Northwestern Mutual Life Insurance Company

Report of the Examination of The Northwestern Mutual Life Insurance Company Milwaukee, Wisconsin As of December 31, 2007 TABLE OF CONTENTS Page I. INTRODUCTION ................................................................................................................. 2 II. HISTORY AND PLAN OF OPERATION ............................................................................. 4 III. MANAGEMENT AND CONTROL ....................................................................................... 6 IV. AFFILIATED COMPANIES ............................................................................................... 10 V. REINSURANCE ................................................................................................................ 18 VI. FINANCIAL DATA ............................................................................................................. 23 VII. SUMMARY OF EXAMINATION RESULTS ...................................................................... 35 VIII. CONCLUSION................................................................................................................... 39 IX. SUMMARY OF COMMENTS AND RECOMMENDATIONS............................................. 40 X. ACKNOWLEDGMENT ...................................................................................................... 41 XI. SUBSEQUENT EVENT..................................................................................................... 42 State of Wisconsin / OFFICE OF THE COMMISSIONER OF INSURANCE Jim Doyle, Governor Sean Dilweg, Commissioner Wisconsin.gov September 16, 2008 125 South Webster Street • P.O. Box 7873 Madison, Wisconsin 53707-7873 Phone: (608) 266-3585 • Fax: (608) 266-9935 E-Mail: ociinformation@wisconsin.gov Web Address: oci.wi.gov Honorable Sean Dilweg Commissioner of Insurance State of Wisconsin 125 South Webster Street Madison, Wisconsin 53703 Honorable Alfred W. Gross Chair, Financial Condition (E) Committee, NAIC Commissioner of Insurance Commonwealth of Virginia 1300 East Main Street Richmond, Virginia 23219 Honorable Merle Scheiber Secretary, Midwestern Zone, NAIC Director of Insurance State of South Dakota 445 East Capitol Avenue Pierre, South Dakota 57501-3185 Honorable Thomas R. Sullivan Secretary, Northeastern Zone, NAIC Commissioner of Insurance State of Connecticut 153 Market Street Hartford, Connecticut 06103 Honorable Scott H. Richardson Secretary, Southeastern Zone, NAIC Director, Department of Insurance State of South Carolina 1201 Main Street, Suite 1000 Columbia, South Carolina 29201 Honorable Morris J. Chavez Secretary, Western Zone, NAIC Superintendent of Insurance State of New Mexico 1120 Paseo de Paralta Santa Fe, New Mexico 87504 Commissioners: In accordance with the instructions of the Wisconsin Commissioner of Insurance, a compliance examination has been made of the affairs and financial condition of: THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY Milwaukee, Wisconsin and this report is respectfully submitted. I. INTRODUCTION The previous examination of The Northwestern Mutual Life Insurance Company (the company or NML) was conducted in 2003 as of December 31, 2002. The current examination covered the intervening period ending December 31, 2007, and included a review of such 2008 transactions as deemed necessary to complete the examination. The examination was conducted in accordance with the NAIC Financial Condition Examiners Handbook, which sets forth guidance for planning and performing an examination to evaluate the financial condition and identify prospective risks of an insurer. This approach includes the obtaining of information about the company including corporate governance, the identification and assessment of inherent risks within the company, and the evaluation of system controls and procedures used by the company to mitigate those risks. The examination also included an assessment of the principles used and significant estimates made by management, as well as an evaluation of the overall financial statement presentation and management’s compliance with statutory accounting principles, annual statement instructions, and Wisconsin laws and regulations. The examination consisted of a review of all major phases of the company's operations, and included the following areas: History Management and Control Corporate Records Conflict of Interest Fidelity Bonds and Other Insurance Employees' Welfare and Pension Plans Territory and Plan of Operations Affiliated Companies Growth of Company Reinsurance Financial Statements Accounts and Records Data Processing Emphasis was placed on the audit of those areas of the company's operations accorded a high priority by the examiner-in-charge when planning the examination. Special attention was given to the action taken by the company to satisfy the recommendations and comments made in the previous examination report. 2 The company is annually audited by an independent public accounting firm as prescribed by s. Ins 50.05, Wis. Adm. Code. An integral part of this compliance examination was the review of the independent accountant's work papers. Based on the results of the review of these work papers, alternative or additional examination steps deemed necessary for the completion of this examination were performed. The examination work papers contain documentation with respect to the alternative or additional examination steps performed during the course of the examination. Independent Actuary's Review An independent actuarial firm was engaged under a contract with the Office of the Commissioner of Insurance. The actuary reviewed the adequacy of aggregate life and annuity reserves, aggregate accident and health reserves, dividends to policyholders, asset adequacy analysis, and deferred life insurance premiums. The actuary’s results were reported to the examiner-in-charge. As deemed appropriate, reference is made in this report to the actuary's conclusion. 3 II. HISTORY AND PLAN OF OPERATION The company was organized in 1857 as The Mutual Life Insurance Company of the State of Wisconsin. The name was changed in 1865 to the current name. The company is licensed in all 50 states and the District of Columbia. In 2007, the company collected direct premium in the following states: New York Illinois California Wisconsin Florida Texas Ohio New Jersey Pennsylvania Georgia Michigan Minnesota Connecticut All others Total $ 801,126,688 742,592,235 736,787,747 574,673,089 564,816,632 525,410,234 490,281,517 390,728,499 337,775,950 334,647,544 325,552,128 307,100,166 306,245,854 3,697,170,772 7.9% 7.3 7.3 5.7 5.6 5.2 4.8 3.9 3.3 3.3 3.2 3.0 3.0 36.5 100.0% $10,134,909,055 * Premiums are from Schedule T. They include annuity considerations, but do not include dividends applied to purchase paid-up additions and other amounts not allocated by state. The major product marketed by the company is ordinary life insurance written on a participating basis. Other products include individual annuities, disability income insurance, and variable life insurance and variable annuities. In addition, NML offers CompLife, which combines a basic amount of whole life, plus extra protection consisting of one-year term insurance and paid-up additions provided by policy dividends. The major products are marketed through the company’s 8,500 career agents. The following table is a summary of premium income as reported by the company in 2007. The growth of the company is discussed in the “Financial Data” section of this report. 