<PAGE>
April 30, 1999
NORTHWESTERN MUTUAL LIFE-Registered Trademark- [LOGO]
The Quiet Company-Registered Trademark- [LOGO]
NML Variable Annuity Account B
Nontax-Qualified Annuities
Individual Retirement Annuities
Roth IRAs
Simplified Employee Pension Plan IRAs
SIMPLE IRAs
Tax Deferred Annuities
457 Deferred Compensation Plan Annuities
Non-Transferable Annuities
PROSPECTUSES
Northwestern Mutual Series Fund, Inc. and
Russell Insurance Funds
The Northwestern Mutual
Life Insurance Company
720 East Wisconsin Avenue
Milwaukee, WI 53202
(414) 271-1444
<PAGE>
The Northwestern Mutual Life Insurance Company
[LOGO] NML Variable Annuity Account B
PROFILE
- ----------
April 30, 1999
PROFILE OF THE VARIABLE ANNUITY CONTRACT
THIS PROFILE IS A SUMMARY OF SOME OF THE MORE IMPORTANT POINTS THAT YOU SHOULD
CONSIDER AND KNOW BEFORE PURCHASING THE CONTRACT. WE DESCRIBE THE CONTRACT MORE
FULLY IN THE PROSPECTUS WHICH ACCOMPANIES THIS PROFILE. PLEASE READ THE
PROSPECTUS CAREFULLY.
1. THE ANNUITY CONTRACT The Contract provides a means for you, the owner, to
invest on a tax-deferred basis in your choice of sixteen investment portfolios.
The Contract also allows investment on a fixed basis in a guaranteed account.
The Contract is intended for retirement savings or other long-term investment
purposes. The Contract provides for a death benefit during the years when funds
are being accumulated and for a variety of income options following retirement.
The sixteen investment portfolios are listed in Section 4 below. These
portfolios bear varying amounts of investment risk. Those with more risk are
designed to produce a better long-term return than those with less risk. But
this is not guaranteed. You can also lose your money.
The amounts invested on a fixed basis earn interest at a rate we set once each
year. Both interest and principal are guaranteed by Northwestern Mutual Life.
You may invest in any or all of the sixteen investment portfolios. You may move
money among these portfolios without charge up to 12 times per year. After that,
a charge of $25 may apply. Transfers of amounts invested on a fixed basis are
subject to restrictions.
During the years when funds are being paid into your Contract, known as the
accumulation phase, the earnings accumulate on a tax-deferred basis. The
earnings are taxed as income if you make a withdrawal. The income phase begins
when you start receiving annuity payments from your Contract, usually at
retirement. Monthly annuity payments begin on the date you select.
The amount you accumulate in your Contract, including the results of investment
performance, will determine the amount of your monthly annuity payments.
2. ANNUITY PAYMENTS If you decide to begin receiving monthly annuity payments
from your Contract, you may choose one of three payment plans: (1) monthly
payments for a specified period of five to thirty years, as you select; (2)
monthly payments for your life (assuming you are the annuitant), and you may
choose to have payments continue to your beneficiary for the balance of ten or
twenty years if you die sooner; or (3) monthly payments for your life and for
the life of another person (usually your spouse) selected by you. After you
begin receiving monthly annuity payments you cannot change your selection if the
payments depend on your life or the life of another.
These payment plans are available to you on a variable or fixed basis. Variable
means that the amount accumulated in your Contract will continue to be invested
in one or more of the sixteen investment portfolios as you choose. Your monthly
annuity payments will vary up or down to reflect continuing investment
performance. Or you may choose a fixed annuity payment plan which guarantees the
amount you will receive each month.
3. PURCHASE You may make purchase payments of $25 or more as you accumulate
funds in your Contract. The minimum initial purchase payment is $100, or $25 for
Contracts used with some tax-qualified retirement plans. We offer Front Load and
Back Load Contracts, as briefly described in Section 5. For the Front Load
Contract the minimum initial purchase payment is $10,000. Your Northwestern
Mutual Life agent will help you complete a Contract application form.
4. INVESTMENT CHOICES You may invest in any or all of the following investment
portfolios. All of these are described in the attached prospectuses for
Northwestern Mutual Series Fund, Inc. and the Russell Insurance Funds.
Northwestern Mutual Series Fund, Inc.
1. Small Cap Growth Stock Portfolio
2. Aggressive Growth Stock Portfolio
3. International Equity Portfolio
4. Index 400 Stock Portfolio
5. Growth Stock Portfolio
6. Growth and Income Stock Portfolio
7. Index 500 Stock Portfolio
8. Balanced Portfolio
9. High Yield Bond Portfolio
10. Select Bond Portfolio
11. Money Market Portfolio
Russell Insurance Funds
1. Multi-Style Equity Fund
2. Aggressive Equity Fund
3. Non-U.S. Fund
4. Real Estate Securities Fund
5. Core Bond Fund
PROFILE
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The Northwestern Mutual Life Insurance Company
[LOGO] NML Variable Annuity Account B
PROFILE
- ----------
April 30, 1999
You may also invest all or part of your funds on a fixed basis (the Guaranteed
Interest Fund).
5. EXPENSES The Contract has insurance and investment features, and there are
costs related to them. For the Front Load Contract we deduct a sales load of 4%
from your purchase payments. The percentage is lower when cumulative purchase
payments exceed $100,000. For the Back Load Contract there is no sales load
deducted from purchase payments but a withdrawal charge of 0% to 8% applies,
depending on the length of time the money you withdraw has been in the Contract
and the size of your Contract.
Each year we deduct a $30 Contract fee. Currently this fee is waived if the
value of your Contract is $50,000 or more.
We also deduct mortality and expense risk charges for the guarantees associated
with your Contract. These charges are at the annual rate of .40% for the Front
Load Contract and 1.25% for the Back Load Contract.
The portfolios also bear investment charges that range from an annual rate of
.21% to 1.30% of the average daily value of the portfolio, depending on the
investment portfolio you select. The following charts are designed to help you
understand the charges for the Front Load and Back Load Contracts. The first
three columns show the annual expenses as a percentage of assets including the
insurance charges, the portfolio charges and the total charges. Portfolio
expenses are based on 1998 expenses for the thirteen portfolios that were in
operation during 1998. Portfolio expenses for the other three portfolios, which
have not begun operations, are estimated for 1999 at an annualized rate.
Expenses for the portfolios reflect fee waivers and expense reimbursements. The
last two columns show you examples of the charges, in dollars, you would pay.
The examples reflect the impact of the asset based charges, any sales loads or
withdrawals that would apply, and the $30 Contract fee calculated by dividing
the annual Contract fees collected by the average assets of the sub-account. The
examples assume that you invested $1,000 in a Contract which earns 5% annually
and that you withdraw your money at the end of year one, and at the end of year
ten. Both of these examples, for both Contracts, reflect aggregate charges on a
cumulative basis to the end of the 1 or 10-year period.
For more detailed information, see the Expense Table which begins on page 3 of
the attached prospectus for the Contracts.
EXPENSES
- --------------------------------------------------------------------------------
FRONT LOAD CONTRACT
ANNUAL EXPENSES AS A PERCENTAGE OF ASSETS
<TABLE>
<CAPTION>
EXAMPLES: *
Total Annual Total Total Annual Charges
Total Annual Portfolio Annual At End of
Portfolio Insurance Charges Charges Expenses 1 Year 10 Years
<S> <C> <C> <C> <C> <C>
Northwestern Mutual Series Fund,
Inc.
Small Cap Growth Stock .43% 1.00% 1.43% $ 54 $ 205
Aggressive Growth Stock .43% .52% .95% $ 49 $ 152
International Equity .43% .76% 1.19% $ 52 $ 179
Index 400 Stock .43% .35% .78% $ 48 $ 133
Growth Stock .43% .46% .89% $ 49 $ 145
Growth and Income Stock .43% .58% 1.01% $ 50 $ 159
Index 500 Stock .43% .21% .64% $ 46 $ 117
Balanced .43% .30% .73% $ 47 $ 127
High Yield Bond .43% .50% .93% $ 49 $ 150
Select Bond .43% .30% .73% $ 47 $ 127
Money Market .43% .30% .73% $ 47 $ 127
Russell Insurance Funds
Multi-Style Equity .43% .92% 1.35% $ 53 $ 196
Aggressive Equity .43% 1.25% 1.68% $ 56 $ 231
Non-U.S. .43% 1.30% 1.73% $ 57 $ 236
Real Estate Securities .43% 1.15% 1.58% $ 55 $ 220
Core Bond .43% .80% 1.23% $ 52 $ 183
</TABLE>
NOTE: THE MINIMUM INITIAL PURCHASE PAYMENT FOR A FRONT LOAD CONTRACT IS $10,000.
THE NUMBERS ABOVE MUST BE MULTIPLIED BY 10 TO FIND THE EXPENSES FOR A FRONT LOAD
CONTRACT OF MINIMUM SIZE.
* THE $30 CONTRACT FEE IS REFLECTED AS .03% OF THE ASSETS BASED ON ACTUAL FEES
COLLECTED DIVIDED BY AVERAGE ASSETS OF THE SUB-ACCOUNT.
PROFILE
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ii
<PAGE>
The Northwestern Mutual Life Insurance Company
[LOGO] NML Variable Annuity Account B
PROFILE
- ----------
April 30, 1999
BACK LOAD CONTRACT
ANNUAL EXPENSES AS A PERCENTAGE OF ASSETS
<TABLE>
<CAPTION>
EXAMPLES: **
Total Annual Total Total Annual Charges
Total Annual Portfolio Annual At End of
Portfolio Insurance Charges Charges Expenses 1 Year 10 Years
<S> <C> <C> <C> <C> <C>
Northwestern Mutual Series Fund,
Inc.
Small Cap Growth Stock 1.39% 1.00% 2.39% $ 104 $ 273
Aggressive Growth Stock 1.39% .52% 1.91% $ 99 $ 224
International Equity 1.39% .76% 2.15% $ 102 $ 249
Index 400 Stock 1.39% .35% 1.74% $ 98 $ 206
Growth Stock 1.39% .46% 1.85% $ 99 $ 217
Growth and Income Stock 1.39% .58% 1.97% $ 100 $ 230
Index 500 Stock 1.39% .21% 1.60% $ 96 $ 190
Balanced 1.39% .30% 1.69% $ 97 $ 200
High Yield Bond 1.39% .50% 1.89% $ 99 $ 222
Select Bond 1.39% .30% 1.69% $ 97 $ 200
Money Market 1.39% .30% 1.69% $ 97 $ 200
Russell Insurance Funds
Multi-Style Equity 1.39% .92% 2.31% $ 103 $ 265
Aggressive Equity 1.39% 1.25% 2.64% $ 107 $ 298
Non-U.S. 1.39% 1.30% 2.69% $ 107 $ 303
Real Estate Securities 1.39% 1.15% 2.54% $ 106 $ 288
Core Bond 1.39% .80% 2.19% $ 102 $ 253
</TABLE>
** THE $30 CONTRACT FEE IS REFLECTED AS 0.14% OF THE ASSETS BASED ON ACTUAL
FEES COLLECTED DIVIDED BY AVERAGE ASSETS OF THE SUB-ACCOUNT.
6. TAXES The Contracts may be issued as an individual retirement annuity
(IRA), simplified employee pension (SEP), SIMPLE IRA, Roth IRA, tax deferred
annuity (TDA), Section 457 deferred compensation plan, nontransferable annuity
or nontax-qualified annuity. The Contracts will be subject to certain
contribution limits and/or other requirements depending on their tax
classification. With the exception of Roth IRAs and nontax-qualified annuities,
purchase payments are excluded from income. In all cases, earnings on your
Contract are not taxed as they accrue. If the Contract is purchased as an
individual retirement annuity (IRA), tax deferred annuity (TDA) or in other
situations where purchase payments are excluded from income, the entire amount
of monthly annuity payments, and any withdrawals, will generally be taxed as
income. If the Contract is purchased as a ROTH IRA, certain distributions after
5 years will be tax-free. Finally, if the Contract is purchased as a
nonqualified annuity, amounts withdrawn prior to the income phase will be taxed
as income to the extent of earnings. During the income phase, monthly annuity
payments will be considered partly a return of your investment which is not
taxed and partly a distribution of earnings which is taxed as income. In all
cases, a 10% federal penalty tax may apply if you make taxable withdrawals from
the Contract before you reach age 59 1/2.
7. ACCESS TO YOUR MONEY You may take money out of your Contract at any time
before monthly annuity payments begin. For the Front Load Contract there is no
charge for withdrawals. For the Back Load Contract there is a withdrawal charge
of 8% or less, depending on how much money has been paid into the Contract and
how long it has been held there. Each purchase payment has its own withdrawal
charge period. When you make a withdrawal, we use the oldest amounts first when
the charge is calculated. After the first year, part of any investment earnings
may be withdrawn without a withdrawal charge. For both Front Load and Back Load
Contracts, you may also have to pay income tax and a tax penalty on amounts you
take out.
PROFILE
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<PAGE>
The Northwestern Mutual Life Insurance Company
[LOGO] NML Variable Annuity Account B
PROFILE
- ----------
April 30, 1999
8. PERFORMANCE The value of your Contract will vary up or down reflecting the
performance of the investment portfolios you select. The chart below shows total
returns for each of the investment portfolios that was in operation, and used
with the Account, during the years shown. These numbers, for the Front Load
Contract and the Back Load Contract, reflect the asset-based charges for
mortality and expense risks, the annual Contract fees and investment expenses
for each portfolio. The numbers include the annual Contract fee in the amount of
.03% for the Front Load Contract and .14% for the Back Load Contract. The
numbers do not reflect deductions from purchase payments for the Front Load
Contract or any withdrawal charge for the Back Load Contract. Those charges, if
applied, would reduce the performance. Past performance does not guarantee
future results.
PERFORMANCE
- --------------------------------------------------------------------------------
FRONT LOAD CONTRACT
<TABLE>
<CAPTION>
Calendar Year
Portfolio 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Aggressive Growth
Stock 7.09 13.37 17.19 38.70 4.95 18.60 5.49 55.07 NA NA
International Equity 4.37 11.80 20.49 14.08 -.53 NA NA NA NA NA
Growth Stock 26.15 29.30 20.38 30.26 NA NA NA NA NA NA
Growth and Income
Stock 22.61 29.47 19.45 30.56 NA NA NA NA NA NA
Index 500 Stock 28.17 32.63 22.22 36.66 .76 9.29 6.80 29.00 NA NA
Balanced 18.37 20.99 12.96 25.85 -.45 9.11 4.87 23.40 .61 15.10
High Yield Bond -2.27 15.35 19.25 16.28 NA NA NA NA NA NA
Select Bond 6.61 8.99 2.87 18.59 -3.25 9.86 6.53 16.37 7.86 13.38
Money Market 4.97 5.02 4.83 5.37 3.61 2.41 2.90 5.24 7.57 8.51
</TABLE>
BACK LOAD CONTRACT
<TABLE>
<CAPTION>
Calendar Year
Portfolio 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Aggressive Growth
Stock 6.07 12.30 16.07 37.38 3.96 17.47 4.48 53.85 NA NA
International Equity 3.38 10.73 19.34 13.00 -1.47 NA NA NA NA NA
Growth Stock 24.94 28.07 19.23 29.02 NA NA NA NA NA NA
Growth and Income
Stock 21.44 28.24 18.31 29.32 NA NA NA NA NA NA
Index 500 Stock 26.95 31.37 21.05 35.37 -.20 8.26 5.78 27.77 NA NA
Balanced 17.24 19.84 11.88 24.65 -1.39 8.07 3.86 22.23 -.35 14.01
High Yield Bond -3.20 14.26 18.11 15.17 NA NA NA NA NA NA
Select Bond 5.59 7.96 1.88 17.46 -4.17 8.81 5.51 15.27 6.83 12.30
Money Market 3.97 4.02 3.82 4.37 2.63 1.43 1.91 4.23 6.54 7.48
</TABLE>
9. DEATH BENEFIT If you die before age 65, and before monthly annuity payments
begin, your beneficiary will receive a death benefit. The amount will be the
value of your Contract or, if greater, the amount you have paid in. The death
benefit will be adjusted, of course, for any withdrawals you have made. The
death benefit will be paid as a lump sum or your beneficiary may select a
monthly annuity payment plan.
PROFILE
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<PAGE>
The Northwestern Mutual Life Insurance Company
[LOGO] NML Variable Annuity Account B
PROFILE
- ----------
April 30, 1999
10. OTHER INFORMATION
FREE LOOK. If you return the Contract within ten days after you receive it (or
whatever period is required in your state), we will send your money back. There
is no charge for our expenses but the amount you receive may be more or less
than what you paid, based on actual investment experience following the date we
received your purchase payment.
AVOID PROBATE. In most cases, when you die, your beneficiary will receive the
full death benefit of your Contract without going through probate.
AUTOMATIC DOLLAR-COST AVERAGING. With our Dollar-Cost Averaging Plan, you can
arrange to have a regular amount of money ($100 minimum) automatically
transferred from the Money Market Portfolio into the portfolio or portfolios you
have chosen on a monthly or quarterly basis.
ELECTRONIC FUNDS TRANSFER (EFT). Another convenient way to invest using the
dollar-cost averaging approach is through our EFT Plan. These automatic
checkbook withdrawals allow you to add to your portfolio(s) on a regular monthly
basis through payments drawn directly on your checking account.
SYSTEMATIC WITHDRAWAL PLAN. You can arrange to have regular amounts of money
sent to you while your Contract is still in the accumulation phase. Our
Systematic Withdrawal Plan allows you to automatically redeem accumulation units
to generate monthly payments. Of course you will have to pay taxes on certain
amounts of money you receive.
AUTOMATIC REQUIRED MINIMUM DISTRIBUTIONS. For IRAs, Simplified Employee Pension
Plans, SIMPLE IRA Plans and 403(b) Plans, you can arrange for annual required
minimum distributions to be sent to you automatically once you turn age 70 1/2.
DIVIDENDS. We are paying dividends on approximately 18% of our inforce variable
annuity contracts in 1999, primarily older, larger contracts. The dividends
arise principally as a result of more favorable expense results than assumed in
determining deductions on these contracts.
PORTFOLIO REBALANCING. To help you maintain your asset allocation plan over
time we offer a rebalancing service. This will automatically readjust your
investment option allocations, on a periodic basis, back to the allocation
percentages you have selected.
INTEREST SWEEPS. If you select this service we will automatically sweep or
transfer interest from the Guaranteed Interest Fund to any combination of
variable investment options. Interest earnings can be swept monthly, quarterly,
semi-annually or annually.
NML EXPRESS. 1-800-519-4NML (1-800-519-4665). Get up-to-date information about
your contract at your convenience with your contract number and your Personal
Identification Number (PIN). Call toll-free to review contract values and unit
values, transfer among portfolios, change the allocation and obtain fund
performance information.
INTERNET. For information about Northwestern Mutual Life, visit us on our
Website. Included are daily unit values and fund performance information.
www.northwesternmutual.com
THESE FEATURES MAY NOT BE AVAILABLE IN ALL STATES AND MAY NOT BE SUITABLE FOR
YOUR PARTICULAR SITUATION.
11. INQUIRIES If you need more information, please contact us at:
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY, 720 EAST WISCONSIN AVENUE,
MILWAUKEE, WISCONSIN 53202; (414) 271-1444
PROFILE
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<PAGE>
PROSPECTUS
NML VARIABLE ANNUITY ACCOUNT B
This prospectus describes individual variable annuity contracts (the
"Contracts") offered by The Northwestern Mutual Life Insurance Company
("Northwestern Mutual Life").
We offer the Contracts for use in these situations:
- - Individual Retirement Annuities (IRAs), including traditional IRAs, Simplified
Employee Pensions (SEPs) and SIMPLE IRAs.
- - Roth IRAs.
- - Tax-Deferred Annuities (TDAs).
- - Section 457 deferred compensation plans.
- - Non-transferable annuities issued in exchange for fixed-dollar annuities
received or distributions of termination benefits from tax-qualified plans or
trusts.
- - Other situations that do not qualify for special tax treatment.
We use NML Variable Annuity Account B (the "Account") to keep the money you
invest separate from our general assets. The money in the Account is invested in
the eleven portfolios of Northwestern Mutual Series Fund, Inc. and the five
Russell Insurance Funds. You select the Portfolios or Funds in which you want to
invest. The Account has 16 Divisions that correspond to the 11 Portfolios and 5
Funds in which you may invest. The Contracts also permit you to invest on a
fixed basis, at rates that we determine. This prospectus describes only the
Account and the variable provisions of the Contracts except where there are
specific references to the fixed provisions.
We offer two versions of the Contracts: Front Load Contracts and Back Load
Contracts. See the Expense table on page 3 and the Deductions section, beginning
on page 20.
