
PRINCIPAL OCCUPATION
TRUSTEE DURING PAST FIVE YEARS DIRECTORSHIPS
------- ---------------------- -------------
John E. Steuri Chairman (retired), Superior Financial Corp.
Advanced Thermal Technologies
(heating, air conditioning and humidity
control), Little Rock, Arkansas, 1997-2001.
John J. Stollenwerk President and Chief Executive Officer, Badger Meter, Inc.
Allen-Edmonds Shoe Corporation, Port Koss Corporation
Washington, Wisconsin, since 1998. Prior U.S. Bancorp
thereto, President and Owner, 1980-1998.
Barry L. Williams President and Chief Executive Officer, CH2M Hill Companies Ltd.
Williams Pacific Ventures, Inc. (venture R. H. Donnelly Corporation
capital), San Francisco, California, since Pacific Gas & Electric Company
1993. Simpson Manufacturing Co., Inc.
Synavant Inc.
The Newhall Land and Farming Company
USA Education Inc.
Kathryn D. Wriston Director of various corporations. The Goodyear Tire & Rubber Company
The Stanley Works
Edward J. Zore President and Chief Executive Officer of Manpower, Inc.
Northwestern Mutual since 2001; President Mason Street Funds, Inc.
from 2000 to 2001. Prior thereto, Northwestern Mutual Series
Executive Vice President (Life and Disability Fund, Inc.
Income Insurance), 1998-2000 and Executive Vice
President (Finance and Investments), 1995-1998
62
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.
NAME AGE POSITION
- ---- --- --------
Edward J. Zore 56 President and Chief Executive Officer
John M. Bremer 54 Senior Executive Vice President and Chief Operating
Officer (Chief Compliance Officer)
Peter W. Bruce 56 Senior Executive Vice President (Insurance)
Deborah A. Beck 54 Executive Vice President (Planning and Technology)
William H. Beckley 54 Executive Vice President (Agencies)
Bruce L. Miller 59 Executive Vice President (Marketing)
Mason G. Ross 58 Executive Vice President and Chief Investment
Officer
Mark G. Doll 52 Senior Vice President (Public Markets)
Richard L. Hall 56 Senior Vice President (Life Insurance)
William C. Koenig 54 Senior Vice President and Chief Actuary
Gary A. Poliner 48 Senior Vice President and Chief Financial Officer
Charles D. Robinson 57 Senior Vice President (Investment Products and
Services)
John E. Schlifske 42 Senior Vice President (Securities and Real Estate)
Leonard F. Stecklein 55 Senior Vice President (Annuity and Accumulation
Products)
Frederic H. Sweet 58 Senior Vice President (Corporate and Government
Relations)
Walt J. Wojcik 62 Senior Vice President (Information Systems)
Robert J. Berdan 55 Vice President, General Counsel and Secretary
Steven T. Catlett 52 Vice President and Controller
Thomas E. Dyer 56 Vice President (Corporate Services)
Christina H. Fiasca 47 Vice President (Field Systems Administration)
Susan A. Lueger 48 Vice President (Human Resources)
Jean M. Maier 47 Vice President (Field Services and Support)
Meridee J. Maynard 46 Vice President (Disability Income)
Gregory C. Oberland 44 Vice President (New Business)
Barbara F. Piehler 51 Vice President (Information Systems)
James F. Reiskytl 64 Vice President (Tax and Financial Planning)
Marcia Rimai 46 Vice President (Policyowner Services)
Lora A. Rosenbaum 45 Vice President (Compliance/Best Practices)
J. Edward Tippetts 57 Vice President (Marketing)
Martha M. Valerio 55 Vice President (Information Systems)
David B. Wescoe 47 Vice President (Northwestern Mutual Investment
Services)
W. Ward White 62 Vice President (Communications)
Michael L. Youngman 50 Vice President (Government Relations)
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.
63
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. 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. 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.
