OUR MUTUAL ADVANTAGE

Transcription

1 OUR MUTUAL ADVANTAGE

2 Of all the reasons policyowners and clients value Northwestern Mutual as their partner on the path to financial security, one is paramount. It s often called the company s mutual advantage. As a mutual life insurance company, Northwestern Mutual did not invent the concept of mutuality. Over time, however, and continuing today, the company has become what many point to as the pre-eminent example of the power inherent in the mutual form of corporate governance. Indeed, Northwestern Mutual offers dramatic evidence that a company governed by mutual values can be, in its field, best in the world. 1 The mutual structure of Northwestern Mutual allows the company to act differently than most publicly traded stock companies, which typically must split their focus between customers and shareholders. As a mutual, Northwestern Mutual has no shareholders. The company s mutual structure allows it to focus solely and directly on its customers. Customers buying life insurance, disability insurance and annuities become members the instant they purchase their policies. In the typical stock company, profits go to shareholders. In contrast, Northwestern Mutual is more like a cooperative. After setting aside a safe margin for reserves and surplus each year, the company returns what would otherwise be profits to its participating policyowner members in the form of dividends. Customers of our subsidiary, Northwestern Long Term Care Insurance Company, hold policies that have the potential to pay dividends in the future if actual experience proves to be more favorable than pricing expectations. In other words, Northwestern Mutual s mutual structure brings into alignment the interests of both policyowners and company. For policyowners, that s an enormous mutual advantage. There are others. As a mutual, the company can focus the investments in its general account over the long term. That s another reason why respected experts praise the company s mutual structure and values as the underpinnings for its strong competitive position 2 in which policyowner value and security are the paramount focus. 3 As practiced by Northwestern Mutual, however, mutuality extends well beyond these basic mutual advantages. The customer benefits of our mutuality are manifested in four key values Doing what s right for policyowners and other clients Building long-term relationships to meet their needs Building and preserving financial strength Offering world-class products and expert guidance that address changing needs over a lifetime. We invite you to explore these values on the following pages, to see how our brand of mutuality sets us apart. We believe you will find it to be a mutual advantage. 1 Fortune magazine, Global Most Admired, March 7, Moody s Investors Service, March Standard & Poor s, July

3 THE RIGHT THING Ever since Northwestern Mutual was founded in 1857, generations of company leaders have used a single test in making corporate decisions: Is what we re doing in the best long-term interest of our policyowners? This steadfast customer focus requires a special kind of purposeful fairness. It has produced a tradition as old as the company equitable treatment for all. Mutuality in practice Elsewhere in life insurance, inequitable treatment of some over others became commonplace. Many companies tried to attract new customers by offering special or improved benefits not available to current policyowners. This is not the practice at Northwestern Mutual, where the mutuality that sets us apart extends to our practice of operating on our policyowners behalf in very tangible ways, including pricing, underwriting, claims, service and more. Retroactive benefits One practical example is Northwestern Mutual s approach to retroactivity. As new and enhanced benefits to Northwestern Mutual life and disability insurance products become available, existing policyowners are given the opportunity to acquire them, whenever possible and practical. It (is). pre-eminently the policyowner s company. - Executive Committee of the Board of Trustees, 1888 The company is a mutual organization in the strictest and best sense This is a company operated by the policyholders and for the best interests of the policyholders. - Examination of the Wisconsin Insurance Department, 1905 Our beliefs are not the easy way but we think they are the right way. We do not propose to change our philosophy of mutuality and fairness to all policyowner-members. This company is different. - Francis Ferguson, President and CEO, Northwestern Mutual, 1973 Northwestern Mutual executives use a simple yardstick to measure every business venture, every business decision, every contract: Is it in the best interest of the 2.8 million policyowners? - Best s Review, March

4 Throughout the years, the company has offered several life insurance amendment programs, or Updates, which involved massive efforts to extend new advantages to existing policyowners. In one program alone, Northwestern offered life insurance policyowners $4.5 billion of additional insurance at no increase in premium. Forbes magazine recognized the unusual nature of this commitment: The tactics of Milwaukeebased Northwestern Mutual are a little bit unconventional. It has a habit of attracting new customers by giving away money to old ones. 4 4 Forbes, Shopping for Life, February 22, 1988 We believe mutuality provides Northwestern Mutual with great competitive advantage and is one of the factors that has enabled the company to remain financially strong and to keep decisions focused on longer term implications (rather than on reported quarterly earnings.) - Report of the Policyowners Examining Committee, 2001 Our mutual company has prospered for 148 years by pursuing a model of long-term commitment to policyowners. We believe the company, through its talented employees, will continue this tradition...a present of promises met and a future of promises delivered. - Report of the Policyowners Examining Committee, 2004 The commitment to do the right thing for policyowners, supported by the advantages of having a mutual structure rather than a publicly traded stock structure, provides a common value system that drives and shapes every aspect of Northwestern Mutual s business. - Report of the Policyowners Examining Committee, 2002 Because of its ongoing commitment to mutuality, policyowner value comes first as opposed to shareholder value. As a result, policyowners receive demonstrably better economic value in two ways: industry-leading dividends and the promise that the company will be there when claims come due. - Report of the Policyowners Examining Committee,

