<PAGE>
April 30, 1999
NORTHWESTERN
MUTUAL LIFE-Registered Trademark-
The Quiet Company-Registered Trademark-
NML Variable Annuity Account C
Group Combination Annuity Contracts for
Retirement Plans of Self-Employed Persons
and Their Employees
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
PROSPECTUSES
<PAGE>
PROSPECTUS
GROUP COMBINATION ANNUITY CONTRACTS
NML VARIABLE ANNUITY ACCOUNT C
This prospectus describes group combination annuity contracts (the "Contracts")
offered by The Northwestern Mutual Life Insurance Company ("Northwestern Mutual
Life") for use in connection with plans and trusts meeting the requirements of
Sections 401 or 403(a) of the Internal Revenue Code of 1986, as amended (the
"Code"). Such plans, which are popularly called "HR-10 Plans", afford certain
federal income tax benefits to self-employed individuals and to employees and
their beneficiaries.
The Contracts provide for the accumulation of funds and the payment of
retirement benefits to participants or their beneficiaries ("Annuitants"). You
may accumulate funds on a variable or fixed or combination basis. We will pay
retirement benefits in a lump sum or under a variable or fixed annuity payment
plan. Annuity benefits are described in individual certificates issued to
Annuitants.
We fund variable accumulations and retirement benefits through NML Variable
Annuity Account C (the "Account"), our separate account. This prospectus
describes only the Account and the variable provisions of the Contracts except
where there are specific references to the fixed provisions. The Account has
sixteen Divisions. You may direct how net considerations are allocated among the
Divisions.
We use NML Variable Annuity Account C (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 simplified-load
Contracts. (See "Expense Table", p. 3, and "Deductions", p. 14.)
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 15 of this
prospectus.
This prospectus is valid only when accompanied by the current prospectuses for
Northwestern Mutual Series Fund, Inc. and 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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1
<PAGE>
CONTENTS FOR THIS PROSPECTUS
<TABLE>
<CAPTION>
Page
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<S> <C>
PROSPECTUS............................................ 1
Group Combination Annuity Contracts
NML Variable Annuity Account C..................... 1
INDEX OF SPECIAL TERMS................................ 3
Penalty Tax on Premature Payments................... 3
EXPENSE TABLE......................................... 3
ACCUMULATION UNIT VALUES.............................. 5
THE COMPANY........................................... 8
NML VARIABLE ANNUITY ACCOUNT C........................ 8
THE FUNDS............................................. 8
THE CONTRACTS......................................... 9
Unallocated Group Annuity Contracts................. 9
Purchase Payments Under the Contracts............... 9
Amount and Frequency.............................. 9
Application of Purchase Payments.................. 9
Net Investment Factor............................... 10
Benefits Provided Under the Contracts............... 10
Surrender or Withdrawal Value..................... 10
Retirement Benefits............................... 10
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<S> <C>
Variable Payment Plans.............................. 10
Description of Payment Plans...................... 11
Amount of Annuity Payments........................ 11
Assumed Investment Rate........................... 11
Additional Information.............................. 11
Transfers Between Divisions and
Payment Plans.................................... 11
Owners of the Contracts........................... 12
Deferment of Benefit Payments..................... 12
Dividends......................................... 12
Substitution and Change........................... 12
Amendments and Termination........................ 12
Financial Statements.............................. 12
FEDERAL INCOME TAXES.................................. 13
Contribution Limits................................. 13
Taxation of Contract Benefits....................... 13
Taxation of Northwestern Mutual Life................ 13
DEDUCTIONS............................................ 14
DISTRIBUTION OF THE CONTRACTS......................... 15
CONTRACTS ISSUED PRIOR TO
JANUARY 1, 1992..................................... 15
YEAR 2000 ISSUES...................................... 15
</TABLE>
THE TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION APPEARS
ON THE PAGE FOLLOWING PAGE 15 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......................... 9
Annuity (or Annuity Payments)............. 11
Net Investment Factor..................... 10
Surrender or Withdrawal Value............. 10
<CAPTION>
TERM PAGE
- ------------------------------------------ -----
<S> <C>
Annuitant................................. 12
Owner..................................... 12
Payment Plans............................. 11
</TABLE>
PENALTY TAX ON PREMATURE PAYMENTS Premature payment of benefits under an
annuity contract may cause a penalty tax to be incurred. (See "Taxation of
Contract Benefits", p. 13.)
- --------------------------------------------------------------------------------
EXPENSE TABLE
<TABLE>
<S> <C>
FRONT-LOAD CONTRACT
TRANSACTION EXPENSES FOR
CONTRACTOWNERS
Maximum Sales Load (as a percentage of
purchase payments).................... 4.5%
Installation Fee...................... None
ANNUAL EXPENSES OF THE ACCOUNT
(AS A PERCENTAGE OF ASSETS)
Mortality and Expense Risk Fees....... 0.65%
Total Separate Account Annual
Expenses.............................. 0.65%
</TABLE>
------------------------------------------------------------------------
<TABLE>
<S> <C>
SIMPLIFIED-LOAD CONTRACT
TRANSACTION EXPENSES FOR
CONTRACTOWNERS
Maximum Sales Load (as a percentage of
purchase payments).................... None
Installation Fee...................... $ 750
ANNUAL EXPENSES OF THE ACCOUNT
(AS A PERCENTAGE OF ASSETS)
Mortality and Expense Risk Fees....... 1.25%
Total Separate Account Annual
Expenses.............................. 1.25%
</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
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- --------------------------------------------------------------------------------
EXAMPLE
FRONT-LOAD CONTRACT The plan 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.............................. $ 61 $ 95 $ 131 $ 232
Aggressive Growth Stock............................. $ 56 $ 80 $ 106 $ 181
International Equity................................ $ 59 $ 88 $ 119 $ 206
Index 400 Stock..................................... $ 55 $ 75 $ 98 $ 162
Growth Stock........................................ $ 56 $ 79 $ 103 $ 174
Growth and Income Stock............................. $ 57 $ 82 $ 110 $ 187
Index 500 Stock..................................... $ 53 $ 71 $ 91 $ 146
Balanced............................................ $ 54 $ 74 $ 95 $ 156
High Yield Bond..................................... $ 56 $ 80 $ 105 $ 178
Select Bond......................................... $ 54 $ 74 $ 95 $ 156
Money Market........................................ $ 54 $ 74 $ 95 $ 156
RUSSELL INSURANCE FUNDS
Multi-Style Equity.................................. $ 60 $ 92 $ 127 $ 223
Aggressive Equity................................... $ 63 $ 102 $ 143 $ 257
Non-U.S............................................. $ 64 $ 103 $ 145 $ 262
Real Estate Securities.............................. $ 62 $ 99 $ 138 $ 247
Core Bond........................................... $ 59 $ 89 $ 121 $ 211
</TABLE>
SIMPLIFIED LOAD CONTRACT The plan 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.............................. $ 25 $ 73 $ 123 $ 260
Aggressive Growth Stock............................. $ 20 $ 58 $ 98 $ 210
International Equity................................ $ 23 $ 65 $ 111 $ 236
Index 400 Stock..................................... $ 19 $ 53 $ 89 $ 192
Growth Stock........................................ $ 20 $ 56 $ 95 $ 204
Growth and Income Stock............................. $ 21 $ 60 $ 101 $ 217
Index 500 Stock..................................... $ 17 $ 49 $ 82 $ 177
Balanced............................................ $ 18 $ 51 $ 87 $ 187
High Yield Bond..................................... $ 20 $ 57 $ 97 $ 208
Select Bond......................................... $ 18 $ 51 $ 87 $ 187
Money Market........................................ $ 18 $ 51 $ 87 $ 187
RUSSELL INSURANCE FUNDS
Multi-Style Equity.................................. $ 24 $ 70 $ 119 $ 252
Aggressive Equity................................... $ 28 $ 80 $ 135 $ 285
Non-U.S............................................. $ 28 $ 82 $ 138 $ 290
Real Estate Securities.............................. $ 27 $ 77 $ 130 $ 275
Core Bond........................................... $ 23 $ 67 $ 113 $ 240
</TABLE>
NOTE: THE PURCHASE PAYMENTS FOR EITHER A FRONT-LOAD CONTRACT OR A
SIMPLIFIED-LOAD CONTRACT MUST REACH A TOTAL MINIMUM AMOUNT OF $25,000 DURING THE
FIRST CONTRACT YEAR. THE NUMBERS ABOVE MUST BE MULTIPLIED BY 25 TO FIND THE
EXPENSES FOR A FRONT-LOAD CONTRACT OR A SIMPLIFIED-LOAD CONTRACT OF THIS MINIMUM
SIZE.