4 Premium Income Reinsurance Ceded Line of Business Ordinary life insurance Permanent life Term Universal life Variable life Individual annuities Fixed deferred annuities Variable deferred annuities Payout annuities Group annuities Group disability income Individual disability income Total All Lines Direct Premium Net Premium $ 9,720,495,554 1,000,842,383 97,503,859 686,559,650 $168,249,303 502,376,130 2,953,081 9,719,118 $ 9,552,246,251 498,466,253 94,550,778 676,840,532 87,934,228 1,157,750,612 44,050,006 134,972,078 115,717,310 763,666,143 $13,809,491,823 50,702,916 9,829,952 $743,830,500 87,934,228 1,157,750,612 44,050,006 134,972,078 65,014,394 753,836,191 $13,065,661,323 5 III. MANAGEMENT AND CONTROL Board of Trustees NML’s bylaws allow for a maximum of 30 members on the board of trustees. Currently the board of trustees consists of 20 members who are elected at the annual meeting of policyholders. The four-year terms of the trustees are staggered so that the policyholders elect approximately one fourth of the board each year. Members of the company's board of trustees may also be members of other boards in the holding company group. The trustees are compensated for their services as follows: Trustees’ Fee Schedule As of January 1, 2008 Annual Retainer Trustees Finance Committee members (except senior member) Senior member of Finance Committee Committee chair (except Audit Committee) Other committee members (except Audit, Executive and Finance Committees) Executive Committee members Audit Committee Chair Other Audit Committee members Committee member serving as acting committee chair Special service by trustee Examining Committee Examining Committee Chair Voting inspectors $100,000 3,200 5,000 10,000 1,400 15,000 3,200 Attendance Fee $2,500 1,500 1,500 1,750 1,500 1,500 1,750 1,500 1,750 1,500 2,500 2,500 300 3,500 If committees meet on the same day as the board of trustees, an attendance fee is paid to members for each meeting. If a trustee substitutes as the chair of a committee, the chair’s attendance fee is paid in place of the regular committee attendance fee. “Inside” trustees do not receive board compensation. Currently, the board of trustees consists of the following persons: Name and Residence Facundo L. Bacardi Coral Gables, FL Robert C. Buchanan Appleton, WI Principal Occupation Chairman, Bacardi Limited Retired Chairman, Fox Valley Corporation Term Expires 2010 2011 6 Board of Trustees (cont.) Name and Residence George A. Dickerman Longmeadow, MA David J. Drury Brookfield, WI Connie K. Duckworth Lake Forest, IL David A. Erne River Hills, WI James P. Hackett Grand Rapids, MI Hans Helmerich Tulsa, OK Dale E. Jones Washington, DC Stephen F. Keller Los Angeles, CA Margery Kraus McLean, VA David J. Lubar Milwaukee, WI Ulice Payne, Jr. Greenfield, WI H. Mason Sizemore, Jr. Seattle, WA Peter M. Sommerhauser Mequon, WI John E. Steuri Little Rock, AR John J. Stollenwerk Mequon, WI Barry L. Williams Oakland, CA Kathryn D. Wriston New York, NY Principal Occupation Retired Chairman and CEO, Spalding Sports Worldwide President, Poblocki Sign Company LLC President, Arzu Attorney, Reinhart Boerner Van Deuren, SC President and CEO, Steelcase, Inc. President and CEO, Helmerich & Payne, Inc. Exec. Vice Pres.-Leadership Development, Revolution LLC Attorney, Former Chairman, The Santa Anita President and CEO, APCO Worldwide President, Lubar & Co. President and CEO, Addison-Clifton, LLC Retired President & COO, The Seattle Times Attorney, Godfrey & Kahn, SC Retired Chairman and CEO, ALLTEL Information Services, Inc. Chairman, Allen-Edmonds Shoe Corporation Retired Managing General Partner, Williams Pacific Ventures, Inc. Director of Various Corporations Term Expires 2012 2012 2009 2009 2010 2012 2010 2011 2009 2012 2010 2011 2010 2011 2009 2009 2009 7 Board of Trustees (cont.) Name and Residence Edward J. Zore River Hills, WI Officers of the Company The chief officers and those executive officers at and above the level of senior vice president currently serving are as follows: 2007 Compensation $16,360,076 3,222,612 2,898,545 1,305,583 1,291,667 1,037,359 989,216 941,991 940,630 863,096 857,406 696,943 410,772 318,880 * Principal Occupation President and CEO Northwestern Mutual Term Expires 2009 Name Edward J. Zore John E. Schlifske Gary A. Poliner William C. Koenig Gregory C. Oberland Meridee J. Maynard Marcia Rimai David D. Clark Jeffrey J. Lueken Christina H. Fiasca Jean M. Maier Todd M. Schoon Michael G. Carter Timothy G. Schaefer Mark G. Doll Office President and Chief Executive Officer Exec. Vice President – Affiliate Investment Exec. Vice President – Inv. Products and Services Sr. Vice President and Chief Actuary Exec. Vice President – Insurance and Technology Sr. Vice President – Life Product Exec. Vice President and Chief Admin. Officer Sr. Vice President – Real Estate Sr. Vice President – Securities Sr. Vice President – Agency Services Sr. Vice President – Enterprise Operations and Chief Compliance Officer Sr. Vice President – Agencies Vice President and Chief Financial Officer Chief Information Officer Sr. Vice President and Chief Investment Officer * Mark G. Doll was compensated by Mason Street Advisors, LLC, during 2007. Committees of the Board The company's bylaws allow for the formation of certain committees by the board of trustees. The committees at the time of the examination are listed below: Executive Committee Edward J. Zore, Chair Robert C. Buchanan David J. Drury Peter M. Sommerhauser John E. Steuri John J. Stollenwerk Human Resources, Nominating and Corporate Governance Committee Peter M. Sommerhauser, Chair Connie K. Duckworth James P. Hackett Dale E. Jones Ulice Payne, Jr. Audit Committee David J. Drury, Chair Robert C. Buchanan David A. Erne Hans Helmerich Kathryn D. Wriston Operations and Technology Committee John E. Steuri, Chair Stephen F. Keller H. Mason Sizemore Barry L. Williams 8 Finance Committee Edward J. Zore, Chair Robert C. Buchanan David J. Drury Connie K. Duckworth David A. Erne David J. Lubar Ulice Payne, Jr. Peter M. Sommerhauser John J. Stollenwerk Agency and Marketing Committee John J. Stollenwerk, Chair Facundo L. Bacardi George A. Dickerman Margery Kraus David J. Lubar 9 IV. AFFILIATED COMPANIES NML is the ultimate parent of a holding company system. The organizational chart following this section depicts the relationships among selected significant affiliates in the group. A brief description of the affiliates deemed significant is given in the following paragraphs. Northwestern Long Term Care Insurance Company (NLTC) NLTC was organized in Illinois in 1953 as the Poulsen Insurance Company of America. For most of its history, it was known as the Standard of America Life Insurance Company. NML acquired the company in 1982. On October 10, 1997, NLTC redomiciled from Illinois to Wisconsin and the present name was adopted. Prior to August 1998, NLTC’s insurance business consisted of paying benefits on supplementary contracts purchased by contract owners from NLTC prior to 1996. In August 1998, NLTC began selling its first long-term care insurance product, QuietCare. QuietCare reimburses the insured for long-term care services up to a specified daily limit, currently ranging from $50 to $500 per day. The policyholder can receive reimbursement for some or all of the costs of care received at home, at an adult day care center, at an assisted living facility, or at a nursing home. Benefits begin after the policyholder has accrued either 90 or 180 days (chosen at time of purchase) of qualifying expenses. The policyholder can elect to receive benefits for three years, six years, or for life. The policy includes a waiver of premium provision. The policy is guaranteed renewable, but if experience by rating class deviates from