Golden Gate Capital sued over PHL insurer’s $2.2bn capital shortfall

Golden Gate Capital is facing a lawsuit from policyholders of struggling life insurer PHL Variable Insurance Company, who allege that the private equity firm and its affiliate Nassau Financial Group mismanaged the business and contributed to a $2.2bn capital shortfall, according to a report by Bloomberg.

The complaint, filed in federal court in Connecticut, accuses Golden Gate and Nassau of self-dealing and of using related-party transactions to obscure the insurer’s financial position, including reinsurance arrangements involving affiliated entities outside the US.

The legal action follows a decision by Connecticut regulators to abandon efforts to rehabilitate PHL, which is now facing potential liquidation. Nassau acquired the insurer in 2016. While PHL’s financial difficulties predated the acquisition, state regulators have said investments made following the deal performed below expectations and that arrangements with captive reinsurers did not provide sufficient protection for the company’s capital.

Policyholders allege that a series of transactions involving PHL and other Nassau-related businesses further weakened the insurer. The complaint cites investments in products linked to Nassau, including collateralised loan obligations, collateralised fund obligations and a private credit fund.

The lawsuit also focuses on a programme under which Nassau allegedly used PHL’s assets to help finance the purchase of existing life insurance policies issued by PHL. According to the complaint, shell companies were used in transactions involving approximately $1bn of so-called stranger-originated life insurance policies, while affiliated entities continued making minimum premium payments with the expectation of ultimately receiving death benefits.

The plaintiffs further allege that PHL paid hundreds of millions of dollars in fees and dividends and transferred more than $2 billion through captive reinsurance arrangements, including transactions involving offshore entities controlled by the defendants.

Nassau has rejected the allegations. A company spokesperson said the claims were without merit and that the group would defend itself against the lawsuit, while continuing to cooperate with the rehabilitator overseeing PHL’s affairs.

PHL’s financial problems have already prompted regulatory intervention. Connecticut authorities previously imposed a moratorium limiting policyholder benefits to either $250,000 or $300,000, depending on the relevant policy.