Financial Strength
Our level of surplus remains very strong and is more than adequate to protect the company and its policyowners from future uncertainties. The company's ability to withstand the ongoing financial crisis is further enhanced by:
- a strong liquidity position
- a lack of debt obligations or other use of financial leverage,
- the modest risk profile of its insurance products, and
- the financial flexibility of the annual participating dividend decision made by its Board of Trustees.
We began 2008 with total surplus and asset valuation reserve (AVR) of $15.8 billion, a surplus ratio of 14.5% relative to general account insurance reserves.
During 2008, the equity markets took back a significant portion of the capital gains produced during the mid-1990s, as realized and unrealized capital losses reduced surplus and AVR. At year-end 2008, total surplus and AVR was $13.4 billion, with a surplus ratio of 11.5%.
Surplus provides the company and its policyowners with protection against the unexpected, while AVR supports a long-term investment strategy by cushioning surplus against market volatility.
Our Mutual Advantage
Northwestern Mutual is managed for the long-term benefits of its policyowners. This mutual perspective requires a balance between participating dividends and the long-term financial strength and security.
The dividend interest rate credited on most unborrowed life insurance funds will be 6.5% during 2009, down from 7.5% for each of the preceding four years.
In total, dividends to policyowners are estimated to be $4.6 billion during 2009, the third-highest payout in company history — and expected to remain the highest in the U.S. life insurance industry. This includes:
- more than $200 million in total dividends on individual disability insurance, a 29% increase over the prior year.
- almost $83 million to be paid on term life policies, and
- almost $9 million in dividends paid to long-term care policyowners through our subsidiary Northwestern Long Term Care Insurance Company.
Investment Results
As a diversified investor, Northwestern Mutual was not immune to the adverse financial market events of 2008. Realized capital losses, net of taxes, were $4.1 billion. The company's investment guidelines limit exposure to any single asset class, industry or issuer.
The $79.3 billion bond portfolio remains the cornerstone of the general account investment strategy. This portfolio of public and private debt remained well-diversified and high quality, with 89% rated as investment grade at year-end 2008.
The company's $21.7 billion commercial mortgage loan portfolio, underwritten by the company's real estate field offices, had no delinquent, foreclosed or restructured loans.
Commercial mortgage loans remained well-diversified geographically and by collateral property type.
The aggregate ratio of amounts loaned to the market value of collateral properties was 66% at year-end 2008, a reflection of the loan portfolio's underlying credit strength.
While equity investments remain an important part of the company's long-term investment strategy, an additional measure of caution is appropriate in the near term. The company has reduced new investments in equity securities since mid-2008 but remains well-positioned with the surplus capacity and liquidity to participate in the eventual long-term recovery of the equity markets.
Northwestern Mutual strengthened its liquidity position during 2008, increasing its holdings to more than $25 billion in cash equivalents, U.S. Treasuries or government-guaranteed debt.
Our ample liquidity position, combined with significant positive cash flow from operations, provide the means to seize investment opportunities and to assure that the company will promptly meet all benefit obligations to policyowners and their beneficiaries.
Operating Results
Total revenue increased to $21.9 billion for 2008, a 3% increase from the prior year.
Premium revenue increased 2% to $13.6 billion and included growth for each of life, disability and long-term care insurance.
Net investment income increased 4% to $7.8 billion, primarily a reflection of portfolio growth, stable yields on fixed income investments and the high-quality credit profile of the bond and mortgage loan portfolios.
Benefits paid to policyowners or their beneficiaries totaled $6.1 billion during 2008, an increase of 10% from 2007.
Mortality and other claim experience remained favorable, a reflection of the company's careful assessment of insurance risk.
Commissions and home office expenses increased 3% during 2008, reflecting both sales growth in the company's core insurance products and the company's ongoing commitment to home office efficiency and cost control.
After provision for dividends to policyowners and a the one-time benefit of a tax reserve adjustment, net gain from operations for 2008 was more than $1.1 billion, an increase from $381 million in 2007, due primarily to the change in dividend scale for 2009.
Net income, which includes net realized capital gains and losses, was $483 million for 2008, a decrease from $1.0 billion in 2007.
Net realized capital losses during 2008 were due primarily to impairment adjustments, while realized capital gains during 2007 were primarily the result of gains on the sale of appreciated common stocks.