expectations, NLTC will have the right to increase premiums (subject to required states’ approvals). It is available to individuals 18 to 79 years old. NLTC reinsured 80% of the business in order to limit its exposure to loss on any single insured and to recover a portion of benefits paid. In March 2002, NLTC discontinued issuing this product. An enhanced product, QuietCare RS, was introduced in March 2002 and includes dividend participation, alternate living facility reimbursement up to 100% of the nursing home daily benefit, and a caregiver training benefit. Certain features of the new contract were made available to existing policyowners with no increase in current premiums. Since the new participating feature 10 was provided to existing policyowners, all in-force policies are now participating. The new product is not reinsured. Pursuant to the introduction of NLTC’s QuietCare long-term care product, NML and NLTC entered into two agreements, which are described below. Effective January 1, 1998, NML and NLTC entered into a Product and General Service Agreement, which replaced a previous service agreement. Under the terms of the current agreement, NML agreed to contribute to NLTC the long-term care product developed by NML at an amount that reflects NML’s actual development expense. NLTC reported this transaction as a capital contribution. NLTC then expensed the development costs and nonadmitted the related software. No goodwill was carried as a result of the transaction. In addition to the contribution of the product, NML agreed to provide all requested services including legal, accounting, investment, marketing, and information technology services as necessary of NLTC’s operation. Reimbursement to NML for these services is based on actual expenses incurred and an allocation of shared costs based on the number of employee hours of service provided to each entity. The agreement also provides that rather than direct reimbursement from NLTC for future services, NML may choose to have its capital investment in NLTC increased by the value of the services rendered. The option was exercised for start-up costs incurred prior to the product’s introduction in August 1998. Beginning in September 1998, NLTC began reimbursing NML for administrative expenses. Effective April 29, 1998, NML and NLTC entered into a Capital Support Agreement and Guarantee of Benefits under which NML agrees to maintain the capital and surplus of NLTC at a level that is greater than the lesser of a) 30% of earned premium plus 5% of the value of total net reserves, or b) 150% of the NAIC risk-based capital requirements applicable to NLTC. NML also guarantees to the policyholders of NLTC the ability of NLTC to pay all policy benefits due on contracts of insurance sold by NLTC during the term of the agreement. Effective April 29, 2008, NML and NLTC amended the agreement to extend the term to April 30, 2013, or at such time as NML has invested a total of $400 million in NLTC. The guarantee to existing policyholders of NLTC survives the termination of the agreement. 11 As of December 31, 2007, NLTC’s statutory annual statement reported assets of $287,379,918, liabilities of $233,814,255, and policyholders’ surplus of $53,565,663. Operations for 2007 produced a net loss of $3,762,711. Northwestern Mutual Wealth Management Company (WMC) WMC is a wholly owned subsidiary of NML. WMC is a limited purpose federal savings bank whose principal business is providing fiduciary services, including investment advisory services, certain trust services, and financial planning services. Effective May 31, 2006, NML and WMC entered into a service agreement where NML is to perform certain administrative and support services with respect to WMC’s trust and investment advisory business and its facilities, and to include WMC employees under certain NML benefit plans. WMC agrees to compensate NML for the services provided based on a fee schedule for the given service being provided. The initial term of this agreement was through December 31, 2006, and is renewed automatically for successive one-year terms, unless notice of nonrenewal is given by either party not less than 60 calendar days prior to the end of the initial or renewal term or 90 days’ prior written notification. Effective December 15, 2007, NML and WMC entered into a Capital Support Agreement under which NML agrees to make quarterly capital contributions to WMC in the event that WMC does not maintain the minimum capital required by the Office of Thrift Supervision. Therefore, NML agrees to make capital contributions to WMC in an amount necessary for WMC to meet the minimum required capital for the given calendar quarter. This agreement will terminate upon WMC achieving profitability for four consecutive Thrift Financial Reporting quarters, provided that WMC also maintains the minimum required capital for each of the four consecutive quarters (without relying on a capital contribution from NML). As of December 31, 2007, the audited financial statements of WMC reported assets of $38,955,000, liabilities of $7,699,000, and stockholders’ equity of $31,256,000. Operations for 2007 produced a net income of $4,495,000. 12 Northwestern Investment Management Company, LLC (NIMCo) NIMCo is a wholly owned subsidiary of NML. NIMCo provides investment management and advisory services to NML and its subsidiaries. The investment advisory services that are provided relate to the management of its general account, its group annuity, separate account, and numerous investment subsidiaries owned directly by NML or through its wholly owned subsidiaries, NML Securities Holding, LLC, and NML Real Estate Holdings, LLC. These services are provided through an Investment Services Agreement dated January 1, 2002, between NIMCo and NML. Effective October 1, 2007, NML, NIMCo, and Northwestern Mutual Capital Limited entered into an Investment Services Agreement. This agreement provides that Northwestern Mutual Capital Limited will provide investment sub-advisory services to NIMCo that will assist NIMCo to fulfill its investment advisory obligations to NML under the Investment Services Agreement between NML and NIMCo with respect to European private placement investments (including, but not limited to, debt, equities and mezzanine transactions). The term of this agreement is for one year and will automatically renew for successive one-year terms unless one party gives 30 days’ notice of nonrenewal or 90 days’ advance written notice. NIMCo is to pay Northwestern Mutual Capital Limited an annual advisory fee. As of December 31, 2007, the audited financial statements of NIMCo reported assets of $41,657,632, liabilities of $39,448,566, and member’s equity of $2,209,066. Operations for 2007 produced a net loss of $623,407. Northwestern Mutual Capital Limited (NMCL) NMCL was formed by NML on April 10, 2007, in the United Kingdom. NMCL was established to conduct a London-based international private investment advisory business. NMCL is currently a non-registered investment advisor in the United Kingdom and operates under exemptions from the registration requirements of the UK Financial Services Authority, the English equivalent of the U.S. Securities and Exchange Commission. Effective October 1, 2007, NML and NMCL entered into an Administrative Services Agreement where NML will provide certain administrative, managerial, organizational, financial, 13 legal, recordkeeping and other services on NMCL’s behalf. The initial term of this agreement was through December 31, 2007, with automatic renewal for successive one-year terms unless one party gives 60 days’ notice of nonrenewal. NMCL agrees to