the Power of the Portfolio

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 2010 included about $142 billion of

managed assets backing the company’s insurance and annuity 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 interest component of the dividend scale for traditional permanent life

insurance policies.

In 2011, Northwestern Mutual expects to pay almost $4.9 billion in dividends, mostly

on traditional permanent life insurance policies, fueled in part by the company’s highly

competitive 6.00 percent dividend scale interest rate on unborrowed funds. In 2010,

the company’s total surplus, with the help of investment earnings, grew by $3.4 billion

to $17.6 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 general account investment portfolio supports the dividend scale interest rate

applied to traditional permanent life insurance from Northwestern Mutual.

* The vast majority of managed assets back the company’s surplus and most of the life, disability and long-term care insurance liabilities. The investment strategies described in this booklet apply to the investment of those assets. A portion of managed assets back the remaining liabilities (including fixed-rate annuity liabilities) and have different investment exposures than described in the pages that follow.

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Northwestern Mutual’s investment objective is to generate superior returns while maintaining a well-balanced and diversified investment portfolio to preserve the company’s exceptional financial strength. This time-tested strategy fundamentally supports Northwestern Mutual’s ability to deliver lifelong financial security to its policyowners and clients.

Mason Street Advisors, LLC, and Northwestern Investment Management Company, LLC, both wholly owned subsidiaries of Northwestern Mutual, invest the company’s managed assets in accordance with the company’s investment policy. Consistent with this policy, the company invests approximately 80 percent of managed assets in investment-grade bonds and other high-quality fixed income instruments, and the remaining 20 percent in equities and high-yield bonds.

Fixed income investments represent the core of Northwestern Mutual’s investment portfolio, providing a stable foundation for the overall portfolio while generating current income. Northwestern Mutual’s portfolio of fixed income investments is largely highly rated and is well diversified within and among fixed income sectors to minimize risk.

Northwestern Mutual’s equity investments include private equities, real estate and public common stock. Typically, such diversification across different types of equities enables the company to offset weakness in any one area with attractive performance in another. Furthermore, similar to fixed income, equity investments are highly diversified across countries, industries, company sizes and other parameters.

Northwestern Mutual’s significant allocation to equities and high-yield bonds – investments with a higher risk level and corresponding higher return potential – relative to fellow insurers is a distinguishing component of the company’s investment portfolio. Over the long term, these investments have generated higher returns than investment-grade fixed income securities, providing a distinct advantage to Northwestern Mutual insurance policyowners.

Consistent with the company’s investment policy, Northwestern Mutual may also enter into transactions that are designed to manage the company’s exposure to fluctuations in interest rates, foreign currency exchange rates and market volatility. These strategies include the use of forwards, futures, options and swaps. In implementing these strategies, the company closely manages and monitors counterparty risk, utilizing minimum ratings requirements, maximum exposure limits and collateral agreements, which require the counterparty to post collateral should the market value of a contract exceed established thresholds.

Ultimately, the combination of asset diversification, active portfolio management and a long-term perspective supports outstanding product value and enhances the company’s financial strength. Northwestern Mutual’s prudent investment strategy and unique business model have contributed to more than 150 years of strength and stability. n

Long-term Disciplined Investment Strategy

Investment Principles• Maintain a balance between high-quality fixed

income investments and higher-risk assets.

• Diversify among and within asset classes and specific investments.

• Participate in all major asset classes and market sectors.

• Manage risk across the entire investment portfolio and preserve capital to assure financial strength.

• Seek opportunity in investment activity.

• Manage portfolios to maximize total returns.

The vast majority of managed assets back the company’s surplus and most of the life, disability and long-term care insurance liabilities. The investment strategies described in this booklet apply to the investment of those assets. A portion of managed assets back the remaining liabilities (including fixed-rate annuity liabilities) and have different investment exposures than described in the pages that follow.

2 |

Northwestern Mutual’s core strategic attributes allow the company to invest its general account portfolio in a steady and consistent manner. They provide the confidence to endure the ups and downs of the investment markets that often produce favorable returns. These attributes include the company’s significant capitalization, mutual company structure, and excellent persistency and mortality rates.

