Monday, March 23, 2015

No. 91: Northwestern Mutual—The Proposed Settlement of a Long Dispute over Annuity Dividends

On March 13, 2015, Marleen M. LaPlant, the plaintiff in a long dispute with Northwestern Mutual Life Insurance Company (Milwaukee, WI), filed in federal court a motion for preliminary approval of a settlement. The case relates to a change the company made in 1985 in its method for determining dividends on certain previously issued fixed dollar annuities. The company has agreed to the settlement.

Origin of the Dispute
Prior to 1985, Northwestern determined annuity dividends based on investment returns on the company's entire general account. In the early 1980s, the U.S. experienced an inverted yield curve, where short-term interest rates were higher than long-term interest rates. In 1985, the company introduced "MN annuities" that were credited with dividends based on the interest earnings from a portfolio of short-term bonds. At the same time, the company began crediting dividends on previously issued ("pre-MN") annuities based on the interest earnings from the portfolio of short-term bonds. In the short term, the change meant larger dividends on the pre-MN annuities, but over the long term—when interest rates returned to normal levels—it meant the dividends on the pre-MN annuities were smaller than if the dividends had been based on the investment returns on the company's entire general account.

A major problem was the manner in which Northwestern instituted the change regarding the pre-MN annuities. The company changed the method of determining dividends on the pre-MN annuities without advance notice to the annuitants, without disclosing the change to the annuitants, without offering the annuitants the opportunity to accept or reject the change, and by phasing in the change in such a way as to make it difficult for the annuitants to be aware of the change.

The LaPlant Lawsuit
In August 2008, LaPlant filed a class action lawsuit in state court in Wisconsin on behalf of herself and other pre-MN annuitants. She alleged that Northwestern, in determining dividends on the pre-MN annuities, had breached the contracts and breached its fiduciary duty. The company said it had not breached the contracts and had not breached its fiduciary duty. The company also said its method of determining dividends was consistent with the contracts, did not violate Wisconsin law, was in accordance with actuarial standards, and had been approved by insurance regulators. (See LaPlant v. Northwestern, State of Wisconsin, Milwaukee County Circuit Court, Case No. 08-cv-11988.)

In October 2009, Reserve Circuit Judge Dennis J. Flynn certified a state class. In November 2010, he presided over a two-week bench trial. In March 2011, he handed down a 97-page decision saying the company had breached the contracts and breached its fiduciary duty.

My Articles about the Case
I felt the case was important, and wrote about it in the lead article in the May 2011 issue of The Insurance Forum. I wrote follow-up articles in the July 2011, June 2013, and December 2013 issues. In the conclusion of the first of the four articles, I said:
Northwestern has long and justifiably prided itself on fair treatment of participating policyholders. That is why this case is a major defeat for the company.
The Recusal Motion
Three weeks after Judge Flynn's decision, Northwestern filed a motion that the judge recuse himself. The company had discovered that the judge owned a pre-MN annuity that he had surrendered in 1979, six years before the company made the change in its method of determining dividends on the pre-MN annuities. The cash surrender value of the judge's annuity was $1,456. Judge Flynn denied the recusal motion.

Northwestern petitioned the Wisconsin Court of Appeals to hear an appeal of the denial of the recusal motion. The appellate court denied the petition.

The Regulatory Issue
Northwestern said it had obtained regulatory approval of the 1985 change in the method of determining dividends on the pre-MN annuities. In 1984, the company informed the New York Department of Insurance of the change. The company said it intended to disclose the change in releases to its agents and the media, in its annual report, and in dividend notice stuffers sent to annuitants. The Department approved the change conditioned on those disclosures. However, the company did not make the disclosures.

Northwestern informed the Wisconsin Office of the Insurance Commissioner of the change and the New York Department's approval of the change. The Office raised no objections, and the company viewed the change as having been approved by the Office.

Recent Developments
In 2010, the parties, with the help of a mediator, attempted to resolve the dispute by reaching an agreement. The effort failed.

In September 2011, LaPlant filed a motion to expand the state class (about 3,300 annuitants) to a national class (about 33,000 annuitants). Northwestern removed the case to federal court. LaPlant filed a motion in federal court to return the case to the state court. In August 2012, the federal district court granted the motion to return the case to the state court. (See LaPlant v. Northwestern, U.S. District Court, Eastern District of Wisconsin, Case No. 2:11-cv-910.)

Northwestern appealed the federal district court decision. In November 2012, a three-judge appellate panel vacated the federal district court decision and sent the case back to the federal district court to decide whether to expand the state class to a national class. (See LaPlant v. Northwestern, U.S. Court of Appeals, 7th Circuit, Case No. 12-3264.)

In March 2013, LaPlant filed a motion in the federal district court to expand the state class to a national class. Northwestern opposed the motion and filed a motion to decertify the Wisconsin class. The court has not acted on those motions.

In May 2014, the parties, with the help of a different mediator, undertook a second effort to resolve the dispute by reaching an agreement. This time the effort succeeded. On September 9, 2014, the parties entered into a memorandum of understanding to resolve all the claims of the national class, including the claims in the related cases. They selected a settlement administrator, a notice provider, and an escrow agent. Later they entered into the recently announced settlement.

The Proposed Settlement
Plaintiff experts estimate that the losses suffered by the annuitants are from $100 million to $278 million. Northwestern disputes that there are any damages.

The gross amount of the settlement is $84 million. That will be reduced by plaintiff attorneys' fees in the LaPlant case and the related cases (not to exceed 35 percent of the gross amount of the settlement), plaintiff attorneys' expenses, cost of notice to class members, cost of claims administration, and payments to class representatives in the various cases. I think the net amount of the settlement will be around $50 million.

The recent motion asks the federal district court to approve the settlement on a preliminary basis to allow notices to be sent to the annuitants, and to certify the national class solely for purposes of the settlement. The notices will explain the case. The annuitants will be given the opportunity to opt out of the settlement, register objections, and be heard at the final fairness hearing. According to the proposed schedule, final court approval is at least five months away.

General Observations
LaPlant and the plaintiffs in the related cases did not commence legal action when they were receiving larger dividends than they would have received without the 1985 change. In other words, they took action only when they began receiving smaller dividends as a result of the change. That may be a partial explanation for Northwestern's long and bitter opposition to the lawsuit. For example, the company's recent letter to employees announcing the settlement includes this sentence:
According to Rodd Schneider, vice presidentlitigation counsel in the Law department, the lawsuit was a case of a small group of customers seeking more than its fair share of dividends, which would have come at the expense of all our other policyowners.
On the other hand, it is also true that Northwestern made the change unilaterally and sought to conceal it. That was out of character for the company. In previous situations, the company announced policy or contract changes and offered policyholders the opportunity to accept or reject the changes. For example, in the 1970s the company announced a policy loan interest rate amendment program. The company had begun issuing policies with a variable policy loan interest rate subject to a maximum of 8 percent. In the amendment program, the company offered policyholders with a 5 percent or 6 percent fixed policy loan interest rate the opportunity to change to the variable policy loan interest rate subject to the 8 percent maximum. In exchange for agreeing to the amendment, policyholders became entitled to enhanced dividends.

In my opinion, the lawsuits were justified. I also believe that Judge Flynn got it right. Whether the settlement will receive final approval remains to be seen.

Available Material
For those keenly interested in the case, I offer a complimentary 86-page PDF consisting of five documents: the 3-page motion, the 24-page memorandum in support of the motion, the 4-page declaration in support of the motion, the 3-page plan of allocation, and the 52-page settlement agreement. Send an e-mail to jmbelth@gmail.com and ask for the settlement package in the LaPlant case.

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