compensate NML for these services based upon the fair market value of the services. As of December 31, 2007, the unaudited financial statements of NMCL reported assets of $7,155,032, liabilities of $1,926,660, and equity of $5,228,372. Operations for 2007 produced a net loss of $228,372. Frank Russell Company (Russell) NML acquired the Frank Russell Company effective January 1, 1999, for a purchase price of approximately $955 million plus contingent consideration. This acquisition was accounted for using the statutory purchase method, adjusted for the charge-off of acquisition goodwill. Since the date of the acquisition, NML has charged-off directly from surplus approximately $981 million, representing the goodwill associated with the acquisition. NML received permission from the Office of the Commissioner of Insurance for this statutory treatment, which is different than the NAIC Accounting Practices and Procedures Manual. Russell is a global provider of investment management, investment advisory, securities brokerage, mutual fund development and distribution, investment counseling, indexes and other corporate services in more than 40 countries. Russell manages nearly $213 billion in assets. Founded in 1936, Russell is headquartered in Tacoma, Washington, with additional offices in New York, San Francisco, Toronto, London, Amsterdam, Paris, Singapore, Melbourne, Sydney, Auckland, Johannesburg and Tokyo. As of December 31, 2007, the unaudited financial statements of Russell reported assets of $2,179,621,000, liabilities of $1,790,002,000, and shareholders’ equity of $389,019,000. Operations for 2007 produced a net income of $86,213,000. Northwestern Mutual Investment Services (NMIS) NMIS is a wholly owned subsidiary of NML that performs several services for companies in the NML group. As a broker/dealer, NMIS selects, trains, and supervises the financial representatives of NML who sell variable annuities and variable life insurance and the 14 financial representatives of NMIS who sell mutual funds, stocks, bonds, and other securities. NMIS also acts as co-depositor with NML for certain variable annuity accounts and provides administrative services to NML with regard to these accounts. NML pays a management and other services fee to NMIS based on expenses incurred by NMIS in performing these services. NMIS is managed and operated by NMIS employees. NML employees perform services for NMIS, for which NML is reimbursed under a cost-sharing agreement. As of December 31, 2007, the audited financial statements of NMIS reported assets of $85,152,664, liabilities of $34,527,804, and member equity of $50,624,860. Operations for 2007 produced a net loss of $20,868,990. Mason Street Advisors, LLC (MSA) MSA is a wholly owned subsidiary of NML that provides investment management services regarding public market securities to the group. In addition, MSA is also the investment advisor to Northwestern Mutual Series Fund, Inc., an open-end registered management investment company consisting of 27 separate investment portfolios, which underlie the investment options for NML’s variable life and variable annuity products. For MSA’s service with respect to the public market securities group, NML pays a management fee to MSA based on the value of assets in the investment portfolio at the end of a month MSA is managed and operated by MSA employees. NML employees perform services for MSA, for which NML is reimbursed under an Administrative Services Agreement dated January 1, 2002. As of December 31, 2007, the unaudited financial statements of MSA reported assets of $35,856,160, liabilities of $31,393,216, and member’s equity of $4,462,944. Operations for 2007 produced a net income of $22,018,521. Other Affiliated Agreements In addition to the agreements mentioned above, NML provided management and administrative services to NML Real Estate Holdings, LLC, and NML Securities Holdings, LLC, and other subsidiaries under the terms of individual services agreements. 15 NML is also party to a consolidated federal tax agreement with certain affiliates whereby it files its federal income tax on a consolidated basis. Under these agreements, separate tax liability calculations are performed for each of these affiliates together with all corporations directly or indirectly controlled by each affiliate which would otherwise be entitled or required to file consolidated federal income tax returns with that affiliate. In accordance with these calculations, each affiliate then either pays NML for any taxes so calculated or receives cash or credits from NML. 16 Organizational Chart As of December 31, 2007 Northwestern Mutual Life Insurance Company Northwestern Long Term Care Insurance Company Frank Russell Company (92.4% Owned) Northwestern Mutual Investment Services Mason Street Advisors, LLC Various Other Subsidiaries 17 Northwestern Mutual Capital Limited Northwestern Mutual Wealth Management Company Northwestern Investment Management Company, LLC V. REINSURANCE NML reinsures segments of its business to limit the amount of risk on an individual life, to provide a more competitive price for a broader range of policyholders, to enable a better classification on impaired lives, to protect participating policyowners from adverse experience on other business, or to minimize the company’s risk when entering a new line of business. The company cedes a relatively small amount of business to numerous unaffiliated companies. Ceded net reinsurance premiums were less than 5% of direct premiums written in 2007. The company does not assume any reinsurance. The company’s reinsurance portfolio at the time of the examination is described below. Coinsurance and Yearly Renewable Term The company currently coinsures, at 35-50%, four term insurance products to a pool of four reinsurers. NML determined the underwriting classification for this business, unless the term life coinsurance in force on the life exceeds $30 million or the total amount of insurance in force and applied for on the life in all companies exceeds $65 million. The policies are reinsured as long as they remain in force as term life, subject to recapture by the company under the terms of the treaties. In addition, the risk passes back to NML if the coverage is converted to a permanent life insurance plan. Reinsurance premiums are based on comprehensive schedules attached to the reinsurance agreements. NML receives a commission allowance for the first policy year of 100% of the reinsurance premium on coinsured plans and pays $0 first-year premium on yearly renewable plans. NML’s allowance for renewal years ranges from 30% to 50% on coinsured plans, depending on the reinsurer, product, and underwriting class. NML’s premium in renewal years is a percentage of the 2001 Valuation Basic Table (VBT) on yearly renewable plans. Under this program in 2007, NML ceded approximately $12.6 million of gross first-year premiums. The program included 1,190,000 policies and $372 billion of reinsurance in force at year-end 2007. The pool of reinsurers for new and in-force business consists of: RGA Reinsurance Company (Allianz) American United Life Insurance Company Generali USA Life Reassurance Company (Generali) Canada Life Insurance Company Munich American Reassurance Company (CAN) General Re Life Corporation (GenRe) 18 Lincoln National Life Insurance Company (Lincoln) Munich American Reassurance Company (Munich) RGA Reinsurance Company (RGA) Security Life of Denver Insurance Company (Security) Swiss Re Life and Health America Inc. Transamerica The percentage assumed by each participant varies depending on the specific product and series. Automatic Reinsurance