Capital levels: One measure of financial strength is the company’s total surplus level, which provides a cushion against the volatility of higher-risk assets (which come with corresponding higher rewards) while maintaining the overall strength of the company. Northwestern Mutual’s total surplus, composed of surplus and asset valuation reserve (AVR), remains sound compared to its historical levels (as illustrated in the chart below).

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.

Mutual structure: Northwestern Mutual’s mutual company structure allows it to take a long-term view of investing. Because it is not subject to the quarter-by-quarter financial pressures faced by public companies, it can invest with patience, ride out downturns in the market and develop opportunities that may not realize their full potential for years.

Persistency and mortality: Northwestern Mutual policyowners stay with Northwestern Mutual for many years once they buy a policy and, as a group, tend to live longer lives. That means the company can count on a consistent stream of premium payments coming in the door, allowing it to make more than $1 billion per month in new investments. That strong, positive cash flow lets it seize opportunities that others cannot and refine the portfolio’s investments based on market conditions. n

Northwestern Mutual’s Advantage

2010200620011996199119861981197619710%

3%

6%

9%

12%

15%9.96

%

AVR

Surplus

1.48

%

Surplus RatioSurplus and asset valuation reserve (AVR) as a percentage of general account insurance reserves (consolidated statutory basis)

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Northwestern Mutual Asset Class Performance RankOne-Year Total Returns

Highest-Performing

Class

Lowest-Performing

Class

2010

PrivateMezzanine

Real EstateEquities

Real EstateMortgages

PublicEquities

Public FixedIncome

Public HighYield

Private FixedIncome

PrivateEquities

Convertibles

2008

PrivateMezzanine

Public HighYield

Private FixedIncome

Real EstateEquities

Real EstateMortgages

Convertibles

PublicEquities

Private FixedIncome

PrivateEquities

Public FixedIncome

2009

Public FixedIncome

Real EstateMortgages

Private FixedIncome

Public HighYield

Private FixedIncome

PrivateEquities

Real EstateEquities

PrivateMezzanine

PublicEquities

Convertibles

2001

PrivateMezzanine

Private FixedIncome

Real EstateMortgages

Public FixedIncome

Public HighYield

Real EstateEquities

Convertibles

PrivateEquities

PublicEquities

2002Real EstateMortgages

Public FixedIncome

PrivateMezzanine

Private FixedIncome

Real EstateEquities

Convertibles

Public HighYield

PrivateEquities

PublicEquities

2003Public

Equities

Public HighYield

PrivateEquities

Convertibles

PrivateMezzanine

Real EstateEquities

Private FixedIncome

Real EstateMortgages

Public FixedIncome

2004

PrivateMezzanine

PrivateEquities

Public HighYield

Real EstateEquities

PublicEquities

Convertibles

Private FixedIncome

Real EstateMortgages

Public FixedIncome

2005

Real EstateEquities

Convertibles

PrivateEquities

PrivateMezzanine

PublicEquities

Public HighYield

Private FixedIncome

Public FixedIncome

Real EstateMortgages

2007

PrivateMezzanine

Convertibles

PublicEquities

Real EstateEquities

PrivateEquities

Public HighYield

Real EstateMortgages

Public FixedIncome

Private FixedIncome

2006

Convertibles

PrivateEquities

PrivateMezzanine

PublicEquities

Public HighYield

Private FixedIncome

Public FixedIncome

Real EstateMortgages

Real EstateEquities

Northwestern Mutual Asset Class Performance RankOne-year total returns

Northwestern Mutual’s optimum portfolio balance related to assets backing insurance products relies largely on a portfolio of investment-grade fixed income assets, with the balance made up of equities, commercial mortgage loans, high-yield bonds and mezzanine securities. This balanced strategy is expected to provide above-average returns through a variety of business cycles and economic conditions.

