ov e r 1 50 y ea rs of

st r e n g t h          sta b i l i t y

      investment re p ort 2008
The Northwestern Mutual Advantage
As a mutual company, The Northwestern Mutual Life Insurance Company (Northwestern Mutual...
As a significant investor in fixed income and equity markets,
Northwestern Mutual was not immune to 2008’s market declines...
Investment Objective
Northwestern Mutual’s investment objective is           Northwestern Mutual’s significant allocation
Managing Portfolio Risk in Volatile Markets
While Northwestern Mutual continues to invest with     volatility and will ult...
Overall Results on Invested Assets
        Northwestern Mutual’s total invested assets           Investment earnings in 20...
Total Assets
                                                                          December 31, 2008          December...
Fixed Income Investments
        Northwestern Mutual’s fixed income               The fixed income portfolio is designed t...
Northwestern Mutual’s investments in                                Quality of Public and Private Bond and
public bonds, p...
Fixed Income Investments

        Northwestern Mutual’s investment in
        commercial mortgage whole ...
Mortgage Investments                                           Residential mortgage-backed securities
Equity Investments
        Equity investments are a distinguishing              of 2008, Northwestern Mutual reduced
the private equity markets and to the firms              warehouse and office properties held through
with whom it has dev...
Northwestern Mutual
         Investment Operations
                                                          Mason Street ...
Northwestern Mutual Capital                                 Jeffrey J. Lueken         Mark E. Kishler
Reporting Considerations
         Northwestern Mutual publishes its Investment Report annually to provide information
Financial Strength Ratings*
 The Northwestern Mutual Life Insurance Company has
 among the highest ratings in the life ins...
As a mutual company, Northwestern Mutual
has no shareholders. The company’s mutual structure
  allows it to focus solely a...
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2008 Financial Report


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Northwestern Mutual\'s 2008 Investment Report.

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2008 Financial Report

  1. 1. ov e r 1 50 y ea rs of st r e n g t h sta b i l i t y investment re p ort 2008
  2. 2. The Northwestern Mutual Advantage As a mutual company, The Northwestern Mutual Life Insurance Company (Northwestern Mutual) operates for the protection and benefit of its policyowners, with a singular focus on their best interests. The company’s structure and business model allow for a long-term perspective and approach in its product offerings, business operations and investment strategy. Since its founding in 1857, Northwestern Mutual has been guided by its core principles. The company aims not to be the biggest but instead to be safe, to value quality above quantity and to rank first in benefits to policyowners rather than first in size. Beyond mutuality, what distinguishes Northwestern Mutual? General Account Portfolio Product Mix ■ Northwestern Mutual’s core financial products (depicted in graph to the right) focus primarily on traditional insurance, rather than complex financial Percentage of general account insurance reserves products that may have risks more difficult to predict or manage. ■ Participating portfolio life insurance represents nearly three-quarters of the company’s total premium revenue. This product is considered by rating agencies to be the lowest-risk product in the life insurance industry. ■ Policyowners tend to remain with the company for many years, which is illustrated by the company’s excellent persistency rate of 96.1%. In addition, Northwestern Mutual’s underwriting expertise has enabled the company to benefit from superior mortality experience. Together, these factors translate into stable cash flow. Life Insurance 91% ■The company does not rely on debt financing or leverage to finance its Annuities 5% operations or investment portfolio, reflecting Northwestern Mutual’s Disability and Long-Term Care Insurance 4% conservative approach to Historical Surplus Ratio risk management. Ratio of total surplus and AVR to general Another distinguishing feature is the company’s financial account insurance reserves strength as reflected in its total surplus and surplus ratio, 16% which are two measures of an insurer’s ability to meet its financial obligations. Total surplus was $13.4 billion at 14% year-end 2008. Despite the decline in financial markets 12% during 2008, Northwestern Mutual’s surplus ratio 10% remains both sound, at 11.5%, and strong compared to its historical surplus levels (as shown in chart to the left), 8% as well as the capitalization standards established by the 6% rating agencies and insurance regulators. 4% The factors that make Northwestern Mutual different — 2% its mutual structure, a focus on participating portfolio life insurance, 0% outstanding persistency, mortality and financial strength — 88 90 92 94 96 98 00 02 04 06 08 combine to make the company strong.