This prospectus is a concise description of the information you should know
before you buy a Contract. We have filed additional information about the
Contracts with the Securities and Exchange Commission in a Statement of
Additional Information. We incorporate the Statement of Additional Information
into this prospectus by reference. We will send you the Statement of Additional
Information without charge if you write to The Northwestern Mutual Life
Insurance Company, 720 East Wisconsin Avenue, Milwaukee, Wisconsin, 53202, or
call us at Telephone Number (414) 271-1444. You will find the table of contents
for the Statement of Additional Information following page 23 of this
prospectus.
This prospectus is valid only when accompanied by the current prospectuses for
Northwestern Mutual Series Fund, Inc. and the Russell Insurance Funds which are
attached to this prospectus. You should retain this prospectus for future
reference.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
The Date of this prospectus and the Statement of Additional Information is April
30, 1999.
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<PAGE>
CONTENTS FOR THIS PROSPECTUS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
PROFILE............................................... i-v
PROSPECTUS............................................ 1
NML Variable Annuity Account B...................... 1
INDEX OF SPECIAL TERMS................................ 3
EXPENSE TABLE......................................... 3
ACCUMULATION UNIT VALUES.............................. 6
THE COMPANY........................................... 9
NML VARIABLE ANNUITY ACCOUNT B........................ 9
THE FUNDS............................................. 9
THE CONTRACTS......................................... 10
Purchase Payments Under the Contracts............... 10
Amount and Frequency.............................. 10
Application of Purchase Payments.................. 10
Net Investment Factor............................... 11
Benefits Provided Under the Contracts............... 11
Withdrawal Amount................................. 11
Death Benefit..................................... 11
Maturity Benefit.................................. 12
Variable Payment Plans.............................. 12
Description of Payment Plans...................... 12
Amount of Annuity Payments........................ 12
Assumed Investment Rate........................... 12
Additional Information.............................. 13
Transfers Between Divisions and Payment Plans..... 13
Owners of the Contracts........................... 13
Special Contract for Employers...................... 13
Deferment of Benefit Payments..................... 14
Dividends......................................... 14
Voting Rights..................................... 14
Substitution and Change........................... 14
Fixed Annuity Payment Plans....................... 15
<CAPTION>
Page
-----
<S> <C>
Performance Data.................................. 15
Financial Statements.............................. 15
THE GUARANTEED INTEREST FUND.......................... 15
FEDERAL INCOME TAXES.................................. 16
Qualified and Nontax-Qualified Plans................ 16
Contribution Limitations and General Requirements
Applicable to Contracts............................ 17
Traditional IRA................................... 17
SEP............................................... 17
SIMPLE IRA........................................ 17
Roth IRA.......................................... 17
Tax Deferred Annuity.............................. 17
Section 457 Plan.................................. 18
Nontransferable Annuity........................... 18
Nontax-qualified Contract......................... 18
Taxation of Contract Benefits....................... 18
IRAs, SEPs, SIMPLE IRAs, TDAs and Section 457
Plans and Nontransferable Annuities.............. 18
Roth IRAs......................................... 18
Nonqualified Contracts............................ 19
Premature Withdrawals............................. 19
Mandatory Withholding............................. 19
Taxation of Northwestern Mutual Life................ 19
Other Considerations................................ 19
DEDUCTIONS............................................ 20
Contracts Issued Prior to March 31, 1995............ 22
Contracts Issued Prior to December 17, 1981......... 22
Certain Nontax-Qualified Contracts.................. 22
Reduced Charges for Exchange Transactions........... 22
DISTRIBUTION OF THE CONTRACTS......................... 22
YEAR 2000 ISSUES...................................... 23
</TABLE>
THE TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION APPEARS ON THE
PAGE FOLLOWING PAGE 23 OF THIS PROSPECTUS.
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2
<PAGE>
INDEX OF SPECIAL TERMS
THE FOLLOWING SPECIAL TERMS USED IN THIS PROSPECTUS ARE DISCUSSED AT THE PAGES
INDICATED.
<TABLE>
<CAPTION>
TERM PAGE
- ------------------------------------------------------ -----
<S> <C>
Accumulation Unit..................................... 10
Annuity (or Annuity Payments)......................... 12
Net Investment Factor................................. 11
Payment Plans......................................... 12
<CAPTION>
TERM PAGE
- ------------------------------------------------------ -----
<S> <C>
Annuitant............................................. 13
Maturity Date......................................... 12
Owner................................................. 13
Withdrawal Amount..................................... 11
</TABLE>
- --------------------------------------------------------------------------------
EXPENSE TABLE
<TABLE>
<S> <C>
FRONT LOAD CONTRACT
TRANSACTION EXPENSES FOR CONTRACTOWNERS
Maximum Sales Load (as a percentage of
purchase payments)............................ 4%
Withdrawal Charge............................. None
ANNUAL EXPENSES OF THE ACCOUNT
(AS A PERCENTAGE OF ASSETS)
Mortality and Expense Risk Fees............... .40%
Total Separate Account Annual Expenses........ .40%
ANNUAL CONTRACT FEE
$30; waived if the Contract Value equals or
exceeds $50,000
</TABLE>
------------------------------------------------------------------------
<TABLE>
<S> <C>
BACK LOAD CONTRACT
TRANSACTION EXPENSES FOR CONTRACTOWNERS
Sales Load (as a percentage of purchase
payments).................................... None
Withdrawal Charge for Sales Expenses
(as a percentage of amounts paid)............ 0%-8%
ANNUAL EXPENSES OF THE ACCOUNT
(AS A PERCENTAGE OF ASSETS)
Mortality and Expense Risk Fees.............. 1.25%
Total Separate Account Annual Expenses....... 1.25%
ANNUAL CONTRACT FEE
$30; waived if the Contract Value equals or
exceeds $50,000
</TABLE>
ANNUAL EXPENSES OF THE PORTFOLIOS AND FUNDS
(AS A PERCENTAGE OF THE ASSETS)
<TABLE>
<CAPTION>
TOTAL ANNUAL
EXPENSES
MANAGEMENT FEES (AFTER EXPENSE
(AFTER FEE WAIVER) OTHER EXPENSES REIMBURSEMENT)
----------------------- ------------------- -------------------
<S> <C> <C> <C>
Northwestern Mutual Series Fund, Inc.
Small Cap Growth Stock*..................................... .80% .20% 1.00%
Aggressive Growth Stock..................................... .52% .00% .52%
International Equity........................................ .67% .09% .76%
Index 400 Stock*............................................ .25% .10% .35%
Growth Stock................................................ .45% .01% .46%
Growth and Income Stock..................................... .57% .01% .58%
Index 500 Stock............................................. .20% .01% .21%
Balanced.................................................... .30% .00% .30%
High Yield Bond............................................. .49% .01% .50%
Select Bond................................................. .30% .00% .30%
Money Market................................................ .30% .00% .30%
Russell Insurance Funds**
Multi-Style Equity.......................................... .49% .43% .92%
Aggressive Equity........................................... .53% .72% 1.25%
Non-U.S..................................................... .00% 1.30% 1.30%
Real Estate Securities*..................................... .85% .30% 1.15%
Core Bond................................................... .12% .68% .80%
</TABLE>
*Expenses are estimated for these new Portfolios and Funds, for 1999 at
annualized rates.
**For the Russell Insurance Funds, the adviser has voluntarily agreed to waive a
portion of the management fee, up to the full amount of the fee, equal to the
amount by which the Fund's total operating expenses exceed the amounts shown
above under "Total Annual Expenses (After Expense Reimbursement)". The adviser
has also agreed to reimburse the Fund for all remaining expenses after fee
waivers which exceed the amounts shown above under that heading. Absent the fee
waiver and expense reimbursement, the management fees and total annual expenses
would be .78% and 1.21% for the Multi-Style Equity Fund; .95% and 1.67% for the
Aggressive Equity Fund; .95% and 2.37% for the Non-U.S. Fund; .85% and 1.15% for
the Real Estate Securities Fund; and .60% and 1.28% for the Core Bond Fund.
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3
<PAGE>
EXAMPLE
FRONT LOAD CONTRACT -- You would pay the following expenses on each $1,000
investment, assuming 5% annual return:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Northwestern Mutual Series Fund, Inc.
Small Cap Growth Stock............................... $54 $83 $115 $205
Aggressive Growth Stock.............................. $49 $69 $ 90 $152
International Equity................................. $52 $76 $103 $179
Index 400 Stock...................................... $48 $64 $ 82 $133
Growth Stock......................................... $49 $67 $ 87 $145
Growth and Income Stock.............................. $50 $71 $ 94 $159
Index 500 Stock...................................... $46 $60 $ 74 $117
Balanced............................................. $47 $62 $ 79 $127
High Yield Bond...................................... $49 $68 $ 89 $150
Select Bond.......................................... $47 $62 $ 79 $127
Money Market......................................... $47 $62 $ 79 $127
Russell Insurance Funds
Multi-Style Equity................................... $53 $81 $111 $196
Aggressive Equity.................................... $56 $91 $128 $231
Non-U.S.............................................. $57 $92 $130 $236
Real Estate Securities............................... $55 $88 $123 $220
Core Bond............................................ $52 $77 $105 $183
</TABLE>
NOTE: THE MINIMUM INITIAL PURCHASE PAYMENT FOR A FRONT-LOAD CONTRACT IS $10,000.
YOU MUST MULTIPLY THE NUMBERS ABOVE BY 10 TO FIND THE EXPENSES FOR A FRONT-LOAD
CONTRACT OF MINIMUM SIZE.
EXAMPLE
BACK LOAD CONTRACT -- You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2) surrender just prior to the
end of each time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Northwestern Mutual Series Fund, Inc.
Small Cap Growth Stock............................... $104 $135 $168 $273
Aggressive Growth Stock.............................. $99 $120 $143 $224
International Equity................................. $102 $127 $156 $249
Index 400 Stock...................................... $98 $115 $135 $206
Growth Stock......................................... $99 $118 $140 $217
Growth and Income Stock.............................. $100 $122 $146 $230
Index 500 Stock...................................... $96 $111 $127 $190
Balanced............................................. $97 $113 $132 $200
High Yield Bond...................................... $99 $120 $142 $222
Select Bond.......................................... $97 $113 $132 $200
Money Market......................................... $97 $113 $132 $200
Russell Insurance Funds
Multi-Style Equity................................... $103 $132 $164 $265
Aggressive Equity.................................... $107 $142 $180 $298
Non-U.S.............................................. $107 $144 $183 $303
Real Estate Securities............................... $106 $139 $175 $288
Core Bond............................................ $102 $129 $158 $253
</TABLE>
--
4
<PAGE>
You would pay the following expenses on the same $1,000 investment, assuming NO
SURRENDER OR ANNUITIZATION:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- ------- ------- --------
<S> <C> <C> <C> <C>
Northwestern Mutual Series Fund, Inc.
Small Cap Growth Stock............................... $24 $75 $128 $273
Aggressive Growth Stock.............................. $19 $60 $103 $224
International Equity................................. $22 $67 $116 $249
Index 400 Stock...................................... $18 $55 $95 $206
Growth Stock......................................... $19 $58 $100 $217
Growth and Income Stock.............................. $20 $62 $106 $230
Index 500 Stock...................................... $16 $51 $87 $190
Balanced............................................. $17 $53 $92 $200
High Yield Bond...................................... $19 $60 $102 $222
Select Bond.......................................... $17 $53 $92 $200
Money Market......................................... $17 $53 $92 $200
Russell Insurance Funds
Multi-Style Equity................................... $23 $72 $124 $265
Aggressive Equity.................................... $27 $82 $140 $298
Non-U.S.............................................. $27 $84 $143 $303
Real Estate Securities............................... $26 $79 $135 $288
Core Bond............................................ $22 $69 $118 $253
</TABLE>
The purpose of the table above is to assist a Contract Owner in understanding
the expenses paid by the Account and the Portfolios and Funds and borne by
investors in the Contracts. The sales load for a Front Load Contract depends on
the amount of cumulative purchase payments. For the Back Load Contract the
withdrawal charge depends on the length of time funds have been held under the
Contract and the amounts held. The $30 annual Contract fee is reflected as .03%
for the Front Load Contract and .14% for the Back Load Contract based on the
annual Contract fees collected divided by the average assets of the sub-account.
The Contracts provide for charges for transfers between the Divisions of the
Account and for premium taxes, but we are not currently making such charges. See
"Transfers Between Divisions and Payment Plans", p. 13 and "Deductions", p. 20,
for additional information about expenses for the Contracts. The expenses shown
in the table for the Portfolios and Funds show the annual expenses for each, as
a percentage of their average net assets, based on 1998 operations for the
Portfolios and their predecessors and the Funds. Expenses for Portfolios and
Funds which have not begun operations are estimated. Expenses for each of the
Russell Insurance Funds reflect fee waivers and expense reimbursements that the
Funds' adviser has voluntarily agreed to make for 1999. These may be changed at
any time without notice. Absent the fee waivers and expense reimbursements the
expenses would be higher. See the disclosure at the bottom of page 3. For
additional information about expenses of the Portfolios and Funds, see the
prospectuses for Northwestern Mutual Series Fund, Inc. and the Russell Insurance
Funds attached to this prospectus.
The example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown, subject to
the guarantees of the contracts.
The tables on the following pages present the accumulation unit values of nine
Divisions of the Account for the Contracts, including Contracts issued prior to
the date of this prospectus. These nine Divisions are those which were in
operation in 1998 and prior years. The Contracts issued prior to March 31, 1995
are different in certain material respects from Contracts offered currently, but
the values shown below for Contracts issued after December 16, 1981 and prior to
March 31, 1995 are calculated on the same basis as those for the Back Load
Contracts described in this prospectus. The Front Load Contracts described in
this prospectus have a lower mortality rate and expense guarantee charge than
any of the Contracts issued prior to March 31, 1995
--
5
<PAGE>
ACCUMULATION UNIT VALUES
CONTRACTS ISSUED ON OR AFTER MARCH 31, 1995
<TABLE>
<CAPTION>
FOR YEARS ENDED FOR THE NINE
DECEMBER 31 MONTHS ENDED
------------------------------------------- DECEMBER 31,
1998 1997 1996 1995
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
AGGRESSIVE GROWTH STOCK DIVISION
Front Load Version
Beginning of Period............................. $1.735 $1.305 $1.305 $1.00
End of Period................................... $1.859 $1.735 $1.530 $1.305
Back Load Version
Beginning of Period............................. $3.598 $3.200 $2.753 $2.123
End of Period................................... $3.822 $3.598 $3.200 $2.753
Number of Units Outstanding, End of Period
Front Load...................................... 38,301,039 30,869,455 19,593,516 5,338,263
Back Load....................................... 50,240,828 42,824,318 29,722,778 8,294,210
INTERNATIONAL EQUITY DIVISION
Front Load Version
Beginning of Period............................. $1.537 $1.374 $1.140 $1.00
End of Period................................... $1.605 $1.537 $1.374 $1.140
Back Load Version
Beginning of Period............................. $1.829 $1.649 $1.380 $1.218
End of Period................................... $1.893 $1.829 $1.649 $1.380
Number of Units Outstanding, End of Period
Front Load...................................... 30,705,368 24,895,817 12,485,204 2,784,309
Back Load....................................... 58,015,141 49,418,651 27,579,179 7,214,357
GROWTH STOCK DIVISION
Front Load Version
Beginning of Period............................. $1.883 $1.456 $1.209 $1.00
End of Period................................... $2.375 $1.883 $1.456 $1.209
Back Load Version
Beginning of Period............................. $1.991 $1.552 $1.300 $1.082
End of Period................................... $2.491 $1.991 $1.552 $1.300
Number of Units Outstanding, End of Period
Front Load...................................... 20,435,890 12,915,731 6,777,198 1,715,092
Back Load....................................... 43,931,364 30,083,122 17,808,617 3,952,191
GROWTH AND INCOME STOCK DIVISION
Front Load Version
Beginning of Period............................. $1.852 $1.430 $1.197 $1.00
End of Period................................... $2.271 $1.852 $1.430 $1.197
Back Load Version
Beginning of Period............................. $1.959 $1.525 $1.287 $1.083
End of Period................................... $2.382 $1.959 $1.525 $1.287
Number of Units Outstanding, End of Period
Front Load...................................... 28,665,538 19,189,183 9,882,138 3,530,232
Back Load....................................... 60,018,961 43,671,623 24,818,409 7,514,293
INDEX 500 STOCK DIVISION
Front Load Version
Beginning of Period............................. $2.026 $1.527 $1.249 $1.00
End of Period................................... $2.597 $2.026 $1.527 $1.249
Back Load Version
Beginning of Period............................. $3.240 $2.463 $2.032 $1.604
End of Period................................... $4.119 $3.240 $2.463 $1.991
Number of Units Outstanding, End of Period
Front Load...................................... 49,367,899 32,584,892 17,301,664 278,235
Back Load....................................... 74,933,584 53,900,586 31,553,915 471,752
<CAPTION>
FOR YEARS ENDED FOR THE NINE
DECEMBER 31 MONTHS ENDED
------------------------------------------- DECEMBER 31,
1998 1997 1996 1995
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
BALANCED DIVISION
Front Load Version
Beginning of Period............................. $1.615 $1.334 $1.181 $1.00
End of Period................................... $1.912 $1.615 $1.334 $1.181
Back Load Version
Beginning of Period............................. $5.796 $4.830 $4.311 $3.655
End of Period................................... $6.805 $5.796 $4.830 $4.290
Number of Units Outstanding, End of Period
Front Load...................................... 72,292,495 43,288,762 24,916,332 164,302
Back Load....................................... 50,001,293 37,392,725 24,088,931 372,457
HIGH YIELD BOND DIVISION
Front Load Version
Beginning of Period............................. $1.530 $1.326 $1.112 $1.00
End of Period................................... $1.496 $1.530 $1.326 $1.112
Back Load Version
Beginning of Period............................. $1.595 $1.394 $1.178 $1.067
End of Period................................... $1.546 $1.595 $1.394 $1.178
Number of Units Outstanding, End of Period
Front Load...................................... 19,796,158 11,305,194 4,518,513 1,418,382
Back Load....................................... 34,432,479 22,019,285 10,288,680 2,700,647
SELECT BOND DIVISION
Front Load Version
Beginning of Period............................. $1.266 $1.161 $1.129 $1.00
End of Period................................... $1.350 $1.266 $1.161 $1.129
Back Load Version
Beginning of Period............................. $6.768 $6.261 $6.137 $5.419
End of Period................................... $7.157 $6.768 $6.261 $6.078
Number of Units Outstanding, End of Period
Front Load...................................... 22,093,895 12,652,127 6,391,221 26,732
Back Load....................................... 8,005,277 5,418,476 3,653,656 50,828
MONEY MARKET DIVISION
Front Load Version
Beginning of Period............................. $1.146 $1.091 $1.040 $1.00
End of Period................................... $1.203 $1.146 $1.091 $1.040
Back Load Version
Beginning of Period............................. $2.340 $2.246 $2.161 $2.086
End of Period................................... $2.436 $2.340 $2.246 $2.156
Number of Units Outstanding, End of Period
Front Load...................................... 27,165,662 16,238,723 11,210,749 327,441
Back Load....................................... 22,512,853 14,615,063 12,209,698 379,473
</TABLE>
--
6
<PAGE>
ACCUMULATION UNIT VALUES
CONTRACTS ISSUED AFTER DECEMBER 16, 1981 AND PRIOR TO MARCH 31, 1995
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
----------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AGGRESSIVE GROWTH STOCK
DIVISION
Beginning of Period* $3.598 $3.200 $2.753 $2.001 $1.922 $1.634 $1.562 $1.014
End of Period $3.822 $3.598 $3.200 $2.753 $2.001 $1.922 $1.634 $1.562
Number of Units
Outstanding, End of Period 142,251,000 157,775,380 162,837,073 147,960,662 123,249,312 77,246,018 53,918,035 19,966,511
INTERNATIONAL EQUITY DIVISION
Beginning of Period** $1.829 $1.649 $1.380 $1.220 $1.236 $1.000 -- --
End of Period $1.893 $1.829 $1.649 $1.380 $1.220 $1.236 -- --
Number of Units
Outstanding, End of Period 169,478,000 194,160,450 190,864,716 179,261,185 186,097,279 74,174,799 -- --
GROWTH STOCK DIVISION
Beginning of Period+ $1.991 $1.552 $1.300 $1.006 $1.000 -- -- --
End of Period $2.491 $1.991 $1.552 $1.300 $1.006 -- -- --
Number of Units
Outstanding, End of Period 55,526,000 45,562,063 37,212,487 24,827,801 12,213,322 -- -- --
GROWTH AND INCOME STOCK
DIVISION
Beginning of Period+ $1.959 $1.525 $1.287 $0.994 $1.000 -- -- --
End of Period $2.382 $1.959 $1.525 $1.287 $0.994 -- -- --
Number of Units
Outstanding, End of Period 87,082,000 80,719,502 63,969,388 52,866,200 31,542,581 -- -- --
INDEX 500 STOCK DIVISION
Beginning of Period* $3.240 $2.463 $2.032 $1.499 $1.500 $1.384 $1.306 $1.021
End of Period $4.119 $3.240 $2.463 $2.032 $1.499 $1.500 $1.384 $1.306
Number of Units
Outstanding, End of Period 163,099,000 156,622,110 146,945,069 134,818,674 119,845,898 105,795,927 32,924,088 12,058,133
BALANCED DIVISION
Beginning of Period $5.796 $4.830 $4.311 $3.453 $3.497 $3.232 $3.107 $2.538
End of Period $6.805 $5.796 $4.830 $4.311 $3.453 $3.497 $3.232 $3.107
Number of Units
Outstanding, End of Period 303,184,000 315,853,927 331,700,359 347,995,936 363,391,482 377,043,512 355,125,051 322,313,588
HIGH YIELD BOND DIVISION
Beginning of Period+ $1.595 $1.394 $1.178 $1.022 $1.000 -- -- --
End of Period $1.546 $1.595 $1.394 $1.178 $1.022 -- -- --
Number of Units
Outstanding, End of Period 32,974,000 28,965,737 18,022,623 13,474,146 7,229,418 -- -- --
SELECT BOND DIVISION
Beginning of Period $6.768 $6.261 $6.137 $5.217 $5.437 $4.990 $4.722 $4.091
End of Period $7.157 $6.768 $6.261 $6.137 $5.217 $5.437 $4.990 $4.722
Number of Units
Outstanding, End of Period 19,458,000 18,885,862 19,498,362 21,048,883 20,642,740 21,874,778 15,399,609 10,692,797
MONEY MARKET DIVISION
Beginning of Period $2.340 $2.246 $2.161 $2.067 $2.012 $1.980 $1.940 $1.859
End of Period $2.436 $2.340 $2.246 $2.161 $2.067 $2.012 $1.980 $1.940
Number of Units
Outstanding, End of Period 46,757,000 33,000,108 35,677,445 34,040,829 31,466,730 24,431,865 27,773,056 24,758,592
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31
----------------------
1990 1989
---------- ----------
<S> <C> <C>
AGGRESSIVE GROWTH STOCK
DIVISION
Beginning of Period* $1.000 --
End of Period $1.014 --
Number of Units
Outstanding, End of Period 205,590 --
INTERNATIONAL EQUITY DIVISION
Beginning of Period** -- --
End of Period -- --
Number of Units
Outstanding, End of Period -- --
GROWTH STOCK DIVISION
Beginning of Period+ -- --
End of Period -- --
Number of Units
Outstanding, End of Period -- --
GROWTH AND INCOME STOCK
DIVISION
Beginning of Period+ -- --
End of Period -- --
Number of Units
Outstanding, End of Period --
INDEX 500 STOCK DIVISION
Beginning of Period* $1.000 --
End of Period $1.021 --
Number of Units
Outstanding, End of Period 189,751 --
BALANCED DIVISION
Beginning of Period $2.544 $2.228
End of Period $2.538 $2.544
Number of Units
Outstanding, End of Period 322,488,873 316,204,759
HIGH YIELD BOND DIVISION
Beginning of Period+ -- --
End of Period -- --
Number of Units
Outstanding, End of Period -- --
SELECT BOND DIVISION
Beginning of Period $3.824 $3.401
End of Period $4.091 $3.824
Number of Units
Outstanding, End of Period 6,997,013 5,553,863
MONEY MARKET DIVISION
Beginning of Period $1.743 $1.619
End of Period $1.859 $1.743
Number of Units
Outstanding, End of Period 27,363,279 20,510,416
</TABLE>
* The initial investments in the Aggressive Growth Stock Division and Index 500
Stock Division were made on December 3, 1990.
