Q and A: Connecticut regulators discuss PHL Variable rehab efforts

It isn't often that life insurance companies fall into financial trouble. But when they do, the regulatory rehabilitation process is often prolonged and accompanied by infrequent updates.

Connecticut Insurance Department regulators are busy wrangling a tough case with PHL Variable Insurance Co. PHL and its subsidiaries, Concord Re, Inc., and Palisado Re, Inc., were placed into rehabilitation May 20 by a state superior court judge after several financial setbacks.

PHL issued life insurance and annuity products and related supplemental contracts to policyholders nationwide. Concord and Palisado are captive insurers whose only business is the reinsurance of PHL’s liabilities.

Connecticut Insurance Commissioner Andrew Mais filed the petition to put the companies into rehabilitation after determining that they were in a hazardous financial condition and that other alternatives had been exhausted.

Regulators placed a temporary restriction on policy benefits while working on a rehabilitation plan that must be approved by the court. CID recently published its "first accounting and status report" after months of working on the PHL books.

The department agreed to answer some questions posed by InsuranceNewsNet. Jane Callanan is general counsel for the Connecticut Insurance Department.

INN: How did the books at PHL Variable and its two captives look compared to expectations? Lessons learned?

Callanan: The financial condition of PHL Variable and its captives (the “Companies”) was largely in line with the CID’s expectations at the time the Companies were placed into rehabilitation. The reduction in the Companies’ capital and surplus as of Sept. 30, 2024, was driven primarily by three factors: the Companies’ reserves were increased as a result of being subjected to cash flow testing; certain permitted accounting practices that had been granted prior to rehabilitation were discontinued; and the Companies recognized the impairment of an affiliate loan. Details regarding each of these factors can be found in the rehabilitator’s First Accounting and Status Report filed on November 20.

At this time we are focused on developing a rehabilitation plan and have not yet completed a “post-mortem” that would enable the CID to form definitive conclusions regarding lessons learned.

INN: Is the rehab plan on track for mid-2025 and will the moratorium be lifted?

Callanan: The Rehabilitator continues to expect to present to the court the key terms of a rehabilitation plan by mid-2025. A complete plan of rehabilitation would be filed thereafter, with the plan confirmation process likely in late 2025. The moratorium, as provided in the Moratorium Order entered by the court, will remain in place until the rehabilitation plan is confirmed.

INN: You endorse “combined financial statements” for the three insurers here. Why not treat all insurers and their reinsurers the same way?

Callanan: The Companies are in a different position than other insurers and reinsurers because they are no longer active, going-concern businesses. The rehabilitator believes that combined financial statements, which eliminate intercompany transactions, provide the most meaningful presentation of the Companies’ current financial position to the court, policyholders and other interested parties in the rehabilitation.

INN: PHL Variable began showing signs of stress as early as 2019. What can regulators do better to intervene quicker in these situations?

Callanan: As PHL’s financial condition worsened, the Connecticut Insurance Department increased its regulatory oversight of PHL for several years prior to placing the Companies into supervision in March 2023. The decision to initiate rehabilitation proceedings was determined to be in the best interest of the Company’s policy and annuity holders, creditors and the public. Regulators must always strike a balance with troubled companies between early intervention and allowing companies the opportunity to pursue successful paths out of challenged situations. Even with the range of tools available to regulators, solvency cannot always be restored.

INN: Why were Concord Re and Palisado Re exempted from cash flow testing?

Callanan: Under applicable law, captive insurers such as Concord Re and Palisado Re are not subject to cash flow testing.

INN: Was there ever any financial examination done of PHL Variable?

Callanan: As with all domestic insurers, PHL was subject to quinquennial financial examinations. The last full examination by the CID covered the five-year period between Jan. 1, 2013 and Dec. 31, 2017. At the time, PHL and its subsidiaries were placed into rehabilitation, a financial examination was underway for the five-year period between Jan. 1, 2018, and Dec. 31, 2022.

INN: The update mentions “128 reinsurance agreements spread across 15 third-party reinsurers.” Is there any hope that these agreements will cover the troubled PHL universal life business?

Callanan: PHL has reinsurance agreements that provide partial coverage for its universal life policies. That reinsurance has never been structured to provide coverage in full. Following entry of the Rehabilitation Order, the rehabilitator has actively taken steps to maintain ordinary course billing and payment under all of PHL’s existing reinsurance.

INN: How likely is it that a buyer will be found for some of the PHL blocks?

Callanan: The rehabilitator recently engaged Keefe, Bruyette & Woods to provide financial advisory and investment banking services. The rehabilitator is working closely with KBW to develop a plan to solicit interest in potential transactions involving the Companies or individual blocks of PHL business. It is too early in the process to make a prediction of the outcome.

INN: What percentage of these blocks are held by institutional investors?

Callanan: Typically, life settlement purchase transactions by institutional investors often use trusts and similar entities that make actual ownership difficult or impossible to determine. As a result, the rehabilitator does not have a precise figure of investor-owned policies but believes a material amount of PHL’s universal policies (by face amount) are owned by institutional investors.

INN: Will you have to resort to a premium increase to help stabilize the PHL policies?

Callanan: Prior to rehabilitation, PHL implemented multiple cost-of-insurance increases on certain blocks of PHL policies. Although the rehabilitator is exploring all options to stabilize and improve the Companies’ financial condition, there are no current plans to pursue such an increase at this time.

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.