================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
COMMISSION FILE NUMBERS 333-72913 AND 2-89905-01
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THE NORTHWESTERN MUTUAL LIFE
INSURANCE COMPANY
IN RESPECT OF NML VARIABLE ANNUITY ACCOUNT A & NML VARIABLE ANNUITY ACCOUNT C
(Exact name of registrant as specified in its charter)
WISCONSIN 39-0509570
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
720 EAST WISCONSIN AVENUE
MILWAUKEE, WISCONSIN 53202
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (414) 271-1444
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ------------------------
NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was last sold, or the average bid and asked price of such common
equity, as of the last business day of the registrant's most recently completed
second fiscal quarter. NOT APPLICABLE
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. NONE
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
IN RESPECT OF NML VARIABLE ANNUITY
ACCOUNT A AND NML VARIABLE ANNUITY ACCOUNT C
FORM 10-K
PART I
ITEM 1. BUSINESS
ACCOUNTS A & C
NML Variable Annuity Account A ("Account A") and NML Variable Annuity
Account C ("Account C") are segregated asset accounts of The
Northwestern Mutual Life Insurance Company ("Northwestern Mutual")
formed to provide retirement annuity benefits for (i) self-employed
individuals (and their eligible employees) who adopt plans ("HR-10
Plans") meeting the requirements of Sections 401 or 403(a) of the
Internal Revenue Code of 1986, as amended (the "Code") and (ii)
employees of corporate employers who adopt pension or profit sharing
plans meeting the requirements of Section 401(a) of the Code, or
annuity purchase plans meeting the requirements of Section 403(a) of
the Code (collectively, "Corporate Plans"). Account A receives payments
under individual variable annuity contracts issued by Northwestern
Mutual in connection with HR-10 Plans and Corporate Plans. Account C
receives payments under group combination variable annuity contracts
issued by Northwestern Mutual in connection with HR-10 Plans and
Corporate Plans. The variable annuity contracts issued by Northwestern
Mutual in connection with HR-10 Plans and Corporate Plans are
hereinafter referred to as the "Contracts." Account A and Account C
were established on February 14, 1968 and July 22, 1970, respectively,
by action of the Board of Trustees of Northwestern Mutual in accordance
with the provisions of Wisconsin insurance law. Neither Account A nor
Account C is registered as an investment company under the Investment
Company Act of 1940.
The Contracts provide for the accumulation of funds and the payment of
retirement benefits to participants and their beneficiaries
("Annuitants"). Account A and Account C each have 20 divisions. Money
invested to provide variable benefits under the Contracts is placed in
one or more divisions of the applicable Account which are in turn
invested in 15 portfolios of Northwestern Mutual Series Fund, Inc.
(Small Cap Growth Stock Portfolio, T. Rowe Price Small Cap Value
Portfolio, Aggressive Growth Stock Portfolio, International Growth
Portfolio, Franklin Templeton International Equity Portfolio, Index 400
Stock Portfolio, Growth Stock Portfolio, Large Cap Core Stock Portfolio
(formerly known as the J.P. Morgan Select Growth and Income Stock
Portfolio until January 31, 2003), Capital Guardian Domestic Equity
Portfolio, Index 500 Stock Portfolio, Asset Allocation Portfolio,
Balanced Portfolio, High Yield Bond Portfolio, Select Bond Portfolio
and Money Market Portfolio) and 5 funds of Russell Insurance Funds
(Multi-Style Equity Fund, Aggressive Equity Fund, Non-U.S. Fund, Real
Estate Securities Fund and Core Bond Fund), each of which corresponds
to one of the Account divisions, all as directed by the Annuitant.
Northwestern Mutual Series Fund, Inc. and Russell Insurance Funds,
which are affiliates of Northwestern Mutual, are registered as
investment companies under the Investment Company Act of 1940. The
Contracts also permit investment on a fixed basis, at rates determined
by Northwestern Mutual. The Contracts are sold through individuals who,
in addition to being licensed insurance agents of Northwestern Mutual,
are registered representatives of Northwestern Mutual Investment
Services, LLC ("NMIS"), a wholly-owned company of Northwestern Mutual
and a registered broker-dealer under the Securities Exchange Act of
1934.
Under Wisconsin law, the investment operations of each of Account A and
Account C (other than those Contract investments on a fixed basis) are
kept separate from the operations of Northwestern Mutual. Northwestern
Mutual and its creditors cannot reach assets in Account A or Account C
to satisfy non-Contract related obligations until all obligations under
the Contracts have been satisfied.
See Item 6 herein for Account A and Account C historical financial
information regarding results of operations, changes in equity and
total assets. See Item 8 herein for the audited financial statements of
Account A and Account C.
2
NORTHWESTERN MUTUAL
Founded in 1857, Northwestern Mutual is a mutual insurance company
organized under the laws of the State of Wisconsin. Northwestern
Mutual's products consist of a complete range of permanent and term
life insurance, disability income insurance and annuities for the
personal, business, estate planning and pension markets. Mutual funds,
equity and debt securities, long-term care insurance and trust services
are offered and/or sold through subsidiaries. Northwestern Mutual
markets its insurance products and services in all 50 states of the
United States and in the District of Columbia through an exclusive
network of more than 7,900 financial representatives at December 31,
2002 located in more than 350 offices nationwide. At December 31, 2002,
Northwestern Mutual had approximately 4,300 full- and part-time
employees. Northwestern Mutual's website address is
www.northwesternmutual.com.
Northwestern Mutual's principal lines of business are: (i) life
insurance, which provides a full range of individual life insurance
products, including traditional whole life, permanent and term
combination, variable life and term policies to meet the needs of
middle to upper income individuals, small business owners and
professionals, estates and selected large corporations; (ii) disability
income insurance, which provides a complete line of individual and
group products, including individual non-cancelable, guaranteed
renewable loss of earnings, buyout, key person, and short-term and
long-term group coverages, marketed primarily to middle to upper income
individuals, professionals, and small- to medium-sized businesses and
their owners; (iii) investment products and services, which provide
individual variable, fixed and immediate annuities offered in
conjunction with qualified pension plans, retirement plans for
self-employed individuals, individual retirement and personal non-tax
qualified situations, group annuities, retail mutual funds (including
associated funds offered by Mason Street Funds, Inc. and Frank Russell
Investment Company), brokerage services (offered through its subsidiary
Northwestern Mutual Investment Services, LLC) and trust services
(offered through its subsidiary Northwestern Mutual Trust Company),
marketed primarily to middle to upper income individuals, business
owners and professionals; and (iv) long-term care insurance, offered
through its subsidiary Northwestern Long Term Care Insurance Company,
marketed primarily to middle to upper income individuals, small
business owners and professionals. For the years ended December 31,
2002, 2001, and 2000, Northwestern Mutual had (a) total premiums of
$10.1 billion, $9.4 billion and $9.0 billion, respectively, of which
$8.6 billion, $7.9 billion and $7.3 billion, respectively, was
attributable to life insurance, $0.6 billion for each year was
attributable to disability income insurance and $0.9 billion, $0.9
billion and $1.1 billion, respectively, was attributable to annuity
products in the investment products and services line of business; (b)
net income of $158 million, $650 million and $1.8 billion,
respectively, of which $(18) million, $440 million and $1.5 billion,
respectively, was attributable to life insurance, $149 million, $147
million and $0.2 billion, respectively, was attributable to disability
income insurance, $44 million, $74 million and $0.1 billion,
respectively, was attributable to annuity products in the investment
products and services line of business, and $(17) million, $(11)
million and $0.0 billion, respectively, was attributable to long term
care insurance; and (c) total assets of $102.9 billion, $98.4 billion
and $92.1 billion, respectively, of which $82.8 billion, $77.2 billion
and $70.6 billion, respectively, was attributable to life insurance,
$5.9 billion, $5.8 billion and $5.4 billion, respectively, was
attributable to disability income insurance and $14.2 billion, $15.4
billion and $16.1 billion, respectively, was attributable to annuity
products in the investment products and services line of business.
The life insurance industry is mature and highly competitive.
Competitiveness in the life insurance business is affected by various
factors including, but not limited to, product quality, financial
strength and stability, third party ratings, size and competence of
agency force, range of product lines, customer service, and reputation.
Based on total admitted statutory assets at December 31, 2001,
Northwestern Mutual was the 4th largest U.S. domiciled life insurance
company on an individual basis and the 9th largest on a corporate
family basis. During 2002, there were more than 1,000 life insurance
companies doing business in the United States and many of these
companies offer individual life insurance and annuity products similar
to those offered by Northwestern Mutual. In addition, Northwestern
Mutual competes with banks, brokerage firms, investment advisers,
mutual funds and other financial entities for investment and savings
customers. In the individual and group disability markets, Northwestern
Mutual competes with a limited number of major national and regional
companies offering these specialized products. In the long-term care
business, Northwestern Mutual competes primarily with a limited number
of national companies. National banks, with their pre-existing customer
bases for financial services products, may pose increasing competition
in the future to insurers who sell life insurance and annuity products,
including Northwestern Mutual. United States Supreme Court decisions
have expanded
3
the authority of national banks to sell life insurance products and
annuities. In addition, legislation enacted in 1999 to overturn
Depression-era restrictions on bank affiliations, the
Gramm-Leach-Bliley Act (the "Act"), implemented fundamental changes in
the regulation of the financial services industry in the U.S. The Act
eliminated certain barriers to and restrictions on affiliations between
banks, securities firms and insurance companies that were previously
contained in the Glass-Steagall Act of 1933, as amended, and the Bank
Holding Company Act of 1956, as amended. Under the Act, through the use
of two new structures, financial holding companies and financial
subsidiaries, qualifying bank holding companies and state and national
banks are allowed to provide a wide variety of financial services,
including the authority to engage in certain insurance activities
(e.g., the sale and, in the case of qualifying bank holding companies
only, the underwriting of insurance and annuities). As a result of the
Act, among other things, bank holding companies may acquire insurers
and insurance holding companies may acquire banks. Over time, the Act
may change the competitive and regulatory environment in which
Northwestern Mutual and its subsidiaries conduct their businesses and
may result in additional competition in one or more markets in which
they sell their products and services.
Northwestern Mutual, and its insurance subsidiary Northwestern Long
Term Care Insurance Company, are licensed to transact their insurance
business in, and are subject to regulation and supervision by, all 50
states of the United States and the District of Columbia. The extent of
such regulation varies, but most jurisdictions have laws and
regulations governing the financial aspects of insurance companies,
including standards of solvency, reserves, reinsurance, capital
adequacy and the business conduct of insurance companies. In addition,
statutes and regulations usually require the licensing of insurers and
their agents, the approval of policy forms and related materials and,
for certain lines of insurance, the approval of rates. Such statutes
and regulations also prescribe the permitted types and concentration of
investments. The Act reaffirms that the states remain responsible for
regulating the business of insurance. However, subject to certain
exceptions, no state authority can prevent or restrict depository
institutions and their affiliates from affiliating with insurance
companies as permitted under the Act. In addition, certain state laws
and regulations that place restrictions on a depository institution's
insurance sales activities are preempted.
Frank Russell Company ("Russell"), a subsidiary of Northwestern Mutual,
is a global investment services firm providing multi-manager investment
products and services in 35 countries. Together with its subsidiaries,
Russell managed $67.0 billion in assets at December 31, 2002 and
advises clients representing $1.6 trillion worldwide. Frank Russell is
also well known for its family of market indices, including the Russell
2000, which provide complete sets of performance benchmarks for
investors in the United States.
Robert W. Baird & Co. Incorporated ("Baird"), a subsidiary of
Northwestern Mutual, is a registered broker-dealer providing (through
it and its affiliates) asset management, investment banking, wealth
management and private equity services via offices in the United
States, United Kingdom, France, Spain and Germany. Baird serves
individuals, corporations, institutional investors and municipalities
as financial advisor, asset manager, equity research specialist,
investment banker, private equity investor and public finance
specialist. It is a member of the New York Stock Exchange and other
principal exchanges.
NMIS, a wholly-owned company of Northwestern Mutual, is a full-service
registered broker-dealer serving the investment planning and product
needs of individuals and businesses. Through its registered
representatives, NMIS offers mutual funds, variable annuities, variable
life insurance products, stocks and bonds to its customers in more than
60 cities nationwide. NMIS is a member of the National Association of
Securities Dealers, Inc.
See Item 15 herein for the audited consolidated financial statements of
Northwestern Mutual, including footnote 1 thereto which describes
changes to statutory accounting rules required to be adopted effective
January 1, 2001 that affect the comparability of certain financial
information from prior periods.
PURPOSE OF ANNUAL REPORT
This Annual Report on Form 10-K of Northwestern Mutual is filed with
respect to its Account A and Account C. While certain information in
this Form 10-K relates to Northwestern Mutual as a whole, this Form
10-K is intended to provide information with respect to such Account A
and Account C where relevant.
4
ITEM 2. PROPERTIES
Account A and Account C own no physical properties. Northwestern Mutual
owns and occupies all of the space in its home office complex in
Milwaukee, Wisconsin. Northwestern Mutual owns land in Franklin,
Wisconsin on which it has begun construction of an additional office
campus which it will occupy. Until the Franklin Campus is completed,
Northwestern Mutual, as lessee, is occupying temporary space in three
buildings adjacent to its Milwaukee complex. Northwestern Mutual is the
lessee of eight leases covering its real estate regional offices in
locations throughout the United States. Russell and Baird lease their
principal office space located in Tacoma, Washington and Milwaukee,
Wisconsin, respectively. Northwestern Mutual believes that its owned
and leased properties are suitable and adequate for its current
operations.
ITEM 3. LEGAL PROCEEDINGS
Neither Account A nor Account C are parties to any pending legal
proceedings. Northwestern Mutual is subject to various claims and
proceedings, including claims or proceedings related to its
investments, that occur in the ordinary course of its business. Based
on information currently available to Northwestern Mutual, Northwestern
Mutual believes that none of these current claims or proceedings,
either individually or in the aggregate, will have a material adverse
effect on the financial position of Northwestern Mutual.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
As segregated asset accounts, Account A and Account C do not issue
common equity securities. As a mutual life insurance company,
Northwestern Mutual does not issue common equity securities.
The Contracts issued in connection with Account A and Account C, and
interests in those Contracts, are offered on a continuous basis to
Corporate Plans and HR-10 Plans. The Contracts for Corporate Plans are
not registered under the Securities Act of 1933, in reliance on the
exemption provided by Section 3(a)(2) thereof. All of the Contracts are
offered exclusively by financial representatives of the Northwestern
Mutual who are also registered representatives of NMIS.
During 2002, the following aggregate dollar amounts of such
unregistered securities were sold to Corporate Plans, generating the
aggregate commissions stated:
<Table>
<Caption>
ACCOUNT A ACCOUNT C
--------- ---------
AMOUNT SOLD COMMISSIONS AMOUNT SOLD COMMISSIONS
----------------- ----------- --------------- ------------
$ 32,577,196 (A) $ 1,447,332 (B) $ 83,190,071 (A) $ 725,711 (B)
</Table>
- ----------
(A) Reflects premiums paid by Contract holders, dividend additions and
Northwestern Mutual plan contributions, as applicable.
(B) Reflects an estimate of amounts paid to Northwestern Mutual financial
representatives for sales to Corporate Plans based on a pro rata
allocation of Contract sales generating commissions under the Account.
Accumulation units in Account A and Account C represent the interests of
Contract owners. Purchase payments are applied to credit additional accumulation
units based on the accumulation unit value next determined after each payment is
received. Accumulation units are valued as of the close of business on the New
York Stock Exchange on each business day.
5
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected historical financial data for
Account A for the five years in the period ended December 31, 2002. The data
should be read in conjunction with the financial statements and notes thereto of
Account A contained in Item 8 of this Annual Report.
RESULTS OF OPERATIONS FOR ACCOUNT A:
(IN THOUSANDS)
<Table>
<Caption>
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
Investment Income
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Small Cap Growth Stock Portfolio** ................... $ 26 $ 1 $ 379 $ 149 N/A
Dividend Income from Northwestern
Mutual Series Fund, Inc.
T. Rowe Price Small Cap Value Portfolio # ............ 14 1 N/A N/A N/A
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Aggressive Growth Stock Portfolio .................... 61 19,094 13,412 2,871 $ 3,294
Dividend Income from Northwestern
Mutual Series Fund, Inc.
International Growth Stock Portfolio # ............... 3 -- N/A N/A N/A
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Franklin Templeton International Equity Portfolio .... 574 3,729 3,228 6,194 2,855
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Index 400 Stock Portfolio** .......................... 76 97 801 30 N/A
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Growth Stock Portfolio ............................... 324 1,497 1,855 1,225 461
Dividend Income from Northwestern
Mutual Series Fund, Inc.
J.P. Morgan Select Growth and Income Stock
Portfolio ............................................ 170 876 1,774 4,191 294
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Capital Guardian Domestic Equity Portfolio # ......... 20 1 N/A N/A N/A
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Index 500 Stock Portfolio ............................ 1,197 5,168 6,161 3,676 4,267
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Asset Allocation Portfolio # ......................... 45 6 N/A N/A N/A
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Balanced Portfolio ................................... 7,949 19,440 24,058 34,011 19,089
Dividend Income from Northwestern
Mutual Series Fund, Inc.
High Yield Bond Portfolio ............................ 456 529 611 821 951
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Select Bond Portfolio ................................ 1,181 1,257 1,463 2,088 1,768
</Table>
6
<Table>
<Caption>
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Money Market Portfolio ............................... 440 1,067 1,609 1,410 1,254
Dividend Income from Russell Insurance Funds
Multi-Style Equity Fund** ............................ 22 91 134 76 N/A
Dividend Income from Russell Insurance Funds
Aggressive Equity Fund** ............................. -- 3 261 4 N/A
Dividend Income from Russell Insurance Funds
Non-U.S. Fund** ...................................... 41 17 226 37 N/A
Dividend Income from Russell Insurance Funds
Real Estate Securities Fund** ........................ 142 93 43 12 N/A
Dividend Income from Russell Insurance Funds
Core Bond Fund** ..................................... 55 78 50 22 N/A
----------- ----------- ----------- ----------- -----------
Total Dividend Income ............................. 12,796 53,045 56,065 56,817 34,233
Annuity Rate and Expense Guarantees ..................... (6,269) (7,425) (8,884) (8,722) (8,067)
----------- ----------- ----------- ----------- -----------
Net Investment Income ................................... $ 6,527 $ 45,620 $ 47,181 $ 48,095 $ 26,166
=========== =========== =========== =========== ===========
Realized and Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investments ..................... $ (14,549) $ 15,197 $ 56,764 $ 51,300 $ 37,625
Unrealized Appreciation (Depreciation) of
Investments During the Year ........................ (74,854) (124,257) (120,838) 9,270 36,250
----------- ----------- ----------- ----------- -----------
Net Gain (Loss) on Investments .................. (89,403) (109,060) (64,074) 60,570 73,875
----------- ----------- ----------- ----------- -----------
Increase (Decrease) in Equity Derived from Investment
Activity .............................................. $ (82,876) $ (63,440) $ (16,893) $ 108,665 $ 100,041
=========== =========== =========== =========== ===========
</Table>
- ----------
** Became an investment option under the Contracts effective April 30, 1999.
# Became an investment option under the Contracts effective July 31, 2001.
CHANGES IN EQUITY FOR ACCOUNT A:
(IN THOUSANDS)
<Table>
<Caption>
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
Operations
Net Investment Income ................................. $ 6,527 $ 45,620 $ 47,181 $ 48,095 $ 26,166
Net Realized Gain (Loss) .............................. (14,549) 15,197 56,764 51,300 37,625
Net Change in Unrealized Appreciation (Depreciation) .. (74,854) (124,257) (120,838) 9,270 36,250
----------- ----------- ----------- ----------- -----------
Increase (Decrease) in Equity Derived from Investment
Activity .............................................. (82,876) (63,440) (16,893) 108,665 100,041
----------- ----------- ----------- ----------- -----------
Equity Transactions
Contract Owners' Net Payments ......................... 46,958 46,213 54,157 55,489 62,325
Annuity Payments ...................................... (1,186) (1,316) (1,472) (1,469) (1,306)
Surrenders and Other (Net) ............................ (86,526) (83,649) (121,406) (102,935) (80,848)
Transfers from Other Divisions or Sponsor ............. 89,970 83,322 137,543 125,332 95,967
Transfers to Other Divisions or Sponsor ............... (91,980) (84,772) (138,779) (126,511) (98,941)
----------- ----------- ----------- ----------- -----------
Increase (Decrease) in Equity Derived from Equity
Transactions .......................................... (42,764) (40,202) (69,957) (50,094) (22,803)
----------- ----------- ----------- ----------- -----------
Net Increase (Decrease) in Equity ........................ (125,640) (103,642) (86,850) 58,571 77,238
Equity
Beginning of Period ................................... 593,712 697,354 784,204 725,633 648,395
----------- ----------- ----------- ----------- -----------
End of Period ......................................... $ 468,072 $ 593,712 $ 697,354 $ 784,204 $ 725,633
=========== =========== =========== =========== ===========
</Table>
7
TOTAL ASSETS OF ACCOUNT A:
(IN THOUSANDS)
<Table>
<Caption>
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
ASSETS
Investments at Market Value:
Northwestern Mutual Series Fund, Inc.
Small Cap Growth Stock Portfolio ** ............. $ 14,422 $ 15,624 $ 16,293 $ 4,847 N/A
Northwestern Mutual Series Fund, Inc.
T. Rowe Price Small Cap Value Portfolio # ....... 2,692 585 N/A N/A N/A
Northwestern Mutual Series Fund, Inc.
Aggressive Growth Stock Portfolio ............... 51,966 77,633 106,815 104,344 $ 87,973
Northwestern Mutual Series Fund, Inc.
International Growth Stock Portfolio # .......... 598 157 N/A N/A N/A
Northwestern Mutual Series Fund, Inc.
Franklin Templeton International Equity Portfolio 22,529 30,810 40,333 45,439 44,995
Northwestern Mutual Series Fund, Inc.
Index 400 Stock Portfolio ** .................... 8,330 9,168 7,162 2,205 N/A
Northwestern Mutual Series Fund, Inc.
Growth Stock Portfolio .......................... 23,486 32,717 38,037 39,031 26,774
Northwestern Mutual Series Fund, Inc.
J.P. Morgan Select Growth and Income
Stock Portfolio ................................. 13,703 23,058 26,081 35,735 36,440
Northwestern Mutual Series Fund, Inc.
Capital Guardian Domestic Equity Portfolio # ... 1,670 291 N/A N/A N/A
Northwestern Mutual Series Fund, Inc.
Index 500 Stock Portfolio ....................... 69,524 104,943 133,526 169,861 143,376
Northwestern Mutual Series Fund, Inc.
Asset Allocation Portfolio # .................... 2,800 800 N/A N/A N/A
Northwestern Mutual Series Fund, Inc.
Balanced Portfolio .............................. 181,610 229,239 266,410 319,678 325,287
Northwestern Mutual Series Fund, Inc.
High Yield Bond Portfolio ....................... 4,280 5,018 5,135 6,940 9,287
Northwestern Mutual Series Fund, Inc.
Select Bond Portfolio ........................... 31,441 23,983 20,275 22,162 25,970
Northwestern Mutual Series Fund, Inc.
Money Market Portfolio .......................... 26,634 27,159 25,480 28,975 26,910
Russell Insurance Funds
Multi-Style Equity Fund ** ...................... 3,042 4,111 4,097 2,500 N/A
Russell Insurance Funds
Aggressive Equity Fund ** ....................... 2,283 2,947 2,497 1,142 N/A
Russell Insurance Funds
Non-U.S. Fund ** ................................ 2,284 2,861 3,244 1,383 N/A
Russell Insurance Funds
Real Estate Securities Fund ** .................. 3,056 1,820 1,328 332 N/A
Russell Insurance Funds
Core Bond Fund ** ............................... 2,331 1,527 1,186 693 N/A
Due from Northwestern Mutual .......................... 211 8 -- 1,012 22
Due from Sale of Fund Shares .......................... -- 39 665 1,329 1,408
----------- ----------- ----------- ----------- -----------
Total Assets .......................................... $ 468,892 $ 594,498 $ 698,564 $ 787,608 $ 728,442
=========== =========== =========== =========== ===========
</Table>
- ----------
** Became an investment option under the Contracts effective April 30, 1999.
# Became an investment option under the Contracts effective July 31, 2001.
8
The following tables set forth selected historical financial data for
Account C for the five years in the period ended December 31, 2001. The data
should be read in conjunction with the financial statements and notes thereto of
Account C contained in Item 8 of this Annual Report.
RESULTS OF OPERATIONS FOR ACCOUNT C:
(IN THOUSANDS)
<Table>
<Caption>
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
Investment Income
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Small Cap Growth Stock Portfolio ** ............. $ 32 $ 2 $ 99 $ 32 N/A
Dividend Income from Northwestern
Mutual Series Fund, Inc.
T. Rowe Price Small Cap Value Portfolio # ....... 2 -- N/A N/A N/A
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Aggressive Growth Stock Portfolio ............... 90 27,284 20,221 3,671 $ 4,152
Dividend Income from Northwestern
Mutual Series Fund, Inc.
International Growth Stock Portfolio # .......... -- -- N/A N/A N/A
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Franklin Templeton International Equity Portfolio 906 5,914 5,036 8,184 3,732
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Index 400 Stock Portfolio ** .................... 140 194 1,180 6 N/A
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Growth Stock Portfolio .......................... 330 1,614 2,101 1,223 447
Dividend Income from Northwestern
Mutual Series Fund, Inc.
J.P. Morgan Select Growth and Income Stock
Portfolio ....................................... 180 957 2,123 4,566 343
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Capital Guardian Domestic Equity Portfolio # .... 7 -- N/A N/A N/A
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Index 500 Stock Portfolio ....................... 1,468 6,550 8,370 4,675 5,271
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Asset Allocation Portfolio # .................... 24 -- N/A N/A N/A
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Balanced Portfolio .............................. 3,922 9,705 12,909 18,031 9,909
Dividend Income from Northwestern
Mutual Series Fund, Inc.
High Yield Bond Portfolio ....................... 415 487 558 759 883
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Select Bond Portfolio ........................... 863 911 1,093 1,570 1,357
Dividend Income from Northwestern
Mutual Series Fund, Inc.
Money Market Portfolio .......................... 221 523 971 1,015 899
</Table>
9
<Table>
<Caption>
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
Dividend Income from Russell Insurance Funds
Multi-Style Equity Fund ** .................... 7 37 79 48 N/A
Dividend Income from Russell Insurance Funds
Aggressive Equity Fund ** ..................... -- 1 74 1 N/A
Dividend Income from Russell Insurance Funds
Non-U.S. Fund ** .............................. 9 4 61 13 N/A
Dividend Income from Russell Insurance Funds
Real Estate Securities Fund ** ................ 481 290 52 4 N/A
Dividend Income from Russell Insurance Funds
Core Bond Fund ** ............................. 20 48 22 15 N/A
----------- ----------- ----------- ----------- -----------
Total Dividend Income ....................... 9,117 54,521 54,949 43,813 26,993
Annuity Rate and Expense Guarantees .............. (1,432) (2,007) (2,896) (3,444) (3,155)
----------- ----------- ----------- ----------- -----------
Net Investment Income ............................ $ 7,685 $ 52,514 $ 52,053 $ 40,369 $ 23,838
=========== =========== =========== =========== ===========
Realized and Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investments .............. $ (35,241) $ 8,705 $ 54,861 $ 41,106 $ 29,249
Unrealized Appreciation (Depreciation) of
Investments During the Year ................... (58,211) (133,527) (121,850) 36,856 37,108
----------- ----------- ----------- ----------- -----------
Net Gain (Loss) on Investments .............. (93,452) (124,822) (66,989) 77,962 66,357
----------- ----------- ----------- ----------- -----------
Increase (Decrease) in Equity Derived from Investment
Activity ......................................... $ (85,767) $ (72,308) $ (14,936) $ 118,331 $ 90,195
=========== =========== =========== =========== ===========
</Table>
- ----------
** Became an investment option under the Contracts effective April 30, 1999.
# Became an investment option under the Contracts effective July 31, 2001.
CHANGES IN EQUITY FOR ACCOUNT C:
(IN THOUSANDS)
<Table>
<Caption>
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
Operations
Net Investment Income ................................ $ 7,685 $ 52,514 $ 52,053 $ 40,369 $ 23,838
Net Realized Gain (Loss) ............................. (35,241) 8,705 54,861 41,106 29,249
Net Change in Unrealized Appreciation (Depreciation) (58,211) (133,527) (121,850) 36,856 37,108
----------- ----------- ----------- ----------- -----------
Increase (Decrease) in Equity Derived from Investment
Activity ............................................. (85,767) (72,308) (14,936) 118,331 90,195
----------- ----------- ----------- ----------- -----------
Equity Transactions
Contract Owners' Net Payments ........................ 78,994 90,774 103,967 74,900 93,657
Annuity Payments ..................................... (58) (64) (75) (67) (54)
Surrenders and Other (Net) ........................... (160,876) (140,073) (135,735) (119,041) (87,761)
Transfers from Other Divisions or Sponsor ............ 49,213 55,326 91,474 70,710 72,485
Transfers to Other Divisions or Sponsor .............. (50,870) (53,674) (92,576) (69,203) (71,425)
----------- ----------- ----------- ----------- -----------
Increase (Decrease) in Equity Derived from Equity
Transactions ......................................... (83,597) (47,711) (32,945) (42,701) 6,902
----------- ----------- ----------- ----------- -----------
Net Increase (Decrease) in Equity ....................... (169,364) (120,019) (47,881) 75,630 97,097
Equity
Beginning of Period .................................. 552,816 672,835 720,716 645,086 547,989
----------- ----------- ----------- ----------- -----------
End of Period ........................................ $ 383,452 $ 552,816 $ 672,835 $ 720,716 $ 645,086
=========== =========== =========== =========== ===========
</Table>
10
TOTAL ASSETS OF ACCOUNT C:
(IN THOUSANDS)
<Table>
<Caption>
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
ASSETS
Investments at Market Value:
Northwestern Mutual Series Fund, Inc.
Small Cap Growth Stock Portfolio** ................ $ 16,885 $ 21,098 $ 20,038 $ 949 N/A
Northwestern Mutual Series Fund, Inc.
T. Rowe Price Small Cap Value Portfolio # ......... 454 165 N/A N/A N/A
Northwestern Mutual Series Fund, Inc.
Aggressive Growth Stock Portfolio ................. 71,638 112,232 157,369 139,739 $ 112,355
Northwestern Mutual Series Fund, Inc.
International Growth Stock Portfolio # ............ 58 38 N/A N/A N/A
Northwestern Mutual Series Fund, Inc.
Franklin Templeton International Equity Portfolio.. 35,006 48,902 65,489 64,556 59,265
Northwestern Mutual Series Fund, Inc.
Index 400 Stock Portfolio ** ...................... 14,520 16,849 11,399 473 N/A
Northwestern Mutual Series Fund, Inc.
Growth Stock Portfolio ............................ 22,261 33,016 42,696 39,776 27,819
Northwestern Mutual Series Fund, Inc.
J.P. Morgan Select Growth and Income
Stock Portfolio ................................... 13,872 25,473 29,723 41,105 40,354
Northwestern Mutual Series Fund, Inc.
Capital Guardian Domestic Equity Portfolio # ...... 580 211 N/A N/A N/A
Northwestern Mutual Series Fund, Inc.
Index 500 Stock Portfolio ......................... 77,810 131,489 173,398 220,075 183,326
Northwestern Mutual Series Fund, Inc.
Asset Allocation Portfolio # ...................... 1,491 46 N/A N/A N/A
Northwestern Mutual Series Fund, Inc.
Balanced Portfolio ................................ 82,213 115,972 136,009 167,444 172,972
Northwestern Mutual Series Fund, Inc.
High Yield Bond Portfolio ......................... 3,894 4,583 4,239 6,380 8,611
Northwestern Mutual Series Fund, Inc.
Select Bond Portfolio ............................. 19,561 17,379 14,027 17,537 20,755
Northwestern Mutual Series Fund, Inc.
Money Market Portfolio ............................ 10,973 15,185 12,102 19,341 19,629
Russell Insurance Funds
Multi-Style Equity Fund ** ........................ 751 1,403 1,745 1,706 N/A
Russell Insurance Funds
Aggressive Equity Fund ** ......................... 527 710 643 352 N/A
Russell Insurance Funds
Non-U.S. Fund ** .................................. 527 672 818 565 N/A
Russell Insurance Funds
Real Estate Securities Fund ** .................... 9,566 6,600 2,654 102 N/A
Russell Insurance Funds
Core Bond Fund ** ................................. 804 793 486 384 N/A
Due from Northwestern Mutual ............................ 67 37 16 395 356
Due from Sale of Fund Shares ............................ -- 13 195 798 495
Due from Participants ................................... -- -- -- 232 --
----------- ----------- ----------- ----------- -----------
Total Assets ............................................ $ 383,458 $ 552,866 $ 673,046 $ 721,909 $ 645,937
=========== =========== =========== =========== ===========
</Table>
- ----------
** Became an investment option under the Contracts effective April 30, 1999.
# Became an investment option under the Contracts effective July 31, 2001.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY
The assets of Account A and Account C are invested solely in shares of
Northwestern Mutual Series Fund, Inc. ("Series Fund") and the Russell
Insurance Funds ("Russell Funds," and collectively with the Series
Fund, the "Funds"). The Series Fund consists of the Small Cap Growth
Stock Portfolio, T. Rowe Price Small Cap Value Portfolio, Aggressive
Growth Stock Portfolio, International Growth Portfolio, Franklin
Templeton International Equity Portfolio, Index 400 Stock Portfolio,
Growth Stock Portfolio, Large Cap Core Stock Portfolio (formerly known
as the J.P. Morgan Select Growth and Income Stock Portfolio until
January 31, 2003), Capital Guardian Domestic Equity Portfolio, Index
500 Stock Portfolio, Asset Allocation Portfolio, Balanced Portfolio,
High Yield Bond Portfolio, Select Bond Portfolio and the Money Market
Portfolio. The Russell Funds consist of the Multi-Style Equity Fund,
Aggressive Equity Fund, Non-U.S. Fund, Real Estate Securities Fund and
Core Bond Fund. The Funds are open-end investment companies registered
under the Investment Company Act of 1940. In order to pay annuity
benefits and expenses, the Accounts redeem shares in the Funds.
CAPITAL RESOURCES
Separate Accounts A and C have no material commitments for capital
expenditures as of December 31, 2002, the end of the most recent fiscal
year. All payments from Contract owners of Account A and Account C,
less any sales load or installation fee, are invested in shares of the
Funds. The capital resources of Account A and Account C are the equity
in the respective Accounts. This consists of payments from the Contract
owners, plus unrealized and realized appreciation on the investment of
these payments, plus investment income received from the Funds, minus
payment of annuity benefits and expenses.