64
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Exhibits
PAGE
----
(1) NML Variable Annuity Account A (in Part II, Item 8).................................... 18
Statements of Assets and Liabilities at December 31, 2001 and 2000
Statements of Operations for years ended December 31, 2001, 2000 and 1999
Statements of Changes in Equity for years ended December 31, 2001, 2000 and 1999
Financial Highlights
Notes to Financial Statements
Report of Independent Accountants
(2) NML Variable Annuity Account C (in Part II, Item 8).................................... 40
Statements of Assets and Liabilities at December 31, 2001 and 2000
Statements of Operations for years ended December 31, 2001, 2000 and 1999
Statements of Changes in Equity for years ended December 31, 2001, 2000 and 1999
Financial Highlights
Notes to Financial Statements
Report of Independent Accountants
(3) The Northwestern Mutual Life Insurance Company......................................... 66
Immediately following this page are:
Report of Independent Accountants
Consolidated Statement of Financial Position at December 31, 2001 and 2000
Consolidated Statement of Operations for years ended December 31, 2001, 2000 and 1999
Consolidated Statement of Changes in Surplus for years ended
December 31, 2001, 2000 and 1999
Consolidated Statement of Cash Flows for years ended
December 31, 2001, 2000 and 1999
Notes to Consolidated Statutory Financial Statements
(b) No reports on Form 8-K have been filed during the last quarter of the year ended December 31, 2001.
(c) See Index to Exhibits which is incorporated herein by reference................................ 89
65
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
66
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(IN MILLIONS)
DECEMBER 31,
--------------------
2001 2000
--------- ---------
ASSETS
------
Bonds $44,306 $40,607
Common and preferred stocks 5,369 6,216
Mortgage loans 15,164 14,431
Real estate 1,671 1,627
Policy loans 9,028 8,504
Other investments 4,817 4,508
Cash and temporary investments 2,018 1,217
--------- ---------
Total investments 82,373 77,110
Due and accrued investment income 1,048 1,008
Net deferred tax assets 1,602 --
Deferred premium and other assets 1,583 1,510
Separate account assets 11,786 12,497
--------- ---------
Total assets $98,392 $92,125
========= =========
LIABILITIES AND SURPLUS
-----------------------
Reserves for policy benefits $68,432 $62,816
Policyowner dividends payable 3,650 3,350
Interest maintenance reserve 375 378
Asset valuation reserve 2,034 2,298
Income taxes payable 1,329 1,228
Other liabilities 3,894 3,662
Separate account liabilities 11,786 12,497
--------- ---------
Total liabilities 91,500 86,229
Surplus 6,892 5,896
--------- ---------
Total liabilities and surplus $98,392 $92,125
========= =========
The accompanying notes are an integral part of these financial statements.
67
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(IN MILLIONS)
FOR THE YEAR ENDED
DECEMBER 31,
---------------------------------
2001 2000 1999
---------- -------- -----------
REVENUE:
Premiums $ 9,408 $ 8,925 $ 8,344
Net investment income 5,532 5,339 4,766
Other income 405 1,118 970
---------- -------- -----------
Total revenue 15,345 15,382 14,080
---------- -------- -----------
BENEFITS AND EXPENSES:
Benefit payments to policyowners and
beneficiaries 3,808 4,541 4,023
Net additions to policy benefit reserves 5,367 4,815 4,469
Net transfers to separate accounts 502 469 516
---------- -------- -----------
Total benefits 9,677 9,825 9,008
Commissions and operating expenses 1,453 1,416 1,287
---------- -------- -----------
Total benefits and expenses 11,130 11,241 10,295
---------- -------- -----------
Gain from operations before dividends and taxes 4,215 4,141 3,785
Policyowner dividends 3,651 3,334 3,091
---------- -------- -----------
Gain from operations before taxes 564 807 694
Income tax expense 173 125 203
---------- -------- -----------
Net gain from operations 391 682 491
Net realized capital gains 259 1,147 846
---------- -------- -----------
Net income $ 650 $ 1,829 $ 1,337
========== ======== ===========
The accompanying notes are an integral part of these financial statements.
