An essential ingredient in maintaining Northwestern Mutual’s financial strength
and ability to deliver value to policyowners is the performance of the company’s
general account investment portfolio, which at year-end 2009 included about
$132 billion of managed assets backing the company’s insurance products.
The investment earnings generated by this portfolio produce capital that helps
build the company’s strong financial base. They are also the primary determinant
of the dividend scale interest rate applied to traditional permanent life
In 2010, Northwestern Mutual expects to pay more than $4.7 billion in dividends,
mostly on traditional life insurance policies, fueled in part by the company’s
highly competitive 6.15 percent dividend scale interest rate. In 2009,
the company’s total surplus grew by more than $800 million over the prior year
to more than $14.2 billion.
All of these results that drive the company’s financial strength and life insurance
cash values are possible in part because of the power of the company’s general
account investment portfolio.
Read on for more information about the investment strategies Northwestern
Mutual follows, how it is able to invest in ways that some other companies
cannot and how the company’s team of investment professionals has proven
its ability to consistently beat competitive investment performance benchmarks.
Long-term Disciplined Investment Strategy
Northwestern Mutual’s investment objective is to than investment-grade fixed income securities,
generate superior returns under a variety of economic providing a distinct advantage to Northwestern
conditions, while maintaining a well-balanced and Mutual policyowners.
diversified portfolio to preserve the company’s
exceptional financial strength. This time-tested Consistent with the company’s investment policy,
strategy fundamentally supports Northwestern Northwestern Mutual may also enter into
Mutual’s ability to deliver lifelong financial security transactions that are designed to manage the
to its policyowners and clients. company’s exposure to fluctuations in interest
rates, foreign currency exchange rates and market
Northwestern Investment Management Company, volatility. These strategies include the use of forwards,
LLC and Mason Street Advisors, LLC, both wholly futures, options and swaps. In implementing these
owned subsidiaries of Northwestern Mutual, strategies, the company closely manages and
invest the company’s managed assets in accordance monitors counterparty risk, utilizing minimum
with the company’s investment policy. Consistent with ratings requirements, maximum exposure limits
this policy, the company invests approximately and collateral agreements, which require the
80 percent of managed assets in investment- counterparty to post collateral should the market
grade bonds and other fixed income instruments, value exceed established thresholds.
and the remaining 20 percent in equities and high-
yield bonds. Ultimately, the combination of asset diversification,
active portfolio management and a long-term
Fixed income investments represent the core perspective supports outstanding product value
of Northwestern Mutual’s investment portfolio,
providing a stable foundation for the overall
and enhances the company’s financial strength.
Northwestern Mutual’s prudent investment strategy | 1
portfolio, while generating current income. and unique business model have contributed to
Northwestern Mutual’s portfolio of fixed income more than 150 years of strength and stability. n
investments is largely highly rated and is well
diversified within and among fixed income sectors
to minimize risk.
Northwestern Mutual’s equity investments Investment Principles
include private equities, real estate and public • Maintain a balance between high-quality fixed
common stock. Typically, such diversification income investments and higher-risk assets.
across different types of equities enables the
company to offset weakness in any one area with • Diversify among and within asset classes and
attractive performance in another. Furthermore, specific investments.
similar to fixed income, equity investments are • Participate in all major asset classes and
highly diversified across countries, industries, market sectors.
company sizes and other parameters. • Manage risk across the entire investment
Northwestern Mutual’s significant allocation portfolio and preserve capital to assure
to equities and high-yield bonds – investments financial strength.
with a higher risk level and corresponding higher • Seek opportunity in investment activity.
return potential – relative to fellow insurers is • Manage portfolios to maximize total returns.
a distinguishing component of the company’s
investment portfolio. Over the long term,
these investments have generated higher returns
Northwestern Mutual’s Advantage
Northwestern Mutual’s great financial strength allows The company benefits from a longer-term liability
the company to invest its general account portfolio structure than most other companies in the industry,
in a steady and consistent manner. It provides the which also allows it to invest with a longer investment
confidence to endure the ups and downs of the horizon. The product mix supported by the investment
investment markets that often produce favorable portfolio (illustrated below) is composed mostly
returns. Financial strength results from the of traditional participating life insurance, which is
company’s core strategic attributes, including its considered one of the most stable financial products.
mutual company structure, excellent persistency Owners of participating life insurance policies tend to
and mortality, conservative expense management hold those policies for the long term, thus assuring that
and significant capitalization. the assets backing those policies can be put to work
regardless of short-term market conditions.
