A Connecticut judge has approved a modified moratorium that protects PHL Variable Insurance Co. and two subsidiaries during a state rehabilitation, agreeing to a plan that could reduce universal life death benefits by $4.1 billion while allowing policyholders the option to avoid paying $175 million in estimated total premiums.

Waterbury Superior Court Judge Daniel J. Klau's Tuesday order also allows modifications that could allow other policyholders to access between $39 million and $52.3 million in value from separate fixed indexed annuity accounts.

Connecticut Insurance Commissioner Andrew N. Mais sought the alterations to a June 5, 2024, moratorium that capped death benefit payouts. PHL consented to the rescue effort one month earlier to shore up policy claims of $100 million per quarter, court records show.

According to Judge Klau, Mais' proposal created an issue of first impression of Connecticut. Though the judge favorably cited portions of a 2022 Delaware Chancery Court decision regarding an insurance rescue effort in that state, he declined to follow its reasoning in full, instead saying Mais "need only establish that the proposed action is rational, not arbitrary or capricious, under the circumstances."

Judge Klau accepted the commissioner's proposal under that standard of review and said several objectors failed to show Mais was acting irrationally, fraudulently or in bad faith.

Under Mais' modifications, universal life policyholders can choose three separate options.

Those policyholders can either maintain current coverage by paying current premiums, pay reduced premiums for reduced benefits, or "convert their policy to a claim for a fixed amount … with no ongoing cost of insurance or premium payments," the judge said.

Fixed indexed annuity policyholders can maintain current coverage, receive one-time distributions or activate income riders, Judge Klau noted.

The original moratorium allowed one of two options, leading to objections from high-value policyholders.

Under the 2024 plan, policyholders could either continue to pay premiums "knowing that the stated benefit likely will not be paid in full, but not knowing the extent of the likely discount," the judge said. Or, they could stop paying altogether and seek their policy's cash surrender value, likely at a "significant loss," Judge Klau wrote.

Mais' modifications "do not eliminate this dilemma entirely, but they soften its edges significantly" for universal life policyholders, the judge ruled, concluding Mais' modifications were legally sound.

In an Oct. 24 memorandum, BroadRiver Asset Management LP, which objected to the modifications, said universal life policyholders have paid full premiums despite the moratorium's $300,000 cap on death benefits.

According to BroadRiver, it is neither fair nor equitable for the holders of policies under $300,000 to have received full death benefit payouts while high-value policyholders would receive only a fraction of the policies they purchased.

BroadRiver said it was "unaware of any insolvency proceeding that permits discrimination between similarly-situated creditors solely on the basis of the quantum of the claim."

Another objector, Obra Capital Inc., said Connecticut insurance law "does not and cannot give the rehabilitator carte blanche to undertake actions that prejudice certain policyholders over others, nor does it open the door to arbitrary decisions that may negatively affect the value of the estate, to the detriment of larger policyholders."

In an Oct. 7 reply, Mais said it was impossible to entirely predict the effects of the modifications on PHL's estate, but he estimated two of the new universal life options would likely trim payments to PHL by $165 to $175 million.

"The tradeoff for the reduction in incoming premium would be enormous," Mais offered. "If all eligible holders of UL Policies were to elect one of UL options 2 or 3, there would be no immediate cash outlay from PHL and the aggregate face amount of death benefits under all UL policies would be reduced by approximately $4.1 billion."

That figure accounts for a potential slash in PHL's universal life policies from current face values of $5.95 billion to $1.85 billion, helping keep the struggling insurer solvent, Mais said.

Quoting Mais, Judge Klau agreed the modified moratorium "strikes a balance by giving all policyholders access to cash distributions up to the amount that they would be guaranteed to receive in any liquidation, while also preserving PHL estate assets so that a rehabilitation can be pursued primarily for the benefit of policyholders whose policy limits exceed guaranty association limits."

A spokesperson for the Connecticut Insurance Department declined to immediately comment on Wednesday. Attorneys for BroadRiver and Obra did not immediately respond to requests for comment.

The insurance commissioner is represented by Harold S. Horwich and Benjamin J. Cordiano of Morgan Lewis & Bockius LLP.

BroadRiver is represented by John L. Cesaroni of Zeisler & Zeisler PC and David W. Wirt, David J. Fischer and Richard A. Bixter Jr. of Holland & Knight LLP.

Obra Capital is represented by Debra O'Gorman, Victor Noskov and Carolina Yu of Quinn Emanuel Urquhart & Sullivan LLP.

The case is Insurance Commissioner of the State of Connecticut v. PHL Variable Insurance Co. et al., case number UWY-CV24-6085274-S, in the Waterbury Judicial District of the Connecticut Superior Court.