by: Brian W. Smith, Mayer Brown & Platt, August/September 2000

    BOLI is the term coined to describe all life insurance that a bank purchases and either owns or in which it has a beneficial interest. For several years, banks have been purchasing substantial amounts of life insurance on the lives of their directors, officers and employees for which the banks are the owners and beneficiaries of the policies. These policies have been typically tied to the bank recovering (through the policy proceeds) all or a part of the costs of the bank’s employee compensation and benefit plans.

    OCC Bulletin 2000-23 in two important respects revises the language of 96-51 as it relates to the legal authority of a bank to purchase BOLI. First, 2000-23 enumerates four situations which have been found incidental to banking and therefore permissible for banks: key person insurance, insurance on borrowers, insurance purchases in connection with employee compensation and benefit plans, and insurance taken as security for loans. 2000-23 carefully departs from 96-51 by affirming that: "The OCC may approve other uses of bank-owned life insurance on a case by case basis" (emphasis added). In other words, absent a specific OCC determination of permissibility, BOLI may not be purchased for any reason other than those listed.

    A second way in which 2000-23 differs from 96-51 is that it provides an explicit confirmation that banks may purchase separate account insurance products that hold equity securities for the purpose of hedging their obligations under employee compensation and benefit plans. The OCC warns that if the insurance cannot be properly characterized as an effective hedging transaction, the presence of equity securities in the separate account is impermissible.

    The OCC further advises that a bank considering a separate account:

1. Analyze and document the correlation between the insured liability and the equity securities (held in the separate account).

2. Determine a target hedge effectiveness ratio and establish a method to alter the program if the hedge effectiveness drops.

3. Establish a process for analyzing and reporting the effect of the hedge on the bank’s income statement and capital ratios.

    2000-23 is useful in that it: (a) reinforces the legitimacy of BOLI after so many years and so many banks purchasing these products; and (b) clarifies the limited permissibility of purchasing equity securities in a separate account.

    Banks should be advised, however, that 2000-23 did not in any way lessen the need for meaningful prepurchase risk analysis and judicious evaluation of the proper size and structure of the insurance purchase.

by: Brian W. Smith, Mayer Brown & Platt, August/September 2000

Disclaimer: The materials contained in Securitization.Net™ have been prepared for informational purposes only and are not legal or professional advice. This information has been provided by a variety of sources and the accuracy of such information cannot be guaranteed. Accordingly, we make no representation, express or implied, or assume any legal liability or responsibility for the accuracy, completeness or usefulness of this information. This information is not intended to create, and receipt of it does not constitute, an attorney-client or similar relationship. You should not act upon this information without seeking professional counsel. Do not send us confidential information.