RESULTS OF OPERATIONS
Accumulation units in Account A and Account C represent the interests
of Contract owners. The value of an accumulation unit in each division
varies with the investment experience of the division, which in turn is
determined by the investment experience of the corresponding portfolio
or fund. Set forth below for each of Account A and Account C are
accumulation unit values at December 31, 2002, 2001, and 2000 for each
division, and the percentage change in such values from year to year.
12
ACCOUNT A
ACCUMULATION UNIT VALUES
CONTRACTS ISSUED PRIOR TO DECEMBER 17, 1981:
<Table>
<Caption>
DIVISION 12/31/02 % CHANGE 12/31/01 % CHANGE 12/31/00*
- -------- ----------- -------- --------- -------- ------------
Small Cap Growth Stock........................... $ 1.516823 -19.03% $ 1.873388 -4.49% $ 1.961375
T. Rowe Price Small Cap Value # ................. 0.950636 -6.28 1.014387 1.44 1.000000
Aggressive Growth Stock ......................... 3.711325 -21.74 4.742335 -20.48 5.963354
International Growth Stock # .................... 0.785836 -12.99 0.903153 -9.68 1.000000
Franklin Templeton International Equity ......... 1.636881 -18.02 1.996677 -14.64 2.339241
Index 400 Stock ................................. 1.092338 -15.18 1.287807 -1.40 1.306094
Growth Stock .................................... 2.006974 -21.42 2.554121 -14.86 2.999890
J.P. Morgan Select Growth and Income Stock ...... 1.566688 -28.73 2.198364 -8.46 2.401649
Capital Guardian Domestic Equity # .............. 0.762191 -21.83 0.975051 -2.49 1.000000
Index 500 Stock ................................. 3.089894 -22.65 3.994853 -12.54 4.567635
Asset Allocation # .............................. 0.869281 -10.93 0.975908 -2.41 1.000000
Balanced ........................................ 7.112654 -8.23 7.750204 -3.88 8.062822
High Yield Bond ................................. 1.487426 -3.62 1.543249 4.24 1.480422
Select Bond ..................................... 10.108841 11.25 9.086342 9.54 8.294952
Money Market .................................... 3.030949 0.90 3.004024 3.14 2.912624
Russell Multi-Style Equity ...................... 0.605230 -23.76 0.793888 -14.85 0.932346
Russell Aggressive Equity ....................... 0.847132 -19.66 1.054435 -3.10 1.088117
Russell Non-U.S ................................. 0.690333 -15.78 0.819680 -22.61 1.059216
Russell Real Estate Securities .................. 1.285091 3.03 1.247315 7.03 1.165389
Russell Core Bond ............................... 1.240286 8.03 1.148123 6.60 1.077032
</Table>
- ----------
# Became an investment option under the Contracts effective July 31, 2001.
* Includes accumulation unit values at inception date in 2001 for
portfolios becoming effective after December 31, 2000.
ACCUMULATION UNIT VALUES
CONTRACTS ISSUED AFTER DECEMBER 16, 1981 AND PRIOR TO MARCH 31, 1995:
<Table>
<Caption>
DIVISION 12/31/02 % CHANGE 12/31/01 % CHANGE 12/31/00*
- -------- ----------- -------- ---------- -------- ------------
Small Cap Growth Stock........................... $ 1.489185 -19.44% $ 1.848493 -4.97% $ 1.945087
T. Rowe Price Small Cap Value # ................. 0.943905 -6.75 1.012260 1.23 1.000000
Aggressive Growth Stock ......................... 3.494085 -22.13 4.487184 -20.88 5.671037
International Growth Stock # .................... 0.780276 -13.42 0.901258 -9.87 1.000000
Franklin Templeton International Equity ......... 1.559571 -18.43 1.911919 -15.07 2.251266
Index 400 Stock ................................. 1.072428 -15.60 1.270690 -1.90 1.295242
Growth Stock .................................... 1.921805 -21.81 2.458020 -15.29 2.901600
J.P. Morgan Select Growth and Income Stock ...... 1.500218 -29.09 2.115675 -8.92 2.322995
Capital Guardian Domestic Equity # .............. 0.756787 -22.22 0.973004 -2.70 1.000000
Index 500 Stock ................................. 2.909123 -23.04 3.780024 -12.98 4.343830
Asset Allocation # .............................. 0.863125 -11.37 0.973862 -2.61 1.000000
Balanced ........................................ 6.403383 -8.68 7.012362 -4.36 7.332002
High Yield Bond ................................. 1.424293 -4.10 1.485164 3.72 1.431888
Select Bond ..................................... 9.098961 10.70 8.219594 8.99 7.541503
Money Market .................................... 2.728924 0.39 2.718250 2.62 2.648821
Russell Multi-Style Equity ...................... 0.594202 -24.14 0.783335 -15.28 0.924598
Russell Aggressive Equity ....................... 0.831686 -20.06 1.040412 -3.58 1.079072
Russell Non-U.S ................................. 0.677755 -16.20 0.808779 -23.00 1.050412
Russell Real Estate Securities .................. 1.261665 2.51 1.230726 6.49 1.155691
Russell Core Bond ............................... 1.217720 7.49 1.132872 6.07 1.068073
</Table>
- ----------
# Became an investment option under the Contracts effective July 31, 2001
* Includes accumulation unit values at inception date in 2001 for
portfolios becoming effective after December 31, 2000.
13
ACCUMULATION UNIT VALUES
CONTRACTS ISSUED ON OR AFTER MARCH 31, 1995 AND PRIOR TO MARCH 31, 2000 - FRONT
LOAD VERSION:
<Table>
<Caption>
DIVISION 12/31/02 % CHANGE 12/31/01 % CHANGE 12/31/00*
- -------- ----------- -------- ---------- -------- ------------
Small Cap Growth Stock........................... $ 1.536295 -18.75% $ 1.890848 -4.15% $ 1.972747
T. Rowe Price Small Cap Value # ................. 0.955324 -5.96 1.015860 1.59 1.000000
Aggressive Growth Stock ......................... 1.764232 -21.47 2.246524 -20.20 2.815081
International Growth Stock # .................... 0.789715 -12.69 0.904464 -9.55 1.000000
Franklin Templeton International Equity ......... 1.367662 -17.73 1.662501 -14.35 1.940943
Index 400 Stock ................................. 1.106344 -14.88 1.299809 -1.06 1.313674
Growth Stock .................................... 1.896210 -21.15 2.404787 -14.56 2.814641
J. P. Morgan Select Growth and Income Stock ..... 1.479747 -28.49 2.069175 -8.14 2.252648
Capital Guardian Domestic Equity #............... 0.765966 -21.56 0.976476 -2.35 1.000000
Index 500 Stock ................................. 1.936439 -22.38 2.494890 -12.23 2.842665
Asset Allocation # .............................. 0.873571 -10.62 0.977328 -2.27 1.000000
Balanced ........................................ 1.870656 -7.91 2.031286 -3.54 2.105871
High Yield Bond ................................. 1.425787 -3.28 1.474181 4.61 1.409248
Select Bond ..................................... 1.793220 11.64 1.606263 9.92 1.461268
Money Market .................................... 1.397113 1.25 1.379910 3.50 1.333271
Russell Multi-Style Equity ...................... 0.613006 -23.50 0.801293 -14.55 0.937760
Russell Aggressive Equity ....................... 0.857996 -19.38 1.064253 -2.76 1.094433
Russell Non-U.S ................................. 0.699179 -15.49 0.827309 -22.34 1.065355
Russell Real Estate Securities .................. 1.301549 3.39 1.258915 7.40 1.172137
Russell Core Bond ............................... 1.256188 8.40 1.158815 6.97 1.083276
</Table>
- ----------
# Became an investment option under the Contracts effective July 31, 2001.
* Includes accumulation unit values at inception date in 2001 for
portfolios becoming effective after December 31, 2000.
ACCUMULATION UNIT VALUES
CONTRACTS ISSUED ON OR AFTER MARCH 31, 1995 AND PRIOR TO MARCH 31, 2000 - BACK
LOAD VERSION:
<Table>
<Caption>
DIVISION 12/31/02 % CHANGE 12/31/01 % CHANGE 12/31/00*
- -------- ----------- -------- ---------- -------- ------------
Small Cap Growth Stock........................... $ 1.489185 -19.44% $ 1.848493 -4.97% $ 1.945087
T. Rowe Price Small Cap Value # ................. 0.943905 -6.75 1.012260 1.23 1.000000
Aggressive Growth Stock ......................... 3.494085 -22.13 4.487184 -20.88 5.671037
International Growth Stock # .................... 0.780276 -13.42 0.901258 -9.87 1.000000
Franklin Templeton International Equity ......... 1.559571 -18.43 1.911919 -15.07 2.251266
Index 400 Stock ................................. 1.072428 -15.60 1.270690 -1.90 1.295242
Growth Stock .................................... 1.921805 -21.81 2.458020 -15.29 2.901600
J.P. Morgan Select Growth and Income Stock ...... 1.500218 -29.09 2.115675 -8.92 2.322995
Capital Guardian Domestic Equity # .............. 0.756787 -22.22 0.973004 -2.70 1.000000
Index 500 Stock ................................. 2.909123 -23.04 3.780024 -12.98 4.343830
Asset Allocation # .............................. 0.863125 -11.37 0.973862 -2.61 1.000000
Balanced ........................................ 6.403383 -8.68 7.012362 -4.36 7.332002
High Yield Bond ................................. 1.424293 -4.10 1.485164 3.72 1.431888
Select Bond ..................................... 9.098961 10.70 8.219594 8.99 7.541503
Money Market .................................... 2.728924 0.39 2.718250 2.62 2.648821
Russell Multi-Style Equity ...................... 0.594202 -24.14 0.783335 -15.28 0.924598
Russell Aggressive Equity ....................... 0.831686 -20.06 1.040412 -3.58 1.079072
Russell Non-U.S ................................. 0.677755 -16.20 0.808779 -23.00 1.050412
Russell Real Estate Securities .................. 1.261665 2.51 1.230726 6.49 1.155691
Russell Core Bond ............................... 1.217720 7.49 1.132872 6.07 1.068073
</Table>
- ----------
# Became an investment option under the Contract effective July 31, 2001.
* Includes accumulation unit values at inception date in 2001 for
portfolios becoming effective after December 31, 2000.
14
ACCUMULATION UNIT VALUES
CONTRACTS ISSUED ON OR AFTER MARCH 31, 2000 - FRONT LOAD VERSION:
<Table>
<Caption>
DIVISION 12/31/02 % CHANGE 12/31/01 % CHANGE 12/31/00*
- -------- ----------- -------- ---------- -------- ------------
Small Cap Growth Stock........................... $ 0.702869 -18.83% $ 0.865935 -4.25% $ 0.904342
T. Rowe Price Small Cap Value # ................. 0.953992 -6.05 1.015445 1.54 1.000000
Aggressive Growth Stock ......................... 0.564112 -21.55 0.719033 -20.28 0.901909
International Growth Stock # .................... 0.788618 -12.77 0.904093 -9.59 1.000000
Franklin Templeton International Equity ......... 0.700185 -17.81 0.851962 -14.43 0.995643
Index 400 Stock ................................. 0.870423 -14.97 1.023646 -1.15 1.035589
Growth Stock .................................... 0.616498 -21.23 0.782628 -14.65 0.916924
J.P. Morgan Select Growth and Income Stock....... 0.581563 -28.56 0.814020 -8.24 0.887072
Capital Guardian Domestic Equity # .............. 0.764893 -21.64 0.976072 -2.39 1.000000
Index 500 Stock ................................. 0.604035 -22.46 0.779001 -12.32 0.888477
Asset Allocation # .............................. 0.872356 -10.70 0.976926 -2.31 1.000000
Balanced ........................................ 0.862735 -8.00 0.937735 -3.64 0.973123
High Yield Bond ................................. 0.972766 -3.38 1.006773 4.50 0.963375
Select Bond ..................................... 1.321394 11.53 1.184790 9.81 1.078901
Money Market .................................... 1.092171 1.15 1.079788 3.40 1.044325
Russell Multi-Style Equity ...................... 0.574187 -23.57 0.751294 -14.64 0.880119
Russell Aggressive Equity ....................... 0.727980 -19.46 0.903873 -2.85 0.930436
Russell Non-U.S ................................. 0.557227 -15.57 0.659991 -22.42 0.850723
Russell Real Estate Securities .................. 1.375137 3.28 1.331406 7.30 1.240862
Russell Core Bond ............................... 1.243794 8.30 1.148513 6.87 1.074705
</Table>
- ----------
# Became an investment option under the Contracts effective July 31, 2001.
* Includes accumulation unit values at inception date in 2001 for
portfolios becoming effective after December 31, 2000.
ACCUMULATION UNIT VALUES
CONTRACTS ISSUED ON OR AFTER MARCH 31, 2000 - BACK LOAD VERSION:
<Table>
<Caption>
DIVISION 12/31/02 % CHANGE 12/31/01 % CHANGE 12/31/00*
- -------- ----------- -------- ---------- -------- ------------
Small Cap Growth Stock........................... $ 1.489185 -19.44% $ 1.848493 -4.97% $ 1.945087
T. Rowe Price Small Cap Value # ................. 0.943905 -6.75 1.012260 1.23 1.000000
Aggressive Growth Stock ......................... 3.494085 -22.13 4.487184 -20.88 5.671037
International Growth Stock # .................... 0.780276 -13.42 0.901258 -9.87 1.000000
Franklin Templeton International Equity ......... 1.559571 -18.43 1.911919 -15.07 2.251266
Index 400 Stock ................................. 1.072428 -15.60 1.270690 -1.90 1.295242
Growth Stock .................................... 1.921805 -21.81 2.458020 -15.29 2.901600
J.P. Morgan Select Growth and Income Stock....... 1.500218 -29.09 2.115675 -8.92 2.322995
Capital Guardian Domestic Equity # .............. 0.756787 -22.22 0.973004 -2.70 1.000000
Index 500 Stock ................................. 2.909123 -23.04 3.780024 -12.98 4.343830
Asset Allocation # .............................. 0.863125 -11.37 0.973862 -2.61 1.000000
Balanced ........................................ 6.403383 -8.68 7.012362 -4.36 7.332002
High Yield Bond ................................. 1.424293 -4.10 1.485164 3.72 1.431888
Select Bond ..................................... 9.098961 10.70 8.219594 8.99 7.541503
Money Market .................................... 2.728924 0.39 2.718250 2.62 2.648821
Russell Multi-Style Equity ...................... 0.594202 -24.14 0.783335 -15.28 0.924598
Russell Aggressive Equity ....................... 0.831686 -20.06 1.040412 -3.58 1.079072
Russell Non-U.S ................................. 0.677755 -16.20 0.808779 -23.00 1.050412
Russell Real Estate Securities .................. 1.261665 2.51 1.230726 6.49 1.155691
Russell Core Bond ............................... 1.217720 7.49 1.132872 6.07 1.068073
</Table>
- ----------
# Became an investment option under the Contracts effective July 31, 2001.
* Includes accumulation unit values at inception date in 2001 for
portfolios becoming effective after December 31, 2000.
15
TOTAL EQUITY:
(IN THOUSANDS)
<Table>
<Caption>
12/31/02 12/31/01 12/31/00
-------- -------- --------
$468,072 $593,712 $697,354
</Table>
The decline in 2002's Total Equity was attributable primarily to
investment activities within the Account: the net change in unrealized
depreciation of $74,854 led to a decrease in equity derived from investment
activities of $82,876 for the year ended December 31, 2002. The decline in
2001's Total Equity was also attributable primarily to investment activities
within the Account: the net change in unrealized depreciation of $124,257 led to
a decrease in equity derived from investment activities of $63,440 for the year
ended December 31, 2001.
ACCOUNT C
ACCUMULATION UNIT VALUES
CONTRACTS ISSUED PRIOR TO DECEMBER 17, 1981 OR BETWEEN APRIL 30, 1984 AND
DECEMBER 31, 1991:
<Table>
<Caption>
DIVISION 12/31/02 % CHANGE 12/31/01 % CHANGE 12/31/00*
- -------- ----------- -------- ---------- -------- ------------
Small Cap Growth Stock........................... $ 15.591407 -18.42% $19.112629 -3.76% $ 19.859931
T. Rowe Price Small Cap Value # ................. 9.607906 -5.58 10.175772 1.76 10.000000
Aggressive Growth Stock ......................... 38.441232 -21.15 48.753408 -19.87 60.845203
International Growth Stock # .................... 7.942434 -12.34 9.060000 -9.40 10.000000
Franklin Templeton International Equity ......... 1.759773 -17.40 2.130553 -14.00 2.477334
Index 400 Stock ................................. 11.227976 -14.54 13.138452 -0.65 13.224995
Growth Stock .................................... 21.414901 -20.83 27.049526 -14.22 31.531943
J.P. Morgan Select Growth and Income Stock ...... 16.717038 -28.20 23.281928 -7.77 25.243989
Capital Guardian Domestic Equity # .............. 7.703469 -21.24 9.781208 -2.19 10.000000
Index 500 Stock ................................. 35.246385 -22.07 45.228886 -11.88 51.325633
Asset Allocation # .............................. 8.785751 -10.26 9.789803 -2.10 10.000000
Balanced ........................................ 84.486469 -7.54 91.372736 -3.15 94.345469
High Yield Bond ................................. 15.870922 -2.89 16.343831 5.03 15.560950
Select Bond ..................................... 121.279762 12.09 108.200259 10.37 98.036463
Money Market .................................... 34.132616 1.65 33.577318 3.92 32.311690
Russell Multi-Style Equity ...................... 6.221208 -23.19 8.099453 -14.21 9.440627
Russell Aggressive Equity ....................... 8.707578 -19.06 10.757522 -2.36 11.017913
Russell Non-U.S ................................. 7.095865 -15.15 8.362558 -22.03 10.725190
Russell Real Estate Securities .................. 13.208871 3.80 12.725061 7.84 11.800164
Russell Core Bond ............................... 12.748590 8.84 11.713217 7.41 10.905549
</Table>
- ----------
# Became an investment option under the Contracts effective July 31, 2001.
* Includes accumulation unit values at inception date in 2001 for
portfolios becoming effective after December 31, 2000.
16
ACCUMULATION UNIT VALUES
CONTRACTS ISSUED AFTER DECEMBER 16, 1981 AND PRIOR TO MAY 1, 1984:
<Table>
<Caption>
DIVISION 12/31/02 % CHANGE 12/31/01 % CHANGE 12/31/00*
- -------- ----------- -------- ---------- -------- ------------
Small Cap Growth Stock........................... $ 15.307344 -18.83% $18.858687 -4.25% $ 19.695066
T. Rowe Price Small Cap Value # ................. 9.539874 -6.05 10.154423 1.54 10.000000
Aggressive Growth Stock ......................... 36.213065 -21.55 46.158193 -20.28 57.897540
International Growth Stock # .................... 7.886164 -12.77 9.040958 -9.59 10.000000
Franklin Templeton International Equity ......... 1.676652 -17.82 2.040110 -14.43 2.384172
Index 400 Stock ................................. 11.023428 -14.97 12.963870 -1.15 13.115131
Growth Stock .................................... 20.506308 -21.23 26.031963 -14.65 30.498976
J.P. Morgan Select Growth and Income Stock ...... 16.007652 -28.56 22.405970 -8.24 24.416867
Capital Guardian Domestic Equity # .............. 7.648889 -21.64 9.760679 -2.39 10.000000
Index 500 Stock ................................. 33.200274 -22.46 42.817258 -12.32 48.834231
Asset Allocation # .............................. 8.723560 -10.70 9.769272 -2.31 10.000000
Balanced ........................................ 76.084739 -8.00 82.699005 -3.64 85.820221
High Yield Bond ................................. 15.197603 -3.38 15.728914 4.50 15.050970
Select Bond ..................................... 109.16634 11.53 97.881219 9.81 89.133511
Money Market .................................... 30.774871 1.15 30.425952 3.40 29.426661
Russell Multi-Style Equity ...................... 6.107844 -23.57 7.991801 -14.64 9.362193
Russell Aggressive Equity ....................... 8.548899 -19.46 10.614527 -2.85 10.926333
Russell Non-U.S ................................. 6.966578 -15.57 8.251395 -22.42 10.636093
Russell Real Estate Securities .................. 12.968435 3.28 12.556055 7.30 11.702144
Russell Core Bond ............................... 12.516564 8.30 11.557668 6.87 10.814951
</Table>
- ----------
# Became an investment option under the Contracts effective July 31, 2001.
* Includes accumulation unit values at inception date in 2001 for
portfolios becoming effective after December 31, 2000.
ACCUMULATION UNIT VALUES
CONTRACTS ISSUED AFTER DECEMBER 31, 1991 - FRONT LOAD VERSION:
<Table>
<Caption>
DIVISION 12/31/02 % CHANGE 12/31/01 % CHANGE 12/31/00*
- -------- ----------- -------- --------- -------- ------------
Small Cap Growth Stock........................... $ 1.522337 -18.95% $ 1.878336 -4.39% $ 1.964602
T. Rowe Price Small Cap Value # ................. 0.951956 -6.19 1.014805 1.48 1.000000
Aggressive Growth Stock ......................... 2.360410 -21.66 3.013165 -20.40 3.785207
International Growth Stock # .................... 0.786940 -12.90 0.903525 -9.65 1.000000
Franklin Templeton International Equity ......... 1.652585 -17.94 2.013838 -14.56 2.357007
Index 400 Stock ................................. 1.096297 -15.10 1.291211 -1.30 1.308249
Growth Stock .................................... 2.024216 -21.34 2.573522 -14.77 3.019678
J.P. Morgan Select Growth and Income Stock ...... 1.580140 -28.66 2.215050 -8.37 2.417488
Capital Guardian Domestic Equity # .............. 0.763266 -21.75 0.975455 -2.45 1.000000
Index 500 Stock ................................. 2.420098 -22.58 3.125796 -12.45 3.570426
Asset Allocation # .............................. 0.870499 -10.84 0.976312 -2.37 1.000000
Balanced ........................................ 2.209502 -8.14 2.405185 -3.78 2.499718
High Yield Bond ................................. 1.500210 -3.52 1.554978 4.35 1.490196
Select Bond ..................................... 2.084184 11.36 1.871532 9.65 1.706832
Money Market .................................... 1.504462 1.00 1.489628 3.24 1.442872
Russell Multi-Style Equity ...................... 0.607438 -23.69 0.795993 -14.77 0.933887
Russell Aggressive Equity ....................... 0.850202 -19.58 1.057215 -3.00 1.089907
Russell Non-U.S ................................. 0.692822 -15.70 0.821829 -22.54 1.060950
Russell Real Estate Securities .................. 1.289736 3.13 1.250590 7.14 1.167301
Russell Core Bond ............................... 1.244772 8.13 1.151142 6.71 1.078791
</Table>
- ----------
# Became an investment option under the Contracts effective July 31, 2001.
* Includes accumulation unit values at inception date in 2001 for
portfolios becoming effective after December 31, 2000.
17
ACCUMULATION UNIT VALUES
CONTRACTS ISSUED AFTER DECEMBER 31, 1991 - SIMPLIFIED LOAD VERSION:
<Table>
<Caption>
DIVISION 12/31/02 % CHANGE 12/31/01 % CHANGE 12/31/00*
- -------- ----------- -------- ---------- -------- ------------
Small Cap Growth Stock........................... $ 1.489185 -19.44% $ 1.848493 -4.97% $ 1.945087
T. Rowe Price Small Cap Value # ................. 0.943905 -6.75 1.012260 1.23 1.000000
Aggressive Growth Stock ......................... 3.506913 -22.13 4.503663 -20.88 5.691856
International Growth Stock # .................... 0.780276 -13.42 0.901258 -9.87 1.000000
Franklin Templeton International Equity ......... 1.559571 -18.43 1.911919 -15.07 2.251266
Index 400 Stock ................................. 1.072428 -15.60 1.270690 -1.90 1.295242
Growth Stock .................................... 1.921805 -21.81 2.458020 -15.29 2.901600
J.P. Morgan Select Growth and Income Stock ...... 1.500218 -29.09 2.115675 -8.92 2.322995
Capital Guardian Domestic Equity # .............. 0.756787 -22.22 0.973004 -2.70 1.000000
Index 500 Stock ................................. 2.968449 -23.04 3.857114 -12.98 4.432423
Asset Allocation # .............................. 0.863125 -11.37 0.973862 -2.61 1.000000
Balanced ........................................ 6.435011 -8.68 7.047000 -4.36 7.368231
High Yield Bond ................................. 1.424293 -4.10 1.485164 3.72 1.431888
Select Bond ..................................... 9.187656 10.70 8.299723 8.99 7.615016
Money Market .................................... 2.734853 0.39 2.724154 2.62 2.654580
Russell Multi-Style Equity ...................... 0.594202 -24.14 0.783335 -15.28 0.924598
Russell Aggressive Equity ....................... 0.831686 -20.06 1.040412 -3.58 1.079072
Russell Non-U.S ................................. 0.677755 -16.20 0.808779 -23.00 1.050412
Russell Real Estate Securities................... 1.261665 2.51 1.230726 6.49 1.155691
Russell Core Bond ............................... 1.217720 7.49 1.132872 6.07 1.068073
</Table>
- ----------
# Became an investment option under the Contracts effective July 31, 2001.
* Includes accumulation unit values at inception date in 2001 for
portfolios becoming effective after December 31, 2000.
TOTAL EQUITY:
(IN THOUSANDS)
<Table>
<Caption>
12/31/02 12/31/01 12/31/00
-------- -------- --------
$383,452 $552,816 $672,835
</Table>
The changes in 2002's Total Equity was attributable primarily to
investment activities within the Account: the net change in unrealized
depreciation of $58,211 led to a decrease in equity derived from
investment activities of $85,767 for the year ended December 31, 2002.
The change in 2001's Total Equity was also attributable primarily to
investment activities within the Account: the net change in unrealized
depreciation of $133,527 led to a decrease in equity derived from
investment activities of $72,308 for the year ended December 31, 2001.
CRITICAL ACCOUNTING POLICIES
Dividend income and distributions of net realized gains received from
the Funds are recorded on the ex-date of the dividends. Transactions in
the Funds' shares are accounted for on the trade date. Annuity reserves
are based on published annuity tables. A deduction for annuity rate and
expense guarantees is determined daily. Under current law, no federal
income taxes are payable with respect to Accounts A and C. Accordingly,
no provisions for any such liability has been made.
18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The assets of Account A and Account C consist entirely of shares of the
15 portfolios of the Series Fund and 5 portfolios of the Russell Funds,
together with current amounts due from the sale of Series Fund and
Russell Funds shares and due from Northwestern Mutual. The liabilities
of each of Account A and Account C consist of current amounts due to
Contract owners, due to Northwestern Mutual and due on purchase of
Series Fund and Russell Funds shares. Neither of the Accounts enters
into any market risk sensitive instruments, either for trading purposes
or for purposes other than trading purposes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NML VARIABLE ANNUITY ACCOUNT A
STATEMENTS OF ASSETS AND LIABILITIES
(IN THOUSANDS)
<Table>
<Caption>
DECEMBER 31
--------------------------
2002 2001
------------ -----------
ASSETS
Investments at market value:
Northwestern Mutual Series Fund, Inc.
Small Cap Growth Stock
2002: 9,912 shares (cost $18,759).......... $ 14,422
2001: 8,748 shares (cost $17,350).......... $ 15,624
T. Rowe Price Small Cap Value #
2002: 2,825 shares (cost $2,981)........... 2,692
2001: 576 shares (cost $543)............... 585
Aggressive Growth Stock
2002: 23,805 shares (cost $81,640)......... 51,966
2001: 27,500 shares (cost $96,370)......... 77,633
International Growth Stock #
2002: 758 shares (cost $666)............... 598
2001: 173 shares (cost $165)............... 157
Franklin Templeton International Equity
2002: 22,001 shares (cost $34,441)......... 22,529
2001: 24,394 shares (cost $39,250)......... 30,810
Index 400 Stock
2002: 8,750 shares (cost $9,843)........... 8,330
2001: 8,172 shares (cost $9,465)........... 9,168
Growth Stock
2002: 14,790 shares (cost $33,032)......... 23,486
2001: 16,139 shares (cost $37,094)......... 32,717
J.P. Morgan Select Growth and Income Stock
2002: 15,786 shares (cost $22,115)......... 13,703
2001: 18,915 shares (cost $27,776)......... 23,058
Capital Guardian Domestic Equity #
2002: 2,203 shares (cost $1,904)........... 1,670
2001: 298 shares (cost $277)............... 291
Index 500 Stock
2002: 32,083 shares (cost $81,840)......... 69,524
2001: 36,502 shares (cost $93,314)......... 104,943
Asset Allocation #
2002: 3,263 shares (cost $3,031)........... 2,800
2001: 822 shares (cost $787)............... 800
Balanced
2002: 111,967 shares (cost $194,101)....... 181,610
2001: 125,956 shares (cost $218,603)....... 229,239
</Table>
19
<Table>
<Caption>
December 31
--------------------------
2002 2001
------------ -----------
High Yield Bond
2002: 7,602 shares (cost $5,620)........................................... 4,280
2001: 7,733 shares (cost $6,179)........................................... 5,018
Select Bond
2002: 24,737 shares (cost $29,435)......................................... 31,441
2001: 19,936 shares (cost $23,404)......................................... 23,983
Money Market
2002: 26,634 shares (cost $26,634)......................................... 26,634
2001: 27,159 shares (cost $27,159)......................................... 27,159
Russell Insurance Funds
Multi Style Equity
2002: 336 shares (cost $4,489)............................................. 3,042
2001: 341 shares (cost $5,063)............................................. 4,111
Aggressive Equity
2002: 247 shares (cost $2,928)............................................. 2,283
2001: 258 shares (cost $3,182)............................................. 2,947
Non-U.S
2002: 317 shares (cost $3,341)............................................. 2,284
2001: 328 shares (cost $3,838)............................................. 2,861
Real Estate Securities
2002: 291 shares (cost $3,120)............................................. 3,056
2001: 169 shares (cost $1,794)............................................. 1,820
Core Bond
2002: 224 shares (cost $2,275)............................................. 2,331
2001: 151 shares (cost $1,497)............................................. 1,527
Due from Sales of Fund Shares..................................................... -- 39
Due from Northwestern Mutual Life Insurance Company............................... 211 8
------------ -----------
Total Assets............................................................... $ 468,892 $ 594,498
============ ===========
LIABILITIES AND EQUITY
LIABILITIES
Due to Participants ........................................................... $ 597 739
Due to Northwestern Mutual Life Insurance Company.............................. 223 39
Due on Purchase of Fund Shares................................................. -- 8
------------ -----------
Total Liabilities.......................................................... 820 786
------------ -----------
EQUITY
Group Variable Annuity Contracts Issued:
Before December 17, 1981:...................................................... 35,373 46,841
After December 16, 1981 and Prior to March 31, 1995:........................... 320,815 421,383
On or After March 31, 1995 and Prior to March 31, 2000 - Front Load Version.... 15,937 96,699
On or After March 31, 1995 and Prior to March 31, 2000 - Back Load Version..... 79,380 20,123
On or After March 31, 2000 - Front Load Version:............................... 2,529 6,604
On or After March 31, 2000 - Back Load Version................................. 14,038 2,062
------------ -----------
Total Equity............................................................... 468,072 593,712
------------ -----------
Total Liabilities and Equity............................................... $ 468,892 $ 594,498
============ ===========
</Table>
- ----------
# The initial investment was made July 31, 2001.
The Accompanying Notes are an Integral Part of the Financial Statements.