In addition to maintaining a balanced portfolio, the company diversifies by investing in a variety of asset classes. The fixed income portfolio primarily

includes public and private bonds and commercial mortgage loans. The equity portfolio includes commercial real estate and public and private common stock. Northwestern Mutual achieves even greater diversification by selecting a large number of investments within each asset class. In other words, it doesn’t “bet the ranch” on any one investment. Company investment managers also participate in all major asset classes and market sectors because history has proven that no single asset class is always the highest-performing. As shown in the graph below, the performance of asset classes varies from year to year. n

Balance and Diversification

Opportunistic and Flexible

In 2010, Northwestern Mutual made more than $15 billion in new investments, following a “flexible allocation” policy, which allows the company to allocate money to areas that offer the greatest value at the time. As the relative attractiveness and volatility of different assets changes, so does the allocation strategy. For example, in 2010, the company made

substantial new investments in public common stock, including about $1 billion in high-quality, dividend-paying companies. It made new purchases of about $1 billion in high-yield bonds and another $1 billion of state and municipal bond issues. It was active in the commercial mortgage market, underwriting about $3.5 billion in new loans. n

4 |

Fixed Income

Northwestern Mutual’s fixed income investments serve as the foundation of the overall investment portfolio. Fixed income assets include money market investments, public bonds and preferred stock, private bonds and preferred stock, and commercial mortgage loans. The fixed income portfolio is designed to provide liquidity and current income while minimizing loss of principal.

This well-diversified portfolio is generally invested in investment-grade assets.

The company’s investments in fixed income instruments are actively managed to maximize returns while preserving a high level of safety, liquidity and diversification. To manage portfolio risk, investments are broadly diversified by security type.

Northwestern Mutual’s investments in private bonds and preferred stock provide further diversification to the company’s overall portfolio and often benefit from higher yields and more attractive terms relative to public bonds.

Northwestern Mutual concentrates its mortgage lending in commercial mortgage loans on fixed-rate permanent loans greater than $15 million, secured by income-producing property. The company invests primarily in apartments, office buildings, shopping centers and industrial warehouses throughout the nation. These transactions offer more control over both property quality and choice of borrowers than publicly traded commercial mortgage-backed securities. This portfolio has historically produced attractive yields and low delinquency and loss percentages.

Investment Portfolio Breakdown

Fixed Income Portfolio Composition | 2010 Year-EndTotal fixed income investments: $122.0 billion (statement value)

Corporate 52%

Commercial Mortgage Loans 17%

Residential Mortgage-Backed Securities 15%

US Government and Agencies 6%

Municipal/Other 4%

Commercial Mortgage-Backed Securities 3%

Asset-Backed Securities 2%

Money Market Investments 1%

52%17%

6%

15%

4%3%2%1%

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Equities

Equity investments are a distinguishing element of the company’s investments related to assets backing insurance products. Northwestern Mutual’s equity portfolio is broadly diversified across private equities, real estate and public common stock. At year-end 2010, this portfolio represented 14 percent of total managed assets.

Over time, the company expects equities to contribute higher returns and provide incremental diversification to the overall portfolio. The company’s significant allocation to equities has enhanced Northwestern Mutual’s financial strength and the dividend scale interest rate applied to traditional permanent life insurance.

Private Equities Private equity investments at year-end 2010 totaled $6.7 billion, or 5 percent of total managed assets. The private equity portfolio includes direct mezzanine and equity investments in buyouts of companies, limited partnerships, and direct investments in selected other companies and subsidiaries. Northwestern Mutual’s private equity 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 counterparts and provide

diversification benefits. Northwestern Mutual’s long-term investment horizon allows the company to hold significant investments in this asset class.

Real Estate Equities Commercial real estate equity investments at year-end 2010 totaled $5.7 billion, or 4 percent of total managed assets. The real estate equity portfolio consists primarily of apartment, warehouse and office properties held through both direct and joint venture ownership. Through partnerships with developers nationwide, Northwestern Mutual develops apartment communities and warehouse properties and also purchases properties directly. Asset managers, operating out of regional real estate field offices, monitor local markets and actively manage the investment properties, creating additional value.

Public Common Stock At year-end 2010, the public common stock portfolio totaled $7.3 billion, or 5 percent of total managed assets. The public equity portfolio includes investments in domestic large-, medium- and small-capitalization companies, as well as in foreign companies. Risk is well diversified by company size, industry and country.

* As presented in this report, private equities include direct investment in certain subsidiaries and affiliates.