One measure of financial strength is the company’s
total surplus level, which provides a cushion against Investment Portfolio Product Mix
the volatility of higher risk assets (that come with Investment Portfolio Product Mix
commensurately higher rewards), while maintaining 2009 Year-End
the overall strength of the company. Northwestern Percentage of assets attributable to specific products
Mutual’s total surplus, composed of surplus and asset
Life Insurance 89%
valuation reserve (AVR), remains sound compared to
its historical levels (as illustrated in the chart below). Annuities 6%
Surplus provides the company and its policyowners Disability and Long-Term
Care Insurance 5%
with protection against the unexpected, while 5%
2 AVR supports a long-term investment strategy by 6%
cushioning surplus against market volatility.
Surplus and asset valuation reserve (AVR) as a percentage of
general account insurance reserves (consolidated statutory basis)
1970 1975 1980 1985 1990 1995 2000 2005 2009 2
This contrasts to some companies who must deal with the uncertainty of products that produce less predictable
incoming and outgoing cash flows.
Financial strength. Stable products. In addition, policyowners who remain with Northwestern Mutual for many
years, as a group, tend to live longer lives and pay premiums more consistently. This combination of factors
provides the company with consistent and dependable cash flow for new investment activities, while allowing
the patience needed for investments to grow. It also allows Northwestern Mutual to invest in more asset classes
than its competitors. And it gives the latitude to invest in generally higher-yielding asset classes, such as private
investments, while focusing the investment strategy and objectives on the long-term best interests of policyowners
and clients. n
Balance and Diversification
Northwestern Mutual’s optimum portfolio balance mortgage loans. The equity portfolio includes
relies largely on a portfolio of investment-grade commercial real estate and public and private
fixed income assets, with the balance made up common stock. Northwestern Mutual achieves even
of equities and high-yield and mezzanine debt. greater diversification by selecting a large number of
This balanced strategy is expected to provide above- investments within each asset class. In other words,
average returns through a variety of business cycles we don’t “bet the ranch” on any one investment.
and economic conditions. Company investment managers also participate in
all major asset classes and market sectors because
In addition to maintaining a balanced portfolio, history has proven that no single asset class is always
the company diversifies by investing in a variety of
asset classes. The fixed income portfolio primarily
includes public and private bonds and commercial
the highest-performing. As shown in the graph
below, the performance of asset classes varies from | 3
year to year. n
Northwestern Mutual Asset Class
Northwestern Mutual Asset Class Performance Rank Performance Rank
One-year total returns
One-Year Total Returns
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Performing R.E. Private Fixed R.E. Public Private Private Private Private Private Fixed
Public Fixed Private Fixed
Equities Income Mortgages Equities Equities Equities Equities Equities Income Income
R.E. R.E. Public Fixed Public High Private R.E. Private Private Private Fixed Private
Mortgages Mortgages Income Yield Mezzanine Equities Mezzanine Mezzanine Income Mezzanine
Public Fixed Public Fixed Private Fixed R.E. Private R.E. Public R.E. Public High
Income Income Income Equities Mezzanine Equities Equities Equities Yield
Private Fixed R.E. R.E. Private Public Public Public R.E. Private Public
Income Equities Equities Mezzanine Equities Equities Equities Equities Equities Equities
Public Private Private Public High R.E. Private Fixed
Convertibles Convertibles Convertibles Convertibles
Equities Mezzanine Equities Yield Mortgages Income
Private Public High R.E. Public High Public High Public Fixed Public High R.E.
Equities Yield Equities Yield Yield Income Yield Mortgages
Public High Private Public High Private Fixed Private Fixed Private Fixed R.E. Private Fixed Private Public Fixed
Yield Mezzanine Yield Income Income Income Mortgages Income Mezzanine Income
Private Private Private R.E. R.E. Public Fixed Private Fixed R.E. Private
Mezzanine Equities Equities Mortgages Mortgages Income Income Mortgages Equities
Public Public Public Fixed Public Fixed R.E. Public Fixed Public High Public R.E.
