MODULE 6 – FINANCIAL INSTITUTIONS PART 2

Insurance Companies
The primary function of an insurance company is to protect policyholders (both individuals and corporations) from
adverse events. Insurance companies accept premium payments in exchange for compensation in the event that
certain pre-specified, but undesirable, events occur.
Two Categories of Insurance Companies
Property and casualty insurers are risk intermediaries; life insurers are both risk and time intermediaries. Both allow
households and other entities to limit some of the risks they face. Life insurers also provide methods to transfer
wealth through time and to future generations. These days some insurers provide both type services and some
diversified FIs own both types of insurers.
a. Life Insurance – provides lump-sum benefit to the heirs upon death of the insured person. Could provide cash
value also depending on the type of plan
b. Health insurance – helps pay medical bills
c. Disability insurance – provides continuing income should the insured become unable to work
d. Automobile and home/rental insurance – provides protection against accidents and damage to cars or residences

Life Insurance
Ordinary life policies include the following types:
 Term life. Term life is pure insurance that pays a stated death benefit if the policyholder dies within the
given term. Annual renewable term is common. Premiums increase as the policyholder ages. Variants
include decreasing coverage amount with level premiums or fixed premiums for periods longer than one
year. There is no savings feature with term life. Term policies become prohibitively expensive as the
insured ages and most term life ends without the policy holder collecting anything.
The remaining policies accrue a cash value over time. The insured overpays for the insurance in the early years of
the policy and the excess payment is invested by the insurer. The earnings accrue tax free.
• Whole life policies protect an individual for a lifetime. The insurer will pay a death benefit to the policy
holder’s beneficiaries (as long as the insured pays the premiums.) Variant: Whole life paid up by a certain age.
• Endowment life policies pay a death benefit if the insured dies before retirement (usually), if the insured
is alive at retirement, he or she receives the face value of the policy.
• Variable life policies invest fixed premiums into variable rate securities (mutual funds). The insured’s
death benefit is a function of the premiums paid and the rate of return earned on the investments. The insured
usually chooses the investment vehicle in which the cash value is invested.
• Universal life policies allow the policy holder to change both the premium amount and the contract
maturity over the life of the policy.
Universal and variable universal life policies are more flexible in that they allow policy holders to change, or even
skip premiums and change the maturity of the policy. If the cash value on a universal policy is invested in variable
rate earning assets the policy is a variable universal life policy.
Note: Because of the costs and fees on insurance policies with a savings feature many investors are better off buying
term insurance and investing for retirement on their own in some other tax advantaged vehicle as long as they are
disciplined enough to save on their own for retirement.
More conservative individuals will probably prefer whole life or endowment life policies to variable or universal
life. Some of the universal and universal variable polices are quite complex and it is difficult to predict payouts on
these accounts. If an individual wants one of these policies they should purchase them while they are young as they
become prohibitively expensive as the applicant ages.
•Group life insurance is typically available through an employer. Group life is usually term insurance and will
likely be the lowest cost form of insurance available to individuals as in many cases employers will contribute to
some of the insurance cost (contributory plan). Cost economies and reduced adverse selection also generate lower
costs in group plans.
•Industrial life. A form of low benefit insurance with weekly premiums, it is little used now. It was traditionally
used to provide burial insurance. {Industrial life became unpopular with the Civil Rights Movement as some
African-Americans sued insurers and won, claiming that high cost, low coverage industrial life plans were sold to
blacks, but cheaper, better coverage policies were sold to whites.}
• Credit life policies pay off an outstanding loan if a borrower dies during the term of the loan. It is typically more
expensive than other plans.
•Annuities. They are either immediate or deferred payment contracts where life insurers make regular payments to
an annuitant. The annuity’s features vary; the payments may be fixed or tied to the performance of an investment.
The term may be for a set number of years, or it may continue for as long as the annuitant lives. Variants include
continuing payments until the death of the longest living spouse or even continuing payments for a certain number
of years to beneficiaries.