  3. 3. As a significant investor in fixed income and equity markets, Northwestern Mutual was not immune to 2008’s market declines. Despite these challenges, Northwestern Mutual remains financially sound and is well positioned to fulfill the promises made to its policyowners, a testament to the company’s highly diversified investment portfolio and historically high capital levels at the beginning of 2008. Last year was an unprecedented and difficult period for capital markets and the economy. Global asset prices declined precipitously due largely to unsustainably high levels of borrowing, unwise investment decisions and weak risk management by some market participants. As highly leveraged investors sold assets, housing prices declined and consumer demand weakened, the U.S. economy entered a recession. Governments around the world have intervened on a massive scale, but the near-term economic outlook remains uncertain. Northwestern Mutual’s strength is deeply rooted in its singular focus on the mutual protection and benefit of its policyowners. Unlike many others in the life insurance industry, we do not offer universal life insurance with secondary guarantees, guaranteed investment contracts or annuities with guaranteed living benefits. While other firms faced difficulties in 2008 due to borrowing needs and market conditions, our steady flow of revenues from insurance premiums and investment income totaled $21 billion in 2008, providing more than $12 billion of cash flow for investing activities. In 2008, Northwestern Mutual’s invested assets grew 2.6%, as investment and other income more than offset capital losses. Highlighting our long-term financial strength, dividend payments to participating policyowners in 2009 are expected to total more than $4.5 billion, the third-largest dividend payout in the company’s history. The 6.5% dividend interest rate on most unborrowed permanent life insurance funds reflects our desire to provide policyowners with a very attractive return while conservatively managing the company’s capital. Looking back at the events of the last year, the concept of risk was central to market developments. Managing risk – whether mortality risk, credit risk, or other risk – has always been at the forefront of Northwestern Mutual’s business and investment operations. We reassess risk on an ongoing basis to preserve and enhance the company’s strength and stability. We anticipate that difficult economic conditions could continue for a considerable time, leading to volatile markets, increasing corporate defaults and other challenges to our investment portfolio. In response, we have adopted a defensive approach in our investment activities, reducing our exposure to equities and other higher-risk assets. The company’s experienced investment team has built liquidity in order to position the portfolio to weather a downturn of uncertain duration. As we enter 2009, be assured your company is financially strong and well positioned to build on its 152-year-long track record of success. Mark G. Doll Chief Investment Officer
  4. 4. Investment Objective Northwestern Mutual’s investment objective is Northwestern Mutual’s significant allocation to generate superior risk-adjusted returns while to equity investments relative to fellow insurers maintaining a well-balanced and diversified is a distinguishing component of the company’s portfolio to preserve the company’s exceptional investment portfolio. The company’s mutual financial strength. This time-tested strategy ownership structure, product mix, strong fundamentally supports Northwestern Mutual’s persistency and mortality results, and solid surplus ability to deliver lifelong financial security to its position enable it to maintain greater exposure to policyowners and clients. equity investments than many of its competitors. In 2008, worldwide equity markets declined Northwestern Investment Management Company, significantly. Northwestern Mutual recognized the LLC and Mason Street Advisors, LLC, both risk in the equity markets and reduced exposure wholly owned subsidiaries of Northwestern Mutual, to these markets during the second half of the invest the company’s $123 billion of managed year. By year-end, equities represented only 13% assets in accordance with the company’s investment of managed assets. The company still believes that guidelines. Consistent with Northwestern Mutual’s over a long period of time, equity investments investment objective, the company invests should generate higher returns than fixed income approximately 80% to 85% of managed assets securities, providing a distinct advantage to in fixed income and the remaining 15% to 20% Northwestern Mutual policyowners. of managed assets in equities. Consistent with the company’s investment Fixed income investments represent the core objectives, Northwestern Mutual may also enter of Northwestern Mutual’s investment portfolio, into transactions that are designed to reduce the providing a stable foundation for the overall company’s exposure to fluctuations in interest portfolio while generating current income. rates, foreign currency exchange rates and market Northwestern Mutual’s portfolio of fixed income volatility. These hedging strategies include the investments is largely highly rated and is well- use of forwards, futures, options and swaps. In diversified within and among fixed income sectors implementing its hedging strategies, the company to minimize risk. closely manages and monitors counterparty risk, utilizing minimum ratings requirements, maximum Northwestern Mutual’s equity investments exposure limits, and collateral agreements, which include investments in public common stock, require the counterparty to post collateral should real estate and private equities. Typically, the market value exceed established thresholds. such diversification across different types of equities enables the company to offset weakness Ultimately, the combination of asset diversification, in any one area with attractive performance active portfolio management and a long-term in another. Furthermore, similar to fixed income, perspective supports outstanding product value equity investments are highly diversified across and enhances the company’s financial strength. countries, industries, company sizes and Northwestern Mutual’s prudent investment strategy other parameters. and unique business model have contributed to more than 150 years of strength and stability.