The purpose of the table above is to assist you in understanding the expenses
paid by the Account and the Portfolios and Funds borne by investors in the
Contracts. The sales load for a front-load Contract depends on the amount of
cumulative purchase payments. For both Contracts an annual administration fee of
$150 applies if the Contract value is less than $25,000 on the Contract
anniversary. The table does not include any expenses for premium taxes. We
currently make no charges for premium taxes. See "Deductions," p. 14, 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.
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4
<PAGE>
ACCUMULATION UNIT VALUES
CONTRACTS ISSUED AFTER DECEMBER 31, 1991
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
---------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
AGGRESSIVE GROWTH STOCK DIVISION
Front Load Version
Beginning of Period........... $2.350 $2.078 $1.777 $1.284 $1.226 $1.036 $.984
End of Period................. $2.512 $2.350 $2.078 $1.777 $1.284 $1.226 $1.036
Simplified Load Version
Beginning of Period........... $3.598 $3.200 $2.753 $2.001 $1.922 $1.634 $1.562
End of Period................. $3.822 $3.598 $3.200 $2.753 $2.001 $1.922 $1.634
Number of Units
Outstanding, End of Period
Front Load.................... 2,921,309 3,169,006 3,197,341 2,242,402 1,206,187 1,370,746 821,911
Simplified Load............... 8,671,088 8,989,193 7,872,553 5,316,689 3,503,170 1,538,447 411,718
INTERNATIONAL EQUITY DIVISION
Front Load Version
Beginning of Period*.......... $1.881 $1.686 $1.402 $1.232 $1.241 $1.000 --
End of Period................. $1.958 $1.881 $1.686 $1.402 $1.232 $1.241 --
Simplified Load Version
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
Front Load.................... 2,807,888 3,021,349 2,709,249 2,009,228 1,453,091 743,216 --
Simplified Load............... 6,652,248 7,247,144 5,703,032 3,972,573 2,764,466 591,810 --
GROWTH STOCK DIVISION
Front Load Version
Beginning of Period**......... $2.035 $1.577 $1.313 $1.010 $1.000 -- --
End of Period................. $2.561 $2.035 $1.577 $1.313 $1.010 -- --
Simplified Load Version
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
Front Load.................... 845,190 710,110 587,482 361,207 149,268 -- --
Simplified Load............... 3,373,983 2,159,985 1,742,522 586,644 177,918 -- --
GROWTH AND INCOME STOCK
DIVISION
Front Load Version
Beginning of Period+.......... $2.002 $1.550 $1.300 $0.998 $1.000 -- --
End of Period................. $2.449 $2.002 $1.550 $1.300 $0.998 -- --
Simplified Load Version
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
Front Load.................... 2,452,149 1,970,478 1,357,354 861,211 418,974 -- --
Simplified Load............... 5,876,089 4,547,004 2,769,823 1,733,022 745,425 -- --
INDEX 500 STOCK DIVISION
Front Load Version
Beginning of Period........... $2.564 $1.937 $1.588 $1.165 $1.159 $1.062 $.997
End of Period................. $3.279 $2.564 $1.937 $1.588 $1.165 $1.159 $1.062
Simplified Load Version
Beginning of Period........... $3.240 $2.463 $2.032 $1.499 $1.500 $1.384 $1.306
End of Period................. $4.119 $3.240 $2.463 $2.032 $1.499 $1.500 $1.384
Number of Units
Outstanding, End of Period
Front Load.................... 4,231,423 3,966,706 3,880,961 2,399,586 1,918,074 1,919,768 921,624
Simplified Load............... 10,493,642 9,442,314 8,015,553 5,080,179 3,939,802 2,767,397 599,961
</TABLE>
* The initial investment in the International Equity Division was made on April
30, 1993.
** The initial investments in the Growth Stock Division and High Yield Bond
Division were made on May 3, 1994.
+ The initial investment in the Growth and Income Stock Division was made on
May 3, 1994.
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5
<PAGE>
ACCUMULATION UNIT VALUES
CONTRACTS ISSUED AFTER DECEMBER 31, 1991
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
---------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCED DIVISION
Front Load Version
Beginning of Period......... $1.931 $1.600 $1.419 $1.130 $1.138 $1.045 $.999
End of Period............... $2.281 $1.931 $1.600 $1.419 $1.130 $1.138 $1.045
Simplified Load Version
Beginning of Period......... $5.796 $4.830 $4.311 $3.453 $3.497 $3.232 $3.107
End of Period............... $6.805 $5.796 $4.830 $4.311 $3.453 $3.497 $3.232
Number of Units
Outstanding, End of Period
Front Load.................. 6,324,558 6,187,478 5,934,240 5,275,308 3,879,218 4,987,943 3,980,687
Simplified Load............. 7,165,398 6,839,439 5,971,232 4,902,410 4,108,593 3,002,098 1,445,698
HIGH YIELD BOND DIVISION
Front Load Version
Beginning of Period**....... $1.630 $1.416 $1.190 $1.026 $1.000 -- --
End of Period............... $1.590 $1.630 $1.416 $1.190 $1.026 -- --
Simplified Load Version
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
Front Load.................. 441,272 423,726 275,323 90,184 47,321 -- --
Simplified Load............. 1,917,813 1,219,819 626,090 313,810 149,862 -- --
SELECT BOND DIVISION
Front Load Version
Beginning of Period......... $1.490 $1.370 $1.335 $1.128 $1.169 $1.066 $1.003
End of Period............... $1.585 $1.490 $1.370 $1.335 $1.128 $1.169 $1.066
Simplified Load Version
Beginning of Period......... $6.768 $6.261 $6.137 $5.217 $5.437 $4.990 $4.722
End of Period............... $7.157 $6.768 $6.261 $6.137 $5.217 $5.437 $4.990
Number of Units
Outstanding, End of Period
Front Load.................. 2,718,375 2,574,248 2,676,832 1,800,898 1,668,091 2,389,345 736,697
Simplified Load............. 1,231,485 1,034,899 966,414 677,396 503,763 328,979 133,930
MONEY MARKET DIVISION
Front Load Version
Beginning of Period......... $1.249 $1.192 $1.140 $1.084 $1.048 $1.026 $.999
End of Period............... $1.308 $1.249 $1.192 $1.140 $1.084 $1.048 $1.026
Simplified Load Version
Beginning of Period......... $2.340 $2.246 $2.161 $2.067 $2.012 $1.980 $1.940
End of Period............... $2.436 $2.340 $2.246 $2.161 $2.067 $2.012 $1.980
Number of Units
Outstanding, End of Period
Front Load.................. 1,905,815 1,710,473 2,829,669 2,956,017 3,313,061 218,747 127,838
Simplified Load............. 6,483,460 5,844,682 3,818,067 1,890,645 1,453,033 810,405 485,704
</TABLE>
* The initial investment in the International Equity Division was made on April
30, 1993.