5 LONG-TERM VIEW Steeped in mutuality, Northwestern Mutual enjoys unusual customer loyalty and is commonly ranked as a leader in customer satisfaction. 5 Policyowners not only keep their policies, they keep returning for more. In a typical year, more than half of life insurance purchases are made by existing and satisfied customers. 6 The key to encouraging such loyalty isn t only how we attract customers initially, it s what we do to keep them. Going forward, we re going to continue to drive home the value proposition of excellent product value and long-term customer relationships built by our financial representatives. - Ed Zore, President and CEO, Northwestern Mutual, Leaders magazine, 2002 Whether it s product development, investment selection or other activities that contribute to our lifetime relationships, Northwestern Mutual takes the long view with an eye toward lasting strength and an enduring mutual advantage. One key to building long-term relationships is to provide superior long-term product value. Northwestern Mutual has and continues to return outstanding dividend payouts. 7 The company s consistent results are powered by careful underwriting, vigilant expense control and prudent but productive investment practices. Superior value The company provides superior value, in part, through its general-account investment strategy. This strategy emphasizes long-term investments, which typically outperform shortterm investments. The result has been that policyowners receive steady, stable, excellent value. That s why Northwestern Mutual pays far more individual life insurance dividends each year than any other company ($3.9 billion in 2005). 8 Lasting relationships It s often said that Northwestern Mutual already has what many others in financial services hope to create lasting customer relationships built on confidence and trust. Building such relationships is truly a team effort. And this team effort begins with Northwestern Mutual s nationwide field force of financial representatives. Northwestern Mutual has long been committed to maintaining a well-trained corps of financial representatives who make this profession their lifelong career. Rooted in the Northwestern Mutual culture, our financial representatives are: Trained to develop lifetime clients rather than one-time customers; to address long-term needs and to help clients build sound plans aimed at ensuring their financial security. Committed to providing service throughout their clients lifetimes. Attracted to and joined with Northwestern Mutual through a bond of common values. 4 5 American Customer Satisfaction Index, February Produced by the Stephen M. Ross Business School at the University of Michigan in partnership with the American Society for Quality and international consulting firm, CSI Group. 6 Source: Northwestern Mutual 7 For a fuller explanation of dividends, see inside back cover 8 Source: A.M. Best Company. Data calculated by Northwestern Mutual

6 Since some 54 years ago, when I took out a small life policy, I have been very impressed with the way your Trustees have guided your company, and more impressed with how you deal with your policyowners. - California policyowner, 1993 Listening is key Listening to clients has been a historic company strength. One tradition that keeps us sensitive to customer needs is our Policyowners Examining Committee. Since 1907, the company s Board of Trustees has annually named a group of three to five policyowners to produce an independent and unrestricted evaluation of company operations, management and strategic plans. The committee s report is published each year in our Annual Report. Important improvements in company structure and operations have resulted from this unique annual customer check-up. The Policyowners Examining Committee is an extraordinary thing. I don t know of any company, insurance or not, that opens up its entire shop, in intimate detail, to its customers. The ultimate winners are the policyowners. - George Dickerman, Policyowner, Trustee and former member, Policyowners Examining Committee, Chairman (Retired) Spalding Sports Worldwide Over the years, we have always thought in terms of the individual rather than the mass and have consciously built toward a personal relationship between the policyholder, the agent and the company. - Edmund Fitzgerald, President and CEO, Northwestern Mutual,

