In what is a largely unprecedented conclusion to an insurance receivership, on May 8, 2012, the State Corporation Commission of the Commonwealth of Virginia (the "Commission") allowed Virginia-based Shenandoah Life Insurance Company ("Shenandoah" or the "Company"), a once troubled mutual insurer, to emerge from receivership and resume normal business operations and the sale of new policies.
Although there have been successful "pre-packaged rehabilitations" in which a previously negotiated deal was announced just short of, or immediately upon, entering receivership, the nature and successful outcome of the Shenandoah receivership should be heralded as a landmark achievement for the state-based regulatory system.
In Shenandoah's case, there was no white knight waiting to rescue the Company as it entered receivership. Rather, receivership consultants embarked on a years-long effort of identifying and contacting potential strategic partners, vetting proposed rehabilitation scenarios, and carefully selecting the best solution amidst various opportunities and interested suitors for the distressed Company. The rehabilitation process successfully culminated three years later with Shenandoah's acquisition by United Prosperity Life Insurance Company ("United Prosperity"), which provided Shenandoah with a much needed capital infusion. Also unique to the transaction — no state insurance guaranty funds were triggered or asked to make payments on behalf of Shenandoah's policyholders, although there was a finding of insolvency by the Commission when the rehabilitation plan was approved.
Shenandoah's seeming demise and saving grace
Shenandoah[1] was ordered into state-mandated receivership on Feb. 12, 2009, only months after the beginning of the most serious national and worldwide financial crisis since the Great Depression. The Company suffered significant investment losses prior to receivership, resulting in the finding that further transaction of Shenandoah's business would be hazardous to policyholders, creditors, members and the public. Also, the Company had just been advised by an expected purchaser that its anticipated pre-receivership acquisition deal would not be consummated. In that bleak context, and with the onset of receivership, the late Alfred W. Gross, Commissioner of Insurance in the Commonwealth of Virginia, was appointed Deputy Receiver of the Company, to be subsequently succeeded by Jacqueline K. Cunningham. The Deputy Receiver moved quickly to retain a team of expert receivership consultants (the "receivership team") led by Counsel to the Deputy Receiver.[2]
The receivership team began working immediately to stabilize the Company and evaluate its vulnerabilities and rehabilitation options in an effort to preserve, if at all possible, the interests of policyholders and creditors. To that end, among the first priorities were retaining key Company personnel to continue day-to-day servicing for policyholders, to include continued payment of claims, and stabilizing the Company's financial condition. With the latter objective at the forefront, the Deputy Receiver implemented numerous measures to reduce expenses and unnecessary liabilities, preserve income from renewal premiums, and control cash flow, all while striving to get a better read on the Company's true financial condition and prognosis. Moratoria on the issuance of new business and cash withdrawals were also declared.
Within a few short weeks of being in receivership, the Deputy Receiver and the receivership team determined: (1) Shenandoah's financial condition, good will, and other attributes made it a promising candidate for rehabilitation; (2) Shenandoah's rehabilitation would be in the best interests of policyholders and creditors; and (3) rehabilitation would most likely be achieved through an outside investment, an acquisition, or a merger. Once a rehabilitative course of action was selected, Counsel to the Deputy Receiver launched efforts to identify potential third-party strategic partners or purchasers.
