Va. Insurer's Decline Came With Scant Warning

Policyholders at Risk After Firm Seized

A Virginia-based life insurance company's descent into receivership last month came with little if any warning and with potentially harmful consequences for policyholders, illustrating the risks consumers face as the financial meltdown weakens life insurers.

On Feb. 12, Virginia's insurance regulator seized control of Shenandoah Life Insurance, saying the company's investments had deteriorated to the point that state intervention was necessary to protect policyholders.

Rating agencies that specialize in tracking the health of insurance companies hadn't sounded any alarm. At the time Shenandoah was placed in receivership, they classified Shenandoah's financial strength as "good." For example, the A.M. Best agency rated Shenandoah "B++".

Now, regulators are trying to save the insurer from liquidation, and they have frozen a variety of payouts to Shenandoah customers.

Claims for disability, health and death benefits, among others, are still being paid. So are certain standard annuity payments. But, for the time being, consumers who want to cash in policies, withdraw money from annuities or otherwise tap nest eggs they have entrusted to Shenandoah are out of luck.

"They have been cut off from access to their money," said Bill Boersma, president of the life insurance consulting firm Opportunity Concepts.

In his Feb. 24 speech before Congress, President Obama declared, "your insurance is secure." The president's intent "was to express confidence in the insurance industry as well as the funds that back the insurance industry," White House spokeswoman Jennifer R. Psaki said by e-mail. Nonetheless, the situation at Shenandoah illustrates what can happen to consumers as the global financial crisis eats away at the assets insurance companies hold to absorb losses and pay claims.

Virginia Insurance Commissioner Alfred W. Gross said Shenandoah agreed that regulators should step in because the company's diminished investments left it vulnerable.

The company, founded in 1914 and headquartered in Roanoke, didn't have to collapse to land in receivership and cause disruptions for policyholders.

"This company is not in any way woefully insolvent," Gross said. Rather, he said, it "was trending towards hazardous financial condition."

By one key measure, Shenandoah's financial cushion had shrunk to $78.3 million as of Sept. 30 from $125.8 million at the end of 2007. At the end of 2007, the company, which operates in 31 states and the District, had $15 billion of insurance commitments.

Part of Shenandoah's problem was that it bought preferred stock in Fannie Mae and Freddie Mac, the federally chartered mortgage giants that were seized by the government in early September after a long decline. Shenandoah lost $50 million on the preferred stock, according to the Virginia State Corporation Commission, showing how crises at big financial institutions can spread.