** The initial investment in the International Equity Division was made on April
30, 1993.
+ The initial investments in the Growth Stock Division, Growth and Income Stock
Division, and High Yield Bond Division were made on May 3, 1994.
--
7
<PAGE>
ACCUMULATION UNIT VALUES
CONTRACTS ISSUED PRIOR TO DECEMBER 17, 1981
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
----------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AGGRESSIVE GROWTH STOCK
DIVISION
Beginning of Period* $3.728 $3.299 $2.824 $2.042 $1.952 $1.651 $1.570 $1.014
End of Period $3.980 $3.728 $3.299 $2.824 $2.042 $1.952 $1.651 $1.570
Number of Units Outstanding,
End of Period 1,033,099 1,476,370 1,697,195 1,617,883 1,474,133 969,604 833,606 534,196
INTERNATIONAL EQUITY DIVISION
Beginning of Period** $1.872 $1.680 $1.398 $1.230 $1.240 $1.000 -- --
End of Period $1.947 $1.872 $1.680 $1.398 $1.230 $1.240 -- --
Number of Units Outstanding,
End of Period 1,521,122 2,125,863 2,276,960 2,141,462 2,642,855 1,802,948 -- --
GROWTH STOCK DIVISION
Beginning of Period+ $2.027 $1.573 $1.311 $1.009 -- -- -- --
End of Period $2.549 $2.027 $1.573 $1.311 -- -- -- --
Number of Units Outstanding,
End of Period 334,810 263,014 239,460 19,315 -- -- -- --
GROWTH AND INCOME STOCK
DIVISION
Beginning of Period+ $1.995 $1.546 $1.298 $0.997 -- -- -- --
End of Period $2.438 $1.995 $1.546 $1.298 -- -- -- --
Number of Units Outstanding,
End of Period 433,265 551,213 221,275 32,681 -- -- -- --
INDEX 500 STOCK DIVISION
Beginning of Period* $3.357 $2.539 $2.084 $1.530 $1.523 $1.398 $1.313 $1.021
End of Period $4.289 $3.357 $2.539 $2.084 $1.530 $1.523 $1.398 $1.313
Number of Units Outstanding,
End of Period 10,167,099 11,228,774 12,234,934 13,256,279 14,230,394 15,442,799 317,023 326,395
BALANCED DIVISION
Beginning of Period $6.278 $5.205 $4.623 $3.685 $3.713 $3.414 $3.266 $2.655
End of Period $7.408 $6.278 $5.205 $4.623 $3.685 $3.713 $3.414 $3.266
Number of Units Outstanding,
End of Period 3,072,434 6,272,328 6,695,097 7,327,654 8,155,713 9,324,132 10,125,067 10,652,114
HIGH YIELD BOND DIVISION
Beginning of Period+ $1.624 $1.412 $1.188 $1.025 -- -- -- --
End of Period $1.582 $1.624 $1.412 $1.188 -- -- -- --
Number of Units Outstanding,
End of Period 139,262 251,003 125,053 58,755 -- -- -- --
SELECT BOND DIVISION
Beginning of Period $7.334 $6.750 $6.583 $5.569 $5.774 $5.273 $4.965 $4.280
End of Period $7.794 $7.334 $6.750 $6.583 $5.569 $5.774 $5.273 $4.965
Number of Units Outstanding,
End of Period 956,838 1,078,985 1,151,998 1,364,416 1,492,775 1,701,121 1,808,558 1,979,936
MONEY MARKET DIVISION
Beginning of Period $2.535 $2.421 $2.317 $2.206 $2.136 $2.092 $2.040 $1.945
End of Period $2.652 $2.535 $2.421 $2.317 $2.206 $2.136 $2.092 $2.040
Number of Units Outstanding,
End of Period 1,060,152 997,887 1,377,051 1,358,156 1,458,463 1,331,457 1,787,440 2,059,962
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31
----------------------
1990 1989
---------- ----------
<S> <C> <C>
AGGRESSIVE GROWTH STOCK
DIVISION
Beginning of Period* $1.000 --
End of Period $1.014 --
Number of Units Outstanding,
End of Period 22,431 --
INTERNATIONAL EQUITY DIVISION
Beginning of Period** -- --
End of Period -- --
Number of Units Outstanding,
End of Period -- --
GROWTH STOCK DIVISION
Beginning of Period+ -- --
End of Period -- --
Number of Units Outstanding,
End of Period -- --
GROWTH AND INCOME STOCK
DIVISION
Beginning of Period+ -- --
End of Period -- --
Number of Units Outstanding,
End of Period -- --
INDEX 500 STOCK DIVISION
Beginning of Period* $1.000 --
End of Period $1.021 --
Number of Units Outstanding,
End of Period 4 --
BALANCED DIVISION
Beginning of Period $2.647 $2.307
End of Period $2.655 $2.647
Number of Units Outstanding,
End of Period 11,655,303 12,655,382
HIGH YIELD BOND DIVISION
Beginning of Period+ -- --
End of Period -- --
Number of Units Outstanding,
End of Period -- --
SELECT BOND DIVISION
Beginning of Period $3.981 $3.522
End of Period $4.280 $3.981
Number of Units Outstanding,
End of Period 2,041,191 2,293,077
MONEY MARKET DIVISION
Beginning of Period $1.814 $1.677
End of Period $1.945 $1.814
Number of Units Outstanding,
End of Period 2,574,527 2,285,388
</TABLE>
* The initial investments in the Aggressive Growth Stock Division and Index 500
Stock Division were made on December 3, 1990.
** The initial investment in the International Equity Division was made on April
30, 1993.
+ The initial investments in the Growth Stock Division, Growth and Income Stock
Division, and High Yield Bond Division were made on May 3, 1994.
--
8
<PAGE>
THE COMPANY
The Northwestern Mutual Life Insurance Company was organized by a special act of
the Wisconsin Legislature in 1857. It is the nation's fourth largest life
insurance company, based on total assets in excess of $77 billion on December
31, 1998, and is licensed to conduct a conventional life insurance business in
the District of Columbia and in all states of the United States. Northwestern
Mutual Life sells life and disability income insurance policies and annuity
contracts through its own field force of approximately 6,000 full time producing
agents. The Home Office of Northwestern Mutual Life is located at 720 East
Wisconsin Avenue, Milwaukee, Wisconsin 53202.
"We" in this prospectus means Northwestern Mutual Life.
- --------------------------------------------------------------------------------
NML VARIABLE ANNUITY ACCOUNT B
We established the Account on February 14, 1968 by action of our Board of
Trustees in accordance with the provisions of the Wisconsin insurance law. The
Account is registered with the Securities and Exchange Commission as a unit
investment trust under the Investment Company Act of 1940.
The Account has sixteen Divisions. The money you invest to provide variable
benefits under your Contract is placed in one or more of the Divisions as you
direct.
Under Wisconsin law, the investment operations of the Account are kept separate
from our other operations. The values for your Contract will not be affected by
income, gains or losses for the rest of our business. The income, gains or
losses, realized or unrealized, for the assets we place in the Account for your
Contract will determine the value of your Contract benefits and will not affect
the rest of our business. The assets in the Account are reserved for you and
other Contract owners, although the assets belong to us and we do not hold the
assets as a trustee. We and our creditors cannot reach those assets to satisfy
other obligations until our obligations under your Contract have been satisfied.
But all of our assets (except those we hold in some other separate accounts) are
available to satisfy our obligations under your Contract.
- --------------------------------------------------------------------------------
THE FUNDS
Northwestern Mutual Series Fund, Inc. is composed of eleven separate portfolios
which operate as separate mutual funds. The portfolios are the Small Cap Growth
Stock Portfolio, Aggressive Growth Stock Portfolio, International Equity
Portfolio, Index 400 Stock Portfolio, Growth Stock Portfolio, Growth and Income
Stock Portfolio, Index 500 Stock Portfolio, Balanced Portfolio, High Yield Bond
Portfolio, Select Bond Portfolio and Money Market Portfolio. The Account buys
shares of each Portfolio at net asset value, that is, without any sales charge.
Northwestern Mutual Investment Services, LLC ("NMIS"), our wholly-owned
subsidiary, is the investment adviser to the Fund. We provide the people and
facilities that NMIS uses in performing its investment advisory functions, and
we are a party to the investment advisory agreement. We and NMIS also perform
certain administrative functions and act as co-depositors of the Account. NMIS
has retained J.P. Morgan Investment Management, Inc. and Templeton Investment
Counsel, Inc. under investment sub-advisory agreements to provide investment
advice to the Growth and Income Stock Portfolio and the International Equity
Portfolio.
The Russell Insurance Funds include five separate portfolios which operate as
separate mutual funds. These are the Multi-Style Equity Fund, Aggressive Equity
Fund, Non-U.S. Fund, Real Estate Securities Fund and Core Bond Fund. The Account
buys shares of each of the Russell Insurance Funds at net asset value, that is,
without any sales charge.
The assets of each of the Russell Insurance Funds are invested by one or more
investment management organizations researched and recommended by Frank Russell
Company ("Russell"), and an affiliate of Russell, Frank Russell Investment
Management Company ("FRIMCo"). FRIMCo also advises, operates and
--
9
<PAGE>
administers the Russell Insurance Funds. Russell is our majority-owned
subsidiary.
FOR MORE INFORMATION REGARDING THE MUTUAL FUNDS, INCLUDING INFORMATION ABOUT
THEIR INVESTMENT OBJECTIVES AND EXPENSES, SEE THE PROSPECTUSES FOR NORTHWESTERN
MUTUAL SERIES FUND, INC. AND RUSSELL INSURANCE FUNDS ATTACHED TO THIS
PROSPECTUS. YOU SHOULD READ THE MUTUAL FUND PROSPECTUSES CAREFULLY BEFORE YOU
INVEST IN THE CONTRACTS.
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THE CONTRACTS
PURCHASE PAYMENTS UNDER THE CONTRACTS
AMOUNT AND FREQUENCY A purchase payment is the money you give us to pay for
your Contract. You may make purchase payments monthly, quarterly, semiannually,
annually or on any other frequency acceptable to us.
For Back Load Contracts the minimum amount for each purchase payment is $25 for
Contracts issued as tax-deferred annuities or for use with SIMPLE IRA plans,
simplified employee pensions or deferred compensation plans for public
employees. For other Back Load Contracts, including individual retirement
annuities and nontax-qualified plans, the minimum initial purchase payment is
$100, or $3,500 for Back Load Contracts purchased in exchange for fixed dollar
annuities received as distribution benefits from qualified plans or trusts. (See
"Qualified and Nontax-Qualified Plans", p. 16). For Front Load Contracts the
minimum initial purchase payment is $10,000. The minimum amount for each
subsequent purchase payment is $25 for all Contracts. Minimum amounts for
payments by preauthorized check depend on payment frequency. We will accept
larger purchase payments than due, or payments at other times, but total
purchase payments under any Contract may not exceed $5,000,000 without our
consent.
Purchase payments may not exceed the applicable federal income tax limits. (See
"Federal Income Taxes", p. 16.)
APPLICATION OF PURCHASE PAYMENTS We credit net purchase payments, after
deduction of any sales load, to the Account and allocate them to one or more
Divisions as you direct. We then invest those assets in shares of the Portfolio
or Fund which corresponds to that Division.
We apply purchase payments to provide "Accumulation Units" in one or more
Divisions. Accumulation Units represent your interest in the Account. The number
of Accumulation Units you receive for each net purchase payment is determined by
dividing the amount of the purchase payment to be allocated to a Division by the
value of an Accumulation Unit in that Division, based upon the next valuation of
the assets of the Division we make after we receive your purchase payment at our
Home Office. Receipt of purchase payments at a lockbox facility we have
designated will be considered the same as receipt at the Home Office. We value
assets as of the close of trading on the New York Stock Exchange for each day
the Exchange is open, and at any other time required by the Investment Company
Act of 1940.
The number of your Accumulation Units will be increased by additional purchase
payments or transfers into the Account and decreased by withdrawals or transfers
out of the Account. The investment experience of the Account does not change the
number (as distinguished from the value) of your Accumulation Units.
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). We determine the value by
multiplying the value on the immediately preceding valuation date by the net
investment factor for the Division. (See "Net Investment Factor", below.) Since
you bear the investment risk, there is no guarantee as to the aggregate value of
your Accumulation Units. That value may be less than, equal to, or more than the
cumulative net purchase payments you have made.
You may direct all or part of a purchase payment to the Guaranteed Interest
Fund. Amounts you direct to the Guaranteed Interest Fund will be invested on a
fixed basis. See "The Guaranteed Interest Fund", p. 15.
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NET INVESTMENT FACTOR
For each Division the net investment factor for any period ending on a valuation
date is 1.000000 plus the net investment rate for the Division for that period.
Under the Contract the net investment rate is related to the assets of the
Division. However, since all amounts are simultaneously invested in shares of
the corresponding Portfolio or Fund when allocated to the Division, calculation
of the net investment rate for each of the Divisions may also be based upon the
change in value of a single share of the corresponding Portfolio or Fund.
Thus, for example, in the case of the Balanced Division the net investment rate
is equal to (a) the change in the net asset value of a Balanced Portfolio share
for the period from the immediately preceding valuation date up to and including
the current valuation date, plus the per share amount of any dividends and other
distributions made by the Balanced Portfolio during the valuation period, less a
deduction for any applicable taxes or for any expenses resulting from a
substitution of securities, (b) divided by the net asset value of a Balanced
Portfolio share on the valuation date immediately preceding the current
valuation date, (c) less an adjustment to provide for the deduction for
mortality rate and expense risks that we have assumed. (See "Deductions", p.
20.)
The Portfolios and Funds will distribute investment income and realized capital
gains to the Account Divisions. We will reinvest those distributions in
additional shares of the same Portfolio or Fund. Unrealized capital gains and
realized and unrealized capital losses will be reflected by changes in the value
of the shares held by the Account.
BENEFITS PROVIDED UNDER THE CONTRACTS
The benefits provided under the Contracts consist of a withdrawal amount, a
death benefit and a maturity benefit. Subject to the restrictions noted below,
we will pay all of these benefits in a lump sum or under the payment plans
described below.
WITHDRAWAL AMOUNT On or prior to the maturity date you are entitled to withdraw
the Accumulation Units credited to your Contract and receive the value thereof
less the applicable withdrawal charge. (See "Withdrawal Charge", p. 20.) The
value, which may be either greater or less than the amount you paid is
determined as of the valuation date coincident with or next following our
receipt of your written request for withdrawal on a form we provide. The forms
are available from our Home Office and our agents. You may withdraw a portion of
the Accumulation Units on the same basis, except that we will not grant a
partial withdrawal which would result in less than 100 Accumulation Units
remaining; we will treat a request for such a partial withdrawal as a request to
surrender the entire Contract. Amounts distributed to an Annuitant upon
withdrawal of all or a portion of Accumulation Units may be subject to federal
income tax. (See "Federal Income Taxes", p. 16.) A penalty tax will apply to
premature payments of Contract benefits. A penalty tax of 10% (or 25% during the
first 2 years the owner participates in a SIMPLE IRA plan) of the amount of the
payment which is includible in income will be imposed on non-exempt withdrawals
under individual retirement annuities, tax deferred annuities, nontransferable
annuity Contracts and nonqualified deferred annuities. Payments which are exempt
from the penalty tax include payments upon disability, after age 59 1/2, for
certain large medical expenses and for reimbursement of certain health insurance
premiums and certain substantially equal periodic payments for life.
If annuity payments are being made under Payment Plan 1 the payee may surrender
the Contract and receive the value of the Annuity Units credited to his
Contract, less the applicable withdrawal charge. (See "Withdrawal Charge", p.
20.) Upon death during the certain period of the payee under Plan 2 or both
payees under Plan 3, the beneficiary may surrender the Contract and receive the
withdrawal value of the unpaid payments for the certain period. The withdrawal
value is based on the Annuity Unit value on the withdrawal date, with the unpaid
payments discounted at the Assumed Investment Rate. (See "Description of Payment
Plans", p. 12.)
DEATH BENEFIT Upon the death of the Annuitant prior to the maturity date, we
will pay to the direct beneficiary a death benefit equal to the Contract value,
as of the valuation date coincident with or next following the date on which
proof of death is received at our Home Office or, if later, the date on which
the beneficiary elects a method of payment. If death occurs prior to the
Annuitant's 65th birthday the death benefit, where permitted by state law, will
be not less than the amount of purchase payments we received under the Contract,
less withdrawals. The death benefit may be paid either in a lump sum or under a
payment plan.
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MATURITY BENEFIT Purchase payments under the Contract are payable until the
maturity date specified in the Contract. You may select any date up to age 90 as
the maturity date, subject to applicable tax law requirements and state law. On
the maturity date, if you have not elected any other permissible payment plan,
we will change the maturity date to the Contract anniversary nearest the
Annuitant's 90th birthday. On that date, if you have not elected any other
permissible payment plan, we will pay the value of the Contract in monthly
payments for life under a variable payment plan with payments certain for ten
years.
VARIABLE PAYMENT PLANS
We will pay part or all of the benefits under a Contract under a variable
payment plan you select. The payment plan starts on the maturity date. See
"Maturity Benefit", above. Under a variable plan, you bear the entire investment
risk, since we make no guarantees of investment return. Accordingly, there is no
guarantee of the amount of the variable payments, and you must expect the amount
of such payments to change from month to month.
For a discussion of tax considerations and limitations regarding the election of
payment plans, see "Federal Income Taxes", p. 16.
DESCRIPTION OF PAYMENT PLANS The following payment plans are available:
1. PAYMENTS FOR A CERTAIN PERIOD. An annuity payable monthly for a specified
period of five to 30 years.