Equities Equities Income Income Mortgages Income Yield Equities Equities
Opportunistic and Flexible
In 2009, Northwestern Mutual invested more example, in 2009 most new purchases of fixed
than $15.7 billion in new investments, following income instruments were directed to high-quality
a “flexible allocation” policy, which allows the public bonds, with a focus on corporate issues and
company to allocate money to areas that offer U. S. agency residential mortgage-backed securities,
the greatest value at the time. As the relative both of which offered relatively attractive yields in
attractiveness and volatility of different assets an environment of continued low interest rates. n
changes, so does the allocation strategy. For
Investment Portfolio Breakdown
Fixed Income Northwestern Mutual’s investments in private bonds
Northwestern Mutual’s fixed income investments and preferred stock provide further diversification
serve as the foundation of the overall investment to the company’s overall portfolio and often benefit
portfolio. Fixed income assets include money market from higher yields and more attractive terms relative
investments, public bonds and preferred stock, to public bonds.
private bonds and preferred stock, and commercial Northwestern Mutual concentrates its mortgage
mortgage loans. The fixed income portfolio is lending in commercial mortgage loans on fixed-
designed to provide liquidity and current income, rate permanent loans greater than $15 million,
while minimizing loss of principal. secured by income-producing property. The company
This well-diversified portfolio is generally invested invests primarily in apartments, office buildings,
in investment-grade assets. shopping centers and industrial warehouses
throughout the nation. These transactions offer
The company’s investments in fixed income more control over both property quality and choice
instruments are actively managed to maximize of borrowers than publicly traded commercial
returns, while preserving a high level of safety, mortgage-backed securities. This portfolio has
liquidity and diversification. To manage portfolio historically produced attractive yields and low
risk, investments are broadly diversified by delinquency and loss percentages.
Fixed Income Portfolio Composition
Total fixed income investments: Corporate Bonds 49% 2%3%
$116.3 billion (statement value) 3%
Mortgage Loans 17%
Residential Mortgage-Backed** 16% 7%
US Government/Agency Bonds 7%
Commercial Mortgage-Backed 3% 16% 49%
Money Market 2%
* Includes U.S. Agency PTCs & CMOs
** Includes municipals
Equities Real Estate Equities
Equity investments are a distinguishing element of Commercial real estate equity investments at year-
the company’s investment portfolio. Northwestern end 2009 totaled $5.3 billion, or 4 percent of total
Mutual’s equity portfolio is broadly diversified managed assets. The real estate equity portfolio
across private equities, real estate and public consists primarily of apartment, warehouse and
common stock. At year-end 2009, this portfolio office properties held through both direct and
represented 12 percent of total managed assets. joint venture ownership. Through partnerships
with developers nationwide, Northwestern Mutual
Over time, the company expects equities to develops apartment communities and warehouse
contribute higher returns and provide incremental properties and also purchases properties directly.
diversification to the overall portfolio. The Asset managers, operating out of regional real
company’s significant allocation to equities has estate field offices, monitor local markets and
enhanced Northwestern Mutual’s dividend scale actively manage the investment properties, creating
and financial strength. additional value.
Private Equities Public Common Stock
Private equity investments at year-end 2009 At year-end 2009, the public common stock
totaled $6.5 billion, or 5 percent of total managed portfolio totaled $3.5 billion, or 3 percent of total
assets. The private equity portfolio includes direct managed assets. The public equity portfolio includes
mezzanine and equity investments in buyouts investments in domestic large-, medium- and small-
of companies, limited partnerships, and direct capitalization companies, as well as in foreign
investments in selected other companies and companies. Risk is well diversified by company size,
subsidiaries. Northwestern Mutual’s private equity industry and country.
investments offer an additional potential source of
attractive returns, primarily in the form of capital
gains. Additionally, these assets have generally
exhibited lower volatility than their public market Over time, the company expects equities to
counterparts and provide diversification benefits. contribute higher returns and provide incremental
Northwestern Mutual’s long-term investment diversification to the overall portfolio. The
horizon allows the company to hold significant company’s significant allocation to equities
investments in this asset class. has enhanced Northwestern Mutual’s dividend
scale history and financial strength.
Investment Portfolio Product Mix
Equity Portfolio Composition
Private Equities 43%
Total equity investments:
$15.3 billion (statement value)
Real Estate 34%
Public Common Stock 23%
Colors on all charts should follow
Quality of Fixed Income Portfolio this sequence from the highest
number to lowest
percentages/values – PMS 293 blue,
PMS 7449 purple,
PMS 145 orange,
Quality of Public and Private Bond Ninety percent of the company’s portfolio of
and Preferred Stock Investments public and private bonds and preferred stock was
2009 Year-End rated investment grade (BBB or greater), and 36
percent held the highest-quality rating of AAA.