** The initial investments in the Growth Stock Division and High Yield Bond
Division were made on May 3, 1994.
+ The initial investment in the Growth and Income Stock Division was made on
May 3, 1994.
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6
<PAGE>
ACCUMULATION UNIT VALUES
CONTRACTS ISSUED BETWEEN APRIL 30, 1984 AND DECEMBER 31, 1991
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
AGGRESSIVE GROWTH STOCK
DIVISION
Beginning of Period*............................ $37.055 $32.543 $27.649 $19.849 $18.832
End of Period................................... $39.854 $37.055 $32.543 $27.649 $19.849
Number of Units Outstanding, End of Period........ 1,801,179 1,935,434 1,944,411 1,397,885 1,239,328
INTERNATIONAL EQUITY DIVISION
Beginning of Period**........................... $1.938 $1.726 $1.427 $1.245 $1.246
End of Period................................... $2.032 $1.938 $1.726 $1.427 $1.245
Number of Units Outstanding, End of Period........ 20,139,790 23,069,550 20,439,570 14,747,734 15,153,296
GROWTH STOCK DIVISION
Beginning of Period+............................ $20.837 $16.047 $13.272 $10.145 --
End of Period................................... $26.399 $20.837 $16.047 $13.272 --
Number of Units Outstanding, End of Period........ 651,556 482,897 378,236 63,881 --
GROWTH AND INCOME STOCK
DIVISION
Beginning of Period+............................ $20.502 $15.767 $13.143 $10.024 --
End of Period................................... $25.246 $20.502 $15,767 $13.143 --
Number of Units Outstanding, End of Period........ 801,964 711,558 424,144 117,004 --
INDEX 500 STOCK DIVISION
Beginning of Period++........................... $36.142 $27.134 $22.105 $16.105 $15.916
End of Period................................... $46.522 $36.142 $27.134 $22.105 $16.105
Number of Units Outstanding, End of Period........ 2,699,180 2,558,205 2,386,284 2,232,983 2,284,637
BALANCED DIVISION
Beginning of Period............................. $71.491 $58.832 $51.856 $41.029 $41.036
End of Period................................... $84.987 $71.491 $58.832 $51.856 $41.029
Number of Units Outstanding, End of Period........ 1,211,837 1,341,930 1,489,658 1,889,324 2,327,834
HIGH YIELD BOND DIVISION
Beginning of Period+............................ $16.693 $14.409 $12.030 $10.302 --
End of Period................................... $16.385 $16.693 $14.409 $12.030 --
Number of Units Outstanding, End of Period........ 301,661 235,585 119,423 21,583 --
SELECT BOND DIVISION
Beginning of Period............................. $83.939 $76.682 $74.223 $62.322 $64.139
End of Period................................... $89.873 $83.939 $76.682 $74.223 $62.322
Number of Units Outstanding, End of Period........ 84,033 85,036 97,868 124,163 150,232
MONEY MARKET DIVISION
Beginning of Period............................. $27.435 $26.011 $24.706 $23.346 $22.436
End of Period................................... $28.924 $27.435 $26.011 $24.706 $23.346
Number of Units Outstanding, End of Period........ 45,209 38,584 57,013 62,209 200,510
<CAPTION>
1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
AGGRESSIVE GROWTH STOCK
DIVISION
Beginning of Period*............................ $15.810 $14.923 $10.000 -- --
End of Period................................... $18.832 $15.810 $14.923 -- --
Number of Units Outstanding, End of Period........ 910,764 594,531 40,650 -- --
INTERNATIONAL EQUITY DIVISION
Beginning of Period**........................... $1.000 -- -- -- --
End of Period................................... $1.246 -- -- -- --
Number of Units Outstanding, End of Period........ 1,128,950 -- -- -- --
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++........................... $14.500 $13.519 $10.000 -- --
End of Period................................... $15.916 $14.500 $13.519 -- --
Number of Units Outstanding, End of Period........ 2,454,444 246,820 36,842 -- --
BALANCED DIVISION
Beginning of Period............................. $37.449 $35.557 $28.690 $28.392 $24.560
End of Period................................... $41.036 $37.449 $35.557 $28.690 $28.392
Number of Units Outstanding, End of Period........ 2,660,165 2,787,942 2,872,612 2,853,458 2,721,226
HIGH YIELD BOND DIVISION
Beginning of Period+............................ -- -- -- -- --
End of Period................................... -- -- -- -- --
Number of Units Outstanding, End of Period........ -- -- -- -- --
SELECT BOND DIVISION
Beginning of Period............................. $58.132 $54.335 $46.489 $42.915 $37.688
End of Period................................... $64.139 $58.132 $54.335 $46.489 $42.915
Number of Units Outstanding, End of Period........ 157,630 170,104 162,656 139,272 131,612
MONEY MARKET DIVISION
Beginning of Period............................. $21.814 $21.110 $19.973 $18.488 $16.965
End of Period................................... $22.436 $21.814 $21.110 $19.973 $18.488
Number of Units Outstanding, End of Period........ 341,361 355,217 476,920 427,960 289,871
</TABLE>
* The initial investment in the Aggressive Growth Stock Division was made on
January 25, 1991.
** 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.
++ The initial investment in the Index 500 Stock Division was made on January
16, 1991.
--
7
<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 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 C
We established the Account on July 22, 1970 by action of our Board of Trustees
in accordance with the provisions of the Wisconsin insurance law.
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 Account is not registered as an investment company under the Investment
Company Act of 1940.
- --------------------------------------------------------------------------------
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
--
8
<PAGE>
Russell, Frank Russell Investment Management Company ("FRIMCo"). FRIMCo also
advises, operates and 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.
- --------------------------------------------------------------------------------
THE CONTRACTS
UNALLOCATED GROUP ANNUITY CONTRACTS
The Contracts are unallocated group annuity contracts. The Contracts do not
provide for the establishment of individual accounts for Plan or Trust
participants until participants become entitled to receive benefits from the
Plan or Trust. When a participant retires or otherwise becomes entitled to
receive benefits, you may direct us to pay annuity benefits to the participant.
(See "Retirement Benefits", p. 10). We will then issue the Annuitant a
Certificate describing the benefits which have been selected. (See "Variable
Payment Plans", p. 10) Benefits available to Participants are determined
entirely by the provisions of the Plan or Trust.
PURCHASE PAYMENTS UNDER THE CONTRACTS
AMOUNT AND FREQUENCY You determine the amount and frequency of purchase
payments subject to the provisions of the Plan or Trust. You may pay larger or
additional purchase payments. However, we will not accept (a) any purchase
payment unless it is a contribution for funding or for the payment of fees or
loads under a pension or profit-sharing plan or trust which meets the
requirements of Section 401 of the Code or the requirements for deduction of the
employer's contribution under Section 404(a)(2) of the Code; or (b) any purchase
payment of less than $100.
You may pay purchase payments monthly, quarterly, semiannually, annually or on
any other frequency acceptable to us. If a purchase payment is not paid when
due, or if we decline to accept a purchase payment as provided above, the
Contract will continue in force unless you redeem all Accumulation Units for
their value. You may resume payment of purchase payments at any time the
Contract is in force.
APPLICATION OF PURCHASE PAYMENTS We credit net purchase payments to your
Contract, after deduction of any sales load or installation fee, and we allocate
the payments as you direct. To the extent that you direct a net purchase payment
to accumulate on a variable basis we place it in the Account and allocate it to
one or more Divisions. Assets we allocate to each Division we thereupon invest
in shares of the Portfolio or Fund which corresponds to that Division. If we
receive no allocation instructions, we will place the net purchase payment in
the Money Market Division.