68
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CHANGES
IN SURPLUS (IN MILLIONS)
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------
2001 2000 1999
---------- --------- ---------
Beginning of year balance $ 5,896 $ 5,069 $ 4,741
Net income 650 1,829 1,337
Increase (decrease) in net unrealized gains (555) (1,043) 213
(Increase) decrease in asset valuation reserve 264 73 (377)
Charge-off of goodwill (Note 11) (9) (12) (842)
Cumulative effect of changes in accounting
principles (Note 1) 749 -- --
Increase in net deferred tax assets 73 -- --
Change in reserve valuation basis (Note 5) (61) -- --
Other net decreases (115) (20) (3)
---------- --------- ---------
Net increase in surplus 996 827 328
---------- --------- ---------
End of year balance $ 6,892 $ 5,896 $ 5,069
========== ========= =========
The accompanying notes are an integral part of these financial statements.
69
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH
FLOWS (IN MILLIONS)
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------------------
2001 2000 1999
----------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Premiums and other income received $ 6,607 $ 6,279 $ 5,881
Investment income received 5,527 5,000 4,476
Disbursement of policy loans, net of repayments (524) (566) (358)
Payments to policyowners and beneficiaries (3,996) (3,967) (3,495)
Net transfers to separate accounts (534) (469) (516)
Commissions, expenses and taxes paid (1,708) (1,845) (1,699)
Other, net 202 224 (56)
----------- ---------- ----------
Net cash provided by operating activities 5,574 4,656 4,233
----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from investments sold or matured:
Bonds 35,318 29,539 20,788
Common and preferred stocks 15,465 9,437 13,331
Mortgage loans 1,174 1,198 1,356
Real estate 244 302 216
Other investments 413 659 830
----------- ---------- ----------
52,614 41,135 36,521
----------- ---------- ----------
Cost of investments acquired:
Bonds 38,915 33,378 22,849
Common and preferred stocks 15,014 8,177 13,794
Mortgage loans 2,003 2,261 2,500
Real estate 353 224 362
Other investments 1,106 1,535 1,864
----------- ---------- ----------
57,391 45,575 41,369
----------- ---------- ----------
Net increase (decrease) due to
securities lending and other 4 (158) 499
----------- ---------- ----------
Net cash used in investing activities (4,773) (4,598) (4,349)
----------- ---------- ----------
Net increase (decrease) in cash
and temporary investments 801 58 (116)
Cash and temporary investments, beginning of year 1,217 1,159 1,275
----------- ---------- ----------
Cash and temporary investments, end of year $ 2,018 $ 1,217 $ 1,159
=========== ========== ==========
The accompanying notes are an integral part of these financial statements.
70
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):
Deferred tax accounting $ 850
Pension plan liabilities (74)
Investment valuation changes, net (27)
-----
$ 749
=====
Financial statements prepared on the statutory basis of accounting differ
from financial statements prepared in accordance with generally accepted
accounting principles ("GAAP"), primarily because on a GAAP basis: (1)
certain policy acquisition costs are deferred and 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.
71
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.
72
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.
73
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:
December 31, 2001 Reconciliation to Estimated Fair Value
- ----------------- ------------------------------------------------
Gross Gross Estimated
Statement Unrealized Unrealized Fair
Value Gains Losses Value
----------- ---------- ----------- ----------
(in millions)
U.S. Government $ 4,271 $ 221 $ (84) $ 4,408
States, territories and possessions 262 29 -- 291
Special revenue and assessments 6,032 185 (23) 6,194
Public utilities 2,748 86 (19) 2,815
Banks, trust and insurance companies 1,306 46 (18) 1,334
Industrial and miscellaneous 29,685 1,026 (555) 30,156
Parent, subsidiaries and affiliates 2 -- -- 2
-------- ------ ----- -------
Total $44,306 $1,593 $(699) $45,200
======== ====== ===== =======
December 31, 2000 Reconciliation to Estimated Fair Value
- ----------------- ------------------------------------------------
Gross Gross Estimated
Statement Unrealized Unrealized Fair
Value Gains Losses Value
----------- ---------- ----------- ----------
(in millions)
U.S. Government $ 3,870 $ 241 $ (44) $ 4,067
States, territories and possessions 261 18 -- 279
Special revenue and assessments 5,830 190 (26) 5,994
Public utilities 2,669 37 (77) 2,629
Banks, trust and insurance companies 1,128 29 (3) 1,154
Industrial and miscellaneous 26,846 542 (888) 26,500
Parent, subsidiaries and affiliates 3 -- -- 3
------- ------ ------- -------
Total $40,607 $1,057 $(1,038) $40,626
======= ====== ======= =======
74
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.