for Substandard Nonsmokers Under this program, NML can offer a standard plus policy to nonsmoking applicants who meet the company’s underwriting standards for substandard classes 1 to 5. The coverage is subject to a minimum of $50,000 and a maximum of $10 million of life insurance. The risk is 100% ceded automatically and the first $3 million of conditional receipt claims is split equally among the two reinsurers (except NML retains 50% of conditional receipt claims on lives it evaluates class 1. The reinsurance remains in force as long as the policy remains in force, even if it is on a term life policy later converted to permanent life coverage. The current participating reinsurers are Generali and RGA. This program resulted in $3.2 million of ceded first-year premiums in 2007. The program covered 116,000 policies and $33 billion of reinsurance in force at year-end 2007. Automatic Reinsurance for Substandard Smokers Under this program, NML can offer a standard plus policy to smoking applicants who meet the company’s underwriting standards for substandard classes 1 to 5. The coverage is subject to a minimum of $50,000 and a maximum of $10 million of life insurance. As with the program above, the risk is 100% ceded automatically and the first $3 million of conditional receipt claims is split evenly among two reinsurers. The current participating reinsurers are Generali and RGA. This coverage also continues for the lifetime of the underlying coverage. This program resulted in $493,000 of ceded first-year premiums in 2007. The program covered 9,500 policies and $1.9 billion of reinsurance in force at year-end 2007. Facultative Substandard Prepaid substandard applicants who do not qualify for one of the automatic programs and who meet specified face value or premium minimums are eligible for the facultative substandard reinsurance program. Under this program, underwriting papers are forwarded to 19 several reinsurers who make competitive offers. The reinsurer offering the most favorable classification reinsures the entire contract; NML retains no mortality risk. This coverage continues for the lifetime of the reinsurance coverage. This program involved $4.4 million of first-year reinsurance premiums, and $26 billion of reinsurance in force in 2007. Reinsurers currently participating under this program include Generali, GenRe, Munich, RGA, and SCOR Life U.S. Re Insurance Company. Facultative Excess Reinsurance To avoid irregular mortality costs from the untimely deaths of one or more insureds with very large policies, the company established a retention limit of life insurance of $35 million per life for most ages. If approval of an application would result in NML coverage of the life in excess of NML’s retention, the application must be submitted facultatively. Issue Age 0-60 61-70 71-75 76-85 NML Retention $35 million 15 million 10 million 5 million Under the facultative excess program, NML ceded $233,000 of first-year premiums in 2007. These programs represented about $2.3 billion of reinsurance as of December 31, 2007. Automatic Reinsurance for Joint Substandard The program provides automatic reinsurance of Joint CompLife or Variable Joint CompLife products with a minimum amount of $100,000 and maximum cumulative amount of $8 million for a pair of lives if either life is rated in any of five substandard nonsmoker or smoker classes. (These are the same classes as the automatic reinsurance programs for nonsmokers and smokers, respectively.) The risks are reinsured by RGA; NML retains no mortality risk on these lives. The coverage also continues for the lifetime of the underlying coverage. Under this program, NML ceded $37,000 of first-year premiums in 2007. The program represented about $2.3 billion of reinsurance in force as of December 31, 2007. 20 Automatic Guaranteed Issue Reinsurance for Corporate Clients A pool of two reinsurers provides automatic yearly renewable term (YRT) reinsurance of 90% of the mortality risk on Bank Owned (BOLI) and Corporate Owned (COLI) Life insurance business. Current participating reinsurers are Munich and RGA. Amounts of insurance must be based on a formula benefit and are limited to an amount related to the number of lives in the group. This program allows the company to write BOLI and COLI business to larger limits at more competitive premium rates than if retained. NML paid $2.9 million of first-year reinsurance premiums under this program in 2007. The program represented about $7 billion of reinsurance in force at year-end 2007. Group Disability Reinsurance The company participates with Standard Insurance Company (Standard) to offer both long-term and short-term disability coverage for employees of small businesses. Due to its group disability experience, Standard performs the product development, pricing, underwriting, and claims administration. The business is written on NML paper, but Standard reinsures 60% of the risk. NML may recapture the risk under the terms of the treaty. In addition, NML recaptures the entire risk on any life who converts to individual disability income coverage upon leaving the employer. NML ceded $50.7 million of net (first-year and renewal) reinsurance premiums under this program in 2007. The program represented about $1.1 billion of monthly benefit reinsurance in force at year-end 2007. Catastrophic Risk Reinsurance The company participates with approximately 50 other companies in an individual life insurance catastrophe reinsurance pool. Coverage is provided whenever three or more lives insured by the same company die from a common catastrophe. The pool pays the total death benefit less (a) cash values, (b) amounts recoverable from commercial reinsurance, and (c) a deductible amount based on the insurer’s individual life insurance in force. Each participating company shares in the claims against the pool according to a predetermined formula based on number of policies and average policy size. The company’s share for the first half of 2008 is 21 approximately 17%. Annual fees are determined on a sliding scale based on the company’s inforce amount. The fees range from $1,000 to $27,000. 22 VI. FINANCIAL DATA The following financial statements reflect the financial condition of the company as reported to the Commissioner of Insurance in the December 31, 2007, annual statement. Also included in this section are schedules which reflect the growth of the company, NAIC Insurance Regulatory Information System (IRIS) ratio results for the period under examination, and the compulsory and security surplus calculation. Adjustments made as a result of the examination are noted at the end of this section in the area captioned "Reconciliation of Surplus per Examination." 