2. LIFE ANNUITY WITH OR WITHOUT CERTAIN PERIOD. An annuity payable monthly
until the payee's death, or until the expiration of a selected certain period,
whichever is later. After the payee's death during the certain period, if any,
we will make payments as they come due to the designated contingent beneficiary.
You may select a certain period of either 10 or 20 years, or you may choose a
plan with no certain period.
3. JOINT AND SURVIVOR LIFE ANNUITY WITH CERTAIN PERIOD. An annuity payable
monthly for a certain period of 10 years and thereafter to two persons for their
joint lives. On the death of either payee, payments continue for the remainder
of the 10 years certain or the remaining lifetime of the survivor, whichever is
longer.
We may limit the election of a payment plan to one that results in an initial
payment of at least $20. A payment plan will continue if payments fall to less
than $20 after the payment plan begins.
From time to time we may establish payment plan rates with greater actuarial
value than those stated in the Contract and make them available at the time of
settlement. We may also make available other payment plans, with provisions and
rates we publish for those plans.
AMOUNT OF ANNUITY PAYMENTS We will determine the amount of the first annuity
payment on the basis of the particular payment plan you select, the annuity
payment rate and, for plans involving life contingencies, the Annuitant's
adjusted age and sex. (A Contract with annuity payment rates that are not based
on sex is also available. See "Special Contract for Employers", p. 13.) We will
calculate the amount of the first annuity payment on a basis that takes into
account the length of time over which we expect annuity payments to continue.
The first payment will be lower for an Annuitant who is younger when payments
begin, and higher for an Annuitant who is older, if the payment plan involves
life contingencies. The first payment will be lower if the payment plan includes
a longer certain period. Variable annuity payments after the first will vary
from month to month to reflect the fluctuating value of the Annuity Units
credited to your Contract. Annuity Units represent the interest of the Contract
in each Division of the Account after annuity payments begin.
ASSUMED INVESTMENT RATE The variable annuity rate tables for the Contracts are
based upon an Assumed Investment Rate of 3 1/2%. Variable annuity rate tables
based upon an Assumed Investment Rate of 5% are also available where permitted
by state law.
The Assumed Investment Rate affects both the amount of the first variable
payment and the amount by which subsequent payments increase or decrease. The
Assumed Investment Rate does not affect the actuarial value of the future
payments as of the date when payments begin, though it does affect the actual
amount which may be received by an individual Annuitant.
Over a period of time, if each Division achieved a net investment result exactly
equal to the Assumed Investment Rate applicable to a particular payment plan,
the amount of annuity payments would be level. However, if the Division achieved
a net investment result greater than the Assumed Investment Rate, the
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amount of annuity payments would increase. Similarly, if the Division achieved a
net investment result smaller than the Assumed Investment Rate, the amount of
annuity payments would decrease.
A higher Assumed Investment Rate will result in a larger initial payment but
more slowly rising and more rapidly falling subsequent payments than a lower
Assumed Investment Rate.
ADDITIONAL INFORMATION
TRANSFERS BETWEEN DIVISIONS AND PAYMENT PLANS You may change the allocation of
purchase payments among the Divisions and transfer values from one Division to
another both before and after annuity payments begin. In order to take full
advantage of these features, you should carefully consider, on a continuing
basis, which Division or apportionment is best suited to your long-term
investment needs.
You may at any time change the allocation of purchase payments among the
Divisions by written notice to us. Purchase payments we receive at our Home
Office on and after the date on which we receive notice will be applied to
provide Accumulation Units in one or more Divisions on the basis of the new
allocation.
Before the effective date of a payment plan you may, upon written request,
transfer Accumulation Units from one Division to another. After the effective
date of a payment plan the payee may transfer Annuity Units from one Division to
another. We will adjust the number of Accumulation or Annuity Units to be
credited to reflect the respective value of the Accumulation and Annuity Units
in each of the Divisions. For Accumulation Units the minimum amount which may be
transferred is the lesser of $100 or the entire value of the Accumulation Units
in the Division from which the transfer is being made. For each transfer
beginning with the thirteenth in any Contract year, we may deduct a transfer fee
of $25 from the amount transferred. We currently make no charge for transfers.
If you contemplate the transfer of funds from one Division to another, you
should consider the risk inherent in a switch from one investment medium to
another. In general, frequent transfers based on short-term expectations for the
stock and bond markets, especially transfers of large sums, will tend to
accentuate the danger that a transfer will be made at an inopportune time.
You may transfer amounts which you have invested on a fixed basis to any
Division of the Account, and you may transfer the value of Accumulation Units in
any Division of the Account to the Guaranteed Interest Fund for investment on a
fixed basis, subject to the restrictions described in the Contract. See "The
Guaranteed Interest Fund", p. 15.
After the effective date of a payment plan which does not involve a life
contingency (i.e., Plan 1) a payee may transfer to either form of life annuity
at no charge. We will apply the value of the remaining payments to the new plan
selected. We will determine the amount of the first annuity payment under the
new plan on the basis of the particular plan selected, the annuity payment rate
and the Annuitant's adjusted age and sex. Subsequent payments will vary to
reflect changes in the value of the Annuity Units credited.
We permit other transfers between payment plans subject to such limitations as
we may reasonably determine. Generally, however, we do not permit transfer from
a payment plan involving a life contingency to a payment plan which does not
involve the same life contingency. You may make transfers from the Money Market
Division at any time while a payment plan is in force. The Contracts provide
that transfers between the other Divisions and transfers between payment plans
may be made after the payment plan has been in force for at least 90 days and
thereafter whenever at least 90 days have elapsed since the date of the last
transfer. At present we permit transfers at any time but we reserve the right to
change this practice in the future. We will make the transfer as of the close of
business on the valuation date coincident with or next following the date on
which we receive the request for transfer at our Home Office, or at a later date
if you request.
OWNERS OF THE CONTRACTS The Owner of the Contract has the sole right to
exercise all rights and privileges under the Contract, except as the Contract
otherwise provides. The Owner is ordinarily the Annuitant, but may be an
employer or other entity. The Annuitant is the person upon whose life the
Contract is issued and Contract benefits depend. Following the death of the
Annuitant any remaining Contract benefits are payable to a beneficiary or
contingent beneficiary named in the Contract. In this prospectus, "you" means
the Owner or a prospective purchaser of the Contract.
SPECIAL CONTRACT FOR EMPLOYERS The annuity payment rates for payment plans
which involve a life
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contingency (i.e., Plans 2 and 3) are based, in part, on the sex of the
Annuitant. For certain situations where the Contracts are to be used in
connection with an employer sponsored benefit plan or arrangement, federal law,
and the laws of certain states, may require that purchase payments and annuity
payment rates be determined without regard to sex. A special Contract is
available for this purpose. You are urged to review any questions in this area
with qualified counsel.
DEFERMENT OF BENEFIT PAYMENTS We reserve the right to defer determination of
the withdrawal value of the Contracts, or the payment of benefits under a
variable payment plan, until after the end of any period during which the right
to redeem shares of either of the mutual funds is suspended, or payment of the
redemption value is postponed, pursuant to the provisions of the Investment
Company Act of 1940 because: (a) the New York Stock Exchange is closed, except
for routine closings on holidays or weekends; (b) the Securities and Exchange
Commission has determined that trading on the New York Stock Exchange is
restricted; (c) the Securities and Exchange Commission permits suspension or
postponement and so orders; (d) an emergency exists, as defined by the
Securities and Exchange Commission, so that valuation of the assets of the funds
or disposal of securities they hold is not reasonably practical; or (e) such
suspension or postponement is otherwise permitted by the Act.
DIVIDENDS The Contracts share in our divisible surplus, except while payments
are being made under a variable payment plan. Our divisible surplus is
determined annually for the following year. State law requires that we
distribute the surplus equitably among participating contracts. Distributions of
divisible surplus are commonly referred to as "dividends".
We are paying dividends on approximately 18% of our inforce variable annuity
contracts in 1999. Dividends are not guaranteed to be paid in future years. The
dividend amount is volatile since it is based on the average variable Contract
value which is defined as the value of the Accumulation units on the last
Contract anniversary adjusted to reflect any transactions since that date which
increased or decreased the Contract's interest in the Account.
Dividends on variable annuities arise principally as a result of more favorable
expense experience than that which we assumed in determining deductions. Such
favorable experience is generated primarily by older and/or larger Contracts,
which have a mortality rate and expense risk charge of at least 0.75%. In
general, we are not paying dividends on Contracts with an average variable
Contract value of less than $30,000, and about 75% of those with a value above
$30,000 will receive dividends. The expected dividend payout for 1999 represents
about 0.39% of the average variable Contract value for those Contracts that will
receive dividends. The maximum dividend we are paying on a specific contract is
about 0.70%.
We pay any dividend for a Contract on the anniversary date of that Contract. We
apply the dividend as a net purchase payment unless you elect to have the
dividend paid in cash. In the case of a Contract purchased as an individual
retirement annuity pursuant to Section 408(b) of the Internal Revenue Code,
dividends cannot be paid in cash but must be applied as net purchase payments
under the Contract.
VOTING RIGHTS As long as the Account continues to be registered as a unit
investment trust under the Investment Company Act of 1940, and Account assets
are invested in shares of the Portfolio or the Funds, we will vote the shares
held in the Account in accordance with instructions we receive from the Owners
of Accumulation Units or payees receiving payments under variable payment plans.
Each Owner or payee will receive periodic reports relating to both of the mutual
funds, proxy material and a form with which to give instructions with respect to
the proportion of shares of each Portfolio or Fund held in the Account
corresponding to the Accumulation Units credited to his Contract, or the number
of shares of each Portfolio or Fund held in the Account representing the
actuarial liability under the variable annuity payment plan, as the case may be.
The number of shares will increase from year to year as additional purchase
payments are paid by the Contract Owner; after a variable annuity payment plan
is in effect the number of shares will decrease from year to year as the
remaining actuarial liability declines. We will vote shares for which no
instructions have been received in the same proportion as the shares as for
which instructions have been received.
SUBSTITUTION AND CHANGE We may take any of the following actions, so long as we
comply with all of the requirements of the securities and insurance laws that
may apply. A vote of Contract owners, or of those who have an interest in one or
more of the Divisions of the Account, may be required. Approval by the
Securities and Exchange Commission or another regulatory
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authority may be required. In the event that we take any of these actions, we
may make an appropriate endorsement of your Contract and take other actions to
carry out what we have done.
1. We may invest the assets of a Division in securities of another mutual fund
or another issuer, instead of the Portfolio or Fund in which you have
invested, as a substitute for the shares you already have or as the
securities to be purchased in the future.
2. We may operate the Account or a Division as a mutual fund itself, instead of
investing its assets in a mutual fund, if our Board of Trustees decides that
this would be in the best interest of our Contract owners.
3. We may deregister the Account under the Investment Company Act of 1940 if
registration is no longer required.
4. We may change the provisions of the Contracts to comply with federal or
state laws that apply, including changes to comply with federal tax laws in
order to assure that your Contract qualifies for tax benefits relating to
retirement annuity or variable annuity contracts.
FIXED ANNUITY PAYMENT PLANS We will also pay Contract benefits under fixed
annuity payment plans which are not described in this Prospectus. If you select
a fixed annuity, we will cancel the Accumulation Units credited to your Deferred
Contract, we will transfer the withdrawal value of the Contract to our general
account, and you will no longer have any interest in the Account. We may make a
withdrawal charge in determining the withdrawal value. (See "Withdrawal Amount",
p. 11, and "Withdrawal Charge", p. 20.)
PERFORMANCE DATA We may publish advertisements containing performance data for
the Divisions of the Account from time to time. These performance data may
include both standardized and non-standardized total return figures, although
standardized figures will always accompany non-standardized figures.
Standardized performance data will consist of quarterly return quotations, which
will always include quotations for recent periods of one, five and ten years or,
if less, the entire life of a Division. These quotations will be the average
annual rates of return based on a $1,000 initial purchase payment for a Back
Load Contract, or the minimum $10,000 initial purchase payment for a Front Load
Contract. The standardized performance data will reflect all applicable charges,
including the initial sales load of 4% for the Front Load Contract and the
withdrawal charge that would apply assuming surrender of the Back Load Contract
at the end of the period.
Non-standardized performance data may not reflect the 4% sales load for the
Front Load Contract and may assume that the Back Load Contract remains in force
at the end of the period. These data may also not reflect the annual Contract
fee of $30, since the impact of the fee varies by Contract size. The
non-standardized data may also be for other time periods.
We will base all of the performance data on actual historical investment results
for the Portfolios or Funds, including all expenses they bear. The data are not
intended to indicate future performance. We may construct some of the data
hypothetically to reflect expense factors for the Contracts we currently offer.
We have included additional information about the performance data in the
Statement of Additional Information.
FINANCIAL STATEMENTS Financial statements of the Account and financial
statements of Northwestern Mutual Life appear in the Statement of Additional
Information.
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THE GUARANTEED INTEREST FUND
You may direct all or part of your purchase payments to the Guaranteed Interest
Fund for investment on a fixed basis. You may transfer amounts previously
invested in the Account Divisions to the Guaranteed Interest Fund, prior to the
maturity date, and you may transfer amounts in the Guaranteed Interest Fund to
the Account Divisions. In each case, these transfers are subject to the
restrictions described in the Contract.
Amounts you invest in the Guaranteed Interest Fund become part of our general
assets. In reliance on certain exemptive and exclusionary provisions, we have
not registered interests in the Guaranteed Interest
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Fund under the Securities Act of 1933 and we have not registered the Guaranteed
Interest Fund as an investment company under the Investment Company Act of 1940.
Accordingly, neither the Guaranteed Interest Fund nor any interests therein are
generally subject to these Acts. We have been advised that the staff of the
Securities and Exchange Commission has not reviewed the disclosure in this
prospectus relating to the Guaranteed Interest Fund. This disclosure, however,
may be subject to certain generally applicable provisions of the federal
securities laws relating to the accuracy and completeness of statements made in
prospectuses.
Amounts you invest in the Guaranteed Interest Fund earn interest at rates we
declare from time to time. We will guarantee the interest rate for each amount
for at least one year. The interest rate will be at an annual effective rate of
at least 3%. At the expiration of the period for which we guarantee the interest
rate, a new interest rate may apply. We credit interest and compound it daily.
We determine the effective date for a transaction involving the Guaranteed
Interest Fund in the same manner as the effective date for a transaction
involving a Division of the Account.
Investments in the Guaranteed Interest Fund are subject to a maximum limit of
$1,000,000 ($250,000 in New York) without our prior consent. To the extent that
a purchase payment or transfer from a Division of the Account causes the
Contract's interest in the Guaranteed Interest Fund to exceed this maximum
limit, we will place the amount of the excess in the Money Market Division and
it will remain there until you instruct us otherwise.
Transfers from the Guaranteed Interest Fund to the Account Divisions are subject
to limits. After a transfer from the Guaranteed Interest Fund, we will allow no
further transfers from the Guaranteed Interest Fund for a period of 365 days; in
addition, we will allow no further transfers back into the Guaranteed Interest
Fund for a period of 90 days. The maximum amount that you may transfer from the
Guaranteed Interest Fund in one transfer is the greater of (1) 25% of the amount
that you had invested in the Guaranteed Interest Fund as of the last Contract
anniversary preceding the transfer and (2) the amount of your most recent
transfer from the Guaranteed Interest Fund. But in no event will this maximum
transfer amount be less than $1,000 or more than $50,000. (The $50,000 limit
does not apply in New York.)
The deduction for mortality rate and expense risks, as described below, is not
assessed against amounts in the Guaranteed Interest Fund, and amounts in the
Guaranteed Interest Fund do not bear any expenses of either of the mutual funds.
Other charges under the Contracts apply for amounts in the Guaranteed Interest
Fund as they are described in this prospectus for amounts you invest on a
variable basis. See "Deductions", p. 20. For purposes of allocating and
deducting the annual Contract fee, we consider any investment in the Guaranteed
Interest Fund as though it were an investment of the same amount in one of the
Account Divisions.
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FEDERAL INCOME TAXES
QUALIFIED AND NONTAX-QUALIFIED PLANS
We offer the Contracts for use under the tax-qualified plans (i.e.,
contributions are generally not taxable) identified below:
1. Individual retirement annuities pursuant to the provisions of Section 408 of
the Code, including a traditional IRA established under Section 408(b),
simplified employee pensions established under Section 408(j) and (k) and
SIMPLE IRAs established under Section 408(p).
2. Roth IRAs pursuant to the provisions of Section 408A of the Code.
3. Tax-deferred annuities pursuant to the provisions of Section 403(b) of the
Code for employees of public school systems and tax-exempt organizations
described in Section 501(c)(3).
4. Deferred compensation plans established pursuant to Section 457 of the Code
for employees of state and local governments and tax-exempt organizations.
5. Nontransferable annuity contracts issued in exchange for fixed dollar
annuities previously issued by Northwestern Mutual Life or other insurance
companies or as distributions of termination benefits from tax-qualified
pension or
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profit-sharing plans or trusts or annuity purchase plans.
We also offer the Contracts for use in non tax-qualified situations (i.e.,
contributions are taxable).
CONTRIBUTION LIMITATIONS AND GENERAL REQUIREMENTS APPLICABLE TO CONTRACTS
TRADITIONAL IRA If an individual has earned income, the individual and the
individual's spouse are each permitted to make a maximum contribution of $2,000
to an IRA or IRAs for their benefit for each taxable year. The $2,000 limit is
reduced by contributions to any Roth IRAs of the Owner. Contributions cannot be
made after age 70 1/2. Annual contributions are generally deductible unless the
Owner or the Owner's spouse is an "active participant" in a plan in another
qualified plan during the taxable year. If the Owner is an "active participant"
in a plan, the deduction for 1999 phases out at an adjusted gross income ("AGI")
of between $31,000 - $41,000 (indexed through 2005) for single filers and
between $51,000 - $61,000 (indexed through 2007) for married individuals filing
jointly. If the Owner is not an "active participant" in a plan but the Owner's
spouse is, the Owner's deduction phases out at an AGI of between $150,000 -
$160,000.
The Owner may also make tax free rollover and direct transfer contributions to
an IRA from the Owner's other IRAs or contracts purchased under tax qualified
plans. The surviving spouse can also roll over the deceased Owner's IRA, tax
deferred annuity or qualified plan to the spouse's own IRA.
An IRA is nonforfeitable and generally cannot be transferred.
SEP An employer can make a maximum contribution to a SEP for an eligible
employee of the lesser of 15% of the employee's compensation (generally up to
$160,000 for 1999) or $30,000. SEP contributions are subject to certain minimum
participation and nondiscrimination requirements. Contributions and earnings
thereon are not includible in the employee's gross income until distributed. The
Contracts are nonforfeitable and nontransferable.
SIMPLE IRA A SIMPLE IRA can be established by an employer for any calendar year
in which the employer has no more than 100 employees who each earned at least
$5,000 during the preceding calendar year and the employer does not maintain
another employer sponsored retirement plan. An eligible employee can elect to
contribute up to $6,000 (indexed) per year to a SIMPLE IRA and the employer must
contribute either a matching contribution of up to 3% of the employee's
compensation or a nonelective contribution of 2% of the employee's compensation
(up to $160,000) for each employee. Contributions and earnings thereon are not
includible in the employee's gross income until distributed. SIMPLE IRAs are
exempt from the nondiscrimination, top-heavy and reporting rules applicable to
qualified plans. The Contracts are nonforfeitable and nontransferable.
ROTH IRA If an individual has earned income, the individual and the
individual's spouse are each permitted to make a maximum contribution of $2,000
to a Roth IRA or IRAs for their benefit for each taxable year. The $2,000 limit
is reduced by contributions to any traditional IRAs of the Owner. The maximum
contribution is phased out at an adjusted gross income ("AGI") of between
$95,000 and $110,000 for single filers, between $150,000 and $160,000 for
married individuals filing jointly and between $0 and $10,000 for married
individuals filing separately. Regular contributions to a Roth IRA are not
deductible.
An IRA, SEP or SIMPLE IRA (after two years of participation in a SIMPLE IRA
plan) may be rolled over or converted to a Roth IRA if the Owner has an AGI of
$100,000 or less for the year (not including the rollover amount) and is not
married filing a separate tax return. A rollover to a Roth IRA is fully taxable
(although the tax on rollovers made in 1998 could have been prorated over the
four year period following the rollover). IRA rollovers are not subject to a 10%
premature withdrawal penalty.
TAX DEFERRED ANNUITY Section 403(b) tax deferred annuities can be established
for employees of Section 501(c)(3) tax exempt organizations and public
educational organizations. An eligible employee can make salary reduction
contributions to a tax deferred annuity subject to the employee's "exclusion
allowance" as defined by the Code and an overall limit under Section 415 of the
Code. Elective deferrals for all of the Owner's tax deferred annuity contracts
are limited to $10,000 per year (indexed) with catch-up contributions permitted
in certain circumstances. Contributions and earnings thereon are not included in
the employee's gross income until distributed. Tax deferred annuities are
nonforfeitable and nontransferable and distributions of salary reduction
contributions and earning thereon (except those held as of December 31,
--
17
<PAGE>
1988) cannot be withdrawn prior to age 59 1/2 except on account of termination
of service, death, disability or hardship (contributions only).
