A decade in decline: PHL Variable serving as a cautionary tale

[Editor's Note: The Connecticut Insurance Department answers questions from InsuranceNewsNet about PHL Variable oversight and issues.]

The decade-long downward spiral of PHL Variable Insurance Co. has Connecticut regulators on the verge of liquidation proceedings, seen by some as a black mark on the life insurance industry.

How the insurer moved from seemingly strong health to its present situation might be a bigger mystery. Opinions vary on where the blame lies – with various executives and Connecticut regulators atop the list – but that isn’t going to help with the $2.2 billion shortfall.

PHL’s competitor companies will foot that bill – or a significant amount of it anyway.

Meanwhile, Connecticut insurance commissioner Andrew Mais, who led an 18-month attempt to financially salvage PHL Variable, resigned in late November. Mais declined to comment for this story.

New interim Commissioner Joshua Hershman quickly pivoted to liquidation, a dreaded last-and-final step. The move angered large policyholders.

“Nothing that the Rehabilitator has done has been in the best interests of policyholders – certainly not [large] policyholders,” said Edward Stone, attorney for SWS Holdings. “The fake Rehab was designed to induce lapses (more than $5 billion to date), steal from [large] policyholders and go through the charade of a ‘sales process’ that was never going to result in a real sale.”

SWS Holdings owns two Phoenix Generations universal life policies worth $18 million in death benefits, policies intended to fund an eventual stock purchase agreement. The company has paid more than $12 million in premiums to date, court documents say.

Beyond the money, the PHL case opened an ethical discussion on the life insurance policy as an investment, and whether those policyholders deserve equal consumer protection.

Financial distress

The failure of PHL Variable stretches back more than 20 years to a massive block of high-face-value universal life insurance policies issued between 2004 and 2007. Many of these were "Stranger-Owned Life Insurance" (STOLI) policies, where investors bought multimillion-dollar coverage for elderly individuals.

As these insured individuals reached their late 80s and 90s, claim payouts began to far exceed premiums.

Originally part of the 164-year-old The Phoenix Companies, PHL’s financial stress grew throughout the 2010s due to low interest rates and underperforming investments.

Nassau Reinsurance Group, backed by private equity firm Golden Gate Capital, bought Phoenix for roughly $217 million. While Nassau initially infused over $200 million into the company, it eventually determined the PHL block was unsustainable.

In late 2021, PHL was separated from Nassau and transferred to a different Golden Gate Capital subsidiary, essentially isolating the failing business from Nassau's healthier life insurance units.

Connecticut regulators placed PHL under administrative supervision in March 2023. By 2024, the company's deficit reached a negative $900 million, and Golden Gate Capital declined to provide further capital infusions.

That deficit has since ballooned to $2.2 billion.

‘Dead for a long time’

The post-mortem has many critics pointing the finger at lax oversight from the Connecticut Department of Insurance.

Mais “allowed Nassau to get out of the way and waived cash flow testing that would have shown the company was bleeding hard assets as it paid out hundreds of millions in STOLI claims,” said Larry J. Rybka, CEO and chairman of Valmark Financial Group. “Also allowed a complex scheme of entities to hide that this company had been dead for a long time.”

The oversight from CID is part of the larger conversation about state insurance regulators and their ability to manage complex insurance products, offshore reinsurance deals and opaque investment relationships from private equity-owned insurers.

In a June motion to intervene, Stone alleged that Mais had a significant conflict of interest with respect to the large policyholders. The steady pace of lapsed policies aided the rehabilitation efforts and hurt those large policyholders like SWS Holdings, Stone said.

Hershman is negotiating with the National Organization of Life and Health Insurance Guaranty Associations to determine what assets may be available to provide "limited ongoing benefits" to policyholders whose policies would otherwise terminate 30 days following a liquidation order, he said in a Dec. 31 report.

Stone accused the state of "conspiring" with NOLHGA by forcing policyholders to lapse, thereby reducing the burden on the guaranty associations, which insurance companies fund.

"Since when are Guaranty Associations more worthy of protection than policyholders?" Stone asked. "Meanwhile, the trust and confidence that families place in the life insurance industry is being eroded, and all of the bad acts covered up."

No way to know

Bobby Samuelson doesn’t blame the CID. There was “no reasonable way to know” that Phoenix had mispriced its product and was selling mostly STOLI, explained Samuelson, executive editor of the Life Product Review.

“But the permitted practices granted to Nassau, which are not out of the norm for the industry, did allow the problem to go largely unnoticed and undiagnosed for years,” he added.

The decision to allow Nassau to cut loose PHL looks bad for the CID in hindsight. But, absent the move, “then Nassau would be the one in rehabilitation and potentially liquidation,” Samuelson said.

The blame game is doing little to help smaller policyholders like Glenda and Lowell Thompson of Moulton, Ala. Married for 65 years, the couple bought a PHL Variable product 12 years ago as a vehicle to fund their retirement.

“I find myself being anxious and extremely worried for months, losing sleep over this money we invested,” Glenda Thompson wrote in an October comment letter. “We have saved and saved to have money for our care when we are older.”

Lowell Thompson, 88, was a farmer and factory worker forced to retire from Monsanto in 1982 due to a condition that would eventually leave him legally blind, his wife wrote. He suffered a heart attack in 2023.

Glenda Thompson worked for “many years” as a hospital transcriptionist before earning a degree in sonography at age 51. She worked for the hospital into her 80s, battling breast cancer in 2010. Recently, Glenda Thompson suffered from her own heart condition.

“We both are old and do not have the time to wait for a long process of rehabilitation,” she wrote.

As of this writing, Hershman continues to pursue transactions and potential lawsuits against third parties to recapture more funds. But liquidation and losses are expected. If activated, the Connecticut Life and Health Insurance Guaranty Association pays up to $500,000 in life insurance death benefits.

“The Rehabilitator and his team are working diligently to reach a definitive path forward as quickly as possible and deliver the most value possible to the policyholders,” Hershman wrote in the Dec. 31 status report.

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InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.