Investment Companies

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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
Stock insurance company
•Is smilar in structure to any
corporatıon or public company
Mutual insurance company
•Have no stock and no external
owners
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
policies
Variable life 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
OTC)

in secondary market (exchanges or
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 fixedamount 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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