The employer can also make contributions to a tax deferred annuity subject to
the same rules that apply to qualified plans, including the minimum coverage,
nondiscrimination and spousal consent requirements. ERISA disclosure rules also
apply.
SECTION 457 PLAN A Section 457 deferred compensation plan can be established by
a state or local government or tax-exempt organization. Contracts must be owned
by a trust for the exclusive benefit of the employees and the employees'
beneficiaries in a governmental plan and by the employer (subject to claims of
the employer's general creditors) in a plan of a tax-exempt organization. An
employee can defer the lesser of 33 1/3% of compensation or $8,000 per year
under the plan. Amounts deferred and earnings thereon are not includible in the
employee's gross income until they are paid or made available to the employee or
the employee's beneficiary.
NONTRANSFERABLE ANNUITY Nontransferable annuity contracts are contracts held in
a tax-qualified plan or trust and transferred to the employee on the employee's
separation from service or the termination of the plan. These Contracts cannot
accept additional purchase payments and must comply with the spousal consent
requirements.
NONTAX-QUALIFIED CONTRACT There are no limitations on who can purchase a
nontax-qualified annuity or the amount that can be contributed to the Contract.
Contributions to nontax-qualified Contracts are not deductible. For the Contract
to qualify as a nontax-qualified annuity, the Contract death proceeds must be
distributed to any nonspouse beneficiary either within five years of the Owner's
death or as substantially periodic payments over the beneficiary's life or life
expectancy commencing within one year of the Owner's death. The surviving spouse
is entitled to continue deferral under the Contract.
TAXATION OF CONTRACT BENEFITS
For Contracts held by individuals, no tax is payable as a result of any increase
in the value of a Contract. Except for qualified distributions from Roth IRAs,
Contract benefits will be taxable as ordinary income when received in accordance
with Section 72 of the Code.
IRAS, SEPS, SIMPLE IRAS, TDAS AND SECTION 457 PLANS AND NONTRANSFERABLE
ANNUITIES As a general rule, benefits received as annuity payments or upon
death or withdrawal from these contracts will be taxable as ordinary income when
received.
Where nondeductible contributions are made to individual retirement annuities
and other tax-qualified plans, the Owner may exclude from income that portion of
each benefit payment which represents a return of the Owner's "investment in the
contract" as defined in Section 72 until the entire "investment in the contract"
is recovered. Benefits paid in a form other than an annuity will be taxed as
ordinary income when received except for that portion of the payment which
represents a return of the employee's "investment in the contract." After the
Owner attains age 70 1/2, a 50% penalty may be imposed on payments made from
individual retirement annuities, tax-deferred annuities, nontransferable annuity
Contracts and Section 457 deferred compensation plans to the extent the payments
are less than certain required minimum amounts. With certain limited exceptions,
including hardship withdrawals from tax-deferred annuities, benefits from
individual retirement annuities, tax-deferred annuities and nontransferable
annuity Contracts are subject to the tax-free roll-over provisions of the Code.
However, rollovers of SIMPLE IRAs to individual retirement arrangements within 2
years after the Owner first participates in the SIMPLE IRA plan are fully
taxable.
A loan transaction, using a Contract purchased under a tax-qualified plan as
collateral, will generally have adverse tax consequences. For example, such a
transaction destroys the tax status of the individual retirement annuity and
results in taxable income equal to the Contract value.
ROTH IRAS Qualified distributions from a Roth IRA are not taxable. A qualified
distribution is a distribution (1) made at least 5 years after the issuance of
the Owner's first Roth IRA, and (2) made after the Owner has attained age
59 1/2, made to a beneficiary after the Owner's death, attributable to the Owner
being disabled, or used to pay acquisition expenses of a qualified first time
home purchase. A nonqualified distribution is taxable as ordinary income only to
the extent it exceeds the "investment in the contract" as defined in Section 72.
Distributions are not required to be made from a Roth IRA before the Owner's
death.
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18
<PAGE>
A withdrawal from a Roth IRA of part or all of an IRA rollover contribution
within 5 years of the rollover is subject to a 10% premature withdrawal penalty
(unless an exception applies). In addition, if part or all of an IRA rollover
made in 1998 is withdrawn before 1/1/2001, any taxes on the rollover deferred by
proration may be accelerated. Rollover contributions are treated as withdrawn
after regular contributions for this purpose.
A regular or conversion contribution to a Roth IRA can be recharacterized to an
IRA in a trustee-to-trustee transfer provided the transfer includes the net
income or loss allocable to the contribution and is completed by the due date
for filing the Owner's federal income tax return for the year the contribution
was made. The recharacterized amount will be treated for tax purposes as
originally made from the IRA. Recharacterized amounts can be reconverted to a
Roth IRA once each calendar year. Benefits from a Roth IRA can be rolled over or
transferred directed only to another Roth IRA.
NONQUALIFIED CONTRACTS Benefits received as annuity payments from
nontax-qualified Contracts will be taxable as ordinary income to the extent they
exceed that portion of each payment which represents a return of the "investment
in the contract" as defined in Section 72 until the entire "investment in the
contract" is recovered. Benefits received in a lump sum from these Contracts
will be taxable as ordinary income to the extent they exceed the "investment in
the contract." A partial withdrawal or collateral assignment prior to the
Maturity Date will result in the receipt of gross income by the Owner to the
extent that the amounts withdrawn or assigned do not exceed the excess (if any)
of the total value of Accumulation Units over total purchase payments paid under
the Contract less any amounts previously withdrawn or assigned. Thus, any
investment gains reflected in the Contract values are considered to be withdrawn
first and are taxable as ordinary income. For Contracts issued after October 21,
1988, investment gains will be determined by aggregating all nontax-qualified
deferred Contracts we issue to the Owner during the same calendar year.
A special rule applies to certain nonqualified Contracts not held by
individuals, such as Contracts purchased by corporate employers in connection
with deferred compensation plans. With respect to purchase payments paid after
February 28, 1986, these Contracts will not be taxed as annuity Contracts and
increases in the value of the Contracts will be taxable in the year earned.
PREMATURE WITHDRAWALS A penalty tax will apply to premature payments of
Contract benefits. A penalty tax of 10% of the amount of the payment which is
includible in income will be imposed on non-exempt withdrawals under individual
retirement annuities, Roth IRAs, tax deferred annuities, nontransferable annuity
Contracts and nonqualified deferred annuities. The penalty tax increases to 25%
for non-exempt withdrawals from SIMPLE IRAs within 2 years after the Owner first
participates in the SIMPLE IRA plan. Payments which are exempt from the penalty
tax include payments upon disability, after age 59 1/2 and for certain
substantially equal periodic payments for life. Additional exceptions for
certain large medical expenses, reimbursement of health insurance premiums paid
while the Owner was unemployed, qualified education expenses and first time home
purchases apply to IRAs and Roth IRAs.
MANDATORY WITHHOLDING Benefit payments from tax-deferred annuities and
nontransferable annuity contracts will be subject to mandatory 20% withholding
unless (1) the payments from the tax-deferred annuities are rolled over directly
to another tax-deferred annuity or an individual retirement arrangement, or the
payments from the nontransferable annuity contracts are rolled over directly to
another nontransferable annuity contract, a tax-qualified plan or an individual
retirement arrangement, (2) they are paid in substantially equal installments
over the life or life expectancy of the employee (or of the employee and the
employee's beneficiary) or over a period of 10 years or more, or (3) they are
"required minimum distributions."
TAXATION OF NORTHWESTERN MUTUAL LIFE
We may charge the appropriate Contracts with their shares of any tax liability
which may result from the maintenance or operation of the Divisions of the
Account. We are currently making no charge. (See "Net Investment Factor", p. 11
and "Deductions", p. 20.)
OTHER CONSIDERATIONS
You should understand that the tax rules for annuities and qualified plans are
complex and cannot be readily summarized. The foregoing discussion does not
address special rules applicable in many situations,
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19
<PAGE>
rules governing Contracts issued or purchase payments made in past years,
current legislative proposals or state or other law. We do not intend this
discussion as tax advice. Before you purchase a Contract, we advise you to
consult qualified tax counsel.
- --------------------------------------------------------------------------------
DEDUCTIONS
We will make the following deductions:
1. SALES LOAD. For the Front Load Contract we deduct a sales load from all
purchase payments we receive. The sales load compensates us for the costs we
incur in selling the Contracts. We base the deduction on cumulative purchase
payments we have received and the rates in the table below:
<TABLE>
<CAPTION>
CUMULATIVE PURCHASE PAYMENTS
PAID UNDER THE CONTRACT RATE
- ----------------------------------------------------- ---------
<S> <C>
First $100,000....................................... 4.0%
Next $400,000........................................ 2.0%
Next $500,000........................................ 1.0%
Balance over $1,000,000.............................. 0.5%
</TABLE>
2. DEDUCTIONS FOR MORTALITY RATE AND EXPENSE RISKS. The net investment factor
(see "Net Investment Factor", p. 11) we use in determining the value of
Accumulation and Annuity Units reflects a deduction on each valuation date for
mortality rate and expense risks we have assumed. For the Front Load Contract,
the deduction from Accumulation Units is at a current annual rate of 0.4% of the
assets of the Account, while the deduction from Annuity Units is zero. For the
Back Load Contract the deduction is at a current annual rate of 1.25% of the
assets of the Account. Our Board of Trustees may increase or decrease the
deduction, but in no event may the deduction exceed an annual rate of .75% for
the Front Load Contract and 1.50% for the Back Load Contract. This deduction is
the only expense item paid by the Account to date. The mutual funds pay expenses
which are described in the attached prospectuses for the mutual funds.
The risks we assume are (a) the risk that annuity payments will continue for
longer periods than anticipated because the Annuitants as a group live longer
than expected, and (b) the risk that the charges we make may be insufficient to
cover the actual costs we incur in connection with the Contracts. We assume
these risks for the duration of the Contract.
The net investment factor also reflects the deduction of any reasonable expenses
which may result if there were a substitution of other securities for shares of
the mutual funds as described under "Substitution and Change", p. 14, and any
applicable taxes, i.e., any tax liability we have paid or reserved for resulting
from the maintenance or operation of a Division of the Account, other than
applicable premium taxes which we may deduct directly from considerations. We do
not presently anticipate that we will make any deduction for federal income
taxes (see "Federal Income Taxes", p. 16), nor do we anticipate that maintenance
or operation of the Account will give rise to any deduction for state or local
taxes. However, we reserve the right to charge the appropriate Contracts with
their shares of any tax liability which may result under present or future tax
laws from the maintenance or operation of the Account or to deduct any such tax
liability in the computation of the net investment factor for such Contracts.
3. CONTRACT FEE. On each Contract anniversary prior to the maturity date we
make a deduction of $30 for administrative expenses relating to a Deferred
Contract during the prior year. We make the charge by reducing the number of
Accumulation Units credited to the Contract. For purposes of allocating and
deducting the annual Contract fee, we consider any investment in the Guaranteed
Interest Fund as though it were an investment of the same amount in one of the
Account Divisions. We cannot increase this charge. The charge is intended only
to reimburse us for our actual administrative expenses. We currently are waiving
the charge if the Contract value on the Contract anniversary is $50,000 or more.
4. WITHDRAWAL CHARGE. For the Back Load Contract if you withdraw Accumulation
Units for cash, we will deduct a withdrawal charge for sales expenses. This
charge compensates us for the costs we incur in selling the Contracts. We will
base the withdrawal charge on the Amount Categories and the Rates in the table
below. We base the amount in each Category on cumulative purchase payments you
have made and on
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20
<PAGE>
the number of Contract anniversaries that have occurred since you made each
purchase payment.
<TABLE>
<CAPTION>
AMOUNT CATEGORY RATE
- ------------------------------------------------------ -----
<S> <C>
Eight................................................. 8%
Seven................................................. 7%
Six................................................... 6%
Five.................................................. 5%
Four.................................................. 4%
Three................................................. 3%
Two................................................... 2%
One................................................... 1%
Zero.................................................. 0%
</TABLE>
The first $100,000 of total purchase payments paid over the life of the Contract
start out in Category Eight, the next $400,000 start out in Category Four, the
next $500,000 start out in Category Two, and all additional purchase payments
paid start out in Category One. As of each Contract anniversary, we move any
amount in a Category to the next lower Category until the Contract anniversary
on which that amount reaches Category Zero. The total withdrawal charge will be
the sum of all the results calculated by multiplying the amount in each Category
by the Rate for that Category. The amounts we use to calculate the withdrawal
charge will be limited to the value of the Contract benefits that are subject to
the withdrawal charge. The amounts we use will be taken from those Categories
that produce the lowest withdrawal charge. However, any amounts we use to
determine the charge for a partial withdrawal will not be used to determine
subsequent withdrawal charges. There is no withdrawal charge on the value of
Accumulation Units withdrawn in excess of the total purchase payments you have
paid under the Contract; but in the case of a partial withdrawal, we consider
the purchase payments paid under the Contract to be withdrawn first, except for
amounts eligible for the withdrawal charge free amount described in the next
paragraph.
The withdrawal charge free amount is available on a Contract if the Contract
value is at least $10,000 on the Contract anniversary preceding a withdrawal.
For each Contract year, the withdrawal charge free amount is equal to the lesser
of 10% of the Contract value on the last Contract anniversary, and the amount by
which the Contract value exceeds cumulative purchase payments as of the date of
the withdrawal. We will take eligible amounts withdrawn meeting these
requirements first from the portion of the Contract value that exceeds
cumulative purchase payments. We will base the withdrawal charge for any amounts
not included in the withdrawal charge free amount first on the purchase payments
that have been paid.
We will make no withdrawal charge when you select a variable payment plan.
However, we will make the withdrawal charge if you make a withdrawal, or partial
withdrawal, within five years after the beginning of a variable payment plan
which is not contingent on the payee's life (Plan 1). For fixed payment plans
the Contract provides for deduction of the withdrawal charge when the payment
plan is selected. By current administrative practice, we will waive the
withdrawal charge upon selection of a fixed payment plan for a certain period of
12 years or more (Plan 1) or any fixed payment plan which involves a life
contingency (Plans 2 or 3) if you select the payment plan after the Contract has
been in force for at least one full year.
The amount of withdrawal charges we collect from the Back Load Contracts as a
group will depend on the volume and timing of withdrawal transactions. We are
unable to determine in advance whether this amount will be greater or less than
the sales expenses we incur in connection with those Contracts, but based on the
information presently available we believe it is more likely than not that the
sales expenses we incur will be greater than the withdrawal charges we receive.
We bear this risk for the duration of the Contracts. We will pay any excess of
sales expenses over withdrawal charges from our general assets. These assets may
include proceeds from the charge for annuity rate and expense risks described
above.
5. PREMIUM TAXES. The Contracts provide for the deduction of applicable
premium taxes, if any, from purchase payments or from Contract benefits. Various
jurisdictions levy premium taxes. Premium taxes presently range from 0% to 3.5%
of total purchase payments. Many jurisdictions presently exempt from premium
taxes annuities such as the Contracts. As a matter of current practice, we do
not deduct premium taxes from purchase payments received under the Contracts or
from Contract benefits. However, we reserve the right to deduct premium taxes in
the future.
6. EXPENSES FOR THE PORTFOLIOS AND FUNDS. The expenses borne by the Portfolios
and Funds in which the assets of the Account are invested are described in the
prospectuses for Northwestern Mutual Series Fund, Inc. and the Russell Insurance
Funds. See the prospectuses attached to this prospectus.
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21
<PAGE>
CONTRACTS ISSUED PRIOR TO MARCH 31, 1995 For Contracts issued prior to March
31, 1995 and after December 16, 1981 there is no front-end sales load but there
is a surrender charge of 8% on the first $25,000 of purchase payments, 4% on the
next $75,000 and 2% on purchase payments in excess of $100,000, based on total
cumulative purchase payments paid under the Contract. The surrender charge
applicable for each purchase payment reduces by 1% on each Contract anniversary.
A withdrawal charge free amount is available on the same basis described above
for the current Contracts. See "Withdrawal Charge", page 20. The charge for
mortality and expense risks for those Contracts is 1.25% of the assets of the
Account. The annual Contract fee is the lesser of $30 or 1% of the Contract
value. See the table of accumulation unit values on page 7.
CONTRACTS ISSUED PRIOR TO DECEMBER 17, 1981 For Contracts issued prior to
December 17, 1981 there is no surrender charge, but purchase payments are
subject to a deduction for sales expenses. The deduction is 8% on the first
$5,000 received during a single Contract year as defined in the Contract, 4% on
the next $20,000, 2% on the next $75,000 and 1% on the excess over $100,000. The
charge for mortality rate and expense risks for those Contracts is .75% of the
assets of the Account, which we may raise to a maximum annual rate of 1%. There
is no annual Contract fee. See the table of accumulation unit values on page 8.
CERTAIN NONTAX-QUALIFIED CONTRACTS For nontax-qualified Contracts issued after
December 16, 1981 and prior to May 1, 1983 purchase payments paid under the
Contract are subject to a deduction of 3% on the first $25,000 of purchase
payments, 2% on the next $75,000 and 1% on amounts in excess of $100,000, based
on total cumulative purchase payments paid under the Contract. The charge for
annuity rate and expense risks for these Contracts is .75% of the assets of the
Account, which we may raise to a maximum annual rate of 1%.
REDUCED CHARGES FOR EXCHANGE TRANSACTIONS As a matter of current practice, we
permit owners of fixed dollar annuities we have previously issued to exchange
those contracts for Front Load or Back Load Contracts without paying a second
charge for sales expenses. This rule is subject to a number of exceptions and
qualifications we may change or withdraw at any time.
In general, we make a $25 administrative charge on these exchange transactions
and we permit only one such transaction in any 12-month period. Transactions on
this basis are subject to a limit of 20% of the amount held under the fixed
annuity Contract in any 12-month period, but we are presently waiving this
limit.
Amounts exchanged from a fixed contract which provides for a surrender charge
are not charged for sales expenses when the exchange is effected. We place these
amounts in the same withdrawal charge category under the new Back Load Contract
as they were before.
We place exchange proceeds from fixed contracts which have no surrender charge
provisions in the 0% withdrawal charge category. As an alternative, exchange
proceeds from such a fixed contract may be added to a Front Load Contract or to
a Deferred Contract issued prior to December 17, 1981 without any deduction for
sales expenses.
Fixed annuity contracts (which are not described in this prospectus) are
available in exchange for the Contracts on a comparable basis.
- --------------------------------------------------------------------------------
DISTRIBUTION OF THE CONTRACTS
We sell the Contracts through individuals who, in addition to being licensed
insurance agents of Northwestern Mutual Life, are registered representatives of
Northwestern Mutual Investment Services, LLC, our wholly-owned subsidiary.
Northwestern Mutual Investment Services, LLC is a registered broker-dealer under
the Securities Exchange Act of 1934, and a member of the National Association of
Securities Dealers. Where state law requires, these agents will also be licensed
securities salesmen. Commissions paid to the agents on sales of the Contracts
will not exceed 4% of purchase payments.
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22
<PAGE>
YEAR 2000 ISSUES
Since early 1996, we have been preparing for the computer requirements
associated with the approaching turn of the century. We completed assessment of
our internal systems in 1996. As of the date of this prospectus, the necessary
system changes are substantially complete. System testing is in process and we
expect testing of all critical systems to be completed during the first six
months of 1999.
The work on these computer systems extends to software packages we purchase from
vendors. In addition, we have been communicating formally with our business
partners to identify and assess potential exposure that could result from their
failure to address these computer issues on a timely basis. Each of our
departments has prepared a contingency plan.
We and our business partners bear all of the costs of identifying and resolving
the computer systems issues associated with the year 2000. These costs will have
no effect on the performance of the Account. The Contracts permit us to increase
the charges for our expense risks up to the guaranteed maximum rates. However,
we do not expect our costs for year 2000 compliance to have any significant
effect on the benefits or values provided by the Contracts.
We believe that our computer systems will be ready for the year 2000 well in
advance of the deadline. By their nature, however, the issues in this area carry
the risk of unforeseen problems, both at Northwestern Mutual Life and at all the
other sites where supporting functions and interaction take place. There can be
no assurance that these problems will not have a material adverse impact on the
operations of Northwestern Mutual Life and the Account.
