Pub. 5 2015-2016 Issue 1

12 O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G C O L O R A D A N S R E A L I Z E D R E A M S FEATURE ARTICLE 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. KEN DERKS DAVID SHOMAKER EQUIAS ALLIANCE Report on the Market: BOLI Assets Continue To Have Strong Growth B ank-owned life insurance (BOLI) experi- enced another year of steady growth, with $149.6billion in total assets in2014, a4per- cent increase from the year before, accord- ing to the latest research from the Equias Alliance/ Michael White Bank-Owned Life Insurance (BOLI) Holdings Report. For bankswith less than$10billion 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 popu- lar among all types of banks, withmore 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 re- mains popular with banks because: • It provides tax advantaged invest- ment income not available with traditional bank investments, as well as attractive yields compared to al- ternative 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, en- hance the benefits it provides to the insured employees. Thus, each year, an increasing percentage of U.S. banks holdBOLI 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 contin- ued 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 ac- count 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 remainwith the carrier. In addition, the carrier