iThis decision was based upon the court’s determination that the companies are in a hazardous financial condition. The court has retained exclusive jurisdiction over all creditor claims against the companies. The rehabilitation will affect, among others, current policyholders of life insurance and other policies issued by any of the companies.
The Rehabilitation Order
The Order of Rehabilitation and Appointment of State Insurance Commissioner as Rehabilitator appoints the Connecticut Commissioner of Insurance and his successors in office as the Companies’ rehabilitator and tasks the Commissioner and authorized third parties with continuing the Companies’ businesses as the Commissioner deems to be in the best interests of policyholders, creditors, and the companies’ estates, including activities necessary or appropriate to reform, revitalize, rehabilitate, or run-off the companies. Should the rehabilitator determine that further efforts to rehabilitate the companies would substantially increase the risk of loss to creditors, policyholders, or the public, or would be futile, the rehabilitator may apply to the court for an Order of Liquidation.
Further, under the Order, the rehabilitator is empowered to pursue all appropriate claims and remedies on behalf of the companies and transform the companies as appropriate (through reorganization, consolidation, conversion, reinsurance, merger, policy restructuring, or other means). PHL’s statutory Separate Accounts, established under Conn. Gen. Stat. Section 38a-433 (which generally permits a life insurer, subject to certain conditions, to establish one or more separate accounts to provide for life insurance or life or period-certain annuities payable in fixed or variable amounts or both) must be used solely for the benefit of policyholders whose policies were issued by such Separate Accounts and for the payment of expenses of administering the Separate Account. Obligations to Separate Account policyholders are primary over other PHL policyholders.
In addition, the Order suspends the authority of insurance agents to issue or modify policies or annuities, pending further direction from the rehabilitator.
Reasons for the Order
Based on affidavits of actuaries submitted to the court by the rehabilitator, the request for rehabilitation is the result of (1) high face value universal life insurance policies issued by PHL to insureds over 70 years old between 2004 and 2007 maturing, and (2) a substantial portion of the companies’ investment assets consisting of bonds and structured securities that are “below investment grade or are at the very lowest rung of investment grade.” The companies’ General Account, which is used to pay for, among other things, losses claimed under such universal life policies, currently holds approximately $1.4 billion in admitted assets, as reported in the companies’ 2022 Financial Statement. Since the fourth quarter of 2022, claims have typically exceeded $100 million per quarter, including several multi-million-dollar claims under large policies. According to one actuary’s affidavit, “[t]he pace of these claims is expected to continue and likely increase materially since policyholders covered by these [multi-million dollar] policies are mostly in their late eighties and early nineties.” Further, “the projections as of the fourth quarter 2023 show that if claims were to continue to be paid in full in the ordinary course, the Companies’ aggregate assets would be exhausted in 2030, leaving approximately $1.46 billion of policyholder liabilities with no source of payment.”
The companies were placed under supervision by the Commissioner in March 2023. It is unclear how the companies, which are highly regulated and have been under supervision for over a year, decided to make, and were permitted to continue with, such poor and high-risk investments.
Legal Actions Stayed
The Order enjoins all persons having notice of the Order from pursuing actions (at law and in equity) against the companies or companies’ assets, including actions seeking to obtain any preference, judgment, lien, or the like against the companies or their assets. The Order further stays all legal actions in any jurisdiction to which any of the companies is a party. However, the Order authorizes the rehabilitator, in his sole discretion, to commence or continue legal actions in which any of the companies is a party. This affects policyholders because it prohibits them from commencing or proceeding with pending suits against the companies for coverage, bad faith, and other potential claims.
The Moratorium Order and Policy Premiums
The court also issued a Temporary Moratorium Order, which took effect on May 20. The Moratorium Order will remain in place until a hearing can be held on the Commissioner’s motion for a moratorium on certain benefit payments and transactions. The hearing date has not yet been set.
Among other things, the Moratorium Order allows the rehabilitator to make limited payments to policyholders during the period between May 20 and the ultimate confirmation of a rehabilitation plan. Regarding life insurance policies, policyholders may receive death benefits only equal to the lesser of the amount of the death benefits provided under the policy or $300,000. Any amount exceeding $300,000 in the aggregate under one or more life insurance policies covering one individual will be not paid, regardless of who owns the polices or the number of beneficiaries. If multiple policies covering one individual have an aggregate amount of life insurance death benefits in excess of $300,000, the rehabilitator will determine the allocation of amounts to be paid under each policy.
Nonetheless, the rehabilitator is authorized to make payments that exceed the aforementioned sums if a policyholder demonstrates “hardship.” Demonstrating hardship may be accomplished by completing a specified Hardship Request for Exemption form, which is available from the rehabilitator.
The Moratorium Order also requires policyholders to make minimum periodic premium payments as stipulated by the terms of their policies. The Order language is so broad that it appears to require policyholders to pay premiums rather than allowing policies to lapse. This could raise significant constitutional issues if policyholders were not allowed to stop paying premiums and forfeit all coverage. This outcome is likely not intended by the court. The language regarding minimum premium payments does require policy owners to pay the premium for the stated face amount, although the initial payout may likely only be $300,000. This presents a conundrum for investors: keep paying large premiums on high-face policies or lapse them?
The rehabilitator is required to notify all policyholders and other parties substantially affected by the Moratorium Order. Policyholders or other parties who wish to be heard at the eventual hearing may do so by appearing through counsel on a motion to intervene in order to participate in the proceedings regarding the Moratorium Order. If policyholders wish to participate but cannot or do not wish to appear through counsel, they may provide written comments directly to the Rehabilitator.
