Exam 16: Mutual Funds, Insurance Companies, Investment Banks, and Other Financial Firms

Compare and contrast the asset portfolios of life insurance companies with the asset portfolios of property-casualty insurers. Please try to explain any differences you are able to observe.

In the concluding section of this chapter several major trends affecting all financial institutions today are discussed. Identify these trends. Which ones do you see as long-term trends likely to continue indefinitely into the future? Which may be short-lived (if any)? Please explain your answer.

What is happening to the mix of services offered by life insurers and property-casualty insurance companies? Why?

What functions do security brokers and dealers perform within the financial system? Why are these security companies so important to the effective functioning of the money and capital markets?

Drawing upon the discussion in this chapter on measuring and evaluating the performance of a financial institution, please calculate as many measures of this firm's performance as you can. Do you notice any performance measures that the management of this institution might wish to investigate for possible problems? ‪

The startling collapse of Enron Corporation of Houston - the largest bankruptcy filing in U.S. history - in 2001 and 2002 aroused a storm of controversy about how employee retirement plans should be set up and managed.

The manager of a life insurance company is trying to decide what annual premium to charge a group of policyholders, each of whom has just reached his or her 40th birthday. A check of mortality tables indicates that, for every million persons born 40 years ago, 3 percent die, on average, sometime during their 40th year. If the company has 10,000 policyholders in this age bracket and each has taken out a $50,000 life insurance policy, estimate the probable amount of death benefit claims against the company. How much must be charged in required premiums to each customer wanting a life insurance policy just to cover these expected claims? Suppose the company has operating expenses (plus a target profit) on policy sales to these policyholders of $500,000. What annual premium must be charged each policyholder to recover expenses and meet expected benefit claims?

Recall: ROE = Net after-tax income/Total equity capital and ROA = Net after-tax income/Total assets

The longer maturities of commercial mortgages help explain the growth of lending in this area by life insurance companies.

Life insurers have been forced by deregulation and the appearance of new competitors to offer market-sensitive rates of return to customers on most of their services, which has reduced profits and driven out smaller and less-efficient firms.

By the beginning of the 1990s the pension fund industry held about 15 percent of all junk bonds outstanding.

Federal reform legislation in 2005 required employers to fully fund their pension plans within