Statement Estimated
Value Fair Value
-------- ----------
(in millions)
Due in one year or less $ 823 $ 812
Due after one year through five years 5,931 6,062
Due after five years through ten years 13,923 14,186
Due after ten years 10,604 10,730
------- -------
31,281 31,790
Structured securities 13,025 13,410
------- -------
Total $44,306 $45,200
======= =======
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.
75
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:
For the year ended For the year ended For the year ended
December 31, 2001 December 31, 2000 December 31, 1999
------------------------------- ----------------------------- -------------------------------
Net Net Net
Realized Realized Realized
Realized Realized Gains Realized Realized Gains Realized Realized Gains
Gains Losses (Losses) Gains Losses (Losses) Gains Losses (Losses)
---------- -------- ------- -------- -------- --------- --------- ------- --------
(in millions)
Bonds $ 537 $ (674) $ (137) $ 369 $ (416) $ (47) $ 219 $ (404) $ (185)
Common and
preferred stocks 863 (569) 294 1,534 (333) 1,201 1,270 (255) 1,015
Mortgage loans -- (10) (10) -- (25) (25) 22 (12) 10
Real estate 85 (11) 74 101 -- 101 92 -- 92
Other invested assets 296 (149) 147 395 (177) 218 308 (189) 119
-------- ------- ------ ------ ------- ------- ------- ------ -------
$ 1,781 $(1,413) 368 $2,399 $ (951) 1,448 $ 1,911 $ (860) 1,051
======== ======= ====== ======= ======= ======
Less: Capital gains taxes 98 353 244
Less: IMR gains (losses) 11 (52) (39)
------ ------- ------
Net realized capital gains $ 259 $ 1,147 $ 846
====== ======= ======
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:
For the year ended
December 31,
---------------------------
2001 2000 1999
------- ------- -----
(in millions)
Bonds $ (15) $ (208) $(178)
Common and preferred stocks (699) (851) 415
Mortgage loans -- (2) (10)
Real estate -- (4) (2)
Other investments (193) 22 (12)
------- ------- -----
(907) $(1,043) $ 213
======= =====
Change in deferred taxes 352
-------
$ (555)
=======
See Note 10 regarding the accounting change in 2001 for deferred taxes.
76
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:
December 31, 2001 December 31, 2000
----------------------------------------------------------
Carrying Notional Fair Carrying Notional Fair
Derivative Instrument Value Amount Value Value Amount Value
- --------------------- -------- -------- -------- --------- -------- -------
(in millions)
Specific Hedges:
- ----------------
Foreign currency swaps $ 1 $ 70 $11 $ 6 $118 $ 5
Forward contracts -- 200 3 -- 400 10
Interest rate swaps 1 88 6 -- 83 2
Swaptions/interest
rate floors 14 829 32 16 977 16
Default swaps -- 57 -- -- 52 --
Portfolio Hedges:
- ----------------
Common stock futures
and equity swaps $ 9 $221 $ 9 $ 28 $565 $28
Financial futures (2) 203 (2) -- -- --
Foreign currency
forward contracts -- 502 -- (26) 803 (3)
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.
77
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.
78
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:
Amount Percent
---------- -----------
(in millions)
Subject to discretionary withdrawal - with market value
adjustment $ 8,936 63.5%
Subject to discretionary withdrawal - without market value
adjustment 2,260 16.1%
Not subject to discretionary withdrawal provision 2,869 20.4%
---------- ------
$ 14,065 100.0%
==========
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:
Type of Business Gross Net
------- ------
(in millions)
Ordinary new business $ 145 $ 77
Ordinary renewal 1,351 1,103
------- ------
$ 1,496 $1,180
======= ======
79
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):
At market value $ 9,780
Not subject to discretionary withdrawal 1,762
Non-policy liabilities 244
-------
Total $11,786
=======
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):
From Separate Account Annual Statement:
Transfers to Separate Accounts $ 1,419
Transfers from Separate Accounts (1,128)
-------
291
Reconciling adjustments:
Investment management and administrative charges 72
Mortality, breakage and taxes 139
-------
Net transfers to separate accounts $ 502
=======
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.
