Banks are navigating a challenging and unprecedented banking environment due to the impacts of COVID-19. Interest rates are low, businesses around the country are not fully operational, and banks are facing potential loan losses. However, banks are still expected to make strategic investments to continue to produce strong earnings while evaluating the risk of those underlying investments. During this challenging economic landscape, Bank Owned Life Insurance (BOLI) remains an asset banks should consider due to the consistent income produced by BOLI policies through high credit quality insurance companies.
The BOLI industry had a strong first quarter of 2020 with over $640mm of new BOLI purchased.¹ Although the landscape has shifted due to COVID-19, BOLI is still attractive in today’s marketplace. BOLI carriers are large diversified insurance companies with most rated AA and above by S&P. Insurance companies have sophisticated investment teams with vast resources that allow them to take advantage of opportunities in the market and provide strong performance. In a new BOLI transaction, banks can expect cash on cash yields of around 3% with tax equivalent yields in the 4% range, depending on the tax rate. These yields are supported by the carriers’ large, established portfolios, which frequently include assets purchased during periods of higher interest rates. When invested in General Account BOLI, the mark-to-market risk is borne by the insurance carrier and the insurance companies provide ²guaranteed minimum crediting rates.
Some carriers have taken advantage of recent spread widening and purchased assets, which now support the ~ 4% tax equivalent yields noted above. This presents banks with an attractive high credit/high yield alternative to loans and other bank eligible assets.
For additional information, contact Justin Robertson, Senior BOLI Consultant or Scott Bethune, Vice President BOLI Consulting at (336) 333- 2050.
¹ FDIC Call Reports
² S&P Global – Market Intelligence
4Insurance Carrier monthly rate sheets
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