NONDEPOSITORY INSTITUTIONS

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NONDEPOSITORY INSTITUTIONS Powered By Docstoc
					CONTENTS;


 INSURANCE COMPANIES
 INVESTMENT COMPANIES

 PENSION FUNDS

 FOUNDATIONS
INSURANCE COMPANIES


 Insurance companıes promise to pay specıfıed
  sums contıgent on the occurance of future
  events,such as death or an automobile accident.
 Insurance companies are risk bearers.

 They accept or underwrite the risk in return for
  an insurance premium paid by the polıcyholder or
  owner of the policy.
   A major task for the ınsurance company is
    deciding which applications for ınsurance they
    should accept and which ones should reject.they
    must also determine how much to charge for the
    insurance if they accept the applicatıons .this
    decısıons called the underwrıtıng process.
   Two sources of income for insurance companies ;
     - include the initial underwriting income,
     - investment income that occurs over time.
TWO MAJOR FORMS OF LIFE INSURANCE
COMPANIES
TYPES OF INSURANCE

LIFE INSURANCE

HEALTH INSURANCE

PROPERTY AND CASUALTY INSURANCE

LIABILITY INSURANCE

DISABILITY INSURANCE

LONG TERM CARE INSURANCE

STRUCTURED INSURANCE

INVESTMENT INSURANCE

ANNUITY
 The  risk insured
against is death.The
 ınsurance company
pays the beneficiary
of the life insurance
policy in the event of
   the death of the
       insured.
   HEALTH INSURANCE ;


    The risk insured is the cost of
    medical treatment for the
    ınsured.
   PROPERTY AND CASUALTY INSURANCE;
    The risk insured by property and casualty
    insurance companies is the damage to various
    types of property.
 the major types of such ınsurance are;
1-a house and its content s agaınst risks such as
  fire ,flood
2- vehicles against collision,theft,and other damage
 LIABILITY INSURANCE; the risk insured
  againist is litigation ,the risk of lawsuit the
  insured due to actıons by the insured or others.
 DISABILITY INSURANCE; insures againist the
  inability of an employed person to earn an income
  in either his or her own occupation or any
  occupatiıon.
   INVESTMENT-ORIENTED
    PRODUCTS;The first major devoloped
    by life insurance companies was the
    guaranteed investment contract
    (GIC).




   ANNUITY; another insurance
    company investment product is
    annuity. An annuıty is often described
    as ‗a mutual fund in an insurance
    wrapper.
INSURANCE COMPANIES VERSUS
TYPES OF PRODUCTS
   In concept, these varıous types of ınsurance could
    be combıned in different ways in actual
    companies . Tradıtıonally ,however ,they
    generally are packaged in companies in smilar
    ways.
 Most commonly ,life insurance and health
  insurance occur together in in a life and health
  insurance company.
 İnsurance for property and casualty is combined
  in a P&C insurance company.
 Companies that provide insurance in both
  insurance products are called multiline
  insurance.
TYPES OF LIFE INSURANCE
1-TERM INSURANCE ; is pure life insurance.if the
  insured dies while the polıcy receıves the death
  benefit. İf the insurance does not die within the
  period , the policy is invalid and hold no value.
2- CASH VALUE OR PERMANENT LIFE
 INSURANCE ; a broad classification of
 life insurance includes cash-value or
 permanent or investment-type life
 insurance.
   A major advantage of this and other
 insurance products that offer a cash or
 investment value is that the inside
 buildup is not subject to taxatıon.
LIFE INSURANCE AND LIFE INSURANCE
PRODUCTS ARE COMPLEX .

        Classification of cash value
        ınsurance
                   Guaranteed cash value    Variable life policies
                   policies

Fixed premium      Whole life insurance     Variable life insurance


Flexible premium   Universal life insurance Variable universal
                                            insurance
3- UNIVERSAL LIFE: the key element of unıversal
  life is the flexible of the premium for the
  polıcyownerthis flexible premium concept
  seperates pure insurance protection from the
  investment element of the policy.