  5. 5. Managing Portfolio Risk in Volatile Markets While Northwestern Mutual continues to invest with volatility and will ultimately enable it to capitalize a long-term perspective, in times of severe market on attractive new investment opportunities across disruptions it is prudent to consider near-term various markets when appropriate. tactical measures. In response to the unprecedented developments of 2008, the company has taken several In conjunction with increasing its holdings of higher such steps. Combined with Northwestern Mutual’s quality, liquid investments, Northwestern Mutual financial strength, these decisions are intended has reduced its holdings of higher risk assets, to conservatively position the company to weather as shown below. Reduced holdings of equities and even an extended period of difficult financial other more volatile assets will defensively position market conditions. the company to prosper despite the potential for extended near-term economic weakness. Northwestern Mutual has increased its allocation While investing a significant portion of the portfolio of investments to higher quality, liquid assets. in equities continues to be a key component of the At year-end, Northwestern Mutual held more than company’s overall long-term strategy, its short-term $25 billion in cash equivalents, U.S. Treasuries and actions are focused on reducing risk and guarding government-guaranteed debt, representing 21% of against loss of principal to protect the health of the total managed assets. This near-term reallocation overall portfolio. should help insulate the company from market Allocation to Higher Quality, Reduced Holdings of Higher Risk Assets Liquid Assets 25% 25% 23.5% $25.9 billion 20.0% 20% $22.6 billion 20% 15% 15% 10% 10% 5% 5% 0% 0% 2007 2008 2007 2008 Cash, Treasuries and Government- 2007 2008 Guaranteed Debt as a Percentage of Total Managed Assets Public and Private High Yield Debt 6.4% 6.8% Real Estate Equities 5.4% 5.1% 2007 2008 18.7% 21.0% Private Equities 5.3% 5.0% Public Equities 6.4% 3.1% Total 23.5% 20.0%
  6. 6. Overall Results on Invested Assets Northwestern Mutual’s total invested assets Investment earnings in 2008 included $7.8 increased nearly 3% to $136.6 billion in 2008, billion in net investment income, which was due primarily to the continued investment of predominately comprised of interest payments premiums, interest income and dividend income and dividends. Fixed income investments — partially offset by realized and unrealized contributed 85% of net investment income, capital losses. Over the course of the year, the while equity investments contributed the company shifted its asset allocation in order to remainder, largely in line with each asset class’s increase liquidity and reduce risk. Reflecting this allocation within the overall portfolio. shift, cash and short-term investments increased more than 68% to $4.2 billion, while fixed Realized capital losses in the portfolio income assets grew approximately 5% to $106.4 included $1 billion of write downs for other- billion and equity assets declined nearly 14% to than-temporary declines in value in 2008. $16.6 billion. After taxes and required deferrals of interest- related gains, net losses were $4.1 billion Growth in fixed income assets primarily reflected and reduced the company’s surplus ratio to a $1.2 billion, or 2%, increase in public bonds 11.5% at year-end 2008, compared to 14.5% and preferred stock as well as a $1.3 billion, at year-end 2007. Despite the impact of these or 6%, increase in private bonds and preferred losses, Northwestern Mutual’s healthy surplus stock. Commercial mortgage whole loans ratio of 11.5% is higher than company surplus increased more than $700 million, or 4%. ratios in all but 13 years of the company’s 152-year history. Within the equity portfolio, public common 2 | stock assets declined 50% to $3.9 billion, due to both lower market values and reduced Investment performance in 2008 demonstrated the benefits of Northwestern Mutual’s highly allocation to equities. Real estate equities diversified investment portfolio and disciplined declined 2% to $6.3 billion. Private equities, underwriting standards. The company which include investments in certain had minimal exposure to investments in subsidiaries, increased 27% to $6.4 billion. distressed financial institutions – losses related This growth was due largely to an increase to investments in Lehman Brothers, AIG, in the carrying value of the Russell Investment Fannie Mae (FNMA) and Washington Mutual Group, Northwestern Mutual’s global were equal to approximately 0.2% of total investment services subsidiary, which was invested assets. previously carried at a negative value. This new reporting basis, coupled with new Over the last 10 years, net investment income investments, contributed to the $1.3 billion and total invested assets have exhibited strong increase in private equities and more than and consistent growth, increasing at compound offset a decline in market values. annual rates of 5% and 7%, respectively. These results reflect Northwestern Mutual’s commitment to its disciplined, time-tested investment approach, which supports the company’s outstanding dividend interest rate and strong surplus position. ■