We apply payments we place in the Account to provide "Accumulation Units" in one
or more Divisions. Accumulation Units represent your interest in the Account.
The number of Accumulation Units provided by each net purchase payment is
determined by dividing the amount 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.
The number of your Accumulation Units will be increased by additional purchase
payments and decreased by withdrawals. 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. This in turn is determined by the investment
experience of the corresponding Portfolio or Fund. We determine the value of an
Accumulation Unit on any date by multiplying the value on the immediately
preceding valuation date by the net investment factor for the Division for the
current period. (See "Net Investment Factor", p. 10) Since you bear the
investment risk, there is no guarantee as to the aggregate value of your
Accumulation Unit. That value may be less than, equal to or more than the
cumulative net purchase payments you have made.
--
9
<PAGE>
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 at the beginning of the valuation period, (c) less an adjustment
to provide for the charge for mortality rate and expense guarantees. (See
"Deductions", p. 14.)
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 surrender value and a
retirement 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. We will
take the amounts required to pay benefits from the Divisions of the Account, or
from the value accumulated on a fixed basis, as you direct.
SURRENDER OR WITHDRAWAL VALUE To the extent permitted by the Plan or Trust, you
may terminate the Contract and redeem the value of Accumulation Units credited
to the Contract. We determine the value, which may be either greater or less
than the amount you have paid, as of the valuation date coincident with or next
following our receipt of a written request for termination. Request forms are
available from our Home Office and our agents. You may surrender a portion of
the Accumulation Units on the same basis.
A payee under Payment Plan 1 may elect to withdraw the present value of any
unpaid income payments at any time. Upon death during the certain period of the
payee under Plan 2 or both payees under Plan 3, the beneficiary may elect to
withdraw the present value of any unpaid payments for the certain period. We
base the withdrawal value 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. 11)
RETIREMENT BENEFITS You may direct us to pay retirement benefits to an
Annuitant at any time while your Contract is in force. Upon your request,
benefits may be paid in a lump sum or under the Payment Plans described below.
Your request will state the Payment Plan you have elected and the amount and
date of the first payment. Amounts distributed to an Annuitant may be subject to
federal income tax. A 10% penalty tax may be imposed on the taxable portion of
premature payments of benefits (prior to age 59 1/2 or disability) unless
payments are made after the employee separates from service and payments are
either paid in substantially equal installments over the life or life expectancy
of the employee or are paid on account of early retirement after age 55.
We will determine the amount required to pay the annuity or cash benefits and
will redeem Accumulation Units in that amount. There is no assurance that
amounts accumulated under the Contract will be sufficient to provide the
retirement benefits under the Plan or Trust.
VARIABLE PAYMENT PLANS
We will pay part or all of the benefits under a Contract under a variable
payment plan you select. Under a variable plan the payee bears the entire
investment risk, since no guarantees of investment return are made. 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.
Under a variable Payment Plan an Annuitant must select the initial allocation of
variable benefits among the Divisions. The Annuitant may name and change the
beneficiaries of unpaid payments for the specified period under Plan 1 or the
certain period under Plans 2
--
10
<PAGE>
or 3. We will issue the Annuitant a Certificate describing the variable annuity
benefits and including beneficiary provisions of annuity contracts we issue on
the date of issue of the Certificate. For a discussion of tax considerations and
limitations regarding the election of payment plans, see "Federal Income Taxes",
p. 13.
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,
payments becoming due are paid to the designated contingent beneficiary. A
certain period of either 10 or 20 years may be selected, or a plan with no
certain period may be chosen.
3. JOINT AND SURVIVOR LIFE ANNUITY WITH CERTAIN PERIOD. An annuity payable
monthly for a certain period of 10 years and thereafter to the Annuitant and the
Joint Annuitant 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.
A Payment Plan must result in payments that meet the minimums we require for
annuity payment plans on the date you elect the plan. 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 as 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. 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 and will depend upon the number and
value of Annuity Units credited to the Annuitant. Annuity Units represent the
interest of the Annuitant in each Division of the Account.
ASSUMED INVESTMENT RATE The payment rate tables for the Contracts are based
upon an Assumed Investment Rate of 3 1/2%. Payment 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 actual value of the future payments
as of the date when payments begin.
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 Annuity Unit for each Division would not change in value, and the amount of
annuity payments would be level. However, if the Division achieved a net
investment result greater than the Assumed Investment Rate, the 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
net purchase payments among the Divisions or transfer Accumulation Units from
one Division to another at any time. After the effective date of a variable
Payment Plan the Annuitant may transfer Annuity Units from one Division to
another. Changes in allocation and transfers are effective on the date we
receive a written request at our Home Office or on a future specified date.
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. You may transfer Accumulation Units among the Divisions up to
twelve times in a Contract year without charge. The charge for each additional
transfer is $25. We may set charges and waiting periods for transfers of Annuity
Units.
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11
<PAGE>
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
securities markets, especially transfers of large sums, will tend to accentuate
the danger that a transfer will be made at an inopportune time.
After the effective date of a variable Payment Plan which includes the right of
withdrawal a payee may transfer the withdrawal value to any other Payment Plan.
An administrative charge may apply.
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 employer, a custodian or
trustee. In this prospectus, "you" means the owner or a prospective purchaser of
a Contract. The Annuitant is a Participant in the Plan or Trust who has been
named to receive annuity payments in accordance with the provisions of the Plan
or Trust.
DEFERMENT OF BENEFIT PAYMENTS We reserve the right to defer determination and
payment of the surrender value of the Accumulation Units, the withdrawal value
under a variable Payment Plan, or the payment of benefits under a variable
Payment Plan. Deferral will arise only if the right to redeem shares of a
Portfolio or Fund is suspended, payment of the redemption value is postponed, or
the New York Stock Exchange is closed, or trading thereon is restricted; or an
emergency exists, as a result of which it is not reasonably practical for us to
dispose of securities we own, or to determine the value of Accumulation or
Annuity Units.
DIVIDENDS The Contracts share in our divisible surplus, except while payments
are being made under a payment plan. Our divisible surplus is determined
annually. We credit each Contract's share, if any, as a dividend on the Contract
anniversary. Under the terms of the Contract, we will apply any dividend as a
net purchase payment allocated to the Money Market Division.
On Group Combination Annuity Contracts, dividends arise principally as a result
of more favorable expense experience than that assumed in determining mortality
rate and expense guarantee charges. The dividend 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.
For 1999, all front-load and simplified-load Contracts with an average variable
Contract value of $250,000 or more will receive a dividend of 0.25% of the
average variable Contract value. For the simplified-load Contracts, this factor
increases to 0.75% on the portion of the average variable Contract value in
excess of $500,000. In future years, dividends will continue to be based on
actual experience, and as a result, the factors may be different from those
stated above.
SUBSTITUTION AND CHANGE We reserve the right to (a) substitute other securities
for shares of each Portfolio or Fund held by any Division, or (b) change the
provisions of the Contracts to assure qualification for tax benefits under the
Internal Revenue Code or to comply with any other applicable federal or state
laws. We may make appropriate endorsement on Contracts having an interest in the
Account and take such other action as may be necessary to effect the
substitution or change. You will be given prompt notice after any substitution
or change.
AMENDMENTS AND TERMINATION After the fifth Contract year, we may amend the
Contract with respect to (1) the sales load; (2) the maximum annual annuity rate
and expense guarantee charge; (3) the administration fee; (4) the transfer fee;
(5) the minimum amounts for purchase payment(s) and for the Contract value; or
(6) the payment rate tables which are included in the Contract.