20
NML VARIABLE ANNUITY ACCOUNT A
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<Table>
<Caption>
COMBINED SMALL CAP GROWTH STOCK DIVISION
---------------------------------------- ---------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000 2002 2001 2000
----------- ----------- ----------- ----------- ----------- -----------
Investment Income
Dividend Income ............................ $ 12,796 $ 53,045 $ 56,065 $ 26 $ 1 $ 379
Annuity Rate and Expense Guarantees ........ (6,269) (7,425) (8,884) (198) (179) (153)
----------- ----------- ----------- ----------- ----------- -----------
Net Investment Income (Loss) .................. 6,527 45,620 47,181 (172) (178) 226
----------- ----------- ----------- ----------- ----------- -----------
Realized and Unrealized Gain (Loss) on Investments
Realized Gain (Loss) on Investments ........ (14,549) 15,197 56,764 (785) (343) 827
Unrealized Appreciation (Depreciation)
During the Year .......................... (74,854) (124,257) (120,838) (2,610) (338) (1,850)
----------- ----------- ----------- ----------- ----------- -----------
Net Gain (Loss) on Investments ................ (89,403) (109,060) (64,074) (3,395) (681) (681)
----------- ----------- ----------- ----------- ----------- -----------
Increase (Decrease) in Equity
Derived from Investment Activity ........... $ (82,876) $ (63,440) $ (16,893) $ (3,567) $ (859) $ (797)
=========== =========== =========== =========== =========== ===========
</Table>
<Table>
<Caption>
T. ROWE PRICE
SMALL CAP VALUE DIVISION # AGGRESSIVE GROWTH STOCK DIVISION
-------------------------- -----------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2002 2001 2000
----------- ----------- ----------- ----------- -----------
Investment Income
Dividend Income ............................... $ 14 $ 1 $ 61 $ 19,094 $ 13,412
Annuity Rate and Expense Guarantees ........... (26) (1) (766) (1,021) (1,395)
----------- ----------- ----------- ----------- -----------
Net Investment Income (Loss) ..................... (12) -- (705) 18,073 12,017
----------- ----------- ----------- ----------- -----------
Realized and Unrealized Gain (Loss) on Investments
Realized Gain (Loss) on Investments ........... (73) -- (4,414) 906 11,257
Unrealized Appreciation (Depreciation)
During the Year ............................ (329) 41 (10,937) (40,892) (18,313)
----------- ----------- ----------- ----------- -----------
Net Gain (Loss) on Investments ................... (402) 41 (15,351) (39,986) (7,056)
----------- ----------- ----------- ----------- -----------
Increase (Decrease) in Equity
Derived from Investment Activity .............. $ (414) $ 41 $ (16,056) $ (21,913) $ 4,961
=========== =========== =========== =========== ===========
</Table>
- ----------
# The initial investment in this Division was made on July 31, 2001.
21
NML VARIABLE ANNUITY ACCOUNT A
STATEMENTS OF OPERATIONS CONTINUED
(IN THOUSANDS)
<Table>
<Caption>
FRANKLIN TEMPLETON
INTERNATIONAL GROWTH STOCK INTERNATIONAL
DIVISION # EQUITY DIVISION
---------------------------- --------------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2002 2001 2000
------------ ------------ ------------ ------------ ------------
Investment Income
Dividend Income ................................. $ 3 $ -- $ 574 $ 3,729 $ 3,228
Annuity Rate and Expense Guarantees ............. (5) -- (327) (415) (515)
------------ ------------ ------------ ------------ ------------
Net Investment Income (Loss) ....................... (2) -- 247 3,314 2,713
------------ ------------ ------------ ------------ ------------
Realized and Unrealized Gain (Loss) on Investments
Realized Gain (Loss) on Investments ............. (3) (8) (2,073) (245) 2,247
Unrealized Appreciation (Depreciation)
During the Year .............................. (59) -- (3,472) (8,897) (5,914)
------------ ------------ ------------ ------------ ------------
Net Gain (Loss) on Investments ..................... (62) (8) (5,545) (9,142) (3,667)
------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Investment Activity ................ $ (64) $ (8) $ (5,298) $ (5,828) $ (954)
============ ============ ============ ============ ============
</Table>
<Table>
<Caption>
INDEX 400 STOCK DIVISION GROWTH STOCK DIVISION
---------------------------------------- ------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000 2002 2001 2000
------------ ------------ ------------ ------------ ------------ ------------
Investment Income
Dividend Income .......................... $ 76 $ 97 $ 801 $ 324 $ 1,497 $ 1,855
Annuity Rate and Expense Guarantees ...... (109) (94) (55) (337) (403) (473)
------------ ------------ ------------ ------------ ------------ ------------
Net Investment Income (Loss) ................ (33) 3 746 (13) 1,094 1,382
------------ ------------ ------------ ------------ ------------ ------------
Realized and Unrealized Gain (Loss)
on Investments
Realized Gain (Loss) on Investments ...... (352) (41) 207 (1,842) 464 3,581
Unrealized Appreciation (Depreciation)
During the Year ........................ (1,217) (36) (414) (5,170) (7,478) (6,543)
------------ ------------ ------------ ------------ ------------ ------------
Net Gain (Loss) on Investments .............. (1,569) (77) (207) (7,012) (7,014) (2,962)
------------ ------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Investment Activity ......... $ (1,602) $ (74) $ 539 $ (7,025) $ (5,920) $ (1,580)
============ ============ ============ ============ ============ ============
</Table>
<Table>
<Caption>
J.P. MORGAN SELECT GROWTH AND INCOME CAPITAL GUARDIAN
STOCK DIVISION EQUITY DIVISION#
-------------------------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000 2002 2001
------------ ------------ ------------ ------------ ------------
Investment Income
Dividend Income ............................... $ 170 $ 876 $ 1,774 $ 20 $ 1
Annuity Rate and Expense Guarantees ........... (212) (286) (362) (12) --
------------ ------------ ------------ ------------ ------------
Net Investment Income (Loss) ..................... (42) 590 1,412 8 1
------------ ------------ ------------ ------------ ------------
Realized and Unrealized Gain (Loss) on Investments
Realized Gain (Loss) on Investments ........... (2,738) (278) (2) (54) --
Unrealized Appreciation (Depreciation)
During the Year ............................. (3,694) (2,664) (3,775) (248) 12
------------ ------------ ------------ ------------ ------------
Net Gain (Loss) on Investments ................... (6,432) (2,942) (3,777) (302) 12
------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Investment Activity .............. $ (6,474) $ (2,352) $ (2,365) $ (294) $ 13
============ ============ ============ ============ ============
</Table>
- ----------
# The initial investment in this Division was made on July 31, 2001.
22
NML VARIABLE ANNUITY ACCOUNT A
STATEMENTS OF OPERATIONS CONTINUED
(IN THOUSANDS)
<Table>
<Caption>
INDEX 500 STOCK DIVISION ASSET ALLOCATION DIVISION #
-------------------------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000 2002 2001
------------ ------------ ------------ ------------ ------------
Investment Income
Dividend Income ................................. $ 1,197 $ 5,168 $ 6,161 $ 45 $ 6
Annuity Rate and Expense Guarantees ............. (976) (1,297) (1,722) (22) (2)
------------ ------------ ------------ ------------ ------------
Net Investment Income (Loss) ....................... 221 3,871 4,439 23 4
------------ ------------ ------------ ------------ ------------
Realized and Unrealized Gain (Loss) on Investments
Realized Gain (Loss) on Investments ............. 483 8,880 19,865 (35) --
Unrealized Appreciation (Depreciation)
During the Year .............................. (23,945) (29,565) (39,225) (244) 11
------------ ------------ ------------ ------------ ------------
Net Gain (Loss) on Investments ..................... (23,462) (20,685) (19,360) (279) 11
------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Investment Activity ................ $ (23,241) $ (16,814) $ (14,921) $ (256) $ 15
============ ============ ============ ============ ============
</Table>
<Table>
<Caption>
BALANCED DIVISION HIGH YIELD BOND DIVISION
---------------------------------------- ----------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000 2002 2001 2000
------------ ------------ ------------ ------------ ------------ ------------
Investment Income
Dividend Income ........................... $ 7,949 $ 19,440 $ 24,058 $ 456 $ 529 $ 611
Annuity Rate and Expense Guarantees ....... (2,466) (2,955) (3,494) (55) (62) (68)
------------ ------------ ------------ ------------ ------------ ------------
Net Investment Income (Loss) ................. 5,483 16,485 20,564 401 467 543
------------ ------------ ------------ ------------ ------------ ------------
Realized and Unrealized Gain (Loss) on Investments
Realized Gain (Loss) on Investments ...... (1,610) 6,981 19,864 (439) (655) (756)
Unrealized Appreciation (Depreciation)
During the Year ........................ (23,128) (34,686) (44,078) (179) 381 (119)
------------ ------------ ------------ ------------ ------------ ------------
Net Gain (Loss) on Investments .............. (24,738) (27,705) (24,214) (618) (274) (875)
------------ ------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Investment Activity ......... $ (19,255) $ (11,220) $ (3,650) $ (217) $ 193 $ (332)
============ ============ ============ ============ ============ ============
</Table>
<Table>
<Caption>
SELECT BOND DIVISION MONEY MARKET DIVISION
---------------------------------------- -----------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000 2002 2001 2000
------------ ------------ ------------ ------------ ------------ ------------
Investment Income
Dividend Income .......................... $ 1,181 $ 1,257 $ 1,463 $ 440 $ 1,067 $ 1,609
Annuity Rate and Expense Guarantees ...... (299) (248) (228) (304) (318) (296)
------------ ------------ ------------ ------------ ------------ ------------
Net Investment Income (Loss) ................ 882 1,009 1,235 136 749 1,313
------------ ------------ ------------ ------------ ------------ ------------
Realized and Unrealized Gain (Loss) on Investments
Realized Gain (Loss) on Investments ...... 437 (65) (333) -- -- --
Unrealized Appreciation (Depreciation)
During the Year ........................ 1,426 919 830 -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Net Gain (Loss) on Investments .............. 1,863 854 497 -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Investment Activity ......... $ 2,745 $ 1,863 $ 1,732 $ 136 $ 749 $ 1,313
============ ============ ============ ============ ============ ============
</Table>
- ----------
# The initial investment in this Division was made on July 31, 2001.
23
NML VARIABLE ANNUITY ACCOUNT A
STATEMENTS OF OPERATIONS CONTINUED
(IN THOUSANDS)
<Table>
<Caption>
RUSSELL MULTI-STYLE EQUITY DIVISION RUSSELL AGGRESSIVE 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,
2002 2001 2000 2002 2001 2000
------------ ------------ ------------ ------------ ------------ ------------
Investment Income
Dividend Income ......................... $ 22 $ 91 $ 134 $ -- $ 3 $ 261
Annuity Rate and Expense Guarantees ..... (41) (44) (43) (29) (29) (26)
------------ ------------ ------------ ------------ ------------ ------------
Net Investment Income (Loss) ............... (19) 47 91 (29) (26) 235
------------ ------------ ------------ ------------ ------------ ------------
Realized and Unrealized Gain (Loss) on Investments
Realized Gain (Loss) on Investments ..... (547) (154) (74) (133) (69) 43
Unrealized Appreciation (Depreciation)
During the Year ....................... (495) (517) (564) (409) 6 (359)
------------ ------------ ------------ ------------ ------------ ------------
Net Gain (Loss) on Investments ............. (1,042) (671) (638) (542) (63) (316)
------------ ------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Investment Activity ........ $ (1,061) $ (624) $ (547) $ (571) $ (89) $ (81)
============ ============ ============ ============ ============ ============
</Table>
<Table>
<Caption>
RUSSELL NON-U.S. DIVISION RUSSELL REAL ESTATE SECURITIES 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,
2002 2001 2000 2002 2001 2000
------------ ------------ ------------ ------------ ------------ ------------
Investment Income
Dividend Income ........................... $ 41 $ 17 $ 226 $ 142 $ 93 $ 43
Annuity Rate and Expense Guarantees ....... (32) (34) (33) (30) (21) (9)
------------ ------------ ------------ ------------ ------------ ------------
Net Investment Income (Loss) ................. 9 (17) 193 112 72 34
------------ ------------ ------------ ------------ ------------ ------------
Realized and Unrealized Gain (Loss) on Investments
Realized Gain (Loss) on Investments ....... (459) (287) 21 3 95 40
Unrealized Appreciation (Depreciation)
During the Year ......................... (80) (480) (679) (90) (61) 97
------------ ------------ ------------ ------------ ------------ ------------
Net Gain (Loss) on Investments ............... (539) (767) (658) (87) 34 137
------------ ------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Investment Activity .......... $ (530) $ (784) $ (465) $ 25 $ 106 $ 171
============ ============ ============ ============ ============ ============
</Table>
<Table>
<Caption>
RUSSELL CORE BOND DIVISION
--------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000
------------ ------------ ------------
Investment Income
Dividend Income .............................................. $ 55 $ 78 $ 50
Annuity Rate and Expense Guarantees .......................... (23) (16) (12)
------------ ------------ ------------
Net Investment Income (Loss) .................................... 32 62 38
------------ ------------ ------------
Realized and Unrealized Gain (Loss) on Investments
Realized Gain (Loss) on Investments .......................... 85 16 (23)
Unrealized Appreciation (Depreciation)
During the Year ........................................... 26 (13) 68
------------ ------------ ------------
Net Gain (Loss) on Investments .................................. 111 3 45
------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Investment Activity ............................. $ 143 $ 65 $ 83
============ ============ ============
</Table>
The Accompanying Notes are an Integral Part of the Financial Statements.
24
NML VARIABLE ANNUITY ACCOUNT A
STATEMENTS OF CHANGES IN EQUITY
(IN THOUSANDS)
<Table>
<Caption>
COMBINED SMALL CAP GROWTH STOCK DIVISION
------------------------------------------ -------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000 2002 2001 2000
------------ ------------ ------------ ------------ ------------ -------------
Operations:
Net Investment Income ............... $ 6,527 $ 45,620 $ 47,181 $ (172) $ (178) $ 226
Net Realized Gain (Loss) ............ (14,549) 15,197 56,764 (785) (343) 827
Net Change in Unrealized
Appreciation (Depreciation) ....... (74,854) (124,257) (120,838) (2,610) (338) (1,850)
------------ ------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Investment Activity .... (82,876) (63,440) (16,893) (3,567) (859) (797)
------------ ------------ ------------ ------------ ------------ ------------
Equity Transactions:
Contract Owners' Net Payment ........ 46,958 46,213 54,157 1,990 1,932 2,791
Annuity Payments .................... (1,186) (1,316) (1,472) (2) (7) (13)
Surrenders and Other (Net) .......... (86,526) (83,649) (121,406) (1,772) (1,362) (1,308)
Transfers from Other Divisions
or Sponsors ....................... 89,970 83,322 137,543 5,993 4,029 19,138
Transfers to Other Divisions
or Sponsors ....................... (91,980) (84,772) (138,779) (3,844) (4,403) (8,365)
------------ ------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Equity Transactions .... (42,764) (40,202) (69,957) 2,365 189 12,243
------------ ------------ ------------ ------------ ------------ ------------
Net Increase (Decrease) in Equity ...... (125,640) (103,642) (86,850) (1,202) (670) 11,446
Equity:
Beginning of Period ................. 593,712 697,354 784,204 15,623 16,293 4,847
------------ ------------ ------------ ------------ ------------ ------------
End of Period ....................... $ 468,072 $ 593,712 $ 697,354 $ 14,421 $ 15,623 $ 16,293
============ ============ ============ ============ ============ ============
</Table>
<Table>
<Caption>
T. ROWE PRICE
SMALL CAP VALUE DIVISION # AGGRESSIVE GROWTH STOCK DIVISION
--------------------------- ------------------------------------------
PERIOD ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2002 2001 2000
------------ ------------ ------------ ------------ ------------
Operations:
Net Investment Income .............................. $ (12) $ -- $ (705) $ 18,073 $ 12,017
Net Realized Gain (Loss) ........................... (73) -- (4,414) 906 11,257
Net Change in Unrealized Appreciation (Depreciation) (329) 41 (10,937) (40,892) (18,313)
------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Investment Activity ................... (414) 41 (16,056) (21,913) 4,961
------------ ------------ ------------ ------------ ------------
Equity Transactions:
Contract Owners' Net Payment ....................... 744 87 5,565 6,978 8,119
Annuity Payments ................................... (21) -- (30) (37) (49)
Surrenders and Other (Net) ......................... (399) -- (9,556) (10,388) (19,221)
Transfers from Other Divisions or Sponsors ......... 4,185 490 5,187 7,243 26,450
Transfers to Other Divisions or Sponsors ........... (1,985) (34) (10,758) (10,995) (17,887)
------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Equity Transactions ................... 2,524 543 (9,592) (7,199) (2,588)
------------ ------------ ------------ ------------ ------------
Net Increase (Decrease) in Equity ..................... 2,110 584 (25,648) (29,112) 2,373
Equity:
Beginning of Period ................................ 584 -- 77,631 106,743 104,370
------------ ------------ ------------ ------------ ------------
End of Period ...................................... $ 2,694 $ 584 $ 51,983 $ 77,631 $ 106,743
============ ============ ============ ============ ============
</Table>
- ----------
# The initial investment in this Division was made on July 31, 2001.
25
NML VARIABLE ANNUITY ACCOUNT A
STATEMENTS OF CHANGES IN EQUITY CONTINUED
(IN THOUSANDS)
<Table>
<Caption>
INTERNATIONAL GROWTH FRANKLIN TEMPLETON
STOCK DIVISION # INTERNATIONAL EQUITY DIVISION
--------------------------- ------------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2002 2001 2000
------------ ------------ ------------ ------------ ------------
Operations:
Net Investment Income .................... $ (2) $ -- $ 247 $ 3,314 $ 2,713
Net Realized Gain (Loss) ................. (3) (8) (2,073) (245) 2,247
Net Change in Unrealized
Appreciation (Depreciation) ............ (59) -- (3,472) (8,897) (5,914)
------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Investment Activity ......... (64) (8) (5,298) (5,828) (954)
------------ ------------ ------------ ------------ ------------
Equity Transactions:
Contract Owners' Net Payment ............. 198 24 2,567 2,894 3,890
Annuity Payments ......................... -- -- (14) (17) (19)
Surrenders and Other (Net) ............... (15) -- (4,346) (4,910) (6,674)
Transfers from Other Divisions or Sponsors 678 154 3,446 3,316 7,129
Transfers to Other Divisions or Sponsors . (356) (13) (4,630) (4,969) (8,486)
------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Equity Transactions ......... 505 165 (2,977) (3,686) (4,160)
------------ ------------ ------------ ------------ ------------
Net Increase (Decrease) in Equity ........... 441 157 (8,275) (9,514) (5,114)
Equity:
Beginning of Period ...................... 157 -- 30,784 40,298 45,412
------------ ------------ ------------ ------------ ------------
End of Period ............................ $ 598 $ 157 $ 22,509 $ 30,784 $ 40,298
============ ============ ============ ============ ============
</Table>
<Table>
<Caption>
INDEX 400 STOCK DIVISION GROWTH STOCK DIVISION
------------------------------------------ ------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000 2002 2001 2000
------------ ------------ ------------ ------------ ------------ ------------
Operations:
Net Investment Income ................ $ (33) $ 3 $ 746 $ (13) $ 1,094 $ 1,382
Net Realized Gain (Loss) ............. (352) (41) 207 (1,842) 464 3,581
Net Change in Unrealized
Appreciation (Depreciation) ........ (1,217) (36) (414) (5,170) (7,478) (6,543)
------------ ------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Investment Activity ..... (1,602) (74) 539 (7,025) (5,920) (1,580)
------------ ------------ ------------ ------------ ------------ ------------
Equity Transactions:
Contract Owners' Net Payment ......... 1,618 1,347 1,061 3,233 3,713 4,161
Annuity Payments ..................... (14) (16) (22) (4) (5) (5)
Surrenders and Other (Net) ........... (1,479) (708) 28 (3,860) (3,538) (6,808)
Transfers from Other Divisions
or Sponsors ........................ 4,135 4,453 5,651 3,299 5,424 14,158
Transfers to Other Divisions
or Sponsors ........................ (3,493) (3,006) (2,290) (4,869) (4,981) (10,930)
------------ ------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Equity Transactions ..... 767 2,070 4,428 (2,201) 613 576
------------ ------------ ------------ ------------ ------------ ------------
Net Increase (Decrease) in Equity ....... (835) 1,996 4,967 (9,226) (5,307) (1,004)
Equity:
Beginning of Period .................. 9,158 7,162 2,195 32,717 38,024 39,028
------------ ------------ ------------ ------------ ------------ ------------
End of Period ........................ $ 8,323 $ 9,158 $ 7,162 $ 23,491 $ 32,717 $ 38,024
============ ============ ============ ============ ============ ============
</Table>
- ----------
# The initial investment in this Division was made on July 31, 2001.
26
NML VARIABLE ANNUITY ACCOUNT A
STATEMENTS OF CHANGES IN EQUITY CONTINUED
(IN THOUSANDS)
<Table>
<Caption>
J.P. MORGAN SELECT GROWTH CAPITAL GUARDIAN DOMESTIC
AND INCOME STOCK DIVISION EQUITY DIVISION #
--------------------------- ------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000 2002 2001
------------ ------------ ------------ ------------ ------------
Operations:
Net Investment Income ........................ $ (42) $ 590 $ 1,412 $ 8 $ 1
Net Realized Gain (Loss) ..................... (2,738) (278) (2) (54) --
Net Change in Unrealized
Appreciation (Depreciation) ................ (3,694) (2,664) (3,775) (248) 12
------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Investment Activity ............. (6,474) (2,352) (2,365) (294) 13
------------ ------------ ------------ ------------ ------------
Equity Transactions:
Contract Owners' Net Payment ................. 2,184 2,138 2,864 449 25
Annuity Payments ............................. (51) (66) (77) -- --
Surrenders and Other (Net) ................... (3,074) (3,087) (5,329) (121) (2)
Transfers from Other Divisions or Sponsors ... 2,022 3,370 3,239 2,055 254
Transfers to Other Divisions or Sponsors .... (3,947) (3,033) (7,981) (709) --
------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Equity Transactions ............. (2,866) (678) (7,284) 1,674 277
------------ ------------ ------------ ------------ ------------
Net Increase (Decrease) in Equity ............... (9,340) (3,030) (9,649) 1,380 290
Equity:
Beginning of Period .......................... 23,057 26,087 35,736 290 --
------------ ------------ ------------ ------------ ------------
End of Period ................................ $ 13,717 $ 23,057 $ 26,087 $ 1,670 $ 290
============ ============ ============ ============ ============
</Table>
<Table>
<Caption>
INDEX 500 STOCK DIVISION ASSET ALLOCATION DIVISION #
------------------------------------------ ---------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000 2002 2001
------------ ------------ ------------ ------------ ------------
Operations:
Net Investment Income ....................... $ 221 $ 3,871 $ 4,439 $ 23 $ 4
Net Realized Gain (Loss) .................... 483 8,880 19,865 (35) --
Net Change in Unrealized
Appreciation (Depreciation) .............. (23,945) (29,565) (39,225) (244) 11
------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Investment Activity ............ (23,241) (16,814) (14,921) (256) 15
------------ ------------ ------------ ------------ ------------
Equity Transactions:
Contract Owners' Net Payment ................ 6,935 7,565 9,486 578 86
Annuity Payments ............................ (273) (337) (468) -- --
Surrenders and Other (Net) .................. (14,951) (15,093) (24,033) (147) 2
Transfers from Other Divisions or Sponsors .. 8,032 9,028 16,159 2,148 699
Transfers to Other Divisions or Sponsors .... (12,115) (12,955) (22,419) (326) (2)
------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Equity Transactions ............ (12,372) (11,792) (21,275) 2,253 785
------------ ------------ ------------ ------------ ------------
Net Increase (Decrease) in Equity .............. (35,613) (28,606) (36,196) 1,997 800
Equity:
Beginning of Period ......................... 104,907 133,513 169,709 800 --
------------ ------------ ------------ ------------ ------------
End of Period ............................... $ 69,294 $ 104,907 $ 133,513 $ 2,797 $ 800
============ ============ ============ ============ ============
</Table>
- ----------
# The initial investment in this Division was made on July 31, 2001.
27
NML VARIABLE ANNUITY ACCOUNT A
STATEMENTS OF CHANGES IN EQUITY CONTINUED
(IN THOUSANDS)
<Table>
<Caption>
BALANCED DIVISION HIGH YIELD BOND DIVISION
------------------------------------------ ------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000 2002 2001 2000
------------ ------------ ------------ ------------ ------------ ------------
Operations:
Net Investment Income ................ $ 5,483 $ 16,485 $ 20,564 $ 401 $ 467 $ 543
Net Realized Gain (Loss) ............. (1,610) 6,981 19,864 (439) (655) (756)
Net Change in Unrealized
Appreciation (Depreciation) ........ (23,128) (34,686) (44,078) (179) 381 (119)
------------ ------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Investment Activity ..... (19,255) (11,220) (3,650) (217) 193 (332)
------------ ------------ ------------ ------------ ------------ ------------
Equity Transactions:
Contract Owners' Net Payment ......... 11,208 12,043 13,081 633 523 765
Annuity Payments ..................... (640) (684) (715) (4) (11) (4)
Surrenders and Other (Net) ........... (31,038) (32,253) (44,386) (895) (888) (968)
Transfers from Other Divisions
or Sponsors ........................ 8,932 9,588 8,372 1,378 1,921 746
Transfers to Other Divisions
or Sponsors ........................ (16,839) (14,552) (25,634) (1,636) (1,860) (2,016)
------------ ------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Equity Transactions ..... (28,377) (25,858) (49,282) (524) (315) (1,477)
------------ ------------ ------------ ------------ ------------ ------------
Net Increase (Decrease) in Equity ....... (47,632) (37,078) (52,932) (741) (122) (1,809)
Equity:
Beginning of Period .................. 228,923 266,001 318,933 5,008 5,130 6,939
------------ ------------ ------------ ------------ ------------ ------------
End of Period ........................ $ 181,291 $ 228,923 $ 266,001 $ 4,267 $ 5,008 $ 5,130
============ ============ ============ ============ ============ ============
</Table>
<Table>
<Caption>
SELECT BOND DIVISION MONEY MARKET DIVISION
------------------------------------------ ------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000 2002 2001 2000
------------ ------------ ------------ ------------ ------------ ------------
Operations:
Net Investment Income ................. $ 882 $ 1,009 $ 1,235 $ 136 $ 749 $ 1,313
Net Realized Gain (Loss) .............. 437 (65) (333) -- -- --
Net Change in Unrealized
Appreciation (Depreciation) ......... 1,426 919 830 -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Investment Activity ...... 2,745 1,863 1,732 136 749 1,313
------------ ------------ ------------ ------------ ------------ ------------
Equity Transactions:
Contract Owners' Net Payment .......... 2,605 1,760 1,609 4,308 2,973 3,498
Annuity Payments ...................... (82) (84) (54) (34) (42) (44)
Surrenders and Other (Net) ............ (4,465) (3,070) (3,755) (8,347) (7,417) (8,367)
Transfers from Other Divisions
or Sponsors ......................... 11,827 5,887 1,998 17,060 19,263 21,967
Transfers to Other Divisions
or Sponsors ......................... (4,953) (2,868) (3,403) (13,683) (13,859) (21,732)
------------ ------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Equity Transactions ...... 4,932 1,625 (3,605) (696) 918 (4,678)
------------ ------------ ------------ ------------ ------------ ------------
Net Increase Decrease) in Equity ......... 7,677 3,488 (1,873) (560) 1,667 (3,365)
Equity:
Beginning of Period ................... 23,757 20,269 22,142 27,147 25,480 28,845
------------ ------------ ------------ ------------ ------------ ------------
End of Period ......................... $ 31,434 $ 23,757 $ 20,269 $ 26,587 $ 27,147 $ 25,480
============ ============ ============ ============ ============ ============
</Table>
28
NML VARIABLE ANNUITY ACCOUNT A
STATEMENTS OF CHANGES IN EQUITY CONTINUED
(IN THOUSANDS)
<Table>
<Caption>
RUSSELL MULTI-STYLE EQUITY DIVISION RUSSELL AGGRESSIVE 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,
2002 2001 2000 2002 2001 2000
------------ ------------ ------------ ------------ ------------ ------------
Operations:
Net Investment Income ................. $ (19) $ 47 $ 91 $ (29) $ (26) $ 235
Net Realized Gain (Loss) .............. (547) (154) (74) (133) (69) 43
Net Change in Unrealized
Appreciation (Depreciation) ......... (495) (517) (564) (409) 6 (359)
------------ ------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Investment Activity ...... (1,061) (624) (547) (571) (89) (81)
------------ ------------ ------------ ------------ ------------ ------------
Equity Transactions:
Contract Owners' Net Payment .......... 566 675 1,088 320 447 556
Annuity Payments ...................... (7) (6) (2) -- -- --
Surrenders and Other (Net) ............ (651) (216) (119) (210) (200) (198)
Transfers from Other Divisions
or Sponsors ........................ 2,286 2,557 2,889 1,428 1,011 1,921
Transfers to Other Divisions
or Sponsors ........................ (2,140) (2,372) (1,712) (1,623) (792) (842)
------------ ------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Equity Transactions ...... 54 638 2,144 (85) 466 1,437
------------ ------------ ------------ ------------ ------------ ------------
Net Increase (Decrease) in Equity ........ (1,007) 14 1,597 (656) 377 1,356
Equity:
Beginning of Period ................... 4,111 4,097 2,500 2,875 2,498 1,142
------------ ------------ ------------ ------------ ------------ ------------
End of Period ......................... $ 3,104 $ 4,111 $ 4,097 $ 2,219 $ 2,875 $ 2,498
============ ============ ============ ============ ============ ============
</Table>
<Table>
<Caption>
RUSSELL NON-U.S. DIVISION RUSSELL REAL ESTATE SECURITIES 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,
2002 2001 2000 2002 2001 2000
------------ ------------ ------------ ------------ ------------ ------------
Operations:
Net Investment Income ................ $ 9 $ (17) $ 193 $ 112 $ 72 $ 34
Net Realized Gain (Loss) ............. (459) (287) 21 3 95 40
Net Change in Unrealized
Appreciation (Depreciation) ........ (80) (480) (679) (90) (61) 97
------------ ------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Investment Activity ..... (530) (784) (465) 25 106 171
Equity Transactions:
Contract Owners' Net Payment ......... 361 505 712 597 316 234
Annuity Payments ..................... (2) -- -- (8) (4) --
Surrenders and Other (Net) ........... (356) (270) (203) (375) (127) (17)
Transfers from Other Divisions
or Sponsors ....................... 1,492 1,782 3,039 2,817 2,039 3,101
Transfers to Other Divisions
or Sponsors ........................ (1,516) (1,616) (1,221) (1,819) (1,838) (2,492)
------------ ------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Equity Transactions ..... (21) 401 2,327 1,212 386 826
------------ ------------ ------------ ------------ ------------ ------------
Net Increase (Decrease) in Equity ....... (551) (383) 1,862 1,237 492 997
Equity:
Beginning of Period .................. 2,862 3,245 1,383 1,820 1,328 331
------------ ------------ ------------ ------------ ------------ ------------
End of Period ........................ $ 2,311 $ 2,862 $ 3,245 $ 3,057 $ 1,820 $ 1,328
============ ============ ============ ============ ============ ============
</Table>
29
NML VARIABLE ANNUITY ACCOUNT A
STATEMENTS OF CHANGES IN EQUITY CONTINUED
(IN THOUSANDS)
<Table>
<Caption>
RUSSELL CORE BOND DIVISION
------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000
------------ ------------ ------------
Operations:
Net Investment Income ....................... $ 32 $ 62 $ 38
Net Realized Gain (Loss) .................... 85 16 (23)
Net Change in Unrealized
Appreciation (Depreciation) .............. 26 (13) 68
------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Investment Activity ............ 143 65 83
------------ ------------ ------------
Equity Transactions:
Contract Owners' Net Payment ................ 299 182 242
Annuity Payments ............................ -- -- --
Surrenders and Other (Net) .................. (469) (122) (48)
Transfers from Other Divisions or Sponsors .. 1,570 814 1,586
Transfers to Other Divisions or Sponsors .... (739) (624) (1,369)
------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Equity Transactions ............ 661 250 411
------------ ------------ ------------
Net Increase (Decrease) in Equity .............. 804 315 494
Equity:
Beginning of Period ......................... 1,501 1,186 692
------------ ------------ ------------
End of Period ............................... $ 2,305 $ 1,501 $ 1,186
============ ============ ============
</Table>
The Accompanying Notes are an Integral Part of the Financial Statements.
30
FINANCIAL HIGHLIGHTS
NML VARIABLE ANNUITY ACCOUNT A
(FOR A UNIT OUTSTANDING DURING THE PERIOD)
<Table>
<Caption>
DIVIDEND
INCOME AS A
% OF
UNIT VALUE AVERAGE NET EXPENSE RATIO TOTAL RETURN (2)
DIVISION LOWEST TO HIGHEST ASSETS LOWEST TO HIGHEST LOWEST TO HIGHEST
- -------- ------------------------- ------------ ----------------- ---------------------
Small Cap Growth Stock
Year Ended 12/31/02.................. $0.702869 to $ 1.536295 0.16% 0.40% to 1.25% (19.44%) to (18.75%)
Year Ended 12/31/01.................. $0.865935 to $ 1.890848 0.01% 0.40% to 1.25% (4.97%) to (4.15%)
T. Rowe Price Small Cap Value(1)
Year Ended 12/31/02.................. $0.943905 to $ 0.955324 0.57% 0.40% to 1.25% (6.75%) to (5.96%)
Period Ended 12/31/01................ $1.012260 to $ 1.015860 0.44% 0.40% to 1.25% 1.23% to 1.59%
Aggressive Growth Stock
Year Ended 12/31/02.................. $0.564112 to $ 3.711325 0.10% 0.40% to 1.25% (22.13%) to (21.47%)
Year Ended 12/31/01.................. $0.719033 to $ 4.742335 22.82% 0.40% to 1.25% (20.88%) to (20.20%)
International Growth Stock(1)
Year Ended 12/31/02.................. $0.780276 to $ 0.789715 0.73% 0.40% to 1.25% (13.42%) to (12.69%)
Period Ended 12/31/01................ $0.901258 to $ 0.904464 0.00% 0.40% to 1.25% (9.87%) to (9.55%)
Franklin Templeton International Equity
Year Ended 12/31/02.................. $0.700185 to $ 1.636881 2.12% 0.40% to 1.25% (18.43%) to (17.73%)
Year Ended 12/31/01.................. $0.851962 to $ 1.996677 10.94% 0.40% to 1.25% (15.07%) to (14.35%)
Index 400 Stock
Year Ended 12/31/02.................. $0.870423 to $ 1.106344 0.82% 0.40% to 1.25% (15.60%) to (14.88%)
Year Ended 12/31/01.................. $1.023646 to $ 1.299809 1.20% 0.40% to 1.25% (1.90%) to (1.06%)
Growth Stock
Year Ended 12/31/02.................. $0.616498 to $ 2.006974 1.16% 0.40% to 1.25% (21.81%) to (21.15%)
Year Ended 12/31/01.................. $0.782628 to $ 2.554121 4.47% 0.40% to 1.25% (15.29%) to (14.56%)
J.P. Morgan Select Growth and
Income Stock
Year Ended 12/31/02.................. $0.581563 to $ 1.566688 0.96% 0.40% to 1.25% (29.09%) to (28.49%)
Year Ended 12/31/01.................. $0.814020 to $ 2.198364 3.66% 0.40% to 1.25% (8.92%) to (8.14%)
Capital Guardian Domestic Equity(1)
Year Ended 12/31/02.................. $0.756787 to $ 0.765966 1.82% 0.40% to 1.25% (22.22%) to (21.56%)
Period Ended 12/31/01................ $0.973004 to $ 0.976476 0.72% 0.40% to 1.25% (2.70%) to (2.35%)
Index 500 Stock
Year Ended 12/31/02.................. $0.604035 to $ 3.089894 1.40% 0.40% to 1.25% (23.04%) to (22.38%)
Year Ended 12/31/01.................. $0.779001 to $ 3.994853 4.55% 0.40% to 1.25% (12.98%) to (12.23%)
Asset Allocation(1)
Year Ended 12/31/02.................. $0.863125 to $ 0.873571 2.26% 0.40% to 1.25% (11.37%) to (10.62%)
Period Ended 12/31/01................ $0.973862 to $ 0.977328 1.20% 0.40% to 1.25% (2.61%) to (2.27%)
Balanced
Year Ended 12/31/02.................. $0.862735 to $ 7.112654 3.92% 0.40% to 1.25% (8.68%) to (7.91%)
Year Ended 12/31/01.................. $0.937735 to $ 7.750204 8.01% 0.40% to 1.25% (4.36%) to (3.54%)
High Yield Bond
Year Ended 12/31/02.................. $0.972766 to $ 1.487426 9.94% 0.40% to 1.25% (4.10%) to (3.28%)
Year Ended 12/31/01.................. $1.006773 to $ 1.543249 10.16% 0.40% to 1.25% 3.72% to 4.61%
Select Bond
Year Ended 12/31/02.................. $1.321394 to $ 10.108841 4.40% 0.40% to 1.25% 10.70% to 11.64%
Year Ended 12/31/01.................. $1.184790 to $ 9.086342 5.71% 0.40% to 1.25% 8.99% to 9.92%
Money Market
Year Ended 12/31/02.................. $1.092171 to $ 3.030949 1.65% 0.40% to 1.25% 0.39% to 1.25%
Year Ended 12/31/01.................. $1.079788 to $ 3.004024 3.80% 0.40% to 1.25% 2.62% to 3.50%
Russell Multi-Style Equity
Year Ended 12/31/02.................. $0.574187 to $ 0.613006 0.60% 0.40% to 1.25% (24.14%) to (23.50%)
Year Ended 12/31/01.................. $0.751294 to $ 0.801293 2.33% 0.40% to 1.25% (15.28%) to (14.55%)
Russell Aggressive Equity
Year Ended 12/31/02.................. $0.727980 to $ 0.857996 0.00% 0.40% to 1.25% (20.06%) to (19.38%)
Year Ended 12/31/01.................. $0.903873 to $ 1.064253 0.11% 0.40% to 1.25% (3.58%) to (2.76%)
Russell Non-U.S
Year Ended 12/31/02.................. $0.557227 to $ 0.699179 1.48% 0.40% to 1.25% (16.20%) to (15.49%)
Year Ended 12/31/01.................. $0.659991 to $ 0.827309 0.60% 0.40% to 1.25% (23.00%) to (22.34%)
</Table>
31
FINANCIAL HIGHLIGHTS
NML VARIABLE ANNUITY ACCOUNT A CONTINUED
(FOR A UNIT OUTSTANDING DURING THE PERIOD)
<Table>
Russell Core Bond
Year Ended 12/31/02.............. $1.217720 to $ 1.256188 2.87% 0.40% to 1.25% 7.49% to 8.40%
Year Ended 12/31/01.............. $1.132872 to $ 1.158815 5.90% 0.40% to 1.25% 6.07% to 6.97%
Russell Real Estate Securities
Year Ended 12/31/02.............. $1.261665 to $ 1.375137 5.39% 0.40% to 1.25% 2.51% to 3.39%
Year Ended 12/31/01.............. $1.230726 to $ 1.331406 5.13% 0.40% to 1.25% 6.49% to 7.40%
</Table>
- ------------
(1) Portfolio commenced operations on July 31, 2001.
