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MODULE 6 PACKET
AE 18 – FINANCIAL MARKETS & INSTITUTIONS

MODULE 6 OVERVIEW:

Welcome to Module 6 – FINANCIAL INSTITUTIONS Part 2

This module continues coverage of non-depository institutions with Insurance Companies,

Securities Firms, Investment Banks, Investment Companies and Pension Funds. The module
will focus on providing an overview of each industry and contains some details about their
products and services. This module contains in-lesson exercises, quiz/assignment.

CONSULTATION HOURS:
Phone or Messenger: 3-4 PM Mondays | Thursdays
Virtual time: 6-7 PM Tuesdays I Fridays

MODULE 6 LEARNING OBJECTIVES:

By the end of this module, the students will be able to:

1. Understand the nature and concepts of Insurance Companies, Securities Firms,
Investment Banks, Investment Companies and Pension Funds
2. Analyse the major lines of business performed by the above-mentioned insurance
companies.

COURSE CONTENT FOR MODULE 6:

FINANCIAL INSTITUTIONS Part 2
ACTIVITY DESCRIPTION TIME TO
COMPLETE
Lecture discussion Insurance Companies 45 minutes
Lecture discussion Securities Firms and Investment Banks 30 minutes
Lecture discussion Investment Companies 30 minutes
Lecture discussion Pension Funds 45 minutes
Review Quick Review 15 minutes
Activity ACTIVITY 6 30 minutes
Quiz Summative quiz for module 6 15 minutes
Deadline for module 6 output: 9 January 2021, at strictly 5:00 in the afternoon

LECTURE DISCUSSIONS
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

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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
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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

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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. ABCapitalOnline.com, 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

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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
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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

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employees and self-employed persons. The GSIS provides benefits to all employees in the
public sector.
Visit: https://www.gsis.gov.ph/ and https://www.sss.gov.ph/

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