Bank-owned life insurance (BOLI) experienced another year of steady growth, with $149.6 billion in total assets in 2014, a 4 percent increase from the year before, according to the latest research from the Equias Alliance/Michael White Bank-Owned Life Insurance (BOLI) Holdings Report. For banks with less than $10 billion in assets, the growth rate was a robust 7.1 percent.
Of the 6,509 banking institutions in the U.S. operating at the end of last year, 3,803 (58.4 percent) held BOLI assets. BOLI was popular among all types of banks, with more than 50 percent of banks of all charter types holding BOLI assets. Leading the way were savings banks with 76.0 percent of the 367 banks in this category owning BOLI and Federal Reserve-member banks with 67.4 percent of the 858 banks in the category owning BOLI.
One of the reasons that bank-owned life insurance (BOLI) continued to experience significant growth in 2014 is that existing policyholders often chose to make additional BOLI purchases. This is not uncommon and is a testament to the satisfaction that many BOLI clients have with both the short and long-term performance of their BOLI policies. BOLI remains popular with banks because:
- It provides tax advantaged investment income not available with traditional bank investments, as well as attractive yields compared to alternative investments of a similar risk and duration.
- The growth in the cash value of the BOLI policies generates income for the bank and its shareholders.
- The bank receives the life insurance proceeds tax-free upon the death of an insured employee who elected to participate in the plan.
- The bank may, at its discretion, enhance the benefits it provides to the insured employees.
Thus, each year, an increasing percentage of U.S. banks hold BOLI assets and use the income to help offset and recover employee benefit expenses such as healthcare and retirement.
With BOLI currently providing a net yield ranging from 2.50 percent to 4.00 percent, depending upon the carrier and product, it is not difficult to understand why BOLI remains so appealing to banks. For a bank in the 38 percent tax bracket, this translates into a tax equivalent yield of 4.03 percent to 6.45 percent.
Hybrid and Variable Separate Account Plans
Hybrid separate account plans have continued to grow rapidly the past several years. The number of banks using hybrid separate account has increased by 47.7 percent from 862 at the end of 2011 to 1,273 at the end of 2014 and the amount of hybrid assets reported has increased by 53.2 percent from $10.36 billion to $15.87 billion over the same time period.
Hybrid separate account policies have been attractive to banks because they combine features of both general and separate account insurance products. Hybrid separate account policies operate like general account policies in that the price risk and default risk of individual securities within the portfolio remain with the carrier. In addition, the carrier guarantees a minimum crediting rate of 1.00 percent to 2.00 percent. The enhancement that many banks find attractive is that if the carrier ever becomes insolvent, the assets in the separate account are segregated from the general creditors of the carrier. Essentially, the assets in the separate account serve as collateral for the cash value of the policies. Hybrids have only been available in to BOLI marketplace for approximately 13 years compared to 33 years for general account products, so the total asset value is lower, but the growth rate is greater.
The largest portion of BOLI assets continues to be held in variable separate account policies (47.6 percent of total BOLI assets). However, only 1.1 percent of this total was held by banks with less than $1 billion of assets. Like hybrid separate account products, the assets in a variable separate account are segregated from general creditors in the event of the carrier’s insolvency. However, gains and losses of the underlying investment portfolio are passed through directly to the policyholders. While most banks that have purchased variable separate accounts policies utilize “stable value” wrappers to reduce the accounting volatility, the complexity of the product has made it more suitable to larger banks than to smaller banks.
It is also interesting to note that median BOLI assets rose from 7.6 percent to $3.98 million in 2014 from $3.70 million in 2013, and that the median ratio of bank BOLI assets to Tier 1 Capital increased from 17.46 percent of capital in 2013 to 17.67 percent of capital in 2014.
New Policies in 2014
In 2015, IBIS Associates, Inc., an independent market research firm, published a report analyzing BOLI purchases last year based on information obtained from carriers that market BOLI products. According to that report:
- Life insurance companies reported placing 1,175 BOLI cases in 2014 representing about $3.21 billion in premium. The 1,175 cases included banks purchasing BOLI for the first time as well as additional purchases by banks that already owned BOLI.
- Of the $3.21 billion in new premium, $2.48 billion (77.2 percent) was put into general account; $698.4 million (21.7 percent) into hybrid separate account; and $35.6 million (1.1 percent) into variable separate account.
- Of the 1,175 cases placed, 494 (42.0 percent) were under $1 million in premium; 341 (29.0 percent) were between $1 million and $2 million; 242 (20.6 percent) were between $2 million and $5 million; 75 (6.4 percent) were between $5 million and $15 million; and 23 (2.0 percent) were over $15 million.
The Market’s Future
The near term trend in the marketplace is for higher general account and hybrid separate account purchases and relatively few variable separate account purchases. Finally, the amount of BOLI assets held by U.S. banks is expected to increase annually by 3 percent to 4 percent based on recent results.
Additional Equias articles on BOLI:
BOLI is Becoming an Increasingly Attractive Option for Banks
What Do Bank Boards Need to Know About BOLI
Equias Alliance offers securities through ProEquities, Inc. member FINRA & SIPC. Equias Alliance is independent of ProEquities, Inc.