80
The funded status of the Company's defined benefit plans, both funded and
unfunded, and postretirement benefits at December 31, 2001 were as
follows:
Unfunded Postretirement
Funded Plans plans Benefits
------------ -------- --------------
(in millions)
Accumulated benefit obligation:
Vested participants $ 874 $ 169 $ 96
Nonvested participants 10 1 --
------- ----- ----
884 170 96
Effect of future salary increases 240 71 --
------- ----- ----
Projected benefit obligation 1,124 241 96
Plan assets at fair value 1,819 (4) 24
------- ----- ----
Funded status 695 (245) (72)
Unrecognized transition (asset) liability (657) -- --
------- ----- ----
Net pension asset (liability) $ 38 $(245) $(72)
======= ===== ====
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:
Pension Postretirement
Plans Benefits
------- --------------
(in millions)
Benefit obligation at January 1 $ 1,259 $ 89
Changes in benefit obligation:
Service cost 50 7
Interest cost 86 6
Benefits paid (30) (6)
------- ----
Benefit obligation at December 31 $ 1,365 $ 96
======= ====
Fair value of plan assets at January 1 $ 1,694 $ 23
Changes in plan assets:
Expected return on plan assets 151 2
Benefits paid (30) (1)
------- ----
Fair value of plan assets at December 31 $ 1,815 $ 24
======= ====
81
The components of net periodic pension expense (benefit) for the year
ended December 31, 2001 were as follows (in millions):
Service cost of benefits earned $ 50
Interest cost on projected obligations 86
Expected return on plan assets (151)
------
Net periodic pension expense (benefit) $ (15)
======
The components of net periodic postretirement expense (benefit) for the
year ended December 31, 2001 were as follows (in millions):
Service cost of benefits earned $ 7
Interest cost on projected obligations 6
Expected return on plan assets (2)
------
Net periodic postretirement expense $ 11
======
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.
82
The effect of reinsurance on premium revenue and benefits expense for the
years ended December 31, 2001, 2000 and 1999 was as follows:
For the year ended December 31,
--------------------------------
2001 2000 1999
-------- -------- -------
(in millions)
Direct premium revenue $ 9,956 $ 9,419 $ 8,785
Premiums ceded (548) (494) (441)
-------- -------- -------
Net premium revenue $ 9,408 $ 8,925 $ 8,344
======== ======== =======
Direct benefits expense 10,109 10,140 9,270
Benefits ceded (432) (315) (262)
-------- -------- -------
Net benefits expense $ 9,677 $ 9,825 $ 9,008
======== ======== =======
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 $ 3,053
Deferred tax liabilities (1,451)
-------
Net deferred tax assets $ 1,602
=======
83
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.
84
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):
December 31, 2001
-----------------------
Statement Fair
Value Value
----------- ----------
ASSETS
Bonds $44,306 $45,200
Common and preferred stocks 5,369 7,072
Mortgage loans 15,164 15,875
Real estate 1,671 2,406
Policy loans 9,028 9,375
Other investments, including derivatives 4,817 5,244
Cash and short-term investments 2,018 2,018
LIABILITIES
Investment-type insurance reserves $ 3,417 $ 3,191
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.
85
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
86
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
87
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.
88
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION PAGE
------- ----------- ----
3.1 Restated Articles of Incorporation of The Northwestern Mutual Life
Insurance Company. (This exhibit was filed in electronic format with
Post-Effective Amendment No. 6 on Form N-4 for NML Variable Annuity
Account A, File No. 33-58476, CIK 0000790162, dated November 13,
1995, and is incorporated herein by reference.)
3.2 Amended By-Laws of The Northwestern Mutual Life Insurance Company.
(This exhibit was filed in electronic format with the Registration
Statement on Form S-6 for Northwestern Mutual Variable Life Account,
File No. 333-59103, CIK 0000742277, dated July 15, 1998, and is
incorporated herein by reference.)
