Kelly: My next guest lives in a town that was originally called "Mudsock" in Indiana because people would get off the train, step in a watery mess, and end up with a mud-covered sock.
Greetings! This is Kelly Coughlin.
Voiceover: Kelly Coughlin is CEO of BankBosun, a management consulting firm helping bank C-Level Officers navigate risk and discover reward. He is the host of the syndicated audio podcast, BankBosun.com. Kelly brings over 25 years of experience with companies like PWC, Lloyds Bank, and Merrill Lynch. On the podcast, Kelly interviews key executives in the banking ecosystem to provide bank C-Suite officers risk management, technology, and investment ideas and solutions to help them navigate risks and discover rewards. And now, your host, Kelly Coughlin.
Kelly: Greetings, this is Kelly Coughlin. I'm the CEO of BankBosun and program host. Today, I'm going to interview Todd Andritsch, a very smart and successful former bank executive, who’s working in the bank-owned life insurance and nonqualified benefit plans industry. He's a board member and principal at Equias Alliance.
Todd brings over 12 years of experience in designing customized benefit and BOLI programs. His prior experience includes 17 years in the banking industry. He earned his undergraduate degree from Drake University. And an MBA from DePaul University. I think that means he lived in Des Moines and Chicago. Todd lives in the Fishers, Indiana which is, I believe, a suburb of Indianapolis, Indiana.
We're going to start out with "Let's Play Fishers, Indiana Trivia". I haven't rehearsed these with Todd, so I'm going to throw him a couple curveballs. Todd, are you on the line there?
Todd: I'm here and ready.
Kelly: Now, you can confirm we did not rehearse this, correct?
Todd: Absolutely. I'm interested here what you come up with them and see what these questions are.
Kelly: Okay. What was the previous name of Fishers?
Todd: Could be one of two answers. I think the real answer is Fishers Switch, which was named after the switching station in Fishers at the train line. But it's also known as Mudsocks. It's one of the areas because the horses in the area had mudlines about a foot up their feet because it was just muddy and is known as the Mudsocks area. So I'm not sure what answer, but those are two common answers.
Kelly: Fishers Switch is what I had in mind. Okay, here's question number 2. What do you Todd think the population of Fishers was in 1963, about 50 years ago?
Todd: Since the first neighborhood had not been platted in any, at all Fishers, it was all country, I would say less than probably 500.
Kelly: Good one. It was 350.
Todd: The neighborhood that I live in was the first platted neighborhood and that was platted in 1970 so you were well before that.
Kelly: That's great. Now it’s 65,000. That's a pretty affluent suburb, isn't it?
Todd: I don't know about affluent, but it's been rated as one of the best places to live in the country by numerous organizations over the years just based on income levels, affordable housing, high quality education, education levels…. So it's a good place to live and raise a family.
Kelly: Yeah, that's great. So I covered little bit on your education. Do you want to pick up your business background a little bit and maybe talk about some family, living, married, number of kids, that kind of stuff.
Todd: Sure. Yeah, well you mentioned 17 years in banking in Chicago on the commercial lending side, both as a business development person as well as a manager of commercial lending unit and then went to actually work for a company, that was a friend of mine was their lead banker called Clark Consulting. So that kind of got me into the industry and that Clark Consulting was also based in Barrington, Illinois, which is where I lived at that time. So I was familiar with the company. Just made a change and got out of banking. For number of reasons it was a good move for me. Five kids today and been raising them here in Fishers and ages range from 22 down to about 10. So it’s kind of spread across age ranges there.
Kelly: Yeah that’s great. So that's how you went from banking directly into Clark, which was in the BOLI business, correct?
Todd: Correct. It was almost a predecessor company to Equias Alliance now. BOLI, nonqualified benefit plans, so always working with banks across the country. My emphasis was really in the Midwest; Midwestern banks and just developing relationships with those banks and bankers and trying to help them achieve their objectives.
Kelly: Alright. That's great. Now one thing we did talk about is kind of getting into the difference between general account, separate account, and hybrid portfolios. There was a conference that you and I were at and you gave a brief talk on the hybrid portfolio and I was kind of focusing more on just the general account and you said to me, “ Well, Kelly, you’ve got to keep your eyes open, because the hybrid is something to look out for.” So I’m wondering if you could just talk for a couple of minutes on what’s the general account portfolio; what’s separate account portfolio; but then give a little more attention to the uniqueness of the hybrid portfolio. Some of the features of it, and some of the benefits, and in which markets they are most beneficial and which markets they're not so attractive.
