The Bank-Owned Life (BOLI) Insurance Market is Changing: Here’s How


BOLI-10-24-16.pngBank-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.

What to Do (And Not Do) When Providing Liquidity to Shareholders


capital-strategy-06-22-2015.pngThe absence of market liquidity is a common source of frustration for privately held community bank shareholders. In response, banks may be tempted to facilitate or otherwise become more directly involved in shareholder trading. Such involvement may benefit shareholder relations, but it also involves risk. Banks should be aware of those risks and structure liquidity programs to comply with applicable securities laws.

The Risk of Direct Involvement in Shareholder Trading
As a general rule, the more direct involvement a bank or bank holding company has in its own shareholder liquidity program, the higher the risk that (1) the institution could be subject the broker-dealer registration requirements under the Securities Exchange Act of 1934, (2) trades of the institution’s stock under the liquidity program could require registration under the Securities Act of 1933 and (3) the liquidity program could subject the institution to liability under the Exchange Act’s anti-fraud provisions.

Liquidity Program Alternatives
In light of these risks, banks desiring to implement shareholder liquidity programs should minimize exposure by limiting direct involvement. To avoid broker-dealer and Securities Act registration, banks should ensure that they do not (1) directly handle shareholder funds or securities during the course of a trade (except through an escrow account as discussed below); (2) make any recommendations to shareholders regarding trades; (3) participate in price negotiations among shareholders; or (4) accept any compensation for services provided in connection with the liquidity program. In addition, banks should limit their involvement in liquidity programs to ministerial activities, such as communicating the availability of the program and possibly holding related shareholder funds in escrow. Alternatives for programs that incorporate these recommendations are discussed in more detail below.

Limited Involvement Shareholder Matching Service
One low-risk alternative for a liquidity program is a shareholder matching service in which the bank has limited direct involvement. Under this alternative, an institution could maintain a list of shareholders that have expressed an interest in purchasing additional shares of its stock. When approached by shareholders desiring to sell, it could direct the selling shareholders to the persons included on the prospective purchaser list. Shareholders would then negotiate directly with each other regarding the possible trade. Upon consummation, the institution should record the trades in its stock records as a direct trade between the buying and selling shareholders. The bank should not handle the related funds or securities, except possibly to hold them in escrow on behalf of the selling shareholder pending final closing of the transaction.

Stock Repurchase Program and Re-Offering of Securities
Another alternative for providing shareholder liquidity is to implement a periodic stock repurchase program.  Under this type of program, the board of directors will adopt a standing resolution authorizing the institution to repurchase shares of its common stock from shareholders over a specified period of time and for a specified price. The repurchase program should be subject to limitations, including limitations based upon available funding, insider blackout periods and compliance with applicable laws and regulations. In addition, the bank should not make any representations regarding the value of its stock to a selling shareholder. After shares of an institution’s stock have been purchased in a repurchase program, the institution could make those shares available for purchase by its shareholders or others through periodic offerings. Those offerings would have to be conducted under an available exemption from registration under the Securities Act.

Over-the-Counter Listing
Another alternative for enhancing shareholder liquidity is for the bank to have its stock quoted on an over-the-counter market, such as the OTCQX for Banks (OTCQX). The OTCQX is a quotation service that facilitates trading in securities that are not listed or traded on the NASDAQ, NYSE or any other national securities exchange. By having its stock quoted over-the-counter, a bank could provide more liquidity for its shareholders while avoiding risks arising out of its direct involvement in such trades. Those benefits, however, must be weighed against the costs. To have its stock quoted over-the-counter, the bank generally would be required to engage a corporate broker, satisfy certain eligibility requirements and provide certain financial and other disclosures on an ongoing basis.

Conclusion
Privately held community banks are increasingly confronted with shareholder demands for liquidity. A bank may respond to such demands, but in doing so, its board of directors should be mindful of the risks and consider all available alternatives. Shareholder liquidity programs should be carefully structured to fit within the institution’s overall capital strategy and to comply with federal and state securities laws.