BOLI Increases May Reflect Institutions' 2008 Success or Failure

 

2008 was a dismal year for some of the country’s largest financial institutions. But it was a relatively good year for others. By coincidence or otherwise, the successes and failures of these institutions appear to be reflected by increases in their reported holdings of bank owned life insurance or BOLI.

An increase in BOLI holdings will generally result from one of three events, or some combination of them. Reported BOLI holdings may increase because the bank bought new policies on its employees. They may also increase when the reporting bank acquires a competitor and, during the process, the competitor’s BOLI policies. Increases may also occur when investment returns raise the cash surrender value of existing policies.

            Over the preceding four quarters, BOLI holdings of Bank of America, Citibank, Wachovia, Washington Mutual, and Wells Fargo have been:

                        Dec. 07            Mar. 08            June 08            Sept. 08           % increase

BOA                14.3B               14.5B               16.5B               17.1B                  19.5

Citi                   3.9B                 4.03B               4.05B               4.1B                       5

Wachovia       14.6B               14.4B               14.5B               14.6B                     0

WaMu             4.9B                 5.028B             5.072B             no report               3.4

Wells Fargo    4.9B                 5.15B               5.19B               5.36B                   9.38

While the relationship between BOLI increases and institutional success may be coincidence, a correlation exists nevertheless. Bank of America, with its 19.5% increase in BOLI holdings, recently reported third quarter 2008 net income of $1.18 billion, or $0.15 per share, a figure far lower than a year ago but significant in relation to other 2008 returns in the industry. Bank of America also received approval for the $50 billion acquisition of Merrill Lynch. Wells Fargo likewise achieved solid growth in loans and deposits during 2008 and is on track to complete its acquisition of Wachovia by year’s end. This success correlates to Wells Fargo’s 9.38% increase in BOLI holdings over the last year.

Wachovia, Citibank and Washington Mutual did not fare as well in 2008. Citibank required bailout money from the federal government and has cut tens of thousands of jobs during the year. Wachovia and Washington Mutual were acquired by competitors while on the brink of collapse. These failures correlate to the relatively pedestrian increases in their BOLI holdings. But perhaps the most interesting question is why their BOLI holdings increased at all (Wachovia’s did not). It seems unlikely that these institutions invested their cash in additional policies. The reported increases may therefore be attributable to investment gains which, at these percentages, are similar to the returns available from treasury bills or similar investments.

 

How Much Are Citigroup's Former Employees Worth Dead?

     Since the beginning of 2008, Citigroup has made thousands of employee layoffs and is poised to discharge thousands more by year’s end. The layoffs may ultimately total between 17,000 to 24,000 employees due to subprime and credit-related losses, according to CNBC.

     The layoffs raise the interesting question, “how much are Citigroup’s former employees worth dead?”

     Citibank, N.A., like many national banks, invests heavily in policies of bank owned life insurance or “BOLI.” BOLI policies insure the lives of the bank’s employees, but unlike traditional life insurance name the bank as the policy beneficiary. When the bank employee dies, the insurance benefits are paid to the bank. 

     Banks, like Citibank, are required to report their life insurance holdings through reports filed with the Federal Financial Institutions Examination Council and report those holdings on line five of a schedule called “RC-F—Other Assets.” Those reports demonstrate that Citibank has acquired billions of dollars of BOLI coverage on the lives of its employees since 2006. Citibank possessed $2.215 billion in BOLI coverage as of March 31, 2006, $3.325 billion as of March 31, 2007, and $3.99 billion as of December 31, 2007. Notably, banks report their life insurance assets in terms of cash surrender value, meaning that the policy benefits due from employee deaths are likely far greater than the amount reported on the schedules. 

     BOLI policies remain in force even if the insured person’s employment with the bank ends. Thus, Citibank will receive insurance benefits upon the deaths of its former employees who were insured by a BOLI policy. As the employees who were laid off in 2008 die, policy benefits will flow to Citibank. And from a pool of 17,000 to 24,000 former employees, those benefits may be significant, even by Citibank’s standards.