7 FINANCIAL STRENGTH Financial strength is and has been integral to Northwestern Mutual s vision for policyowners and clients. Our mutuality sets us apart financially. On a basic level, of course, financial strength is an obligation. It arises from our commitment to policyowners, from the personal security they entrust with us. Company founders pioneered a culture of consistently receives the highest marks from rating agencies, which means it is fiscally strong enough to outlast you. - Worth magazine, Editors Choice Award July/August 2002 scrupulous responsibility for policyowner funds to provide superior value and pay claims promptly on long-term financial contracts that often remain in force for decades. Throughout our history, this attitude and approach has kept the company on a strong and solid course during difficult economic times that rocked many others in the business world. Clearly, Northwestern Mutual has achieved financial strength of major proportions. Our approach to mutuality, including the long-term investment strategy and tight focus on operating fundamentals, helps us maintain the highest possible financial ratings. 9 6 Northwestern Mutual is committed to retaining its mutuality, which Moody s believes can be a competitive advantage in today s markets. While stock companies have greater access to capital, advantages of remaining a mutual company include extremely competitive returns to participating policyowners in the form of dividends and reduced shortterm scrutiny from outside parties, permitting the company to take a longer-term planning horizon (such as taking advantage of favorable longterm equity market returns to maintain high policy dividends). - Moody s Investors Service, Rating Analysis, April Moody s, Aaa; Standard & Poor s, AAA; A.M. Best, A++; and FitchRatings, AAA If you find a client with an existing Northwestern Mutual Life policy, simply insist on retention of that policy. Northwestern Mutual is, by quite a margin, the best. So it was in 1955 when I went into the business. So it will likely be long after I m dead. - James Hunt, Consumer Federation of America Web site ( September 28, 2001 The (insurer financial strength) ratings reflect Northwestern s market-leading individual life insurance business, its extremely strong capitalization and very strong operating performance. Other factors include the company s very strong and unique investment strategy and strong liquidity. - Standard & Poor s Insurance Rating Analysis, July 2004

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9 BUILDING BLOCKS OF MUTUALITY Superior life insurance value for the policyowner rests on our ability to produce outstanding results in these four areas: Mortality Expenses Persistency Investments These four value-producers are building blocks of mutuality. Northwestern Mutual excels at all four. Superior Mortality A periodic industry study allows Northwestern Mutual to compare its mortality experience to the combined mortality of Northwestern and 20 of its major competitors. In simple terms, Northwestern Mutual policyowners, on average, tend to live longer. The comparison below shows the first 15 policy years, covers all ages, and includes the best classes of smokers and non-smokers the vast majority of Northwestern Mutual s insureds. Northwestern Mutual has consistently experienced lower mortality than its competitors. In the latest study, its mortality experience was about 35% better than the intercompany average. Because the average company pays proportionately more in death benefits than Northwestern Mutual does, the average company has that much less to return in dividends to surviving policyowners. We attribute this superiority in mortality to a field force that seeks out people who live responsibly, and to a medical and underwriting staff exceptionally skilled in assessing health risks. This contributes to superior value for our policyowners. Society of Actuaries Comparative Mortality Study Medical & Paramedical Combined All Ages, First 15 Policy Years Intercompany Average Northwestern Mutual 140% 105% 70% 35% Source: Society of Actuaries Comparative Mortality Studies Prepared and calculated by The Northwestern Mutual Life Insurance Company, Milwaukee, WI

10 Low Expenses The company is noted for its frugality and its ability to keep costs down. This has been a hallmark of the company s management, decade after decade. It remains a key competitive advantage today and a key ingredient of superior value for the customer. As an example, Northwestern Mutual s expenses, as measured on its principal product line, have consistently been about one-third less than the industry average. These expense savings can provide additional value for policyowners in the form of dividends and surplus. Ordinary Life Expenses as Percent of Premium* Company** Northwestern Mutual 18.6% 17.7% 18.1% AEGON Jefferson-Pilot Manulife Financial (1) Pacific Life New York Life Guardian Prudential American Express Met Life & Affiliates (2) State Farm Principal Lincoln National Mass Mutual AXA Financial (3) Industry Average * Direct premiums, excluding dividends to additions ** Family data (1) Primary Companies John Hancock, John Hancock USA (2) Primary Companies New England, General American, Metropolitan Life (3) Primary Companies Equitable, MONY Source: A.M. Best Company, prepared and calculated by The Northwestern Mutual Life Insurance Company, Milwaukee, WI. Doing what is best for the policyowner and creating policyowner value (rather than shareholder value) remains fundamental to the shared value system of the organization. - Report of the Policyowners Examining Committee, 2001 Northwestern Mutual has become a model of the life insurance company that did things right. Northwestern has stuck to selling traditional kinds of policies makes its decisions on conservative standards, and controls costs aggressively. - The New York Times, August 30, 1992 Our character means 108 years of adherence to principles and practices that have produced outstanding results. Our record of quality performance and integrity gives this company unique character. - Donald Slichter, President and CEO, Northwestern Mutual,