23 The Northwestern Mutual Life Insurance Company Assets As of December 31, 2007 Net Admitted Assets $ 76,616,335,001 526,039,423 9,010,576,455 20,281,585,505 550,844,388 212,624,909 1,275,644,247 10,689,021 2,532,454,648 11,797,026,022 8,642,146,976 50,521,912 Assets Bonds Stocks: Preferred stocks Common stocks Mortgage loans on real estate: First liens Other than first liens Real estate: Occupied by the company Held for production of income Held for sale Cash, cash equivalents, and shortterm investments Contract loans Other invested assets Receivables for securities Write-ins for invested assets: Financial options, futures, and forward contracts Derivative receivables Investment income due and accrued Premiums and considerations: Uncollected premiums and agents' balances in course of collection Deferred premiums, agents' balances, and installments booked but deferred and not yet due Reinsurance: Amounts recoverable from reinsurers Other amounts receivable under reinsurance contracts Net deferred tax asset Electronic data processing equipment and software Furniture and equipment, including health care delivery assets Receivable from parent, subsidiaries and affiliates Write-ins for other than invested assets: Amounts recoverable from state guaranty associations Miscellaneous accounts receivable Employees and agents trusts Prepaid expenses and miscellaneous $ 76,616,335,001 526,039,423 9,011,136,380 20,281,585,505 550,844,388 212,624,909 1,275,644,247 10,689,021 2,532,454,648 11,799,078,437 8,667,319,155 50,521,912 Nonadmitted Assets $ 0 559,925 2,052,415 25,172,179 63,655,502 (7,039,926) 1,392,905,881 7,008 63,655,502 (7,039,926) 1,392,898,873 90,977,322 789,524 90,187,798 1,466,924,645 1,466,924,645 28,574,574 19,657,280 1,461,402,342 174,046,151 63,487,156 40,769,276 137,703,638 63,487,156 28,574,574 19,657,280 1,461,402,342 36,342,513 40,769,276 985,888 13,014,126 527,229,193 25,097,061 985,888 13,014,126 527,229,193 25,097,061 24 Prepaid pension cost Premium tax recoveries in process Receivable for securities (unsettled within 15 days of end of period) Agents balances Total assets excluding separate accounts, segregated accounts and protected cell assets From separate accounts, segregated accounts and protected cell assets Total Assets 432,873,419 793,251 12,926,172 108,943,311 432,873,419 793,251 12,926,172 108,943,311 137,451,495,650 19,703,619,892 $157,155,115,542 822,625,934 136,628,869,716 19,703,619,892 $822,625,934 $156,332,489,608 25 The Northwestern Mutual Life Insurance Company Liabilities, Surplus, and Other Funds As of December 31, 2007 Aggregate reserve for life contracts Aggregate reserve for accident and health contracts Liability for deposit-type contracts Contract claims: Life Accident and health Policyholders’ dividends and coupons due and unpaid Provision for policyholders’ dividends and coupons payable in following calendar year: Apportioned for payment to December 31, 2008 Premiums and annuity considerations received in advance Contract liabilities not included elsewhere: Interest maintenance reserve Commissions to agents due or accrued General expenses due or accrued Transfers to separate accounts due or accrued (net) Taxes, licenses, and fees due or accrued, excluding federal income taxes Current federal and foreign income taxes Unearned investment income Amounts withheld or retained by company as agent or trustee Remittances and items not allocated Miscellaneous liabilities: Asset valuation reserve Reinsurance in unauthorized companies Payable to parent, subsidiaries and affiliates Payable for securities Write-ins for liabilities: Deferred commissions Due on asset purchase Forward contracts Insurance service account funds Interest on policy and contract funds due or accrued Liability for deferred compensation plans Payable to reinsurer Post-retirement benefit obligation Reserve for guaranty fund Total liabilities excluding separate accounts business From separate accounts statement Total liabilities Unassigned funds (surplus) Total Liabilities, Capital and Surplus $101,850,312,813 4,446,286,218 2,234,135,026 288,465,863 36,250,395 93,266,511 5,020,000,000 49,471,851 706,741,871 29,777,854 133,132,259 (177,221,478) 34,068,270 683,406,565 185,477,927 52,334,916 193,361,301 3,680,920,139 1,529,250 48,626,971 3,113,057,542 571,233,124 774,315 919,320 375,002,052 4,618,352 702,559,370 3,918,068 130,473,358 30,000,000 124,522,900,023 19,703,619,891 144,226,519,914 12,105,969,694 $156,332,489,608 26 The Northwestern Mutual Life Insurance Company Summary of Operations For the Year 2007 Premiums and annuity considerations for life and accident and health contracts Considerations for supplementary contracts with life contingencies Net investment income Amortization of interest maintenance reserve Commissions and expense allowances on reinsurance ceded Miscellaneous income: Income from fees associated with investment management, administration, and contract guarantees from separate accounts Charges and fees for deposit-type contracts Write-ins for miscellaneous income: Sundry receipts and benefit plans Total income items Death benefits Matured endowments Annuity benefits Disability benefits and benefits under accident and health contracts Surrender benefits and withdrawals for life contracts Interest and adjustments on contract or deposit-type contract funds Payments on supplementary contracts with life contingencies Increase in aggregate reserves for life and accident and health contracts Subtotal Commissions on premiums, annuity considerations, and deposit-type contract funds (direct business only) General insurance expenses Insurance taxes, licenses, and fees excluding federal income taxes Increase in loading on deferred and uncollected premiums Net transfers to or (from) separate accounts net of reinsurance Write-in for deductions: Fines and penalties Total deductions Net gain (loss) from operations before dividends to policyholders and federal income taxes Dividends to policyholders Net gain (loss) from operations after dividends to policyholders and before federal income taxes $ 1,620,632,280 47,159,910 217,813,292 496,864,017 3,006,947,536 185,225,640 63,804,937 7,738,006,304 13,376,453,916 $13,065,661,322 51,625,941 7,527,550,053 28,186,245 176,257,740 271,101,000 53,208 92,907,916 21,213,343,425 903,650,047 807,276,152 221,019,065 4,022,136 484,546,229 8,818 15,796,976,363 5,416,367,062 5,008,469,699 407,897,363 27 Federal and foreign income taxes incurred (excluding tax on capital gains) Net gain (loss) from operations after dividends to policyholders and federal income taxes and before realized capital gains or losses Net realized capital gains or (losses) Net Income 20,517,224 387,380,139 616,403,494 $ 1,003,783,633 28 The Northwestern Mutual Life Insurance Company Cash Flow For the Year 2007 Premiums collected net of reinsurance Net investment income Miscellaneous income Total Benefit- and loss-related payments Net transfers to separate accounts, segregated accounts and protected cell accounts Commissions, expenses paid, and aggregate write-ins for deductions Dividends paid to policyholders Federal and foreign income taxes paid (recovered) Total deductions Net cash from operations Proceeds from investments sold, matured, or repaid: Bonds Stocks Mortgage loans Real estate Other invested assets Net gains (losses) on cash, cash equivalents, and short-term investments Total investment proceeds Cost of investments acquired (longterm only): Bonds Stocks Mortgage loans Real estate Other invested assets Miscellaneous applications Total investments acquired Net increase (or decrease) in contract loans and premium notes Net cash from investments Cash from financing and miscellaneous sources: Net deposits on deposit-type contracts and other insurance liabilities Other cash provided (applied) Net cash from financing and miscellaneous sources $13,148,331,615 7,412,623,217 540,319,864 21,101,274,696 $ 5,609,475,380 474,012,337 1,831,476,051 4,606,092,925 252,075,211 12,773,131,904 8,328,142,792 $64,795,700,244 6,081,364,649 2,939,897,440 177,330,000 1,174,572,811 194,571 75,169,059,715 70,652,056,417 5,568,291,708 4,421,602,861 150,580,063 1,405,141,706 996,310,649 83,193,983,404 802,365,727 (8,827,289,416) 197,565,805 (39,995,462) 157,570,343 29 Reconciliation: Net change in cash, cash equivalents, and short-term investments Cash, cash equivalents, and shortterm investments: Beginning of year End of Year (341,576,281) 2,874,030,929 $ 2,532,454,648 30 The Northwestern Mutual Life Insurance Company Compulsory and Security Surplus Calculation December 31, 2007 Assets