(2) Total Return includes deductions for management and other expenses;
excludes deductions for sales loads and other charges. Returns are not
annualized for periods less than one year.
The Accompanying Notes are an Integral Part of the Financial Statements.
32
NML VARIABLE ANNUITY ACCOUNT A
NOTES TO FINANCIAL STATEMENTS
NOTE 1--NML Variable Annuity Account A (the "Account") is a segregated asset
account of The Northwestern Mutual Life Insurance Company ("Northwestern
Mutual") used to fund variable annuity contracts ("contracts") for HR-10 and
corporate pension and profit-sharing plans which qualify for special tax
treatment under the Internal Revenue Code. Currently, two versions of the
contract are offered: Front Load contracts with a sales charge up to 4.5% of
purchase payments and Back Load contracts with a withdrawal charge of 0-6%.
NOTE 2--The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Principal accounting policies are summarized below.
NOTE 3--All assets of each Division of the Account are invested in shares of the
corresponding Portfolio of Northwestern Mutual Series Fund, Inc. and the Russell
Insurance Funds (collectively known as the "Funds"). The shares are valued at
the Funds' offering and redemption price per share. The Funds are diversified
open-end investment companies registered under the Investment Company Act of
1940.
NOTE 4--Annuity reserves are based on published annuity tables with age
adjustment and benefit payments which reflect actual investment experience. For
variable payment plans issued prior to January 1, 1974, annuity reserves are
based on the 1955 American Annuity Table with assumed interest rates of 3% or
5%. For variable payment plans issued on or after January 1, 1974 and before
January 1, 1985, annuity reserves are based on the 1971 Individual Annuity Table
with assumed interest rates of 3-1/2% or 5%. For variable payment plans issued
on or after January 1, 1985, annuity reserves are based on the 1983 Annuity
Table a adjusted with assumed interest rates of 3-1/2% or 5%.
NOTE 5--Dividend income from the Funds is recorded on the ex-date of the
dividends. Transactions in the Funds' shares are accounted for on the trade
date. The basis for determining cost on sale of the Funds' shares is identified
cost. Purchases and sales of the Funds' shares for the years ended December 31
by each Division are shown below:
<Table>
<Caption>
PURCHASES 2002 2001 2000
- --------- ----------- ----------- -----------
Small Cap Growth Stock ..................... $ 4,461,452 $ 3,119,762 $17,753,003
T. Rowe Price Small Cap Value# ............ 3,056,595 544,334 N/A
Aggressive Growth Stock .................... 7,414,573 23,504,270 28,757,540
International Growth Stock#................. 519,948 164,575 N/A
Franklin Templeton International Equity .... 3,334,140 5,754,067 79,974,310
Index 400 Stock ............................ 2,397,162 4,038,686 2,853,810
Growth Stock .............................. 3,786,154 6,550,789 11,793,727
J.P. Morgan Select Growth and Income Stock.. 2,595,415 3,711,176 9,919,814
Capital Guardian Domestic Equity#........... 1,827,157 277,299 N/A
Index 500 Stock ............................ 10,496,270 11,216,245 20,410,794
Asset Allocation#........................... 2,448,370 787,179 N/A
Balanced ................................... 19,743,059 27,209,702 44,419,512
High Yield Bond ........................... 1,107,893 1,951,937 2,095,955
Select Bond ................................ 11,093,552 6,619,324 4,931,954
Money Market .............................. 8,251,938 15,154,072 20,905,226
Russell Multi-Style ........................ 814,757 1,097,267 2,666,402
Russell Aggressive Equity ................. 343,250 871,028 1,593,605
Russell Non-U.S. ........................... 474,958 973,304 1,498,221
Russell Core Bond ......................... 1,316,732 1,738,713 758,431
Russell Real Estate Securities.............. 1,982,942 586,923 357,723
</Table>
33
NML VARIABLE ANNUITY ACCOUNT A
NOTES TO FINANCIAL STATEMENTS CONTINUED
<Table>
<Caption>
SALES 2002 2001 2000
- ----- ----------- ----------- -----------
Small Cap Growth Stock ..................... $ 2,267,772 $ 3,107,912 $ 5,283,832
T. Rowe Price Small Cap Value# ............. 544,753 1,251 N/A
Aggressive Growth Stock .................... 16,374,895 12,700,645 19,230,800
International Growth Stock# ............... 15,440 1 N/A
Franklin Templeton International Equity .... 6,070,557 6,134,228 8,640,998
Index 400 Stock ............................ 1,666,098 1,955,209 1,353,450
Growth Stock .............................. 6,005,545 4,859,534 8,573,786
J.P. Morgan Select Growth and Income Stock.. 5,518,037 3,793,450 9,525,030
Capital Guardian Domestic Equity# ......... 145,921 36 N/A
Index 500 Stock ............................ 20,459,679 19,112,689 29,656,415
Asset Allocation#........................... 169,149 8 N/A
Balanced ................................... 42,633,986 36,676,777 56,250,284
High Yield Bond ........................... 1,228,005 1,795,043 2,157,663
Select Bond ................................ 5,331,758 3,765,014 5,660,540
Money Market .............................. 8,777,655 13,474,404 21,431,894
Russell Multi-Style ........................ 841,367 483,989 864,610
Russell Aggressive Equity ................. 465,120 364,836 548,989
Russell Non-U.S. ........................... 512,890 616,921 484,146
Russell Core Bond ......................... 562,906 249,167 1,332,763
Russell Real Estate Securities.............. 645,240 1,297,610 1,636,969
</Table>
- ---------
# Initial Investment in this division was made on July 31, 2001.
NOTE 6--A deduction for annuity rate and expense guarantees is determined daily
and paid to Northwestern Mutual as compensation for assuming the risk that
annuity payments will continue for longer periods than anticipated because the
annuitants as a group live longer than expected, and the risk that the charges
made by Northwestern Mutual may be insufficient to cover the actual costs
incurred in connection with the contracts.
For contracts issued prior to December 17, 1981, the deduction is at an annual
rate of 3/4 of 1% of the net assets of each Division attributable to these
contracts. For these contracts, the rate may be increased or decreased by the
Board of Trustees of Northwestern Mutual not to exceed a 1% annual rate.
For contracts issued after December 16, 1981 and prior to March 31, 1995, the
deduction is at an annual rate of 1-1/4% of the net assets of each Division
attributable to these contracts. For these contracts, the rate may be increased
or decreased by the Board of Trustees of Northwestern Mutual not to exceed a
1-1/2% annual rate.
For contracts issued on or after March 31, 1995 and prior to March 31, 2000, for
the Front Load version and the Back Load version, the deduction for annuity rate
and expense guarantees is determined daily at annual rates of 4/10 of 1% and
1-1/4%, respectively, of the net assets of each Division attributable to these
contracts and is paid to Northwestern Mutual. For these contracts, the rates may
be increased or decreased by the Board of Trustees of Northwestern Mutual not to
exceed 3/4 of 1% and 1-1/2%, respectively.
For contracts issued on or after March 31, 2000, for the Front Load version and
the Back Load version, the deduction for annuity rate and expense guarantees is
determined daily at annual rates of 5/10 of 1% and 1-1/4%, respectively, of the
net assets of each Division attributable to these contracts and is paid to
Northwestern Mutual. For these contracts, the rates may be increased or
decreased by the Board of Trustees of Northwestern Mutual not to exceed 3/4 of
1% and 1-1/2% annual rates, respectively. The current charges will not be
increased for five years from the date of the most recent Prospectus.
Since 1995, Northwestern Mutual has paid a dividend to certain contracts. The
dividend is reinvested in the Account and has been reflected as a Contract
Owners' Net Payment in the accompanying financial statements.
NOTE 7--Northwestern Mutual is taxed as a "life insurance company" under the
Internal Revenue Code and the operations of the Account form a part of and are
taxed with those of Northwestern Mutual. Under current law, no federal income
taxes are payable with respect to the Account. Accordingly, no provision for any
such liability has been made.
34
NML VARIABLE ANNUITY ACCOUNT A
NOTES TO FINANCIAL STATEMENTS CONTINUED
NOTE 8--Equity Values by Division for the year ended December 31, 2002 are shown
below: (in thousands, except accumulation unit values)
<Table>
<Caption>
CONTRACTS ISSUED:
CONTRACTS ISSUED: AFTER DECEMBER 16, 1981 AND
PRIOR TO DECEMBER 17, 1981 PRIOR TO MARCH 31, 1995
------------------------------------ -------------------------------------
ACCUMULATION ACCUMULATION
UNIT UNITS UNIT UNITS
DIVISION VALUE OUTSTANDING EQUITY VALUE OUTSTANDING EQUITY
- -------- ----------- ----------- -------- ------------ ----------- -------
Small Cap Growth Stock ............. $ 1.516823 196 $ 297 $ 1.489185 6,573 $ 9,788
T. Rowe Price Small Cap Value 0.950636 230 219 0.943905 1,401 1,322
Aggressive Growth Stock ............ 3.711325 256 950 3.494085 10,045 35,098
International Growth Stock ......... 0.785836 13 10 0.780276 317 247
Franklin Templeton International
Equity ........................ 1.636881 326 534 1.559571 9,896 15,434
Index 400 Stock .................... 1.092338 243 265 1.072428 4,143 4,443
Growth Stock ....................... 2.006974 313 628 1.921805 6,983 13,420
J.P. Morgan Select Growth and
Income Stock .................. 1.566688 125 196 1.500218 5,160 7,741
Capital Guardian Domestic Equity 1 0.762191 107 82 0.756787 1,190 901
Index 500 Equity ................... 3.089894 3,965 12,251 2.909123 12,908 37,551
Asset Allocation ................... 0.869281 41 36 0.863125 2,124 1,833
Balanced ........................... 7.112654 1,322 9,403 6.403383 22,433 143,647
High Yield Bond .................... 1.487426 69 103 1.424293 1,461 2,081
Select Bond ........................ 10.108841 603 6,096 9.098961 1,840 16,742
Money Market ....................... 3.030949 460 1,394 2.728924 6,073 16,573
Russell Multi-Style Equity ......... 0.605230 6 4 0.594202 2,539 1,509
Russell Aggressive Equity .......... 0.847132 113 96 0.831686 1,279 1,064
Russell Non-U.S .................... 0.690333 33 23 0.677755 1,927 1,306
Russell Real Estate Securities ..... 1.285091 55 71 1.261665 1,199 1,513
Russell Core Bond .................. 1.240286 11 14 1.217720 996 1,213
--------- ---------
Equity ........................ 32,672 313,426
Annuity Reserves .............. 2,701 7,389
--------- ---------
Total Equity .................. $ 35,373 $ 320,815
========= =========
</Table>
<Table>
<Caption>
CONTRACTS ISSUED: CONTRACTS ISSUED:
ON OR AFTER MARCH 31, 1995 AND ON OR AFTER MARCH 31, 1995 AND
PRIOR TO MARCH 31, 2000 PRIOR TO MARCH 31, 2000
FRONT LOAD VERSION BACK LOAD VERSION
------------------------------------ -------------------------------------
ACCUMULATION ACCUMULATION
UNIT UNITS UNIT UNITS
DIVISION VALUE OUTSTANDING EQUITY VALUE OUTSTANDING EQUITY
- -------- ------------ ----------- --------- ------------ ----------- ---------
Small Cap Growth Stock ............... $ 1.536295 323 $ 496 $ 1.489185 1,965 $ 2,926
T. Rowe Small Cap Value .............. 0.955324 272 260 0.943905 591 558
Aggressive Growth Stock .............. 1.764232 1,184 2,089 3.494085 3,455 12,072
International Growth Stock ........... 0.789715 6 5 0.780276 214 167
Franklin Templeton International
Equity .......................... 1.367662 870 1,190 1.559571 2,870 4,476
Index 400 Stock ...................... 1.106344 344 381 1.072428 2,052 2,201
Growth Stock ......................... 1.896210 591 1,121 1.921805 3,629 6,974
J.P. Morgan Select Growth and
Income Stock .................... 1.479747 641 949 1.500218 2,625 3,938
Capital Guardian Domestic Equity 1 0.765966 37 28 0.756787 409 310
Index 500 Equity ..................... 1.936439 1,084 2,099 2.909123 4,606 13,399
Asset Allocation ..................... 0.873571 107 93 0.863125 584 504
Balanced ............................. 1.870656 1,610 3,012 6.403383 2,544 16,290
High Yield Bond ...................... 1.425787 138 197 1.424293 1,056 1,504
Select Bond .......................... 1.793220 482 864 9.098961 605 5,505
Money Market ......................... 1.397113 1,308 1,827 2.728924 1,724 4,705
Russell Multi-Style Equity ........... 0.613006 634 389 0.594202 1,405 835
Russell Aggressive Equity ............ 0.857996 281 241 0.831686 714 594
Russell Non-U.S ...................... 0.699179 256 179 0.677755 818 554
Russell Real Estate Securities ....... 1.301549 153 199 1.261665 656 828
Russell Core Bond .................... 1.256188 66 83 1.217720 599 729
--------- ---------
Equity .......................... 15,702 79,069
Annuity Reserves ................ 235 311
--------- ---------
Total Equity .................... $ 15,937 $ 79,380
========= =========
</Table>
35
NML VARIABLE ANNUITY ACCOUNT A
NOTES TO FINANCIAL STATEMENTS CONTINUED
<Table>
<Caption>
CONTRACTS ISSUED: CONTRACTS ISSUED:
ON OR AFTER MARCH 31, 2000 ON OR AFTER MARCH 31, 2000
FRONT LOAD VERSION BACK LOAD VERSION
---------------------------------- -------------------------------------
ACCUMULATION ACCUMULATION
UNIT UNITS UNIT UNITS
DIVISION VALUE OUTSTANDING EQUITY VALUE OUTSTANDING EQUITY
- -------- ------------ ----------- ------ ------------ ----------- --------
Small Cap Growth Stock .............. $ 0.702869 154 $ 108 $1.489185 522 $ 777
T. Rowe Small Cap Value ............. 0.953992 28 27 0.943905 328 310
Aggressive Growth Stock ............. 0.564112 222 125 3.494085 412 1,440
International Growth Stock .......... 0.788618 23 18 0.780276 193 151
Franklin Templeton International ....
Equity ......................... 0.700185 133 93 1.559571 403 629
Index 400 Stock ..................... 0.870423 181 158 1.072428 740 794
Growth Stock ........................ 0.616498 140 86 1.921805 635 1,220
J.P. Morgan Select Growth and
Income Stock ................... 0.581563 206 120 1.500218 244 366
Capital Guardian Domestic Equity 1 0.764893 44 34 0.756787 418 316
Index 500 Equity .................... 0.604035 281 170 2.909123 653 1,900
Asset Allocation .................... 0.872356 131 114 0.863125 251 217
Balanced ............................ 0.862735 829 715 6.403383 329 2,107
High Yield Bond ..................... 0.972766 60 58 1.424293 197 281
Select Bond ......................... 1.321394 183 242 9.098961 106 964
Money Market ........................ 1.092171 197 215 2.728924 513 1,400
Russell Multi-Style Equity .......... 0.574187 72 41 0.594202 403 239
Russell Aggressive Equity ........... 0.727980 52 38 0.831686 226 188
Russell Non-U.S ..................... 0.557227 94 52 0.677755 258 175
Russell Real Estate Securities ...... 1.375137 46 63 1.261665 280 353
Russell Core Bond ................... 1.243794 42 52 1.217720 173 211
------ --------
Equity ......................... 2,529 14,038
Annuity Reserves ............... -- --
------ --------
Total Equity ................... $2,529 $ 14,038
====== ========
</Table>
Equity Values by Division for the year ended December 31, 2001 are shown below:
(in thousands, except accumulation unit values)
<Table>
<Caption>
CONTRACTS ISSUED:
CONTRACTS ISSUED: AFTER DECEMBER 16, 1981 AND
PRIOR TO DECEMBER 17, 1981 PRIOR TO MARCH 31, 1995
--------------------------------------- -------------------------------------
ACCUMULATION ACCUMULATION
UNIT UNITS UNIT UNITS
DIVISION VALUE OUTSTANDING EQUITY VALUE OUTSTANDING EQUITY
- -------- ------------ ----------- -------- ------------ ----------- ---------
Small Cap Growth Stock ............ $ 1.873388 243 $ 454 $ 1.848493 5,700 $ 10,537
T. Rowe Price Small Cap Value ..... 1.014387 11 11 1.012260 293 296
Aggressive Growth Stock ........... 4.742335 305 1,444 4.487184 12,273 55,072
International Growth Stock ........ 0.903153 11 10 0.901258 91 82
Franklin Templeton International
Equity ....................... 1.996677 340 679 1.911919 11,504 21,995
Index 400 Stock ................... 1.287807 335 431 1.270690 4,225 5,368
Growth Stock ...................... 2.554121 311 795 2.458020 8,243 20,262
J.P. Morgan Select Growth and
Income Stock ................. 2.198364 182 400 2.115675 6,685 14,144
Capital Guardian Domestic
Equity ......................... 0.975051 11 11 0.973004 193 188
Index 500 Equity .................. 3.994853 4,934 19,712 3.780024 15,617 59,034
Asset Allocation .................. 0.975908 11 11 0.973862 477 464
Balanced .......................... 7.750204 1,566 12,135 7.012362 26,333 184,658
High Yield Bond ................... 1.543249 74 114 1.485164 1,881 2,794
Select Bond ....................... 9.086342 515 4,675 8.219594 1,651 13,573
Money Market ...................... 3.004024 766 2,301 2.718250 6,010 16,336
Russell Multi-Style Equity ........ 0.793888 27 21 0.783335 2,727 2,136
Russell Aggressive Equity ......... 1.054435 64 67 1.040412 1,623 1,689
Russell Non-U.S ................... 0.819680 52 42 0.808779 2,184 1,767
Russell Real Estate Securities .... 1.247315 23 28 1.230726 812 999
Russell Core Bond ................. 1.148123 17 19 1.132872 793 898
-------- ---------
Equity ....................... 43,360 412,292
Annuity Reserves ............. 3,481 9,091
-------- ---------
Total Equity ................. $ 46,841 $ 421,383
======== =========
</Table>
36
NML VARIABLE ANNUITY ACCOUNT A
NOTES TO FINANCIAL STATEMENTS CONTINUED
<Table>
<Caption>
CONTRACTS ISSUED: CONTRACTS ISSUED:
ON OR AFTER MARCH 31, 1995 AND ON OR AFTER MARCH 31, 1995 AND
PRIOR TO MARCH 31, 2000 PRIOR TO MARCH 31, 2000
FRONT LOAD VERSION BACK LOAD VERSION
------------------------------------- --------------------------------------
ACCUMULATION ACCUMULATION
UNIT UNITS UNIT UNITS
DIVISION VALUE OUTSTANDING EQUITY VALUE OUTSTANDING EQUITY
- -------- ------------- ----------- -------- ------------ ----------- --------
Small Cap Growth Stock ............ $ 1.890848 324 $ 612 $ 1.848493 1,809 $ 3,344
T. Rowe Small Cap Value ........... 1.015860 96 98 1.012260 151 153
Aggressive Growth Stock ........... 2.246524 1,271 2,856 4.487184 3,733 16,752
International Growth Stock ........ 0.904464 8 7 0.901258 31 28
Franklin Templeton International
Equity ....................... 1.662501 870 1,446 1.911919 3,194 6,106
Index 400 Stock ................... 1.299809 253 329 1.270690 1,706 2,167
Growth Stock ...................... 2.404787 677 1,628 2.458020 3,786 9,305
J.P. Morgan Select Growth and
Income Stock ................. 2.069175 657 1,359 2.115675 2,910 6,156
Capital Guardian Domestic Equity .. 0.976476 7 6 0.973004 71 69
Index 500 Equity .................. 2.494890 1,234 3,078 3.780024 5,051 19,091
Asset Allocation .................. 0.977328 83 81 0.973862 215 209
Balanced .......................... 2.031286 1,745 3,545 7.012362 2,779 19,490
High Yield Bond ................... 1.474181 211 312 1.485164 1,073 1,593
Select Bond ....................... 1.606263 301 483 8.219594 437 3,595
Money Market ...................... 1.379910 2,064 2,848 2.718250 1,759 4,782
Russell Multi-Style Equity ........ 0.801293 609 488 0.783335 1,505 1,179
Russell Aggressive Equity ......... 1.064253 278 296 1.040412 685 713
Russell Non-U.S ................... 0.827309 254 210 0.808779 820 663
Russell Real Estate Securities .... 1.258915 97 122 1.230726 395 486
Russell Core Bond ................. 1.158815 21 24 1.132872 367 416
--------- --------
Equity ....................... 19,828 96,297
Annuity Reserves ............. 295 402
--------- --------
Total Equity ................. $ 20,123 $ 96,699
========= ========
</Table>
<Table>
<Caption>
CONTRACTS ISSUED: CONTRACTS ISSUED:
ON OR AFTER MARCH 31, 2000 ON OR AFTER MARCH 31, 2000
FRONT LOAD VERSION BACK LOAD VERSION
-------------------------------------- -----------------------------------
ACCUMULATION ACCUMULATION
UNIT UNITS UNIT UNITS
DIVISION VALUE OUTSTANDING EQUITY VALUE OUTSTANDING EQUITY
- -------- ------------ ----------- -------- ------------ ----------- -------
Small Cap Growth Stock ............ $ 0.865935 140 $ 122 $ 1.848493 284 $ 525
T. Rowe Small Cap Value ........... 1.015445 -- -- 1.012260 26 26
Aggressive Growth Stock ........... 0.719033 168 120 4.487184 243 1,093
International Growth Stock ........ 0.904093 18 16 0.901258 15 14
Franklin Templeton International
Equity ....................... 0.851962 93 79 1.911919 146 279
Index 400 Stock ................... 1.023646 164 167 1.270690 362 460
Growth Stock ...................... 0.782628 66 52 2.458020 253 622
J.P. Morgan Select Growth and
Income Stock ................. 0.814020 138 113 2.115675 124 263
Capital Guardian Domestic Equity .. 0.976072 8 8 0.973004 8 8
Index 500 Equity .................. 0.779001 231 180 3.780024 277 1,049
Asset Allocation .................. 0.976926 -- -- 0.973862 35 34
Balanced .......................... 0.937735 819 768 7.012362 143 1,000
High Yield Bond ................... 1.006773 70 71 1.485164 52 77
Select Bond ....................... 1.184790 96 114 8.219594 26 214
Money Market ...................... 1.079788 1 1 2.718250 180 489
Russell Multi-Style Equity ........ 0.751294 77 58 0.783335 137 107
Russell Aggressive Equity ......... 0.903873 48 43 1.040412 64 67
Russell Non-U.S ................... 0.659991 92 61 0.808779 114 92
Russell Real Estate Securities .... 1.331406 35 46 1.230726 69 85
Russell Core Bond ................. 1.148513 38 43 1.132872 89 100
-------- -------
Equity ....................... 2,062 6,604
Annuity Reserves ............. -- --
-------- -------
Total Equity ................. $ 2,062 $ 6,604
======== =======
</Table>
37
REPORT OF INDEPENDENT ACCOUNTANTS
To The Northwestern Mutual Life Insurance Company and
Contract Owners of NML Variable Annuity Account A
In our opinion, the accompanying statements of assets and liabilities
and the related statements of operations and of changes in equity and the
financial highlights present fairly, in all material respects, the financial
position of NML Variable Annuity Account A and its Small Cap Growth Stock
Division, T. Rowe Price Small Cap Value Division, Aggressive Growth Stock
Division, International Growth Stock Division, Franklin Templeton International
Equity Division, Index 400 Stock Division, Growth Stock Division, J.P. Morgan
Select Growth & Income Stock Division, Capital Guardian Domestic Equity
Division, Index 500 Stock Division, Asset Allocation Division, Balanced
Division, High Yield Bond Division, Select Bond Division, Money Market Division,
Russell Multi-Style Equity Division, Russell Aggressive Equity Division, Russell
Non-U.S. Division, Russell Real Estate Securities Division and Russell Core Bond
Division at December 31, 2002 and 2001, and the results of each of their
operations, the changes in each of their equity and their financial highlights
for the periods indicated, in conformity with accounting principles generally
accepted in the United States of America. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of The Northwestern Mutual Life Insurance Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included direct confirmation of securities owned at December 31,
2002 and 2001 with Northwestern Mutual Series Fund, Inc. and the Russell
Insurance Funds, provide a reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
- ------------------------------
Milwaukee, Wisconsin
January 30, 2003
38
NML VARIABLE ANNUITY ACCOUNT C
STATEMENTS OF ASSETS AND LIABILITIES
(IN THOUSANDS)
<Table>
<Caption>
DECEMBER 31
--------------------------
2002 2001
----------- -----------
ASSETS
Investments at Market Value:
Northwestern Mutual Series Fund, Inc.
Small Cap Growth Stock
2002: 11,605 shares (cost $21,588)......... $ 16,885
2001: 11,812 shares (cost $22,806)......... $ 21,098
T. Rowe Price Small Cap Value#
2002: 476 shares (cost $493) .............. 454
2001: 162 shares (cost $159) .............. 165
Aggressive Growth Stock
2002: 32,817 shares (cost $112,089) ....... 71,638
2001: 39,756 shares (cost $140,948) ....... 112,232
International Growth Stock#
2002: 73 shares (cost $68) ................ 58
2001: 41 shares (cost $39) ................ 38
Franklin Templeton International Equity
2002: 34,186 shares (cost $44,997) ........ 35,006
2001: 38,694 shares (cost $58,397) ........ 48,902
Index 400 Stock
2002: 15,253 shares (cost $17,298) ........ 14,520
2001: 15,015 shares (cost $17,465) ........ 16,849
Growth Stock
2002: 14,018 shares (cost $31,269) ........ 22,261
2001: 16,290 shares (cost $37,853) ........ 33,016
J.P. Morgan Select Growth and Income Stock
2002: 15,981 shares (cost $22,258) ........ 13,872
2001: 20,895 shares (cost $30,763) ........ 25,473
Capital Guardian Domestic Equity#
2002: 765 shares (cost $646) .............. 580
2001: 216 shares (cost $204) .............. 211
Index 500 Stock
2002: 35,907 shares (cost $97,006) ........ 77,810
2001: 47,737 shares (cost $124,634) ....... 131,489
Asset Allocation#
2002: 1,738 shares (cost $1,612) .......... 1,491
2001: 47 shares (cost $45) ................ 46
Balanced
2002: 50,686 shares (cost $95,393) ........ 82,213
2001: 63,722 shares (cost $122,051) ....... 115,972
High Yield Bond
2002: 6,917 shares (cost $4,705) .......... 3,894
2001: 7,061 shares (cost $5,126) .......... 4,583
Select Bond
2002: 15,390 shares (cost $18,303) ........ 19,561
2001: 14,446 shares (cost $16,739) ........ 17,379
Money Market
2002: 10,973 shares (cost $10,973) ........ 10,973
2001: 15,185 shares (cost $15,185) ........ 15,185
</Table>
39
<Table>
<Caption>
DECEMBER 31
--------------------------
2002 2001
----------- -----------
Russell Insurance Funds
Multi-Style Equity
2002: 83 shares (cost $1,140) ............................................ 751
2001: 118 shares (cost $1,766) ........................................... 1,403
Aggressive Equity
2002: 57 shares (cost $688) .............................................. 527
2001: 62 shares (cost $778) .............................................. 710
Non-U.S
2002: 73 shares (cost $800) .............................................. 527
2001: 78 shares (cost $957) .............................................. 672
Real Estate Securities
2002: 910 shares (cost $9,865) ........................................... 9,566
2001: 614 shares (cost $6,485) ........................................... 6,600
Core Bond
2002: 77 shares (cost $796) .............................................. 804
2001: 78 shares (cost $798) .............................................. 793
Due from Sales of Fund Shares .................................................. 0 13
Due from Northwestern Mutual Life Insurance Company ............................ 67 37
----------- -----------
Total Assets ............................................................. 383,458 552,866
----------- -----------
LIABILITIES AND EQUITY
LIABILITIES
Due to Northwestern Mutual Life Insurance Company............................... $ 6 $ 13
Due on Purchase of Fund Shares ................................................. 0 37
----------- -----------
Total Liabilities ........................................................ 6 50
----------- -----------
EQUITY
Group Variable Annuity Contracts Issued:
Before December 17, 1981 or between April 30, 1984 and December 31, 1991 .... 287,155 390,128
After December 16, 1981 and Prior to May 1, 1984 ............................ 2,947 3,636
After December 31, 1991 - Front Load Version ................................ 20,761 29,953
After December 31, 1991 - Simplified Load Version ........................... 72,589 129,099
----------- -----------
Total Equity ............................................................. 383,452 552,816
----------- -----------
Total Liabilities and Equity.............................................. $ 383,458 $ 552,866
=========== ===========
</Table>
- ----------
# The initial investment was made on July 31, 2001.
The Accompanying Notes are an Integral Part of the Financial Statements.