Equity Portfolio Composition | 2010 Year-EndTotal equity investments: $19.7 billion (statement value)

Public Common Stock 37%

Private Equities* 34%

Real Estate 29%

Investment Portfolio Product Mix

37%29%

34%

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Quality of Public and Private Bond and Preferred Stock Investments | 2010 Year-End

Ninety percent of the company’s portfolio of public and private bonds and preferred stock was rated investment grade (BBB or greater), and 32 percent held the highest quality rating of AAA at year-end 2010.

Credit quality is defined as the ability of the issuer to pay interest and principal on a timely basis. These ratings are based on the lower of the credit ratings from Standard & Poor’s, Moody’s Investors Service or Fitch Ratings when available, or internal rating evaluations when third-party ratings are not available. n

Bond Portfolio DurationThe average duration of bond holdings that back life insurance products is relatively short. The portfolio strategically maintains an average duration of five to six years. As a result, the value of the bond holdings is not overly sensitive to changes in the interest rate environment.

AAA 32%

AA 7%

A 20%

BBB 31%

BB 4%

B 4%

CCC & Below 2%

Quality of Fixed Income Portfolio

32%

31%

20%

7%4%

4%2%

Investment Grade

Below Investment Grade

Investment Portfolio Breakdowncontinued

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Investment Portfolio Performance

Northwestern Mutual’s portfolio strategy is to hold a higher percentage than most other insurance companies of equities and high-yield bonds – investments with a higher risk level and corresponding higher return potential – in a well-diversified, actively managed portfolio. This strategy has proven to reduce overall portfolio volatility while increasing returns over time.

That may sound counterintuitive, but the reason it works can be explained by modern portfolio theory, which includes a concept known as the efficient frontier. If your portfolio consisted of 100 percent common stocks, you would expect high returns but with high risk or high volatility of return. This portfolio would be far too risky for Northwestern Mutual policyowners and, probably, for most other people.

At the other end of the spectrum is a portfolio composed of 100 percent 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 over the long term. Given the characteristics of different types of investments and how they perform relative to one another (covariance), modern portfolio theory says 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 only believes this in theory, it has proven it in practice.

During the 20-year period ending in 2010, the return to policyowners in the form of the dividend scale interest rate applied to traditional permanent life insurance policies was higher than it would have been if the portfolio had been 100 percent invested in bonds, as shown in the “Risk vs. Reward” graph below. Just as important, this additional return was earned with lower volatility than if the assets had been 100 percent invested in bonds.

Rat

e of

Ret

urn

(Rew

ard)

Standard Deviation (Risk)

100% Stocks

80% Bonds 12% Stock 8% Real Estate

Hypothetical Portfolio

In�ationT-Bills

Northwestern MutualDividend Scale Interest Rate*

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%0%

4%

2%

6%

8%

10%

12%

100% Real Estate

“The Efficient Frontier”

100% Bonds

Risk vs. Reward 1991-2010

* Average Dividend Scale Interest Rate for unborrowed funds for most permanent life insurance policies with direct recognition (see description on back cover).

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.

8 |

Portfolio Performance and Northwestern Mutual’s Dividend Scale Interest Rate

How can Northwestern Mutual achieve a dividend scale interest rate for its traditional permanent life insurance policies that currently exceeds the yield available through most long-term corporate bonds?

Two key factors explain how the company can support a competitive dividend scale interest rate in a variety of different financial environments.

• First, the dividend scale interest rate applied to traditional permanent life insurance cash values is a portfolio rate, based on the total yield of all applicable investments. The portfolio includes older fixed income investments made at higher rates and newer fixed income investments made at the current lower rates. Thus, the collective performance of the portfolio will differ from prevailing new investment rates. This approach for determining an interest rate is called the portfolio method.

• Second, Northwestern Mutual’s investment strategy is to actively manage a well-diversified portfolio with a long-term investment horizon, as explained on the prior pages. The company’s ability to generate total returns reflecting current income from fixed income investments plus gains from equities can produce an overall portfolio return greater than if the portfolio invested exclusively in fixed income instruments.

