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Corrections Corporation of America Message Board

  • yieldseeker yieldseeker Apr 24, 2000 3:03 PM Flag

    merchant

    My, my, don't we get vulgar when we feel
    threatened!

    "the insurance has to be more than a mere
    wager."

    All insurance is a wager, my friend. I thought that
    would have been obvious, even to you.

    "If
    insurers were allowed to "make book" on the outcome of a
    jury's decision, nobody would buy insurance until after
    they are sued."

    You logic is hilarious. You
    must be mathematically-challenged. The expected value
    of a pay-out within a specified time-frame are
    obviously greater after someone gets sued than before they
    get sued. Therefore, it is cheaper to buy insurance
    before you are sued than after. That is why companies do
    not usually buy insurance after they are sued. It is
    economically more sensible to self-insure at that point.
    However, in the case of PZN, there is an incentive to buy
    the insurance, despite its high cost at this point,
    because that would make Pacific Life comfortable with
    completing the deal.

    Now do you see why you're worng?

    SortNewest  |  Oldest  |  Most Replied Expand all replies
    • See my message re teaching pigs to sing.

    • The State fo California insures homeowners
      against earthquakes. Berkshire Hathaway wrote reinsurance
      against this risk for the State. Where is your law of
      large numbers there? Do you think there will be
      thousands of little earthquakes destroying one house at a
      time over the next 60 years? I doubt it. There will be
      a few moderate earthquakes that do some damage,
      perhaps not enough to invoke the Berkshire reinsurance
      policy. Eventually (if the plicy is in force long enough)
      there will be one enormous earthquake that will force
      Berkshire to make one enormous pay-out (I think they are
      liable for up to $1 billion, or something in like
      that).

      That policy is an enormous gamble, because the timing
      could be such that it might hit tomorrow, or it might
      never hit while the policy is still in
      force.

      Also, you state, "If the outcome of a particular event
      is a given and the cost of that event already set,
      how would you calculate a premium?? "

      As I
      have said, it makes no sense to insure a certain
      outcome. However, the outcome of the PZN lawsuits is
      anything but certain. Again, if you know either the amount
      or the timing of the pay-outs on these lawsuits
      within 50% accuracy, then PZN should hire
      you.

      The lawsuits have been filed, but what will be paid
      and when it will be paid are anything but certain.
      Hence it is insurable.

    • yieldseeker, insurance premiums are dedcutible as
      a business expense, wagers are not. But since you
      and the merchant are treating us to this exchange,
      let me ask you -- if such insurance is available,
      what is the premium likely to be, given the number and
      size of lawsuits, present and potential? And will PZN
      be able to borrow it?

      • 1 Reply to joepalookaboggs
      • Actually, losses from wagers in casinos are
        deductible, and winnings are taxable. Anyway, call it what
        you want, it is a contract tying financial payments
        to risky outcomes. Surely you would agree with that.
        (I am not sure I want to concur with IRS "logic"
        anyway.)

        I have no idea what the premium would be. That is
        the key question. But if PZN can not afford the
        premium (were insurance to be offerred), then it will go
        under, because that would imply that its likely
        liabilities exceed its intrinsic value.

    • Yieldseeker, I certainly cannot claim to know the
      facts with regard to the legality of insurance in this
      case. You seem to have logic on the side of your
      position, but what has logic to do with the law? The list
      of totally illogical laws is endless.

      But IF
      it is possible to insure against these lawsuits,
      doesn't it seem likely that for an investing insurance
      company to require that insurance (settlement of the
      suits is too remote to consider) is perhaps a little...
      self-serving? The requirement might just retain a little
      wriggle-room for PL to back out if they chose, while THEY
      themselves might be the insurer (at a nice profitable
      premium) if they later decided that's the way to
      go.

      Remember that PL was facing competition from a bidder with
      first rights to meet their offer. Maybe in requiring a
      clause the competition could not benefit from they were
      equalizing the playing field a little.

    • Any idea as to the annual insurance premium (with
      a deductible in this galaxy) for a company that has
      seen its share price drop from $40/$30/$20 to $3?
      Question #2 - What company has the cash to pay for it?

      • 1 Reply to nwoodward_2000
      • If the policy pertains to a specific set of
        lawsuits, it would probably be a single premium, not an
        annual premium. Obviously, the declining share price is
        irrelevant to the issue of insurance. Insurance can never be
        issued on credit (insure now, pay later, does not work).
        Hence, I can not imagine why you bring up the share
        price in the context of buying insurance.

        But
        the size of the single premium is a key issue. If it
        were $20mm or less, it would be feasible. If it were
        $100mm or more, it would not be feasible (for PZN).
        However, if the present value of all possible outcomes is
        more than a $100mm liability, then PZN is gone
        already. If PL believed that, it would never have bothered
        to make a proposal. In fact, it would have pushed to
        get the Blackstone deal done.

        Think about it.
        The lawsuits may have little merit, but the PL demand
        of resolution would put PZN in a horrible
        negotiating position, IF insurance were impossible. Why
        settle cheaply if you know the company must settle to
        survive? On the other hand, if the lawsuits are unlikely
        to win large judgements in court, then a
        knowledgeable insurance company can take, say $20mm, upfront,
        and allow the PL deal to go through. Knowing that,
        plantiffs lawyers may want to settle on reasonable terms.
        From their viewpoint, better to settle now that to
        wade it out in court with a large, well-capitalized
        insurance company.

 
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