40
NML VARIABLE ANNUITY ACCOUNT C
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<Table>
<Caption>
COMBINED SMALL CAP GROWTH STOCK DIVISION
---------------------------------------- ------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000 2002 2001 2000
------------ ------------ ------------ ------------ ------------ ------------
Investment Income
Dividend Income ........................ $ 9,117 $ 54,521 $ 54,949 $ 32 $ 2 $ 99
Annuity Rate and Expense Guarantees .... (1,432) (2,007) (2,896 (25) (28) (26)
------------ ------------ ------------ ------------ ------------ ------------
Net Investment Income (Loss) .............. 7,685 52,514 52,053 7 (26) 73
------------ ------------ ------------ ------------ ------------ ------------
Realized and Unrealized Gain (Loss)
on Investments
Realized Gain (Loss) on Investments .... (35,241) 8,705 54,861 (1,245) (886)
295
Unrealized Appreciation (Depreciation)
During the Year ..................... (58,211) (133,527) (121,850) (2,995) (14) (1,897)
------------ ------------ ------------ ------------ ------------ ------------
Net Gain (Loss) on Investments ............ (93,452) (124,822) (66,989) (4,240) (900) (1,602)
------------ ------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Investment Activity ....... $ (85,767) $ (72,308) $ (14,936) $ (4,233) $ (926) $ (1,529)
============ ============ ============ ============ ============ ============
</Table>
<Table>
<Caption>
T. ROWE PRICE
SMALL CAP VALUE DIVISION # AGGRESSIVE GROWTH STOCK DIVISION
--------------------------- ------------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2002 2001 2000
------------ ------------ ------------ ------------ ------------
Investment Income
Dividend Income ...................... $ 2 $ -- $ 90 $ 27,284 $ 20,221
Annuity Rate and Expense Guarantees .. (5) -- (231) (358) (614)
------------ ------------ ------------ ------------ ------------
Net Investment Income (Loss) ............ (3) -- (141) 26,926 19,607
------------ ------------ ------------ ------------ ------------
Realized and Unrealized Gain (Loss)
on Investments
Realized Gain (Loss) on Investments .. (27) -- (10,519) 511 9,000
Unrealized Appreciation (Depreciation)
During the Year ................... (44) 5 (11,735) (58,412) (20,677)
------------ ------------ ------------ ------------ ------------
Net Gain (Loss) on Investments .......... (71) 5 (22,254) (57,901) (11,677)
------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Investment Activity ..... $ (74) $ 5 $ (22,395) $ (30,975) $ 7,930
============ ============ ============ ============ ============
</Table>
<Table>
<Caption>
INTERNATIONAL GROWTH STOCK FRANKLIN TEMPLETON INTERNATIONAL
DIVISION # EQUITY DIVISION
--------------------------- ------------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2002 2001 2000
------------ ------------ ------------ ------------ ------------
Investment Income
Dividend Income ...................... $ -- $ -- $ 906 $ 5,914 $ 5,036
Annuity Rate and Expense Guarantees .. -- -- (78) (121) (186)
------------ ------------ ------------ ------------ ------------
Net Investment Income (Loss) ............ -- -- 828 5,793 4,850
------------ ------------ ------------ ------------ ------------
Realized and Unrealized Gain (Loss)
on Investments
Realized Gain (Loss) on Investments .. (42) -- (8,378) (6,258) 3,131
Unrealized Appreciation (Depreciation)
During the Year ................... (8) (2) (496) (8,375) (8,616)
------------ ------------ ------------ ------------ ------------
Net Gain (Loss) on Investments .......... (50) (2) (8,874) (14,633) (5,485)
------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Investment Activity ..... $ (50) $ (2) $ (8,046) $ (8,840) $ (635)
============ ============ ============ ============ ============
</Table>
- ----------
# The initial investment in this Division was made on July 31, 2001.
41
NML VARIABLE ANNUITY ACCOUNT C
STATEMENTS OF OPERATIONS CONTINUED
(IN THOUSANDS)
<Table>
<Caption>
INDEX 400 STOCK DIVISION GROWTH STOCK DIVISION
------------------------------------------ ------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000 2002 2001 2000
------------ ------------ ------------ ------------ ------------ ------------
Investment Income
Dividend Income ...................... $ 140 $ 194 $ 1,180 $ 330 $ 1,614 $ 2,101
Annuity Rate and Expense Guarantees .. (20) (19) (11) (77) (111) (152)
------------ ------------ ------------ ------------ ------------ ------------
Net Investment Income (Loss) ............ 120 175 1,169 253 1,503 1,949
------------ ------------ ------------ ------------ ------------ ------------
Realized and Unrealized Gain (Loss)
on Investments
Realized Gain (Loss) on Investments .. (823) (575) 98 (2,757) 777 2,717
Unrealized Appreciation (Depreciation)
During the Year ................... (2,160) 275 (923) (4,172) (8,402) (5,875)
------------ ------------ ------------ ------------ ------------ ------------
Net Gain (Loss) on Investments .......... (2,983) (300) (825) (6,929) (7,625) (3,158)
------------ ------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Investment Activity ..... $ (2,863) $ (125) $ 344 $ (6,676) $ (6,122) $ (1,209)
============ ============ ============ ============ ============ ============
</Table>
<Table>
<Caption>
J.P. MORGAN SELECT
GROWTH AND INCOME CAPITAL GUARDIAN DOMESTIC
STOCK DIVISION EQUITY DIVISION #
------------------------------------------- ---------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000 2002 2001
------------ ------------ ------------ ------------ ------------
Investment Income
Dividend Income ...................... $ 180 $ 957 $ 2,123 $ 7 $ --
Annuity Rate and Expense Guarantees .. (78) (124) (178) (3) --
------------ ------------ ------------ ------------ ------------
Net Investment Income (Loss) ............ 102 833 1,945 4 --
------------ ------------ ------------ ------------ ------------
Realized and Unrealized Gain (Loss)
on Investments
Realized Gain (Loss) on Investments .. (3,735) (545) (276) (8) --
Unrealized Appreciation (Depreciation)
During the Year ................... (3,096) (2,643) (4,224) (72) 6
------------ ------------ ------------ ------------ ------------
Net Gain (Loss) on Investments .......... (6,831) (3,188) (4,500) (80) 6
------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Investment Activity ..... $ (6,729) $ (2,355) $ (2,555) $ (76) $ 6
============ ============ ============ ============ ============
</Table>
<Table>
<Caption>
INDEX 500 STOCK DIVISION ASSET ALLOCATION DIVISION #
------------------------------------------ ---------------------------
PERIOD ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000 2002 2001
------------ ------------ ------------ ------------ ------------
Investment Income
Dividend Income ............................... $ 1,468 $ 6,550 $ 8,370 $ 24 $ --
Annuity Rate and Expense Guarantees ........... (259) (420) (688) (8) --
------------ ------------ ------------ ------------ ------------
Net Investment Income (Loss) ..................... 1,209 6,130 7,682 16 --
------------ ------------ ------------ ------------ ------------
Realized and Unrealized Gain (Loss) on Investments
Realized Gain (Loss) on Investments ........... (2,524) 12,916 27,391 (23) --
Unrealized Appreciation (Depreciation)
During the Year ............................ (26,051) (39,298) (53,361) (121) --
------------ ------------ ------------ ------------ ------------
Net Gain (Loss) on Investments ................... (28,575) (26,382) (25,970) (144) --
------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Investment Activity .............. $ (27,366) $ (20,252) $ (18,288) $ (128) $ --
============ ============ ============ ============ ============
</Table>
- ----------
# The initial investment in this Division was made on July 31, 2001.
42
NML VARIABLE ANNUITY ACCOUNT C
STATEMENTS OF OPERATIONS CONTINUED
(IN THOUSANDS)
<Table>
<Caption>
BALANCED DIVISION HIGH YIELD BOND DIVISION
------------------------------------------ ------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000 2002 2001 2000
------------ ------------ ------------ ------------ ------------ ------------
Investment Income
Dividend Income ...................... $ 3,922 $ 9,705 $ 12,909 $ 415 $ 487 $ 558
Annuity Rate and Expense Guarantees .. (356) (497) (688) (15) (22) (30)
------------ ------------ ------------ ------------ ------------ ------------
Net Investment Income (Loss) ............ 3,566 9,208 12,221 400 465 528
------------ ------------ ------------ ------------ ------------ ------------
Realized and Unrealized Gain (Loss)
on Investments
Realized Gain (Loss) on Investments .. (5,135) 3,486 14,398 (278) (737)
(1,290)
Unrealized Appreciation (Depreciation)
During the Year ................... (7,102) (17,384) (27,427) (267) 448 501
------------ ------------ ------------ ------------ ------------ ------------
Net Gain (Loss) on Investments .......... (12,237) (13,898) (13,029) (545) (289) (789)
------------ ------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Investment Activity ..... $ (8,671) $ (4,690) $ (808) $ (145) $ 176 $ (261)
============ ============ ============ ============ ============ ============
</Table>
<Table>
<Caption>
SELECT BOND DIVISION MONEY MARKET DIVISION
------------------------------------------ ------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000 2002 2001 2000
------------ ------------ ------------ ------------ ------------ ------------
Investment Income
Dividend Income ...................... $ 863 $ 911 $ 1,093 $ 221 $ 523 $ 971
Annuity Rate and Expense Guarantees .. (93) (99) (109) (144) (163) (174)
------------ ------------ ------------ ------------ ------------ ------------
Net Investment Income (Loss) ............ 770 812 984 77 360 797
------------ ------------ ------------ ------------ ------------ ------------
Realized and Unrealized Gain (Loss)
on Investments
Realized Gain (Loss) on Investments .. 541 32 (655) -- -- --
Unrealized Appreciation (Depreciation)
During the Year ................... 617 578 1,084 -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Net Gain (Loss) on Investments .......... 1,158 610 429 -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Investment Activity ..... $ 1,928 $ 1,422 $ 1,413 $ 77 $ 360 $ 797
============ ============ ============ ============ ============ ============
</Table>
<Table>
<Caption>
RUSSELL MULTI-STYLE EQUITY DIVISION RUSSELL AGGRESSIVE 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,
2002 2001 2000 2002 2001 2000
------------ ------------ ------------ ------------ ------------ ------------
Investment Income
Dividend Income ...................... $ 7 $ 37 $ 79 $ -- $ 1 $ 74
Annuity Rate and Expense Guarantees .. (10) (14) (19) (7) (7) (7)
------------ ------------ ------------ ------------ ------------ ------------
Net Investment Income (Loss) ............ (3) 23 60 (7) (6) 67
------------ ------------ ------------ ------------ ------------ ------------
Realized and Unrealized Gain (Loss)
on Investments
Realized Gain (Loss) on Investments .. (274) (120) (20) (35) (17)
24
Unrealized Appreciation (Depreciation)
During the Year ................... (26) (144) (282) (93) 9 (103)
------------ ------------ ------------ ------------ ------------ ------------
Net Gain (Loss) on Investments .......... (300) (264) (302) (128) (8) (79)
------------ ------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Investment Activity ..... $ (303) $ (241) $ (242) $ (135) $ (14) $ (12)
============ ============ ============ ============ ============ ============
</Table>
43
NML VARIABLE ANNUITY ACCOUNT C
STATEMENTS OF OPERATIONS CONTINUED
(IN THOUSANDS)
<Table>
<Caption>
RUSSELL NON-U.S. DIVISION RUSSELL REAL ESTATE SECURITIES 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,
2002 2001 2000 2002 2001 2000
------------ ------------ ------------ ------------ ------------ ------------
Investment Income
Dividend Income ...................... $ 9 $ 4 $ 61 $ 481 $ 290 $ 52
Annuity Rate and Expense Guarantees .. (6) (8) (8) (11) (9) (2)
------------ ------------ ------------ ------------ ------------ ------------
Net Investment Income (Loss) ............ 3 (4) 53 470 281 50
------------ ------------ ------------ ------------ ------------ ------------
Realized and Unrealized Gain (Loss)
on Investments
Realized Gain (Loss) on Investments .. (107) (33) 15 101 140
36
Unrealized Appreciation (Depreciation)
During the Year ................... 13 (158) (199) (414) (4) 126
------------ ------------ ------------ ------------ ------------ ------------
Net Gain (Loss) on Investments .......... (94) (191) (184) (313) 136 162
------------ ------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Investment Activity ..... $ (91) $ (195) $ (131) $ 157 $ 417 $ 212
============ ============ ============ ============ ============ ============
</Table>
<Table>
<Caption>
RUSSELL CORE BOND DIVISION
------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000
------------ ------------ ------------
Investment Income
Dividend Income .............................................. $ 20 $ 48 $ 22
Annuity Rate and Expense Guarantees .......................... (6) (7) (4)
------------ ------------ ------------
Net Investment Income (Loss) .................................... 14 41 18
------------ ------------ ------------
Realized and Unrealized Gain (Loss) on Investments
Realized Gain (Loss) on Investments .......................... 27 14 (3)
Unrealized Appreciation (Depreciation)
During the Year ........................................... 11 (12) 23
------------ ------------ ------------
Net Gain (Loss) on Investments .................................. 38 2 20
------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Investment Activity ............................. $ 52 $ 43 $ 38
============ ============ ============
</Table>
The Accompanying Notes are an Integral Part of the Financial Statements.
44
NML VARIABLE ANNUITY ACCOUNT C
STATEMENTS OF CHANGES IN EQUITY
(IN THOUSANDS)
<Table>
<Caption>
COMBINED SMALL CAP GROWTH STOCK DIVISION
------------------------------------------ ------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000 2002 2001 2000
------------ ------------ ------------ ------------ ------------ ------------
Operations:
Net Investment Income (Loss) ........ $ 7,685 $ 52,514 $ 52,053 $ 7 $ (26) $ 73
Net Realized Gain (Loss) ............ (35,241) 8,705 54,861 (1,245) (886) 295
Net Change in Unrealized
Appreciation (Depreciation) ...... (58,211) (133,527) (121,850) (2,995) (14) (1,897)
------------ ------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Investment Activity .... (85,767) (72,308) (14,936) (4,233) (926) (1,529)
------------ ------------ ------------ ------------ ------------ ------------
Equity Transactions:
Contract Owners' Net Payment ........ 78,994 90,774 103,967 3,161 3,160 4,045
Annuity Payments .................... (58) (64) (75) -- -- --
Surrenders and Other (Net) .......... (160,876) (140,073) (135,735) (3,415) (3,044) (373)
Transfers from Other Divisions
or Sponsors ....................... 49,213 55,326 91,474 3,066 4,837 17,508
Transfers to Other Divisions
or Sponsors ........................ (50,870) (53,674) (92,576) (2,791) (2,967) (562)
------------ ------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Equity Transactions .... (83,597) (47,711) (32,945) 21 1,986 20,618
------------ ------------ ------------ ------------ ------------ ------------
Net Increase (Decrease) in Equity ...... (169,364) (120,019) (47,881) (4,212) 1,060 19,089
Equity:
Beginning of Period ................. 552,816 672,835 720,716 21,098 20,038 949
------------ ------------ ------------ ------------ ------------ ------------
End of Period ....................... $ 383,452 $ 552,816 $ 672,835 $ 16,886 $ 21,098 $ 20,038
============ ============ ============ ============ ============ ============
</Table>
<Table>
<Caption>
T. ROWE PRICE
SMALL CAP VALUE DIVISION # AGGRESSIVE GROWTH STOCK DIVISION
--------------------------- ------------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2002 2001 2000
------------ ------------ ------------ ------------ ------------
Operations:
Net Investment Income (Loss) ........ $ (3) $ -- $ (141) $ 26,926 $ 19,607
Net Realized Gain (Loss) ............ (27) -- (10,519) 511 9,000
Net Change in Unrealized
Appreciation (Depreciation) ...... (44) 5 (11,735) (58,412) (20,677)
------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Investment Activity .... (74) 5 (22,395) (30,975) 7,930
------------ ------------ ------------ ------------ ------------
Equity Transactions:
Contract Owners' Net Payment ........ 96 94 9,670 13,427 23,615
Annuity Payments .................... -- -- -- (3) (5)
Surrenders and Other (Net) .......... (78) -- (23,497) (23,656) (20,763)
Transfers from Other Divisions
or Sponsors ....................... 592 66 2,021 4,001 16,356
Transfers to Other Divisions
or Sponsors ....................... (247) -- (6,377) (7,931) (9,504)
------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Equity Transactions .... 363 160 (18,183) (14,162) 9,699
------------ ------------ ------------ ------------ ------------
Net Increase (Decrease) in Equity ...... 289 165 (40,578) (45,137) 17,629
Equity:
Beginning of Period ................. 165 -- 112,232 157,369 139,740
------------ ------------ ------------ ------------ ------------
End of Period ....................... $ 454 $ 165 $ 71,654 $ 112,232 $ 157,369
============ ============ ============ ============ ============
</Table>
- ----------
# The initial investment in this Division was made on July 31, 2001.
45
NML VARIABLE ANNUITY ACCOUNT C
STATEMENTS OF CHANGES IN EQUITY CONTINUED
(IN THOUSANDS)
<Table>
<Caption>
INTERNATIONAL GROWTH FRANKLIN TEMPLETON INTERNATIONAL
STOCK DIVISION # EQUITY DIVISION
---------------------------- --------------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2002 2001 2000
------------ ------------ ------------ ------------ ------------
Operations:
Net Investment Income (Loss) ................. $ -- $ -- $ 828 $ 5,793 $ 4,850
Net Realized Gain (Loss) ..................... (42) -- (8,378) (6,258) 3,131
Net Change in Unrealized
Appreciation (Depreciation) ............... (8) (2) (496) (8,375) (8,616)
------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Investment Activity ............. (50) (2) (8,046) (8,840) (635)
------------ ------------ ------------ ------------ ------------
Equity Transactions:
Contract Owners' Net Payment ................. 67 11 30,003 27,273 22,162
Annuity Payments ............................. -- -- (2) (2) (2)
Surrenders and Other (Net) ................... (10) -- (39,024) (32,422) (22,407)
Transfers from Other Divisions or Sponsors ... 159 29 6,265 2,545 9,389
Transfers to Other Divisions or Sponsors ..... (145) -- (3,090) (5,144) (7,571)
------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Equity Transactions ............. 71 40 (5,848) (7,750) 1,571
------------ ------------ ------------ ------------ ------------
Net Increase (Decrease) in Equity ............... 21 38 (13,894) (16,590) 936
Equity:
Beginning of Period .......................... 38 -- 48,902 65,492 64,556
------------ ------------ ------------ ------------ ------------
End of Period ................................ $ 59 $ 38 $ 35,008 $ 48,902 $ 65,492
============ ============ ============ ============ ============
</Table>
<Table>
<Caption>
INDEX 400 STOCK DIVISION GROWTH STOCK DIVISION
------------------------------------------ ------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000 2002 2001 2000
------------ ------------ ------------ ------------ ------------ ------------
Operations:
Net Investment Income (Loss) ....... $ 120 $ 175 $ 1,169 $ 253 $ 1,503 $ 1,949
Net Realized Gain (Loss) ........... (823) (575) 98 (2,757) 777 2,717
Net Change in Unrealized
Appreciation (Depreciation) ..... (2,160) 275 (923) (4,172) (8,402) (5,875)
------------ ------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Investment Activity ... (2,863) (125) 344 (6,676) (6,122) (1,209)
------------ ------------ ------------ ------------ ------------ ------------
Equity Transactions:
Contract Owners' Net Payment ....... 2,788 3,343 881 3,727 4,918 6,941
Annuity Payments ................... (1) -- -- (3) (4) (4)
Surrenders and Other (Net) ......... (3,440) (2,104) (366) (6,378) (6,927) (6,269)
Transfers from Other Divisions
or Sponsors ...................... 2,998 6,318 10,283 2,570 2,504 6,640
Transfers to Other Divisions
or Sponsors ...................... (1,810) (1,982) (217) (3,995) (4,049) (3,179)
------------ ------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Equity Transactions ... 535 5,575 10,581 (4,079) (3,558) 4,129
------------ ------------ ------------ ------------ ------------ ------------
Net Increase (Decrease) in Equity ..... (2,328) 5,450 10,925 (10,755) (9,680) 2,920
Equity:
Beginning of Period ................ 16,849 11,399 474 33,016 42,696 39,776
------------ ------------ ------------ ------------ ------------ ------------
End of Period ...................... $ 14,521 $ 16,849 $ 11,399 $ 22,261 $ 33,016 $ 42,696
============ ============ ============ ============ ============ ============
</Table>
- ----------
# The initial investment in this Division was made on July 31, 2001.
46
NML VARIABLE ANNUITY ACCOUNT C
STATEMENTS OF CHANGES IN EQUITY CONTINUED
(IN THOUSANDS)
<Table>
<Caption>
J.P. MORGAN SELECT GROWTH AND INCOME CAPITAL GUARDIAN DOMESTIC
STOCK DIVISION EQUITY DIVISION #
------------------------------------------ ---------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000 2002 2001
------------ ------------ ------------ ------------ ------------
Operations:
Net Investment Income (Loss) ................. $ 102 $ 833 $ 1,945 $ 4 $ --
Net Realized Gain (Loss) ..................... (3,735) (545) (276) (8) --
Net Change in Unrealized
Appreciation (Depreciation) ............... (3,096) (2,643) (4,224) (72) 6
------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Investment Activity ............. (6,729) (2,355) (2,555) (76) 6
------------ ------------ ------------ ------------ ------------
Equity Transactions:
Contract Owners' Net Payment ................. 2,377 3,353 4,010 62 103
Annuity Payments ............................. -- -- -- -- --
Surrenders and Other (Net) ...................... (5,579) (5,302) (6,461) (55) --
Transfers from Other Divisions or Sponsors ... 973 2,133 2,472 509 102
Transfers to Other Divisions or Sponsors ..... (2,644) (2,079) (8,848) (67) --
------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Equity Transactions ............. (4,873) (1,895) (8,827) 449 205
------------ ------------ ------------ ------------ ------------
Net Increase (Decrease) in Equity ............... (11,602) (4,250) (11,382) 373 211
Equity:
Beginning of Period .......................... 25,473 29,723 41,105 211 --
------------ ------------ ------------ ------------ ------------
End of Period ................................ $ 13,871 $ 25,473 $ 29,723 $ 584 $ 211
============ ============ ============ ============ ============
</Table>
<Table>
<Caption>
INDEX 500 STOCK DIVISION ASSET ALLOCATION DIVISION #
------------------------------------------ ---------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000 2002 2001
------------ ------------ ------------ ------------ ------------
Operations:
Net Investment Income (Loss) ................. $ 1,209 $ 6,130 $ 7,682 $ 16 $ --
Net Realized Gain (Loss) ..................... (2,524) 12,916 27,391 (23) --
Net Change in Unrealized
Appreciation (Depreciation) ............... (26,051) (39,298) (53,361) (121) --
------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Investment Activity ............. (27,366) (20,252) (18,288) (128) --
------------ ------------ ------------ ------------ ------------
Equity Transactions:
Contract Owners' Net Payment ................. 10,129 15,810 20,521 185 15
Annuity Payments ............................. (3) (4) (5) (10) --
Surrenders and Other (Net) ................... (31,783) (31,233) (31,320) (9) --
Transfers from Other Divisions or Sponsors ... 1,762 4,024 6,728 1,406 31
Transfers to Other Divisions or Sponsors ..... (6,390) (10,254) (24,313) -- --
------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Equity Transactions ............. (26,285) (21,657) (28,389) 1,572 46
------------ ------------ ------------ ------------ ------------
Net Increase (Decrease) in Equity ............... (53,651) (41,909) (46,677) 1,444 46
Equity:
Beginning of Period .......................... 131,489 173,398 220,075 46 --
------------ ------------ ------------ ------------ ------------
End of Period ................................ $ 77,838 $ 131,489 $ 173,398 $ 1,490 $ 46
============ ============ ============ ============ ============
</Table>
- ----------
# The initial investment in this Division was made on July 31, 2001.
47
NML VARIABLE ANNUITY ACCOUNT C
STATEMENTS OF CHANGES IN EQUITY CONTINUED
(IN THOUSANDS)
<Table>
<Caption>
BALANCED DIVISION HIGH YIELD BOND DIVISION
------------------------------------------ ------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000 2002 2001 2000
------------ ------------ ------------ ------------ ------------ ------------
Operations:
Net Investment Income (Loss) ......... $ 3,566 $ 9,208 $ 12,221 $ 400 $ 465 $ 528
Net Realized Gain (Loss) ............. (5,135) 3,486 14,398 (278) (737) (1,290)
Net Change in Unrealized
Appreciation (Depreciation) ...... (7,102) (17,384) (27,427) (267) 448 501
------------ ------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Investment Activity .. (8,671) (4,690) (808) (145) 176 (261)
------------ ------------ ------------ ------------ ------------ ------------
Equity Transactions:
Contract Owners' Net Payment ...... 6,606 8,917 13,295 531 1,643 698
Annuity Payments .................. (26) (28) (37) (1) (1) (1)
Surrenders and Other (Net) ........ (24,451) (18,268) (26,734) (1,020) (2,091) (1,212)
Transfers from Other Divisions
or Sponsors ...................... 4,001 3,462 2,847 709 2,647 669
Transfers to Other Divisions
or Sponsors ...................... (11,207) (9,430) (19,997) (763) (2,030) (2,034)
------------ ------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Equity Transactions .. (25,077) (15,347) (30,626) (544) 168 (1,880)
------------ ------------ ------------ ------------ ------------ ------------
Net Increase (Decrease) in Equity .... (33,748) (20,037) (31,434) (689) 344 (2,141)
Equity:
Beginning of Period ............... 115,972 136,009 167,443 4,583 4,239 6,380
------------ ------------ ------------ ------------ ------------ ------------
End of Period ..................... $ 82,224 $ 115,972 $ 136,009 $ 3,894 $ 4,583 $ 4,239
============ ============ ============ ============ ============ ============
</Table>
<Table>
<Caption>
SELECT BOND DIVISION MONEY MARKET DIVISION
------------------------------------------ ------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000 2002 2001 2000
------------ ------------ ------------ ------------ ------------ ------------
Operations:
Net Investment Income (Loss) ...... $ 770 $ 812 $ 984 $ 77 $ 360 $ 797
Net Realized Gain (Loss) .......... 541 32 (655) -- -- --
Net Change in Unrealized
Appreciation (Depreciation) .... 617 578 1,084 -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Investment Activity .. 1,928 1,422 1,413 77 360 7979
------------ ------------ ------------ ------------ ------------ ------------
Equity Transactions:
Contract Owners' Net Payment ...... 2,853 2,126 2,655 4,425 4,807 4,448
Annuity Payments .................. (6) (5) (4) (5) (17) (17)
Surrenders and Other (Net) ........ (5,251) (3,607) (4,440) (13,638) (10,053) (14,734)
Transfers from Other Divisions
or Sponsors ...................... 6,188 5,722 2,504 10,654 12,104 11,630
Transfers to Other Divisions
or Sponsors ...................... (3,530) (2,306) (5,638) (5,725) (4,118) (9,596)
------------ ------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Equity Transactions .. 254 1,930 (4,923) (4,289) 2,723 (8,269)
------------ ------------ ------------ ------------ ------------ ------------
Net Increase (Decrease) in Equity .... 2,182 (3,352) (3,510) (4,212) 3,083 (7,472)
Equity:
Beginning of Period ............... 17,379 14,027 17,537 15,185 12,102 19,574
------------ ------------ ------------ ------------ ------------ ------------
End of Period ..................... $ 19,561 $ 17,379 $ 14,027 $ 10,973 $ 15,185 $ 12,102
============ ============ ============ ============ ============ ============
</Table>
48
NML VARIABLE ANNUITY ACCOUNT C
STATEMENTS OF CHANGES IN EQUITY CONTINUED
(IN THOUSANDS)
<Table>
<Caption>
RUSSELL MULTI-STYLE EQUITY DIVISION RUSSELL AGGRESSIVE 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,
2002 2001 2000 2002 2001 2000
------------ ------------ ------------ ------------ ------------ ------------
Operations:
Net Investment Income (Loss) ....... $ (3) $ 23 $ 60 $ (7) $ (6) $ 67
Net Realized Gain (Loss) ........... (274) (120) (20) (35) (17) 24
Net Change in Unrealized
Appreciation (Depreciation) ..... (26) (144) (282) (93) 9 (103)
------------ ------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Investment Activity ... (303) (241) (242) (135) (14) (12)
------------ ------------ ------------ ------------ ------------ ------------
Equity Transactions:
Contract Owners' Net Payment ....... 312 228 210 92 120 133
Annuity Payments ................... -- -- -- -- -- --
Surrenders and Other (Net) ......... (345) (119) (243) (145) (72) (170)
Transfers from Other Divisions
or Sponsors .......................... 90 61 672 67 84 472
Transfers to Other Divisions
or Sponsors ....................... (406) (271) (357) (62) (51) (131)
------------ ------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Equity Transactions ... (349) (101) 282 (48) 81 304
------------ ------------ ------------ ------------ ------------ ------------
Net Increase (Decrease) in Equity ..... (652) (342) 40 (183) 67 292
Equity:
Beginning of Period ................ 1,403 1,745 1,705 710 643 351
------------ ------------ ------------ ------------ ------------ ------------
End of Period ...................... $ 751 $ 1,403 $ 1,745 $ 527 $ 710 $ 643
============ ============ ============ ============ ============ ============
</Table>
<Table>
<Caption>
RUSSELL NON-U.S. DIVISION RUSSELL REAL ESTATE SECURITIES 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,
2002 2001 2000 2002 2001 2000
------------ ------------ ------------ ------------ ------------ ------------
Operations:
Net Investment Income (Loss) ...... $ 3 $ (4) $ 53 $ 470 $ 281 $ 50
Net Realized Gain (Loss) .......... (107) (33) 15 101 140 36
Net Change in Unrealized
Appreciation (Depreciation) .... 13 (158) (199) (414) (4) 126
------------ ------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Investment Activity .. (91) (195) (131) 157 417 212
------------ ------------ ------------ ------------ ------------ ------------
Equity Transactions:
Contract Owners' Net Payment ...... 85 114 125 1,725 1,245 151
Annuity Payments .................. -- -- -- (1) -- --
Surrenders and Other (Net) ........ (147) (86) (152) (2,490) (1,081) (48)
Transfers from Other Divisions
or Sponsors ......................... 109 21 516 4,673 4,382 2,707
Transfers to Other Divisions
or Sponsors ...................... (101) -- (105) (1,098) (1,014) (473)
------------ ------------ ------------ ------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Equity Transactions .. (54) 49 384 2,809 3,532 2,337
------------ ------------ ------------ ------------ ------------ ------------
Net Increase (Decrease) in Equity .... (145) (146) 253 2,966 3,949 2,549
Equity:
Beginning of Period ............... 672 818 565 6,600 2,651 102
------------ ------------ ------------ ------------ ------------ ------------
End of Period ..................... $ 527 $ 672 $ 818 $ 9,566 $ 6,600 $ 2,651
============ ============ ============ ============ ============ ============
</Table>
49
NML VARIABLE ANNUITY ACCOUNT C
STATEMENTS OF CHANGES IN EQUITY CONTINUED
(IN THOUSANDS)
<Table>
<Caption>
RUSSELL CORE BOND DIVISION
------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000
------------ ------------ ------------
Operations:
Net Investment Income (Loss) ................. $ 14 $ 41 $ 18
Net Realized Gain (Loss) ..................... 27 14 (3)
Net Change in Unrealized
Appreciation (Depreciation) ............... 11 (12) 23
------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Investment Activity ............. 52 43 38
------------ ------------ ------------
Equity Transactions:
Contract Owners' Net Payment ................. 100 67 77
Annuity Payments ............................. -- -- --
Surrenders and Other (Net) ................... (121) (8) (43)
Transfers from Other Divisions or Sponsors ... 401 253 81
Transfers to Other Divisions or Sponsors ..... (422) (48) (51)
------------ ------------ ------------
Increase (Decrease) in Equity
Derived from Equity Transactions ............. (42) 264 64
------------ ------------ ------------
Net Increase (Decrease) in Equity ............... 10 307 102
Equity:
Beginning of Period .......................... 793 486 384
------------ ------------ ------------
End of Period ................................ $ 803 $ 793 $ 486
============ ============ ============
</Table>
The Accompanying Notes are an Integral Part of the Financial Statements.
50
FINANCIAL HIGHLIGHTS
NML VARIABLE ANNUITY ACCOUNT C
(FOR A UNIT OUTSTANDING DURING THE PERIOD)
<Table>
<Caption>
DIVIDEND
INCOME AS
A % OF
UNIT VALUE AVERAGE NET EXPENSE RATIO TOTAL RETURN(2)
DIVISION LOWEST TO HIGHEST ASSETS LOWEST TO HIGHEST LOWEST TO HIGHEST
- -------- ------------------------ ----------- ----------------- ----------------------
Small Cap Growth Stock
Year Ended 12/31/02...................... $1.489185 to $ 15.591407 0.16% 0.00% to 1.25% (19.44%) to (18.42%)
Year Ended 12/31/01...................... $1.848493 to $ 19.112629 0.01% 0.00% to 1.25% (4.97%) to (3.76%)
T. Rowe Price Small Cap Value(1) ...........
Year Ended 12/31/02...................... $0.943905 to $ 9.607906 0.49% 0.00% to 1.25% (6.75%) to (5.58%)
Period Ended 12/31/01.................... $1.012260 to $ 10.175772 0.38% 0.00% to 1.25% 1.23% to 1.76%
Aggressive Growth Stock
Year Ended 12/31/02...................... $2.360410 to $ 38.441232 0.10% 0.00% to 1.25% (22.13%) to (21.15%)
Year Ended 12/31/01...................... $3.013165 to $ 48.753408 22.56% 0.00% to 1.25% (20.88%) to (19.87%)
International Growth Stock(1)
Year Ended 12/31/02...................... $0.780276 to $ 7.942434 0.27% 0.00% to 1.25% (13.42%) to (12.34%)
Period Ended 12/31/01....... ............ $0.901258 to $ 9.060000 0.00% 0.00% to 1.25% (9.87%) to (9.40%)
Franklin Templeton International Equity
Year Ended 12/31/02...................... $1.559571 to $ 1.759773 2.11% 0.00% to 1.25% (18.43%) to (17.40%)
Year Ended 12/31/01...................... $1.911919 to $ 2.130553 10.95% 0.00% to 1.25% (15.07%) to (14.00%)
Index 400 Stock
Year Ended 12/31/02...................... $1.072428 to $ 11.227976 0.84% 0.00% to 1.25% (15.60%) to (14.54%)
Year Ended 12/31/01...................... $1.270690 to $ 13.138452 1.30% 0.00% to 1.25% (1.90%) to (0.65%)
Growth Stock
Year Ended 12/31/02...................... $1.921805 to $ 21.414901 1.20% 0.00% to 1.25% (21.81%) to (20.83%)
Year Ended 12/31/01...................... $2.458020 to $ 27.049526 4.53% 0.00% to 1.25% (15.29%) to (14.22%)
J.P. Morgan Select Growth and Income Stock
Year Ended 12/31/02...................... $1.500218 to $ 16.717038 0.97% 0.00% to 1.25% (29.09%) to (28.20%)
Year Ended 12/31/01...................... $2.115675 to $ 23.281928 3.63% 0.00% to 1.25% (8.92%) to (7.77%)
Capital Guardian Domestic Equity(1)
Year Ended 12/31/02...................... $0.756787 to $ 7.703469 2.12% 0.00% to 1.25% (22.22%) to (21.24%)
Period Ended 12/31/01.................... $0.973004 to $ 9.781208 0.71% 0.00% to 1.25% (2.70%) to (2.19%)
Index 500 Stock
Year Ended 12/31/02...................... $2.420098 to $ 35.246385 1.44% 0.00% to 1.25% (23.04%) to (22.07%)
Year Ended 12/31/01...................... $3.125796 to $ 45.228886 4.54% 0.00% to 1.25% (12.98%) to (11.88%)
Asset Allocation(1)
Year Ended 12/31/02...................... $0.863125 to $ 8.785751 2.61% 0.00% to 1.25% (11.37%) to (10.26%)
Period Ended 12/31/01.................... $0.973862 to $ 9.789803 0.72% 0.00% to 1.25% (2.61%) to (2.10%)
Balanced
Year Ended 12/31/02...................... $2.209502 to $ 84.486469 4.05% 0.00% to 1.25% (8.68%) to (7.54%)
Year Ended 12/31/01...................... $2.405185 to $ 91.372736 7.91% 0.00% to 1.25% (4.36%) to (3.15%)
High Yield Bond
Year Ended 12/31/02...................... $1.424293 to $ 15.870922 10.23% 0.00% to 1.25% (4.10%) to (2.89%)
Year Ended 12/31/01...................... $1.485164 to $ 16.343831 10.11% 0.00% to 1.25% 3.72% to 5.03%
Select Bond
Year Ended 12/31/02...................... $2.084184 to $121.279762 4.77% 0.00% to 1.25% 10.70% to 12.09%
Year Ended 12/31/01...................... $1.871532 to $108.200259 5.60% 0.00% to 1.25% 8.99% to 10.37%
Money Market
Year Ended 12/31/02...................... $1.504462 to $ 34.132616 1.66% 0.00% to 1.25% 0.39% to 1.65%
Year Ended 12/31/01...................... $1.489628 to $ 33.577318 3.74% 0.00% to 1.25% 2.62% to 3.92%
Russell Multi-Style Equity
Year Ended 12/31/02...................... $0.594202 to $ 6.221208 0.62% 0.00% to 1.25% (24.14%) to (23.19%)
Year Ended 12/31/01...................... $0.783335 to $ 8.099453 2.58% 0.00% to 1.25% (15.28%) to (14.21%)
Russell Aggressive Equity
Year Ended 12/31/02...................... $0.831686 to $ 8.707578 0.00% 0.00% to 1.25% (20.06%) to (19.06%)
Year Ended 12/31/01...................... $1.040412 to $ 10.757522 0.11% 0.00% to 1.25% (3.58%) to (2.36%)
Russell Non-U.S
Year Ended 12/31/02...................... $0.677755 to $ 7.095865 1.62% 0.00% to 1.25% (16.20%) to (15.15%)
Year Ended 12/31/01...................... $0.808779 to $ 8.362558 0.59% 0.00% to 1.25% (23.00%) to (22.03%)
</Table>
51
FINANCIAL HIGHLIGHTS
NML VARIABLE ANNUITY ACCOUNT C CONTINUED
(FOR A UNIT OUTSTANDING DURING THE PERIOD)
<Table>
Russell Core Bond
Year Ended 12/31/02......... $1.217720 to $ 12.748590 2.91% 0.00% to 1.25% 7.49% to 8.84%
Year Ended 12/31/01......... $1.132872 to $ 11.713217 6.24% 0.00% to 1.25% 6.07% to 7.41%
Russell Real Estate Securities
Year Ended 12/31/02......... $1.261665 to $ 13.208871 5.22% 0.00% to 1.25% 2.51% to 3.80%
Year Ended 12/31/01......... $1.230726 to $ 12.725061 5.28% 0.00% to 1.25% 6.49% to 7.84%
</Table>
- -----------
(1) Portfolio commenced operations on July 31, 2001.