It is, of course, impossible to know what the dividend scale interest rate will be in the future. The graph below provides a historical view of how Northwestern Mutual’s dividend scale interest rate applied to most traditional permanent life insurance cash values compares to rates on long-term corporate bonds. Note that the dividend scale interest rate tends to follow the general trend of new money rates, but it lags and is less volatile. In other words, 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

Northwestern Mutual Dividend Scale Interest Rate1

Moody’s Corporate Bond Average2

0

2

4

6

8

10

12

14

16

0

2

4

6

8

10

12

14

16NMDSIR

20102005200019951990198519801975197019651960195519501945194019351930

Aaa 3

Long-Term Bond Yields Compared to Northwestern Mutual’s Dividend Scale Interest Rate

1 Average Dividend Scale Interest Rate for unborrowed funds for most permanent life insurance policies with direct recognition (see description on back cover).

2 The Economic Report of the President: Moody’s Corporate Bond Average (Data available beginning in 1939).

How Is the Dividend Scale Interest Rate Determined?

Northwestern Mutual’s dividend scale interest rate applied to most traditional permanent life insurance cash values is based on the actual investment performance of the assets in the investment portfolio that back this product. This performance is referred to as the portfolio earned rate.

A portfolio earned rate reflects a company’s overall rate of return on those assets, regardless of when the assets were acquired, so the portfolio approach is quite simple: Determine the ratio of total investment earnings (interest, dividends, capital gains and so on) to invested assets (bonds, stocks, mortgages and other investments). The result is one interest rate, even though the assets consist of many different investments made at different times, each earning a different rate of return.

To arrive at the dividend scale interest rate, a deduction is made from the portfolio earned rate to cover items such as investment expenses, taxes and a contribution to surplus. The dividend scale interest rate is credited to all applicable life policies even though premiums were paid at different times and were invested at different interest rates.

Northwestern Mutual believes that the portfolio method of crediting interest is currently the best approach for its traditional permanent life insurance policies. These policies have premiums that are paid over a long period, during both rising and falling interest rate cycles. The portfolio method of crediting interest protects policyowners by smoothing the effects of large swings in current interest rates.

Dividends Are More Than Just Interest

It is important to note that the dividend scale interest rate applied to most traditional permanent life insurance cash values is just one element that determines the actual dollar amount of dividends. The other important factors include mortality (representing the cost of death benefits paid to beneficiaries) and expenses. In fact, more than half of Northwestern Mutual’s expected 2011 dividend payout is attributable to favorable expense and claims experience.

Northwestern Mutual’s goal is to pay the highest possible policyowner dividends consistent with maintaining a strong financial position. Since Northwestern Mutual is a mutual company, it has no stockholders and, thus, no dividends to be paid to stockholders. All the money earned over and above what is needed to pay benefits to policyowners, to run the operation and to keep the company on a solid financial footing is returned to policyowners as dividends.

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[inside back cover]

This material describes the investment strategy for the managed assets in Northwestern Mutual’s general account investment portfolio. The vast majority of managed assets back the company’s surplus and most of the life, disability and long-term care insurance liabilities. The investment strategies described in this booklet apply to the investment of those assets. A portion of managed assets back the remaining liabilities (including fixed-rate annuity liabilities) and have different investment exposures than described in this booklet.

The company’s dividend scale interest rate for unborrowed funds for most traditional permanent life insurance policies reflects the investment performance of the applicable managed assets net of taxes and any contribution to surplus. This rate is used for crediting interest on unborrowed funds for most traditional permanent life insurance policy values after mortality and expense charges have been deducted. It reflects investment performance of managed assets. Depending on the terms of the particular policy, adjustments are made to reflect either individual policy loan activity or average loan activity of all policies in the dividend class.

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. The approach described in this brochure for determining dividends, the dividend scale interest rate and other dividend factors are subject to change without notice. Similarly, the investment philosophy and strategy described in this booklet is subject to change without notice at the discretion of Northwestern Mutual’s management and Board of Trustees.

The Northwestern Mutual Life Insurance Company’s operational results, investment holdings and financial position for year-end 2010 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 or by written request to: Northwestern Mutual, Corporate Communications, N04, 720 E. Wisconsin Avenue, Milwaukee, WI 53202.

The Northwestern Mutual Life Insurance Company • Milwaukee, WIwww.northwesternmutual.com

29-4692 (0502) (REV 0511)