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23
<PAGE>
TABLE OF CONTENTS FOR STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
Page
-----
<S> <C>
DISTRIBUTION OF THE CONTRACTS..................... B-2
DETERMINATION OF ANNUITY PAYMENTS................. B-2
Amount of Annuity Payments...................... B-2
Annuity Unit Value.............................. B-3
Illustrations of Variable Annuity Payments...... B-3
VALUATION OF ASSETS OF THE ACCOUNT................ B-4
TRANSFERABILITY RESTRICTIONS...................... B-4
PERFORMANCE DATA.................................. B-4
EXPERTS........................................... B-6
<CAPTION>
Page
-----
<S> <C>
FINANCIAL STATEMENTS OF THE ACCOUNT
(for the two years ended December 31, 1998)...... B-7
REPORT OF INDEPENDENTACCOUNTANTS
(for the two years ended December 31, 1998)...... B-13
FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL LIFE
(for the three years ended December 31, 1998).... B-14
REPORT OF INDEPENDENT ACCOUNTANTS
(for the three years ended December 31, 1998).... B-27
</TABLE>
- --------------------------------------------------------------------------------
This Prospectus sets forth concisely the information about NML Variable Annuity
Account B that a prospective investor ought to know before investing. Additional
information about Account B has been filed with the Securities and Exchange
Commission in a Statement of Additional Information which is incorporated herein
by reference. The Statement of Additional Information is available upon request
and without charge from The Northwestern Mutual Life Insurance Company. To
receive a copy, return the request form to the address listed below, or
telephone (414) 271-1444.
TO: The Northwestern Mutual Life Insurance Company
Annuity and Accumulation Products Marketing Department
Room E12J
720 East Wisconsin Avenue
Milwaukee, WI 53202
Please send a Statement of Additional Information for NML Variable
Annuity Account B to:
Name __________________________________________________________________
Address _______________________________________________________________
______________________________________________________________________
City ______________________________ State ____________ Zip ____________
<PAGE>
More information about Northwestern Mutual Series Fund, Inc. is included in the
Fund's Statement of Additional Information (SAI), incorporated by reference in
this prospectus, which is available free of charge.
More information about the Fund's investments is included in the Fund's annual
and semi-annual reports, which discuss the market conditions and investment
strategies that significantly affected each Portfolio's performance during the
previous fiscal period.
To request a free copy of the Fund's SAI, or current annual or semi-annual
report, call us at 1-800-519-4665. Information about the Fund (including the
SAI) can be reviewed and copied at the Public Reference Room of the Securities
and Exchange Commission (SEC) in Washington, DC. Information on the operation
of the Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330. Reports and other information about the Fund are available on
the SEC's Internet site at http://www.sec.gov. Copies of the information may
be obtained, upon payment of a duplicating fee by writing the Public
Reference Section of the SEC, Washington, DC 20549-6009.
NORTHWESTERN MUTUAL LIFE
<TABLE>
<CAPTION>
VARIABLE ANNUITY CONTRACTS
<S> <C>
Nontax-Qualified Annuities SIMPLE IRAs
Individual Retirement Annuities Tax Deferred Annuities
Roth IRAs 457 Deferred Compensation Plan Annuities
Simplified Employee Pension Plan IRAs Non-Transferable Annuities
</TABLE>
NML VARIABLE ANNUITY ACCOUNT B
NORTHWESTERN MUTUAL SERIES FUND, INC.
RUSSELL INSURANCE FUNDS
90-1773 (4-99)
PROSPECTUSES
Investment Company Act File Nos. 811-3990 and 811-5371
--------------
NORTHWESTERN MUTUAL LIFE-Registered Trademark- [LOGO] PRSRT STD
PO BOX 3095 U S POSTAGE
Milwaukee WI 53201-3095 PAID
MILWAUKEE WI
PERMIT NO 426
--------------
Change Service Requested
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
VARIABLE ANNUITY CONTRACTS
(for Individual Retirement Annuities, Tax-Deferred Annuities
and Non-Qualified Plans)
NML VARIABLE ANNUITY ACCOUNT B
(the "Account"),
a separate investment account of
The Northwestern Mutual Life Insurance Company
("Northwestern Mutual Life")
- --------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus but supplements and
should be read in conjunction with the prospectus for the Contracts. A copy of
the prospectus may be obtained from The Northwestern Mutual Life Insurance
Company, 720 East Wisconsin Avenue, Milwaukee, Wisconsin 53202, telephone number
(414) 271-1444.
- --------------------------------------------------------------------------------
The Date of the Prospectus to which this Statement of Additional
Information Relates is April 30, 1999.
The Date of this Statement of Additional Information is April 30, 1999.
B-1
<PAGE>
DISTRIBUTION OF THE CONTRACTS
The Contracts are offered on a continuous basis exclusively through
individuals who, in addition to being life insurance agents of Northwestern
Mutual Life, are registered representatives of Northwestern Mutual Investment
Services, LLC ("NMIS").
NMIS may be considered the underwriter of the Contracts for purposes of the
federal securities laws. The following amounts of commissions were paid on sales
of the Contracts during each of the last three years:
<TABLE>
<CAPTION>
YEAR AMOUNT
------ --------
<S> <C>
1998 $20,405,686
1997 $15,326,743
1996 $14,128,993
</TABLE>
DETERMINATION OF ANNUITY PAYMENTS
The following discussion of the method for determining the amount of
monthly annuity payments under a variable payment plan is intended to be read in
conjunction with these sections of the prospectus for the Contracts: "Variable
Payment Plans", p. 10, including "Description of Payment Plans", p. 10, "Amount
of Annuity Payments", p. 10, and "Assumed Investment Rate", p. 11; "Dividends",
p. 12; "Net Investment Factor", p. 9; and "Deductions", p. 14.
AMOUNT OF ANNUITY PAYMENTS The amount of the first annuity payment under a
variable Payment Plan will be determined on the basis of the particular Payment
Plan selected, the annuity payment rate and, for plans involving life
contingencies, the Annuitant's adjusted age and sex. The amount of the first
payment is the sum of the payments from each Division of the Account determined
by applying the appropriate annuity payment rate to the product of the number of
Accumulation Units in the Division on the effective date of the Payment Plan and
the Accumulation Unit value for the Division on that date. Annuity rates
currently in use are based on the 1983 a Table with Projection Scale G and age
adjustment.
Variable annuity payments after the first will vary from month to month and
will depend upon the number and value of Annuity Units credited to the
Annuitant. After the effective date of a Payment Plan a Contract will not share
in the divisible surplus of Northwestern Mutual Life.
The number of Annuity Units in each Division is determined by dividing the
amount of the first annuity payment from the Division by the value of an Annuity
Unit on the effective date of the Payment Plan. The number of Annuity Units thus
credited to the Annuitant in each Division remains constant throughout the
annuity period. However, the value of Annuity Units in each Division will
fluctuate with the investment experience of the Division.
The amount of each variable annuity payment after the first is the sum of
payments from each Division determined by multiplying this fixed number of
Annuity Units each month by the value of an Annuity Unit for the Division on (a)
the fifth valuation date prior to the payment due date if the payment due date
is a valuation date, or (b) the sixth valuation date prior to the payment due
date if the payment due date is not a valuation date. To illustrate, if a
payment due date falls on a Friday, Saturday or Sunday, the amount of the
payment will normally be based upon the Annuity Unit value calculated on the
preceding Friday. The preceding Friday would be the fifth valuation date prior
to the Friday due date, and the sixth valuation date prior to the Saturday or
Sunday due dates.
B-2
<PAGE>
ANNUITY UNIT VALUE The value of an Annuity Unit for each Division was
established at $1.00 as of the date operations began for that Division. The
value of an Annuity Unit on any later date varies to reflect the investment
experience of the Division, the Assumed Investment Rate on which the annuity
rate tables are based, and the deduction for mortality rate and expense risks
assumed by Northwestern Mutual Life.
The Annuity Unit value for each Division on any valuation date is
determined by multiplying the Annuity Unit value on the immediately preceding
valuation date by two factors: (a) the net investment factor for the current
period for the Division; and (b) an adjustment factor to neutralize the Assumed
Investment Rate used in calculating the annuity rate tables.
ILLUSTRATIONS OF VARIABLE ANNUITY PAYMENTS To illustrate the manner in
which variable annuity payments are determined consider this example. Item (4)
in the example shows the applicable monthly payment rate for a male, adjusted
age 65, who has elected a life annuity Payment Plan with a certain period of 10
years with an Assumed Investment Rate of 3-1/2% (Plan 2, as described in the
prospectus).
<TABLE>
<S> <C>
(1) Assumed number of Accumulation Units in
Balanced Division on maturity date........................... 25,000
(2) Assumed Value of an Accumulation Unit in
Balanced Division at maturity................................ $2.000000
(3) Cash Value of Contract at maturity, (1) X (2) ............... $50,000
(4) Assumed applicable monthly payment rate per
$1,000 from annuity rate table............................... $5.44
(5) Amount of first payment from Balanced Division,
(3) X (4) divided by $1,000.................................. $272.00
(6) Assumed Value of Annuity Unit in
Balanced Division at maturity................................ $1.500000
(7) Number of Annuity Units credited in
Balanced Division, (5) divided by (6)........................ 181.33
</TABLE>
The $50,000 value at maturity provides a first payment from the Balanced
Division of $272.00, and payments thereafter of the varying dollar value of
181.33 Annuity Units. The amount of subsequent payments from the Balanced
Division is determined by multiplying 181.33 units by the value of an Annuity
Unit in the Balanced Division on the applicable valuation date. For example, if
that unit value is $1.501000, the monthly payment from the Division will be
181.33 multiplied by $1.501000, or $272.18.
However, the value of the Annuity Unit depends entirely on the investment
performance of the Division. Thus in the example above, if the net investment
rate for the following month was less than the Assumed Investment Rate of
3-1/2%, the Annuity Unit would decline in value. If the Annuity Unit value
declined to $1.499000 the succeeding monthly payment would then be 181.33 X
$1.499000, or $271.81.
For the sake of simplicity the foregoing example assumes that all of the
Annuity Units are in the Balanced Division. If there are Annuity Units in two or
more Divisions, the annuity payment from each
B-3
<PAGE>
Division is calculated separately, in the manner illustrated, and the total
monthly payment is the sum of the payments from the Divisions.
VALUATION OF ASSETS OF THE ACCOUNT
The value of Portfolio or Fund shares held in each Division of the Account
at the time of each valuation is the redemption value of such shares at such
time. If the right to redeem shares of a Portfolio or Fund has been suspended,
or payment of redemption value has been postponed, for the sole purpose of
computing annuity payments the shares held in the Account (and Annuity Units)
may be valued at fair value as determined in good faith by the Board of Trustees
of Northwestern Mutual Life.
TRANSFERABILITY RESTRICTIONS
Ownership of a Contract purchased as a tax-deferred annuity pursuant to
Section 403(b) of the Internal Revenue Code of 1954, as amended (the "Code")
cannot be changed and the Contract cannot be sold, assigned or pledged as
collateral for a loan, or for any other purpose, to any person other than
Northwestern Mutual Life. Similar restrictions are applicable to Contracts
purchased in exchange transactions by persons who have received fixed dollar
policies as distributions of termination benefits from tax-qualified corporate
or HR-10 plans or trusts. Ownership of a Contract purchased as an individual
retirement annuity pursuant to Section 408(b) of the Code cannot be transferred
except in limited circumstances involving divorce.
PERFORMANCE DATA
Standardized performance data in advertisements will show the average
annual total return for each Division of the Account, according to the following
formula prescribed by the Securities and Exchange Commission:
P(1 + T) to the power of n = ERV
Where:
<TABLE>
<S> <C>
P = a hypothetical initial payment of $1000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
$1000 payment made at the beginning of the
1, 5 or 10 year periods at the end of the 1,
5, or 10 year periods (or fractional portion
thereof)
</TABLE>
Average annual total return is the annual compounded rate of return that
would have produced the ending surrender value under a Contract if the owner
had invested in a specified Division over the stated period and investment
performance had remained constant throughout the period. The calculation
assumes a single $1,000 purchase payment made at the beginning of the period
and surrender of the Contract at the end of the period. It reflects a
deduction for all Account, Fund and Contract level charges, including the 4%
initial sales load for the Front Load Contract and the withdrawal charge for
the Back Load Contract. The $30 annual Contract fee is reflected as .03% for
the Front Load Contract and .14% for the Back Load based on the annual
contract fees collected divided by the assets of the sub-account. For the
Front Load Contract the data will assume a minimum initial purchase payment
of $10,000 and the amounts will be divided by 10 to conform the presentation
to the $1,000 purchase payment assumption required by the prescribed formula.
The following table shows the standardized average annual total return data
for each Division of the Account for the period ended December 31, 1998:
B-4
<PAGE>
FRONT LOAD CONTRACT
<TABLE>
<CAPTION>
DIVISION 1-YEAR 5-YEAR 10-YEAR INCEPTION*
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth Stock 2.81 14.64 NA 18.31
International Equity 0.19 8.83 NA 11.94
Growth Stock 21.10 NA NA 21.48
Growth and Income Stock 17.70 NA NA 20.36
Index 500 Stock 23.04 22.31 NA 19.48
Balanced 13.63 14.18 12.19 NA
High Yield Bond -6.18 NA NA 9.66
Select Bond 2.35 5.65 8.08 NA
Money Market 0.77 3.91 4.58 NA
- -------------------------------------------------------------------------------------------------------------
</TABLE>
BACK LOAD CONTRACT
<TABLE>
<CAPTION>
DIVISION 1-YEAR 5-YEAR 10-YEAR INCEPTION*
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth Stock -0.93 14.22 NA 17.90
International Equity -3.62 8.31 NA 11.46
Growth Stock 17.94 NA NA 21.07
Growth and Income Stock 14.44 NA NA 19.90
Index 500 Stock 19.95 21.95 NA 18.99
Balanced 10.24 13.72 11.66 NA
High Yield Bond -10.20 NA NA 9.04
Select Bond -1.41 5.02 7.57 NA
Money Market -3.03 3.24 4.02 NA
- -------------------------------------------------------------------------------------------------------------
</TABLE>
* INDEX 500 STOCK AND AGGRESSIVE GROWTH STOCK DIVISIONS BEGAN DECEMBER 1990;
INTERNATIONAL EQUITY DIVISION BEGAN APRIL 1993; GROWTH STOCK, GROWTH AND
INCOME STOCK AND HIGH YIELD BOND DIVISIONS BEGAN MAY 1994.
Non-standardized performance data are calculated on the same basis as the
standardized total return data, except that the 4% initial sales load for the
Front Load Contract is not reflected and it is assumed that the Back Load
Contract remains in force at the end of the period. The annual Contract fee of
$30 is also not reflected.
The following table shows the non-standardized average annual total
return data for each Division of the Account for the period ended December
31, 1998:
FRONT LOAD CONTRACT
<TABLE>
<CAPTION>
DIVISION 1-YEAR 5-YEAR 10-YEAR INCEPTION*
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth Stock 7.12 15.71 NA 19.06
International Equity 4.40 9.83 NA 12.86
Growth Stock 26.18 NA NA 22.68
Growth and Income Stock 22.64 NA NA 21.51
Index 500 Stock 28.21 23.43 NA 20.17
Balanced 18.40 15.21 12.76 NA
High Yield Bond -2.24 NA NA 10.73
Select Bond 6.64 6.55 8.64 NA
Money Market 5.01 4.79 5.06 NA
- -------------------------------------------------------------------------------------------------------------
</TABLE>
B-5
<PAGE>
BACK LOAD CONTRACT
<TABLE>
<CAPTION>
DIVISION 1-YEAR 5-YEAR 10-YEAR INCEPTION*
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth Stock 6.22 14.73 NA 18.06
International Equity 3.52 8.90 NA 11.91
Growth Stock 25.12 NA NA 21.64
Growth and Income Stock 21.61 NA NA 20.48
Index 500 Stock 27.13 22.39 NA 19.16
Balanced 17.40 14.24 11.81 NA
High Yield Bond -3.06 NA NA 9.79
Select Bond 5.74 5.65 7.73 NA
Money Market 4.12 3.91 4.17 NA
- ------------------------------------------------------------------------------------------------------------
</TABLE>
* INDEX 500 STOCK AND AGGRESSIVE GROWTH STOCK DIVISIONS BEGAN DECEMBER 1990;
INTERNATIONAL EQUITY DIVISION BEGAN APRIL 1993; GROWTH STOCK, GROWTH AND
INCOME STOCK AND HIGH YIELD BOND DIVISIONS BEGAN MAY 1994.
Advertisements with performance data may compare the average annualized
total return figures for one or more of the Divisions to (1) the Standard &
Poor's 500 Composite Stock Price Index, Wilshire Index, 1750 Index, EAFE Index,
Merrill Lynch Domestic Master Index, Lehman Brothers High Yield Intermediate
Market Index or other indices measuring performance of a relevant group of
securities; (2) other variable annuity separate account tracked by Lipper
Analytical Services or other ratings services; or (3) the Consumer Price Index.
EXPERTS
The financial statements of the Account as of December 31, 1998 and for
each of the two years in the period ended December 31, 1998 and of
Northwestern Mutual Life as of December 31, 1998 and 1997 and for each of the
three years in the period ended December 31, 1998 included in this Statement
of Additional Information have been so included in reliance on the reports of
PricewaterhouseCoopers LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting. PricewaterhouseCoopers LLP
provides audit services for the Account. The address of
PricewaterhouseCoopers LLP is 100 East Wisconsin Avenue, Suite 1500,
Milwaukee, Wisconsin 53202.
B-6
<PAGE>
ACCOUNT B FINANCIAL STATEMENTS
NML VARIABLE ANNUITY ACCOUNT B
Financial Statements
DECEMBER 31, 1998
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
<TABLE>
<S> <C> <C>
ASSETS
Investments at Market Value:
Northwestern Mutual Series Fund, Inc.
