Cash Flow Underwriting
A price slashing tactic used by insurance companies to drum up business when times are tough.
In essence, these companies sell their solid gold policies well below their actual value in an effort to entice new customers to purchase their fancy products (even though these new policyholders might be, well...slightly undesirable).
So...why do business with customers who have stupidly bad driving records? Because the insurance guys are smart. They’ll take the immediate sales capital from these not so perfect policies and turn around and invest the cash back into lucrative investments. And down the road, hopefully these higher returns will offset the amount of money they’ll have to pay out-of-pocket to cover Billy Bob’s frequent fender benders, reckless driving tickets, and DUI’s he so kindly claims.
Related or Semi-related Video
Finance: What is a managing underwriter,...1 Views
finance a la shmoop what is a managing underwriter
and what is the selling group well the managing underwriter isn't just a person
it's a group and it's very different from this guy the managing Undertaker [Gravestones appear]
after that Ebola outbreak well the key word here is managing in
that the manager is the backstop the fiduciary the risk taker the one who
loses his shirt should the offering go awry in a way that can be proven in a [Hoover sucks shirt off man]
court of law with 12 angry jurors that it was the
evil banks fault specifically the managing underwriter is
the QB in a securities offering such that the company designates this group
as their primary point of contact in selling a chunk of themselves or raising
debt from the kindly loving mutual and hedge fund investors on Wall Street at [Person holding cup on Wall Street]
issue is risk when an underwriting happens usually for a few brief moments
in time the managing underwriter actually owns the shares that it's [Pile of stocks appear]
offering to the public or whoever's buying them it buys them at some
discount from the company you know something like oh no 24 bucks a share
and then turns around and sells them for 25 bucks a share a few minutes later
making a nice living on that dollar spread for 20 million shares that they
just placed well they don't keep all this money there are usually other
underwriters not managing the process involved in the sale of the securities [Underwriters appear]
to the street so they get their piece of the offering this other group is called
the selling group and they essentially work under the direction of the managing
underwriter and serve a very simple but important role in getting early [Cash transfers to selling group]
commitments for mutual and hedge funds to buy a given volume at a given price
at a given level of certainty you know all else being equal think of the
selling group as a gaggle of ex cheerleaders and football quarterbacks [Cheerleaders and football players appear on a field]
who were a hundred SAT points smarter than the average realtor they just get
their selling commission and they don't split anything off the top in the way
the managing underwriter does and a typical set of slits might designate the
managing underwriter is getting 15% of the gross sales of the offering off the
top before anyone else gets anything in this case the managing underwriter would
get in a 15% of that 20 million-dollar spread or 3 million bucks and more or
less just for showing up they might then get
third piece of the remaining 85% or 17 million bucks to sell that than to the [Piechart appears for gross sales]
street and that five or six million dollars generally goes directly to their
sales force in return for winning the hundred-meter client ass-kissing at the [Men running on a track]
annual buy-side fair keeping good relationships with buyers is oddly an
entire career in Wall Street today purposely missed putts on the golf [Golfer putting a ball]
course aggressive fawning about their butt hair
looking hair transplants that make the portfolio manager truly look 21 again [Guys look at man with hair transplant]
and other officious acts while they're all part of this lucrative sales job on
Wall Street and it's a great gig if you have thick skin and you know very [Elephant in a field]
puckery lips
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