In May 2024, PHL Variable Life Insurance Co and captive reinsurers Concord Re and Palisado Re were placed into rehabilitation proceedings by then Connecticut Insurance Commissioner Andrew C Mais.
Now, two years later, the saga has seemingly come to a conclusion, albeit not one that some in the life settlement market were hoping for.
That’s because PHL Variable is now entering the liquidation process; most of the investors who intervened in the original rehabilitation proceedings saw their active participation in the litigation conclude as of the beginning of May.
The Rehabilitator determined that rehabilitation would ultimately leave over-the-cap policyholders worse off than a formal liquidation, which at least triggers a payout from the Connecticut State Guaranty Association. For institutional investors who viewed these policies as high-value assets, however, the statutory safety net is largely symbolic.
“The transition from rehabilitation to liquidation triggers the involvement of the state guaranty fund system, but it brings a rigid ceiling to investor recovery,” said Brian Casey, Partner at Troutman Pepper Locke.
“Under the NAIC’s Life and Health Insurance Guaranty Association Model Act, which was developed well before there was an active life settlement market, the statutory limit for death benefits is generally fixed at $300,000 in most states. It’s a vital backstop for individual consumers, but for the life settlement market, it is a drop in the ocean.”
Individual investment firms holding PHL policies will be impacted by the PHL liquidation but there is, arguably, a bigger picture for the life settlement market overall because at an industry level, for the first time, the space can no longer claim that every policy it ever owned has not paid in full upon maturity because of an insolvent life insurance company.
That claim was used historically to illustrate just how strong life insurers are as risk counterparties to an investment, and it can be used no longer. Institutional investors looking at a life settlement allocation currently might, therefore, be forgiven for seeing this news and hitting the pause button.
But life carrier failures are few and far between and there exists plenty to support any claim that the PHL Variable situation is not one that might repeat or spill over into contagion.
An analysis of the 2024 statutory filings of 42 life insurance companies targeted by life settlement investors by insurance asset management firm, Conning, in its 2025 Strategic Study, Life Settlements: A Pause for Now found that the average risk-based capital (RBC) – a measure of an insurer’s financial strength developed by the NAIC – had a weighted average RBC level of 463%.
This was higher than the 434% for life insurance industry as a whole, and significantly above the 200% authorized control level capital (ACLC) level, the level at which a state regulator may consider taking action to address an insurer’s solvency. Not one carrier was below the 200% threshold in Conning’s report.
There are other reasons why what seems like a bad headline is not an industry-wide risk when you read the whole story.
First, active life settlement portfolio management best practice suggests that investors diversify by many criteria, to specifically guard against overexposure to any one risk.
“It’s common in life settlement portfolios to have limits on concentrations across a range of factors, such as the age of the insured, gender, their life expectancies, policy size, medical conditions,” said Chris Conway, Managing Director at Vitaro Group.
“Insurance carriers are another category, and even within that, life settlement portfolio managers look at credit ratings of the carriers and the states they do business in, so a typical portfolio would have multiple layers of diversification by carrier.”
Other developments in the past decade or so mean that counterparty risk in the life settlement market is lower now. Litigation and regulation around ‘STOLI’ – stranger-originated life insurance’ – policies in the past decade means that specific practice is essentially consigned to history now, and other trends, such as improvements in underwriting by insurers and the implementation of suitability checks mean that an underwriter which might have missed that 20 seniors in the same zip code were all buying $10m policies funded by the same premium finance company back in 2004 would not do so now.
And the implementation of Actuarial Guideline (AG) 55 – designed to provide regulators with much more transparency into the asset adequacy of offshore asset-intensive reinsurance structures, in turn forcing a fundamental shift in how cedants report risk – means that any offshore asset-intensive reinsurance deals involving universal life insurance – the main type of life insurance seen in the life settlement market – will now be subject to greater scrutiny.
Furthermore, the broad adoption of Principle-Based Reserving (PBR) marks a fundamental shift away from the “one-size-fits-all” formulas of the past. Unlike the static models that left older blocks of universal life insurance (like those within PHL) vulnerable to interest rate volatility, PBR requires insurers to right-size their reserves based on a company’s actual risk experience and modern economic scenarios.
Complementing this is the NAIC’s Group Capital Calculation (GCC) – a tool that provides regulators with a holistic view of the financial health of an entire insurance group, including non-insurance affiliates. By highlighting “contagion risk” from parent companies or sister captives before it reaches the policyholder level, the GCC ensures that the capital backing these policies isn’t being eroded by opaque corporate structures.
There’s no denying that the PHL Variable collapse has hurt some investors. But at a macro level, that life insurers are the main counterparty risk in the life settlement market remains one of its benefits.
“Institutional investors with life settlement allocations – or those looking at making them – might be forgiven for looking at the PHL Variable story and getting cold feet,” said Casey.
“But in terms of risk counterparties to an investment strategy and/or asset class, US life insurers are almost as good as it gets. The industry is well capitalised, well run, and regulatory financial solvency developments in recent years, both in the US and offshore, have added to that strong foundation.”
