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 instead, after finding that the struggling life insurer — acquired by private equity firm Golden Gate Capital a decade ago — is in worse shape than previously thought.

Authorities said they may also sue Golden Gate and its Nassau Financial Group insurance arm on claims including breach of fiduciary duty if the firms don’t agree to an acceptable settlement. In a statement, Nassau called such accusations “without merit.”

Seeking rehabilitation no longer appears feasible, Joshua Hershman, the interim head of Connecticut’s insurance department, wrote in a court filing on New Year’s Eve. PHL doesn’t have enough assets to make sure that such a strategy — selling viable operations and restructuring other parts — would result in larger payouts to policyholders than a liquidation, said Hershman, who also serves as the rehabilitator.

“It has become clear that all of PHL’s blocks of business are materially impaired,” according to the filing. “The rehabilitator believes that any plan for a resolution of PHL’s liabilities must include a liquidation order.”

PHL — acquired by Golden Gate’s Nassau as private equity firms expanded into life insurance and reshaped the industry — is now a cautionary tale. While some of PHL’s struggles predated the takeover, authorities later said investments under its new ownership didn’t perform as well as anticipated and that deals with captive reinsurers failed to safeguard enough capital. In court updates last year, authorities estimated PHL faced a $2.2 billion shortfall.

Initially seeking to overhaul PHL’s finances, the Connecticut regulator steered the business into a rehabilitation process that limited payments to customers, withholding more than $500 million of their nest eggs as of last September. 

That left numerous policyholders in the lurch, with some complaining about having to continue paying premiums to keep policies active without the certainty of reaping the benefits.

“The rehabilitator recognizes that the passage of time in the rehabilitation proceeding creates hardship for certain policyholders,” Hershman said in Wednesday’s filing.

The rehabilitator said his office has identified potential legal claims against third parties — among them Nassau entities and their Golden Gate parent — including claims for breach of fiduciary duty, breach of contract and avoidable transfers. 

“If an acceptable settlement that would be in the best interests of policyholders cannot be achieved, the rehabilitator intends to file a lawsuit against the applicable entities,” according to the filing. Though the regulator said negotiations are underway, it noted that both Nassau and Golden Gate “dispute the validity of any claims.”

The transactions that the rehabilitator is faulting under Golden Gate’s ownership were carried out after review and approval by the state regulator, Nassau said in a separate statement. It blamed PHL’s problems on a block of universal life policies issued between 2004 and 2008, which are now largely held by institutional investors.

“As the rehabilitator itself acknowledges, PHL’s financial challenges predate Nassau’s involvement with PHL by a decade,” Nassau said. “We continue to cooperate in an effort to reach a resolution and provide PHL with administrative support. However, should the rehabilitator pursue litigation, we will vigorously defend ourselves and expect to prevail on the merits.”

A representative for Golden Gate declined to comment.

When US life insurers and annuity providers can’t meet their obligations, customers may still collect at least some of their benefits from a state guaranty association funded by assessments on other insurers.

But those backstops are capped — typically at around $250,000 for an annuity. PHL’s regulator said it’s still trying to eke out larger payouts through a partial sale or a reinsurance transaction with third parties.

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