Banks and thrifts are boosting their investments in bank-owned life insurance in an effort to keep pace with rising employee benefits costs and generate additional income.
At Sept. 30, banks and thrifts held $147.8 billion of BOLI assets, up 8.8% from the same period in 2011, according to a report compiled by the consulting firm Michael White Associates.
Banks and thrifts use BOLI largely to fund employee benefits. Payments are made into a designated fund and all premiums paid are tax free, which can reduce banks' overall benefits costs. As the policies increase in value they can also help boost banks' profits.
Michael White, the president of Radnor, Pa.-based Michael White Associates, says the increase in BOLI assets can be explained in part by new regulations that require thrift holding companies to report their BOLI holdings. He added, though, that more banks are investing in BOLI programs to help generate income at a time when loan growth is flat and new regulations are crimping fee income.
"Banks are looking for yield, and BOLI can offer earnings growth," he says.
White's firm consults banks on insurance matters. The report was sponsored by Meyer-Chatfield, a Jenkintown, Pa., firm that helps banks design compensation programs and develop BOLI strategies.
According to the report, more than half of the nation's banks and thrifts hold BOLI assets and most of them confine their holding to fixed-rate general account policies. However, the report noted that 599 institutions have invested in so-called "separate-account" life insurance policies, which offer potentially higher yields but also come with more risks. Such policies were heavily concentrated among banks with $10 billion of assets or more.
Banks also have the option of investing in hybrid accounts — a combination of general account and separate account policies. At Sept. 30, 1,040 institutions reported having hybrid accounts, up 3.3% from the same period in 2011.