4-VARIABLE UNIVERSAL LIFE INSURANCE:
  combine features of variable life and universal life
  policies
FUNDAMENTALS OF THE
INSURANCE INDUSTRY
   A fundamental aspect of the insurance industry
    results from the relatıonship between the
    revenues and costs.
1- the timing and magnitude of the payments are
  much less certain for an insurance company .
2- the long lag between the receipts and payments
  for an insurance company,which introduces the
  importance of the investment portfolio.
STRUCTURE OF INSURANCE
COMPANY
 1- MANUFACTURER AND GUARANTOR
 2- INVESTMENT COMPANY

 3- DISTRIBUTION COMPONENT
INSURANCE COMPANY
INVESTMENT STRATEGIES
   In general , the charecteristics of insurance
    company investment portfolios should reflect
    their liabilities ,or the insurance products they
    underwrite.
THE VARIOUS TYPES OF INSURANCE POLİCİES
DİFFER İN FOLLOWİNG WAYS:



 The expected time at which the avarage payment will
  be made by ınsurance company
 The satatistical or actuarial accuarcy of estimates of
  when the eventinsures againist will occur and the
  amount of the payment.
 Other factors .
Investment
 Companies
DEFINITION:
   Investment companies are financial
    intermediaries that sell shares to public and
    invest the proceeds in a diversified portfolio of
    securities.
TYPES OF INVESTMENT COMPANIES


   Open-end investment companies

   Closed-end investment companies

   Unit investment trust
 OPEN-ENDED          INVESTMENT
 COMPANIES
  most known as mutual funds
  Price based on NAV
  continuously offer new shares to the public
  capitalization is open
    NET ASSET VALUE (NAV)
   Per-share market value of mutual fund‘s portfolio:

    NAV = (total assets – total liabilities)
           ------------------------------------
          number of shares outstanding
CLOSED-END INVESTMENT COMPANİES
  Trade   in secondary market (exchanges or
  OTC)
      No prospectur
  Rarely   trades at NAV
      Usually at discount, but occasionally at premium
  Embedded  tax liabilities
  Some of holdings may not be marketable
  Conversion to open-end form
      May produce windfall gains for investors
      Sometimes have exit fees for those redeeming
       immediately after conversion
UNIT INVESTMENT TRUSTS (UITS)

  Unmanaged,    self-liquidating
  Most UITs are debt (primarily short-term)
   but some are equity (may have liquidation
   date for portfolio)
  Some UITs are equity
      Liquidation date
      Example: Dogs of the Dow portfolios
ADVANTAGES OF UITS
 Convenience
 Low cost for holding diversified portfolio

 Stable portfolio

 Tax efficiency

 No or minimal management fees
DISADVANTAGES OF UITS

 May not find UIT to match investment goal
 Front-end loads can be hefty

 Lack of resale market
FUND SALES CHARGES AND ANNUAL
OPERATING EXPENSES
   Investors in mutual funds bear two types of costs.
 Sales Charges (shareholders fee) : this cost is
  ‗one-time‘ charge debited to the investor for a
  specific transaction such aas a purchase,
  redemtion, or exchange.
   Expence ratio (operating expence): This cost
    covers the funds expences the largest of which is
    for invesment manegement.This charge is
    imposed annualy and occurs on all funds and for
    all types of disribution.
TYPES OF FUNDS
   Passive (index) funds :Mutual fund that
  owns a portfolio of either common stock or
  bonds that replicates a major market
  index, such as the S&P 500 or Lehman
  Brothers Aggregate Bond Index
 Index funds are low-cost funds that are
  especially useful in passive investment
  strategies in which the investor is satisfied
  to match performance of index.
   Active Funds:attemt to out perform an index
    and other funds by actively trading the fund
    portfolio.
FAMILY OF FUNDS
 Group of mutual funds owned and marketed by
  same company
 Advantages:

     Exchange privilege
     Convenience of dealing with one
      company
     TAXATION OF MUTUAL FUND
   no corporate income tax liability
      it pays at least 90% of its net income to shareholder

