105. 105. What do you know about insurance companies as institution investors?

Institutional investors are organizations which pool large sums of money and invest those sums in securities, real property and other investment assets. They can also include operating companies which decide to invest their profits to some degree in these types of assets.Typical investors include banks, insurance companies, retirement or pension funds, hedge funds, investment advisors and mutual funds. Their role in the economy is to act as highly specialized investors on behalf of others. Funds are useful because they will hold a broad portfolio of investments in many companies. This spreads risk, so if one company fails, it will be only a small part of the whole fund's investment. Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange for payment. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance companies are also part of the institutional investment community and controlled almost the same amount of funds as investment firms. These organizations, which include property and casualty insurers and life insurance companies, take in premiums to protect policy holders from various types of risk. The premiums are then invested by the insurance companies to provide a source of future claims and a profit. There are different types of insurance companies according to the object of insurance. They are life insurance companies, property insurance companies and health insurance companies. The most popular in Ukraine is property insurance. Imagine that you want to insure your car. Then you have to pay some regular amounts to the insurance companies. There are a lot of such people who pay to the insurance company. Then insurance company add all received payments and buy for example government bonds (insurance companies try to invest in low risky debt instruments). Such investments are usually middle-term investments. As a result company will get a periodical payments during the whole period and principal amount at the maturity date. Such investitions is a source of profit for the company and a source of paying insurance payments. The main advantage of institutional investors is ability to cumulate a large sum of money. The larger the sum of money, the larger interest we can gen from investing and more different debt instruments we can attract. It helps to doversify risks.

106. What is Financial leasing?

Lease is a form of contract transferring the use or occupancy of land, space, structure or equipment, in consideration of payment, usually in the form of a rent.

What is Financial leasing?

- the lessee has the exclusive right to use the leased asset during the contract period for which he must pay a fixed fee (lease payment)

- lifetime of a leasing contract is the same as full depreciation term, but no less than 12 months

- the lessee gets the title to the property or redeem it for residual value when the term of agreement ends

- the lessee usually selects the leased asset and the supplier

- title retained by lessor

- non-cancelable in lease period

- lessor transfer the risk and reward

- leasing object is registered on lessee’s balance

Impact on accounting

• Since a finance lease is capitalized, both assets and liabilities in the balance sheet increase. As a consequence, working capital decreases, but the debt/equity ratio increases, creating additional leverage.

• Finance lease expenses are allocated between interest expense and principal value much like a bond or loan; therefore, in a statement of cash flows, part of the lease payments are reported under operating cash flow but part under financing cash flow. Therefore, operating cash flow increases.

Elements in lease structure

• The Transaction: (Asset-renting transaction distinguishes a lease from a loan, lent out is money vs. lent out is the asset)

• Parties to a lease: Two parties (the lessor and the lessee)

• The leased asset: (The asset may be anything - an automobile, aircraft, machine, consumer durable, building or a factory. Only tangible assets can be lease. Intangible assets cannot be lease. Handing over of possession is essential. Right to use)

Advantages of ‘LEASING’ to ‘LESSEE’

(Saving of capital, Flexibility and Convenience, Planning Cash Flows, Improvement in Liquidity, Shifting of Risk of Obsolescence, Maintenance and Specialized Services)

Disadvantages of ‘LEASING’ to ‘LESSEE

(Higher Cost, Risk of being deprived the use of asset, No Alteration in Asset, Penalties on Termination of Lease)

Advantages of ‘LEASING’ to ‘LESSOR’

(Higher Profits, Tax Benefits, Quick Returns)

Disadvantages of ‘LEASING’ to ‘LESSOR’

(High Risk of Obsolescence, Price Level Changes, Long Term Investment)