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

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Presentation on theme: "Saunders & Cornett, Financial Institutions Management, 4th ed. 1 “What is robbing a bank compared with founding a bank?” Bertolt Brecht."— Presentation transcript:

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

2 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.

3 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.

4 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.

5 Saunders & Cornett, Financial Institutions Management, 4th ed. 5 Shifting Buying Patterns Wall Street Journal, 9/18/02 Annualized Premium Market Share Up to 6/2002 Term22%20%21% Universal Life 17%21%25% Variable Life 37%33%26% Whole Life 24%26%27%

6 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.

7 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

8 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

9 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)

10 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


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