Todd: Sure. As you mentioned, there’s three different general types of bank owned life insurance. I think of it as a three-column chart. On the left side of the chart is the oldest type of product, the General Account Product. The General Account Product means that you’re an unsecured creditor of the insurance carrier when you give them the bank’s money. In return, you get some basic guarantees. The guarantees include, a guaranteed minimum interest rate, interest default protection and no mark-to-market asset which is a book value guarantee by the carrier. General Account is simple, safe and weighted 100% from risk based capital purposes. But the down side is that you’re an unsecured creditor of that carrier, so the carrier’s credit rating and financial strength is very important. That was the left chart on the column, now let’s describe the right chart of that column. It’s a BOLI product kown as Variable Separate Account. Variable Separate Account is typically a bigger bank product and as such is more complex than the other products. The reason it’s a “bigger bank” product, and I’m putting that in quotes “bigger bank” and that has some variants in it, there’s no set hard line as to what “bigger bank” means. But it’s a bigger bank product because the minimum purchase amounts are typically much larger, as well as the complexity of the product.
It’s a literal security, so that product is a security, it’s covered by securities law, in addition to insurance laws. So, you end up getting into much more documentation and complexity, as I said. It can be a good product for bigger banks, but you also have to have a staff that’s willing to and capable of administering it. So, just having more moving parts makes it more complex.
Kelly: So, with that in mind, what are some of the advantages of the separate accounts?
Todd: Well the advantages of Variable Separate Accounts, include separate asset protection, which is off the carrier’s balance sheet and often time lower expenses due to the bigger dollar amounts. There’s also possibly a lower risk based capital rating. These products are more flexible, allowing the bank to change investment philosophies over time, but there’s no guarantees. And again, it’s much more complex than the other forms.
Kelly: When you use the term a big bank product what do you mean by that…a big bank product?
Todd: Well, that's a good question. And I would put it not to necessarily on asset size but more of a complexity of the institution. But typically, I don't see that variable separate account product in a bank that’s less than billion and a half to two billion dollars. At that point, they're typically getting enough accounting staff and financial management staff to monitor and manage that type of asset. So, that's a general rule but it's really based more on complexity in institution that it is on size of institution.
Kelly: And now the Hybrid Account, how does that fit into this chart?
Todd: So far, what we’ve described is the left and the right columns of that chart. Those two columns. But what’s left is the combination of the two in the middle, which is the hybrid. Which makes sense, a hybrid between the General Account and the Variable Separate Account. This product is called a Hybrid Separate Account, thus the hybrid name. It’s what falls between the two and brings the best of both of those other products to the middle and together. What it does is it brings the simplicity and guarantees of the General Account from the left-hand product into the hybrid, which includes the guarantees such as the guaranteed minimum crediting rate, investment default protection and book value guarantees and it is 100% risk rated. But, the hybrid also has many and most of the advantages of the Variable Separate Account in this middle column on the chart and that’s the separate asset protection and much of the flexibility to investment philosophies and changes in investments over time.
The advantages here are you are getting the guarantees of the general account, you're getting the much of the flexibility and the separate account collateral effectively…it’s not collateral but it’s effectively what it is, backing you up from the separate account side. And you do get the opportunity to move between funds and pick the right fund and investment management philosophy to fit the bank's balance sheet needs overtime. But as I said, it’s because of the guarantees from the carrier backing it up it still is a 100% risk weighted. But it does provide much more flexibility with the simplicity like a general account.
Kelly: And who assumes the balance sheet risk on those assets?
Todd: It’s part of the carriers guarantees and part of what they’re bringing similar to the general account. If market interest rates change, which obviously we continue to see quite a bit in the market and the interest rates are a big deal today and will continue to be. But if rates rise, what happens to value of those bonds on that carriers balance sheet? Well they’ll decline a bit. But that’s not the bank's issue. The guaranteed book value that the carrier is guaranteeing, that investment risk in that mark to market risk, is the carrier's risk, not the individual bank owner of this hybrid separate account BOLI policy.
