Monthly LRA Update: November 2024

ACCOUNTING DEVELOPMENT

Article on BOLI Surrender and Redeploy Considerations On October 9 professionals from RSM US published an article on Insurance Newsnet, titled BOLI, bonds and banks: Accounting for early surrender. Since the recent increases in interest rates, many banks have considered surrendering recently purchased (i.e., prior to the run up in interest rates) BOLI to reinvest the proceeds in new BOLI with a higher yield. Over the past year, several banks have reported such transactions in their quarterly earnings releases.

According to this article, “one of the Big Four accounting firms has suggested that such a ‘surrender and redeploy’ transaction could call into question the deferred tax treatment of the new policy as well as any existing policies not yet surrendered.” The authors then provide a brief assessment and comparison relative to voluntarily liquidating Hold-to-Maturity (HTM) bonds. They note that a bank risks “tainting” the HTM treatment of all HTM securities if it sells certain HTM securities or reclassifies them to AFS.

The article does not reach any specific conclusions but observes that “…accounting or regulatory authorities seeking a reasonable way to apply, clarify or reform the current

‘expectations’ standard may well conclude that a similar ‘tainting’ rule should be applied…” to BOLI.

The exception to recording a deferred tax liability for BOLI is an important consideration. Each surrender situation is unique and should be carefully evaluated based on the specific facts and circumstances. In our view, there are situations when surrenders will not “taint” the deferred tax accounting of the remaining BOLI. Whenever a bank elects to surrender certain BOLI policies, arguments in support of its intention to hold the remaining BOLI to maturity should be documented, along with the circumstances justifying the surrender.