  7. 7. Total Assets December 31, 2008 December 31, 2007 In Millions In Millions Fixed Income Investments Short-Term Money Market Investments $4,213 $2,496 Long-Term* Public Bonds and Preferred Stock 58,563 57,356 Private Bonds and Preferred Stock 23,410 22,069 Commercial Mortgage Whole Loans 20,259 19,546 Total Fixed Income Investments 106,445 101,467 Equity Investments Real Estate 6,300 6,401 Public Common Stock 3,936 7,859 Private Equities** 6,360 5,020 Total Equity Investments 16,596 19,280 Total Managed Assets $123,041 $120,747 Loans on Policies 12,884 11,797 Other Investments 712 643 Total Invested Assets*** $136,637 $133,187 Other Assets Separate Account Business 5,130 13,387 3,656 19,704 | 3 Total Assets $155,154 $156,547 * As of year-end 2008, Commercial Mortgage-backed Securities are included in “Public Bonds and Preferred Stock.” As a result, $3.5 billion included in “Commercial Mortgage Loans” in the 2007 Investment Report (now “Commercial Mortgage Whole Loans”) is now shown under “Public Bonds and Preferred Stock” for purposes of this chart only. Similarly, mezzanine investments in corporate issuers are included in “Private Bonds and Preferred Stock” at year-end 2008. As a result, $1.5 billion included in “Private Equities” in the 2007 Investment Report is now shown under “Private Bonds and Preferred Stock.” ** As presented in this report, private equities include direct investment in certain subsidiaries and affiliates. *** Includes investment income due and accrued of $1,498 million and $1,395 million in 2008 and 2007, respectively. Note: Please read table above in conjunction with Reporting Considerations on page 12 of this publication. Numbers in tables are rounded. Total Managed Asset Growth in billions $150 $125 $100 $75 $50 $25 $0 1999 2000 2000 2001 2 2002 2 2003 2 2004 2 2005 2 2006 2 2007 2 2008 2
  8. 8. Fixed Income Investments Northwestern Mutual’s fixed income The fixed income portfolio is designed to investments serve as the foundation of the provide liquidity and current income while overall investment portfolio. Fixed income minimizing loss of principal. To that end, assets include money market instruments, the portfolio is well-diversified and generally public bonds and preferred stock, private invested in high-quality assets. Public bonds, bonds and preferred stock and commercial preferred stock and money market instruments, mortgage whole loans. The company’s which are considered to be the most liquid allocation to fixed income assets increased fixed income assets in the portfolio, together to 87% of total managed assets at year-end remain the largest component of the portfolio, 2008, from 84% of total managed assets comprising 59% of total fixed income assets at year-end 2007, due in part to the decline in 2008. Private bonds and preferred stock in value of equities in general as well as represented 22% and commercial mortgage measures taken by the company to reduce whole loans represented 19% of total fixed overall portfolio risk. income assets at year-end. Composition of Fixed Income Portfolio PERCENT/TOTAL TYPE DETAIL FIXED INCOME Corporate 47% Corporate investments include bonds and other 4 | fixed income instruments issued by public and private corporations in the U.S. and abroad. Commercial Mortgage 19% Commercial mortgage whole loans include private Whole Loans fixed income investments backed by individual income-producing commercial properties. Residential Mortgage- 15% Residential mortgage-backed securities include backed Securities public fixed income investments backed by pools of residential mortgages. U.S. Gov’t. and Agencies 8% U.S. Government and agency securities include fixed income investments issued or guaranteed by the U.S. Government or affiliated agencies. Money Market Investments 4% Money market investments include generally short-term and highly liquid instruments, such as bankers’ acceptances, commercial paper, repurchase agreements and government bills. Commercial Mortgage- 3% Commercial mortgage-backed securities include backed Securities public fixed income investments backed by pools of commercial mortgage loans. Asset-backed Securities 2% Asset-backed securities include a variety of fixed income securities backed by pools of different types of financial assets, including credit card receivables, auto loans and other assets. Municipal/Other 2% Municipal/Other investments include a variety of fixed income securities issued by U.S. municipalities and other governmental entities.
