Pub. 2 2011 Issue 1

www.wvbankers.org 8 take the mystery out of the purchase and risk management of BOLI products. In response to those questions we have devel- oped this “Nine Step Due Diligence Process.” Due to space limitations, this article will necessarily concen- trate only on whole life and general account universal life BOLI products, which constitute most of the BOLI products found in the market today. The “Nine Step” due diligence process is designed to help minimize the risk that a bank will make some missteps in building and/or managing its BOLI portfolio: 1. The bank should review the insurance carrier’s ratings from Best, S&P, Fitch, and Moody’s. The Guidelines state that “carrier selection is one of the most critical decisions in a BOLI purchase [and] credit quality is a key variable.” The ratings ref lect the carrier’s claims paying ability, which is the bank’s ultimate investment risk. The bank should also review the carrier’s past financial ratings for trends. It is important to note that out of about 1,000 life insurance companies in the US, only 40 have ever offered an actual single premium BOLI product. Furthermore, to date, only about half of these carriers are still active in the BOLI market. As a result, it is important to properly evaluate an insurance companies ratings. 2. Is the carrier a stock or a mutual company? According to Moody’s 2005 Report on Life Insurers, “mutual companies are relatively more concerned with solvency and financial strength compared to the growth and profitability objectives that are typically the focus of stockholder-owned insur- ers.” Moody’s 2009 Report said that “the U.S. mutual life insurance companies have more successfully protected and maintained their credit worthiness than their stockholder- owned rivals.” All things being equal, a mutual company may be preferred. 3. How efficiently does the carrier operate its business? The bank should review the carrier’s operating fundamentals; i.e., mortality and expenses, lapse ratios, and investment returns. A comparison should be made to other BOLI carriers. The comparison will show how efficiently the carrier operates, which may indicate how one BOLI product might perform long-term against another. 4. Examine the BOLI illustration for cash values and death benefits at guaranteed charges and crediting rates. Most Q Nine Steps — continued from page 7