- 97 -
did not offer coverage to certain high-risk shippers.
Nevertheless, the coverage underwritten by FFIC was very similar
to that which was purported to be provided by NUF and OPL and is
an indication that the price of the excess value coverage
provided by NUF and OPL was substantially more than the price
petitioner could have obtained in arm's-length negotiations.55
Respondent's expert, Prof. Alan Shapiro, Ph.D., professor of
finance and business economics, estimated that $0.092 per $100 of
declared value in excess of $100 would have been an arm's-length
price for insurance covering petitioner's excess value activity.
Professor Shapiro based his analysis on the proposition that an
arm's-length price for OPL's excess value coverage would be one
that over time provided OPL with a fair return on its necessary
equity investment.
In coming to his conclusion, Professor Shapiro compared what
OPL's return on equity would have been had it been reinsuring the
EVC activity during the years 1979 through 1983 with that of
54(...continued)
premiums minus claims paid minus commissions.
55Had petitioner's customers paid $0.125 per $100 of
declared value (the same as PIP charged), EVC revenues would have
been cut in half, but the gross profit percentage (one-half of
EVC's, less all claims paid, divided by one-half of EVC's) for
the years 1979 through 1989 would have been 37 percent. One-half
of EVC revenue for 1979 through 1989 is $622,678,544 less actual
claims paid of $393,153,605 equals gross profit of $229,524,939.
Gross profit of $229,524,939 divided by $622,678,544 equals a
gross profit percentage of 37 percent.
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