Golden Gate Sued Over Insurer’s $2.2 Billion Capital Shortfall

Policyholders of a struggling life insurer sued its private equity owner, accusing Golden Gate Capital of self-dealing and mismanaging PHL Variable Insurance Co. to the point that it now faces possible liquidation.

A lawsuit filed in Connecticut federal court on Friday also accuses Golden Gate and its subsidiary Nassau Financial Group of concealing PHL’s financial problems through reinsurance deals with affiliated companies, including a Cayman Islands entity.

The suit follows a decision by state regulators to scrap plans to rehabilitate the insurer, which was acquired by Nassau in 2016. While PHL’s troubles predate the purchase, state authorities said investments under its new ownership didn’t perform as well as anticipated and that deals with captive reinsurers failed to safeguard enough capital.

PHL policyholders are alleging that the business didn’t fail on its own but rather because of a series of related-party payments that included investing PHL assets in Nassau’s own products such as collateralized loan obligations, collateralized fund obligations, and a private credit fund.

“Defendants systematically and callously pillaged PHL’s assets by using PHL’s money to finance their own ventures, buy back roughly $1 billion of PHL-issued stranger-originated life insurance policies through shell companies, collect hundreds of millions of dollars in fees and dividends, and transfer more than $2 billion through captive reinsurance arrangements—including offshore entities they controlled,” according to the complaint.

“These claims are without merit and we will vigorously defend ourselves,” a spokesperson for Nassau said in an email statement. “We continue to cooperate fully with the Rehabilitator in its efforts to protect and serve PHL policyholders.”

PHL is heading for liquidation, and a Connecticut regulator previously enforced a moratorium that capped policyholders’ benefits at $250,000 or $300,000, depending on the policies.

Friday’s lawsuit claims that some of the issues stemmed from a buyback program where Nassau used PHL to finance the purchase of its own existing policies, then continued paying the minimum premiums so an affiliate could ultimately collect their death benefits.

Golden Gate and Nassau also allegedly put hundreds of millions of policyholder payments into Nassau credit products that “significantly decreased in value each year,” according to the complaint. But the firms continued to make the investments because they generated millions of dollars of fees for themselves, the lawsuit said.