Has BOLI Become a Bad Investment?

Lower Returns Due to BOLI Investment Constraints Have Wiped Out the Tax Benefits - But There's a Solution

During its heyday (1998-2008), BOLI was purchased by banks as a way to enhance after-tax yields for bank-eligible investments. Crediting rates for typical bank-eligible strategies were relatively high (4% to 5%) and often based on a yield-to-worst formula with some level of expected excess return. Corporate tax rates were also relatively high. As a result, the tax savings on the earnings was generally considerably higher than the costs of the BOLI.

Since then, various marketplace trends have materially weakened BOLI’s value proposition. Some of these trends are out of the bank’s control:

  • Declining Yields: Yields on bank-eligible strategies have substantially declined during the current protracted low-yield environment

  • Declining Tax Rates: With the corporate Federal tax rate at 21%, the value of the tax-free wrapper available from BOLI has been diminished

Other trends in the BOLI marketplace can be managed by the bank:

  • Arbitrary Investment Guideline Constraints: stable value wrap providers have continued to tighten arbitrary guideline constraints, sharply limiting opportunities for investment managers to generate excess returns (liquidity requirements, sector and credit concentration limits, and further reductions in duration). Institutional asset managers have confirmed these constraints are costing policyowners 0.50% ~ 1.00% per annum in return on traditional Core and MBS strategies, all but eliminating any incremental after-tax benefit from the BOLI policy

  • Limitations on Investment Reallocations: most wrap providers are making it difficult or impossible for policyholders to reallocate their investments as market conditions change. During the full business cycle, this materially impacts a bank’s ability to generate additional yields from longer-duration credit and capital-optimized bank-efficient strategies

As a result of these trends, BOLI is becoming a lagging asset for banks – with few opportunities offered by wrap providers to enhance returns through market-driven asset allocation and active management from portfolio managers. Fortunately, there are solutions.

Atlas SV Partners provides stable value contracts that remove arbitrary investment guideline constraints and give policyowners the ability to reallocate their investments. Over the past 20 years, our team has developed and administered several SV businesses that together have generated $50 billion in AUM.

For more information, please contact David J. Marshall via email at david.marshall[at] or by phone at (917) 364-8932.

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