Conn. regulators prep PHL Variable for liquidation after selloff fails

Connecticut regulators say a potential sale of troubled PHL Variable Insurance Co. life blocks is no longer feasible, and liquidation is the next step.

Interim Insurance Commissioner Josh Hershman announced the stunning change in strategy in the latest rehabilitation report released Dec. 31.

"The Companies do not have the assets that would be necessary to transfer to a buyer or reinsurer any blocks of business without causing other policyholders to receive less than what they would receive from the guaranty associations in a conventional liquidation," the report reads.

Former commissioner and rehabilitator Andrew Mais had been working toward a sale of PHL Variable blocks for months before abruptly retiring on Nov. 28. A decision on a buyer was due on Dec. 31.

The sales effort was a crucial part of a delayed overall rehabilitation plan for PHL Variable and hinged on non-universal-life blocks being attractive enough to buyers. In a Nov. 20 status report, Mais said the rehabilitator also “expects to file an outline of the terms of a rehabilitation plan” by the end of the year.

'Fake rehab'

The liquidation news generated outrage from large policyholders who have battled with Connecticut regulators for much of the past two years.

Edward S. Stone is a Greenwich, Conn., attorney for SWS Holdings, which owns two Phoenix Generations universal life policies worth $18 million in death benefits. The company has paid more than $12 million in premiums to date, court documents say.

The policies were purchased in 2006 with the intent to fund an eventual stock purchase agreement. SWS sought “full-party” status in the PHL Variable rehabilitation proceedings, but Judge Daniel J. Klau denied the request.

"The fake rehab was designed to induce lapses (more than $5 billion to date), steal from over-the-cap policyholders and go through the charade of a 'sales process' that was never going to result in a real sale," Stone said via email Monday.

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 the 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 are funded by insurance companies.

"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."

The troubled PHL and its subsidiaries, Concord Re and Palisado Re, were put in Mais’s control after a May 20, 2024, court order.

Hershman said further analysis determined that all of PHL's life blocks are "materially impaired," none more so than the block of UL policies.

"This means that a pure rehabilitation plan – one without any funding from outside of the Companies’ assets – is not feasible," Hershman wrote. "Instead, the Rehabilitator believes that any plan for a resolution of PHL’s liabilities must include a liquidation order for the Companies."

Scrambling for coverage

Under Connecticut law, 30 days after the entry of a liquidation order, all policies terminate, except to the extent they are covered by a guaranty association.

Claim for the loss of policy coverage "would be junior in priority" to the claims of the guaranty
associations and existing claims for death benefits or surrender value that have not been paid as a result of a moratorium that has been in place since May 20, 2024, Hershman noted.

As a result, claims for loss of coverage or loss of the policy itself would "not ordinarily be paid in a liquidation where the insolvency is as deep as PHL’s insolvency," Hershman explained. However, a liquidation order can be combined with a transaction that will enable active policyholders to receive some level of ongoing benefits "in excess" of what they would receive solely under guaranty association coverage, he added.

Guaranty association coverage is generally up to $300,000.

Hershman is negotiating with two prospective buyers willing to provide limited coverage or benefits above the guaranty associations’ limits, provided that they can reach agreement with the guaranty associations on also providing coverage on the portion of policies within the guaranty associations’ limits, he explained.

"The Rehabilitator is now focused on pursuing a transaction of this type in order to maximize the value of the Companies’ assets and coverage for policyholders," Hershman wrote.

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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.