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The Benefit of Hindsight


I think taking a look back every now and again is undoubtedly a good thing. If one has made progress, one can enjoy a feeling of satisfaction. If one has made mistakes, one can take stock of those and hopefully learn from them.

But we humans repeat errors, alas. I plead guilty to that. Even if we become aware of negative tendencies, we can forget or overlook them. It’s all too easy to do that.

Witness what happened with PHL Variable Insurance Company, which is in rehabilitation with the Connecticut Department of Insurance. The root cause began decades ago, with the sale of stranger-owned life insurance (STOLI) to sophisticated investor groups, which insiders knew about – and questioned – but the practice continued. The STOLI policies, at high dollar amounts, caused major shocks to financial results and greatly depleted assets when payouts had to be made.

At present the company has negative risk-based capital and a huge deficit; under terms of the rehabilitation, the company has suspended surrenders or withdrawals and limited death benefits and annuity payments from general account-supported annuities and life policies. Clients in separate account products appear to be okay.

After all this all plays out, some policyholders may have to accept reduced payments, and, if the company has insufficient assets to meet obligations, the state guaranty fund will be used to support payouts. It will make for a great case study.

I think this situation echoes the downfalls of Baldwin United and Executive Life, insurers who sold fixed annuities with gaudy crediting rates supported by junk bonds (interest rates were high at the time but the insurance executives and bond dealers were self-dealing also). Baldwin failed in 1983 and special arrangements had to be made to cover policyholders. The New York affiliate of Executive Life was placed in rehabilitation in 1991 and in 2012 a state court ordered the company’s liquidation; those policyholders are covered though a non-profit guaranty fund.

Clearly, in this industry it can take years for problems to metastasize and be resolved.

In my time I’ve seen industry players step in to help peers in times of crisis. In the late 90s and early 2000s, insurers that wanted out of the life and annuity business merged with or were acquired by others. After the 2008 crisis, leading players like Hartford, Sun Life, John Hancock and ING exited the VA business altogether and, it has taken time, but much of their closed blocks have been run off and/or acquired (often by private equity-backed reinsurers). In the last decade Wall Street stepped in to facilitate the spinoffs of Brighthouse, Equitable and Jackson from parents that wanted to trim their risk profiles. More recently, creative reinsurance arrangements have been made to help deal with the costs of managing vintage blocks and even to support new business.

I would argue much has been done to mitigate risks once they have proven too much to handle. But how to avoid such pitfalls in the first place? Looking in the rear-view mirror every so often might help.


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