  9. 9. Northwestern Mutual’s investments in Quality of Public and Private Bond and public bonds, preferred stock and money Preferred Stock Investments* market instruments are actively managed to maximize returns while preserving a high AAA 39% level of safety, liquidity and diversification. To manage portfolio risk, investments are AA 8% broadly diversified by security type, including A 15% corporates, residential mortgage-backed, BBB 27% asset-backed and U.S. Government securities. BB 5% In 2008, the company increased its allocation to U.S. Government securities and money B 4% market instruments to enhance liquidity and CCC & reduce volatility. At year-end, Northwestern Below 2% Mutual held more than $25 billion in cash equivalents, U.S. Treasuries and government- guaranteed debt. Northwestern Mutual’s investments in private bonds and preferred stock provide further diversification to the investments – defined as the ability of the company’s overall portfolio and often benefit issuer to timely pay interest and repay from higher yields and more attractive terms principal – remained high. As of year-end relative to public bonds. 2008, 39% of these investments held the highest quality rating of AAA.* Investment The credit quality of the company’s public and private bond and preferred stock grade securities – those rated BBB* or higher – comprised 89% of the portfolio. | 5 Total Fixed Income Portfolio 2007 2008 60% 50% 48% 47% 47 40% 30% 20% 19 19%19% 16%15% 16%15% 5 10% 6% 8% 3% 4% 4% 3% 3% 2% 1% 2% 6% 3 4 3% % % 0 Corporate Commercial Residential U.S. Gov’t Money Market Commercial Asset- Municipal/ Mortgage Mortgage- and Agencies Investments Mortgage- backed Other Whole Loans backed backed Securities Securities Securities * Quality ratings pertain exclusively to public and private fixed income securities and omit commercial mortgage whole loans. These ratings are based on the higher of the credit ratings from Standard & Poor’s, Moody’s or Fitch Ratings when available, or internal rating evaluations when third-party ratings are not available.
  10. 10. Fixed Income Investments continued Northwestern Mutual’s investment in commercial mortgage whole loans accounted for 19% of fixed income investments at year- end 2008. The company tempered its new commitments to this asset class throughout 2008 as market liquidity virtually disappeared and economic uncertainty increased. Northwestern Mutual’s historical focus on property selection, borrower quality and disciplined underwriting continued. Northwestern Mutual concentrates its mortgage lending on fixed-rate permanent loans greater than $15 million secured by income-producing property. The company invests primarily in Commercial Mortgage Whole Loan apartments, shopping centers, office buildings in Dallas, Texas and industrial warehouses throughout the Rosewood Court is a 19-story multi- nation. Private transactions offer more control over both property quality and choice of tenant Class-A office tower located on borrowers than publicly traded commercial a high profile site in the Uptown district mortgage-backed securities. This portfolio has of Dallas, Texas. This property secures 6 | historically produced attractive yields and low delinquency and loss percentages. ■ a commercial mortgage whole loan in Northwestern Mutual’s portfolio. Commercial Mortgage Commercial Mortgage Whole Loans by Region Whole Loans by Class West 36% Midwest 11% Apartments 34% Industrial 12% East 30% Other 1% Office 26% Other 6% South 22% Retail 22%
  11. 11. Mortgage Investments Residential mortgage-backed securities are generally highly liquid public bonds Northwestern Mutual’s total exposure to backed by a standardized pool of residential mortgage-related investments, including mortgages. The mortgage payments public residential mortgage-backed securities from the individual loans within the and commercial mortgage-backed securities pool are passed through for payment of as well as commercial mortgage whole principal and interest to the bondholders. loans, represented 37% of the fixed As of year-end, 85% of residential mortgage- income portfolio at year-end. While all backed securities within the portfolio were of these investments are related to real guaranteed by either the U.S. Government estate, it is important to note that each or government-sponsored entities. has unique qualities and attributes. Commercial mortgage-backed securities Commercial mortgage whole loans are fixed are publicly traded bonds secured by a income investments originated in the private diversified pool of commercial mortgage market directly with owners of commercial whole loans originated by