      Two kinds of payments to investors:

          one for income
          another for net capital gains realized
PENSION FUNDS
   WHAT DOES PENSION FUND MEAN?
     Pension funds are commonly run by some
    sort of financial intermediary for the
    company and its employees, although
    some larger corporations operate their
    pension funds in-house. Pension funds
    control relatively large amounts of capital
    and represent the largest institutional
    investors in many nations.
TYPES OF PENSION PLANS
   Defined-benefit plan
     Annual contributions are determined by the benefits
      ―defined‖ in the plan paid at retirement
     If value of pension assets exceeds (over funded)
      current and future benefits owed, employer may
         Reduce future contributions
         Distribute surplus to shareholders

         Occurred during stock and bond boom of the 1990‘s
   Defined-contribution plan
     Provides benefits determined by the accumulated
      contributions and the fund‘s investment performance
     ―Contributions‖ are designated in plan, not amounts
      available at retirement
     Firm knows with certainty the amount of the
      contribution
     Provides uncertain benefits to participants
HYBRID PENSION PLAN

Defined benefit pension plans are
 cumbersome for the plan sponsor to
 administer and are not portable from one
 job to another by employees in an
 increasingly mobile workforce. Defined
 contribution plans put the investment
 choices and investment risk on the
 employee. In response to these and other
 limitations forms of hybrid pension
 plans, or combinations of defined benefit
 and defined contribution plans developed.
CASH BALANCE PENSION PLAN
A  cash balance pension plan is basically a
 defined benefit with some of the features
 of a defined contribution plan. A cash
 balance plan defines future pension
 benefits, not employer contributions.
 Retirement benefits are based on a fixed-
 amount annual employer contribution and
 a guaranteed minimum annual
 investment return.
REGULATION
 Regulations  vary depending on the type of
  plan—defined benefit more regulated
 Criticism of plans led to regulation
   Unfair treatment in terms of vesting or service
    requirements needed to qualify for a pension
   Some plans were underfunded and could not pay the
    benefits they promised
   Employees did not benefit when plans had excess
    earnings but received reduced benefits when plans
    performance faltered
PENSION REGULATION
   Employee Retirement Income Security Act of
    1974 (ERISA)
     Funding standards
     Fiduciary standards
     Vesting standards
     Pension Benefit Guarantee Corporation

 Enforced by U.S. Department of Labor
 Many pension plans cancelled after ERISA after
  funding required
PENSION REGULATION
   The Pension Benefit Guaranty Corporation
       Intended to provide insurance on pension plans
       Federally chartered agency that guarantees
        beneficiaries of defined contribution plans get benefits
       Receives no government support
       Funds come from annual premiums and other income
        from active pension plans
       Monitors plans
       Takes over failed plans (bankruptcy of firm) and pays
        minimum benefits to beneficiaries
PENSION REGULATION
   Accounting regulations
       Allow companies to more quickly recognize gains and
        losses
       May increase the volatility of funds‘ returns
       Rules may affect portfolio composition
       Underfunded plans shown as a liability on the
        balance sheet
       Volatility of returns also depends on the composition
        of the portfolio
MANAGERS OF PENSION FUNDS
A   plan sponsor chooses one of the
  following to manage the defined benefit
  pension assets under its control:
 1) use in-house staff to manage all the
  pension assets itself
 2) distribute the pension assets to one or
  more money management firms to manage
 3) combine alternatives 1 and 2.
   In addition to money managers, advisors
  called plan sponsor consultants provide a
  number of services to pension plan
  sponsors, including the following:
 Develop plan investment policy and asset
  allocation among the major asset classes
 Provide actuarial advice

 Design benchmarks against which the
  fund‘s money managers will be measured
 Provide specialized research.
FOUNDATIONS
 Foundations   are another group of
  institutions with funds to invest in
  financial markets. These institutions were
  mainly set up by wealthy individuals and
  families for the benefit of universities,
  private schools, hospitals, religious
  institutions, museums, and other
  institutions.
 The managers of a foundation‘s funds
  invest in long-term assets with the
  primary goal of safeguarding the principal
  of the fund.

				
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