Kelly: From what I’m hearing from you, there are advantages in the general account, and there are advantages for big banks in the separate account. So this is kind of right in between there. Is that what I'm hearing you say?
Todd: Yes, it’s bringing advantages on both sides into the middle in that chart description I had before. A typical hybrid will have at least two, maybe three or four, different investment philosophies you can choose from and again you can have that flex with the needs of the bank’s balance sheet over time. Do you want only a government fund, where you want absolute credit protection and have a very conservative portfolio or would you rather get more aggressive and move into more of a Lehmann aggregate type of approach; or even further maybe even a small equity upside within that BOLI portfolio. All of those are available within hybrid type of products. It just depends on what you are trying to look for in terms of your risk profile and appetite on the bank’s balance sheet, and you got the opportunity to move in and out of those over time.
Kelly: Okay. Well, there must be a cost of having that kind of flexibility. Would it be safe in assuming that the expense ratios are a little higher in the hybrid vs. the general account?
Todd: In general, they are very similar. There is a cost difference
between the hybrid and the general account. One of the major differences is the carriers have to have some type of payment to the other general account that’s the best way to put it up to pay for the guarantee they’re providing to the hybrid fund. And often times, it’s about a 10 basis point cost. There’s a couple of carriers actually have it literally at 10 basis point. But that's the payment from that hybrid account to the actual carrier for those guarantees backing it up. But really the yield differences over time are more driven by less the costs there than it is kind of what the market rates are; and what’s being invested in; and where new money is flowing in. It’s driving more kind of the yields that are obtained. But the cost of insurance, cost of investment management, really there's no difference there at all between those different types of funds.
Kelly: Aren't the underlying assets or securities that the insurance investment team invest in...aren’t they going to be pretty much the same?
Todd: Pretty much. All the funds are going to be bank eligible BOLI assets because they’re investing for banks in this bank-owned life insurance policies. They're very much similar. But does the general account products necessarily have as much governments in it? In dollar amount it might, but the hybrid fund could have a government only fund, where that’s all that the banks want to be and that’s a very conservative government fund. So it could have a particular fund may have a higher emphasis on one thing or another, depending on what the investment objectives are of that fund. And therefore, that’s why it fits the balance sheet and the risk management profile of the bank depeding on what the needs are over time in the hybrid a little bit differently and you could just match that a little bit closer to what the bank’s needs are. If your investment portfolio really doesn’t have much governments, but you want to have that in the BOLI fund, you can manage the risk profile, the bank's balance sheet overall differently and use that as a piece of the puzzle.
Kelly: What's going on now in the market? Is hybrid an attractive alternative now? Is general account where all the money's going or is hybrid still an attractive investment for banks these days?
Todd: It’s a good question. And the answer to that really depends on market timing and kind of when you're looking. Today, you're right, there’s really, in the last year there’s been very little variable separate account, the big bank products as I described it earlier, really kind of new purchases being done.
General account has been getting a majority of new business, about twice that of the hybrid separate accounts today. And that’s really just based on yield. As the hybrid separate accounts are smaller portfolios, new money going in is being bought at new money rates. So there isn’t as much as a block of an existing insurance and cash value out there to kind of leverage off of older investments as there is in general account.
So general account as of June of 2016 had almost $70 billion in cash value and to put that in perspective in terms of the hybrid separate account, there’s about $17 billion as of the end of June in hybrid separate accounts. So new money going in is going to dilute an existing portfolio less in a larger portfolio, which is the general account.
So, the bulk of the growth has been in general accounts over the last year or two, but there's still is a good amount of money going into the hybrid separate accounts and really the reasons that I went through before: collateral protection, diversification, and diversifying carriers as well product types is still putting a lot of money into hybrid separate account.
As a rate environment changes and long term rates increase, I think you’ll see that flip back to what it was a couple of years ago and probably more going into hybrid separate account than into general account. I think it’s just an issue of what the rate environment is doing right now and kind of where most money is going today. But I think that will change with new money rates over time.
Kelly: Okay. You had mentioned early on in the podcast that separate accounts tended to be kind of big bank product. Is there a certain type of bank profile that you think is appropriate for the hybrid or is it mainly the internal culture of the bank and the appetite for control that you think influences that?