Aggressive Growth Stock
236,145 shares (cost $565,515)............. $ 818,007
International Equity
291,261 shares (cost $408,731)............. 488,444
Growth Stock
133,789 shares (cost $210,399)............. 300,624
Growth and Income Stock
260,808 shares (cost $348,055)............. 423,552
Index 500 Stock
356,667 shares (cost $645,769)............. 1,173,076
Balanced
1,180,836 shares (cost $1,687,263)......... 2,626,180
High Yield Bond
145,498 shares (cost $159,267)............. 136,186
Select Bond
191,043 shares (cost $226,720)............. 238,613
Money Market
205,636 shares (cost $205,636)............. 205,636 $ 6,410,318
-----------
Due from Sale of Fund Shares.................................... 2,508
Due from Northwestern Mutual Life Insurance Company............. 2,063
-----------
Total Assets.................................................... $ 6,414,889
-----------
-----------
LIABILITIES
Due to Participants........................................... $ 8,709
Due to Northwestern Mutual Life Insurance Company............. 2,508
Due on Purchase of Fund Shares................................ 2,021
-----------
Total Liabilities......................................... 13,238
-----------
EQUITY (NOTE 8)
Contracts Issued Prior to December 17, 1981................... 91,339
Contracts Issued After December 16, 1981 and Prior to March
31, 1995..................................................... 4,318,647
Contracts Issued On or After March 31, 1995:
Front Load Version............................................ 599,836
Back Load Version............................................. 1,391,829
-----------
Total Equity.............................................. 6,401,651
-----------
Total Liabilities and Equity.............................. $ 6,414,889
-----------
-----------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements
B-7
<PAGE>
ACCOUNT B FINANCIAL STATEMENTS
NML VARIABLE ANNUITY ACCOUNT B
Statements of Operations and Changes in Equity
(IN THOUSANDS)
<TABLE>
<CAPTION>
AGGRESSIVE GROWTH INTERNATIONAL EQUITY
COMBINED STOCK DIVISION 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,
1998 1997 1998 1997 1998 1997
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend Income............... $ 279,975 $ 273,279 $ 29,446 $ 42,923 $ 29,263 $ 15,386
Annuity Rate and Expense
Guarantees.................. 67,916 53,021 9,236 8,086 6,000 5,358
------------- ------------- ------------- ------------- ------------- -------------
Net Investment Income......... 212,059 220,258 20,210 34,837 23,263 10,028
------------- ------------- ------------- ------------- ------------- -------------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS
Realized Gain on
Investments............... 88,924 39,663 27,122 12,892 17,380 4,228
Unrealized Appreciation
(Depreciation) of
Investments During the
Period.................... 521,055 527,607 650 39,283 (24,915) 30,048
------------- ------------- ------------- ------------- ------------- -------------
Net Gain (Loss) on
Investments............... 609,979 567,270 27,772 52,175 (7,535) 34,276
------------- ------------- ------------- ------------- ------------- -------------
Increase in Equity Derived
from Investment
Activity.................. 822,038 787,528 47,982 87,012 15,728 44,304
------------- ------------- ------------- ------------- ------------- -------------
EQUITY TRANSACTIONS
Contract Owners' Net
Deposits.................. 804,374 677,589 94,566 99,971 60,272 74,713
Annuity Payments............ (11,449) (8,151) (737) (540) (559) (462)
Surrenders and Other
(net)..................... (370,626) (227,384) (55,445) (31,527) (33,875) (17,649)
Transfers from Other
Divisions or Sponsor...... 812,385 508,492 57,046 68,100 56,567 53,618
Transfers to Other Divisions
or Sponsor................ (825,382) (519,749) (113,076) (92,620) (102,582) (46,867)
------------- ------------- ------------- ------------- ------------- -------------
Increase in Equity Derived
from Equity Transactions.... 409,302 430,797 (17,646) 43,384 (20,177) 63,353
------------- ------------- ------------- ------------- ------------- -------------
Net Increase (Decrease) in
Equity...................... 1,231,340 1,218,325 30,336 130,396 (4,449) 107,657
EQUITY
Beginning of Year........... 5,170,311 3,951,986 786,882 656,486 492,432 384,775
------------- ------------- ------------- ------------- ------------- -------------
End of Year................. $6,401,651 $5,170,311 $817,218 $786,882 $487,983 $492,432
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements
B-8
<PAGE>
NML VARIABLE ANNUITY ACCOUNT B
Statements of Operations and Changes in Equity
(IN THOUSANDS)
<TABLE>
<CAPTION>
GROWTH & INCOME INDEX 500
GROWTH STOCK DIVISION 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,
1998 1997 1998 1997 1998 1997
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend Income............... $ 4,848 $ 7,990 $ 3,489 $ 61,425 $ 32,261 $ 21,296
Annuity Rate and Expense
Guarantees.................. 2,665 1,459 4,034 2,356 11,266 7,413
------------- ------------- ------------- ------------- ------------- -------------
Net Investment Income
(Loss)...................... 2,183 6,531 (545) 59,069 20,995 13,883
------------- ------------- ------------- ------------- ------------- -------------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS
Realized Gain on
Investments............... 1,471 694 2,454 731 15,353 3,597
Unrealized Appreciation
(Depreciation) of
Investments During the
Period.................... 49,578 26,626 67,034 (8,963) 198,764 158,395
------------- ------------- ------------- ------------- ------------- -------------
Net Gain (Loss) on
Investments............... 51,049 27,320 69,488 (8,232) 214,117 161,992
------------- ------------- ------------- ------------- ------------- -------------
Increase in Equity Derived
from Investment
Activity.................. 53,232 33,851 68,943 50,837 235,112 175,875
------------- ------------- ------------- ------------- ------------- -------------
EQUITY TRANSACTIONS
Contract Owners' Net
Deposits.................. 54,754 35,700 73,068 55,118 152,424 115,401
Annuity Payments............ (268) (151) (642) (386) (1,910) (1,292)
Surrenders and Other
(net)..................... (12,505) (4,686) (19,173) (7,534) (53,430) (28,174)
Transfers from Other
Divisions or Sponsor...... 56,084 30,593 63,150 55,360 154,924 88,834
Transfers to Other Divisions
or Sponsor................ (28,461) (14,624) (46,768) (21,037) (115,601) (57,501)
------------- ------------- ------------- ------------- ------------- -------------
Increase in Equity Derived
from Equity Transactions.... 69,604 46,832 69,635 81,521 136,407 117,268
------------- ------------- ------------- ------------- ------------- -------------
Net Increase (Decrease) in
Equity...................... 122,836 80,683 138,578 132,358 371,519 293,143
EQUITY
Beginning of Year........... 177,410 96,727 284,747 152,389 799,451 506,308
------------- ------------- ------------- ------------- ------------- -------------
End of Year................. $300,246 $177,410 $423,325 $284,747 $1,170,970 $799,451
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements
B-9
<PAGE>
NML VARIABLE ANNUITY ACCOUNT B
Statements of Operations and Changes in Equity
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCED DIVISION HIGH YIELD BOND DIVISION SELECT 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,
1998 1997 1998 1997 1998 1997
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend Income............... $ 143,628 $ 91,116 $ 13,983 $ 15,911 $ 14,579 $ 10,248
Annuity Rate and Expense
Guarantees.................. 29,061 24,287 1,408 752 2,437 1,923
------------- ------------- ------------- ------------- ------------- -------------
Net Investment Income
(Loss)...................... 114,567 66,829 12,575 15,159 12,142 8,325
------------- ------------- ------------- ------------- ------------- -------------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS
Realized Gain on
Investments............... 24,370 16,178 87 147 687 1,196
Unrealized Appreciation
(Depreciation) of
Investments During the
Period.................... 248,726 283,731 (18,317) (5,691) (465) 4,178
------------- ------------- ------------- ------------- ------------- -------------
Net Gain (Loss) on
Investments............... 273,096 299,909 (18,230) (5,544) 222 5,374
------------- ------------- ------------- ------------- ------------- -------------
Increase in Equity Derived
from Investment
Activity.................. 387,663 366,738 (5,655) 9,615 12,364 13,699
------------- ------------- ------------- ------------- ------------- -------------
EQUITY TRANSACTIONS
Contract Owners' Net
Deposits.................. 220,919 162,927 40,941 27,421 33,881 26,099
Annuity Payments............ (6,278) (4,545) (301) (159) (570) (457)
Surrenders and Other
(net)..................... (153,449) (105,615) (8,012) (2,481) (13,382) (10,101)
Transfers from Other
Divisions or Sponsor...... 103,591 60,446 39,779 29,165 50,470 22,652
Transfers to Other Divisions
or Sponsor................ (133,506) (98,388) (31,044) (9,307) (36,471) (23,258)
------------- ------------- ------------- ------------- ------------- -------------
Increase in Equity Derived
from Equity Transactions.... 31,277 14,825 41,363 44,639 33,928 14,935
------------- ------------- ------------- ------------- ------------- -------------
Net Increase (Decrease) in
Equity...................... 418,940 381,563 35,708 54,254 46,292 28,634
EQUITY
Beginning of Year........... 2,202,757 1,821,194 100,661 46,407 191,965 163,331
------------- ------------- ------------- ------------- ------------- -------------
End of Year................. $2,621,697 $2,202,757 $136,369 $100,661 $238,257 $191,965
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
<CAPTION>
MONEY MARKET DIVISION
-----------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
INVESTMENT INCOME
Dividend Income............... $ 8,478 $ 6,984
Annuity Rate and Expense
Guarantees.................. 1,809 1,387
------------- -------------
Net Investment Income
(Loss)...................... 6,669 5,597
------------- -------------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS
Realized Gain on
Investments............... -- --
Unrealized Appreciation
(Depreciation) of
Investments During the
Period.................... -- --
------------- -------------
Net Gain (Loss) on
Investments............... -- --
------------- -------------
Increase in Equity Derived
from Investment
Activity.................. 6,669 5,597
------------- -------------
EQUITY TRANSACTIONS
Contract Owners' Net
Deposits.................. 73,549 80,239
Annuity Payments............ (184) (159)
Surrenders and Other
(net)..................... (21,355) (19,617)
Transfers from Other
Divisions or Sponsor...... 230,774 99,724
Transfers to Other Divisions
or Sponsor................ (217,873) (156,147)
------------- -------------
Increase in Equity Derived
from Equity Transactions.... 64,911 4,040
------------- -------------
Net Increase (Decrease) in
Equity...................... 71,580 9,637
EQUITY
Beginning of Year........... 134,006 124,369
------------- -------------
End of Year................. $205,586 $134,006
------------- -------------
------------- -------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements
B-10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NML VARIABLE ANNUITY ACCOUNT B
Notes to Financial Statements
DECEMBER 31, 1998
NOTE 1 -- NML Variable Annuity Account B (the "Account") is registered as a unit
investment trust under the Investment Company Act of 1940 and is a segregated
asset account of The Northwestern Mutual Life Insurance Company ("Northwestern
Mutual" or "Sponsor") used to fund variable annuity contracts ("contracts") for
tax-deferred annuities, individual retirement annuities and non-qualified plans.
Beginning March 31, 1995, two versions of the contract are offered: Front Load
contracts with a sales charge up to 4% of purchase payments and Back Load
contracts with a withdrawal charge of 0-8%.
NOTE 2 -- The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Principal
accounting policies are summarized below.
NOTE 3 -- All assets of each Division of the Account are invested in shares of
the corresponding Portfolio of Northwestern Mutual Series Fund, Inc. (the
"Fund"). The shares are valued at the Fund's offering and redemption price per
share.
The Fund is an open-end investment company 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 Table a with
assumed interest rates of 3 1/2% or 5%.
NOTE 5 -- Dividend income from the Fund is recorded on the record date of the
dividends. Transactions in Fund shares are accounted for on the trade date. The
basis for determining cost on sale of Fund shares is identified cost. Purchases
and sales of Fund shares for the year ended December 31, 1998 by each Division
are shown below:
<TABLE>
<CAPTION>
PURCHASES SALES
------------- ------------
<S> <C> <C>
Aggressive Growth Division.......... $ 52,886,651 $ 49,961,563
International Equity Division....... 56,140,710 53,062,162
Growth Stock Division............... 74,993,862 3,109,497
Growth & Income Stock
Division............................ 78,595,199 9,143,672
Index 500 Stock Division............ 181,353,026 22,684,529
Balanced Division................... 220,059,260 73,056,429
High Yield Bond Division............ 63,971,868 9,992,629
Select Bond Division................ 56,781,795 10,814,747
Money Market Division............... 133,792,656 62,264,377
</TABLE>
NOTE 6 -- A deduction for annuity rate and expense guarantees is determined
daily and paid to Northwestern Mutual as compensation for assuming the risk that
annuity payments will continue for longer periods than anticipated because the
annuitants as a group live longer than expected, and the risk that the charges
made by Northwestern Mutual may be insufficient to cover the actual costs
incurred in connection with the contracts.
For contracts issued on or after March 31, 1995, 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% annual rate, respectively.
For contracts issued after December 16, 1981 and prior to March 31, 1995, the
deduction is at an annual rate of 1 1/4% of the net assets of each Division
attributable to these contracts. For these contracts, the rate may be increased
or decreased by the Board of Trustees of Northwestern Mutual not to exceed a
1 1/2% annual rate.
For contracts issued prior to December 17, 1981, the deduction is at an annual
rate of 3/4 of 1% of the net assets of each Division attributable to these
contracts. For these contracts, the rate may be increased or decreased by the
Board of Trustees of Northwestern Mutual not to exceed a 1% annual rate.
Since 1995, Northwestern Mutual has paid a dividend to certain contracts. The
dividend is re-invested in the Account and has been reflected as a Contract
Owners' Net Deposit 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.
B-11
<PAGE>
NML VARIABLE ANNUITY ACCOUNT B
Notes to Financial Statements
(IN THOUSANDS)
DECEMBER 31, 1998
NOTE 8 -- Equity Values by Division are shown below:
<TABLE>
<CAPTION>
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
- ---------------------------------------- -------------- ------------- --------- -------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Aggressive Growth Stock................. $ 3.979925 1,033 $ 4,111 $ 3.822308 142,251 $ 543,726
International Equity.................... 1.947470 1,521 2,962 1.893030 169,478 320,826
Growth Stock............................ 2.549324 335 854 2.490522 55,526 138,288
Growth and Income....................... 2.437983 433 1,056 2.381813 87,082 207,413
Index 500 Stock......................... 4.288648 10,167 43,603 4.119000 163,099 671,803
Balanced................................ 7.408002 3,072 22,761 6.804809 303,184 2,063,107
High Yield Bond......................... 1.582307 139 220 1.545816 32,974 50,972
Select Bond............................. 7.793891 958 7,457 7.157135 19,458 139,262
Money Market............................ 2.652467 1,060 2,812 2.436196 46,757 113,910
--------- ----------
Equity................................ 85,836 4,249,307
Annuity Reserves...................... 5,503 69,340
--------- ----------
Total Equity.......................... $ 91,339 $4,318,647
--------- ----------
--------- ----------
</TABLE>
<TABLE>
<CAPTION>
CONTRACTS ISSUED: CONTRACTS ISSUED:
ON OR AFTER MARCH 31, 1995 ON OR AFTER MARCH 31, 1995
FRONT LOAD VERSION BACK LOAD VERSION
---------------------------------------- -----------------------------------------
ACCUMULATION UNITS ACCUMULATION UNITS
DIVISION UNIT VALUE OUTSTANDING EQUITY UNIT VALUE OUTSTANDING EQUITY
- ---------------------------------------- -------------- ------------- --------- -------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Aggressive Growth Stock................. $ 1.858751 38,301 71,192 $ 3.822308 50,241 $ 192,036
International Equity.................... 1.604722 30,706 49,274 1.893030 58,015 109,824
Growth Stock............................ 2.375383 20,436 48,543 2.490522 43,931 109,412
Growth and Income Stock................. 2.270962 28,665 65,098 2.381813 60,019 142,954
Index 500 Stock......................... 2.597374 49,368 128,227 4.119000 74,933 308,651
Balanced................................ 1.912247 72,292 138,241 6.804809 50,001 340,250
High Yield Bond......................... 1.495835 19,796 29,612 1.545816 34,432 53,226
Select Bond............................. 1.350384 22,094 29,835 7.157135 8,005 57,295
Money Market............................ 1.203067 27,166 32,682 2.436196 22,513 54,846
--------- ----------
Equity................................ 592,704 1,368,494
Annuity Reserves...................... 7,132 23,335
--------- ----------
Total Equity.......................... $ 599,836 $1,391,829
--------- ----------
--------- ----------
</TABLE>
B-12
<PAGE>
ACCOUNTANTS' REPORT
[LOGO]
REPORT OF INDEPENDENT ACCOUNTANTS
To The Northwestern Mutual Life Insurance Company and
Contract Owners NML Variable Annuity Account B
In our opinion, the accompanying combined statement of assets and liabilities
and the related combined and separate statements of operations and changes in
equity present fairly, in all material respects, the financial position of NML
Variable Annuity Account B and the Aggressive Growth Stock Division,
International Equity Division, Growth Stock Division, Growth and Income Stock
Division, Index 500 Stock Division, Balanced Division, High Yield Bond Division,
Select Bond Division and the Money Market Division thereof at December 31, 1998,
the results of each of their operations and the changes in each of their equity
for each of the two years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of The Northwestern Mutual Life Insurance Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards 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, 1998 with
Northwestern Mutual Series Fund, Inc., provide a reasonable basis for the
opinion expressed above.
[SIG]
Milwaukee, Wisconsin
January 25, 1999
B-13
<PAGE>
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(IN MILLIONS)
The following financial statements of Northwestern Mutual should be considered
only as bearing upon the ability of Northwestern Mutual Life to meet its
obligations under the Policies.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Bonds......................................... $ 34,888 $ 32,359
Common and preferred stocks................... 6,576 6,524
Mortgage loans................................ 12,250 10,835
Real estate................................... 1,481 1,372
Policy loans.................................. 7,580 7,163
Other investments............................. 1,839 2,026
Cash and temporary investments................ 1,275 572
Due and accrued investment income............. 827 795
Other assets.................................. 1,313 1,275
Separate account assets....................... 9,966 8,160
--------- ---------
Total assets.............................. $ 77,995 $ 71,081
--------- ---------
--------- ---------
LIABILITIES AND SURPLUS
Reserves for policy benefits.................. $ 51,815 $ 47,343
Policy benefit and premium deposits........... 1,709 1,624
Policyowner dividends payable................. 2,870 2,640
Interest maintenance reserve.................. 606 461
Asset valuation reserve....................... 1,994 1,974
Income taxes payable.......................... 1,161 1,043
Other liabilities............................. 3,133 3,735
Separate account liabilities.................. 9,966 8,160
--------- ---------
Total liabilities......................... 73,254 66,980
Surplus....................................... 4,741 4,101
--------- ---------
Total liabilities and surplus............. $ 77,995 $ 71,081
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
B-14
<PAGE>
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
REVENUE
Premium income................................ $ 8,021 $ 7,294 $ 6,667
Net investment income......................... 4,536 4,171 3,836
Other income.................................. 922 861 759
--------- --------- ---------
Total revenue............................. 13,479 12,326 11,262
--------- --------- ---------
BENEFITS AND EXPENSES
Benefit payments to policyowners and
beneficiaries................................ 3,602 3,329 2,921
Net additions to policy benefit reserves...... 4,521 4,026 3,701
Net transfers to separate accounts............ 564 566 579
--------- --------- ---------
Total benefits............................ 8,687 7,921 7,201
Operating expenses............................ 1,297 1,138 1,043
--------- --------- ---------
Total benefits and expenses............... 9,984 9,059 8,244
--------- --------- ---------
Gain from operations before dividends and taxes... 3,495 3,267 3,018
Policyowner dividends............................. 2,869 2,636 2,341
--------- --------- ---------
Gain from operations before taxes................. 626 631 677
Income tax expense................................ 301 356 452
--------- --------- ---------
Net gain from operations.......................... 325 275 225
Net realized capital gains........................ 484 414 395
--------- --------- ---------
Net income................................ $ 809 $ 689 $ 620
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
B-15
<PAGE>
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CHANGES IN SURPLUS
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
BEGINNING OF YEAR BALANCE......................... $4,101 $3,515 $2,786
Net income...................................... 809 689 620
Increase (decrease) in net unrealized gains..... (147) 576 295
Increase in investment reserves................. (20) (526) (176)
Other, net...................................... (2) (153) (10)
------- ------- -------
Net increase in surplus......................... 640 586 729
------- ------- -------
END OF YEAR BALANCE............................... $4,741 $4,101 $3,515
------- ------- -------
------- ------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
B-16
<PAGE>
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Insurance and annuity premiums.................. $ 8,876 $ 8,093 $ 7,361
Investment income received...................... 4,216 3,928 3,634
Disbursement of policy loans, net of
repayments..................................... (416) (360) (326)
Benefits paid to policyowners and
beneficiaries.................................. (3,572) (3,316) (2,912)
Net transfers to separate accounts.............. (564) (565) (579)
Policyowner dividends paid...................... (2,639) (2,347) (2,105)
Operating expenses and taxes.................... (1,749) (1,722) (1,663)
Other, net...................................... (83) 124 (59)
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES..... 4,069 3,835 3,351
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
PROCEEDS FROM INVESTMENTS SOLD OR MATURED
Bonds......................................... 28,720 38,284 31,942
Common and preferred stocks................... 10,359 9,057 4,570
Mortgage loans................................ 1,737 1,012 1,253
Real estate................................... 159 302 178
Other investments............................. 768 398 316
-------- -------- --------
41,743 49,053 38,259
-------- -------- --------
COST OF INVESTMENTS ACQUIRED
Bonds......................................... 30,873 41,169 35,342
Common and preferred stocks................... 9,642 9,848 4,463
Mortgage loans................................ 3,135 2,309 2,455
Real estate................................... 268 202 125
Other investments............................. 567 359 255
-------- -------- --------
44,485 53,887 42,640
-------- -------- --------
NET INCREASE (DECREASE) IN SECURITIES LENDING
AND OTHER...................................... (624) 440 1,617
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES......... (3,366) (4,394) (2,764)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY
INVESTMENTS...................................... 703 (559) 587
CASH AND TEMPORARY INVESTMENTS, BEGINNING OF
YEAR............................................. 572 1,131 544
-------- -------- --------
CASH AND TEMPORARY INVESTMENTS, END OF YEAR....... $ 1,275 $ 572 $ 1,131
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
B-17
<PAGE>
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
1. PRINCIPAL ACCOUNTING POLICIES
The accompanying consolidated statutory financial statements include the
accounts of The Northwestern Mutual Life Insurance Company ("Company") and its
wholly-owned life insurance subsidiary, Northwestern Long Term Care Insurance
Company ("Subsidiary"). The Company and its Subsidiary offer life, annuity,
disability income and long term care products to the personal, business, estate
and tax-qualified markets.
The consolidated financial statements have been prepared using accounting
policies prescribed or permitted by the Office of the Commissioner of Insurance
of the State of Wisconsin ("statutory basis of accounting").
In 1998, the National Association of Insurance Commissioners ("NAIC") adopted
the Codification of Statutory Accounting Principles, which will replace the
current Accounting Practices and Procedures manual as the NAIC's primary
guidance on statutory accounting. The NAIC is now considering amendments to the
codification guidance that would also be effective upon its planned
implementation effective January 1, 2001. It is expected that the Office of the
Commissioner of Insurance of the State of Wisconsin ("OCI") will adopt the
codification, but it is not known whether the OCI will make any changes to that
guidance. The potential effect of the codification on the Company will depend
upon the guidance adopted by the OCI.
Financial statements prepared on the statutory basis of accounting vary from
financial statements prepared on the basis of Generally Accepted Accounting
Principles ("GAAP") primarily because on a GAAP basis (1) policy acquisition
costs are deferred and amortized, (2) investment valuations and insurance
reserves are based on different assumptions, (3) funds received under
deposit-type contracts are not reported as premium revenue, and (4) deferred
taxes are provided for temporary differences between book and tax basis of
certain assets and liabilities. The effects on the financial statements of the
differences between the statutory basis of accounting and GAAP are material to
the Company.
The preparation of financial statements in conformity with the statutory basis
of accounting requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual future results could differ from these estimates.
INVESTMENTS
The Company's investments are valued on the following bases:
<TABLE>
<S> <C> <C>
Bonds -- Amortized cost using the interest method; loan-backed and
structured securities are amortized using estimated
prepayment rates and, generally, the prospective adjustment
method
Common and preferred stocks -- Common stocks are carried at fair value, preferred stocks
are generally carried at cost, and unconsolidated
subsidiaries are recorded using the equity method
Mortgage loans -- Amortized cost
Real estate -- Lower of cost, less depreciation and encumbrances, or
estimated net realizable value
Policy loans -- Unpaid principal balance, which approximates fair value
Other investments -- Consists primarily of joint venture investments which are
valued at equity in ventures' net assets
Cash and temporary investments -- Amortized cost, which approximates fair value
</TABLE>
B-18
<PAGE>
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
TEMPORARY INVESTMENTS
Temporary investments consist of debt securities that have maturities of one
year or less at acquisition.
