In a significant development for the US life insurance sector, Connecticut state regulators have officially dropped a plan to rehabilitate the struggling PHL Variable Insurance Co. and are now seriously considering liquidating the company. The decision comes after a reassessment revealed the insurer's financial condition is far more dire than earlier estimates.
Rehabilitation Plan Deemed Unfeasible
Joshua Hershman, the interim head of Connecticut’s insurance department who also acts as the rehabilitator for PHL, stated in a court filing on New Year’s Eve that saving the company no longer appears viable. The core issue is that PHL lacks sufficient assets to ensure a rehabilitation strategy—which involves selling viable operations and restructuring others—would yield better payouts for policyholders than an outright liquidation.
"It has become clear that all of PHL’s blocks of business are materially impaired," the filing stated. Hershman concluded that any resolution must now include a liquidation order. The regulator had initially placed PHL into rehabilitation to overhaul its finances, a move that has already led to over $500 million being withheld from policyholders' accounts as of last September.
Potential Legal Battle with Private Equity Owners
Authorities have pointed a finger at the insurer's ownership. PHL was acquired a decade ago by Nassau Financial Group, the insurance arm of private equity firm Golden Gate Capital, during a wave of PE investments into the life insurance industry. Regulators now allege that investments made under this new ownership underperformed and that deals with captive reinsurers failed to protect enough capital.
The rehabilitator's office has identified potential legal claims against Nassau and Golden Gate, including for breach of fiduciary duty and breach of contract. The court filing warns that if an acceptable settlement beneficial to policyholders cannot be reached, a lawsuit will be filed. In response, Nassau has called the accusations "without merit," arguing that the challenged transactions were approved by the state regulator at the time and that PHL's core problems stem from a block of universal life policies issued between 2004 and 2008.
Policyholders in Limbo Amid Massive Shortfall
The situation has left numerous policyholders in a difficult position. Many have had to continue paying premiums to keep their policies active without any certainty of eventually receiving the full benefits. Hershman acknowledged the hardship, stating, "The rehabilitator recognizes that the passage of time in the rehabilitation proceeding creates hardship for certain policyholders."
Latest estimates point to a staggering $2.2 billion shortfall at PHL. While state guaranty associations provide a safety net for policyholders of failed insurers, these backstops have caps, often around $250,000 for annuities. The Connecticut regulator is still exploring options like a partial sale or reinsurance deal to try and secure larger payouts for customers beyond these guarantees.
This case stands as a cautionary tale of private equity's foray into the life insurance industry. While some of PHL's troubles predate its acquisition, the regulator's actions highlight the severe consequences when turnaround strategies fail and the ultimate burden placed on policyholders.