(2) Total Return includes deductions for management and other expenses;
excludes deductions for sales loads and other charges. Returns are not
annualized for periods less than one year.
The Accompanying Notes are an Integral Part of the Financial Statements.
52
NML VARIABLE ANNUITY ACCOUNT C
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- NML Variable Annuity Account C (the "Account") is a segregated asset
account of The Northwestern Mutual Life Insurance Company ("Northwestern
Mutual") used to fund variable annuity contracts ("contracts") for HR-10 and
corporate pension and profit-sharing plans which qualify for special tax
treatment under the Internal Revenue Code. Currently, two versions of the
contract are offered: Front Load contracts with a sales charge up to 4.5% of
purchase payments and Simplified Load contracts with an installation fee of
$750.
NOTE 2 -- The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Principal accounting policies are summarized below.
NOTE 3 -- All assets of each Division of the Account are invested in shares of
the corresponding Portfolio of Northwestern Mutual Series Fund, Inc. and the
Russell Insurance Funds (collectively know as the "Funds"). The shares are
valued at the Funds' offering and redemption price per share. The Funds are
open-end investment companies registered under the Investment Company Act of
1940.
NOTE 4 -- Annuity reserves are based on published annuity tables with age
adjustments and benefit payments which reflect actual investment experience.
Annuity reserves are based on the 1983 Table a adjusted with assumed interest
rates of 3-1/2% or 5%.
NOTE 5 -- Dividend income from the Funds is recorded on the ex-date of the
dividends. Transactions in the Funds' shares are accounted for on the trade
date. The basis for determining cost on sale of the Funds' shares is identified
cost. Purchases and sales of the Funds' shares for the years ended December 31
by each Division are shown below:
<Table>
<Caption>
PURCHASES 2002 2001 2000
- --------- ----------- ----------- -----------
Small Cap Growth Stock ...................... $ 4,101,427 $ 6,233,394 $21,822,710
T. Rowe Price Small Cap Value# ............. 439,368 159,645 N/A
Aggressive Growth Stock ..................... 13,446,357 36,767,770 47,835,326
International Growth Stock#.................. 81,631 39,524 N/A
Franklin Templeton International Equity ..... 37,675,272 31,683,628 31,939,632
Index 400 Stock ............................. 4,794,956 8,666,766 12,366,486
Growth Stock ............................... 4,614,934 6,414,454 12,950,757
J.P. Morgan Select Growth and Income Stock... 3,214,603 4,403,338 5,847,806
Capital Guardian Domestic Equity#............ 507,375 204,575 N/A
Index 500 Stock ............................. 17,825,221 17,138,782 21,135,615
Asset Allocation#............................ 1,602,656 45,385 N/A
Balanced .................................... 13,689,364 15,734,227 19,926,273
High Yield Bond ............................ 1,019,296 4,182,589 2,046,585
Select Bond ................................. 6,546,498 7,322,244 5,061,775
Money Market ............................... 10,578,873 14,787,625 14,029,450
Russell Multi-Style ......................... 326,188 401,949 851,426
Russell Aggressive Equity .................. 123,680 183,388 646,095
Russell Non-U.S. ............................ 107,319 134,575 646,150
Russell Core Bond .......................... 145,550 752,848 179,473
Russell Real Estate Securities............... 5,919,307 5,224,573 3,116,036
</Table>
53
NML VARIABLE ANNUITY ACCOUNT C
NOTES TO FINANCIAL STATEMENTS CONTINUED
<Table>
<Caption>
SALES 2002 2001 2000
- ----- ------------ ------------ ------------
Small Cap Growth Stock ...................... $ 4,073,616 $ 4,295,263 $ 1,131,840
T. Rowe Price Small Cap Value# .............. 78,233 176 N/A
Aggressive Growth Stock ..................... 29,800,357 24,003,411 18,536,546
International Growth Stock# ................. 11,232 123 N/A
Franklin Templeton International Equity ..... 42,699,052 33,668,396 25,522,098
Index 400 Stock ............................. 4,139,828 2,918,757 615,601
Growth Stock ................................ 8,441,163 8,466,155 6,871,377
J.P. Morgan Select Growth and Income Stock .. 7,984,459 5,467,056 12,730,171
Capital Guardian Domestic Equity# ........... 57,966 145 N/A
Index 500 Stock ............................. 40,484,151 32,662,751 42,005,726
Asset Allocation# ........................... 13,114 83 N/A
Balanced .................................... 35,212,020 21,870,333 38,332,517
High Yield Bond ............................. 1,162,441 3,549,767 3,398,369
Select Bond ................................. 5,400,203 4,580,899 9,000,392
Money Market ................................ 14,793,674 11,701,602 21,273,753
Russell Multi-Style ......................... 678,182 485,832 510,026
Russell Aggressive Equity ................... 178,946 114,505 276,105
Russell Non-U.S ............................. 158,091 89,282 208,804
Russell Core Bond ........................... 150,115 441,607 736,889
Russell Real Estate Securities .............. 2,586,225 1,382,753 97,425
</Table>
- -----------
# Initial Investment in this division was made on July 31, 2001.
NOTE 6 -- A deduction for annuity rate and expense guarantees is determined
daily and paid to Northwestern Mutual as compensation for assuming the risk that
annuity payments will continue for longer periods than anticipated because the
annuitants as a group live longer than expected and the risk that the charges
made by Northwestern Mutual may be insufficient to cover the actual costs
incurred in connection with the contracts.
For contracts issued after December 16, 1981, and prior to May 1, 1984, the
deduction is determined daily at an annual rate of 1/2 of 1% of the net assets
of each Division attributable to these contracts and is paid to Northwestern
Mutual. For these contracts, the rate may be increased or decreased by the Board
of Trustees of Northwestern Mutual not to exceed a 3/4 of 1% annual rate.
Generally, for contracts issued after December 31, 1991, for the Front Load
Version and the Simplified Load Version, the deduction for annuity rate and
expense guarantees is determined daily at annual rates of 6.5/10 of 1% and
1-1/4%, respectively, of the net assets of each Division attributable to these
contracts and is paid to Northwestern Mutual. For these contracts, the rates may
be increased or decreased by the Board of Trustees of Northwestern Mutual not to
exceed 1% and 1-1/2% annual rates, respectively.
Since 1996, Northwestern Mutual has paid a dividend to certain contracts. The
dividend is re-invested in the Account and has been reflected as a Contract
Owners' Net Payment in the accompanying financial statements.
NOTE 7 -- Northwestern Mutual is taxed as a "life insurance company" under the
Internal Revenue Code and the operations of the Account form a part of and are
taxed with those of Northwestern Mutual. Under current law, no federal income
taxes are payable with respect to the Account. Accordingly, no provision for any
such liability has been made.
54
NML VARIABLE ANNUITY ACCOUNT C
NOTES TO FINANCIAL STATEMENTS CONTINUED
NOTE 8 -- Equity Values by Division for the year ended December 31, 2002 are
shown below: (in thousands, except accumulation unit values)
<Table>
<Caption>
CONTRACTS ISSUED: CONTRACTS ISSUED:
PRIOR TO DECEMBER 17, 1981 OR BETWEEN AFTER DECEMBER 16, 1981 AND
APRIL 30, 1984 AND DECEMBER 31, 1991 PRIOR TO MAY 1, 1984
------------------------------------- -----------------------------------
ACCUMULATION ACCUMULATION
UNIT UNITS UNIT UNITS
DIVISION VALUE OUTSTANDING EQUITY VALUE OUTSTANDING EQUITY
- -------- ------------ ----------- -------- ------------ ----------- --------
Small Cap Growth Stock ............ $ 15.591407 992 $ 15,467 $ 15.307344 -- $ --
T. Rowe Price Small Cap Value ..... 9.607906 5 48 9.539874 -- --
Aggressive Growth Stock ........... 38.441232 1,538 59,123 36.213065 2 72
International Growth Stock ........ 7.942434 2 16 7.886164 -- --
Franklin Templeton International
Equity ....................... 1.759773 17,431 30,675 1.676652 26 44
Index 400 Stock ................... 11.227976 1,163 13,058 11.023428 -- --
Growth Stock ...................... 21.414901 821 17,582 20.506308 -- --
J.P. Morgan Select Growth and
Income Stock ................. 16.717038 552 9,228 16.007652 2 32
Capital Guardian Domestic Equity .. 7.703469 9 69 7.648889 -- --
Index 500 Stock ................... 35.246385 1,782 62,809 33.200274 3 100
Asset Allocation .................. 8.785751 20 176 8.723560 -- --
Balanced .......................... 84.486469 664 56,099 76.084739 27 2,054
High Yield Bond ................... 15.870922 176 2,793 15.197603 1 15
Select Bond ....................... 121.279762 92 11,158 109.16634 -- --
Money Market ...................... 34.132616 9 307 30.774871 -- --
Russell Multi-Style Equity ........ 6.221208 8 50 6.107844 -- --
Russell Aggressive Equity ......... 8.707578 1 9 8.548899 -- --
Russell Non-U.S ................... 7.095865 3 21 6.966578 -- --
Russell Real Estate Securities .... 13.208871 641 8,467 12.968435 --
Russell Core Bond ................. 12.748590 -- -- 12.516564 -- --
-------- --------
Equity ....................... 287,155 2,317
Annuity Reserves ............. -- 630
-------- --------
Total Equity ................. $287,155 $ 2,947
======== ========
</Table>
<Table>
<Caption>
CONTRACTS ISSUED: CONTRACTS ISSUED:
AFTER DECEMBER 31, 1991 AFTER DECEMBER 31, 1991
FRONT LOAD VERSION SIMPLIFIED LOAD VERSION
----------------------------------- -----------------------------------
ACCUMULATION ACCUMULATION
UNIT UNITS UNIT UNITS
DIVISION VALUE OUTSTANDING EQUITY VALUE OUTSTANDING EQUITY
- -------- ------------ ----------- -------- ------------ ----------- --------
Small Cap Growth Stock ............. $ 1.522337 197 $ 300 $ 1.489185 753 $ 1,121
T. Rowe Price Small Cap Value ...... 0.951956 107 102 0.943905 319 301
Aggressive Growth Stock ............ 2.360410 972 2,294 3.506913 2,895 10,153
International Growth Stock ......... 0.786940 7 6 0.780276 51 40
Franklin Templeton International
Equity ........................ 1.652585 533 881 1.559571 2,178 3,397
Index 400 Stock .................... 1.096297 337 369 1.072428 994 1,066
Growth Stock ....................... 2.024216 414 838 1.921805 1,982 3,809
J.P. Morgan Select Growth and
Income Stock .................. 1.580140 572 904 1.500218 2,469 3,704
Capital Guardian Domestic Equity ... 0.763266 153 117 0.756787 532 403
Index 500 Stock .................... 2.420098 1,590 3,848 2.968449 3,722 11,049
Asset Allocation ................... 0.870499 49 43 0.863125 1,295 1,118
Balanced ........................... 2.209502 2,482 5,484 6.435011 2,852 18,353
High Yield Bond .................... 1.500210 129 194 1.424293 626 892
Select Bond ........................ 2.084184 519 1,082 9.187656 787 7,231
Money Market ....................... 1.504462 2,092 3,147 2.734853 2,738 7,488
Russell Multi-Style Equity ......... 0.607438 415 252 0.594202 753 447
Russell Aggressive Equity .......... 0.850202 135 115 0.831686 487 405
Russell Non-U.S .................... 0.692822 171 118 0.677755 573 388
Russell Real Estate Securities ..... 1.289736 193 249 1.261665 664 838
Russell Core Bond .................. 1.244772 336 418 1.217720 317 386
-------- --------
Equity ........................ 20,761 72,589
Annuity Reserves .............. -- --
-------- --------
Total Equity .................. $ 20,761 $ 72,589
======== ========
</Table>
55
NML VARIABLE ANNUITY ACCOUNT C
NOTES TO FINANCIAL STATEMENTS CONTINUED
Equity Values by Division for the year ended December 31, 2001 are shown below:
(in thousands, except accumulation unit values)
<Table>
<Caption>
CONTRACTS ISSUED: CONTRACTS ISSUED:
PRIOR TO DECEMBER 17, 1981 OR BETWEEN AFTER DECEMBER 16, 1981 AND
APRIL 30, 1984 AND DECEMBER 31, 1991 PRIOR TO MAY 1, 1984
------------------------------------- -----------------------------------
ACCUMULATION ACCUMULATION
UNIT UNITS UNIT UNITS
DIVISION VALUE OUTSTANDING EQUITY VALUE OUTSTANDING EQUITY
- -------- ------------- ----------- -------- ------------ ----------- --------
Small Cap Growth Stock ............ $ 19.112629 974 $ 18,614 $ 18.858687 1 $ 10
T. Rowe Price Small Cap Value ..... 10.175772 1 15 10.154423 -- --
Aggressive Growth Stock ........... 48.753408 1,744 85,024 46.158193 2 95
International Growth Stock ........ 9.060000 2 15 9.040958 -- --
Franklin Templeton International
Equity ....................... 2.130553 18,588 39,603 2.040110 34 70
Index 400 Stock ................... 13.138452 1,137 14,937 12.963870 -- 4
Growth Stock ...................... 27.049526 903 24,420 26.031963 -- 3
J.P. Morgan Select Growth and
Income Stock ................. 23.281928 660 15,365 22.405970 2 55
Capital Guardian Domestic Equity .. 9.781208 3 31 9.760679 -- --
Index 500 Stock ................... 45.228886 2,199 99,439 42.817258 9 390
Asset Allocation .................. 9.789803 3 31 9.769272 -- --
Balanced .......................... 91.372736 814 74,381 82.699005 27 2,234
High Yield Bond ................... 16.343831 177 2,893 15.728914 1 8
Select Bond ....................... 108.200259 81 8,810 97.881219 -- 23
Money Market ...................... 33.577318 14 466 30.425952 -- --
Russell Multi-Style Equity ........ 8.099453 24 197 7.991800 -- --
Russell Aggressive Equity ......... 10.757522 1 10 10.614527 -- --
Russell Non-U.S ................... 8.362558 3 24 8.251395 -- --
Russell Real Estate Securities .... 12.725061 460 5,853 12.556055 -- --
Russell Core Bond ................. 11.713217 -- -- 11.557668 -- --
-------- --------
Equity ....................... 390,128 2,892
Annuity Reserves ............. -- 744
-------- --------
Total Equity ................. $390,128 $ 3,636
======== ========
</Table>
<Table>
<Caption>
CONTRACTS ISSUED: CONTRACTS ISSUED:
AFTER DECEMBER 31, 1991 AFTER DECEMBER 31, 1991
FRONT LOAD VERSION SIMPLIFIED LOAD VERSION
----------------------------------- ------------------------------------
ACCUMULATION ACCUMULATION
UNIT UNITS UNIT UNITS
DIVISION VALUE OUTSTANDING EQUITY VALUE OUTSTANDING EQUITY
- -------- ------------ ----------- -------- ------------ ----------- ---------
Small Cap Growth Stock ............. $ 1.878336 267 $ 502 $ 1.848493 1,067 $ 1,972
T. Rowe Price Small Cap Value ...... 1.014805 7 7 1.012260 141 142
Aggressive Growth Stock ............ 3.013165 1,501 4,522 4.503663 5,015 22,584
International Growth Stock ......... 0.903525 -- -- 0.901258 25 22
Franklin Templeton International
Equity ........................ 2.013838 1,090 2,194 1.911919 3,670 7,017
Index 400 Stock .................... 1.291211 301 389 1.270690 1,182 1,503
Growth Stock ....................... 2.573522 558 1,435 2.458020 2,897 7,120
J.P. Morgan Select Growth and
Income Stock .................. 2.215050 1,013 2,244 2.115675 3,691 7,810
Capital Guardian Domestic Equity ... 0.975455 66 64 0.973004 119 116
Index 500 Stock .................... 3.125796 1,895 5,922 3.857114 6,662 25,694
Asset Allocation ................... 0.976312 5 5 0.973862 11 10
Balanced ........................... 2.405185 3,594 8,644 7.047000 4,314 30,398
High Yield Bond .................... 1.554978 148 230 1.485164 967 1,437
Select Bond ........................ 1.871532 573 1,072 8.299723 892 7,404
Money Market ....................... 1.489628 927 1,380 2.724154 4,816 13,120
Russell Multi-Style Equity ......... 0.795993 476 379 0.783335 1,056 827
Russell Aggressive Equity .......... 1.057215 173 183 1.040412 497 517
Russell Non-U.S .................... 0.821829 205 168 0.808779 592 479
Russell Real Estate Securities ..... 1.250590 180 225 1.230726 424 522
Russell Core Bond .................. 1.151142 337 388 1.132872 358 405
-------- ---------
Equity ........................ 29,953 129,099
Annuity Reserves .............. -- --
-------- ---------
Total Equity .................. $ 29,953 $ 129,099
======== =========
</Table>
56
REPORT OF INDEPENDENT ACCOUNTANTS
To The Northwestern Mutual Life Insurance Company and
Contract Owners of NML Variable Annuity Account C
In our opinion, the accompanying statements of assets and liabilities and the
related statements of operations and of changes in equity and the financial
highlights present fairly, in all material respects, the financial position of
NML Variable Annuity Account C and its Small Cap Growth Stock Division, T. Rowe
Price Small Cap Value Division, Aggressive Growth Stock Division, International
Growth Stock Division, Franklin Templeton International Equity Division, Index
400 Stock Division, Growth Stock Division, J.P. Morgan Select Growth & Income
Stock Division, Capital Guardian Domestic Equity Division, Index 500 Stock
Division, Asset Allocation Division, Balanced Division, High Yield Bond
Division, Select Bond Division, Money Market Division, Russell Multi-Style
Equity Division, Russell Aggressive Equity Division, Russell Non-U.S. Division,
Russell Real Estate Securities Division and Russell Core Bond Division at
December 31, 2002 and 2001, and the results of each of their operations, the
changes in each of their equity and their financial highlights for the periods
indicated, in conformity with accounting principles generally accepted in the
United States of America. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of The
Northwestern Mutual Life Insurance Company's management; our responsibility is
to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with auditing
standards generally accepted in the United States of America, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included direct
confirmation of securities owned at December 31, 2002 and 2001 with Northwestern
Mutual Series Fund, Inc. and the Russell Insurance Funds, provide a reasonable
basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
- ----------------------------------
Milwaukee, Wisconsin
January 30, 2003
57
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
58
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Neither Account A nor Account C have any directors or executive
officers. The following information, as of March 1, 2003, is provided with
respect to each director, including persons chosen to become directors, of
Northwestern Mutual. Northwestern Mutual uses the title of Trustee to denote the
directors.
<Table>
<Caption>
YEAR EXPIRATION
ELECTED/ OF TERM OTHER POSITIONS PRESENTLY
TRUSTEE AGE APPT'D OF OFFICE HELD WITH REGISTRANT
- ------- --- -------- ---------- --------------------
Edward E. Barr................. 66 1991 May 2003(1) Member, Human Resources and Public Policy Committee
John M. Bremer................. 55 2001 May 2006 Chief Operating Officer (Chief Compliance Officer);
Member, Executive Committee
Peter W. Bruce ................ 57 2001 May 2004 Chief Insurance Officer; Member, Executive Committee
Robert C. Buchanan ............ 62 1991 May 2003(1) Member, Audit, Executive and Finance Committees
George A. Dickerman ........... 64 1994 May 2004 Member, Agency and Marketing Committee
Pierre S. du Pont ............. 68 1985 May 2006 Member, Human Resources and Public Policy Committee
James D. Ericson .............. 67 1989 May 2004 Member, Agency and Marketing, Executive and Finance
Committees
David A. Erne ................. 59 2002 May 2005 Member, Audit, Executive and Finance Committees
J. E. Gallegos ................ 67 1985 May 2004 Member, Operations and Technology Committee
Stephen N. Graff .............. 68 1996 May 2004 Member, Audit, Executive, and Finance Committees
Patricia Albjerg Graham ....... 68 1980 May 2004 Member, Human Resources and Public Policy Committee
James P. Hackett .............. 47 2000 May 2006 Member, Operations and Technology Committee
Stephen F. Keller ............. 64 1984 May 2003(1) Member, Human Resources and Public Policy Committee
Barbara A. King. .............. 56 1996 May 2006 Member, Agency and Marketing Committee
J. Thomas Lewis. .............. 66 1978 May 2006 Member, Agency and Marketing Committee
Daniel F. McKeithan, Jr ....... 67 1988 May 2003(1) Member, Executive, Finance, and Human Resources and
Public Policy Committees
H. Mason Sizemore, Jr ......... 61 1993 May 2003(1) Member, Operations and Technology Committee
Harold B. Smith. .............. 69 1973 May 2004(2) Member, Operations and Technology Committee
Sherwood H. Smith, Jr ......... 68 1992 May 2006 Chair, Agency and Marketing Committee
Peter M. Sommerhauser ......... 60 1999 May 2006 Chair, Human Resources and Public Policy Committee;
Member, Executive and Finance Committees
John E. Steuri ................ 63 1994 May 2003(1) Chair, Operations and Technology Committee
John J. Stollenwerk ........... 63 1993 May 2005 Member, Agency and Marketing, Executive and Finance
Committees
Barry L. Williams ............. 58 1987 May 2005 Member, Audit Committee
Kathryn D. Wriston ............ 64 1986 May 2005 Chair, Audit Committee
Edward J. Zore ................ 57 2000 May 2005 President and CEO; Chair, Executive and Finance
Committees; Member, Agency and Marketing, Operations and
Technology Committees
</Table>
- ----------
(1) Candidate proposed for re-election by the Board of Trustees for the
election to be held at the May 2003 Annual meeting of Policyowners. If
re-elected, these Trustees' terms will expire in May 2007.
(2) Mr. Harold B. Smith is retiring from the Board of Trustees effective May
28, 2003.
59
The business experience and directorships of Northwestern Mutual's
Trustees as of March 1, 2002 are as follows:
<Table>
<Caption>
PRINCIPAL OCCUPATION
TRUSTEE DURING PAST FIVE YEARS DIRECTORSHIPS
------- ---------------------- -------------
Edward E. Barr Retired Chairman, Sun Chemical Group,
B.V. (graphic arts), Fort Lee, New Jersey,
since 2003. Prior thereto, Chairman from
1998-2002; Chairman and CEO, 1997-1998;
President and Chief Executive Officer,
1987-1997.
John M. Bremer Chief Operating Officer (Chief Compliance
Officer) of Northwestern Mutual since 2002.
Prior thereto, Senior Executive Vice President
and Chief Operating Officer (Chief
Compliance Officer) from 2001-2002;
Senior Executive Vice President and
Secretary from 2000-2001; Executive
Vice President, General Counsel and
Secretary from 1998-2000; Senior Vice
President, General Counsel and Secretary
from 1995-1998.
Peter W. Bruce Chief Insurance Officer of Northwestern
Mutual since October 1, 2002. Prior thereto,
Senior Executive Vice President (Insurance)
from 2000-2002; Executive Vice President
(Accumulation Products and Long Term Care)
from 1998-2000; Executive Vice President
(Operations and Administration) from 1995-
1998.
Robert C. Buchanan President and Chief Executive Officer, Fox Brady Corporation
Valley Corporation (manufacturer of gift
wrap and writing paper), Appleton,
Wisconsin, since 1980.
George A. Dickerman Retired Chairman, Spalding Sports Worldwide
(manufacturer of sporting equipment),
Chicopee, Massachusetts, since 1999. Prior
thereto, Chairman, 1997-1998; President,
1981-1997.
Pierre S. du Pont Attorney, Richards, Layton & Finger PepsiAmericas, Inc
(law firm), Wilmington, Delaware, since 1985.
James D. Ericson Retired Chairman of Northwestern Mutual since Kohl's Corporation
2001; Chairman, 2001; Chairman and Chief The Marcus Corporation
Executive Officer from 2000 to 2001. Prior thereto,
President and Chief Executive Officer from
1993-2000.
David A. Erne Attorney, Reinhart Boerner Van Deuren s.c. (law Artisan Funds, Inc.
firm), Milwaukee, Wisconsin, since 1968.
J. E. Gallegos Attorney, Gallegos Law Firm, Santa Fe,
New Mexico, since 1988.
Stephen N. Graff Office Managing Partner (retired), Arthur Mason Street Funds, Inc.
Andersen LLP, Milwaukee, Wisconsin, Northwestern Mutual Series
1981-1994. Fund, Inc.
Regal-Beloit Corporation
</Table>
60
<Table>
<Caption>
PRINCIPAL OCCUPATION
TRUSTEE DURING PAST FIVE YEARS DIRECTORSHIPS
------- ---------------------- -------------
Patricia Albjerg Professor of the History of American Apache Corporation
Graham Education, Harvard University, Cambridge,
Massachusetts, since 1974; President, Spencer
Foundation (social and behavioral sciences),
Chicago, Illinois, 1991-2000.
James P. Hackett President and Chief Executive Officer of Fifth Third Bancorp
Steelcase Inc. (office furniture manufacturer) Steelcase Inc.
Grand Rapids, Michigan, since 1994.
Stephen F. Keller Attorney, Los Angeles, California, since
1962. Chairman, The Santa Anita Companies,
Arcadia, California, 1993-1996.
Barbara A. King President, Landscape Structures, Inc.
(manufacturer of playground equipment),
Delano, Minnesota, since 1973.
J. Thomas Lewis Attorney, New Orleans, Louisiana,
since 1998. Prior thereto, associated with
Monroe & Lemann (law firm),
New Orleans, Louisiana, 1965-1998.
Daniel F. McKeithan, Jr. President, Tamarack Petroleum Co., Inc. The Marcus Corporation
(operator of oil and gas wells), U.S. Bancorp
Milwaukee, Wisconsin, since 1982.
H. Mason Sizemore, Jr. Retired President and Chief Operating Officer,
The Seattle Times, Seattle, Washington, since
2001. Prior thereto, President and Chief
Operating Officer since 1985.
Harold B. Smith Chairman, Executive Committee, Illinois Illinois Tool Works Inc.
Tool Works Inc. (engineered components Northern Trust Corporation
and industrial systems and consumables), W. W. Grainger, Inc.
Glenview, Illinois, since 1982.
Sherwood H. Smith, Jr. Chairman Emeritus, Carolina Power & Light Nortel Networks Corporation
Company, Raleigh, North Carolina, since
1999. Prior thereto, Chairman, 1996-1999.
Peter M. Sommerhauser Attorney, Godfrey & Kahn, S.C. (law firm), Kohl's Corporation
Milwaukee, Wisconsin, since 1969.
John E. Steuri Retired Chairman, Advanced Thermal Superior Financial Corporation
and Technologies (heating, air conditioning
humidity control), Little Rock,
Arkansas, since 2001; Chairman,
1997-2001.
John J. Stollenwerk President and Chief Executive Officer, Badger Meter, Inc.
Allen-Edmonds Shoe Corporation, Port Koss Corporation
Washington, Wisconsin, since 1998. Prior U.S. Bancorp
thereto, President and Owner, 1980-1998.
</Table>
61
<Table>
<Caption>
PRINCIPAL OCCUPATION
TRUSTEE DURING PAST FIVE YEARS DIRECTORSHIPS
------- ---------------------- -------------
Barry L. Williams President and Chief Executive Officer, CH2M Hill Companies Ltd.
Williams Pacific Ventures, Inc. (venture R. H. Donnelly Corporation
capital), San Francisco, California, since Pacific Gas & Electric Company
1993. PG&E Corporation
Simpson Manufacturing Co., Inc.
Synavant Inc.
The Newhall Land and Farming
Company
USA Education Inc.
Kathryn D. Wriston Director of various corporations. The Goodyear Tire & Rubber Company
The Stanley Works
Edward J. Zore President and Chief Executive Officer of Manpower, Inc.
Northwestern Mutual since 2001. Prior Mason Street Funds, Inc.
thereto, President, 2000-2001; Northwestern Mutual Series
Executive Vice President (Life and Disability Fund, Inc.
Income Insurance), 1998-2000; Executive Vice
President (Finance and Investments), 1995-1998.
</Table>
62
The following information as of March 1, 2003, is provided with respect
to each Executive Officer of Northwestern Mutual. The term of office for all
Executive Officers is one year expiring May 31, 2003.
<Table>
<Caption>
NAME AGE CURRENT POSITION AND YEAR ASSUMED
- ---- --- ---------------------------------
Edward J. Zore......... 57 President and Chief Executive Officer (2001)
John M. Bremer......... 55 Chief Operating Officer (Chief Compliance Officer) (2001)
Peter W. Bruce......... 57 Chief Insurance Officer (2002)
Deborah A. Beck........ 55 Executive Vice President (Planning and Technology) (2000)
William H. Beckley..... 55 Executive Vice President (Agencies) (2000)
Bruce L. Miller........ 60 Executive Vice President (Marketing) (2000)
Mason G. Ross.......... 59 Executive Vice President and Chief Investment Officer (2001)
Mark G. Doll........... 53 Senior Vice President (Public Markets) (1996)
Richard L. Hall........ 57 Senior Vice President (Life Insurance) (2000)
William C. Koenig...... 55 Senior Vice President and Chief Actuary (1995)
Barbara F. Piehler..... 52 Senior Vice President and Chief Information Officer (2002)
Gary A. Poliner........ 49 Senior Vice President and Chief Financial Officer (2001)
Charles D. Robinson.... 58 Senior Vice President (Investment Products and Services) (2001)
John E. Schlifske...... 43 Senior Vice President (Securities and Real Estate) (1999)
Leonard F. Stecklein... 56 Senior Vice President (Annuity and Accumulation Products) (2000)
Frederic H. Sweet...... 59 Senior Vice President (Corporate and Government Relations) (1998)
Robert J. Berdan....... 56 Vice President, General Counsel and Secretary (2001)
Steven T. Catlett...... 53 Vice President and Controller (2001)
Thomas E. Dyer......... 57 Vice President (Corporate Services) (1998)
Christina H. Fiasca.... 48 Vice President (Field System Administration) (2002)
Susan A. Lueger........ 49 Vice President (Human Resources) (1994)
Jean M. Maier.......... 48 Vice President (Field Services and Support) (2001)
Meridee J. Maynard..... 47 Vice President (Disability Income) (2001)
Gregory C. Oberland.... 45 Vice President (New Business) (2001)
Marcia Rimai........... 47 Vice President (Policyowner Services) (2000)
Lora A. Rosenbaum...... 46 Vice President (Compliance/Best Practices) (2000)
J. Edward Tippetts..... 58 Vice President (Field Development) (2002)
Martha M. Valerio...... 56 Vice President (Technology Research and Web Resources) (2001)
David B. Wescoe........ 48 Vice President (Northwestern Mutual Investment Services) (2000)
W. Ward White.......... 63 Vice President (Communications) (1990)
Michael L. Youngman.... 51 Vice President (Government Relations) (2001)
</Table>
All of the Executive Officers, except David B. Wescoe and Charles D.
Robinson, have been employed by Northwestern Mutual in an executive or
management position for more than five years. Mr. Wescoe joined Northwestern
Mutual in 1999. From 1994 to 1999, Mr. Wescoe was employed by Manpower, Inc. as
Vice President and General Counsel. Mr. Robinson joined Northwestern Mutual in
2001. Prior thereto he was with AIG, Global Retirement Services Division as
Chief Marketing Officer and Senior Vice President from 1999 to 2000. From 1980
to 1999, Mr. Robinson served in various positions of increasing responsibility
with VALIC/American General Group, most recently as Senior Vice President,
Institutional Marketing.
63
ITEM 11. EXECUTIVE COMPENSATION
Not applicable. Account A and Account C have no directors or executive
officers, the Executive Officers and Trustees of Northwestern Mutual spend no
substantial portion of their time on matters relating to Accounts A and C, such
persons receive no compensation tied specifically to any services provided to
Accounts A and C, and the amounts of compensation received by the Executive
Officers and Trustees of Northwestern Mutual have no bearing on the values
associated with the Contracts issued in connection with Accounts A and C.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Not applicable. As segregated asset accounts, Account A and Account C
have no shareholders. As a mutual life insurance company, Northwestern Mutual
has no shareholders. No Contract owner is the beneficial owner of more than 5%
of Account A, Account C or Northwestern Mutual's voting securities. Neither
Accounts A or C, nor Northwestern Mutual, maintain equity compensation plans
under which equity securities are authorized for issuance.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective January 1, 2002, Northwestern Mutual's subsidiary, Mason
Street Advisors, LLC ("MSA"), commenced serving as the investment advisor to the
Series Fund. The Board of the Series Fund approved the assignment of the
investment advisory agreement to MSA in 2001, the renewal of which was approved
in 2002. Various Trustees and Executive Officers of Northwestern Mutual serve as
directors and officers of the Series Fund and/or MSA and may be deemed to have a
direct or indirect material interest in the existence of the investment advisory
agreement.
Northwestern Mutual's subsidiary, Frank Russell Company, provides the
Russell Funds and its investment adviser, Frank Russell Investment Management
Company ("FRIMCo"), a subsidiary of Frank Russell Company, with asset management
consulting services that it provides to its other consulting clients. The
Russell Funds do not compensate Russell for these services. FRIMCo is party to
an investment advisory agreement with the Russell Funds, the renewal of which
was approved in 2002. Certain Trustees and Executive Officers of Northwestern
Mutual serve as directors of Frank Russell Company and may be deemed to have a
direct or indirect material interest in the existence of the investment
management agreement.
Various Trustees and Executive Officers of Northwestern Mutual (and
their family members and associates) may have securities accounts with Baird
and/or NMIS and may have effected transactions through such accounts during 2002
and through the date hereof, including transactions in mutual funds sponsored by
Northwestern Mutual and Russell.
Trustees and executive officers of Northwestern Mutual (and their
family members and associates) own insurance policies and/or other contracts
issued by Northwestern Mutual or an insurance affiliate in the ordinary course
of business. Loans are made to Northwestern Mutual's Trustees and Executive
Officers (and their family members and associates) in accordance with the
provisions of insurance policies or other contracts which they may own. Such
loans are made in the ordinary course of business, in accordance with applicable
law and are administered solely pursuant to the terms of such policies.