third parties. real estate. Northwestern Mutual originates These investments typically offer more these investments through a network of liquidity than commercial mortgage whole experienced professionals located in eight loans. Northwestern Mutual’s commercial regional field offices throughout the country. mortgage-backed portfolio comprised 3% These investments are directly secured by of fixed income assets and 2.5% of invested apartments, office buildings, warehouses assets. Of these, 59% were rated AAA*, or shopping centers. Commercial mortgage with 84% rated A* or better as of year-end. whole loans are considered illiquid because of the unique attributes of the underlying | 7 property securing each loan. $39.6 billion $39.5 billion 100% Percent of Total Mortgage Investments by Type 80% 2007 2008 60% Commercial Mortgage Whole Loans 49% 51% Residential Mortgage- 40% backed Securities 40% 40% Commercial Mortgage- 20% backed Securities 11% 9% 0% 2007 2008 * Quality ratings based on the higher of the credit ratings from Standard & Poor’s, Moody’s or Fitch Ratings when available, or internal rating evaluations when third party-ratings are not available.
  12. 12. Equity Investments Equity investments are a distinguishing of 2008, Northwestern Mutual reduced element of Northwestern Mutual’s investment its holdings of public common stock. portfolio. The company’s equity portfolio is Furthermore, in an effort to lower the broadly diversified across different types of common stock portfolio’s risk profile, the equity investments, including public common company increased its allocation to domestic stock, private equity and real estate. In 2008, large capitalization companies and lowered this portfolio represented 13% of total its allocation to foreign companies. managed assets, down from 16% in 2007. This overall decline reflects both a shift toward Private equity investments accounted lower risk fixed income investments and a for 38% or $6.4 billion of total equity reduction in market values. investments at year-end. The private equity portfolio includes mezzanine and equity While Northwestern Mutual’s equity investments in buyouts of companies, investments declined in value in 2008, over private equity and venture capital limited the long term the company expects equities to partnerships and direct investments in contribute both higher risk-adjusted returns selected other companies and subsidiaries. and provide incremental diversification to the Northwestern Mutual’s private equity overall portfolio. Over time, the company’s investments offer an additional potential significant allocation to equities has enhanced source of attractive returns, primarily in Northwestern Mutual’s dividend payment the form of capital gains. Additionally, these history and financial strength. assets generally exhibit lower volatility than their public market counterparts and provide 8 | At year-end 2008, the public common stock portfolio totaled $3.9 billion, or 24% of diversification benefits. Northwestern Mutual’s long-term investment horizon allows the the total equity portfolio. The public equity company to hold significant investments in portfolio includes investments in domestic this asset class. large, medium and small capitalization companies, as well as in foreign companies. Despite the challenging private equity Risk is well-diversified by company size, investing environment experienced in 2008, industry and country. During the course Northwestern Mutual remains committed to $7.9 billion $3.9 billion Diversification of 100% Public Common Stocks 80% 2007 2008 60% Domestic Large-Cap 57% 59% Foreign 26% 24% 40% Domestic Mid-Cap 9% 11% Domestic Small-Cap 8% 6% 20% 0% 2007 2008
  13. 13. the private equity markets and to the firms warehouse and office properties held through with whom it has developed long-standing both direct and joint venture ownership. relationships. The company believes that Through partnerships with developers investing in fundamentally strong businesses nationwide, Northwestern Mutual develops alongside leading private equity sponsors apartment communities and warehouse provides an additional level of diversification properties and also purchases properties and the opportunity for attractive returns. directly. Asset managers, operating out of our real estate field offices, monitor local Another facet of the company’s equity markets and actively manage the investment portfolio is commercial real estate equity properties, creating additional long-term investments, which represented 38% or value. The company also invests in private $6.3 billion of the total equity portfolio real estate funds and public real estate at year-end 2008. The real estate equity investment trusts (REITs), providing further portfolio consists primarily of apartment, diversification within the equity account. ■ | 9 $19.3 billion $16.6 billion Diversification of Equities 100% 80% 2007 2008 60% Private Equities 26% 38% Real Estate 33% 38% 40% Public Common Stock 41% 24% 20% 0% 2007 2008
