Virginia regulators took control Thursday of Shenandoah Life Insurance Inc. in Roanoke, saying they intervened to protect policyholders and creditors in the wake of stock losses and a failed merger that left the 95-year-old company in precarious financial condition.
A judge placed the company in receivership and appointed the State Corporation Commission as receiver, beginning a review designed to determine whether Shenandoah Life should be rehabilitated or liquidated.
The commission said the company agreed on the need for the receiver, who by law will supervise and can override the actions of current management.
Robert Clark, the company's chief executive officer, did not return a message left Thursday afternoon.
Change was immediate at the company doing business in 31 states and the District of Columbia. For now, the company, whose revenue exceeded $300 million during the first nine months of last year, is no longer writing new policies. It is operating under restrictions about which types of claims will be paid and which won't.
Neither the company nor state released any information about employees, who numbered 280 late last year.
Events began unfolding early Thursday when the company, which specializes in life and dental and annuities, posted a short notice on its Web site disclosing that a planned merger with American United Mutual Insurance Holding Co., described in November as a strategy for growth and stability, was off following American United Mutual's pulling out.
"Further information will follow shortly," the announcement said.
Shortly after 1 p.m., a spokesman for the commission revealed by e-mail that the state had placed the company in receivership.
"Shenandoah is in a hazardous financial condition such that any further transaction of business will be hazardous to its members, insureds, policyholders, subscribers, creditors and the public," said a receivership order signed by Judge Beverly Snukals of Richmond Circuit Court.
By midafternoon, Virginia Commissioner of Insurance Alfred Gross was on his way to Shenandoah's headquarters on Brambleton Avenue, according to SCC spokesman Ken Schrad. Gross will be the deputy receiver.
A rating agency, A.M. Best Co., in turn downgraded the financial strength rating for Shenandoah Life to E, for "under supervision," from B++, which means "good."
Shenandoah had a strong operating year going in 2008 with revenue up 14 percent to $308.5 million and operating profit up 90 percent to $8.4 million as of Sept. 30.
But in November, Shenandoah Life revealed an investment loss of $69.9 million in the stock of secondary mortgage market entities Freddie Mac and Fannie Mae and an entity called Sigma Finance. Shares of Freddie and Fannie had plunged in the wake of subprime, or credit-challenged, borrowers defaulting on home loans in record numbers.
Many companies had placed similar investments, which had carried high ratings and yielded high returns, and "many, many organizations were caught off guard" when the investments deteriorated, said Susan Chaplinsky, a professor of business administration at the University of Virginia's Darden Graduate School of Business Administration.
Its finances weighed down by the heavy losses, Shenandoah Life posted a net loss of $61.5 million during the first nine months of 2008, compared with a net gain of $4.7 million for the same period in 2007.
The same day news of the loss became public, Shenandoah announced the merger plan with Indiana-based American United Mutual. The two firms said the deal would close in mid-2009 and included an undisclosed investment in Shenandoah Life by American United.
Cautioning that she has not studied Shenandoah Life, Chaplinsky said the merger plan could have been designed at least in part to increase Shenandoah's capital, or reserve funds, that had been hard-hit by investment losses. A.M. Best said the company's statutory capital underwent a "large reduction" to $78.3 million on Sept. 30 due to investment losses.
Without a way to shore up capital, that left Shenandoah Life vulnerable to missing government mandates that require insurers to keep sufficient cash on hand.
The receiver's job is to manage what happens next.
"Receivership means you have more liability than assets to pay, by definition," Chaplinsky said. "Somebody's going to lose."
The receiver's job, in part, is to ensure available funds are doled out according to legally established priorities that place policyholders and earned wages ahead of the interests of bondholders and, finally, shareholders, who stand last in line, Chaplinsky said.
"If nobody else steps in, I think they've probably lost their investment in this company," Chaplinsky said.
In a mutually funded insurance company such as this one, the policyholders function like shareholders and have a stake in the company. Shenandoah Life, which has an estimated 230,000 policies outstanding, has previously paid dividends to those policyholders during profitable times.
Court papers said Gross will determine whether Shenandoah "should be rehabilitated." And, if a buyer comes along, Chaplinsky said, employees might transition to jobs with that company. Or, in the end, the company could sell its insurance assets and shut down.