An amendment will not become effective until after we have given you at least 30
days' written notice. An Amendment to the payment rate tables will not apply to
a Payment Plan that starts before the amendment becomes effective.
We reserve the right to terminate a Contract if representations you have made to
us are or become incorrect. You may terminate a Contract in whole or in part at
any time and we will pay you the value of the Accumulation Units.
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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12
<PAGE>
FEDERAL INCOME TAXES
We offer the Contracts only for use under tax-qualified plans meeting the
requirements of Sections 401 and 403(a) of the Code. However, in the event we
should issue Contracts pursuant to HR-10 Plans, trusts or custodial accounts
which at the time of issuance are not qualified under the Code, some or all of
the tax benefits described herein may be lost.
CONTRIBUTION LIMITS
Any employer, including a self-employed person, can establish a plan under
Section 401(a) or 403(a) for participating employees. As a general rule, annual
contributions to a defined contribution plan made by the employer and the
employee cannot exceed the lesser of $30,000 or 25% of compensation or earned
income (up to $160,000, indexed).
Qualified plans are subject to minimum coverage, nondiscrimination and spousal
consent requirements. In addition, "top heavy" rules apply if more than 60% of
the contributions or benefits are allocated to certain highly compensated
employees. Violations of the contribution limits or other requirements may
disqualify the plan and/or subject the employer to taxes and penalties.
TAXATION OF CONTRACT BENEFITS
No tax is payable as a result of any increase in the value of a Contract until
benefits from the Contract are received. Benefits received as annuity payments
will be taxable as ordinary income when received in accordance with Section 72
of the Code. As a general rule, where an employee makes nondeductible
contributions to the Plan, the payee may exclude from income that portion of
each benefit payment which represents a return of the employee's "investment in
the contract" as defined in Section 72 until the entire "investment in the
contract" is recovered. A 50% penalty tax may be imposed on payments to the
extent they are less than certain required minimum amounts. In addition, a 10%
penalty tax may be imposed on benefits paid in excess of the benefits provided
under the Plan formula if the payee is or was a "5% owner" of the employer while
a participant in the Plan.
Benefits paid in a form other than an annuity will be taxed as ordinary income
when received except for that portion of the payment, if any, which represents a
return of the employee's "investment in the contract". Benefits received as a
"lump sum distribution" may be eligible for a separate tax averaging calculation
and, with certain limited exceptions, all benefits are subject to tax-free
rollover provisions of the Code. A 10% penalty tax may be imposed on the taxable
portion of premature payments of benefits (prior to age 59 1/2 or disability)
unless payments are made after the employee separates from service and payments
are either paid in substantially equal installments over the life or life
expectancy of the employee or are paid on account of early retirement after age
55 or unless payments are made for medical expenses in excess of 7.5% of the
employee's Adjusted Gross Income.
A loan from the Plan to an employee, other than an owner-employee, may be
taxable as ordinary income depending on the amount and terms of the loan. A loan
to an owner-employee is a prohibited transaction under the Code and could
disqualify the Plan.
Benefit payments will be subject to mandatory 20% withholding unless (1) they
are rolled over directly to another 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."
The rules governing plan provisions, payments and deductions and taxation of
distributions from such Plans and Trusts, as set forth in the Code and the
regulations relating thereto, are complex and cannot be readily summarized.
Furthermore, special rules are applicable in many situations. You should consult
qualified tax counsel before you adopt an HR-10 pension or profit-sharing plan
or trust.
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. 10
and "Deductions", p. 14.)
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13
<PAGE>
DEDUCTIONS
We will make the following deductions:
1. DEDUCTIONS FROM PURCHASE PAYMENTS.
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 the cumulative amounts we have received and the rates in the table
below:
<TABLE>
<CAPTION>
CUMULATIVE PURCHASE PAYMENTS
PAID UNDER THE CONTRACT RATE
- ----------------------------------------------------- -----------
<S> <C>
First $150,000....................................... 4.5%
Next $350,000........................................ 3.0%
Next $500,000........................................ 1.0%
Balance over $1,000,000.............................. .5%
</TABLE>
Simplified-Load Contract
We deduct an installation fee in the amount of $750 from the first purchase
payment we receive. Alternatively, you may pay the fee separately when you
submit the application for the Contract. The installation fee covers the
non-recurring expenses of processing the application and issuing the Contract.
2. ANNUAL MORTALITY RATE AND EXPENSE GUARANTEE CHARGE. The net investment
factor (see "Net Investment Factor", p. 10) we use in determining the value of
Accumulation and Annuity Units reflects a charge on each valuation date for
mortality and expense risks we have assumed. For the front-load Contract the
charge on an annual basis is .65% of the current value of the net assets of the
Account. For the simplified-load Contract the charge on an annual basis is 1.25%
of the net assets. We may increase this charge to a maximum of 1.00% for the
front-load Contract and 1.50% for the simplified-load Contract. After the fifth
Contract year we may amend the maximum. (See "Amendments and Termination", p.
12.)
The mortality risk is that annuity payments will continue for longer periods
than anticipated because the Annuitants as a group live longer than expected.
The expense risk is 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. 12, and the
deduction of any applicable taxes. Applicable taxes could include any tax
liability we have paid or reserved for resulting from the maintenance or
operation of a Division of the Account. We do not presently anticipate that any
deduction will be made for federal income taxes (see "Federal Income Taxes" p.
13), 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. ADMINISTRATION FEE. We may terminate a Contract on 60 days' written notice
after it has been in force for one year if the total Contract value (including
any amounts held on a fixed basis) is less than the minimum Contract value of
$25,000. In lieu of terminating the Contract we may charge an administration fee
of $150 annually on the Contract anniversary.
4. 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 2% 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.
5. 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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14
<PAGE>
DISTRIBUTION OF THE CONTRACTS
We will 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 are calculated partly as a percentage of
purchase payments and partly as a percentage of Contract values for each
Contract year. We do not expect total commissions, on average, to exceed the
equivalent of 7.0% of purchase payments.
- --------------------------------------------------------------------------------
CONTRACTS ISSUED PRIOR TO JANUARY 1, 1992
For Contracts issued prior to January 1, 1992 the purchase payments are subject
to a charge for sales expenses. This deduction is at the rate of 4.0% on the
first $25,000; 2.0% on the next $75,000; 1.0% on the next $100,000; .4% on the
next $100,000; .2% on the next $200,000; and .1% on the balance over $500,000 of
cumulative purchase payments. For these Contracts there is also an annual
service fee charged on each anniversary, based on the value of Accumulation
Units on the last valuation date of the Contract year, at the rate of .5% on the
first $100,000; .4% on the next $100,000; .3% on the next $100,000; .2% on the
next $200,000; and .1% on the balance over $500,000. The charge for annuity rate
and expense risks may not exceed .25% of the Account assets held for these
Contracts (unless the Contracts are amended after the fifth Contract year), and
we currently are making no charge for these risks. These Contracts contain no
provisions for accumulation of funds on a fixed basis. See the table of
accumulation unit values on page 7.
- --------------------------------------------------------------------------------
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.
--
15
<PAGE>
TABLE OF CONTENTS FOR STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
Page
-----
<S> <C>
GENERAL INFORMATION.................................. B-2
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
EXPERTS.............................................. B-4
<CAPTION>
Page
-----
<S> <C>
FINANCIAL STATEMENTS OF THE
ACCOUNT (for the two years ended
December 31, 1998)................................. B-5
REPORT OF INDEPENDENT
ACCOUNTANTS (for the two years ended
December 31, 1998)................................. B-11
FINANCIAL STATEMENTS OF
NORTHWESTERN MUTUAL LIFE
(for the three years ended
December 31, 1998)................................. B-12
REPORT OF INDEPENDENT
ACCOUNTANTS (for the three years
ended December 31, 1998)........................... B-25
</TABLE>
- --------------------------------------------------------------------------------
This Prospectus sets forth concisely the information about NML Variable Annuity
Account C that a prospective investor ought to know before investing. Additional
information about Account C 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 C 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
Group Combination Annuity Contracts
for Retirement Plans of Self-Employed Persons
and Their Employees
NML Variable Annuity Account C
Northwestern Mutual Series Fund, Inc.
