Bank-owned life insurance (BOLI) has undergone a number of changes since it was first introduced in the early 1980s. The number of carriers offering BOLI was a handful in the 1980s, increased to 20 or so in the 1990s and 2000s, and since has decreased to 8 to 10 active carriers as a number of insurers have exited the market or are currently sitting on the sidelines due to the low rate environment.
As competition for attractive investments has increased due to low yields, many carriers have moderately increased duration. Interestingly, several carriers have reduced purchases of below investment grade securities as the yield spread available for them has decreased to the point where the investment return does not justify the increased risk.
On the sales front, in the first six months of this year, there was a 10 percent increase in the number of banks purchasing BOLI compared to a similar period in 2015. Despite the increase in BOLI purchases, there was a decline in the number of banks purchasing the hybrid separate account product as most banks opted for general account.
As the financial crisis passed and banks become more comfortable with the long-term credit quality of carriers, data shows that fewer banks selected hybrid account policies than in the past, which have a mix of variable and general account properties.
Some aspects of the market have, however, remained consistent over time: there have been steady annual increases in both the amount of BOLI assets held by banks and in the percentage of banks holding BOLI assets.
The focus of this article is to look more closely at the state of the market as of June 30, 2016, including changes that have occurred between June 30, 2015 and June 30, 2016 to help track market trends.
New Purchases of BOLI
IBIS Associates, an independent market research firm, publishes a report analyzing BOLI sales based on information obtained from insurers that market BOLI products. According to the IBIS Associates BOLI Report for the period January 1, 2016 to June 30, 2016:
- During the first six months of 2016, 553 banks purchased BOLI. The 553 banks included institutions purchasing it for the first time as well as additional purchases by banks that already own BOLI. This was a 10 percent increase over the 502 banks that purchased BOLI during the same time period in 2015.
- New BOLI premium from banks amounted to $1.78 billion as of June 30, 2016. During a similar six month period in 2015, the total was $2.10 billion or $320 million higher. The difference is attributable to one large variable separate account purchase in the first half of 2015 ($400 million).
- General account purchases dominated the market during the first half of 2016. Of the $1.78 billion in new BOLI premium, $1.65 billion (92.8 percent) was invested in general accounts. Hybrid product purchases amounted to $75.8 million (4.3 percent) while variable separate account purchases (where the investment risk is held by the policyholders and investment gains flow directly to them rather than the insurance carrier) were only $51.4 million (2.9 percent).
- During the period July 1, 2012 to June 30, 2014, 226 banks purchased a hybrid product while for the period July 1, 2014 to June 30, 2016, the number of banks with a hybrid product increased by just 42 banks.
The reasons cited by bankers for purchasing BOLI are that it provides competitive returns with superior credit quality. Current BOLI net yields are in the range of 3.00 percent to 3.75 percent which generates tax equivalent net yields of 4.85 percent to 6.05 percent for a bank in the 38 percent tax bracket. Income generated by BOLI can help offset the increasing costs of a bank’s benefit programs.
Status of Market
Based on a review of FDIC data, the September 2016 Equias Alliance/Michael White Bank-Owned Life Insurance Holdings Report, shows that as of June 30, 2016:
- BOLI assets reached $159.0 billion reflecting a 3.8 percent increase from $153.1 billion as of June 30, 2015. Banks with between $1 billion and $10 billion in assets had the largest percentage increase in BOLI assets during this timeframe with 8.3 percent growth.
- Of the 6,058 banks in the survey, 3,713 (61.3 percent) now report holding BOLI assets. This percentage has grown year after year. There is, however, a wide discrepancy in the percentage of banks holding BOLI by size category. For example, only 39.9 percent of banks with under $100 million in assets hold BOLI while 81.9 percent of banks with $1 billion to $10 billion in assets hold BOLI.
In summary, the positive trends in new purchases, growth in assets and usage of BOLI by banks continued in the first half of 2016.