Golden Gate Capital Insurer PHL Veers to Liquidation as Rehab Hopes Fade
(Bloomberg) — State regulators are abandoning a plan to rehabilitate PHL Variable Insurance Co. and may pursue liquidation after finding the struggling life insurer, acquired a decade ago by private equity firm Golden Gate Capital, is in worse shape than previously thought.
If the firms do not agree to an acceptable settlement, they could sue Golden Gate and its Nassau Financial Group insurance arm for allegations including breach of fiduciary duty, officials said. Nassau said in a statement that such accusations were “unfair.”
Seeking rehabilitation no longer seems possible, Joshua Hershman, interim head of Connecticut’s insurance department, wrote in a court filing on New Year’s Eve. Hershman, who also acts as a rehabilitator, said PHL does not have sufficient assets to ensure that a strategy such as selling viable operations and restructuring other parts would result in larger payouts to policyholders than liquidation.
“It turned out that all of PHL’s business blocks were financially damaged,” according to the application. “The rehabilitation expert believes that any plan to resolve PHL’s liabilities should include a liquidation order.”
PHL, acquired by Golden Gate’s Nassau, has now become a cautionary tale as private equity firms move into life insurance and reshape the industry. Although some of PHL’s problems occurred before the takeover, officials later said investments under its new ownership did not perform as well as expected and agreements with affiliated reinsurers failed to maintain sufficient capital. In last year’s court updates, officials estimated PHL was facing a $2.2 billion shortfall.
The Connecticut regulator, which initially sought to overhaul PHL’s finances, had withheld more than $500 million in eggs as of last September, sending the business into a rehabilitation process that limits payments to customers.
This left many policyholders in a difficult situation; Some complained that they had to continue paying premiums to keep policies active without being absolutely sure of the benefits.
“The rehabilitation expert acknowledges that the passage of time in the rehabilitation process creates hardship for some policyholders,” Hershman said in Wednesday’s filing.
The rehabilitation expert said his office identified potential legal claims against third parties, including Nassau entities and their Golden Gate parent company, including breach of fiduciary duty, breach of contract and avoidable transfers.
“If an acceptable resolution that is in the best interest of the policyholders cannot be reached, the rehabilitation specialist intends to file a lawsuit against the relevant entities,” according to the application. The regulator said negotiations were ongoing but noted that both Nassau and Golden Gate “challenged the validity of any claims.”
Nassau said in a separate statement that the transactions in which the rehabilitator faulted Golden Gate’s ownership were carried out after review and approval by the state regulator. He blamed PHL’s problems on a bloc of universal life policies enacted between 2004 and 2008, which are now largely in the hands of institutional investors.
“As the rehabilitator acknowledges, PHL’s financial difficulties predate Nassau’s participation in PHL by a decade,” Nassau said. “We continue to cooperate in an effort to reach a resolution and provide administrative support to PHL. However, should the rehabilitator file suit, we will defend ourselves vigorously and expect to prevail on the merits.”
A representative for Golden Gate declined to comment.
When life insurers and annuity providers in the U.S. fail to meet their obligations, customers can still receive at least some of their benefits from a government guaranty association funded by assessments from other insurance companies.
However, these supports have limits; for annual income usually around $250,000. The PHL regulator said it was still trying to obtain larger payouts through partial sales or a reinsurance transaction with third parties.
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