Russell Insurance Funds
90-1896 (4-99)
PROSPECTUSES
Investment Company Act File Nos. 811-3990 and 811-5371
NORTHWESTERN
MUTUAL LIFE-Registered Trademark-
PO Box 3095
Milwaukee WI 53201-3095
Change Service Requested
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
GROUP COMBINATION ANNUITY CONTRACTS
(for Retirement Plans of Self-Employed Persons and their Employees)
NML VARIABLE ANNUITY ACCOUNT C
(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>
GENERAL INFORMATION
The Account was originally named NML Separate Account C but was
renamed NML Variable Annuity Account C on November 23, 1983. The Account is
used for the Contracts and for outstanding Contracts to Provide Annuity
Benefits. Northwestern Mutual Life discontinued sales of Contracts to Provide
Annuity Benefits on May 1, 1984.
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, including commissions on sales of Contracts to
corporate pension plans, during each of the last three years:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1998 $162,781
1997 $120,550
1996 $756,038
</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. 11, and "Assumed Investment Rate", p. 11; "Dividends",
p. 12; "Net Investment Factor", p. 9; and "Deductions", p. 17.
AMOUNT OF ANNUITY PAYMENTS The amount of the first annuity payment
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. The amount of the first payment is the sum of the
payments from each Division. The payments from each Division are determined by
multiplying the applicable monthly variable annuity payment rate by the benefits
allocated to the Division under the variable Payment Plan. (See "Illustrations
of Variable Annuity Payments".) Payment rate tables are set forth in the
Contracts. Annuity payment rates currently in use by Northwestern Mutual Life
are based on the 1983 Table a with Projection Scale G.
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. The amount held under a Payment Plan 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. The payments from each Division are determined
by multiplying the number of Annuity Units
B-2
<PAGE>
credited to the Annuitant in the Division 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.
ANNUITY UNIT VALUE The value of an Annuity Unit for each Division
was arbitrarily established as of the date on which the operations of the
Division began. 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 annuity rate and expense
guarantee charge.
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 mortality rate tables.
ILLUSTRATIONS OF VARIABLE ANNUITY PAYMENTS To illustrate the manner
in which variable annuity payments are determined consider this example. Item
(2) in the example shows the applicable monthly payment rate for an annuitant,
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) Value of Annuitant's retirement benefit
allocated to Balanced. . . . . . . . . . . . . . . $ 50,000
(2) Assumed applicable monthly payment rate
per $1,000 from annuity rate table . . . . . . . . $ 5.00
(3) Amount of first payment from Balanced
Division (1) x (2) divided by $1,000 . . . . . . . $ 250.00
(4) Assumed Value of Annuity Unit in Balanced
Division on effective date of payment plan . . . . $ 1.500000
(5) Number of Annuity Units credited in
Balanced Division, (3) divided by (4). . . . . . . 166.67
</TABLE>
The $50,000 value on the effective date of the payment plan provides a first
payment from the Balanced Division of $250.00, and payments thereafter of the
varying dollar value of 166.67 Annuity Units. The amount of subsequent payments
from the Balanced Division is determined by multiplying 166.67 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 166.67 multiplied by $1.501000, or $250.17.
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 (see "Net Investment Factor") 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 166.67 X $1.499000, or $249.84.
B-3
<PAGE>
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 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 may be transferred subject to the terms of the
Plan or Trust. The transferee, or its fiduciary representative, must
acknowledge in writing that the new Owner is a tax-qualified pension or
profit-sharing plan. Written proof of transfer satisfactory to Northwestern
Mutual Life must be received at the Home Office of Northwestern Mutual Life.
The transfer will take effect on the date the proof of the transfer is signed.
Ownership of a Contract may not be assigned without the consent of Northwestern
Mutual Life. Northwestern Mutual Life will not be responsible for the validity
or effect of the assignment or for any payment or other action taken by
Northwestern Mutual Life before Northwestern Mutual Life consents to the
assignment.
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-4
<PAGE>
ACCOUNT C FINANCIAL STATEMENTS
NML VARIABLE ANNUITY ACCOUNT C
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
32,435 shares (cost $90,547)............... $112,355
International Equity
35,340 shares (cost $52,601)............... 59,265
Growth Stock
12,380 shares (cost $21,944)............... 27,819
Growth and Income Stock
24,848 shares (cost $35,764)............... 40,354
Index 500 Stock
55,739 shares (cost $103,423).............. 183,326
Balanced
77,775 shares (cost $122,951).............. 172,972
High Yield Bond
9,200 shares (cost $10,065)................ 8,611
Select Bond
16.617 shares (cost $19,964)............... 20,755
Money Market
19,629 shares (cost $19,629)............... 19,629 $645,086
---------
Due from Sale of Fund Shares.................................. 495
Due from Northwestern Mutual Life Insurance Company........... 356
--------
Total Assets.................................................. $645,937
--------
--------
LIABILITIES
Due to Northwestern Mutual Life Insurance Company........... $ 495
Due on Purchase of Fund Shares.............................. 356
--------
Total Liabilities....................................... 851
--------
EQUITY (NOTE 8)
Group Variable Annuity Contracts Issued:
Before December 17, 1981 or between April 30, 1984 and
December 31, 1991.......................................... $392,516
After December 16, 1981 and Prior to May 1, 1984............ 8,067
After December 31, 1991 - Front Load Version................ 56,811
After December 31, 1991 - Simplified Load Version........... 187,692
--------
Total Equity............................................ 645,086
--------
Total Liabilities and Equity............................ $645,937
--------
--------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements
B-5
<PAGE>
ACCOUNT C FINANCIAL STATEMENTS
NML VARIABLE ANNUITY ACCOUNT C
Statements of Operations and Changes in Equity
(IN THOUSANDS)
<TABLE>
<CAPTION>
AGGRESSIVE GROWTH
COMBINED STOCK DIVISION INTERNATIONAL EQUITY 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............... $ 26,993 $ 27,691 $ 4,152 $6,050 $ 3,732 $ 1,946
Annuity Rate and Expense
Guarantees.................. 3,155 2,502 591 533 289 259
------------- ------------- ------------- ------------- ------------- -------------
Net Investment Income......... 23,838 25,189 3,561 5,517 3,443 1,687
------------- ------------- ------------- ------------- ------------- -------------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS
Realized Gain on
Investments............... 29,249 18,686 7,961 6,115 3,560 1,012
Unrealized Appreciation
(Depreciation) of
Investments During the
Period.................... 37,108 44,242 (3,919) 1,306 (4,426) 3,272
------------- ------------- ------------- ------------- ------------- -------------
Net Gain (Loss) on
Investments............... 66,357 62,928 4,042 7,421 (866) 4,284
------------- ------------- ------------- ------------- ------------- -------------
Increase in Equity Derived
from Investment
Activity.................. 90,195 88,117 7,603 12,938 2,577 5,971
EQUITY TRANSACTIONS
Contract Owners' Net
Deposits.................. 93,657 91,195 16,937 18,472 8,353 9,763
Annuity Payments............ (54) (50) (2) (2) (1) (1)
Surrenders and Other
(net)..................... (87,761) (58,500) (20,805) (13,113) (8,855) (4,326)
Transfers from Other
Divisions or Sponsor...... 72,485 46,344 3,375 5,552 2,281 6,230
Transfers to Other Divisions
or Sponsor................ (71,425) (45,769) (6,341) (7,536) (8,966) (3,221)
------------- ------------- ------------- ------------- ------------- -------------
Increase (Decrease) in Equity
