|Silliman on Sports
By Stan Silliman
OSU FUNDRAISER INSURANCE CASE FALTERS
Let’s back up. When Mike Holder and Boone Pickens came up with their “Gift of a Lifetime” scheme to raise money for the athletic program by insuring older wealthy donors - $ 10 million policies, average premium $ 600,000 per year - they never expected to lose money. Holder was heard to have said “This could make us $ 300 million but if it doesn’t work, I’ll be in a cave with Bin Laden.” Note to Mike: No, not unless the cave you’re referring to is at the bottom of the ocean where Bin Laden’s corpse lies.
Are we up to speed? Not yet? Well, let’s add Whisperin’ Richard Danel, 78-year-old owner of Stillwater’s Varsity Barber Shop to the mix. Whisperin’ Richard (Seinfeld would call him a “low talker”), who bleeds orange and only uses his razor on other orange bleeders, loved the idea so much he convinced twelve of his older, wealthier customers to get exams and let OSU buy policies on them.
The problem: elderly OSU donors (ages 65 to 85) were healthy as oxen and didn’t kick buckets as expected. Consequently, OSU, left with a stack of 27 upright buckets, decided to quit paying their annual $ 16.5 million premium and asked the insurance company to return the premiums.
As much as I like the concept of asking for returns when it turns out the product you bought wasn’t needed after all, businesses don’t exactly agree with me. I still have a bunch of Y2K survival products, like dried food, I can’t get the grocer to accept.
In OSU’s case, the wealthy donors who all passed physicals to qualify… passed for a reason. As it turns out, Lincoln National Insurance determined these old 65 to 85-year-old guys were not likely to die soon. Maybe there’s something about getting your hair cut at the Varsity which insures longevity. Maybe people live longer when the pace is slow and the surroundings are stress free. Maybe people live longer when your investment adviser/hair cutter whispers to you.
Here’s something else to ponder. Lincoln National, since 1905, was the first life insurance company to use actuary science. That tells me if you’re betting against Lincoln National in a race-to-the-death contest, you’re going up against a stacked deck.
Still it seemed like a good idea. Maybe like a hedge from someone who knows hedge funds. The reason for the policies, according to Boone Pickens, was to protect income coming from donors. Sounds like a good thing. If the guys live, they can donate more money. If they die, $ 10 million goes to the golf program. If I’m a donor and you want to pay for a policy on me, I say fine, just so long as the grim reaper isn’t hiding behind you. If the insurance company accepts me, I’m elated because it probably means I’ll live long enough to make them money.
Judge Solis ruled OSU was not entitled to a return of premiums. OSU is out $ 33 million. The lesson: Hedges are not transparent. They’re leafy and bushy and hide whatever’s behind them. You might think you know what’s in them or behind them or can predict but you can’t. Lincoln National knew the applicant pool better than the Cowboys. They also knew the likelihood of someone dying in the first 2 to 5 years was pretty low and that most people, when faced with absurdly high premiums, drop them in the first few years. We imagine Mike Holder thinking “But their logo had the face of Honest Abe.”
|Silliman On Sports
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