11 10 As it happens, Northwestern, the master of loyalty, is also famous for its careful cost management yet all of Northwestern s savings would not sustain superior production if they weren t reinvested in the delivery of superior value to customers and agents, earning their loyalty in the process. - Frederick Reichheld, The Loyalty Effect, 1996 A commandment that flows from our credo is a policy of aggressive fairness. We treat all of our policyowners with the same thorough respect. - Donald J. Schuenke, President and CEO, Northwestern Mutual, 1988 Our company has embraced mutuality for 143 years. But ironically, today, as more and more companies abandon the mutual form, the advantage of mutuality is finally getting its rightful attention. We like being a mutual company. - James D. Ericson, President and CEO, Northwestern Mutual, 2000 Excellent Persistency The third contributor to policyowner value is persistency, the degree to which policyowners keep what they have purchased. A low lapse rate leads to better mortality results, better cash flow for investments, and a larger base over which to spread expenses. The latest available data shows Northwestern s annual life insurance lapse rate to be almost half the industry average. The company also regards its leadership position in persistency as important to the consumer for two reasons. First, it is perhaps the truest measure of customer satisfaction people voting with their dollars, so to speak. And secondly, persistency is an indicator that the products were properly bought and properly sold in the first place. People keep the policies in force for the simple reason that the products are filling a real need. Lapse Ratio by Amount Combining New Business & Inforce Business Company* Northwestern Mutual 4.5% 4.0% 3.9% American Express Prudential Mass Mutual New York Life Lincoln National Principal Manulife Financial(1) State Farm Met Life & Affiliates (2) Pacific Life Guardian Jefferson-Pilot AXA Financial (3) AEGON Industry Average * Family data (1) Primary Companies John Hancock, John Hancock USA (2) Primary Companies New England, General American, Metropolitan Life (3) Primary Companies Equitable, MONY Source: A.M. Best Company, prepared and calculated by The Northwestern Mutual Life Insurance Company, Milwaukee, WI.

12 High-Quality Investment Portfolio The final building block of superior value and of our unique brand of mutuality is how we manage our general-account investment portfolio. Northwestern Mutual invests in all the major asset classes and market sectors, maintaining a diversified portfolio that blends fixed income and equity investments. The company is opportunistic in investment activity and value-oriented in its investment approach. It can take a long-term perspective and in some cases can be more aggressive with portions of its investment portfolio. This strategy allows Northwestern Mutual to maximize total returns with reduced volatility in an effort to increase investment income and create additional value for policyowners. 10 Small wonder that observers refer to this competitive advantage as the power of the portfolio % 15.0% Public Bonds & Preferred Stock 45.1% 3.8% Private Bonds & Preferred Stock 16.9% Private Equities & Subsidiaries 3.1% 7.8% 5.0% 18.3% Source: Northwestern Mutual 10 For a fuller explanation of the investment portfolio, see Northwestern Mutual s brochure The Power of the Portfolio 11

13 MEETING CHANGING NEEDS FOR LIFE Northwestern Mutual s world-class insurance products result from a vision and passion to be simply the best in quality and value. We have always aimed to Provide superior products Avoid fads and gimmicks Upgrade our policies in both the scope of coverage and ability to provide better benefits at lower costs. This insurance and financial firm has zero new-economy glamour, and that s just fine. It s only gaining market share, boosting sales, and successfully retaining its topperforming sales agents. - Sales and Marketing Management, #1 Sales Force: Co-Winner, July 2001 In recent decades, policyowners have brought to us a broader range of financial needs. Northwestern Mutual has answered with more diverse products and services. While keeping our focus on world-class insurance, we ve also added a careful selection of related financial products. The Northwestern Mutual Financial Network These financial products are presented to customers in a coordinated way through the Northwestern Mutual Financial Network. The Network, the marketing name for the sales and distribution arm of Northwestern Mutual, includes both the company s financial representatives and the financial specialists who help them meet each client s unique needs. The combination of financial representatives and specialists provide needs-based analysis, expert guidance and innovative solutions to help clients improve financial security through Asset and income protection Education funding Business needs analysis Investment services Employee and executive benefits Retirement solutions and Estate analysis And our mutual advantage thrives. As we continue to do what s right for policyowners, build long-term relationships to meet their needs, build and preserve financial strength, and provide expert guidance, we will draw upon the benefits of the culture and values that have defined our company over time. We have an incredibly high level of integrity and a reputation for doing the right thing. When I first came here in 1969, we were focused on doing what's right for the customer, and that remains our priority today. - Ed Zore, President and CEO, Northwestern Mutual, Leaders magazine,

14 7 Dividends for Northwestern Mutual policies are distributions of the company s surplus. They arise when premiums plus investment income are more than enough to cover company operating expenses (including taxes), claim costs, guaranteed increases in policy cash values and additions to surplus. Dividends are paid annually to policyowners in proportion to company earnings on their policies. However, decisions with respect to the determination and allocation of divisible surplus are at 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. Also, there is no guarantee that any dividend will be paid on an individual policy in any given year. Securities are offered through Northwestern Mutual Investment Services, LLC, Suite 300, 611 E. Wisconsin Ave., Milwaukee, Wisconsin, 53202, NMIS is a member of the NASD and SIPC.

15 Charts contained in this brochure were prepared and calculated by The Northwestern Mutual Life Insurance Company, Milwaukee, WI. The Northwestern Mutual Life Insurance Company Milwaukee, WI (1002) (REV 0805)