My, my, don't we get vulgar when we feel
"the insurance has to be more than a mere
All insurance is a wager, my friend. I thought that
would have been obvious, even to you.
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?
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 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
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?? "
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
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?
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"
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.
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
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.
You may be correct in all you say. Nevertheless,
your analysis implies that Pacific Life considers it
possible to contract insurance on liabilities attributable
to existing lawsuits.
Whether it is
economically advantageous, I do not even have an opinion. I am
only saying it is possible. Certainly, I agree with
your assessment that Pacific Life put in the
requirement to serve its own interests.
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?
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.
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