Derived from Equity
Transactions................ 6,902 33,220 (6,836) 3,373 (7,188) 8,445
------------- ------------- ------------- ------------- ------------- -------------
Net Increase (Decrease) in
Equity...................... 97,097 121,337 767 16,311 (4,611) 14,416
EQUITY
Beginning of Year........... 547,989 426,652 111,590 95,279 63,876 49,460
------------- ------------- ------------- ------------- ------------- -------------
End of Year................. $645,086 $547,989 $112,357 $111,590 $59,265 $63,876
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements
B-6
<PAGE>
ACCOUNT C FINANCIAL STATEMENTS
NML VARIABLE ANNUITY ACCOUNT C
Statements of Operations and Changes in Equity
(IN THOUSANDS)
<TABLE>
<CAPTION>
GROWTH & INCOME
GROWTH STOCK DIVISION STOCK DIVISION
-------------------------------- --------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend Income............... $ 447 $ 712 $ 343 $ 5,941
Annuity Rate and Expense
Guarantees.................. 92 52 180 104
-------------- -------------- -------------- --------------
Net Investment Income......... 355 660 163 5,837
-------------- -------------- -------------- --------------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS
Realized Gain on
Investments............... 1,374 715 780 660
Unrealized Appreciation
(Depreciation) of
Investments During the
Period.................... 3,304 1,866 5,917 (1,982)
-------------- -------------- -------------- --------------
Net Gain (Loss) on
Investments............... 4,678 2,581 6,697 (1,322)
-------------- -------------- -------------- --------------
Increase (Decrease) in
Equity Derived from
Investment Activity....... 5,033 3,241 6,860 4,515
EQUITY TRANSACTIONS
Contract Owners' Net
Deposits.................. 3,452 2,670 6,130 7,626
Annuity Payments............ (3) (3) -- --
Surrenders and Other
(net)..................... (2,332) (1,049) (3,594) (2,186)
Transfers from Other
Divisions or Sponsor...... 9,371 3,487 8,719 5,741
Transfers to Other Divisions
or Sponsor................ (3,548) (2,232) (5,246) (1,247)
-------------- -------------- -------------- --------------
Increase (Decrease) in Equity
Derived from Equity
Transactions................ 6,940 2,873 6,009 9,934
-------------- -------------- -------------- --------------
Net Increase in Equity........ 11,973 6,114 12,869 14,449
EQUITY
Beginning of Year........... 15,847 9,733 27,485 13,036
-------------- -------------- -------------- --------------
End of Year................. $ 27,820 $ 15,847 $ 40,354 $ 27,485
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
<CAPTION>
INDEX 500
STOCK DIVISION
-----------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
INVESTMENT INCOME
Dividend Income............... $ 5,271 $ 3,756
Annuity Rate and Expense
Guarantees.................. 721 514
------------- -------------
Net Investment Income......... 4,550 3,242
------------- -------------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS
Realized Gain on
Investments............... 7,377 5,480
Unrealized Appreciation
(Depreciation) of
Investments During the
Period.................... 27,279 23,021
------------- -------------
Net Gain (Loss) on
Investments............... 34,656 28,501
------------- -------------
Increase (Decrease) in
Equity Derived from
Investment Activity....... 39,206 31,743
EQUITY TRANSACTIONS
Contract Owners' Net
Deposits.................. 21,772 17,138
Annuity Payments............ (3) (3)
Surrenders and Other
(net)..................... (18,000) (11,007)
Transfers from Other
Divisions or Sponsor...... 12,300 7,667
Transfers to Other Divisions
or Sponsor................ (5,878) (4,859)
------------- -------------
Increase (Decrease) in Equity
Derived from Equity
Transactions................ 10,191 8,936
------------- -------------
Net Increase in Equity........ 49,397 40,679
EQUITY
Beginning of Year........... 133,929 93,250
------------- -------------
End of Year................. $183,326 $133,929
------------- -------------
------------- -------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements
B-7
<PAGE>
ACCOUNT C FINANCIAL STATEMENTS
NML VARIABLE ANNUITY ACCOUNT C
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............... $ 9,909 $ 6,461 $ 883 $ 1,028 $ 1,357 $ 1,058
Annuity Rate and Expense
Guarantees.................. 906 749 39 22 142 117
------------- ------------- ------------- ------------- ------------- -------------
Net Investment Income......... 9,003 5,712 844 1,006 1,215 941
------------- ------------- ------------- ------------- ------------- -------------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS
Realized Gain on
Investments............... 7,790 4,562 (56) 44 463 97
Unrealized Appreciation
(Depreciation) of
Investments During the
Period.................... 10,517 16,710 (1,081) (376) (483) 425
------------- ------------- ------------- ------------- ------------- -------------
Net Gain (Loss) on
Investments............... 18,307 21,272 (1,137) (332) (20) 522
------------- ------------- ------------- ------------- ------------- -------------
Increase (Decrease) in
Equity Derived from
Investment Activity....... 27,310 26,984 (293) 674 1,195 1,463
EQUITY TRANSACTIONS
Contract Owners' Net
Deposits.................. 17,458 17,262 1,310 964 3,811 3,598
Annuity Payments............ (41) (37) -- -- (3) (3)
Surrenders and Other
(net)..................... (22,224) (16,900) (1,191) (198) (3,378) (3,448)
Transfers from Other
Divisions or Sponsor...... 9,934 5,080 2,932 2,564 4,393 1,445
Transfers to Other Divisions
or Sponsor................ (13,201) (9,980) (716) (418) (3,323) (2,798)
------------- ------------- ------------- ------------- ------------- -------------
Increase (Decrease) in Equity
Derived from Equity
Transactions................ (8,074) (4,575) 2,335 2,912 1,500 (1,206)
------------- ------------- ------------- ------------- ------------- -------------
Net Increase in Equity........ 19,236 22,410 2,042 3,586 2,695 257
EQUITY
Beginning of Year........... 153,735 131,325 6,569 2,983 18,059 17,802
------------- ------------- ------------- ------------- ------------- -------------
End of Year................. $172,971 $153,735 $ 8,611 $ 6,569 $ 20,754 $ 18,059
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
<CAPTION>
MONEY MARKET DIVISION
-----------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
INVESTMENT INCOME
Dividend Income............... $ 899 $ 739
Annuity Rate and Expense
Guarantees.................. 195 152
------------- -------------
Net Investment Income......... 704 587
------------- -------------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS
Realized Gain on
Investments............... -- --
Unrealized Appreciation
(Depreciation) of
Investments During the
Period.................... -- --
------------- -------------
Net Gain (Loss) on
Investments............... -- --
------------- -------------
Increase (Decrease) in
Equity Derived from
Investment Activity....... 704 587
EQUITY TRANSACTIONS
Contract Owners' Net
Deposits.................. 14,434 13,702
Annuity Payments............ (1) (1)
Surrenders and Other
(net)..................... (7,382) (6,273)
Transfers from Other
Divisions or Sponsor...... 19,180 8,578
Transfers to Other Divisions
or Sponsor................ (24,206) (13,478)
------------- -------------
Increase (Decrease) in Equity
Derived from Equity
Transactions................ 2,025 2,528
------------- -------------
Net Increase in Equity........ 2,729 3,115
EQUITY
Beginning of Year........... 16,899 13,784
------------- -------------
End of Year................. $ 19,628 $ 16,899
------------- -------------
------------- -------------
</TABLE>
The Accompanying Notes are an Integral Part of the Financial Statements
B-8
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NML VARIABLE ANNUITY ACCOUNT C
Notes to Financial Statements
DECEMBER 31, 1998
NOTE 1 -- NML Variable Annuity Account C (the "Account") is a segregated asset
account of The Northwestern Mutual Life Insurance Company ("Northwestern Mutual"
or "Sponsor") used to fund variable annuity contracts ("contracts") for HR-10
and corporate pension and profit-sharing plans which qualify for special tax
treatment under the Internal Revenue Code. Beginning December 31, 1991, two
versions of the contract are offered: Front Load contracts with a sales charge
up to 4 1/2% of purchase payments and Simplified Load contracts with an
installment fee of $750.
