2-1 Financial Institutions other than Depository Financial Institutions

2-2 Keys To Success  Distribution Capabilities Funding/Liabilities Assets/Fund deployment (including investment)  Compliance  Product Pricing  Risk Control  Operational Efficiency

2-3 Life Insurance Companies  Distribution Funding – insurance policy issuance Assets - investments  Compliance  Product pricing Underwriting of policies  Product offered  Loss & cost analysis  Risk control All risks faced by banks (less liquidity risk) Additional risk: uncertainty of liabilities  Operational efficiency Over 8000 companies Largest change: Brokered to to captive agents Deal with state regulation

2-4 Life Insurance Balance Sheet Abbreviated Life Insurance Balance Sheet Assets: Investments62.9 Separate Account Assets33.0 Other Assets4.1 Total Assets100.0 Liabilities and Capital: Policy Reserves52.9 Deposit-type accounts & Other14.4 Separate Accounts32.9 Capital & Surplus5.6 Total100.0

2-5 Life Insurance Balance Sheet

2-6 Health Insurance  Mostly part of life companies  Very different business  Most important: Operational efficiency  This is a processing business Pricing of products Compliance/regulatory relationships  Investment performance is far less important Vast majority of funds in/out in one year

2-7 P&C Insurance vs. Life Ins.  Reduced spread of risk Natural disasters  Shorter-term policies (liabilities) Less investments, so performance not as significant While P&C industry premiums > life industry premiums, less than half the investments Much more volatile short-term earnings

2-8 P&C Abbreviated Balance Sheet Abbreviated P&C Insurance Balance Sheet Assets: Investments78.0 Receivables8.3 Other Assets13.7 Total Assets100.0 Liabilities and Capital: Policy Reserves72.0 Other Liabilities14.5 Capital & Surplus13.5 Total100.0

2-9 P&C Balance Sheet

2-10 Simple Insurance Income Statement Abbreviated Insurance Company Income Statement Premium Income100.0 Losses on policies75.0 Loss Ratio = 75.0 Policy administration expenses15.0 Selling and General Admin11.0 Combined ratio = Investment Income8.0 Policy dividends paid0.6 Pretax Income7.4

2-11 Finance Companies  Like banks, but not really Borrow and lend  No insured deposits Must issue bonds/commercial paper for funding Higher capital ratios Less regulation Lower-quality borrowers  Independent finance companies – R.I.P. Squeezed between banks and securitization  Only captive finance companies still around GE Capital. GMAC, FMC Product expertise & sales support

2-12 Mutual Funds  Only marginally “Institutions”  Each fund is a corporation  Investment results flow directly to investors (less expenses)  Keys to success: Investment results Distribution  “Sponsored” by investment advisor

2-13  Captive customers  Important factors: Investment performance Risk control Efficiency  Extremely long-term liabilities  Sponsored by corporation or government Pension Plans