Policyholder Faces Financial Uncertainty

When Annie Benjamin put $99,000 into an annuity a decade ago, she had faith that her insurance company would secure her retirement income. She also expected regulators to ensure that insurance providers could fulfill their promises.

Unfortunately, her trust turned out to be misplaced. PHL Variable Insurance Co., a life insurance company owned by private equity, is heading toward bankruptcy and liquidation in 2024. Benjamin’s account is now frozen, leaving her and around 100,000 other policyholders facing a staggering $2.2 billion deficit, as revealed in official documents.

“Everything I thought I could rely on is gone,” Benjamin, a former executive from Minnesota dealing with an autoimmune disease, shared. “I try to stay calm about it, but it really has taken a toll on my mental well-being. Basically, I feel trapped.”

As traditional pensions fade away, more people in the U.S. find themselves relying on life insurance companies to ensure a stable retirement. However, the industry is no longer as robust as it once was.

Aggressive firms tied to private equity are acquiring insurance companies in complex transactions that put policyholders at risk. This has left individuals like Benjamin with limited insight into the safety of their premium investments. The specifics of these arrangements are often hidden deep within annual financial statements, placing the onus on state regulators to ensure that funds are safeguarded and companies financially sound.

Experts argue that the collapse of PHL highlights the shortcomings of state regulators in consumer protection.

“Regulators can’t afford to make mistakes,” stated Larry Rybka, founder of an investment advisory firm in Ohio. “It’s devastating because they’re so removed from the actual situation.”

A spokesperson for the Connecticut Department of Insurance avoided questions about the approved PHL transaction, noting that it “may be subject to future legal action.”

PHL has not responded to requests for comment, and its private equity owner, Golden Gate Capital, also declined to engage.

Changes in the Insurance Landscape

The life insurance sector used to be straightforward, with companies collecting premiums and investing them in dependable assets to fulfill future obligations. However, the model has shifted; more aggressive companies are now engaging in riskier investments, which has raised some concerns.

Research indicates that some firms assume obligations of policyholders through practices like reinsurance, which takes place across U.S. states and internationally, often without public oversight. This lack of transparency prevents policyholders from gauging their insurance company’s stability.

PHL’s failure can be attributed to several factors. Connecticut regulators noted that the company’s investments did not yield expected returns and that COVID-19 disproportionately impacted payouts, requiring PHL to disburse more than initially anticipated.

Moreover, PHL engaged in intricate reinsurance agreements with affiliates, exacerbating the issues faced by policyholders, as regulatory documents reveal that the losses could be even greater.

Reinsurance allows insurers to offload some of their obligations to other companies, which could, in theory, reduce risk. But it can also lead to a thinner capital base, creating vulnerabilities and increasing fear for policyholders.

It wasn’t until investigators delved deeper into PHL that they unearthed alarming details: assets tied to a 2019 reinsurance deal that had been valued at $450 million turned out to be worthless.

This transaction included arrangements with PHL affiliates, set up to handle claims exceeding a specific limit. However, such deals are typically not considered immediate assets by state regulators, leading to potential oversights.

Experts emphasize that PHL’s situation serves as a stark example of what can occur when insurance companies obscure significant liabilities from their balance sheets.

“The hole was vast by the time we finally recognized it,” explained Thomas D. Gober, a former insurance examiner who recently briefed Senate members on concerns within the industry.

According to a recent report from Conning & Company, excess-loss agreements introduce “underappreciated risks” to the sector, as they could vanish suddenly, compromising the insurers’ capacity to meet obligations.

If an insurance company collapses, there isn’t a federal safety net akin to the Federal Deposit Insurance Corporation; instead, state guaranty associations attempt to cover policyholder losses, but payouts are limited. For instance, PHL policyholders may receive only a fraction of their claims back, estimated between 34% and 57% during the liquidation process.

Andrew Mace, who was Connecticut’s insurance commissioner during PHL’s contract approval, left the department under mysterious circumstances last fall to join Deloitte, where he now serves as a senior advisor.

Multiple attempts to reach Mace for comment were unsuccessful, and Deloitte did not respond to inquiries regarding PHL.

Regulatory Oversight Concerns

Connecticut isn’t the only state where insurance regulators have allowed dubious reinsurance deals. Other states have similarly approved transactions that don’t align with established accounting standards, raising red flags among experts.

Gober stumbled upon relevant documents last year that highlighted these issues. The findings indicate that policyholders might be at risk if reinsurance promises are not legitimate or if the assets backing those promises are difficult to liquidate in times of need.

American Equity, another insurance firm, has faced scrutiny regarding three reinsurance transactions involving around $6 billion in debt owed to its policyholders. Despite its claims, public financial statements raise flags about whether the necessary reserves are set aside for claims.

The root of these issues stems from regulators allowing deviations from sound organizational practices, which compromises the stability of such reinsurance agreements.

Experts emphasize that insurance companies need to have immediate liquidity, enabling them to fulfill claims without delay. If they cannot convert assets to cash quickly, the entire arrangement is rendered ineffective.

The reinsurance agreement involving American Equity embodies these concerns. It highlights the complexity and risks associated with how the insurance landscape has evolved over time.

Brookfield Wealth Solutions, which acquired American Equity, has claimed that their arrangements are sound; however, doubts linger about their financial health based on assessments from industry ratings agencies, though they assure policyholders of their commitment to financial security.

Iowa’s insurance commissioner refrained from discussing specific deals but claimed efforts are in alignment with economic realities. Vermont Insurance Commissioner Kai Samsom echoed similar sentiments, defending the regulatory approach taken in these transactions.