Securities Firms and Investment Banks

Investment bankers assist borrowers in raising capital in debt and equity markets and provide advice about mergers
and acquisitions, corporate restructuring and general assistance in finance. Bankers also provide many creative over
the counter derivative products. Securities firms provide brokerage and market making services. The investment
banking and securities industries are complementary and many firms provide a broad range of services.
Investment Banking in Philippines
Services Offered by Investment Banks in the Philippines:
 M&A Advisory
For a company that looks to grow, a merger or acquisition is an opportunity to expand its horizon. The investment
banking in the Philippines offers that room and assistance for any corporate to expand through public takeovers,
cross-border deals or joint ventures at an international level.

 Debts & Equity Capital Markets Financing

Investors don’t always know which trends can help them make more money or prevent them from making more
profits. Investment banks in the Philippines understand the intricacies of the debt and capital markets. They help
their clients spot the trends, help them understand the nitty-gritty of the global market, and also let them make smart
moves around their investments.

 Bespoke Financing
Through bespoke financing, the investment banks in the Philippines help their clients understand the need of right
financing. The company may look for structured financing, leveraged, or specialized financing.
 Investment Research
This is another most significant service offered by investment banks in the Philippines. In doing the research for
their clients’ investment banks in Philippines use quantitative research, statistical modeling, and data science.

Top Investment Banks in the Philippines

Here is the list of top investment banks in the Philippines:
1. [Link], Inc.
2. Asian Alliance Investment Corporation
3. Asian Focus Group Inc.
4. BPI Capital Corporation
5. Eastgate Capital Partners, Inc.
6. First Abacus Financial Holdings Corporation
7. First Metro Investment Corporation
8. FSG Capital Inc.
9. Insular Investment & Trust Corporation
10. Investment & Capital Corporation of the Philippines
11. Mabuhay Capital Corporation, Inc.
12. Medco Holdings, Incorporated
13. Navarro Amper & Co
14. PNB Capital and Investment Corporation
15. Punongbayan & Araullo
16. SB Capital Investment Corporation
17. Unioil Resources & Holdings Company, Inc.

Securities underwriting can be undertaken through either public or private offerings. A public offering represents the
sale of a security to the public at large. In a private offering, an investment bank acts as a private placement agent
for a fee, placing the securities with one or a few large institutional investors such as life insurance companies.
Issuers of privately placed securities are not required to register with the SEC since the placements (sales of
securities) are made only to large, sophisticated investors.
As of January 2020, the total number of accredited brokers in the Philippine Stock Exchange are 130 and listed here
are the crème of the crop in terms of online trading platform. They are 30 online brokers at present. Because we are
in the modern world of internet and the web, it is very important we adopt this new fast technology offered by the
online realm.
Top Stock Brokers in the Philippines:
1. COL Financial
COL Financial is the number one online stock broker right now for its easy and user-friendly platform. COL
Financial also offers mutual funds together with stocks. Its former name was Citisec Online.
2. First Metro Sec
The second stock broker which is also generating great reviews is First Metro Sec (by Metrobank group). The
upgraded version of First Metro Sec called First Metro Pro is the most advanced online trading platform in the
Philippines right now 2020.
3. BDO Nomura
BDO Nomura is on the third spot of best stock brokers in the Philippines. What we like about BDO Nomura is that
you won’t need an initial fund to open an account if you’re a BDO account holder. BDO is known for their amazing
market research and updates.
4. BPI Trade
Another great online trading platform is BPITrade. Same with BDO, you don’t have to deposit money when you
open an account if you already have a BPI bank account. This platform has been trading stocks for many years now.
5. Philstocks
Philstocks is another user-friendly interface in trading and investing stocks online. Grab a demo and you’ll know
what I’m talking about. Loved by beginners and starters, Philstocks trading platform sure deserves to be on the top.

Investment Companies
What Is an Investment Company?
An investment company is a corporation or trust engaged in the business of investing the pooled capital of investors
in financial securities. This is most often done either through a closed-end fund or an open-end fund (also referred to
as a mutual fund). In the U.S., most investment companies are registered with and regulated by the Securities and
Exchange Commission (SEC) under the Investment Company Act of 1940.
An investment company is also known as "fund company" or "fund sponsor." They often partner with third-party
distributors to sell mutual funds.
Mutual Funds
A mutual fund represents a pool of financial resources obtained from individuals and invested in the money and
capital markets. It represents another way for those with extra funds to channel those funds to those in need of extra
funds.
Investing in mutual funds allows an investor to achieve a greater level of diversification than could likely be
achieved by investing in individual stock on one's own account. A single share of a mutual fund could represent
ownership in over a thousand different companies. Since mutual funds can buy and sell securities in large blocks, its
trading cost are much lower than those of the individual investor buying a few shares at a time.

