MEMO- BOLI in the News

In recent weeks much has been written about the sizable losses that were taken by a few large banks due to write downs of their Bank Owned Life Insurance portfolios. Bank Owned Life Insurance (BOLI) is also known as wholesale or institutional insurance, because no loads or expenses are passed to the policy owner except the mortality charge. BOLI has been purchased by financial institutions for over 25 years as an attractive investment used to offset the costs of providing employee benefits. BOLI has traditionally been thought of as an extremely conservative and stable asset, so what led to the sizeable write downs at Fifth Third Bank and Wachovia and should you be worried about your BOLI holdings?

Not all BOLI is the Same.

The BOLI owned by Wachovia, Fifth Third Bank, and many other large national banks is simply not the same asset that is typically owned by smaller community banks and credit unions. Larger financial institutions tend to opt for what is known as Separate Account BOLI while smaller institutions most often elect to purchase General Account BOLI. Despite sharing an acronym there are significant differences in product structure and risk dynamics between these two types of BOLI.

Separate Account BOLI

Separate account BOLI allows for the purchaser to direct the investment of the asset into any number of investment funds outside the general portfolio of the insurance carrier. This structure provides the policy owner some added control and flexibility with the investment, and limits the counterparty risk of the insurance carrier to only the death benefit. While these separate account funds can also offer attractive yields they lack the diversity of an insurance carrier’s general account and seldom offer the minimum return guarantees of general account products. Furthermore Separate Account products are subject to market fluctuations and can lose value. Separate account BOLI is typically structured with a third party Stable Value Wrap that serves as a mechanism for smoothing out the market fluctuations of the chosen fund. These wraps amortize the unrealized gains and losses of the fund so as to provide stability for asset accounting by removing mark to market risk. Ultimately these wraps do not protect the asset from losses, and if an underlying fund deteriorates far enough write downs will be necessary. The losses experienced by the Hedge Funds Wachovia and Fifth Third Bank had elected to invest in are an example of this.

General Account BOLI

General Account BOLI invests the premium in the general assets of an insurance carrier. This form of BOLI remains a great option for financing executive benefit programs at smaller financial institutions. With current yields 150-200bps above the 10 year treasury, and being supported by large diverse portfolios General Account BOLI provides the safety, predictability, and stability you would want for funding long term benefit obligations. General Account BOLI products have guaranteed minimum crediting rates between 2.5%-3% and most carriers have AA and AAA ratings on their portfolios.

Burns-Fazzi, Brock, & Associates Role in Your BOLI Investment

Despite the conservative nature of your General Account BOLI holdings it is important to remember that you are a general creditor of the insurance carrier. This is why we closely monitor the credit ratings of our partner carriers and carefully analyze the asset quality, concentration, and duration of their portfolios. Each year we provide a compliance review which includes carrier financials and rating agency reports to help you continue to know your product.