Institutional Capital
Institutional PPLI, also referred to as Corporate, or Insurance Company Owned Life Insurance (“COLI”, or “ICOLI”, respectively), provides a means to offset balance sheet liabilities associated with deferred compensation plans, enhance after-tax yield of investment earnings, reduce Risk-Based Capital charges associated with direct investments in alternative asset classes, and/or provide a mechanism to achieve stable value wrap accounting treatment.
Risk-Based Capital (“RBC”) Solution:
Insurance companies face significant RBC charges (as high as 45%) when they allocate to asset classes such as private equity, real estate, direct lending or hedge funds. The RBC charges and the corresponding cash reserves required to allocate to these asset classes often make it difficult for insurance companies to achieve their investment portfolio targets given the persistent low yields in traditional fixed income markets.
To compound this RBC issue, insurance companies are subject to income tax on their surplus assets, and most insurance companies have already utilized their carry forward losses from 2008 and 2009.
As a solution, insurance companies can acquire ICOLI.
At inception, a significant portion of an ICOLI program is made up of life insurance risk that is a general obligation of the issuing insurance company.
Unrelated Business Taxable Income (“UBTI”) Solution:
U.S. Tax-Exempt investors such as Pension Funds, Foundations and Endowments are subject to UBTI on certain alternative asset class allocations such as infrastructure, direct lending, private equity and others. These alternative asset class allocations have helped U.S. Tax-Exempt investors achieve the return thresholds needed to satisfy obligations and/or to optimize the value put to work in the philanthropic community. In addition to the unwanted tax drag, excessive UBTI can result in the potential forfeiture of an institution’s tax-exempt status.
In the past, U.S. Tax- Exempt investors have utilized offshore vehicles to avoid UBTI, which can be costly and create certain administrative complexities for U.S. Tax-Exempt investors. Conversely, a Group Variable Annuity (“GVA”) allows U.S. Tax-Exempt investors to allocate domestically through a very simple structure without incurring UBTI. The elimination of UBTI is achieved because the separate account of the life insurance company that issues the GVA is the investor while the U.S. Tax-Exempt investor is the owner of the GVA contract. As a result, U.S. Tax-Exempt investors do not realize any tax on the accumulation or distribution of proceeds in a GVA. GVAs have a history, dating back to the early 1990’s, of enabling U.S. Tax-Exempt investors to allocate without UBTI; to date, approximately $50 billion have been invested through GVA contracts.