  14. 14. Northwestern Mutual Investment Operations Mason Street Advisors, a federally Northwestern Mutual’s $123 billion managed registered investment advisor, is assets portfolio is overseen by an experienced responsible for managing the public team of investment professionals, working fixed income, preferred stock and together to achieve the company’s investment common stock investments in objectives. The investment team is led by the Northwestern Mutual’s portfolio. following senior executives. Mason Street Advisors maintains a disciplined investment process that emphasizes rigorous research Mark G. Doll and macroeconomic foresight. With Senior Vice President an average of more than 18 years & Chief Investment Officer of institutional knowledge and David D. Clark experience, Mason Street Advisors’ Senior Vice President team of 56 investment professionals (Real Estate) bring maturity, consistency and Jeffrey J. Lueken continuity to the management of Senior Vice President public market holdings within (Private Markets) Northwestern Mutual’s portfolio. 10 | Jefferson V. DeAngelis Vice President Jefferson V. DeAngelis (Public Markets) President Gary M. Hewitt Vice President Patricia L. Van Kampen Christopher P. Swain (Investment Risk Management) Managing Director Managing Director (Common Stock) (Public Fixed Income) Thomas A. Carroll Michael R. Buchholz The company’s investment portfolio includes Managing Director Managing Director fixed income, equity and real estate (Common Stock) (Public Fixed Income) investments. Investment strategy and Jill M. Grueninger Dennis E. Korjenek portfolio management are executed by teams Managing Director Managing Director (Common Stock) (Public Fixed Income) of investment professionals within Mason Street Advisors, LLC (Mason Street Advisors) David R. Keuler Jason Steigman Managing Director Managing Director and Northwestern Investment Management (Common Stock) (Public Fixed Income) Company, LLC (NIMCO), both wholly owned William R. Walker Steven P. Swanson subsidiaries of The Northwestern Mutual Life Managing Director Managing Director Insurance Company. NIMCO is comprised (Common Stock) (Public Fixed Income) of Northwestern Mutual Capital, which manages privately held debt and equity investments, and Northwestern Mutual Real Estate, which manages commercial real estate-related investments.
  15. 15. Northwestern Mutual Capital Jeffrey J. Lueken Mark E. Kishler Senior Vice President Managing Director With offices in Milwaukee and London and a staff (Private Debt & Equity) of over 30 investment professionals, Northwestern Jerome R. Baier Managing Director Randal R. Ralph Mutual Capital invests globally, in North America, (Energy and Public Managing Director Europe, Australia and Asia. The company manages Convertible Securities) (Private Equity Funds) a diversified portfolio that includes private fixed David A. Barras Howard Stern income investments, mezzanine investments and equity Managing Director Managing Director co-investments in private equity transactions, private (Private Debt & Equity) (Private Debt & Equity) equity funds and convertible securities. With decades Timothy S. Collins Richard A. Strait of experience as an investor in the private capital Managing Director Managing Director markets, Northwestern Mutual Capital serves as a (Private Debt & Equity) (Private Equity Funds and Private Debt committed, trusted source of capital for corporations & Equity) and financial sponsors worldwide. | 11 Northwestern Mutual Real Estate David D. Clark Senior Vice President Northwestern Mutual is one of the largest real Michael P. Cusick estate investors in the nation, with investments Managing Director in commercial mortgage loans, equities and (Mortgage Loan securitized investments across all major property Production West) types. Northwestern Mutual is a trusted financing Gregory Walz source with more than 70 experienced investment Managing Director professionals who provide quick, decisive action (Mortgage Loan Production East) and flexible, creative solutions. Origination, underwriting and servicing are enhanced by having Thomas D. Zale Managing Director real estate professionals in eight regional field offices (Real Estate Equities) familiar with local markets, borrowers and investors.
