At the end of the first quarter in 2009, Bank of America had the most life insurance on employees: $17.3 billion. The bank won’t disclose how much it owes executives and insists that “Bank of America uses this insurance to help defray the cost of employee benefits.” But filings show that the bank had an unfunded obligation of only $1.3 billion for retiree health benefits; it also owes $2.6 billion for supplemental executive pensions. This suggests that at least $15 billion of the BOLI is intended to back the deferred-compensation obligations. JPMorgan Chase had $11 billion in BOLI and, coincidentally, $10 billion in deferred-compensation obligations. The size of its retiree health obligations? Only $1 billion.
Citigroup had $919 million in unfunded retiree-health obligations, $586 million in supplemental executive pension obligations, and roughly $5 billion in deferred compensation. Offsetting these obligations: $4.2 billion in life insurance. Citigroup said it had bought BOLI because it was “an attractive use of capital” and for “the tax-free nature of the death proceeds.”
Wachovia Corp. had $12 billion in BOLI at the end of 2008, when it was acquired by Wells Fargo (which had $5.7 billion). None of the banks would say how many employees it had life insurance policies on, or whether they were still employed by the bank.
UNDERGROUND
Life insurance on employees accounts for an estimated one-third of all sales of cash-value life insurance. The amounts companies hold can exceed the size of their pension plans. Yet companies and insurers are required to report almost nothing on it, making it impossible for employees, regulators, and lawmakers to determine just how much money companies have stashed away in the insurance.
Insurance regulators, who often accommodate the wishes of the industry, help keep the practice a mystery. The National Association of Insurance Commissioners says it has no data about the scope of the sales, and, though banks report their total holdings to regulators, other companies aren’t required to.
Even bank regulators, including the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Deposit Insurance Corp., have little data. Banks are required to disclose the total cash surrender value of their policies in quarterly bank filings. This is the amount of money they have stuffed into the contracts, plus interest. But they don’t have to disclose anything else, including how much the investments are contributing to earnings. In 2007, the IRS began requiring companies to report the number of employees they purchase insurance on, and the total amount. But companies don’t have to provide any figures for insurance they held prior to these new disclosure rules.
The insurance industry won’t talk about it, either. The American Council of Life Insurers, which has lobbied strongly to oppose restrictions on COLI, says it doesn’t have any data on the product. The National Association of Life Underwriters, despite devoting one-third of its annual conference on life insurance to COLI, says it doesn’t know how much companies are buying.
The Life Insurance Marketing and Research Association says it doesn’t ask companies how much of the insurance they have, and A.B. Best Co., which sells a report on COLI on its Web site, says it doesn’t know how much employers buy or what percentage of life insurance sales it accounts for.
Some insurance consultants used to provide figures to the public, but they stopped. CAST Management Consultants in Los Angeles reported in the early 2000s that sales of new corporate-owned life had risen 60 percent. But it has kept mum since.
Insurance companies that sell COLI don’t even mention the products in their SEC filings. Hartford Life, a major COLI provider, used to. In 2001, it had janitors insurance with a face value of $4.3 billion in force among its clients, according to its annual report. COLI in all its forms brought the company $37 million of its $1 billion of net income that year. But Hartford stopped providing such disclosures. The insurers also stopped mentioning in filings that they owned policies on their own employees. Hartford took out an undisclosed amount of insurance on about eight hundred of its own managers in 2002, but current filings don’t mention it.
Prudential Insurance Co. of America had four groups of policies on workers’ lives, valued at $813 million, in the early 2000s. MetLife Inc., a big seller of corporate-owned life insurance, bought policies on “several thousand” of its own employees in 1993, 1998, and 2001. (There’s sometimes a bit more disclosure when insurers buy life insurance on their own employees; if they buy the policies from a subsidiary, they have to disclose the purchases as related-party transactions.)
The SEC requires that companies report increases in the amount of life insurance they have—but only if the increases are “material.”
Further, when companies report the holdings, they commonly report all their life insurance in aggregate. This includes “key man” policies taken out on top executives, and split-dollar policies, which are used to funnel lavish retirement benefits to top executives.
For investors, another challenge is knowing how much life insurance might be contributing to a company’s bottom line. Companies commonly aggregate the insurance-related income with other items in the “other income” section of their filings.
Clark/Bardes, the COLI consultant, is also vague. A footnote in the income section of its 2000 filing says the “other income” category “includes $1 million in life insurance proceeds.” The company received the $1 million when an employee died in a plane crash.
Chapter 8
UNFAIR SHARES
BUYING LIFE INSURANCE on workers is one way many companies informally fund executive deferred compensation. Tapping the regular pension plan is another. Intel, the giant semiconductor chip maker, moved more than $200 million of its deferred-compensation obligations into the regular pension plan in 2005. This move converted an unfunded liability—deferred compensation for the top 3.5 percent to 5 percent or so of its workforce—into a fully funded, regular pension benefit.
When these 12,000 or so highly paid employees and executives at the chip maker get ready to collect their deferred salaries, Intel won’t have to pay them out of cash; the pension plan will pay them.[13]
There was another benefit as well: Intel contributed $187 million to the pension fund to cover the executive obligations. Normally, companies can deduct the cost of deferred compensation only when they actually pay it, often many years after the obligation is incurred. But Intel’s contribution to the pension plan was deductible immediately. Its tax saving: nearly $70 million in the first year.
Meanwhile, the pension contribution enabled Intel to book as much as an extra $136 million of profit over the ten years that began in 2005 (thanks to the pension accounting rules that let companies immediately record noncash income from pension-plan contributions, based on what they expect the assets to earn when invested). The $136 million was Intel’s estimate of the returns on the contribution. The company’s effective guaranteed return on the contribution in the first year: 40.6 percent.
Intel’s move wasn’t illegal, though it had a peculiar result: It turned a pension plan for a company with more than fifty thousand workers primarily into a fund to pay for the deferred compensation of the company’s most highly paid employees, roughly 4 percent of the workforce.
If it were this easy for all employers to just shift executive liabilities into their employee pension plans, they would all have done so long ago. But tax rules put up a roadblock. To get tax breaks, pensions have to be open to a broad group of employees and can’t discriminate in favor of the highly paid.
Benefits consultants, however, found a loophole in the discrimination rules that has enabled a growing
