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funds. He found that the average value of claims increased by
18.7 percent per year from 1981 to 1991.
Gallagher analyzed Crossroads' balance sheets as of December
31, 1991, and December 31, 1992. He projected Crossroads' future
distributable earnings from policies in effect on the gift dates
by reviewing the policies' past results and analyzing Crossroads'
loss reserves (embedded value). He also projected distributable
earnings from policies he expected Crossroads to write after the
gift dates, based on a review of Crossroads' historical results
and market expectations (goodwill value).
Gallagher assessed market conditions for Crossroads and its
competitors. He concluded that Crossroads had poor underwriting
experience in most of the years since it began operations.
Gallagher projected that Crossroads' premiums would grow by 5
percent per year for the 5 years after the gift dates, the loss
ratio would be 160 percent for the first year and would decrease
over the next 4 years, and that underwriting expenses would be
12.5 percent of earned premium for all 5 years.
He discounted the distributable earnings by 20 percent using
risk-adjusted rates of return. He estimated that Crossroads had
understated its reserves by $16,600,000 on January 1, 1992, and
by $8,800,000 on January 1, 1993. Using these amounts for
Crossroads' reserves, he estimated that the fair market value of
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