In mid-May, Connecticut Insurance Commissioner Andrew N. Mais filed a ‘Petition for Rehabilitation and Appointment of the Commissioner as Rehabilitator of PHL Variable Insurance Company (PHL)’ and its subsidiaries, Concord Re, Inc. and Palisado Re, Inc., in the Connecticut Superior Court.
“Today’s filing underscores the Department’s commitment to protecting consumers and ensuring the availability of a financially sound insurance industry in Connecticut,” said Commissioner Mais in a press release.
“This action is a critical first step for the Department to begin developing and implementing a plan of rehabilitation that both maximizes the value of the Companies’ assets and equitably administers PHL’s business for the benefit of all policy and annuity holders,” he added.
The Connecticut Insurance Department (CID) filed the petition after determining that the companies are in a hazardous financial condition and that “other alternatives have been thoroughly explored”.
Commissioner Mais, as Rehabilitator, expects to develop a plan of rehabilitation for the companies over the next 12 months.
There could be a significant impact on life settlement asset managers that own PHL policies in their portfolios here. The CID has issued a temporary moratorium order, which limits the payout of a claim for death benefits to $300,000 (until further notice), ostensibly until a Plan of Rehabilitation is developed.
This is significantly lower than the average death benefit in the life settlement market; recent data published by industry group the Life Insurance Settlement Association suggests that in 2023, the mean face value purchased in the industry’s secondary market works out to approximately $1.45m.
Many policies transacted in the marketplace have a death benefit far north of that figure, however; there is a lot of variance in the range of death benefit size in the life settlement market. But regardless of whether an investor owns a $600,000 policy or a $5m policy, any maturations in the next year or so will yield only $300,000 while the rehabilitation process plays out. In the event of a liquidation, PHL policyowners looking to recover additional death benefit payouts will become claimants in the liquidation.
Those investors will, of course, be hoping that the plan of rehabilitation includes the payment of the full death benefit for in-force policies. The CID will try and find a white knight to absorb PHL, which could be another insurance company or even a buyer like a large private equity firm. But, according to Brian Casey, Partner and Co-Leader of the Regulatory and Transactional Insurance Practice Group at Locke Lord, it’s not always clear and won’t be for at least another year.
“Life insurance company rehabilitations are complex and lengthy,” he said. “It’s difficult to predict right now what will happen with PHL.”
Whatever happens to PHL, and investors holding its policies, this news story brings into focus the topic of counterparty risk in the life settlement industry.
The worst-case scenario here is that PHL’s rehabilitation is unsuccessful such that the company transitions from a rehabilitation into a liquidation proceeding. While solvency risk is a significant risk, it is also, comparatively, an infrequent one; there are only one or two life and health insurer failures each year. In 2022, there were more than 700 life insurers active in the US, so if one fails, plenty remain to support not only the American consumer but capital markets investors in the life insurance industry as well.
Instead, it is Cost of Insurance risk that is a much more frequently experienced carrier-related risk in the life settlement market. Life insurers are permitted to raise the cost of insurance on certain policies in situations where they need to raise capital, but they must apply to the state regulator to do so. That hasn’t stopped multiple life insurers from doing so in the past decade, but subsequent class action lawsuits have been filed by policyholders against life insurers that raised the CoI which were ‘won’ by the plaintiffs, resulting in the return of excess payments to policyholders.
That doesn’t mean that CoI risk should be underestimated, of course. But, according to Patrick McAdams, Investment Manager at SL Investment Management, a prudent life settlement investor has plenty of tools available through which they can mitigate their risk.
“Most well managed life settlement portfolios have limits on concentrations in different factors, such as the age of the insured, gender, their life expectancies, policy size, carriers, and even medical conditions – you want to, say, cap exposure to insureds whose primary medical issue is diabetes. Credit risk is pretty standard practice in our industry – you have credit rating limits, where you don’t have exposure to a carrier that has a poor credit rating, for example, or at least, you keep that exposure to a minimum and cap max exposure to any one life insurance company,” he said.
The full extent of the impact on the life settlement market of PHL being placed into rehabilitation will not be known for many years. It’s certainly not a good news story for the industry – PHL was exposed significantly to Universal Life policies, the type favoured by the life settlement market – so asset managers with PHL policies in their portfolios could be in for a tough time.
But investors with life settlements allocations should feel a touch reassured about the bigger picture. So far, there hasn’t been a contagion effect in markets – the SPDR S&P Insurance ETF (KIE), while being down a dollar since the news broke, is up around 11% year to date at the time of publishing. According to Casey, the PHL situation, while not good, is not reflective of the US life insurance company industry at large.
“This is not a systemic issue for the life settlement market. This issue involved one life insurance company. The credit rating for life insurers in the US is generally strong, as is the regulatory environment under which they operate. It remains a benefit to the life settlement market that life insurers are the main counterparty in the space.”
The Connecticut Insurance Department did not respond to a request for comment by press time.