AAA 36% 3% 3%
4% Credit quality is defined as the ability of the
AA 9% issuer to pay interest and principal on a timely
36% basis. These ratings are based on the higher of the
credit ratings from Standard & Poor’s, Moody’s
28% Investors Service or Fitch Ratings when available,
Investment Grade or internal rating evaluations when third-party
BB 4% ratings are not available. n
B 3% 17%
Investment Portfolio Performance
Northwestern Mutual’s portfolio strategy is to Given the characteristics of different types of
hold a higher percentage than most other investments and how they perform relative to one
insurance companies of equities and high-yield another (covariance), modern portfolio theory says
| bonds – investments with a higher risk level
and corresponding higher return potential –
in a well-diversified, actively managed portfolio.
public, private and real estate equities can be mixed
with a bond portfolio and, in the process, reduce
risk while adding return. Northwestern Mutual not
This strategy has proven to reduce overall portfolio only believes this in theory, it has proven it
volatility, while increasing returns over time. in practice.
That may sound counterintuitive, but the reason During the 20-year period ending in 2009,
it works can be explained by modern portfolio the investment return to policyowners in the
theory, which includes a concept known as the form of the dividend scale interest rate was higher
efficient frontier. If your portfolio consisted of than it would have been if the portfolio had
100 percent common stocks, you would expect been 100 percent invested in bonds, as shown in
high returns, but with high risk or high volatility the “Risk vs. Reward” graph on the next page.
of return. This portfolio would be far too risky Just as important, this additional return was earned
for Northwestern Mutual policyowners and, with lower volatility than if the assets had been
probably, for most other people. 100 percent invested in stocks.
At the other end of the spectrum is a portfolio
100 percent composed of bonds. Obviously,
the risk in this portfolio would be much less than
that of an all-stock portfolio, but could not be
expected to generate the same high returns.
Risk vs. Reward
1990-2009 Hypothetical Portfolio
Northwestern Mutual 80% Bonds
Dividend Scale 12% Stock
Interest Rate* 8% Real Estate
“T E F ”
Rate of Return (Reward)
0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%
Standard Deviation (Risk)
Source: The performance data above is based on the following investment indices: BarCap US
Agg Bond TR USD, S&P 500 TR, NCREIF Property and Ibbotson US 30 Day T-Bill TR.
All points in graphic assume no taxes or transaction costs.
* Rate for unborrowed funds after charges (see description on back cover).
Investment Performance Summary
Total rates of return through 2009 year-end
Northwestern Mutual Return
Corporate Benchmark* 0%
5-Year Total Return 10-Year Total Return
* Individual benchmarks are selected for each fixed income and equity class, based on common and
custom indicies having similar investment profiles, objectives and timing factors. These individual
benchmarks are then blended to arrive at the aggregate benchmarks displayed above.
Because Northwestern Mutual invests a greater But Northwestern Mutual offers an additional
portion of its portfolio in assets with a higher risk advantage: expert investment management.
level and corresponding higher return potential, Over the past five and ten year periods,
the portfolio enjoys an investment return greater the actual total rates of return for the general
than if invested completely in investment-grade fixed account investment portfolio have exceeded
income instruments (see “Risk vs. Reward” at the the competitive benchmarks. For policyowners,
top of the page). the performance of the portfolio is the primary
factor that determines the company dividend
scale interest rate. n
Portfolio Performance and Northwestern
Mutual’s Dividend Scale Interest Rate
How can Northwestern Mutual achieve a dividend • Second, Northwestern Mutual’s investment
scale interest rate applied to life insurance cash strategy is to actively manage a well-diversified
values that currently exceeds the yield available portfolio with a long-term investment horizon,
through most government-backed securities? as explained earlier in this piece. The company’s
ability to generate competitive total returns,
Two key factors explain how the company can including both current income and capital
support a competitive dividend scale interest rate in appreciation, while preserving the company’s
a variety of different financial environments. exceptional financial strength determines future
dividend scale interest rates.
• First, the dividend scale interest rate is a
portfolio rate, based on the total yield of all It is, of course, impossible to know what the
applicable investments. The portfolio includes dividend scale interest rate will be in the future.
older fixed income investments made at higher The graph below provides a historical view of how
rates and newer fixed income investments made Northwestern Mutual’s dividend scale interest rate
at the current lower rates. Thus, the collective compares to rates on U.S. government securities.