NOTE 2 -- The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Principal
accounting policies are summarized below.
NOTE 3 -- All assets of each Division of the Account are invested in shares of
the corresponding Portfolio of Northwestern Mutual Series Fund, Inc. (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
adjustments and benefit payments which reflect actual investment experience.
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....... $ 15,042,444 $ 18,315,682
International Equity Division.... 10,115,335 13,861,624
Growth Stock Division............ 11,736,176 4,445,344
Growth & Income Stock Division... 12,220,296 6,047,669
Index 500 Stock Division......... 27,128,970 12,386,814
Balanced Division................ 25,547,459 24,616,712
High Yield Bond Division......... 4,842,682 1,661,445
Select Bond Division............. 7,219,542 4,504,138
Money Market Division............ 28,689,880 25,961,429
</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
annuities 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.
Generally, for contracts issued after December 31, 1991, for the Front Load
version and the Simplified Load version, the deduction for annuity rate and
expense guarantee is determined daily at annual rates of 6 1/2/10 of 1% and
1 1/4%, respectively, of the net assets of each Division attributable to these
contracts and is paid to Northwestern Mutual. For these contracts, the rates may
be increased or decreased by the Board of Trustees of Northwestern Mutual not to
exceed 1% and 1 1/2% annual rates, respectively.
For contracts issued after December 16, 1981, and prior to May 1, 1984, the
deduction is determined daily at an annual rate of 1/2% of 1% of the net assets
of each Division attributable to these contracts and is paid to Northwestern
Mutual. For these contracts, the rate may be increased or decreased by the Board
of Trustees of Northwestern Mutual not to exceed a 3/4% of 1% annual rate.
Since 1996, Northwestern Mutual has paid a dividend to certain contracts. The
dividend is re-invested in the Account and has been reflected as a Contract
Owners' Net 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-9
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NML VARIABLE ANNUITY ACCOUNT C
Notes to Financial Statements
(IN THOUSANDS)
DECEMBER 31, 1998
NOTE 8 -- Equity Values by Division are shown below:
<TABLE>
<CAPTION>
GROUP VARIABLE ANNUITY CONTRACT ISSUED:
---------------------------------------------------------------------------------------
BEFORE DECEMBER 17, 1981 OR BETWEEN AFTER DECEMBER 16, 1981 AND
APRIL 30, 1984 AND DECEMBER 31, 1991 PRIOR TO MAY 1, 1984
----------------------------------------- --------------------------------------------
ACCUMULATION UNITS ACCUMULATION UNITS
DIVISION UNIT VALUE OUTSTANDING EQUITY UNIT VALUE OUTSTANDING EQUITY
- ------------------------------------------ -------------- ------------- ---------- -------------- ----------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Aggressive Growth Stock................... $ 39.854126 1,801 $ 71,784 $ 38.303948 2 $ 56
International Equity...................... 2.031842 20,140 40,921 1.975051 119 235
Growth Stock.............................. 26.398692 652 17,200 25.790044 -- 4
Growth and Income Stock................... 25.245888 802 20,246 24.663747 4 106
Index 500 Stock........................... 46.522428 2,699 125,572 44.708227 14 606
Balanced.................................. 84.986573 1,212 102,990 78.082648 80 6,256
High Yield Bond........................... 16.385350 302 4,943 16.007423 -- 3
Select Bond............................... 89.873176 84 7,552 82.531570 1 40
Money Market.............................. 28.923541 45 1,308 26.605346 1 25
---------- ---------
Equity.................................. 392,516 7,331
Annuity Reserves........................ -- 736
---------- ---------
Total Equity............................ $ 392,516 $ 8,067
---------- ---------
---------- ---------
</TABLE>
<TABLE>
<CAPTION>
GROUP COMBINATION ANNUITY CONTRACT ISSUED:
-------------------------------------------------------------------------------------
AFTER DECEMBER 31, 1991 AFTER DECEMBER 31, 1991
FRONT LOAD VERSION SIMPLIFIED 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.................. $ 2.511728 2,922 $ 7,338 $ 3.822308 8,671 $ 33,144
International Equity..................... 1.958397 2,808 5,499 1.893030 6,652 12,593
Growth Stock............................. 2.561090 845 2,164 2.490522 3,374 8,403
Growth and Income Stock.................. 2.449237 2,452 6,005 2.381813 5,876 13,996
Index 500 Stock.......................... 3.278539 4,232 13,873 4.119000 10,494 43,223
Balanced................................. 2.281157 6,324 14,427 6.804809 7,165 48,759
High Yield Bond.......................... 1.589625 442 702 1.545816 1,918 2,965
Select Bond.............................. 1.585144 2,718 4,309 7.157135 1,232 8,814
Money Market............................. 1.308441 1,906 2,494 2.436196 6,484 15,795
--------- ----------
Equity................................. 56,811 187,692
Annuity Reserves....................... -- --
--------- ----------
Total Equity........................... $ 56,811 $ 187,692
--------- ----------
--------- ----------
</TABLE>
B-10
<PAGE>
ACCOUNT C ACCOUNTANTS' REPORT
[LOGO]
REPORT OF INDEPENDENT ACCOUNTANTS
To The Northwestern Mutual Life Insurance Company and
Contract Owners NML Variable Annuity Account C
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 C 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.
/s/ PricewaterhouseCoopers
Milwaukee, Wisconsin
January 25, 1999
B-11
<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-12
<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-13
<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-14
<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-15
<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-16
<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-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
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-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
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-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
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-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
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 RISKS REDUCED
- --------------------------------------------- --------------------------------------- ----------------------------------------
(IN MILLIONS)
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------ ------------------
<S> <C> <C> <C>
Foreign Currency Forward
Contracts................................... $ 601 $ 564 Currency exposure on foreign-denominated
investments.
Common Stock Futures......................... 657 327 Stock market price fluctuation.
Bond Futures................................. 379 95 Bond market price fluctuation.
Options to acquire Interest Rate 419 530 Interest rates payable on certain annuity
Swaps....................................... and insurance contracts.
Foreign Currency and Interest Rate Swaps..... 94 209 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-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
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-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
($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-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
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-24
<PAGE>
[LOGO]
[LETTERHEAD]
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.
/s/ PricewaterhouseCoopers
January 25, 1999
B-25
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . B-2
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
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-4
FINANCIAL STATEMENTS OF THE ACCOUNT. . . . . . . . . . . . . . . . . . . . B-5
(for the two years ended December 31, 1998)
REPORT OF INDEPENDENT ACCOUNTANTS. . . . . . . . . . . . . . . . . . . . . B-11
(for the two years ended December 31, 1998)
FINANCIAL STATEMENTS OF NORTHWESTERN MUTUAL LIFE . . . . . . . . . . . . . B-12
(for the three years ended December 31, 1998)
REPORT OF INDEPENDENT ACCOUNTANTS. . . . . . . . . . . . . . . . . . . . . B-25
(for the three years ended December 31, 1998)
</TABLE>
B-26
