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Change in annuity dividends draws lawsuit against Northwestern Mutual

A change in the way Northwestern Mutual calculated the dividends for some annuity policyholders has caused a Wisconsin circuit court judge and his wife to file a lawsuit against the Milwaukee-based company, two months after Northwestern Mutual announced a record-breaking dividend payout of $3.7 billion.

The change "stripped the participating annuities of the benefits of diversified, long-term investment and materially reduced their long-term growth and value."

Daniel and Catherine Noonan filed the lawsuit, which seeks nationwide class action status, after discovering in 2000 that 15 years earlier Northwestern Mutual had "unilaterally" changed the way the dividends to their annuity policies were calculated. The couple is seeking clarification on the terms of their contracts.

"This lawsuit seeks to displace an investment strategy that has produced superior policy performance, worked extremely well for all Northwestern Mutual policyowners, and is the envy of the industry," says Jean Towell, a spokesperson for Northwestern Mutual. "For this reason, we will vigorously defend against the lawsuit."

According to the complaint, after years of basing dividends on the performance of company investments as a whole, Northwestern Mutual began in 1985 to calculate the dividends paid to tens of thousands of participating annuityholders based on the performance of a segmented account which was invested in relatively short-term bonds. This change "stripped the participating annuities of the benefits of diversified, long-term investment and materially reduced their long-term growth and value."

After being told by Northwestern Mutual that it believed it had the right to change the contracts without the consent of the owners, the Noonans filed the lawsuit under Wisconsin law asking for a clarification of the rights of the participating annuityholders and Northwestern Mutual's obligations under the contracts, "particularly as to dividend rights and the unilateral change in the basis for dividends."

While the Noonans are not seeking any damages yet, their lawyer George Kersten doesn't rule out the possibility.

"If it determines that the contract means what we think it means, the court may grant further equitable relief," says Kersten.

The lawsuit was originally filed in Wisconsin state court but Northwestern Mutual asked to have the case moved to federal court, arguing that the annuities are subject to the Employee Retirement Income Security Act of 1974 (ERISA), a federal statute.

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