Further Contraction of Treasury Yields Combined with Bank’s Low Interest Projections over time Led to Exponential Growth in BOLI
BOLI’s unprecedented run of prominence reached a new height in the second quarter of 2021. Both the number of purchases and amount of written premium jumped more than double quarter over quarter and grew by 3 and 8 orders of magnitude Year over Year, respectively.
Two main factors have driven BOLI’s performance and growth: the continued low interest rate environment and projections that any rate recovery will be long and drawn out. After brief signs of Treasury relief in the first quarter of 2021, yields dipped again during the second quarter. Then, even as the Federal reserve has indicated that interest rates will be on the rise some time in the near future, Banks are projecting increases to be small and slow moving.
In seeking return while limiting interest rate risk, Banks have been turning to BOLI to meet both criteria. BOLI crediting rates are highly competitive with other bank permissible assets, while providing an asset which will respond to prevailing interest rates over time.
Assumptions: $10 million guaranteed issue BOLI purchase, 29% corporate tax rate
Source: 2Q2021 FDIC Bank Call Reports
If you have any questions about BOLI or would like to explore how BOLI could fit into your portfolio, please contact your Mullin Barens Sanford Consultant.
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