In 2015, the percentage of banks with bank-owned life insurance (BOLI) increased, the majority selected a General Account (GA) product and the cash surrender value of policies rose.
These are some of the conclusions drawn from the latest research from the Equias Alliance/Michael White Bank-Owned Life Insurance Holdings Report. Of the 6,182 banks in the U.S. operating at the end of last year, 60.5 percent now report holding BOLI assets. This percentage has consistently grown year after year. Further, the percentage of banks in each size category holding BOLI assets increased from the end of 2014 to the end of 2015 with banks in the $1 billion to $10 billion asset category having the highest percentage of BOLI at 82.5 percent.
BOLI assets reached $156.2 billion at the end of 2015, reflecting a 4.4 percent increase from $149.6 billion as of December 31, 2014. The growth in BOLI holdings is attributable to a variety of factors including an increase in the value of those holdings, first-time purchases of BOLI by banks, and additional purchases by banks already having BOLI on the books.
Holdings by Product Type
The highest dollar amount of BOLI assets continues to be held in Variable Separate Accounts (VSAs), where the investment risk is held by the policyholders and investment gains flow directly to them rather than the insurance carrier. VSA assets totaled $71.95 billion representing 46.1 percent of all BOLI assets as of December 31, 2015, down slightly from 47.6 percent at the end of 2014. At the same time, only 480 or 12.8 percent of all banks with BOLI reported holding VSA assets, down from 14.2 percent a year ago. Typically, only larger banks hold VSA assets because of the investment risk noted previously. The average amount of VSA assets held by these 480 banks is substantially larger than the average amount of General Account (GA) or Hybrid Separate Account (HSA) assets held by community banks due to the size differential between the banks.
The type of BOLI assets most widely held by banks in 2015 was GA. A GA’s cash surrender values are supported by the assets of the insurance company. Nearly 96 percent of banks with BOLI reported GA BOLI assets. In comparison to GA products, HSAs have not been available for purchase nearly as long. Since 2011, the number of banks using HSA products increased by 47 percent to 1,280. The above BOLI holding percentages exceed 100 percent since some banks have more than one type of BOLI product.
New Purchases of BOLI in 2015
According to a report from IBIS Associates, Inc., an independent market research firm, BOLI sales last year increased to $4.048 billion which were attributable to purchases by approximately 500 banks. This was 26 percent higher than the $3.214 billion reported in 2014 and was primarily due to a major increase in VSA premium which rose from $35.6 million in 2014 to $504.0 million in 2015. This was due, in part, to a few very large VSA purchases that may not be duplicated in future years.
Why BOLI Remains Popular
Feedback we have received from our clients suggests that the reasons BOLI remains appealing as an investment for banks has not changed in recent years:
- 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; and
- The bank can use the income to pay for one or more non-qualified benefit plans to help attract and retain key executives, or use the income to help offset and recover employee benefit costs such as health care and retirement expenses.
Since BOLI currently offers a net yield ranging from approximately 2.25 percent to 3.75 percent, depending upon the carrier and product, BOLI remains a popular investment option for many financial institutions. For a bank in the 38 percent tax bracket, this translates into a tax equivalent yield of 3.62 percent to 6.05 percent.
Finally, based on our experience, banks owning BOLI policies remain very satisfied with their previous purchases and would consider making additional purchases in the future.