How to Get the Best of Both Worlds in Your Pre-Fund Plan


In a year where depositories face ongoing margin pressure, management teams and boardrooms across the country search for alternatives that generate additional profits. In many respects, credit unions may have a more challenging time recuperating lost interest income compared to their bank counterparts, given the regulatory hurdles they face in both their loan book and investment portfolio. To provide relief as it relates to the latter, the NCUA enacted section 701.19, “Benefits for Employees of Federal Credit Unions”, which allows federally chartered institutions to circumvent Section 703 of the NCUA rules and regulations. As employee benefits costs have outpaced the reasonable expected return profile of a federally chartered core bond portfolio (governed by 703), the need for expanded investment authority was apparent.

Institutions have long used various insurance products as pre-funding investments, either in Bank-Owned (BOLI) or Credit Union-Owned (CUOLI) Life Insurance form. However, over the last three years, one of the more popular choices has become a pre-funded securities portfolio. With nearly a 50% increase between June 2017 and June 2020, according to S&P Global Market Intelligence, it’s easy to see why this has become a more widespread investment vehicle. Affording institutions the opportunity to purchase corporate bonds and equities, securities portfolios provide flexibility in their mandate, both from an interest rate and credit risk standpoint, with little barriers to exit, and relatively low management fees (assuming the portfolio is not managed internally). One of the pitfalls, however, is the mark-to-market accounting treatment these portfolios receive, giving rise to potential income statement volatility. To alleviate accounting concerns, and smooth P&L recognition, institutions are exploring a middle ground, known as a Stable Value Wrap, or Annuity. We discuss the finer points below:

  • What is a Stable Value Wrap? An annuity, managed in a separate account, whose sole beneficiary is the institution, or company. The “wrap” is provided by an insurance carrier, which smooths the accounting impact of more volatile investment exposures, such as equities. Rather than being classified as a trading portfolio, the annuity is considered an insurance contract and the value change is managed over an amortization period given the expected return profile at inception. The important takeaway is that the “wrap”, or protection, is only meant to be an accounting solution, it does not provide any economic benefit

Example: 4% expected return, with a 5-year “smoothing” or amortization period

  • ABC institution credits 4% expected return, straight line, with no volatility
  • ABC institution earns 5%. The additional 1% increase is then recognized over the amortization period
  • Book 4.20% for year 2 (1% increase over the “smoothing” period), and reassess annually
  • Beyond friendly accounting, what other benefits does my institution receive? In the “traditional” mold, BOLI and CUOLI have served as the standard bearer. The beneficiary’s assets are setup in a general account, meaning they are invested in and owned by the insurance provider, often leading to a more rigid mandate. The other side of the coin is a securities portfolio, which is typically seen as a low-cost, hands-on alternative, offering a better liquidity profile and lower barriers to exit. Ultimately, a Stable Value Wrap may give your institution the best of both worlds. Managed in a separate account, the assets are set up in a bankruptcy remote trust eliminating carrier risk, or risk that the carrier should default. Additionally, you have the freedom to change the portfolio strategy without penalty and designate an asset manager separately from the insurance provider. This allows the beneficiary to more closely align institutional goals and risk tolerance with portfolio guidelines, and partner with an asset manager your institution trusts.

After a volatile 2020, where rates remain historically low, and the search for higher returns continues, we believe, a Stable Value Wrap is a worthwhile consideration for any institution looking to reduce income statement volatility and maximize earnings. Many benefits provided by a securities portfolio are still available to the beneficiary, without the headache of mark-to-market accounting treatment. Uncertainty has loomed large throughout the year, but a Stable Value Wrap offers more certainty to the way institutions manage and offset an ever-growing expenditure.

Michael Oravetz

Michael Oravetz joined ALM First Financial Advisors in 2016. Michael assists in delivering holistic balance sheet strategies across a variety of funds managementdisciplines including loan and deposit pricing, portfolioand liquidity risk management, as well as profitability andfunds transfer pricing. Michael participates with implementing firm-wide strategic initiatives and modeling procedures. In addition, Michael conductsresearch for asset liability management strategies, interest rate hedging strategies, ALM model validations, loan pool valuation, and credit analyses. Prior to joining ALM First, he worked as an analyst in the Acquisitions and Capital Markets Group for Reef Oil & Gas. Michael holds a bachelor’s degree in bothFinance and Accounting from The University of Texas at Dallas, where he graduated with honors

Robert Perry is a Principal at ALM First, joining the firm in 2010. Mr. Perry leads ALM First’s ALM and Investment Strategy Groups and is responsible for the development of asset liability and investment portfolio themes for the firm. He also provides strategic focus for financial institution client portfolios that are primarily invested in the high credit quality sectors, and is instrumental in balance sheet hedging strategy development.

Robert Perry

Mr. Perry has more than 30 years of experience in the banking and bank-consulting businesses. Mr. Perry has shared his in-depth knowledge and financial management background at many conferences, training and educational events in the areas of ALM and investment strategy, profitability and portfolio strategies, as well as hedging and derivatives use. Mr. Perry has been quoted and published in various publications including WIB CFO Digest, WIB Directors Digest, Credit Union Business, Bloomberg News, and many more.

Before joining ALM First, Mr. Perry previously served as Managing Director of the ALM and Investment Strategy division of DataTech Management in Los Angeles, California, and Chief Investment Officer for First Coastal Bank in Manhattan Beach. Previously, Mr. Perry was a Principal and Product Portfolio Manager at Smith Breeden Associates, Inc., where he managed Smith Breeden’s Enhanced Cash and Enhanced Equity Strategies. He also managed Smith Breeden’s bank consulting group, which included the non-discretionary asset management and risk-reporting businesses. Prior to joining Smith Breeden in 1991, he worked as an analyst in the risk management area of Centura Bank in North Carolina.

Learn more about ALM First’s Employee Benefits Pre-Funding Portfolio Management Solutions at or contact us at to discuss your institution’s specific needs in more detail.

ALM First Financial Advisors is an SEC registered investment advisor with a fiduciary duty that requires it to act in the best interests of clients and to place the interests of clients before its own; however, registration as an investment advisor does not imply any level of skill or training. ALM First Financial Advisors, LLC (“ALM First Financial Advisors”), an affiliate of ALM First Group, LLC (“ALM First”), is a separate entity and all investment decisions are made independently by the asset managers at ALM First Financial Advisors.  Access to ALM First Financial Advisors is only available to clients pursuant to an Investment Advisory Agreement and acceptance of ALM First Financial Advisors’ Brochure. You are encouraged to read these documents carefully. All investing is subject to risk, including the possible loss of your entire investment. The content in this message is provided for informational purposes and should not be relied upon as recommendations or financial planning advice. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues. While such information is believed to be reliable, no representation or warranty is made concerning the accuracy of any information presented.

This content is for CU BUSINESS eMagazine , Special Deal: 2 websites , and NEW! The Leadership Team Builder Group Subscription members only.
Log In Register

Share post:



More like this

PSCU Announces Additional Investment of Over $50 Million in Lumin Digital

St. Petersburg, Fla. —(Aug.24, 2021)—PSCU,the nation’s premier payments credit...

TCU Ultra-Short Duration Portfolio Creates $6.2M in Additional Value for Shareholders

Washington, D.C. – The Trust for Credit Unions (TCU), the...

SECU Financial Partners Welcomes LPL Financial Advisor Jonathan Wasey

Leading professional brings more than 24 years of experience...

Reinvestment Risk Rears Its Ugly Head for Ladder Portfolios

Reinvestment risk is rearing its ugly head for investment...