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Large Banks Quietly Pile Up 'Janitors' Insurance Policies

Thursday, May 2, 2002 - 00:00
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This article is part of a series that won the 2003 George Polk Award for Financial Reporting. A list of those articles is available at

Some of America's biggest banks -- including Bank of America Corp., J.P. Morgan Chase & Co., and Bank One Corp. -- hold billions of dollars in so-called janitors insurance on their present and former employees. But investors may have a hard time finding much information in their Securities and Exchange Commission filings.

Like many large employers, banks for years have taken out life insurance on the lives of large groups of their workers at all levels, with the banks as the beneficiaries, sometimes without informing their employees. The insurance can give a nice boost to bottom-line profits because it provides tax breaks. Income earned on money in the policies is tax-free for the employer, and when the workers and former workers die, the cash payments the company receives at their deaths are tax-free.

Bank of America, for example, purchased an undisclosed amount of coverage in 1995, 1996, 1998 and 2000, according to documents given to its workers, and the policies continue in effect even after employees have quit, retired or been laid off. But there is no mention of the insurance policies in the company filings. Shirley Norton, a spokeswoman for Bank of America, says the firm doesn't disclose any details of the insurance because "we're not required to."

J.P. Morgan Chase has a brief statement in its filings, noting that it uses company-owned life insurance to finance employee benefits -- but not how much it holds or how much income it generates. "That's just company policy," spokesman Tom Johnson says. He adds that the policies are on "management-level" employees and retirees.

Wachovia Corp. refers to its insurance policy only once in its latest federal filings, in a table reconciling tax figures. A spokeswoman says the policy covers about 25% of Wachovia's employees, whom it considers officers of the company. The policy contributes about 3% of the bank's operating earnings, the spokeswoman says.

Mellon Financial Corp. discloses that it held $1.5 billion in life-insurance assets that benefit the company at the end of 2001, but includes no other details. A spokesman says the policies cover some 600 of the company's "most senior people." He adds that Mellon's filings don't include more details, because the impact of the bank-owned life insurance, or BOLI, on net income is small enough that it isn't material. Materiality often is defined as the information an investor needs to know to make informed decisions about investing.

Insurance experts say many more banks hold this kind of insurance than the slightly more than 100 banks that made such disclosures, as determined by a search of SEC filings.

At least 150 to 200 of the nation's 600 publicly traded banks have purchased a combined tens of billions of dollars worth of insurance on their employees, says Eric Connerly, a partner and financial-services analyst with money-management firm Boston Partners. That includes many of the biggest institutions, which account for a majority of bank assets, he adds.

But pinning down an exact figure is impossible, because some large banks won't even tell big investors such as Boston Partners, which invests $11 billion on behalf of clients, about the extent of their insurance policies, calling it "immaterial," Mr. Connerly says.

Clark/Bardes Consulting Inc., a major provider of bank-owned life insurance, says it has helped arrange bank-insurance policies covering 79,000 people, with a face value of $35 billion. That suggests that, on average, Clark/Bardes's banking customers have insured employees for more than $400,000 each. A spokesman for Clark/Bardes says the coverage it sells to banks is used to insure "officer-level" employees only, not for low-level employees.

Whether a bank has BOLI is important information for investors to know, Mr. Connerly says, because otherwise it is difficult to determine how much of a bank's earnings comes from core lending and other businesses, and how much comes from items such as tax-free income from the insurance.

How much the insurance contributes to the bottom line at banks is unclear. Even when banks disclose how much of the insurance they hold, few investors can figure out what that means for the bottom line. Mellon, for example, doesn't publicly disclose how much income the assets generate.

In an interview, Mellon says the insurance would pay out a total of $3.2 billion on the deaths of all the covered people, and that it generated $75 million in income for the company; but those figures aren't in its filings. Mr. Connerly calculates that the policies probably contributed about $16.4 million of Mellon's net income in 2001 -- or 1.2%.

While Bank of America declined to respond to questions on the amount of earnings this insurance generates, Mr. Connerly says the bank told him that the insurance contributes less than five cents a share annually to its earnings.