In the ordinary course of its business, Northwestern Mutual makes loans
to its field force Managing Partners in connection with their business
operations. Interest on such loans is tied to Northwestern Mutual's cost of
funds or the prime rate, depending upon the purpose of the loan. On occasion, a
Managing Partner who has received such a loan may assume an Executive Officer
position at Northwestern Mutual. In such circumstances, historically the
outstanding loans have remained in place and are satisfied in accordance with
the terms of the underlying loan documentation.
At December 31, 2002, Peter M. Sommerhauser, a Northwestern Mutual
Trustee since May 1999, was the beneficial owner of approximately 9.6% of the
outstanding common stock of Kohl's Corporation, primarily by virtue of his
serving as a trustee of several trusts for the benefit of the families of
current and former executive officers of Kohl's Corporation and as a director of
charitable foundations established by executive officers of Kohl's Corporation.
While Mr. Sommerhauser has sole or shared voting and investment power over such
shares held in the trusts and foundations, he has no pecuniary interest in those
shares. In 1994, a number of years prior to Mr. Sommerhauser becoming a
Northwestern Mutual Trustee, Northwestern Mutual lent as part of its normal
portfolio investment activities to Kohl's
64
Department Stores, Inc., a subsidiary of Kohl's Corporation, $40,000,000 and
received a 6.57% Senior Note, guaranteed by Kohl's Corporation, due March 31,
2004. The principal amount of such indebtedness was reduced to $13,333,333
during 2002, which remains outstanding at March 1, 2003.
Mr. David A. Erne, a Northwestern Mutual Trustee since July 2002, is a
shareholder of Reinhart Boerner Van Deuren s.c. Reinhart Boerner Van Deuren s.c.
provided legal services to Northwestern Mutual and certain related entities
during 2002 and year-to-date 2003. The aggregate amount of such legal services
billed to Northwestern Mutual or related entities is less than 1% of the law
firm's gross revenues for its last fiscal year.
ITEM 14. CONTROLS AND PROCEDURES
Based on their evaluation of the registrant's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) as conducted within 90
days of the filing date of this Annual Report, the registrant's Chief Executive
Officer and Chief Financial Officer have concluded that those disclosure
controls and procedures provide reasonable assurance that the information
required to be disclosed by the registrant in the reports it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Commission's rules and forms. There were no
significant changes in the registrant's internal controls or in other factors
that could significantly affect such controls subsequent to the date of
evaluation referenced above.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Exhibits
PAGE
----
(1) NML Variable Annuity Account A
(in Part II, Item 8)................................................. 19
Statements of Assets and Liabilities at December 31, 2002 and 2001
Statements of Operations for years ended December 31, 2002, 2001 and 2000
Statements of Changes in Equity for years ended
December 31, 2002, 2001 and 2000
Financial Highlights
Notes to Financial Statements
Report of Independent Accountants
(2) NML Variable Annuity Account C
(in Part II, Item 8)................................................. 39
Statements of Assets and Liabilities at December 31, 2002 and 2001
Statements of Operations for years ended December 31, 2002, 2001 and 2000
Statements of Changes in Equity for years ended
December 31, 2002, 2001 and 2000
Financial Highlights
Notes to Financial Statements
Report of Independent Accountants
(3) The Northwestern Mutual Life
Insurance Company.................................................... 66
Immediately following this page are:
Report of Independent Accountants
Consolidated Statement of Financial Position at December 31, 2002 and 2001
Consolidated Statement of Operations for years ended
December 31, 2002, 2001 and 2000
Consolidated Statement of Changes in Surplus for years ended
December 31, 2002, 2001 and 2000
Consolidated Statement of Cash Flows for years ended
December 31, 2002, 2001 and 2000
Notes to Consolidated Statutory Financial Statements
(b) No reports on Form 8-K have been filed during the last
quarter of the year ended December 31, 2002.
(c) See Index to Exhibits which is incorporated
herein by reference ......................................... 98
65
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Policyowners of
The Northwestern Mutual Life Insurance Company
We have audited the accompanying consolidated statement of financial position of
The Northwestern Mutual Life Insurance Company and its subsidiary ("the
Company") as of December 31, 2002 and 2001, 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, 2002. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As described in Note 1 to the financial statements, the Company prepared these
consolidated financial statements using accounting practices prescribed or
permitted by the Office of the Commissioner of Insurance of the State of
Wisconsin (statutory basis of accounting), which practices differ from
accounting principles generally accepted in the United States of America.
Accordingly, the consolidated financial statements are not intended to represent
a presentation in accordance with accounting principles generally accepted in
the United States. The effects on the consolidated financial statements of the
variances between the statutory basis of accounting and accounting principles
generally accepted in the United States, although not reasonably determinable,
are presumed to be material.
In our opinion, the consolidated financial statements audited by us (1) do not
present fairly in conformity with generally accepted accounting principles, the
financial position of The Northwestern Mutual Life Insurance Company and its
subsidiary as of December 31, 2002 and 2001, or the results of their operations
or their cash flows for each of the three years in the period ended December 31,
2002 because of the effects of the variances between the statutory basis of
accounting and accounting principles generally accepted in the United States of
America referred to in the preceding paragraph, and (2) do present fairly, in
all material respects, the financial position of The Northwestern Mutual Life
Insurance Company and its subsidiary as of December 31, 2002 and 2001 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2002, on the basis of accounting described in Note
1.
As discussed in Note 1 to the financial statements, the Company adopted the
accounting policies in the revised National Association of Insurance
Commissioners "Accounting Practices and Procedures Manual" - Effective January
1, 2001, as required by the Office of the Commissioner of Insurance of the State
of Wisconsin. The effect of adoption is recorded as an adjustment to surplus as
of January 1, 2001.
/s/ PRICEWATERHOUSECOOPERS LLP
- ---------------------------------
Milwaukee, Wisconsin
January 21, 2003
66
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(IN MILLIONS)
<Table>
<Caption>
DECEMBER 31
--------------------------
2002 2001
------------ ------------
ASSETS:
Bonds ................................ $ 50,597 $ 44,306
Common and preferred stocks .......... 4,902 5,369
Mortgage loans ....................... 15,692 15,164
Real estate .......................... 1,503 1,671
Policy loans ......................... 9,292 9,028
Other investments .................... 4,242 4,817
Cash and temporary investments ....... 1,814 2,018
------------ ------------
Total investments ............... 88,042 82,373
Due and accrued investment income .... 1,100 1,048
Net deferred tax assets .............. 1,887 1,602
Deferred premium and other assets .... 1,660 1,583
Separate account assets .............. 10,246 11,786
------------ ------------
Total assets .................... $ 102,935 $ 98,392
============ ============
LIABILITIES AND SURPLUS:
Reserves for policy benefits ......... $ 74,880 $ 68,432
Policyowner dividends payable ........ 3,765 3,650
Interest maintenance reserve 521 375
Asset valuation reserve .............. 1,268 2,034
Income taxes payable 777 1,329
Other liabilities .................... 4,261 3,894
Separate account liabilities ......... 10,246 11,786
------------ ------------
Total liabilities ............... 95,718 91,500
Surplus .............................. 7,217 6,892
------------ ------------
Total liabilities and surplus ... $ 102,935 $ 98,392
============ ============
</Table>
The accompanying notes are an integral part of these financial statements.
67
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(IN MILLIONS)
<Table>
<Caption>
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------------------
2002 2001 2000
------------ ------------ ------------
REVENUE:
Premiums $ 10,108 $ 9,447 $ 8,966
Net investment income 5,477 5,431 5,229
Other income 439 467 1,187
------------ ------------ ------------
Total revenue 16,024 15,345 15,382
------------ ------------ ------------
BENEFITS AND EXPENSES:
Benefit payments to policyowners and beneficiaries 3,902 3,808 4,541
Net additions to policy benefit reserves 6,186 5,367 4,815
Net transfers to separate accounts 242 502 469
------------ ------------ ------------
Total benefits 10,330 9,677 9,825
Commissions and operating expenses 1,580 1,453 1,416
------------ ------------ ------------
Total benefits and expenses 11,910 11,130 11,241
------------ ------------ ------------
Gain from operations before dividends and taxes 4,114 4,215 4,141
Policyowner dividends 3,792 3,651 3,334
------------ ------------ ------------
Gain from operations before taxes 322 564 807
Income tax expense (benefit) (442) 173 125
------------ ------------ ------------
Net gain from operations 764 391 682
Net realized capital gains (losses) (606) 259 1,147
------------ ------------ ------------
Net income $ 158 $ 650 $ 1,829
============ ============ ============
</Table>
The accompanying notes are an integral part of these financial statements.
68
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CHANGES IN SURPLUS
(IN MILLIONS)
<Table>
<Caption>
FOR THE YEAR ENDED
DECEMBER 31,
------------------------------
2002 2001 2000
-------- -------- --------
Beginning of year balance ........................... $ 6,892 $ 5,896 $ 5,069
Net income ....................................... 158 650 1,829
Change in net unrealized capital gains (losses) .. (517) (555) (1,043)
Increase in net deferred tax assets .............. 44 73 --
Increase in nonadmitted assets and other ......... (126) (124) (32)
Change in reserve valuation bases (Note 5) ....... -- (61) --
Change in asset valuation reserve ................ 766 264 73
Cumulative effect of changes in accounting
principles (Note 1) ............................. -- 749 --
-------- -------- --------
Net increase in surplus ..................... 325 996 827
-------- -------- --------
End of year balance ......................... $ 7,217 $ 6,892 $ 5,896
======== ======== ========
</Table>
The accompanying notes are an integral part of these financial statements.
69
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN MILLIONS)
<Table>
<Caption>
FOR THE YEAR ENDED
DECEMBER 31,
------------------------------------
2002 2001 2000
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Premiums and other income received ................................. $ 6,947 $ 6,607 $ 6,149
Investment income received ......................................... 5,224 5,328 5,000
Disbursement of policy loans, net of repayments .................... (264) (524) (566)
Payments to policyowners and beneficiaries ......................... (4,130) (3,996) (3,967)
Net transfers to separate accounts ................................. (257) (534) (469)
Commissions, expenses and taxes paid ............................... (1,855) (1,698) (1,845)
---------- ---------- ----------
Net cash provided by operating activities ....................... 5,665 5,183 4,302
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from investments sold or matured:
Bonds ............................................................. 60,865 35,318 29,539
Common and preferred stocks ....................................... 1,766 15,465 9,437
Mortgage loans .................................................... 1,532 1,174 1,198
Real estate ....................................................... 468 244 302
Other investments ................................................. 1,646 494 659
---------- ---------- ----------
66,277 52,695 41,135
---------- ---------- ----------
Cost of investments acquired:
Bonds ............................................................. 67,398 38,915 33,378
Common and preferred stocks ....................................... 2,003 15,014 8,177
Mortgage loans .................................................... 2,005 2,003 2,261
Real estate ....................................................... 191 353 224
Other investments ................................................. 748 1,106 1,535
---------- ---------- ----------
72,345 57,391 45,575
---------- ---------- ----------
Net cash applied in investing activities ........................ (6,068) (4,696) (4,440)
---------- ---------- ----------
CASH FLOWS FROM FINANCING AND MISCELLANEOUS SOURCES:
Proceeds from deposit-type contract funds and
other liabilities without life or disability contingencies ........ 990 996 907
Withdrawals from deposit-type contract funds and
other liabilities without life or disability contingencies ........ (741) (793) (777)
Other cash provided (applied) ...................................... (50) 111 66
---------- ---------- ----------
Net cash provided by financing and other activities: ............ 199 314 196
---------- ---------- ----------
Net increase(decrease) in cash and temporary investments ...... (204) 801 58
Cash and temporary investments, beginning of year ..................... 2,018 1,217 1,159
---------- ---------- ----------
Cash and temporary investments, end of year ................... $ 1,814 $ 2,018 $ 1,217
========== ========== ==========
</Table>
The accompanying notes are an integral part of these financial statements.
70
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
1. BASIS OF PRESENTATION AND CHANGES IN ACCOUNTING PRINCIPLES
The accompanying consolidated statutory financial statements include
the accounts of The Northwestern Mutual Life Insurance Company and its
wholly-owned subsidiary, Northwestern Long Term Care Insurance Company
(together, "the Company"). All intercompany balances and transactions
were eliminated. The Company offers life, annuity, disability income
and long-term care insurance products to the personal, business, and
estate markets.
The consolidated financial statements were prepared in conformity with
accounting practices prescribed or permitted by the Office of the
Commissioner of Insurance of the State of Wisconsin ("statutory basis
of accounting"). Beginning January 1, 2001, insurance companies
domiciled in Wisconsin were required to prepare statutory basis
financial statements in accordance with the new National Association of
Insurance Commissioners ("NAIC") "Accounting Practices and Procedures
Manual", subject to any variations prescribed or permitted by the
Office of the Commissioner of Insurance of the State of Wisconsin
("OCI").
These new requirements differed from those used prior to January 1,
2001, primarily because under the new statutory accounting principles:
(1) deferred tax balances were established for temporary differences
between book and tax bases of certain assets and liabilities, (2)
investment valuation adjustments on impaired assets were measured
differently and were reported as realized losses, (3) pension and other
employee benefit obligations were accounted for based on the funded
status of the related plans, (4) recognition of earnings from
unconsolidated subsidiaries and affiliates as net investment income was
limited to dividends received, (5) certain software costs were
capitalized and amortized to expense over a maximum of five years, and
(6) premiums, benefits and reserve changes for policies without
significant mortality or morbidity risks ("deposit-type contracts")
were not included in revenue or benefits as reported in the
consolidated statement of operations.
The cumulative effect of adoption of these new accounting principles
was reported as an adjustment to surplus as of January 1, 2001, with no
restatement of prior periods permitted. This cumulative effect was the
difference in the amount of surplus that would have been reported at
that date if the new accounting principles had been retroactively
applied to all prior periods. The cumulative effect of these accounting
changes increased surplus by $749 million at that date, and included
the following (in millions):
<Table>
Deferred tax accounting ................ $ 850
Pension plan liabilities ............... (74)
Investment valuation changes, net ...... (27)
--------
$ 749
========
</Table>
Financial statements prepared on the statutory basis of accounting
differ from financial statements prepared in accordance with generally
accepted accounting principles ("GAAP"), primarily because on a GAAP
basis: (1) certain policy acquisition costs are deferred and amortized,
(2) investment valuations and policy benefit reserves use different
methods and assumptions, (3) deposit-type contracts, for which
premiums, benefits and reserve changes are not included in revenue or
benefits as reported in the statement of operations, are defined
differently, (4) majority-owned, non-insurance subsidiaries are
consolidated, (5) changes in deferred taxes are reported as a component
of net income, and (6) no deferral of realized gains
71
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
and losses is permitted. The effects on the financial statements of the
Company from the differences between the statutory basis of accounting
and GAAP are material.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with the
statutory basis of accounting required management to use assumptions or
make estimates that affected the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
future results could differ from these assumptions and estimates.
INVESTMENTS
See Note 3 regarding the reported statement value and estimated fair
value of the Company's investments in bonds, common and preferred
stocks, mortgage loans and real estate.
POLICY LOANS
Policy loans primarily represent amounts borrowed from the Company by
life insurance policyowners, secured by the cash value of the related
policies. They are reported in the financial statements at unpaid
principal balance.
OTHER INVESTMENTS
Other investments consist primarily of real estate joint ventures,
partnership investments, including real estate, venture capital and
leveraged buyout fund limited partnerships, leveraged leases and
subsidiaries, controlled and affiliated entities. These investments are
valued based on the equity method of accounting, which approximated
fair value. Other investments also include derivative financial
instruments. See Note 4 regarding the Company's use of derivatives.
TEMPORARY INVESTMENTS
Temporary investments represent securities that have maturities of one
year or less at purchase, and are reported at amortized cost, which
approximated fair value.
NET INVESTMENT INCOME
Net investment income primarily represents interest and dividends
received or accrued on bonds, mortgage loans, policy loans and other
investments. It also includes amortization of any purchase premium or
discount using the interest method, adjusted prospectively for any
change in estimated yield-to-maturity. Accrued investment income more
than 90 days past due is nonadmitted and reported as a direct reduction
of surplus. Accrued investment income that is ultimately deemed
uncollectible is reported as a reduction of net investment income in
the period that such determination is made. Beginning January 1, 2001,
net investment income also includes dividends paid to the Company from
accumulated earnings of unconsolidated subsidiaries, affiliates,
partnerships and joint ventures. Prior to 2001, the Company's share of
undistributed earnings in these entities was recognized as net
investment income using the equity method. Net investment income is
reduced by investment management expenses, real estate depreciation,
depletion related to energy assets and interest costs associated with
securities lending.
72
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
INTEREST MAINTENANCE RESERVE
The Company is required to maintain an interest maintenance reserve
("IMR"). The IMR is used to defer realized gains and losses, net of
income tax, on fixed income investments that result from changes in
interest rates. Net realized gains and losses deferred to the IMR are
amortized into investment income over the estimated remaining life of
the investment sold.
INVESTMENT CAPITAL GAINS AND LOSSES
Realized capital gains and losses are recognized based upon specific
identification of securities sold. Beginning January 1, 2001, realized
capital losses also include valuation adjustments for impairment of
bonds, stocks, mortgage loans, real estate and other investments with a
decline in fair value that management considers to be
other-than-temporary. Factors considered in evaluating whether a
decline in value is other-than-temporary include: (1) whether the
decline is substantial, (2) the Company's ability and intent to retain
the investment for a period of time sufficient to allow for an
anticipated recovery in value, (3) the duration and extent to which the
market value has been less than cost, and (4) the financial condition
and near-term prospects of the issuer. Prior to 2001, these valuation
adjustments were classified as unrealized capital losses and only
reported as realized upon disposition. Realized capital gains and
losses as reported in the consolidated statement of operations are net
of any IMR deferrals and current income tax expense. See Note 3
regarding details of realized capital gains and losses.
Unrealized capital gains and losses primarily represent changes in the
reported fair value of common stocks. Beginning January 1, 2001,
changes in the Company's share of undistributed earnings in
unconsolidated subsidiaries, affiliates, partnerships and joint
ventures are classified as changes in unrealized capital gains and
losses. Prior to 2001, the Company's share of undistributed earnings in
these entities was recognized as net investment income using the equity
method. See Note 3 regarding details of changes in unrealized capital
gains and losses.
ASSET VALUATION RESERVE
The Company is required to maintain an asset valuation reserve ("AVR").
The AVR represents a general reserve for invested asset valuation using
a formula prescribed by the NAIC. The AVR is designed to protect
surplus against potential declines in the value of the Company's
investments. Increases or decreases in AVR are reported as direct
adjustments to surplus.
SEPARATE ACCOUNTS
See Note 7 regarding separate account assets and liabilities reported
by the Company.
PREMIUM REVENUE
Life insurance premiums are recognized as revenue at the beginning of
each policy year. Annuity, disability income and long-term care
insurance premiums are recognized as revenue when received by the
Company. Premium revenue is reported net of ceded reinsurance, see Note
9.
73
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
OTHER INCOME
Other income includes ceded reinsurance expense allowances and various
insurance policy charges. Beginning January 1, 2001, considerations
received on supplementary contracts without life contingencies are
classified as deposit-type transactions and thereby excluded from
revenue. Prior to 2001, these considerations were reported as revenue
and included in other income.
BENEFIT PAYMENTS TO POLICYOWNERS AND BENEFICIARIES
Benefit payments to policyowners and beneficiaries include death,
surrender and disability benefits, as well as matured endowments and
supplementary contract payments. Beginning January 1, 2001, benefit
payments on supplementary contracts without life contingencies are
classified as deposit-type transactions and thereby excluded from
expense. Prior to 2001, these payments were reported as benefit
expense. Benefit payments are reported net of ceded reinsurance
recoveries, see Note 9.
RESERVES FOR POLICY BENEFITS
See Note 5 regarding the methods and assumptions used to establish the
Company's reserves for future insurance policy benefits.
COMMISSIONS AND OPERATING EXPENSES
Commissions and other operating costs, including costs of acquiring new
insurance policies, are generally charged to expense as incurred.
ELECTRONIC DATA PROCESSING EQUIPMENT AND SOFTWARE
Electronic data processing ("EDP") equipment and software used in the
Company's business are reported at cost less accumulated depreciation.
Beginning January 1, 2001, certain software costs are capitalized and
depreciated over a maximum of five years, while EDP equipment is
capitalized and depreciated over three years. Most unamortized software
costs are nonadmitted assets and thereby excluded from surplus. Prior
to 2001, the Company expensed all software costs, while EDP equipment
was capitalized and amortized over its useful life. EDP equipment and
software assets of $20 million and $18 million at December 31, 2002 and
2001, respectively, were net of accumulated depreciation of $48 million
and $44 million, respectively, and included in other assets in the
consolidated statement of financial position. Depreciation expense is
recorded using the straight-line method and totaled $27 million, $14
million and $8 million for the years ended December 31, 2002, 2001 and
2000, respectively.
POLICYOWNER DIVIDENDS
Almost all life insurance and disability income policies and certain
annuity contracts and long-term care policies issued by the Company are
participating. Annually, the Company's Board of Trustees approves
dividends payable on participating policies in the following fiscal
year, which are accrued and charged to operations when approved.
Participating policyowners generally have the option to direct their
dividends to be paid in cash, used to reduce future premiums due or
used to purchase additional insurance. A majority of dividends are used
by policyowners to purchase additional insurance and are reported as
premiums in the consolidated statement of operations, but are not
included in premiums received or policy benefits paid in the
consolidated statement of cash flows.
74
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
NONADMITTED ASSETS
Certain assets are designated as nonadmitted and thereby not permitted
as a component of surplus on the statutory basis of accounting. Such
assets, principally assets related to pension funding, amounts advanced
to or due from the Company's financial representatives and fixed
assets, EDP equipment and software net of accumulated depreciation, are
excluded from the consolidated statement of financial position. Changes
in nonadmitted assets are reported as a direct adjustment to surplus.
RECLASSIFICATIONS
Certain financial statement balances for 2001 and 2000 have been
reclassified to conform to the current year presentation.
3. INVESTMENTS
BONDS
Investments in bonds are reported in the financial statements at
amortized cost, less any valuation adjustment. The interest method is
used to amortize any purchase premium or discount. Use of the interest
method for loan-backed bonds and structured securities includes
anticipated prepayments obtained from independent sources. Prepayment
assumptions are updated at least annually, with the prospective
adjustment method used to recognize related changes in the
yield-to-maturity of such securities.
Estimated fair value is based upon values published by the Securities
Valuation Office ("SVO") of the NAIC. In the absence of SVO-published
values, estimated fair value is based upon quoted market prices, if
available. For bonds without quoted market prices, fair value is
estimated using independent pricing services or internally developed
pricing models.
Valuation adjustments are made for bonds in or near default, which are
reported at the lower of amortized cost or fair value, or for bonds
with a decline in fair value that management considers to be
other-than-temporary. Statement value and estimated fair value of bonds
at December 31, 2002 and 2001 were as follows:
<Table>
<Caption>
December 31, 2002 Reconciliation to Estimated Fair Value
- ----------------- -------------------------------------------------------
Gross Gross Estimated
Statement Unrealized Unrealized Fair
Value Gains Losses Value
------------ ------------ ------------ ------------
(in millions)
U.S. Government $ 8,932 $ 531 $ (21) $ 9,442
States, territories and possessions 396 61 -- 457
Special revenue and assessments 7,576 400 (1) 7,975
Public utilities 2,501 251 (25) 2,727
Banks, trust and insurance companies 1,355 71 (15) 1,411
Industrial and miscellaneous 29,836 2,150 (688) 31,298
Parent, subsidiaries and affiliates 1 -- -- 1
------------ ------------ ------------ ------------
Total $ 50,597 $ 3,464 $ (750) $ 53,311
============ ============ ============ ============
</Table>
75
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
<Table>
<Caption>
December 31, 2001 Reconciliation to Estimated Fair Value
- ----------------- -------------------------------------------------------
Gross Gross Estimated
Statement Unrealized Unrealized Fair
Value Gains Losses Value
------------ ------------ ------------ ------------
(in millions)
U.S. Government $ 4,271 $ 221 $ (84) $ 4,408
States, territories and possessions 262 29 -- 291
Special revenue and assessments 6,032 185 (23) 6,194
Public utilities 2,748 86 (19) 2,815
Banks, trust and insurance companies 1,306 46 (18) 1,334
Industrial and miscellaneous 29,685 1,026 (555) 30,156
Parent, subsidiaries and affiliates 2 -- -- 2
------------ ------------ ------------ ------------
Total $ 44,306 $ 1,593 $ (699) $ 45,200
============ ============ ============ ============
</Table>
Statement value and estimated fair value of bonds by contractual
maturity at December 31, 2002 are 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>
Statement Estimated
Value Fair Value
------------ ------------
(in millions)
Due in one year or less $ 1,165 $ 1,193
Due after one year through five years 9,858 10,202
Due after five years through ten years 13,362 14,235
Due after ten years 11,877 12,747
------------ ------------
36,262 38,377
Structured securities 14,335 14,934
------------ ------------
Total $ 50,597 $ 53,311
============ ============
</Table>
COMMON AND PREFERRED STOCKS
Common stocks are reported in the financial statements at fair value,
which is based upon quoted market prices, if available. For common
stocks without quoted market prices, fair value is estimated using
independent pricing services or internally developed pricing models.
Investments in common stock of unconsolidated subsidiaries and
affiliates are included in the consolidated statement of financial
position using the equity method.
Preferred stocks rated "1" (highest quality), "2" (high quality), or
"3" (medium quality) by the SVO are reported in the financial
statements at amortized cost. All other preferred stock is reported at
the lower of cost or fair value. Estimated fair value is based upon
quoted market prices, if available. For preferred stock without quoted
market prices, fair value is estimated using independent pricing
services or internally developed pricing models.
76
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
MORTGAGE LOANS
Mortgage loans are reported in the financial statements at unpaid
principal balance, less any valuation allowance or unamortized
commitment or origination fee. These fees are generally deferred and
amortized into investment income using the interest method. Mortgage
loans are collateralized by properties located throughout the United
States and Canada. The Company attempts to minimize mortgage loan
investment risk by diversification of borrowers, geographic locations
and types of collateral properties.
The maximum and minimum interest rates for mortgage loans originated
during 2002 were 8.2% and 5.0%, respectively, while these rates during
2001 were 9.8% and 6.4%, respectively. The aggregate average ratio of
amounts loaned to the value of collateral for mortgage loans originated
during 2002 and 2001 were 65% and 68%, respectively, with a maximum of
100% for any single loan during each of 2002 and 2001.
Mortgage loans are considered impaired when, based on current
information, management considers it probable that the Company will be
unable to collect all principal and interest due according to the
contractual terms of the loan. If necessary, a valuation adjustment is
made to reduce the carrying value of an impaired loan to the lower of
unpaid principal balance or estimated net realizable value based on
appraisal of the collateral property. If the impairment is considered
to be temporary, the valuation adjustment is classified as an
unrealized loss. Beginning January 1, 2001 valuation adjustments for
impairments considered to be other-than-temporary were reported as
realized losses. Prior to 2001, all changes in valuation adjustments
were reported as unrealized gains or losses. At December 31, 2002 and
2001, the reported value of mortgage loans was reduced by $44 million
and $99 million, respectively, in valuation adjustments.
REAL ESTATE
Real estate investments are reported in the financial statements at
cost, less any valuation adjustment, encumbrances and accumulated
depreciation of buildings and other improvements using a straight line
method over the estimated useful life of the improvements. An
investment in real estate is considered impaired when the projected
undiscounted net cash flow from the investment is less than depreciated
cost. When the Company determines that an investment in real estate is
impaired, a valuation adjustment is made to reduce the carrying value
to estimated fair value, after encumbrances, based on appraisal of the
property. The valuation adjustment is included in realized losses. At
December 31, 2002 and 2001, the reported value of real estate
investments was reduced by $0 and $52 million, respectively, in
valuation adjustments.
LEVERAGED LEASES
Leveraged leases are reported in the financial statements at the
present value of minimum lease payments, plus the residual value of the
leased asset. At December 31, 2002 and 2001, the reported value of
leveraged leases was $532 million and $669 million, respectively. The
reported value of leveraged leases was reduced by $108 million at
December 31, 2002 to reflect a decline in value of certain aircraft
leases that management considers to be other-than-temporary. The
decline in value was charged against an existing valuation allowance
and is not included as a component of net realized capital losses for
2002. Leveraged leases are included in other investments and primarily
represent investments in commercial aircraft or real estate property
that are leased to third parties and serve as collateral for
non-recourse borrowings.
77
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
CAPITAL GAINS AND LOSSES
Realized investment gains and losses for the years ended December 31,
2002, 2001 and 2000 were as follows:
<Table>
<Caption>
For the year ended For the year ended For the year ended
December 31, 2002 December 31, 2001 December 31, 2000
------------------------------ ------------------------------ ------------------------------
Net Net Net
Realized Realized Realized
Realized Realized Gains Realized Realized Gains Realized Realized Gains
Gains Losses (Losses) Gains Losses (Losses) Gains Losses (Losses)
-------- -------- -------- -------- -------- -------- -------- -------- --------
(in millions)
Bonds $ 950 $ (1,237) $ (287) $ 537 $ (674) $ (137) $ 369 $ (416) $ (47)
Common and
preferred stocks 356 (619) (263) 863 (569) 294 1,534 (333) 1,201
Mortgage loans -- (4) (4) -- (10) (10) -- (25) (25)
Real estate 121 (3) 118 85 (11) 74 101 -- 101
Other invested assets 158 (258) (100) 296 (149) 147 395 (177) 218
-------- -------- -------- -------- -------- -------- -------- -------- --------
$ 1,585 $ (2,121) (536) $ 1,781 $ (1,413) 368 $ 2,399 $ (951) 1,448
======== ======== ======== ======== ======== ========
Less: Capital gains taxes (194) 98 353
Less: IMR gains (losses) 264 11 (52)
-------- -------- --------
Net realized capital
gains (losses) $ (606) $ 259 $ 1,147
======== ======== ========
</Table>
Proceeds on the sale of bond investments totaled $53 billion, $30
billion and $25 billion for the years ended December 31, 2002, 2001 and
2000, respectively. Realized losses included $588 million and $457
million for the years ended December 31, 2002 and 2001, respectively,
of pretax valuation adjustments for declines in fair value of
investments that were considered to be other-than-temporary.
Other-than-temporary declines in fair value of $508 million for the
year ended December 31, 2000 are included in net unrealized losses.
Changes in net unrealized investment gains and losses for the years
ended December 31, 2002, 2001 and 2000 were as follows:
<Table>
<Caption>
For the year ended December 31,
------------------------------------------
2002 2001 2000
------------ ------------ ------------
(in millions)
Bonds $ (150) $ (15) $ (208)
Common and preferred stocks (436) (699) (851)
Mortgage loans -- -- (2)
Real estate -- -- (4)
Other investments (172) (193) 22
------------ ------------ ------------
(758) (907) $ (1,043)
============
Change in deferred taxes 241 352
------------ ------------
$ (517) $ (555)
============ ============
</Table>
See Note 10 regarding the accounting change in 2001 for deferred taxes
as regards to unrealized gains and losses.
78
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
SECURITIES LENDING
The Company has entered into securities lending agreements whereby
certain investment securities are loaned to third parties, primarily
major brokerage firms. The Company's policy requires a minimum of 102%
of the fair value of the loaned securities, calculated on a daily
basis, as collateral in the form of either cash or securities held by
the Company or a trustee. At December 31, 2002 and 2001, unrestricted
cash collateral held by the Company of $1.6 billion and $1.3 billion,
respectively, is included in cash and invested assets and the
offsetting collateral liability of $1.6 billion and $1.3 billion,
respectively, is included in other liabilities. Additional non-cash
collateral of $389 million and $823 million is held on the Company's
behalf by a trustee at December 31, 2002 and 2001, respectively, and is
not included in the Consolidated Statement of Financial Position.
MORTGAGE DOLLAR ROLLS
The Company has also entered into reverse repurchase agreements whereby
the Company agrees to sell and repurchase various mortgage-backed
securities. At December 31, 2002 and 2001, the book value of securities
subject to these agreements and included in bonds were $1,042 million
and $964 million, respectively, while fair values were $1,057 million
and $966 million, respectively. The repurchase obligation liability of
$1,042 million and $964 million were included in the other liabilities
at December 31, 2002 and 2001, respectively. Securities subject to
these agreements had contractual maturities of 30 years at each of
December 31, 2002 and 2001 and weighted average interest rates of 5.8%
and 6.8%, respectively.
4. DERIVATIVE FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into derivative
transactions, generally to mitigate the risk to Company assets and
liabilities of fluctuations in interest rates, foreign currency
exchange rates and other market risks. Derivative investments are
reported as other investments in the consolidated statement of
financial position. Derivatives that hedge specific assets and
liabilities are reported in a manner consistent with the hedged item
(e.g., at amortized cost or fair value), while derivative financial
instruments that hedge a portfolio of assets or liabilities are
reported at fair value. Fair value is estimated as the amount that the
Company would expect to receive or pay upon termination of the contract
at the reporting date. Changes in the carrying value of derivatives
that hedge a portfolio of assets or liabilities are reported as
realized capital gains and losses.
79
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
The Company held the following positions for hedging purposes at
December 31, 2002 and 2001:
<Table>
<Caption>
December 31, 2002 December 31, 2001
----------------------------------- -----------------------------------
Carrying Notional Fair Carrying Notional Fair
Derivative Instrument Value Amount Value Value Amount Value
--------------------- ---------- ---------- ---------- ---------- ---------- ----------
(in millions)
Specific Hedges:
Foreign currency swaps $ -- $ 68 $ 7 $ 1 $ 70 $ 11
Forward purchase agreements -- -- -- -- 200 3
Interest rate swaps (3) 442 (8) 1 88 6
Swaptions 12 358 12 8 304 13
Interest rate floors 8 625 41 6 525 19
Credit default swaps -- 67 -- -- 57 --
Commodity swaps -- 5 (1) -- -- --
Portfolio Hedges:
Equity futures and swaps -- -- -- 9 221 9
Fixed income futures -- 365 -- (2) 203 (2)
Foreign currency forward
contracts (19) 567 (17) -- 502 --
</Table>
The notional or contractual amounts of derivative financial instruments
are used to denominate the transactions and do not represent the
amounts exchanged between the parties.
Foreign currency swaps are used to hedge exposure to variable U.S.
dollar cash flows from certain bonds denominated in foreign currencies.
A foreign currency swap is a contractual agreement to exchange the
currencies of two different countries at a specified rate of exchange
in the future.
Forward purchase agreements are used to fix the price of a security
purchase or sale to be settled on a future date, reducing or
eliminating the risk of price fluctuation prior to settlement. Forward
purchase agreements fix the price, quantity and settlement date for a
future purchase or sale.
