The court-appointed rehabilitator of troubled Hartford-based PHL Variable Insurance Co. has abandoned efforts to save the failed insurer through a traditional rehabilitation plan, determining that any resolution will require a liquidation order and funding from state guaranty associations.

Connecticut Interim Insurance Commissioner Josh Hershman, who took over as rehabilitator Dec. 12, reported to Waterbury Superior Court on Wednesday that all of PHL’s business blocks are “materially impaired” — not just the problematic universal life policies that triggered the company’s 2024 collapse.

The finding means PHL lacks sufficient assets to transfer any policies to a buyer without leaving other policyholders worse off than they would be in a conventional liquidation, according to the Dec. 31 report.

“A pure rehabilitation plan — one without any funding from outside of the Companies’ assets — is not feasible,” Hershman wrote.

The report also disclosed that the rehabilitator has identified potential legal claims against PHL’s former owners, Hartford-based Nassau Financial Group and its parent company, San Francisco-based private equity firm Golden Gate Capital. The claims include breach of fiduciary duty, breach of contract and avoidable transfers.

“If an acceptable settlement that would be in the best interests of policyholders cannot be achieved, the Rehabilitator intends to file a lawsuit against the applicable entities,” the report states.

A spokesperson for Nassau Financial disputed the claims in a statement to the Hartford Business Journal.

“The potential claims in the Rehabilitator’s latest report follow the standard NAIC Receiver’s Handbook approach of pursuing recoveries from prior affiliates. However, in this instance, the claims are without merit,” the spokesperson said. “The transactions concerned were undertaken only after a thorough review, negotiation, and approval process with the Connecticut Insurance Department.”

The spokesperson added that Nassau would “vigorously defend” itself if sued and “expect(s) to prevail on the merits.”

Despite the shift away from pure rehabilitation, Hershman is negotiating with two prospective buyers who have submitted proposals to provide policyholders with coverage exceeding state guaranty association limits.

One bidder’s proposal is to acquire PHL with help from an insurance partner. The other structures the deal as a reinsurance transaction. Both would pay a portion of existing unpaid death claims at closing and assume all active policies.

The rehabilitator is in “active negotiations” with the National Organization of Life and Health Insurance Guaranty Associations to determine what assets may be available for providing enhanced benefits.

PHL was placed under state control in May 2024 after reporting negative capital of $2.2 billion.

The company traces its roots to The Phoenix Cos. and was acquired in 2016 by Nassau Reinsurance Group Holdings, backed by Golden Gate Capital.