May 2008:- Bank-owned life insurance (BOLI) losses in Citigroup’s Falcon credit hedge fund has focused attention on the risks of aggressive BOLI investments. Wachovia Corp. and Fifth Third reported losses of $315 million and $323 million from BOLI investments in Citigroup's slidingFalcon funds. Other banks and insurance companies could also incur losses from BOLI hedge fund investments that have gone sour. The exposure is huge and observers fear that the implications for the hedge fund industry is serious. Large bank holding companies and stand-alone banks reported bank-owned life insurance (BOLI) assets of $120.4 billion in 2007, compared with $103.9 billion in 2006, according to the latest Michael White-Mullin TBG BOLI Holdings Report.
RiskMetrics fears that other banks and companies could incur losses. The implications are withdrawals from poor performing hedge funds and potential bank and insurance company decisions to refrain from investing in hedge funds.
What BOLI means
The Federal Reserve Bank of Philadelphia published a paper on the risks in 2003 when BOLI products were around $58 billion. BOLI is a life insurance policy purchased to insure the life of certain bank employees, usually officers and other highly compensated employees. The policies may also be used to fund employee pension and benefit plans, with the bank using the death benefit proceeds to cover pension and benefit plan obligations for non-insured employees. By definition, BOLI is "bank-owned" and the cash surrender value (CSV) of the policy, net of surrender charges, is a bank asset, according to the Philadelphia Fed. The losses hafve thus eroded the capital base of Wachovia Corp. and Fifth Third.
A case that highlighted the dangers of BOLI
BOLI problems have surfaced in the case of Fifth Third Bank versus Transamerica Life Insurance Company and Clark Consulting Inc. TransAmerica and Clark collected $612 million in premiums from Fifth Third and invested the premiums in the Falcon Fund, which is managed by Citigroup. Fifth Third is claiming $323 million in damages, according to the action's documentation.
Instead of enjoying steady tax free returns, Fifth Third had to substantially write down the value of its BOLI asset and has allegedly suffered other substantial damages. Fifth Third alleges breach of contract, breach of fidiciary duties, fraud through alleged false statements and omissions, professional negligence, alleged negligent misrepresentation and insurance company bad faith.
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