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unpaid losses and loss adjustment expenses. Cf. Hanover Ins. Co.
v. Commissioner, 69 T.C. at 270-272 (the Commissioner's
adjustments to the taxpayer's reserves for unpaid losses were
reasonable; the taxpayer failed to adjust its loss reserves after
NAIC examiners found substantial overstatements).
Hurley adjusted petitioner's loss reserves each year to
account for petitioner's actual loss experience. This suggests
petitioner's loss estimates were fair and reasonable. See
Roanoke Vending Exch., Inc. v. Commissioner, 40 T.C. 735, 741
(1963) (bad debt reserve); Home Ice Cream & Ice Co. v.
Commissioner, 19 B.T.A. 762, 765 (1930) (same).
Hurley and Schacht testified that insurance companies have
an incentive not to overstate their unpaid losses because
overstating their losses may result in higher premiums, may make
them less competitive with other companies, and could diminish
their surplus to the point that they cannot write new policies.
Petitioner's insureds would prefer to keep their medical
malpractice insurance premiums low. This tension between
petitioner and its insureds suggests that petitioner's reserve
for unpaid losses was fair and reasonable.
2. Whether Petitioner's Reserve Estimates Were Within the
Range of Hurley's Estimates
Petitioner contends that its unpaid loss reserves for years
ended 1991 and 1992 fall within the range of estimates made by
Hurley and are fair and reasonable. Respondent erroneously
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