Interest rate swaps are used to hedge exposure to variable interest
payments on certain floating rate bonds. An interest rate swap is a
contractual agreement to pay a floating rate of interest, based upon a
reference index, in exchange for a fixed rate of interest established
at the origination of the contract.
Swaptions are used to hedge the asset/liability risks of a significant
and sustained increase or decrease in interest rates for certain of the
Company's insurance products. Swaptions are a contractual agreement
whereby one party holds an option to enter into an interest rate swap
with another party on predefined terms.
80
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
Interest rate floors are used to hedge the asset/liability risks of a
significant and sustained decrease in interest rates. Floors entitle
the Company to receive settlement payments from the counterparties if
interest rates decline below a specified level.
Credit default swaps are used to hedge against a drop in bond prices
due to credit concerns for certain bond issuers. A credit default swap
allows the Company to put the bond to a counterparty at par upon a
"credit event" sustained by the bond issuer. A credit event is defined
as bankruptcy, failure to pay, or obligation acceleration.
Commodity swaps are used to hedge the forward sale of crude oil and
natural gas production. Commodity swaps are agreements whereby one
party pays a floating commodity price in exchange for a specified fixed
commodity price.
Equity index futures contracts and equity total return swaps are used
to mitigate exposure to market fluctuations for the Company's portfolio
of common stocks. Futures contracts obligate the Company to buy or sell
a financial instrument at a specified future date for a specified
price. Swaps are contracts to exchange, for a period of time, the
investment performance of one underlying instrument for the investment
performance of another underlying instrument, typically without
exchanging the instruments themselves.
Fixed income futures contracts are used to hedge interest rate risks
for a portion of its fixed maturity investment portfolio. These futures
contracts obligate the Company to buy or sell a financial instrument at
a specified future date for a specified price.
Foreign currency forward contracts are used to hedge the foreign
exchange risk for portfolios of investments denominated in foreign
currencies. Foreign currency forward contracts obligate the Company to
deliver a specified amount of foreign currency at a future date at a
specified exchange rate.
In addition to derivatives used for hedging purposes, the Company
entered into replication transactions during 2002. A replication
transaction means a derivative transaction is entered into in
conjunction with other investment transactions in order to "replicate"
the investment characteristics of otherwise permissible investments.
During 2002, the Company entered into two replication transactions; a
$15 million par equivalent fixed income replication comprised of a
credit default swap, an interest rate swap and an asset-backed security
purchase; and a $25 million par equivalent fixed income replication
comprised of a credit default swap and an asset-backed security
purchase. These replication transactions, including their derivative
components, are carried at amortized cost. The Company also entered
into long equity and fixed income futures replication transactions
during 2002. The average fair value of replications during 2002 was $72
million, with an ending fair value of $8 million at December 31, 2002.
5. RESERVES FOR POLICY BENEFITS
Reserves for policy benefits represent the net present value of future
policy benefits, less future policy premiums, estimated using actuarial
methods based on mortality and morbidity experience tables and
valuation interest rates prescribed or permitted by the OCI.
81
NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
Use of these actuarial tables and methods involved assumptions
regarding future mortality and morbidity. Actual future experience
could differ from the assumptions used to make these estimates.
Life insurance reserves on substantially all policies issued since 1978
are based on the Commissioner's Reserve Valuation Method ("CRVM") with
interest rates ranging from 3-1/2% to 5-1/2% and the 1958 or 1980 CSO
mortality tables. Other life policy reserves are primarily based on the
net level premium method, using various mortality tables at interest
rates ranging from 2% to 4-1/2%. As of December 31, 2002, the Company
has $750 billion of total life insurance in-force, including $8 billion
of life insurance in-force for which gross premiums are less than net
premiums according to the standard valuation methods and assumptions
prescribed by the OCI.
As of January 1, 2001, the Company changed the valuation basis for
reserves on certain term life insurance policies. The impact of this
change increased policy benefit reserves by $61 million, and was
reported as a direct reduction of surplus for the year ended December
31, 2001.
Tabular cost has been determined from the basic data for the
calculation of policy reserves. Tabular cost less actual reserves
released has been determined from the basic data for the calculation of
reserves and reserves released. Tabular interest has been determined
from the basic data for the calculation of policy reserves. Tabular
interest on funds not involving life contingencies is calculated as the
product of the valuation rate of interest times the mean of the amount
of funds subject to such rate held at the beginning and end of the year
of valuation.
Additional premiums are charged for substandard lives for policies
issued after January 1, 1956. Net level premium or CRVM mean reserves
are based on multiple mortality tables or one-half the net flat or
other extra mortality charge. The Company waives deduction of
fractional premiums upon death of an insured and returns any portion of
the final premium beyond the date of death. Surrender values are not
promised in excess of the legally computed reserves.
Deferred annuity reserves on contracts issued since 1985 are primarily
based on the Commissioner's Annuity Reserve Valuation Method with
interest rates ranging from 3-1/2% to 6-1/4%. Other deferred annuity
reserves are based on contract value. Immediate annuity reserves are
based on present value of expected benefit payments at interest rates
ranging from 3-1/2% to 7-1/2%. Beginning January 1, 2001 changes in
future policy benefits on supplementary contracts without life
contingencies are classified as deposit-type transactions and thereby
excluded from net additions to policy benefit reserves in the
consolidated statement of operations. Prior to 2001, these reserve
changes were reported as a component of operations.
82
NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 2002 and 2001, the withdrawal characteristics of the
Company's annuity reserves and deposit liabilities were as follows:
<Table>
<Caption>
December 31, 2002 December 31, 2001
----------------------- -----------------------
Amount Percent Amount Percent
---------- ---------- ---------- ----------
(in millions)
Subject to discretionary
withdrawal - with market value adjustment $ 7,539 58.5% $ 8,936 63.5%
Subject to discretionary
withdrawal - without market value adjustment 2,620 20.3% 2,260 16.1%
Not subject to discretionary
withdrawal 2,738 21.2% 2,869 20.4%
---------- ---------- ---------- ----------
$ 12,897 100.0% $ 14,065 100.0%
========== ==========
</Table>
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, with interest rates
ranging from 3% to 4% and the 1964 Commissioner's Disability Table for
morbidity. Disabled life reserves for DI policies are based on the
present value of expected benefit payments, primarily using the 1985
CIDA (modified for Company experience in the first four years of
disability) and interest rates ranging from 3% to 5-1/2%.
Active life reserves for long-term care policies consist of
mid-terminal reserves and unearned premium. Mid-terminal reserves are
based on the one-year preliminary term method, industry-based
experience morbidity, total terminations based on the 1983 Individual
Annuity Mortality table with no lapse, and an interest rate of either
4% or the minimum rate allowable for tax purposes. When the tax
interest rate is used, reserves are compared in the aggregate to the
statutory minimum and the greater of the two is held. Disabled life
reserves for long-term care policies are based on the present values of
expected benefit payments using industry-based long-term care
experience with a 4.5% interest rate.
6. PREMIUM AND ANNUITY CONSIDERATIONS DEFERRED AND UNCOLLECTED
Gross deferred and uncollected insurance premiums represent life
insurance premiums due to be received from policyowners through the
next respective policy anniversary dates. Net deferred and uncollected
premiums represent only the portion of gross premiums related to
mortality charges and interest.
83
NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
Deferred and uncollected premiums at December 31, 2002 and 2001 were as
follows:
<Table>
<Caption>
December 31, 2002 December 31, 2001
---------------------- ----------------------
Type of Business Gross Net Gross Net
- ---------------- ---------- ---------- ---------- ----------
(in millions)
Ordinary new business $ 149 $ 69 $ 145 $ 77
Ordinary renewal 1,409 1,145 1,351 1,103
---------- ---------- ---------- ----------
$ 1,558 $ 1,214 $ 1,496 $ 1,180
========== ========== ========== ==========
</Table>
7. SEPARATE ACCOUNTS
Separate account assets and related policy liabilities represent the
segregation of funds deposited by variable life insurance and variable
annuity policyowners. Policyowners bear the investment performance risk
associated with variable products. Separate account assets are invested
at the direction of the policyowner in a variety of mutual fund
options. Variable annuity policyowners also have the option to invest
in a fixed interest rate annuity issued by the general account of the
Company. Separate account assets are reported at fair value based
primarily on quoted market prices.
Following is a summary of separate account liabilities by withdrawal
characteristic at December 31, 2002 and 2001:
<Table>
<Caption>
December 31,
----------------------
2002 2001
---------- ----------
(in millions)
At market value $ 8,442 $ 9,780
Not subject to discretionary withdrawal 1,550 1,762
Non-policy liabilities 254 244
---------- ----------
Total $ 10,246 $ 11,786
========== ==========
</Table>
While separate account liability values are not guaranteed by the
Company, the variable annuity and variable life insurance products
represented in the separate accounts do include guaranteed minimum
death benefits underwritten by the Company. At December 31, 2002 and
2001, general account reserves for policy benefits included $11 million
and $6 million, respectively, in reserves for these benefits.
Separate account premiums and other considerations received during the
years ended December 31, 2002 and 2001 were $1,341 million and $1,419
million, respectively. Following is a summary reconciliation of amounts
reported as transfers to and from separate accounts in the summary of
operations of the Company's NAIC Separate Account Annual Statement and
the amount reported as net transfers to separate accounts in the
accompanying consolidated statement of operations for the years ended
December 31, 2002 and 2001:
84
NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
<Table>
<Caption>
For the year ended December 31,
-------------------------------
2002 2001
------------ ------------
(in millions)
From Separate Account Annual Statement:
Transfers to Separate Accounts $ 1,341 $ 1,419
Transfers from Separate Accounts (1,300) (1,128)
------------ ------------
41 291
Reconciling adjustments:
Investment management and administrative charges 65 72
Mortality, breakage and taxes 136 139
------------ ------------
Net transfers to separate accounts $ 242 $ 502
============ ============
</Table>
8. EMPLOYEE AND REPRESENTATIVE BENEFIT PLANS
The Company sponsors noncontributory defined benefit retirement plans
for all eligible employees and field representatives. These include
tax-qualified plans, as well as nonqualified plans that provide
benefits to certain participants in excess of ERISA limits for
qualified plans. The Company's policy is to fully fund the obligations
of qualified plans in accordance with ERISA requirements.
Beginning January 1, 2001 the costs associated with these retirement
benefits are expensed over the annual periods during which the
participant provides services to the Company, including recognition of
pension assets and liabilities based on the funded status of the
related plans. Prior to 2001, the Company recognized pension expense
only in the periods in which contributions were made to plan assets.
In addition to pension benefits, the Company provides certain health
care and life insurance benefits ("postretirement benefits") to retired
employees, field representatives and eligible dependents. Substantially
all employees and field representatives will become eligible for these
benefits if they reach retirement age while working for the Company.
85
NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
Aggregated assets and projected benefit obligations of the defined
benefit plans and for postretirement benefits at December 31, 2002 and
2001, and changes in assets and obligations for the years then ended,
were as follows:
<Table>
<Caption>
Defined Benefit Plans Postretirement Benefits
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(in millions)
Fair value of plan assets at January 1 $ 1,612 $ 1,694 $ 20 $ 23
Changes in plan assets:
Actual return on plan assets (161) (54) (2) (2)
Actual plan benefits paid (31) (28) (1) (1)
------------ ------------ ------------ ------------
Fair value of plan assets at December 31 $ 1,420 $ 1,612 $ 17 $ 20
============ ============ ============ ============
Projected benefit obligation at January 1 $ 1,367 $ 1,261 $ 96 $ 89
Changes in benefit obligation:
Service cost of benefits earned 54 50 11 7
Interest cost on projected obligations 95 86 8 6
Projected plan benefits paid (34) (30) (8) (6)
Experience (gains) losses 17 -- 24 --
------------ ------------ ------------ ------------
Projected benefit obligation at December 31 $ 1,499 $ 1,367 $ 131 $ 96
============ ============ ============ ============
</Table>
Plan assets are invested primarily in common stocks and corporate debt
securities through a separate account of the Company. Fair value of
plan assets is based primarily on quoted market values.
The projected benefit obligation represents the actuarial net present
value of future benefit obligations, which is calculated annually by
the Company. The following table summarizes assumptions used in
estimating the projected benefit obligation at December 31, 2002 and
2001:
<Table>
<Caption>
Defined Benefit Plans Postretirement Benefits
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Discount rate 7.0% 7.0% 7.0% 7.0%
Long-term rate of return on plan assets 8.5% 9.0% 8.5% 9.0%
Annual increase in compensation 5.0% 5.0% 5.0% 5.0%
</Table>
The projected benefit obligations at December 31, 2002 and 2001 also
assumed an annual increase in future retiree medical costs of 10%,
grading down to 5% over 5 years and remaining level thereafter. A
further increase in the assumed healthcare cost trend of 1% in each
year would increase the accumulated postretirement benefit obligation
as of December 31, 2002 by $13 million and net periodic postretirement
benefit expense during 2002 by $2 million. A decrease in the assumed
healthcare cost trend of 1% in each year would decrease the accumulated
postretirement benefit obligation as of December 31, 2002 by $13
million and net periodic postretirement benefit expense during 2002 by
$2 million.
Projected benefit obligations included $12 million and $11 million for
non-vested employees at December 31, 2002 and 2001, respectively.
86
NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
An aggregated reconciliation of the funded status of the plans to the
net liability recorded by the Company at December 31, 2002 and 2001, as
well as the components of net periodic benefit costs for the years then
ended, were as follows:
<Table>
<Caption>
Defined Benefit Plans Postretirement Benefits
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(in millions)
Fair value of plan assets at December 31 $ 1,420 $ 1,612 $ 17 $ 20
Projected benefit obligation at December 31 1,499 1,367 131 96
------------ ------------ ------------ ------------
Funded status (79) 245 (114) (76)
Unrecognized net experience losses 516 207 29 4
Unrecognized initial net asset (644) (657) -- --
Nonadmitted asset (58) (38) -- --
------------ ------------ ------------ ------------
Net pension liability $ (265) $ (243) $ (85) $ (72)
============ ============ ============ ============
Components of net periodic benefit cost:
Service cost of benefits earned $ 54 $ 50 $ 11 $ 7
Interest cost on projected obligations 95 86 9 6
Amortization of experience gains and losses 5 -- 1 --
Amortization of initial net asset (13) -- -- --
Expected return on plan assets (136) (151) (2) (2)
------------ ------------ ------------ ------------
Net periodic expense (benefit) $ 5 $ (15) $ 19 $ 11
============ ============ ============ ============
</Table>
Unrecognized net experience gains or losses represent cumulative
amounts by which plan experience for return on plan assets or benefit
costs has been more or less favorable than assumed. These net
differences accumulate without recording in the Company's financial
statements unless they exceed ten percent of plan assets or projected
benefit obligation, whichever is greater. If they exceed this limit,
they are amortized into net periodic benefit costs over the remaining
average years of service until retirement of the employee base, which
is currently seventeen years.
Unrecognized initial net assets represent the amount by which the fair
value of plan assets exceeded the projected benefit obligation for
funded pension plans upon the adoption of new statutory accounting
principles at January 1, 2001. The Company has elected not to record an
initial asset for this excess, rather it will establish the asset
through amortization of this initial asset as a credit to net periodic
benefit cost.
Any net pension assets for funded plans are nonadmitted under statutory
accounting and are thereby excluded from surplus.
The Company also sponsors a contributory 401(k) plan for eligible
employees and a noncontributory defined contribution plan for full-time
representatives. For the years ended December 31, 2002, 2001 and 2000
the Company expensed total contributions to these plans of $22 million,
$20 million and $19 million, respectively.
87
NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
9. REINSURANCE
In the normal course of business, the Company limits its exposure to
life insurance death benefits on any single insured by ceding insurance
coverage to reinsurers under excess and coinsurance contracts. The
Company retains a maximum of $25 million of coverage per individual
life and $35 million maximum of coverage per joint life. The Company
also has an excess reinsurance contract for certain disability income
policies issued prior to 1999 with retention limits varying based upon
coverage type.
Amounts shown in the consolidated financial statements are reported net
of reinsurance. Reserves for policy benefits at December 31, 2002 and
2001 were net of ceded reserves of $877 million and $757 million,
respectively. The effect of reinsurance on premium revenue and benefits
expense for the years ended December 31, 2002, 2001 and 2000 was as
follows:
<Table>
<Caption>
For the year ended December 31,
------------------------------------------
2002 2001 2000
------------ ------------ ------------
(in millions)
Direct premium revenue $ 10,706 $ 9,995 $ 9,460
Premiums ceded (598) (548) (494)
------------ ------------ ------------
Net premium revenue $ 10,108 $ 9,447 $ 8,966
============ ============ ============
Direct benefit expense 10,749 10,109 10,140
Benefits ceded (419) (432) (315)
------------ ------------ ------------
Net benefit expense $ 10,330 $ 9,677 $ 9,825
============ ============ ============
</Table>
In addition, the Company received $172 million, $161 million and $146
million for the years ended December 31, 2002, 2001 and 2000,
respectively, from reinsurers as allowances for reimbursement of
commissions and other expenses on ceded business. These amounts are
included in other income in the consolidated statement of operations.
Reinsurance contracts do not relieve the Company from its obligations
to policyowners. Failure of reinsurers to honor their obligations could
result in losses to the Company. The Company attempts to minimize this
risk by diversifying its reinsurance coverage among a number of
reinsurers that meet its standards for strong financial condition.
There were no reinsurance recoverables at December 31, 2002 and 2001,
which were considered by management to be uncollectible.
88
NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
10. INCOME TAXES
The Company files a consolidated federal income tax return including
the following entities:
<Table>
Northwestern Mutual Investment Services, LLC Baird Holding Company
Northwestern International Holdings, Inc. Frank Russell Company
NML Real Estate Holdings, LLC and subsidiaries Bradford, Inc.
NML Securities Holdings, LLC and subsidiaries Network Planning Advisors, LLC
Northwestern Investment Management Company, LLC Mason Street Advisors, LLC
Northwestern Securities Holdings, LLC NML - CBO, LLC
Northwestern Mutual Trust Company JYD, LLC
</Table>
The Company collects from or refunds to these subsidiaries their share
of consolidated income taxes determined under written tax-sharing
agreements. Federal income tax returns for years through 1999 are
closed as to further assessment of tax. The liability for income taxes
payable in the financial statements includes a provision for any
additional taxes that may become due with respect to the open tax
years.
Beginning January 1, 2001 the Company accounts for deferred tax assets
and liabilities, which reflect the financial statement impact of
cumulative temporary differences between the tax and financial
statement bases of assets and liabilities. Prior to 2001, no deferred
tax balances were reported. The components of the net admitted deferred
tax asset at December 31, 2002 and 2001 were as follows:
<Table>
<Caption>
December 31,
----------------------
2002 2001 Change
---------- ---------- ----------
(in millions)
Deferred tax assets:
Policy acquisition costs $ 673 $ 626 $ 47
Investment asset 664 360 304
Policy benefit liabilities 1,769 1,728 41
Benefit plan obligations 223 202 21
Guaranty fund assessment 14 14 --
Nonadmitted assets 67 54 13
Other 61 69 (8)
---------- ---------- ----------
Gross deferred tax assets $ 3,471 $ 3,053 $ 418
Deferred tax liabilities:
Premium and other receivables $ 425 $ 416 $ 9
Investment asset 1,156 1,034 122
Other 3 1 2
---------- ---------- ----------
Gross deferred tax liabilities $ 1,584 $ 1,451 $ 133
---------- ---------- ----------
Net admitted deferred tax asset $ 1,887 $ 1,602 $ 285
========== ========== ==========
</Table>
89
NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
Statutory accounting principles limit the amount of gross deferred tax
assets that can be included in Company surplus. This limit is based on
a formula that takes into consideration available loss carryback
capacity, expected timing of reversal for existing temporary
differences, gross deferred tax liabilities and the level of Company
surplus. At December 31, 2002 and 2001, the Company's gross deferred
tax assets did not exceeded this limitation.
Changes in deferred tax assets and liabilities related to unrealized
gains and losses on investments are reported as a component of changes
in unrealized capital gains and losses in the consolidated statement of
changes in surplus. Other net changes in deferred tax assets and
liabilities are direct adjustments to surplus and separately reported
in the consolidated statement of changes in surplus.
The major components of current income tax expense (benefit) were as
follows:
<Table>
<Caption>
December 31,
---------------------------
2002 2001
------------ ------------
(in millions)
Current year income tax $ 26 $ 170
Tax credits (15) (11)
Equity tax (credit) (453) 14
------------ ------------
Total current tax expense (benefit) $ (442) $ 173
============ ============
</Table>
The Company's taxable income can vary significantly from gain from
operations before taxes due to differences in revenue recognition and
expense deduction between book and tax.
The Company is subject to an "equity tax" that is assessed only on
mutual life insurance companies. At December 31, 2001, the liability
for income taxes payable included $453 million related to the Company's
estimated liability for equity tax, primarily with respect to the 2001
tax year. In March 2002, Congress passed legislation that suspended
assessments of equity tax for tax years 2001 through 2003. As a result,
this liability was released as a credit to current tax expense during
2002.
The Company's effective tax rates were 299% and 21% for the years ended
December 31, 2002 and 2001. The effective rate is not the statutory
rate applied to the Company's taxable income or loss by the Internal
Revenue Service. It is a financial statement relationship that
represents the relationship between the sum of total taxes, including
those that affect net income and changes in deferred taxes not related
to unrealized gains and losses on investments, to the sum of gain from
operations before taxes and pretax net realized gains or losses. These
financial statement effective rates were different than the applicable
federal tax rate of 35% due primarily to differences between book and
tax recognition of net investment income and realized capital gains and
losses, prior year adjustments and the impact the of equity tax in
2002.
The effective tax rate for the year ended December 31, 2000 was 16%,
based only on tax expense attributed to net gain from operations and
its relationship to gain from operations before taxes. The effective
rate was less than the applicable federal rate of 35% due primarily to
differences between book and tax recognition of investment income and
realized capital gains and losses and prior year adjustments.
90
NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
Income taxes incurred in the current and prior years of $1.7 billion
are available at December 31, 2002 for recoupment in the event of
future net losses.
11. FRANK RUSSELL COMPANY ACQUISITION AND GOODWILL
The Company acquired Frank Russell Company ("Russell") effective
January 1, 1999 for a purchase price of approximately $955 million plus
contingent consideration. Russell, a global leader in multi-manger
investment services, provides investment products and services in more
than 35 countries. This investment is accounted for using the equity
method, adjusted for the charge-off of acquisition goodwill, and is
included in common stocks in the consolidated statement of financial
position. Since the date of acquisition, the Company charged-off
directly from surplus approximately $882 million, representing the
goodwill associated with the acquisition. The Company has received
permission from the OCI for this statutory accounting treatment, which
is different than the NAIC "Accounting Practices and Procedures
Manual".
The Company has unconditionally guaranteed certain debt obligations of
Russell, including $350 million of senior notes and up to $150 million
of other credit facilities.
12. CONTINGENCIES
The Company has also guaranteed certain obligations of other
affiliates. These guarantees totaled approximately $112 million at
December 31, 2002 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 $2.2 billion
at December 31, 2002 and were extended at market interest rates and
terms.
The Company is engaged in various legal actions in the normal course of
its investment and insurance operations. In the opinion of management,
losses that may result from such actions would not have a material
effect on the Company's financial position at December 31, 2002.
13. RELATED PARTY TRANSACTIONS
During 2001 and 2000, the Company transferred appreciated equity
investments to wholly-owned subsidiaries as a capital contribution to
the subsidiaries. Realized capital gains of $244 million and $220
million for 2001 and 2000, respectively, were reported based on the
fair value of the assets at transfer.
91
NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of investment assets, including derivatives, and certain
policy liabilities at December 31, 2002 and 2001 were as follows:
<Table>
<Caption>
December 31, 2002 December 31, 2001
-------------------------- --------------------------
Statement Fair Statement Fair
Value Value Value Value
------------ ------------ ------------ ------------
(in millions)
Assets:
Bonds $ 50,597 $ 53,311 $ 44,306 $ 45,200
Common and preferred stocks 4,902 6,373 5,369 7,072
Mortgage loans 15,692 17,485 15,164 15,875
Real estate 1,503 2,181 1,671 2,406
Policy loans 9,292 9,628 9,028 9,375
Other investments 4,242 4,802 4,817 5,244
Cash and short-term investments 1,814 1,814 2,018 2,018
Liabilities:
Investment-type insurance reserves $ 3,737 $ 3,562 $ 3,417 $ 3,191
</Table>
Fair value of bonds, common and preferred stocks and derivative
financial instruments are based upon quoted market prices, when
available. For those not actively traded, fair values are estimated
using independent pricing services or internally developed pricing
models. The fair value of mortgage loans is estimated by discounting
estimated future cash flows using market interest rates for debt with
comparable credit risk and maturities. Real estate fair value is
determined by discounting estimated future cash flows using market
interest rates. Policy loan fair value is estimated based on discounted
projected cash flows using market interest rates and assumptions
regarding future loan repayments based on Company experience. Other
investments primarily represent joint ventures and partnerships, for
which the equity method approximates fair value.
The fair value of investment-type insurance reserves is estimated by
discounting estimated future cash flows at market interest rates for
similar instruments with comparable maturities.
92
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE NORTHWESTERN MUTUAL
LIFE INSURANCE COMPANY
In respect of NML Variable
Annuity Account A and NML
Variable Annuity Account C
(Registrant)
By /s/ EDWARD J. ZORE
-------------------------------------
Edward J. Zore
President and Chief Executive Officer
Date: March 25, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<Table>
<Caption>
TITLE
-----
/s/ EDWARD J. ZORE Trustee, President and
- ------------------------------ Chief Executive Officer
Edward J. Zore
/s/ GARY A. POLINER Senior Vice President and
- ------------------------------ Chief Financial Officer
Gary A. Poliner
/s/ STEVEN T. CATLETT Vice President and
- ------------------------------ Controller
Steven T. Catlett
/s/ EDWARD E. BARR* Trustee
- ------------------------------
Edward E. Barr
/s/ JOHN M. BREMER* Trustee
- ------------------------------
John M. Bremer
/s/ PETER W. BRUCE* Trustee
- ------------------------------
Peter W. Bruce
/s/ ROBERT C. BUCHANAN* Trustee
- ------------------------------
Robert C. Buchanan
/s/ GEORGE A. DICKERMAN* Trustee
- ------------------------------
George A. Dickerman
/s/ PIERRE S. DU PONT* Trustee
- ------------------------------
Pierre S. du Pont
/s/ JAMES D. ERICSON* Trustee
- ------------------------------
James D. Ericson
/s/ Trustee
- ------------------------------
David A. Erne
/s/ J. E. GALLEGOS* Trustee
- ------------------------------
J. E. Gallegos
</Table>
93
<Table>
<Caption>
TITLE
-----
/s/ STEPHEN N. GRAFF* Trustee
- -----------------------------------
Stephen N. Graff
/s/ PATRICIA ALBJERG GRAHAM* Trustee
- -----------------------------------
Patricia Albjerg Graham
/s/ JAMES P. HACKETT* Trustee
- -----------------------------------
James P. Hackett
/s/ STEPHEN F. KELLER* Trustee
- -----------------------------------
Stephen F. Keller
/s/ BARBARA A. KING* Trustee
- -----------------------------------
Barbara A. King
/s/ J. THOMAS LEWIS* Trustee
- -----------------------------------
J. Thomas Lewis
/s/ DANIEL F. MCKEITHAM, JR.* Trustee
- -----------------------------------
Daniel F. McKeithan, Jr.
/s/ H. MASON SIZEMORE, JR.* Trustee
- -----------------------------------
H. Mason Sizemore, Jr.
/s/ HAROLD B. SMITH* Trustee
- -----------------------------------
Harold B. Smith
/s/ SHERWOOD H. SMITH, JR. * Trustee
- -----------------------------------
Sherwood H. Smith, Jr.
/s/ PETER M. SOMMERHAUSER* Trustee
- -----------------------------------
Peter M. Sommerhauser
/s/ JOHN E. STEURI* Trustee
- -----------------------------------
John E. Steuri
/s/ JOHN J. STOLLENWERK* Trustee
- -----------------------------------
John J. Stollenwerk
/s/ BARRY L. WILLIAMS* Trustee
- -----------------------------------
Barry L. Williams
/s/ KATHRYN D. WRISTON* Trustee
- -----------------------------------
Kathryn D. Wriston
</Table>
Each of the above signatures is affixed as of March 25, 2003
*By /s/ EDWARD J. ZORE
-----------------------------------------
Edward J. Zore, Attorney in Fact,
pursuant to the Power of Attorney
attached as exhibit 24.1 hereto.
94
CERTIFICATIONS
I, Edward J. Zore, certify that:
1. I have reviewed this annual report on Form 10-K of The Northwestern
Mutual Life Insurance Company in respect of NML Variable Annuity Account A and
NML Variable Annuity Account C;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
By /s/ EDWARD J. ZORE
--------------------------------------
Edward J. Zore
President and Chief Executive Officer
Date: March 25, 2003
95
I, Gary A. Poliner, certify that:
1. I have reviewed this annual report on Form 10-K of The Northwestern
Mutual Life Insurance Company in respect of NML Variable Annuity Account A and
NML Variable Annuity Account C;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
By /s/ GARY A. POLINER
--------------------------------------
Gary A. Poliner
Senior Vice President and
Chief Financial Officer
Date: March 25, 2003
96
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED PURSUANT TO SECTION 12
OF THE ACT
As supplemental information, the Commission is separately being
furnished with four copies of each of the following documents: (1) 2002 Annual
Report for NML Variable Annuity Account A; and (2) 2002 Annual Report for NML
Variable Annuity Account C.
No proxy material is prepared specifically for contract holders under
NML Variable Annuity Account A or NML Variable Annuity Account C. The
Northwestern Mutual Life Insurance Company, a mutual company with no
shareholders, does prepare a proxy statement and proxy for each policyholder of
a company-issued insurance policy or annuity contract.
97
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT DESCRIPTION PAGE
- ------- ----------- ----
3.1 Restated Articles of Incorporation of The Northwestern Mutual
Life Insurance Company. (This exhibit was filed in electronic
format with Post-Effective Amendment No. 6 on Form N-4 for NML
Variable Annuity Account A, File No. 33-58476, CIK 0000790162,
dated November 13, 1995, and is incorporated herein by
reference.)
3.2 By-Laws of The Northwestern Mutual Life Insurance 100
Company as amended December 4, 2002.
3.3 Resolution of the Board of Trustees of The Northwestern Mutual
Life Insurance Company creating "Northwestern Mutual Variable
Annuity Account A". (This exhibit was filed in electronic
format with the Registration Statement on Form N-4 for NML
Variable Annuity Account A, File No. 333-22455, CIK
0000790162, dated February 27, 1997, and is incorporated
herein by reference.)
3.4 Resolution of the Board of Trustees of The Northwestern Mutual
Life Insurance Company creating Separate Account C. (This
exhibit was filed in electronic format with the Annual Report
on Form 10-K for the fiscal year ended December 31, 1999 of
The Northwestern Mutual Life Insurance Company in respect of
NML Variable Annuity Account A and NML Variable Annuity
Account C, dated March 28, 2000 ("1999 Form 10-K"), and is
incorporated herein by reference.)
3.5 Resolution of the Board of Trustees of The Northwestern Mutual
Life Insurance Company to use Separate Account C to facilitate
the issuance and maintenance of the Contracts and renaming the
Account "NML Variable Annuity Account C". (This exhibit was
filed in electronic format with the 1999 Form 10-K and is
incorporated herein by reference.)
10.1 Flexible Payment Variable Annuity Front Load Contract, RR.V.A.
(032000) (sex neutral). (This exhibit was filed in electronic format
with Post-Effective Amendment No. 4 on Form N-4 for NML Variable
Annuity Account A, File No. 333-72913, CIK 0000790162, dated May 31,
2001, and is incorporated herein by reference.)
10.2 Flexible Payment Variable Annuity Back Load Contract, RR.V.A.
(032000) (sex neutral). (This exhibit was filed in electronic format
with Post-Effective Amendment No. 4 on Form N-4 for NML Variable
Annuity Account A, File No. 333-72913, CIK 0000790162, dated May 31,
2001, and is incorporated herein by reference.)
10.3 Variable Annuity Front Load and Back Load Contract Payment
Rate Tables, RR.V.A.B (032000), included in Exhibits 10.1 and
10.2 above (sex distinct).
</Table>
98
<Table>
<Caption>
EXHIBIT DESCRIPTION PAGE
- ------- ----------- ----
10.4 Enhanced Death Benefit for Front Load and Back Load Contracts, VA.
EDB. (032000), included in Exhibits 10.1 and 10.2 above.
10.5 Waiver of Withdrawal Charge for Back Load Contract, VA.WWC. (032000),
included in Exhibit 10.2 above.
10.6 Amended Application forms for Front Load and Back Load
Contracts, included in Exhibits 10.1 and 10.2 above.
10.7 Form of Participation Agreement Among Russell Insurance Funds,
Russell Fund Distributors, Inc. and The Northwestern Mutual Life
Insurance Company. (This exhibit was filed in electronic format with
the Registration Statement on Form N-4 for NML Variable Annuity
Account A, File No. 333-72913, CIK 0000790162, dated February 25,
1999, and is incorporated herein by reference.)
10.8 Form of Participation Agreement among Variable Insurance
Products Funds, Fidelity Distributors Corporation and The
Northwestern Mutual Life Insurance Company. (This exhibit was
filed in electronic format with the Registration Statement on
Form N-6 for Northwestern Mutual Variable Life Account, File
No. 33-89188, CIK 0000742277, dated February 28, 2003, and is
incorporated herein by reference.)
10.9 Form of Administrative Service Fee Agreement between The
Northwestern Mutual Life Insurance Company and Frank Russell
Company. (This exhibit was filed in electronic format with the
Registration Statement on Form N-4 for NML Variable Annuity
Account A, File No. 333-72913, CIK 0000790162, dated February
25, 1999, and is incorporated herein by reference.)
10.10 Distribution Contract. (This exhibit was filed in electronic
format with the Registration Statement on Form N-4 for NML
Variable Annuity Account A, File No. 333-22455, CIK
0000790162, dated February 27, 1997, and is incorporated
herein by reference.)
10.11 Group Combination Annuity Contract, NVP.1C.(0594), with
amended application, including Contract amendment (sex
neutral). (This exhibit was filed in electronic format with
Post-Effective Amendment No. 22 on Form N-4 for NML Variable
Annuity Account C, File No. 2-89905-01, CIK 0000790163, dated
May 31, 2001, and is incorporated herein by reference.)
10.12 Amended Application Form for Group Combination Annuity Contract,
included in Exhibit 10.10 above.
21.1 Subsidiaries of the Registrant 117
24.1 Power of Attorney 119
99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 121
</Table>
99