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“What is robbing a bank compared with founding a bank?”

“What is robbing a bank compared with founding a bank?”. Bertolt Brecht. Insurance Companies. Life Insurance Policies pool risks associated with death or retirement. Property-Casualty Insurance

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“What is robbing a bank compared with founding a bank?”

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  1. “What is robbing a bank compared with founding a bank?” Bertolt Brecht Saunders & Cornett, Financial Institutions Management, 4th ed.

  2. Insurance Companies • Life Insurance • Policies pool risks associated with death or retirement. • Property-Casualty Insurance • Policies pool risks associated with loss of real assets, personal property and exposure to legal liability. Saunders & Cornett, Financial Institutions Management, 4th ed.

  3. Life Insurance Companies • Ordinary Life Ins. Policies (62% of US mkt) • Marketed on an individual basis • Group Life (32%) • A large no. of insured persons are covered under a single policy to reduce costs: eg., employees. • Industrial Life (1%) • Direct marketing/weekly payments • Credit Life (6%) • Tied to mortgages and other loans. Saunders & Cornett, Financial Institutions Management, 4th ed.

  4. Ordinary Life Insurance Policies • Term Life • Pure insurance/no savings attached. • Whole Life • Level premiums/face value received on death. • Endowment Life • Term if death occurs during endowment period, otherwise whole life (receives face value) • Variable Life • Fixed premiums invested in portfolio so payout is determined by returns. • Universal Life & Variable Universal Life • Both premium amounts & maturity can be changed. Saunders & Cornett, Financial Institutions Management, 4th ed.

  5. Shifting Buying PatternsWall Street Journal, 9/18/02 Annualized Premium Market Share Saunders & Cornett, Financial Institutions Management, 4th ed.

  6. Property-Casualty Insurance Policies • Fire insurance • Homeowners insurance • Commercial multiple peril insurance • Automobile liability & physical damage ins. • Liability insurance • Provides protection against nonauto-related legal liability. Can include operational risk events such as employee fraud or negligence. • Long-tail loss. HFLS vs. LFHS risk events. Saunders & Cornett, Financial Institutions Management, 4th ed.

  7. Profitability Analysis • Loss Ratio = Losses/premiums • Loss adjustment expenses (LAE) = costs of settling claims. • Expense Ratio=Operating expenses/premiums • Dividend Ratio=Dividends paid/premiums • Combined Ratio=Loss Ratio+Expense Ratio + Dividend Ratio • Operating Ratio=Combined ratio – Investment yield on company portfolio • Overall profitability=100-operating ratio Saunders & Cornett, Financial Institutions Management, 4th ed.

  8. Securities Firms and Investment Banks • Broker-dealers • Assist in trading of existing securities (secondary securities). • Discount brokers vs. market makers. • Underwriting • Issuance of new securities (primary securities) • Shelf Registration • IPOs • Private Placements Saunders & Cornett, Financial Institutions Management, 4th ed.

  9. Mutual Funds • Open-ended – priced at NAV • Closed-End Investment companies • Fund Objectives • Equity: Index Funds • Debt • Hybrid • Money Market • REITs (closed end) • Hedge Funds (closed end) Saunders & Cornett, Financial Institutions Management, 4th ed.

  10. Finance Companies • Sales Finance Cos. • Lend to retail customers (ex. GMAC, Ford Motor Credit, Sears Roebuck Acceptance Corp.) • Personal Credit Institutions • Installment loans to consumers (ex.Household Finance) • Business Credit Institutions • Business financing through equipment leasing and factoring (purchasing accts rec) (ex. CIT Group, Heller Financial) • Subprime Lenders Saunders & Cornett, Financial Institutions Management, 4th ed.

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