(no subject)
Pat Brockett ( brockett@mail.utexas.edu )
Thu, 25 Jun 1998 12:05:23 -0400
<fontfamily><param>Times</param><bigger><bigger>Theoretical support for
the hypothesis that Rich Phillips discussed related to organizational
structure and using subsidiaries to manage risk (using bankruptcy as a
risk management tool) can be found in the article by Richard MacMinn
and me entitled "Corporate Spin-offs as a Value Enhancing Technique
when Faced With Legal Liabilities," Insurance: Mathematics and
Economics (April, 1995), Vol. 16, No. 1, 63-68. By the way, this
technique of allowing the subsidiary to go bankrupt to save the parent
has been used in practice for captive insurance companies. If my
memory serves me, I recall hearing of a corporation, I think it was
Phillips Petroleum, who took a lot of unrelated business into their
captive to achieve the tax-deductibility of their premiums without
careful underwriting. When the losses came in from their loose
underwriting, they simply let the subsidiary go bankrupt. Other
example are available, although perhaps not common. I recall reading
in the Wall Street Journal about 7-10 years ago that Texaco Oil was
moving their oil shipping business out of the corporate shell after
Exxon Valdez to enable them to limit their liability for large
environmental liabilities should such arise (of course, there is also
still the option of the parent to "bail out " the subsidiary, but now
this becomes a financial option and can be priced as such). I commend
Rich and his co- authors on an interesting paper which should have an
important impact on the profession.
Pat Brockett
</bigger></bigger></fontfamily>
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| Patrick L. Brockett
|
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| Gus S. Wortham Chaired Professor of
| Risk Management, Voice: (512) 471-6028
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