3.3 Resolution of the Board of Trustees of The Northwestern Mutual Life
Insurance Company creating "Northwestern Mutual Variable Annuity
Account A". (This exhibit was filed in electronic format with the
Registration Statement on Form N-4 for NML Variable Annuity Account
A, File No. 333-22455, CIK 0000790162, dated February 27, 1997, and
is incorporated herein by reference.)
3.4 Resolution of the Board of Trustees of The Northwestern Mutual Life
Insurance Company creating Separate Account C. (This exhibit was
filed in electronic format with the Annual Report on Form 10-K for
the fiscal year ended December 31, 1999 of The Northwestern Mutual
Life Insurance Company in respect of NML Variable Annuity Account A
and NML Variable Annuity Account C, dated March 28, 2000 ("1999 Form
10-K"), and is incorporated herein by reference.)
3.5 Resolution of the Board of Trustees of The Northwestern Mutual Life
Insurance Company to use Separate Account C to facilitate the
issuance and maintenance of the Contracts and renaming the Account
"NML Variable Annuity Account C". (This exhibit was filed in
electronic format with the 1999 Form 10-K and is incorporated herein
by reference.)
10.1 Flexible Payment Variable Annuity Front Load Contract, RR.V.A.
(032000) (sex neutral). (This exhibit was filed in electronic format
with Post-Effective Amendment No. 4 on Form N-4 for NML Variable
Annuity Account A, File No. 333-72913, CIK 0000790162, dated May 31,
2001, and is incorporated herein by reference.)
10.2 Flexible Payment Variable Annuity Back Load Contract, RR.V.A.
(032000) (sex neutral). (This exhibit was filed in electronic format
with Post-Effective Amendment No. 4 on Form N-4 for NML Variable
Annuity Account A, File No. 333-72913, CIK 0000790162, dated May 31,
2001, and is incorporated herein by reference.)
10.3 Variable Annuity Front Load and Back Load Contract Payment Rate
Tables, RR.V.A.B (032000), included in Exhibits 10.1 and 10.2 above
(sex distinct).
10.4 Enhanced Death Benefit for Front Load and Back Load Contracts, VA.
EDB. (032000), included in Exhibits 10.1 and 10.2 above.
10.5 Waiver of Withdrawal Charge for Back Load Contract, VA.WWC.
(032000), included in Exhibit 10.2 above.
89
EXHIBIT DESCRIPTION PAGE
------- ----------- ----
10.6 Amended Application forms for Front Load and Back Load Contracts,
included in Exhibits 10.1 and 10.2 above.
10.7 Form of Participation Agreement Among Russell Insurance Funds,
Russell Fund Distributors, Inc. and The Northwestern Mutual Life
Insurance Company. (This exhibit was filed in electronic format with
the Registration Statement on Form N-4 for NML Variable Annuity
Account A, File No. 333-72913, CIK 0000790162, dated February 25,
1999, and is incorporated herein by reference.)
10.8 Form of Administrative Service Fee Agreement between The
Northwestern Mutual Life Insurance Company and Frank Russell
Company. (This exhibit was filed in electronic format with the
Registration Statement on Form N-4 for NML Variable Annuity Account
A, File No. 333-72913, CIK 0000790162, dated February 25, 1999, and
is incorporated herein by reference.)
10.9 Distribution Contract. (This exhibit was filed in electronic format
with the Registration Statement on Form N-4 for NML Variable Annuity
Account A, File No. 333-22455, CIK 0000790162, dated February 27,
1997, and is incorporated herein by reference.)
10.10 Group Combination Annuity Contract, NVP.1C.(0594), with amended
application, including Contract amendment (sex neutral). (This
exhibit was filed in electronic format with Post-Effective Amendment
No. 22 on Form N-4 for NML Variable Annuity Account C, File No.
2-89905-01, CIK 0000790163, dated May 31, 2001, and is incorporated
herein by reference.)
10.11 Amended Application Form for Group Combination Annuity Contract,
included in Exhibit 10.10 above.
21.1 Subsidiaries of The Northwestern Mutual Life Insurance Company 91
24.1 Power of Attorney 94
90