In what is a largely unprecedented conclusion to an insurance receivership, on May 8, 2012, the State Corporation Commission of the Commonwealth of Virginia (the “Commission”) allowed Virginia-based Shenandoah Life Insurance Company (“Shenandoah” or the “Company”), a once troubled mutual insurer, to emerge from receivership and resume normal business operations and the sale of new policies.

Although there have been successful “pre-packaged rehabilitations” in which a previously negotiated deal was announced just short of, or immediately upon, entering receivership, the nature and successful outcome of the Shenandoah receivership should be heralded as a landmark achievement for the state-based regulatory system.

In Shenandoah’s case, there was no white knight waiting to rescue the Company as it entered receivership. Rather, receivership consultants embarked on a years-long effort of identifying and contacting potential strategic partners, vetting proposed rehabilitation scenarios, and carefully selecting the best solution amidst various opportunities and interested suitors for the distressed Company.  The rehabilitation process successfully culminated three years later with Shenandoah’s acquisition by United Prosperity Life Insurance Company (“United Prosperity”), which provided Shenandoah with a much needed capital infusion. Also unique to the transaction — no state insurance guaranty funds were triggered or asked to make payments on behalf of Shenandoah’s policyholders, although there was a finding of insolvency by the Commission when the rehabilitation plan was approved.

Shenandoah’s seeming demise and saving grace

Shenandoah[1] was ordered into state-mandated receivership on Feb. 12, 2009, only months after the beginning of the most serious national and worldwide financial crisis since the Great Depression.  The Company suffered significant investment losses prior to receivership, resulting in the finding that further transaction of Shenandoah’s business would be hazardous to policyholders, creditors, members and the public. Also, the Company had just been advised by an expected purchaser that its anticipated pre-receivership acquisition deal would not be consummated.  In that bleak context, and with the onset of receivership, the late Alfred W. Gross, Commissioner of Insurance in the Commonwealth of Virginia, was appointed Deputy Receiver of the Company, to be subsequently succeeded by Jacqueline K. Cunningham.  The Deputy Receiver moved quickly to retain a team of expert receivership consultants (the “receivership team”) led by Counsel to the Deputy Receiver.[2]

The receivership team began working immediately to stabilize the Company and evaluate its vulnerabilities and rehabilitation options in an effort to preserve, if at all possible, the interests of policyholders and creditors. To that end, among the first priorities were retaining key Company personnel to continue day-to-day servicing for policyholders, to include continued payment of claims, and stabilizing the Company’s financial condition.  With the latter objective at the forefront, the Deputy Receiver implemented numerous measures to reduce expenses and unnecessary liabilities, preserve income from renewal premiums, and control cash flow, all while striving to get a better read on the Company’s true financial condition and prognosis.  Moratoria on the issuance of new business and cash withdrawals were also declared.

Within a few short weeks of being in receivership, the Deputy Receiver and the receivership team determined:  (1) Shenandoah’s financial condition, good will, and other attributes made it a promising candidate for rehabilitation; (2) Shenandoah’s rehabilitation would be in the best interests of policyholders and creditors; and (3) rehabilitation would most likely be achieved through an outside investment, an acquisition, or a merger.  Once a rehabilitative course of action was selected, Counsel to the Deputy Receiver launched efforts to identify potential third-party strategic partners or purchasers.

Remedial measures implemented while in receivership materially contributed toward making the Company a more attractive acquisition target. Attentive and enlightened management of invested assets during the receivership period enabled the Company not only to capitalize on the recovery in the capital markets, but also to substantially improve both the quality of the invested assets and the Company’s ability to withstand later aftershocks to the broader economy, such as the global impact of the debt crisis in the Euro zone. During the receivership, the portfolio of invested assets gained more than $300 million in market value while improving credit quality and preserving acceptable yield and duration.

In due course, United Prosperity emerged as the most promising suitor for a proposed demutualization, acquisition, and rehabilitation of Shenandoah. After a period of intense reciprocal due diligence and document drafting, United Prosperity and the Deputy Receiver executed a Stock Purchase Agreement on May 4, 2011.[3] Counsel to the Deputy Receiver subsequently shepherded the process of addressing potential objections, devising solutions to move past conditional and regulatory hurdles, and seeking all necessary approvals for the proposed transaction including, after a hearing: (1) the Commission’s approval of the Company’s proposed conversion, rehabilitation plan, and acquisition of control; and (2) the policyholders’ vote in favor of the Company’s conversion to a stock company. The rehabilitation plan was approved by the Commission and a more than 97% favorable vote of policyholders, and received no formal opposition from regulators or other interested parties.

The next chapter for Shenandoah

Having satisfied all conditions precedent to the Stock Purchase Agreement and with the receipt of all requisite approvals, the Deputy Receiver lifted the moratoria, and on May 8, 2012, the Commission entered its order terminating receivership proceedings, bringing a positive finality to the transaction. Today Shenandoah is a Virginia stock life insurance company and wholly-owned subsidiary of United Prosperity. Back from the precipice of liquidation, a revitalized Shenandoah is now immersed in the business of insurance, on its way to reclaiming its historical role as an efficient competitor in its markets.  The recapitalized Company remains fully obligated under its insurance policies and contracts, continues to fully pay approved policyholder claims, employs top-quality personnel, and will shortly resume offering the type of premier insurance products for which it had been known for almost a century prior to receivership.

Shenandoah’s successful rehabilitation is a triumphant victory story for the state-based regulatory system and rebuts the conventional wisdom that liquidation or run-off are the only practicable conclusions for a financially impaired insurance company. Shenandoah’s favorable outcome can be attributed, in part, to the Deputy Receiver’s immediate responsiveness to a faltering financial situation, the engagement of an experienced team of consultants, a carefully sought and vetted rehabilitation opportunity, anticipatory deliberation of potential obstacles and creative solutions to complex issues, and a steadfast and determined collaboration among the Deputy Receiver, the receivership team, regulators, United Prosperity, employees, policyholders, and creditors.

Arati Bhattacharya is a partner at. Cantilo & Bennett LLP.

[1] Shenandoah is based in Roanoke,Virginia, and is licensed in thirty states and theDistrict of Columbia. Prior to being placed in receivership, the Company had assets exceeding $1.6 billion and annual premiums of approximately $284 million.

[2] Counsel to the Deputy Receiver in the rehabilitation and acquisition of Shenandoah was Cantilo & Bennett, L.L.P. (“Cantilo & Bennett”), an Austin, Texas “boutique” law firm whose practice focuses on insurance rehabilitations and liquidations.

[3] Per the terms of the executed Stock Purchase Agreement, the Company would convert its structure from a mutual insurance company to a stock company and convey 100% of the resulting stock to United Prosperity. As consideration, United Prosperity would provide a sufficient capital infusion amount for the Company to attain a requisite risk-based capital level.