In early December, Connecticut Superior Court Judge Daniel J. Klau granted the proposals to modify the moratorium order that was originally filed in May 2024 by Andrew Mais, Connecticut’s Insurance Commissioner at the time, in respect of the rehabilitation of PHL Variable Life Insurance Company (PHL).
The original order capped the payouts of maturing life insurance policies at $300,000 per individual life (regardless of the number of policies), meaning that policyowners with face value exposure greater than that amount – such as life settlement funds (which tend to buy higher face value policies) – immediately began sitting on a paper loss.
One significant challenge faced by policyowners was that they had to continue to pay the premiums just to keep the policies in force.
For the life settlement cohort, it was a case of damned if you do, damned if you don’t; the former because you’re spending money on an asset that has a ceiling of $300,000 per life insured, the latter because if you don’t keep the policy in force, you lose the whole thing.
But fast forward to July last year and Mais proposed modifications to the original order.
First, policyholders could keep the status quo. Second, they could reduce the face amount of their death benefits with correspondingly lower cost of insurance or premium payments, and third, convert their policy to a claim for a fixed amount in the rehabilitation proceedings with no ongoing cost of insurance or premium payments.
For Edward Stone, Partner at Edward Stone Law, these options were not as helpful as they seemed on the surface.
“The first choice is not a choice, and the second choice is a provision in every PHL universal life insurance policy I have reviewed – one that says you can reduce the face amount and pay less. These are not really new options. The only real new option is the adjusted surrender value – but so far, the rehabilitator has not spelled out exactly how that is going to be calculated,” he said.
The Connecticut Insurance Department did not return an email offering the opportunity to comment prior to publishing.
Still, life settlement funds with PHL policies in their portfolio will soon – if they haven’t already – receive an individualised election package asking them to make their selection. They have just 45 days from the date on the letter to do this, as Interim Insurance Commissioner and new Rehabilitator Joshua Hershman (Mais retired at the end of November) will be looking for a more accurate picture of what the actual liabilities will end up being – because he wants to liquidate PHL.
In a report filed on 31st December last year, Hershman concluded that a rehabilitation was not possible because “After receiving refined bids from the parties engaged in the marketing and sale process and the completion of additional due diligence by the Rehabilitator and his advisors, it has become clear that all of PHL’s blocks of business are materially impaired”. The intent to liquidate comes because Hershman “will not pursue a transaction that will deliver less value than a liquidation of the Companies”.
So, for the life settlement market, it’s a case of making their selections and seeing what the liquidation looks like. The report says that the Rehabilitator is in negotiations with two parties “that are willing and able to provide limited ongoing coverage or benefits above the guaranty associations’ limits, provided that they can reach agreement with the guaranty associations on also providing coverage on the portion of policies within the guaranty associations’ limits.”
There is little certainty here, however, and a significant haircut for policyholders holding face value beyond the $300,000 limit is on the cards.
While PHL’s liquidation will/would be difficult for all policyholders, not only the life settlement cohort – Stone has a client who had a $2m policy on her husband who passed away and only got the $300,000 (“she has kids in high school and hasn’t worked in 30 years – this is a concerning situation for real human beings,” he said) – the topic of carrier risk will doubtless be front and centre of investor due diligence meetings between life settlement funds and their investor clients.
Life settlement portfolio managers already diversify by carrier, as well as age, state, face value, sex – it’s portfolio construction 101 for the industry – but losses still hurt.
But if there is a silver lining to be had here, it’s that this is an isolated incident as opposed to something more fundamental.
“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,” Troutman Pepper Locke Partner Brian Casey told this magazine last year.
Still, this is a saga that the life settlement market will want to end. For those owning PHL policies, however, it will be tough, and for the industry at large, it is unlikely to be quick.
“First of all, there needs to be a proposed liquidation plan that everyone can see. But there is the whole back and forth with the state guaranty associations and NOLHGA [the National Organization of Life & Health Insurance Guaranty Associations]. They need to figure out how much all of the folks whose claims are over the cap will get. Policyholders also need to understand that all amounts paid by State Guaranty Associations get recouped from remaining estate assets pari passu with policyholder claims, to the extent there are assets remaining after all of the under the cap claims are paid. Once the amount of under the cap claims are sorted, the Plan of Liquidation will address how and when State Guaranty Associations will contribute funds and the extent to which the over the cap claims get reduced,” said Stone.
“Given that PHL Variable is reporting negative surplus in excess of $2.2bn, the reductions will be very material and painful for policyholders. We are still only in the middle innings of this one – I’m not sure it gets completely resolved this year.”