Maturity
Long term mutual funds primarily invest in assets that have maturities of more than one year. Long-term funds
comprise equity funds (composed of common and preferred stock securities), bond funds (composed of fixed-
income securities with a maturity of over one year), and hybrid funds (composed of both stock and bond securities).
Some money market assets are included for liquidity purposes. Short-term funds comprise taxable money market
mutual funds (MMMFs) and tax-exempt money market mutual funds (containing various mixes of those money
market securities with an original maturity of less than one year). Long-term equity funds typically are well
diversified, and the risk is more systematic or market based. Bond funds have extensive interest rate risk because of
their long-term, fixed-rate nature. Sector, or industry-specific, funds have systematic (market) and unsystematic risk,
regardless of whether they are equity or bond funds. The principal type of risk for short-term funds is interest rate
risk, because of the predominance of fixed-income securities. Because of the shortness of maturity of the assets,
which often is less than 60 days, this risk is mitigated to a large extent. Short-term funds generally have virtually no
liquidity or default risk because of the types of assets held.
 Pension Funds
Pension funds allow people to transfer wealth through time while avoiding taxation on their investment earnings
during their working years. The primary purpose of pensions is to provide retirement income for individuals.
Traditionally most pension funds have paid set benefits to retirees based on their wage during their tenure with the
company and years of service. Today more and more individuals are covered by plans that do not pay a set amount
at retirement, rather their retirement benefits will normally be an annuitized payment based on the terminal value of
their wealth in the plan. The value of their plan holdings depends upon the amounts paid in and the earnings on the
funds invested.
*Private pension funds are administered by private corporations (e.g., insurance company, mutual fund). Public
pension funds are those funds administered by a federal, state, local or national government (e.g., Social Security).
*Pension plans administered by life insurance companies are termed insured pension funds. The designation is due
not necessarily to the type of administrator, but to the classification of assets in which pension fund contributions are
invested. Specifically, there is no separate pool of assets backing the pension plan. Rather, pension plan funds are
pooled and invested in the general asset accounts of the insurance company. The portion of the insurance company’s
assets devoted to the pension funds is reported in the liability section under “pension fund reserves”.
*Non-insured pension plans are managed by a trust department of a financial institution appointed by the sponsoring
business, participant, or union. Trustees invest the contributions and pay the retirement benefits in accordance with
the terms of the pension fund.
*In a defined benefit pension fund, the corporate employer (or fund sponsor) agrees to provide the employee a
specific cash benefit upon retirement, based on a formula that considers such factors as years of employment and
salary during employment. The formula is generally one of three types: flat benefit, career average, or final pay
formula.
*With a defined contribution pension plan, the employer (or plan sponsor) does not pre-commit to providing a
specified retirement income. Rather, the employer contributes a specified amount to the pension fund during the
employee’s working years. The final retirement benefit is then based on the total employer contributions, any
additional employee contributions, and any investment gains or losses.
*The three types of formulas used to determine pension benefits for defined benefit pension funds are the following:
flat benefit formula, career average formula, and final pay formula. A flat benefit formula pays a flat amount for
every year of employment. Two variations of career average formulas exist; both base retirement benefits on the
average salary over the entire period of employment. Under one formula, retirees earn benefits based on a
percentage of their average salary during the entire period they belonged to the pension fund. Under the alternative
formula, the retirement benefit is equal to a percentage of the average salary times the number of years employed. A
final pay formula pays a retirement benefit based on a percentage of the average salary during a specified number of
years at the end of the employee’s career times the number of years of service.
Philippine Pension Funds
The Philippine pension program consists of the Social Security System (SSS) and the Government Service Insurance
System (GSIS). The SSS provides benefits to all private employees and self-employed persons. The GSIS provides
benefits to all employees in the public sector.