Todd: Yeah, I'm not sure it’s an asset size, or charter type or anything like that...that's going to dictate a hybrid separate account purchase versus another type. I think it’s going to get to what are yields, that credit protection or lack thereof, offset buy an enhanced yield. I think it’s going to get to that risk reward trade-off that bankers are used to making every single day as banks aren’t in the risk avoidance business; they’re in a risk mitigation business.
Are we taking on a risk and are we getting paid for it? That’s a risk mitigation business in trying to figure out how to get their money back in a safe and sound way. That's the same thing in BOLI. There is advantages and disadvantages to the different structures, having assets backing you up and having flexibility on a product with carrier guarantees is better than not having those things. But what is the return trade off?
In today's environment, as I mentioned many banks are saying that return trade off isn't worthwhile. I’m better off going with general account and giving up some of those additional protections. But as rates rise, I think we'll start seeing a different mix in the market. So it's about whether those things are helping mitigate risks internally. Is flexibility good and important? Is the asset protection backing up off-balance sheet of that carrier important? Those things, if the answer to those is yes, hybrid product is absolutely the way to go and depending on market timing, it’s going to be a little below, at, or higher than that general account equivalent.
Kelly: Great. Based on your background, you are at your core primarily a banker and secondarily you are an insurance guy. When you look at BOLI, do you think banks allocate assets to BOLI for investment reasons or insurance reasons? Or some look at it as it’s a loan to insurance company. What's your perspective on that and when you work with a bank, do you emphasize one or the other, or do you stick with…it’s an insurance product?
Todd: Banks are allowed to own or have an assignment of life insurance for three reasons and three reasons only: First is key man coverage on key officers and executives and that’s a temporary need. The executive or the officer leaves the bank, you have to get rid of the policy.
Second is an assignment of a policy for a loan. Got a loan; it doesn’t have enough collateral, not good enough, something's going to happen when you're relying on the individual in terms of repayment you're going to have an assignment, a policy pays off or it moves to another bank, you let go of that assignment.
The third and only other reason that a bank can own or hold a life insurance policy is to offset and recover benefit liabilities it’s all per the regulators. So what banks do is they buy life insurance on a group of executives or directors. The enhanced yields on those policies that's available is really recovering existing benefit expense. It could be pension costs. It could be 401(k) match. It could be health care costs. It could be other nonqualified type plans. It’s for recovering those benefit liabilities and expense.
So while we're talking about some investment aspects here, the reason their bank buys is to offset and recover those benefit liabilities. That is the business purpose. That’s why it’s there. And it’s the only, effectively permanent need. If you and I are both insured at a bank and we leave, our seats and positions are replaced by somebody else. Those benefit expenses continue. So that’s the only effectively permanent need that the bank has and reason to keep that life insurance on the book is to support those benefit liabilities.
And that's really what it revolves around with these banks and again it’s a risk mitigation tool. Benefit expenses are rising. Banks want to keep key employees and have benefit programs that do that. So in order to do that they have to pay for it. One way to mitigate those expenses and keep them down is to have bank-owned life insurance on the books to help pay for those things, because the only difference between Bank A and Bank B isn’t the color of their green money. It’s no different. The difference is the people and how they’re serving their clients. There’s obviously other marketing differences. But it really gets down to the people. Keeping, attracting, retaining, rewarding your key people is important. So then how do you pay for those programs? Bank-owned life insurance is a way to help support those. Because they’re really the only permanent need, and the reason you can own it is to offset and recover those benefit liabilities.
Kelly: You seem pretty passionate about this business. Was that your reason to get into it, to help these banks better compete?
Todd: Yeah, that's the tool. My motivation for getting into this business and anything I do, it's just working with people and continue to develop relationships. Having strong relationships with people you like working with, and developing that bond and trust over time. Whether that would have been in my commercial lending days, or today in this arena, it's about helping people achieve their objectives and then building those relationships. So helping someone with their retirement programs and be able to live comfortably in retirement; helping a bank maintain its profitability by keeping key people; growing the institution by adding new people; that all gets down to compensation and keeping people and the way they pay for it. So bank-owned life insurance and nonqualified benefits are just tools to help build and maintain relationships and help the organization have the tools to grow internally and grow itself and that's just the tool I’m bringing to the table that I can help them with.