Less security surplus of insurance subsidiaries Less liabilities Adjusted surplus Annual premium: Individual life and health Factor Total $156,332,489,608 26,199,929 144,226,519,914 12,079,769,765 $7,060,669,055 15% $1,059,100,35 8 115,869,181 10% 11,586,918 Group life and health Factor Total Greater of 7.5% of consideration or 2% of reserves for annuities and deposit administration funds Compulsory surplus (subject to a $2,000,000 minimum) Compulsory Surplus Excess or (Deficit) 105,971,204 1,176,658,480 $ 10,903,111,285 Adjusted surplus (from above) Security surplus: (140% of compulsory surplus, factor reduced 1% for each $33 million in premium written in excess of $10 million, with a minimum of 110%) Security Surplus Excess or (Deficit) $ 12,079,769,765 1,294,324,328 $ 10,785,445,437 31 The Northwestern Mutual Life Insurance Company Reconciliation and Analysis of Surplus (in thousands) For the Five-Year Period Ending December 31, 2007 The following schedule is a reconciliation of total capital and surplus during the period under examination as reported by the company in its filed annual statements: 2007 Capital and surplus, beginning of year Net income Change in net unrealized capital gains/losses Change in net deferred income tax Change in nonadmitted assets and related items Change in liability for reinsurance in unauthorized companies Change in reserve on account of change in valuation bases Change in asset valuation reserve Cumulative effect of changes in accounting principles Write-ins for gains and (losses) in surplus: Additional minimum pension liability adjustment Prior period adjustments Charge-off of excess goodwill Change in pension liability for nonvested benefits Tax liability adjustment Capital and surplus, end of year 2006 2005 2004 2003 $11,684,376 1,003,784 (17,370) 164,234 $10,380,535 838,201 571,348 332,723 $ 8,933,951 926,389 340,525 235,991 $7,546,758 $ 7,217,143 823,688 701,424 637,198 28,213 1,159,424 (136,994) (62,293) 63,129 (314,445) (86,082) (12,911) 315 661 (1,488) 2,471 40 (2,659) (592,298) (513,005) 27,175 12,944 (1,298,036) (55,260) 378 (75,156) (3,395) 69,439 (1,026) (8,002) (7,071) (23,237) (76,261) 36,122 200,000 $12,105,970 $11,684,376 $10,380,535 $8,933,951 $7,546,758 32 The Northwestern Mutual Life Insurance Company Insurance Regulatory Information System For the Five-Year Period Ending December 31, 2007 The company’s NAIC Insurance Regulatory Information System (IRIS) results for the period under examination are summarized below. There were no unusual results. Ratio Net change in capital & surplus Gross change in capital & surplus Net income to total income Adequacy of investment income Non-admitted to admitted assets Total real estate & mortgage loans to cash & invested assets #7 Total affiliated investments to capital & surplus #8 Surplus relief #9 Change in premium #10 Change in product mix #11 Change in asset mix #12 Change in reserving ratio #1 #2 #3 #4 #5 #6 2007 4% 4 5 157 1 19 36 1 10 0.1 0.1 1 2006 13% 13 4 159 1 19 36 1 6 0.3 0.2 3 2005 16% 16 5 158 1 20 33 2 6 0.6 0.2 1 2004 18% 18 5 158 0 20 29 2 3 0.1 0.3 (1) 2003 5% 5 4 161 0 20 27 2 1 0.2 0.3 (1) Growth of The Northwestern Mutual Life Insurance Company Year 2007 2006 2005 2004 2003 2002 Admitted Assets $156,332,489,608 144,961,941,781 132,972,531,579 123,906,728,557 113,772,974,966 102,918,611,445 Liabilities $144,226,519,914 133,277,565,922 122,591,996,986 114,972,777,444 106,226,216,562 95,701,468,016 Capital and Surplus $12,105,969,694 11,684,375,859 10,380,534,593 8,933,951,113 7,546,758,404 7,217,143,429 Net Life Premiums, Annuity Considerations, and Deposits Life Insurance Premiums $10,793,218,875 9,786,270,450 9,167,612,847 8,912,436,716 8,667,002,927 8,506,322,564 Annuity Considerations $1,283,967,613 1,156,515,085 995,829,009 798,634,452 716,904,019 677,024,807 Deposit-type Contract Funds $55,753,346 44,953,200 43,697,106 25,238,053 51,752,114 96,365,698 Year 2007 2006 2005 2004 2003 2002 33 Life Insurance In Force (in thousands) Gross Risk In Force $1,064,769,780 995,855,463 931,350,474 870,378,556 811,214,993 751,164,441 Year 2007 2006 2005 2004 2003 2002 Ceded $453,155,600 439,700,253 426,748,594 418,383,545 395,148,114 356,988,035 Net $611,614,180 556,155,210 504,601,880 451,995,011 416,066,879 391,176,406 Accident and Health Incurred Claims and Cost Containment Expenses* $459,388,297 576,084,663 513,536,611 543,473,564 518,952,017 537,541,484 Combined Loss and Expense Ratio 85.5% 103.5 99.1 104.2 109.5 116.1 Year 2007 2006 2005 2004 2003 2002 Net Premiums Earned $816,158,953 771,331,547 734,119,029 694,984,522 657,415,432 625,913,184 Commissions Incurred $89,518,834 84,983,851 80,629,121 78,232,941 76,690,148 69,953,441 Other Expenses Incurred** $148,645,606 136,794,514 132,884,152 102,282,414 124,295,995 119,271,043 * Includes increase in contract reserves ** Includes taxes, licenses, and fees The company has exhibited a pattern of consistent growth with admitted assets and surplus increasing 52% and 68%, respectively, during the period under examination. NML’s life insurance in force, which currently exceeds $1.1 trillion, is comprised of approximately 5 million policyholders with traditionally low lapse rates contributing to the reported increases. Reconciliation of Surplus per Examination No adjustments were made to surplus as a result of the examination. The amount of surplus reported by the company as of December 31, 2007, is accepted. 34 VII. SUMMARY OF EXAMINATION RESULTS Compliance with Prior Examination Report Recommendations There were 11 specific comments and recommendations in the previous examination report. Comments and recommendations contained in the last examination report and actions taken by the company are as follows: 1. Report of Executive Compensation—It is recommended that the company properly complete the “Report of Executive Compensation,” as required by ss. 601.42 and 611.63 (4), Wis. Stat. Action—Compliance. 2. Safekeeping Agreements—It is again recommended that the company amend its custodial agreements such that they contain provisions requiring: a) that the custodian is obligated to indemnify NML for any loss of securities occasioned by the negligence or dishonesty of the custodian’s officers or employees, or burglary, robbery, holdup, theft, or mysterious disappearance, including loss by damage or destructions; and b) that in the event there is a loss of the securities for which the custodian is obligated to indemnify NML, the securities shall be promptly replaced or the value of the securities and the value of any loss of rights or privileges resulting from said loss of securities shall be promptly replaced. Action—Compliance. 3. Custodial Reconciliations—It is again recommended that the company establish procedures to reconcile report totals, in addition to individual items, at periodic intervals (such as every 24 months) to reveal items that may go undetected by the current program. Action—Compliance. 4. Invested Assets—It is again recommended that the company comply with the filing requirements set forth in the Purposes and Procedures Manual of the NAIC Securities Valuation Office by filing the required documents. Action—Compliance. 5. Private Placements—It is recommended that the company establish procedures to ensure that financial statements are received for private placements in accordance with financial covenants to facilitate its review of financial position as well as filings with the SVO. Action—Compliance. 