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Connecticut Puts Phoenix Life and Annuity Issuer in Rehab

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What You Need to Know

  • A financial examiner listed low interest rates as one contributing factor.
  • Another contributing factor: Investor-owned life insurance.
  • Customers will have to apply for hardship exemptions to make cash withdrawals.

Connecticut Insurance Commissioner Andrew Mais has received approval from a state court in Hartford to put PHL Variable Insurance Co. — the insurer that once wrote the Phoenix Companies’ variable insurance policies and variable annuity contracts — in rehabilitation.

The rehabilitation order, which also includes two reinsurers controlled by PHL, limits benefits payments and cash withdrawals, and it raises the possibility that PHL could stop making trailing commission payments to agents after six months.

PHL struggled because of the effects of low interest rates on its investment returns, the impact of the COVID-19 pandemic on life insurance claims and mortality-related annuity benefit payments, and the effects of the life settlement industry on the performance of universal life policies, according to a petition Connecticut officials filed with the court in Hartford.

Because life settlement investors who bought the universal life policies typically pay the minimum amount to keep the policies in force, and make no use of the policy’s own investment features, they have led to the policies generating much less revenue than PHL had originally expected when it priced the policies, Michael Shanahan, a Connecticut financial examiner, said in an affidavit included with the petition.

“These policies comprise PHL’s most unprofitable block and are a major cause of the continued deterioration of the companies’ financial condition,” Shanahan said.

What it means: Financial professionals with clients who may have life insurance policies or annuities written by PHL need to tell the clients about the new restrictions on payments to customers.

The history: PHL Variable Insurance was created in 1981 to write variable products for the company that eventually became known as the Phoenix Cos.

PHL issued products such as term life, whole life, fixed annuities and non-variable indexed annuities as well as universal life, variable life and variable annuities.

The parent company was a policyholder-owned mutual. It demutualized in 2001.

The Nassau companies, part of a holding company controlled by Golden Gate Capital, announced plans to acquire Phoenix in 2015 and, after closing on the deal in 2016, added a total of $180 million in extra capital to Phoenix insurance company affiliates.

Nassau created a reinsurer, Concord, in 2019 to support efforts to wind down the PHL Variable business. Projections created at the time showed that PHL and Concord would have enough to pay all customers in full, but, in 2020, PHL’s condition deteriorated, according to the rehabilitation petition.

Regulators approved other moves intended to strengthen the company, including a 2021 reorganization that separated PHL Variable from Nassau’s other insurance businesses.

The current situation: Today, the only PHL employees are the company’s officers. Nassau companies handle all company operations under the terms of service agreements.

PHL ended 2022 with about $2.2 billion in general account assets, $800 million in separate account assets and $900 million in negative capital and surplus, and it’s on track to run dry in 2030, according to the rehabilitation petition.

When PHL’s assets are depleted, the company will still have about $1.4 billion in policyholder and annuity holder liabilities on its books, Connecticut Insurance Department officials estimated.

Regulatory involvement: The rehabilitation petition shows that Connecticut regulators put PHL under an order of administrative supervision in March 2023.

Since then, managers of PHL and its reinsurers have made other, unsuccessful efforts to strengthen the business.

But the companies have told the Connecticut Insurance Department that Golden Gate’s insurance business holding company “will not provide additional capital or cause its subsidiaries or affiliates to do so in order to improve the companies’ financial condition,” according to the Connecticut department’s petition.

The companies “do not have access to additional capital from their parent or affiliates; they face short and intermediate term shortages of liquidity; and they do not have a realistic plan to address their deteriorated financial condition,” the department said.

The court entered the order making Mais, the Connecticut commissioner, PHL’s rehabilitator Monday. Mais is supposed to develop a rehabilitation plan within 12 months. He said that there are no current plans to liquidate PHL and that he does not believe the restrictions on recurring payments or death benefits tied to PHL’s general account assets will affect many customers.

The department has posted links to PHL rehabilitation resources, including information aimed at the customers, on its website.

Customers: Customers can get ordinary life and annuity benefits from the portions of their benefits backed by their own separate account assets.

For any benefits backed by PHL’s general account assets, the benefit limit is $300,000 for life insurance and $250,000 for annuities.

Customers can take cash out through loans, surrenders or withdrawals only if they apply for and receive approval for hardship exemptions.

“Decisions on requests for hardship payments shall be made on a case-by-case basis in the rehabilitator’s sole and absolute discretion,” according to the rehabilitation order.

Agent commissions: Agents are not getting commissions for new PHL product sales, but some may be collecting trailing commissions.

PHL will continue making commission payments for six months, according to the rehabilitation order.

After six months, “the rehabilitator shall evaluate whether the continued payment of commissions or other compensation to agents is in the best interest of the companies and their policyholders,” according to the order. “At that time, if the rehabilitator determines that the continued payment of commissions or other compensation to agents is not in the best interest of the companies and their policyholders, he is authorized to immediately suspend such payment without further order of the court.”

Nassau’s statement: Nassau said in a statement that it has provided PHL with administrative and investment services since the two companies separated in 2021.

“We will continue in this role at the direction of the commissioner of the Connecticut Insurance Department, who is appointed rehabilitator,” the company said.

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