NET INVESTMENT INCOME
Net investment income includes interest and dividends received or due and
accrued on debt securities and stocks, equity in unconsolidated subsidiaries'
earnings and the Company's share of joint venture income. Net investment income
is reduced by investment management expenses, real estate depreciation,
depletion related to energy assets and costs associated with securities lending.
INTEREST MAINTENANCE RESERVE
The Company is required to maintain an interest maintenance reserve ("IMR"). The
IMR is used to defer realized gains and losses, net of tax, on fixed income
investments resulting from changes in interest rates. Net realized gains and
losses deferred to the IMR are amortized into investment income over the
approximate remaining term to maturity of the investment sold.
INVESTMENT RESERVES
The Company is required to maintain an asset valuation reserve ("AVR"). The AVR
establishes a general reserve for invested asset valuation using a formula
prescribed by state regulations. The AVR is designed to stabilize surplus
against potential declines in the value of investments. In addition, the Company
maintained a $200 million voluntary investment reserve at December 31, 1998 and
1997 to absorb potential investment losses exceeding those considered by the AVR
formula. Increases or decreases in these investment reserves are recorded
directly to surplus.
SEPARATE ACCOUNTS
Separate account assets and related policy liabilities represent the segregation
of funds deposited by "variable" life insurance and annuity policyowners.
Policyowners bear the investment performance risk associated with variable
products. Separate account assets are invested at the direction of the
policyowner in a variety of Company-managed mutual funds. Variable product
policyowners also have the option to invest in a fixed interest rate annuity in
the general account of the Company. Separate account assets are reported at fair
value.
PREMIUM REVENUE AND OPERATING EXPENSES
Life insurance premiums are recognized as revenue at the beginning of each
policy year. Annuity and disability income premiums are recognized when received
by the Company. Operating expenses, including costs of acquiring new policies,
are charged to operations as incurred.
OTHER INCOME
Other income includes considerations on supplementary contracts, ceded
reinsurance expense allowances and miscellaneous policy charges.
B-19
<PAGE>
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
BENEFIT PAYMENTS TO POLICYOWNERS AND BENEFICIARIES
Benefit payments to policyowners and beneficiaries include death, surrender and
disability benefits, matured endowments and supplementary contract payments.
RESERVES FOR POLICY BENEFITS
Reserves for policy benefits are determined using actuarial estimates based on
mortality and morbidity experience tables and valuation interest rates
prescribed by the Office of the Commissioner of Insurance of the State of
Wisconsin. See Note 3.
POLICYOWNER DIVIDENDS
Almost all life insurance policies, and certain annuity and disability income
policies, issued by the Company are participating. Annually, the Company's Board
of Trustees approves dividends payable on participating policies in the
following fiscal year, which are accrued and charged to operations when
approved.
RECLASSIFICATION
Certain financial statement balances for 1997 and 1996 have been reclassified to
conform to the current year presentation.
2. INVESTMENTS
DEBT SECURITIES
Debt securities consist of all bonds and fixed-maturity preferred stocks. The
estimated fair values of debt securities are based upon quoted market prices, if
available. For securities not actively traded, fair values are estimated using
independent pricing services or internally developed pricing models. The Company
records unrealized losses for debt securities considered impaired.
B-20
<PAGE>
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
Statement value, which principally represents amortized cost, and estimated fair
value of the Company's debt securities at December 31, 1998 and 1997 were as
follows:
<TABLE>
<CAPTION>
RECONCILIATION TO ESTIMATED FAIR VALUE
---------------------------------------
GROSS GROSS ESTIMATED
STATEMENT UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1998 VALUE APPRECIATION DEPRECIATION VALUE
- -------------------------------------------------- --------- ------------ ------------ ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
US Government and political obligations........... $ 3,904 $ 461 $ (11) $ 4,354
Mortgage-backed securities........................ 7,357 280 (15) 7,622
Corporate and other debt securities............... 23,627 1,240 (382) 24,485
--------- ------------ ------ ---------
34,888 1,981 (408) 36,461
Preferred stocks.................................. 189 4 (1) 192
--------- ------------ ------ ---------
Total............................................. $35,077 $1,985 $(409) $36,653
--------- ------------ ------ ---------
--------- ------------ ------ ---------
<CAPTION>
RECONCILIATION TO ESTIMATED FAIR VALUE
---------------------------------------
GROSS GROSS ESTIMATED
STATEMENT UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1997 VALUE APPRECIATION DEPRECIATION VALUE
- -------------------------------------------------- --------- ------------ ------------ ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
US Government and political obligations........... $ 3,695 $ 336 $ (3) $ 4,028
Mortgage-backed securities........................ 7,015 264 (4) 7,275
Corporate and other debt securities............... 21,649 1,098 (208) 22,539
--------- ------------ ------ ---------
32,359 1,698 (215) 33,842
Preferred stocks.................................. 167 4 (2) 169
--------- ------------ ------ ---------
Total............................................. $32,526 $1,702 $(217) $34,011
--------- ------------ ------ ---------
--------- ------------ ------ ---------
</TABLE>
The statement value of debt securities by contractual maturity at December 31,
1998 and 1997 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.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
(IN MILLIONS)
<S> <C> <C>
Due in one year or less........................... $ 655 $ 605
Due after one year through five years............. 5,031 4,878
Due after five years through ten years............ 10,286 9,760
Due after ten years............................... 11,748 10,268
------------ ------------
27,720 25,511
Mortgage-backed securities........................ 7,357 7,015
------------ ------------
$35,077 $32,526
------------ ------------
------------ ------------
</TABLE>
STOCKS
The estimated fair values of common and perpetual preferred stocks are based
upon quoted market prices, if available. For securities not actively traded,
fair values are estimated using independent pricing services or internally
developed pricing models.
B-21
<PAGE>
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
The adjusted cost of common and preferred stock held by the Company at December
31, 1998 and 1997 was $4.8 billion and $5.0 billion, respectively.
MORTGAGE LOANS AND REAL ESTATE
Mortgage loans are collateralized by properties located throughout the United
States and Canada. The Company attempts to minimize mortgage loan investment
risk by diversification of geographic locations and types of collateral
properties.
The fair value of mortgage loans as of December 31, 1998 and 1997 was
approximately $12.9 billion and $11.5 billion, respectively. The fair value of
the mortgage loan portfolio is estimated by discounting the future estimated
cash flows using current interest rates of debt securities with similar credit
risk and maturities, or utilizing net realizable values.
At December 31, 1998 and 1997, real estate includes $61 million acquired through
foreclosure at each date and $120 million and $124 million, respectively, of
home office real estate. In 1998, 1997 and 1996, the Company recorded unrealized
losses of $5 million, $2 million and $43 million, respectively, for the excess
of statement value over fair value of certain real estate investments and
mortgage loans.
REALIZED GAINS AND LOSSES
Realized investment gains and losses for the years ended December 31, 1998, 1997
and 1996 were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------ ------------------------------ ------------------------------
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Bonds......................... $ 514 $ (231) $ 283 $ 518 $ (269) $ 249 $ 396 $ (383) $ 13
Common and preferred stocks... 885 (240) 645 533 (150) 383 580 (115) 465
Mortgage loans................ 18 (11) 7 14 (14) - 2 (15) (13)
Real estate................... 41 - 41 100 (2) 98 36 - 36
Other investments............. 330 (267) 63 338 (105) 233 204 (51) 153
-------- -------- -------- -------- -------- -------- -------- -------- --------
1,788 (749) 1,039 1,503 (540) 963 1,218 (564) 654
-------- -------- -------- -------- -------- -------- -------- -------- --------
Less: Capital gains taxes..... 358 340 224
Less: IMR deferrals........... 197 209 35
-------- -------- --------
Net realized capital gains.... $ 484 $ 414 $ 395
-------- -------- --------
-------- -------- --------
</TABLE>
SECURITIES LENDING
The Company has entered into a securities lending agreement whereby certain
securities are loaned to third parties, primarily major brokerage firms. The
Company's policy requires a minimum of 102 percent of the fair value of the
loaned securities as collateral, calculated on a daily basis in the form of
either cash or securities. Collateral assets received and related liability due
to counterparties of $1.5 billion are included in the consolidated
B-22
<PAGE>
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
statements of financial position for each of the periods ended at December 31,
1998 and 1997, and approximate the statement value of securities loaned at those
dates.
INVESTMENT IN MGIC
The Company owns 11.0% (11.9 million shares) of the outstanding common stock of
MGIC Investment Corporation ("MGIC"). This investment is accounted for using the
equity method. At December 31, 1998 and 1997, the fair value of the Company's
investment in MGIC exceeded the statement value of $180 million and $273
million, respectively, by $296 million and $768 million, respectively.
In July 1995, the Company entered into a forward contract with a brokerage firm
to deliver 8.9 million to 10.7 million shares of MGIC (or cash in an amount
equal to the market value of the MGIC shares at contract maturity) in August,
1998, in exchange for a fixed cash payment of $247 million ($24 per share). The
Company's objective in entering into the forward contract was to hedge against
depreciation in the value of its MGIC holdings during the contract period below
the initial spot price of $24, while partially participating in appreciation, if
any, during the forward contract's duration. In August 1998, the Company
delivered 8.9 million shares to settle the forward contract. In conjunction with
the settlement, the Company recorded a $114 million realized gain.
DERIVATIVE FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into transactions to reduce
its exposure to fluctuations in interest rates, foreign currency exchange rates
and market volatility. These hedging strategies include the use of forwards,
futures, options and swaps.
The Company held the following positions for hedging purposes at December 31,
1998 and 1997:
<TABLE>
<CAPTION>
DERIVATIVE FINANCIAL INSTRUMENT NOTIONAL AMOUNTS
- --------------------------------------------- ---------------------------------------
(IN MILLIONS)
DECEMBER 31,
1998 DECEMBER 31, 1997
------------------ ------------------
<S> <C> <C> <C>
Foreign Currency Forward
Contracts................................... $601 $564
Common Stock Futures......................... 657 327
Bond Futures................................. 379 95
Options to acquire Interest Rate Swaps....... 419 530
Foreign Currency and Interest Rate Swaps..... 94 209
<CAPTION>
DERIVATIVE FINANCIAL INSTRUMENT RISKS REDUCED
- --------------------------------------------- ---------------------------------------------
<S> <C>
Foreign Currency Forward Currency exposure on foreign-denominated
Contracts................................... investments.
Common Stock Futures......................... Stock market price fluctuation.
Bond Futures................................. Bond market price fluctuation.
Options to acquire Interest Rate Swaps....... Interest rates payable on certain annuity and
insurance contracts.
Foreign Currency and Interest Rate Swaps..... Interest rates on variable rate notes and
currency exposure on foreign-denominated
bonds.
</TABLE>
The notional or contractual amounts of derivative financial instruments are used
to denominate these types of transactions and do not represent the amounts
exchanged between the parties.
In addition to the use of derivatives for hedging purposes, equity swaps were
held for investment purposes during 1997 and 1998. The notional amount of equity
swaps outstanding at December 31, 1998 and 1997 was $188 million and $143
million, respectively.
Foreign currency forwards, foreign currency swaps, stock futures and equity
swaps are reported at fair value. Resulting gains and losses on these contracts
are unrealized until expiration of the contract. There is no statement
B-23
<PAGE>
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
value reported for interest rate swaps, bond futures and options to acquire
interest rate swaps prior to the settlement of the contract, at which time
realized gains and losses are deferred to IMR. Changes in the value of
derivative instruments are expected to offset gains and losses on the hedged
investments. During 1998, net realized and unrealized gains on investments were
partially offset by net realized losses of $104 million and net unrealized
losses of $58 million on derivative instruments. The effect of derivative
instruments in 1997 and 1996 was not material to the Company's results of
operations.
3. RESERVES FOR POLICY BENEFITS
Life insurance reserves on substantially all policies issued since 1978 are
based on the Commissioner's Reserve Valuation Method with interest rates ranging
from 3 1/2% to 5 1/2%. Other life policy reserves are primarily based on the net
level premium method employing various mortality tables at interest rates
ranging from 2% to 4 1/2%.
Deferred annuity reserves on contracts issued since 1985 are valued primarily
using the Commissioner's Annuity Reserve Valuation Method with interest rates
ranging from 3 1/2% to 6 1/4%. Other deferred annuity reserves are based on
contract value. Immediate annuity reserves are based on present values of
expected benefit payments at interest rates ranging from 3 1/2% to 7 1/2%.
Active life reserves for disability income ("DI") policies issued since 1987 are
primarily based on the two-year preliminary term method using a 4% interest rate
and the 1985 Commissioner's Individual Disability Table A ("CIDA") for
morbidity. Active life reserves for prior DI policies are based on the net level
premium method, a 3% to 4% interest rate and the 1964 Commissioner's Disability
Table for morbidity. Disabled life reserves for DI policies are based on the
present values of expected benefit payments primarily using the 1985 CIDA
(modified for Company experience in the first two years of disability) with
interest rates ranging from 3% to 5 1/2%.
Use of these actuarial tables and methods involves estimation of future
mortality and morbidity based on past experience. Actual future experience could
differ from these estimates.
4. EMPLOYEE AND AGENT BENEFIT PLANS
The Company sponsors noncontributory defined benefit retirement plans for all
eligible employees and agents. The expense associated with these plans is
generally recorded by the Company in the period contributions to the plans are
funded. As of January 1, 1998, the most recent actuarial valuation date
available, the qualified defined benefit plans were fully funded. The Company
recorded a liability of $98 million and $87 million for nonqualified defined
benefit plans at December 31, 1998 and 1997, respectively. In addition, the
Company has a contributory 401(k) plan for eligible employees and a
noncontributory defined contribution plan for all full-time agents. The
Company's contributions are expensed in the period contributions are made to the
plans. The Company recorded $29 million, $27 million and $25 million of total
expense related to its defined benefit and defined contribution plans for the
years ended December 31, 1998, 1997 and 1996, respectively. The defined benefit
and defined contribution plans' assets of $1.9 billion and $1.7 billion at
December 31, 1998 and 1997, respectively, were primarily invested in the
separate accounts of the Company.
In addition to pension and retirement benefits, the Company provides certain
health care and life insurance benefits ("postretirement benefits") for retired
employees. Substantially all employees may become eligible for these benefits if
they reach retirement age while working for the Company. Postretirement benefit
costs for the years ended December 31, 1998, 1997 and 1996 were a net expense
(benefit) of $1.8 million, ($1.3) million and
B-24
<PAGE>
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
($12.0) million, respectively. Net benefits were primarily a result of favorable
differences between actuarial assumptions and actual experience.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
-------------------- --------------------
<S> <C> <C>
Unfunded postretirement
benefit obligation for
retirees and other fully
eligible employees (Accrued
in statement of financial
position).................... $35 million $34 million
Estimated postretirement
benefit obligation for active
non-vested employees (Not
accrued until employee
vests)....................... $56 million $50 million
Discount rate................. 7% 7%
Health care cost trend rate... 10% to an ultimate 10% to an ultimate
5%, declining 1% for 5%, declining 1% for
5 years 5 years
</TABLE>
If the health care cost trend rate assumptions were increased by 1%, the accrued
postretirement benefit obligation as of December 31, 1998 and 1997 would have
been increased by $5 million and $4 million, respectively.
At December 31, 1998 and 1997, the recorded postretirement benefit obligation
was reduced by $23 million and $20 million, respectively, for assets funded for
postretirement health care benefits.
5. REINSURANCE
In the normal course of business, the Company seeks to limit its exposure to
loss on any single insured and to recover a portion of benefits paid by ceding
to reinsurers under excess coverage and coinsurance contracts. The Company
retains a maximum of $25 million of coverage per individual life and $35 million
maximum of coverage per joint life. The Company has an excess reinsurance
contract for disability income policies with retention limits varying based upon
on coverage type.
The amounts shown in the accompanying consolidated financial statements are net
of reinsurance. Policy benefit reserves at December 31, 1998 and 1997 were
reported net of ceded reserves of $518 million and $435 million, respectively.
The effect of reinsurance on premiums and benefits for the years ended December
31, 1998, 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Direct premiums................................... $8,426 $7,647 $7,064
Premiums ceded.................................... (405) (353) (397)
------- ------- -------
Net premium revenue............................... $8,021 $7,294 $6,667
------- ------- -------
------- ------- -------
Benefits to policyowners and beneficiaries........ $8,869 $8,057 $7,348
Benefits ceded.................................... (182) (136) (147)
------- ------- -------
Net benefits to policyowners and beneficiaries.... $8,687 $7,921 $7,201
------- ------- -------
------- ------- -------
</TABLE>
B-25
<PAGE>
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
In addition, the Company received $121 million, $115 million and $93 million for
the years ended December 31, 1998, 1997 and 1996, respectively, from reinsurers
representing allowances for reimbursement of commissions and other expenses.
These amounts are included in other income in the consolidated statement of
operations.
Reinsurance contracts do not relieve the Company from its obligations to
policyowners. Failure of reinsurers to honor their obligations could result in
losses to the Company; consequently, allowances are established for amounts
deemed uncollectible. The Company evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk arising from similar
geographic regions, activities or economic characteristics of the reinsurers to
minimize its exposure to significant losses from reinsurer insolvencies.
6. INCOME TAXES
Provisions for income taxes are based on current income tax payable without
recognition of deferred taxes. The Company files a consolidated life-nonlife
federal income tax return. Federal income tax returns for years through 1988 are
closed as to further assessment of tax. Adequate provision has been made in the
financial statements for any additional taxes which may become due with respect
to the open years.
The Company's effective tax rate on gains from operations before taxes for the
years ended December 31, 1998, 1997 and 1996 was 48%, 56%, and 67% respectively.
The Company's effective tax rate exceeds the federal corporate rate of 35%
primarily because, (1) the Company pays a tax that is assessed only on the
surplus of mutual life insurance companies ("equity tax"), and (2) the Company
must capitalize and amortize (as opposed to immediately deducting) an amount
deemed to represent the cost of acquiring new business ("DAC tax").
7. ACQUISITION OF FRANK RUSSELL COMPANY
Pursuant to an Agreement and Plan of Merger, dated as of August 10, 1998, the
Company acquired Frank Russell Company effective January 1, 1999 for a purchase
price of approximately $950 million. Frank Russell is a leading investment
management and consulting firm, providing investment advice, analytical tools
and investment vehicles to institutional and individual investors in more than
30 countries.
In connection with its acquisition of Frank Russell Company, the Company will be
required in 1999 to charge-off directly from surplus approximately $341 million,
which represents the amount of acquisition goodwill less 10% of the Company's
surplus at December 31, 1998. In addition, the Company will request permission
from the OCI to charge-off the remaining $474 million of acquisition goodwill in
1999 and currently intends to do so.
In connection with the acquisition, the Company has unconditionally guaranteed
certain debt obligations of Frank Russell Company, including $350 million of
senior notes and up to $150 million of other credit facilities.
8. CONTINGENCIES
The Company has guaranteed certain obligations of its affiliates. These
guarantees totaled approximately $133 million at December 31, 1998 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 $2.1 billion at December 31, 1998 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
financial position.
B-26
<PAGE>
[LOGO]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Policyowners of
The Northwestern Mutual Life Insurance Company
We have audited the accompanying consolidated statement of financial position of
The Northwestern Mutual Life Insurance Company and its subsidiary as of December
31, 1998 and 1997, 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, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, these 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), which practices differ from generally accepted accounting
principles. 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 at December 31, 1998 and 1997, or the results of their operations or
their cash flows for each of the three years in the period ended December 31,
1998 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 at December 31, 1998 and 1997 and the results of their operations and
their cash flows for each of the three years in the period ended December 31,
1998, on the basis of accounting described in Note 1.
PRICEWATERHOUSECOOPERS LLP
January 25, 1999
B-27
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DISTRIBUTION OF THE CONTRACTS....................................................B-2
DETERMINATION OF ANNUITY PAYMENTS................................................B-2
Amount of Annuity Payments....................................................B-2
Annuity Unit Value............................................................B-3
Illustrations of Variable Annuity Payments....................................B-3
VALUATION OF ASSETS OF THE ACCOUNT...............................................B-4
TRANSFERABILITY RESTRICTIONS.....................................................B-4
PERFORMANCE DATA.................................................................B-4
EXPERTS..........................................................................B-6
FINANCIAL STATEMENTS OF THE ACCOUNT..............................................B-7
(for the two years ended December 31, 1998)
REPORT OF INDEPENDENT ACCOUNTANTS...............................................B-13
(for the two years ended December 31, 1998)
FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL LIFE................................B-14
(for the three years ended December 31, 1998)
REPORT OF INDEPENDENT ACCOUNTANTS...............................................B-27
(for the three years ended December 31, 1998)
</TABLE>
B-28
