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What Policyholders Need to Know

• South Carolina regulators want a court to place Atlantic Coast Life and its reinsurer under state control, alleging risky and illiquid investments threaten policyholders.
• Roughly 50,000 annuity customers and more than 100,000 life and funeral-policy holders could be affected, according to filings cited by state-based reporting.
• The case escalated again this week when Florida suspended Atlantic Coast Life from writing new or renewal business, although existing policies must continue to be serviced.

By Samuel López | USA Herald

South Carolina is asking a judge for extraordinary authority over Atlantic Coast Life Insurance Company — and behind the legal fight is a question that should matter to anyone who owns an annuity: What actually backs the promise that your retirement money will be there when you need it?

On September 15, South Carolina Insurance Director Michael Wise petitioned the Richland County Court of Common Pleas to place Atlantic Coast Life and its subsidiary and reinsurer, Southern Atlantic Re Inc., into rehabilitation. If granted, the companies would be placed under Department of Insurance control while regulators examine their finances and attempt to restore them to sound financial condition. Department of Insurance SC

That distinction matters. Rehabilitation is not the same thing as liquidation, and Atlantic Coast Life has not been declared insolvent by the South Carolina court. No rehabilitation order has been entered. A-CAP, Atlantic Coast Life's parent, says the companies continue paying claims and meeting policyholder obligations. The company and regulators have also agreed to mediation after A-CAP dismissed a lawsuit it had filed against Wise.

But the allegations explain why regulators are acting.

South Carolina contends Atlantic Coast Life and Southern Atlantic Re became heavily exposed to higher-risk and illiquid investments, including assets connected to collapsed investment firm 777 Partners. Bankruptcy records cited in the regulatory dispute indicate A-CAP-related entities may be owed nearly $1.3 billion by 777-related companies. Regulators also contend some assets were overstated or inadequately disclosed. A-CAP disputes the state's characterization of its financial condition.

The reinsurance structure is especially important. Atlantic Coast Life transferred approximately $2.4 billion in reserves and associated investments to Southern Atlantic Re, according to reporting based on the state's filings. Reinsurance normally spreads risk. But moving liabilities to another company does not make economic risk disappear if the assets supporting those obligations themselves become impaired or difficult to sell.

That gets to the issue retirees should understand.

A fixed annuity may promise predictable interest or income, but it is still ultimately backed by the claims-paying ability of the insurance company issuing it. Policyholders may never see the bonds, private loans, real estate investments or affiliated transactions sitting behind that promise. Regulators do.

The stakes are substantial. South Carolina's allegations could affect approximately 50,000 annuity holders and more than 100,000 people holding older life insurance or funeral-related policies. Yahoo Finance

Independent warning signs have also appeared. On September 22, AM Best downgraded Atlantic Coast Life's financial-strength rating from B, or Fair, to C+, or Marginal, leaving the rating under review with negative implications. AM Best cited weakening balance-sheet strength, operating performance and concerns involving illiquid assets.

Then came another development.

Florida regulators on October 1 immediately suspended Atlantic Coast Life's certificate of authority, determining that the insurer was impaired and pointing directly to South Carolina's rehabilitation proceeding. Florida ordered the company to stop soliciting or accepting new and renewal business there. Importantly, Florida also ordered Atlantic Coast Life to continue servicing existing policies and honoring its existing liabilities. FLOIR

For current policyholders, that means this is serious — but it does not mean an annuity or life policy suddenly became worthless. The key questions now are whether South Carolina's court grants rehabilitation, what regulators ultimately determine the assets are worth, whether additional capital can be raised, and whether the companies can satisfy long-term obligations without further intervention.

For retirees, the larger lesson reaches beyond one insurer. A guaranteed insurance contract is only as secure as the financial institution standing behind that guarantee — which is precisely why regulators scrutinize what insurers do with billions of dollars entrusted to them.

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