performance of the portfolio will differ from Note that the portfolio dividend scale interest rate
prevailing new investment rates. This approach tends to follow the general trend of new money
for determining an interest rate is called the rates, but lags and is less volatile. In other words,
portfolio method. it is generally lower than the new money rate when
| new money rates are rising and higher than the new
money rates when new money rates are falling. n
Long-Term Government Bond Yields Compared to
Northwestern Mutual’s Dividend Scale Interest Rate
Source: Bloomberg 30-Year Treasury Bonds
16 Northwestern Mutual Dividend Scale Interest Rate 16
14 Long-Term Government Bond Yields 14
1928 1933 1938 1943 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2009
How Is the Dividend Scale Interest
Northwestern Mutual’s dividend scale interest rate higher dividend rates to its new customers than
is based on the actual investment performance of the it could under the portfolio method. But there’s a
applicable assets in the investment portfolio. This catch; since there is only so much total investment
performance is referred to as the portfolio earned income regardless of how it is distributed, paying
rate. A portfolio earned rate reflects a company’s more to new policyowners means paying less to
overall rate of return on its assets, regardless of older policyowners. Northwestern Mutual believes
when the assets were acquired, so the portfolio that the portfolio method of crediting interest is
approach is quite simple: determine the ratio of currently the best approach for its regular, fixed-
total investment earnings (interest, dividends, rents, premium life insurance policies. These policies
capital gains and so on) to invested assets (bonds, have premiums that are paid over a long period,
stocks, mortgages and other investments). The result during both rising and falling interest rate cycles.
is one interest rate – even though the assets consist The portfolio method of crediting interest protects
of many different investments made at different policyowners by smoothing the effects of large
times, each earning a different rate of return. swings in current interest rates.
To arrive at the dividend scale interest rate,
a deduction is made from the portfolio earned rate,
to cover certain items such as investment expenses, It is important to note that the dividend scale
taxes and a contribution to surplus. The dividend interest rate, which reflects the performance of
scale interest rate is credited to all applicable
life policies even though premiums were paid at
the company’s investments, is just one element
that determines the actual dollar amount of | 9
different times and were invested at different dividends. The other important factors include
interest rates. mortality charges (representing the cost of death
benefits paid to survivors) and expense charges.
Northwestern Mutual has always used the portfolio
In fact, about 60 percent of the expected 2010
method of crediting interest in determining life
insurance policy dividends. Most other major life payout is attributable to favorable expense and
insurers have historically followed the portfolio claims experience. It is also important to note
method, until interest rates began to climb in the that Northwestern Mutual’s goal is to pay the
late 1970s. That’s when “new money” methods were highest possible policyowner dividends consistent
adopted by some – with the rationale that newer with maintaining a strong financial position. Since
policyowners should benefit from the higher interest Northwestern Mutual is a mutual company, it
rates available when their premiums were paid, has no stockholders and, thus, no dividends to
while older policyowners should be credited at the be paid to stockholders. All the money earned
lower rates existing when their premiums were paid. over and above what is needed to pay benefits to
The “new money” method of crediting interest, policyowners, to run the operation and to keep the
in contrast to the portfolio method, has a lot of company on a solid financial footing, is returned to
glamour when interest rates are rising. In a rising policyowners as dividends.
interest rate environment, a company could pay
This material describes the investment strategy for the managed assets in Northwestern Mutual’s general account
and the investment performance of these assets. The company’s dividend scale interest rate for unborrowed funds
reflects the investment performance of the managed assets net of taxes and any contribution to surplus. This rate is
used for crediting interest on policy values after deducting mortality and expense charges. Because of the mortality
and expense charges, the dividend scale interest rate should not be used as a measure of the policy’s internal rate
of return. The dividend scale and the underlying interest rates are reviewed annually and are subject to change.
Future dividends are not guaranteed, although Northwestern Mutual has paid a dividend every year since 1872.
Decisions with respect to the amount and appropriate allocation of divisible surplus for participating policies of
Northwestern Mutual are left to the discretion and business judgment of the Board of Trustees. There is no guaranteed
approach or formula for determining the amount of divisible surplus or the manner in which it is allocated as dividends.
Further, there is no guarantee that any dividend will be paid on an individual policy in any given year. Therefore,
the approach described in this brochure for determining dividends, the dividend scale interest rate and other dividend
factors are subject to change without notice.
The dividend scale interest rate for a particular policy is the interest rate used for crediting interest on policy values
after deducting mortality and expense charges. It reflects investment performance of both managed assets and policy
loans. Depending on the type of policy, either individual policy loan activity or average loan activity of all policies in the
dividend class is reflected.
The Northwestern Mutual Life Insurance Company’s operational results, investment holdings and financial
position for the year ending 12/31/2009 are reported in the company’s Consolidated Financial Statement (CFS).
PricewaterhouseCoopers LLP is the company’s independent auditor. A copy of Northwestern Mutual’s CFS is available
online at www.northwesternmutual.com | About Northwestern Mutual | Financial Information and Reports, or by
written request to: Northwestern Mutual, Corporate and Executive Communications, N04, 720 E. Wisconsin Avenue,
Milwaukee, WI 53202.
The Northwestern Mutual
Life Insurance Company • Milwaukee, WI
29-4692 (0502) (REV 0810)