  16. 16. Reporting Considerations Northwestern Mutual publishes its Investment Report annually to provide information on the asset mix of its portfolio and the investment results generated during the previous calendar year. Certain types of investments have been grouped differently for this report than in Northwestern Mutual’s Consolidated Financial Statements (CFS). The most significant of these differences as of December 31, 2008 are: “Other investments” of $9.2 billion reported in the CFS includes subsidiaries and affiliates, joint ventures, and partnerships. This report classifies these investments based on the character of the underlying assets, including investments in private equities, real estate, and public common stock of $4.4 billion, $2.8 billion and $0.4 billion, respectively. Mortgage loans of $21.7 billion reported in the CFS includes $1.7 billion of loans made to real estate joint ventures in which the company is an equity investor. This report classifies these assets as real estate investments. Due and accrued investment income of $1.5 billion reported separately in the CFS is included in the respective asset classes to which the amounts due relate in this report. Total assets, investment income and capital gains in this report are consistent with the company’s CFS. The notes to the CFS provide further details as to the accounting and valuation methods applied to the reported investment values. PricewaterhouseCoopers LLP is the company’s independent accountant. In respect to comments pertaining to the company’s year-end 2008 surplus total of $13.4 billion and surplus ratio of 11.5%, these figures included the effect of two permitted accounting practices. The first allowed the company to reflect some of the substantial value of Russell Investments, its global investment services subsidiary. The second change related to the treatment of deferred tax assets affected by investments that suffered market declines in 2008. Without the permitted practices, the company’s total surplus would have been $11.8 billion and its total surplus 12 | ratio would have been 10.1%, higher than company surplus ratios in all but 13 of the company’s 152-year history. ‘Total surplus,’ as cited in this report, is the combination of surplus and asset valuation reserve (AVR). In respect to comments pertaining to Northwestern Mutual’s dividend payout and dividend scale interest rate, decisions with respect to the determination and allocation of divisible surplus are left to the discretion and sound business judgment of the company’s Board of Trustees. There is no guaranteed specific method or formula for the determination and allocation of divisible surplus. Accordingly, the company’s approach is subject to change. Neither the existence nor the amount of a dividend is guaranteed on any policy in any given policy year. Some policies may not receive any dividends in a particular year or years even while other policies receive dividends. In its 2009 dividend scale resolution, the Board of Trustees has exercised its discretion to guarantee a minimum amount of dividends to be paid in 2009 to the policyhoders as a group. If this guaranteed amount exceeds the aggregate amount of dividends actually paid to individual policyholders in 2009, that excess will be paid out in 2010 pursuant to the 2009 dividend scale resolution. The presence of a guaranteed minimum amount in the 2009 dividend scale resolution does not obligate Northwestern Mutual to declare a dividend in future years or to guarantee any portion of dividends that may be declared in future years. A copy of Northwestern Mutual’s Consolidated Financial Statement is available on the company’s web site – www.nmfn.com, or by written request to: Northwestern Mutual, Corporate and Policyowner Relations, N04, 720 E. Wisconsin Ave., Milwaukee, WI 53202.
  17. 17. Financial Strength Ratings* The Northwestern Mutual Life Insurance Company has among the highest ratings in the life insurance industry from the four major rating agencies: Standard & Poor’s, Moody’s Investors Service, Fitch Ratings and A.M. Best. *Ratings are subject to change. Third-party ratings are a measure of a company’s relative financial strength and security but are not a reflection of the performance of stability of funds invested in a company’s separate accounts.
  18. 18. As a mutual company, Northwestern Mutual has no shareholders. The company’s mutual structure allows it to focus solely and directly on serving the best interests of its policyowners and clients. The company’s vision and values are echoed in a statement made by its Executive Committee and printed in the company’s 1888 Annual Report to Policyowners. “The ambition of the Northwestern has been less to be large than to be safe: its aim is to rank first in benefits to policyowners rather than first in size. Valuing quality above quantity, it has preferred to secure its business under certain salutary restrictions and limitations rather than write a much larger business at the possible sacrifice of those valuable points which have made the Northwestern preeminently the policyowner’s company.” – 1888 Executive Committee The Northwestern Mutual Life Insurance Company • Milwaukee, WI www.northwesternmutual.com 19-1205 (0309)