35 6. Provisionally Exempt Securities—It is recommended that the company develop and implement new written procedures related to PE securities that includes maintaining a record supporting its decisions and evidencing its continued monitoring of the securities listed as PE to ensure the proper application of the provisionally exempt guidelines pursuant to the Purpose and Procedures Manual of the NAIC Securities Valuation Office. Action—Compliance. 7. Security Lending Program—It is recommended that the company amend its agency agreements to include provisions requiring: a) that the custodian is obligated to indemnify NML for any loss of securities/collateral in the custodian’s custody occasioned by the negligence or dishonesty of the custodian’s officers or employees, or burglary, robbery, holdup, theft, or mysterious disappearance, including loss by damage or destruction; and b) that in the event there is a loss of the securities for which the custodian is obligated to indemnify NML, the securities be promptly replaced or the value of the securities/collateral and the value of any loss of rights or privileges resulting from said loss of securities shall be promptly replaced. Action—Compliance. 8. Security Lending Program—It is recommended that the company amend its agency agreements to either include provisions requiring additional collateral requirements relating to collateral denominated in a different currency or include provisions that specify collateral must be denominated in the same currency as securities loaned. Action—Compliance. 9. Security Lending Program—It is recommended that the company implement procedures to periodically, not less than annually, audit its securities lending programs administered by third parties to review for compliance with agreement provisions including, but not limited to, a review for compliance with collateral requirements. Action—Compliance. 10. Mortgage Loans—It is recommended that in future annual statements, the company properly create a valuation allowance (a contra asset) for the impairments deemed “temporary,” or write down the mortgage loan (recognizing a realized loss and establishing a new cost basis) for impairments considered to be “other than temporary.” Action—Compliance. 11. Other Long-Term Invested Assets—It is recommended that in future annual statements, the company report the actual cost column of Schedule BA in accordance with the NAIC Annual Statement Instructions – Life, Accident and Health. Action—Compliance. 36 Summary of Current Examination Results Common Stock $9,010,576,455 The above balance includes eight private common stock investments where the company used its internal valuation method versus the valuation given by the NAIC Securities Valuation Office (SVO). The variance between the two valuation methods resulted in $112 million (net of deferred taxes) in additional surplus. According to Statements of Statutory Accounting Principles (SSAP) No. 30, management is responsible for determining fair value based on analytical or pricing mechanisms when a price is not available from the SVO. In the case of these eight private common stocks, the price was available from the SVO. Since NML intended to deviate from statutory accounting principles, they should have requested a permitted accounting practice from the Office of the Commissioner of Insurance (OCI) 30 days prior to the financial statement filing date for non-disapproval. NML notified OCI of the valuation variance in a letter that was submitted with its annual statement filing. The examination determined the variance between the two valuation methods to be immaterial; therefore, no adjustment to surplus was made. It is recommended that the company value its private common stock investments in accordance with SSAP No. 30 or request a permitted practice from OCI for non-disapproval. Insurance Service Account Funds $375,002,052 The above balance represents funds that a policyowner has deposited with the company in an Insurance Service Account (ISA). The funds deposited in the ISAs can be used at the policyowners discretion to pay insurance premiums, repay policy loans, or withdraw the funds without having a policy cancelled. These funds meet the definition of a deposit-type contract in accordance with SSAP No. 50, which defines deposit-type contracts as not incorporating any insurance risk. In addition, these funds also resemble the characteristics of a deposit-type contract as described in SSAP No. 52, which states that deposit-type contracts grant policyholders significant discretion over the amount and timing of deposits and withdrawals. NML reported the balance in these accounts as a write-in to liabilities in its financial statements versus including these amounts as a ‘Liability for deposit-type contracts” due to the amounts in the ISAs were not directly related to any one particular contract. Although the funds deposited in the ISAs are not 37 associated directly with a specific contract, the examination determined that the company’s ISA funds met the definition of a deposit-type contract due to the funds would not have been received by the company unless the individual had one or more contracts with NML. The examination determined this to be immaterial to the company; therefore, no reclassification has been made. However, it is recommended that the company report its ISA funds as “Liability for deposit-type contracts” in future quarterly and annual statement filings. 38 VIII. CONCLUSION As of December 31, 2007, NML had total assets of $156,332,489,608, total liabilities of $144,226,519,914, and policyholders’ surplus of $12,105,969,694. The company continues to have steady growth and reported an increase in surplus during each year under examination. These traditionally favorable results have allowed NML to continue to increase dividends to a reported $5 billion for 2007. This, coupled with NML’s exclusive distribution system, has established high levels of brand loyalty exhibited by low lapse ratios. NML’s major product remains ordinary life insurance written on a participating basis. The examination resulted in two recommendations. No adjustments to surplus or reclassifications were made as a result of this examination. The examination found that the company complied with all of the prior examination recommendations. 39 IX. SUMMARY OF COMMENTS AND RECOMMENDATIONS 1. Page 37 - Common Stock—It is recommended that the company value its private common stock investments in accordance with SSAP No. 30 or request a permitted practice from OCI for non-disapproval. Page 38 - Insurance Service Account Funds—It is recommended that the company report its ISA funds as “Liability for deposit-type contracts” in future quarterly and annual statement filings. 2. 40 X. ACKNOWLEDGMENT The courtesy and cooperation extended during the course of the examination by the officers and employees of the company are acknowledged. In addition to the undersigned, the following representatives of the Office of the Commissioner of Insurance, State of Wisconsin, participated in the examination: Name Bill Genne Sarah Haeft Tom Houston, AFE Carmenza Rincon Victoria Chi Richard Fluhr, CFE Title Insurance Financial Examiner Insurance Financial Examiner Insurance Financial Examiner Insurance Financial Examiner Insurance Financial Examiner—Advanced Examiner, Representing the State of Ohio Respectfully submitted, Amy J. Malm Examiner-in-Charge 41 XI. SUBSEQUENT EVENT Subsequent to the completion of the examination, the company requested and received a permitted practice to carry its investment in Frank Russell Company based on its audited GAAP book value, consistent with SSAP No. 97, as the basis for its statutory equity method, but without any adjustments for the acquisition goodwill. This permitted practice became effective on September 30, 2008. 42