Kelly: Great. What type of banks should contact you? I know you’ve got a geographical focus clearly in Indiana, what other states do you work? What profile do you look for? Do you want to help banks that have BOLI on the books from other providers, and then you enhance their reporting or servicing? Who do you want to work with? Who should be contacting you?
Todd: Primarily focus: Indiana, Michigan, Ohio, Kentucky, are my cores states and I got a couple people helping me with that, that are employed by me but again, building those relationships. But again, size of the bank, the charter type, irrelevant. We work with banks from $30 million in assets to over $15 billion, a wide range. And what we do for those different institutions varies, but really, any and all of the above.
Look, we’d love to help banks that have BOLI right now, maintain those portfolios and become a little more efficient with that, maybe enhance yields slightly, if they’ve got it already. We help with M&A activities in terms of reviewing a target’s nonqualified plans and BOLI portfolio and how it can be rolled into existing client. It could be a bank that’s never had any of the above, but it wants to explore it and understand how to retain a key employee and to grow their business and/or just to become more profitable. Any or all of those, again these are just tools to help banks achieve their objectives.
Each bank's objectives are a little bit different and vary. There is no one size fits all. It’s about getting in and understanding the people, understanding the board, understanding what makes the institution tick, what their objectives are, and then structuring something around that.
Just like bankers know that a loan is not a loan is not a loan. A line of credit is not the same as a term loan is not the same as mortgage. They have different needs. They have different objectives, and different ways to structure to make sure that it achieves their clients' objectives. That's the same thing with BOLI and nonqualified benefit plans. And that’s why we talked about hybrid vs. general account. We can go and structure around the particular needs to help the individual bank regardless of size or geographic location achieve their objectives and to help them drive down that course they want to go on.
Kelly: That's great. Sounds like you like what you do.
Todd: I do. It's fun helping people. And no matter what business you're in, and that's what I do and that's what I enjoy.
Kelly: That's great. All right. Now, I gave you a heads up. I was going to ask you either your favorite quote or the dumbest thing you’ve done or said in your career. And I’ll let you know that your business partner, Glenn, answered the dumbest thing by giving a summary of a presentation he made with his zipper down. So, that was pretty dumb, so you might be able to top that.
Todd: Mine isn’t necessarily what I’ve done in my career, but probably the dumbest thing I ever said was "Sure, I'll go skydiving with you.” As I'm holding on to the strut of the plane thinking, I can hold on to this thing and land, but then letting go and having a whole different type of reaction. So dumbest thing I ever said was "Sure, I'll go skydiving with you". Favorite quote? Yeah, I thought about that one a little bit and yeah, it varies and shifts over time, but I think right now it would probably be a quote from the Bible. Proverbs 27:17. “As iron sharpens iron, so one man sharpens another.” I've been thinking about that one a lot recently and I think it applies to not only our faith but all our personal relationships as well as business.
Kelly: That's a good one. Read it again.
Todd: Proverbs 27:17. “As iron sharpens iron, so one man sharpens another.”
Kelly: That's quite good. I’ve never heard that. Very good.
Todd: As we deal with other people, and challenge each other and question each other. And the more we challenge each other, the sharper we get and the better we get. So, I really like that one.
Kelly: Well, that's all I have, Todd. Is there anything else you want to sign off with or shall we conclude this?
Todd: No, thank you. That was great, appreciate the time.
Kelly: Thank you very much. Keep sharpening your iron. We'll be in touch soon. Thank you.
Voiceover: We want to thank you for listening to the syndicated audio program, BankBosun.com The audio content is produced and syndicated by Seth Greene, Market Domination, with the help of Kevin Boyle.
Video content is produced by The Guildmaster Studio, Keenan Bobson Boyle. The voice introduction is me, Karim Kronfli. The program is hosted by Kelly Coughlin.
If you like this program, please tell us. If you don’t, please tell us how we can improve it. And now, some disclaimers.
Kelly is licensed with the Minnesota State Board of Accountancy as a Certified Public Accountant. The views expressed here are solely those of Kelly Coughlin and his guests in their private capacity and do not in any way represent the views of any other agent, principal, employer, employee, vendor or supplier.