-32-
IV. Analysis
A. Whether Petitioner Has Proved That Its Estimates of
Unpaid Losses Were Fair and Reasonable
1. Necessity and Reasonableness of Adverse
Development Reserve
As described above, petitioner’s total unpaid loss reserve
comprises a case reserve, as established by its claim
department, and an adverse development reserve, set by Bixler
and its controller. For the years in issue, the adverse
development reserve increased petitioner’s total unpaid loss
reserves by amounts ranging from about 37 percent to about 50
percent.
Although Bixler testified generally about the uncertainty
inherent in petitioner’s reserves, petitioner can point to no
concrete evidence or analysis showing, for the years in issue,
the necessity for or reasonableness of the adverse development
addition to the case reserves as estimated by petitioner’s claim
department. The record does not suggest that the claim
department’s estimates of unpaid losses were low or failed to
reflect potential adverse development. In fact, Bixler
acknowledged that he had no reason to be critical of
petitioner’s case reserves.
In Western Cas. & Sur. Co. v. Commissioner, 65 T.C. at 917,
the taxpayer had established in three schedule P lines of
coverage “voluntary loss reserves”, which were an additional
amount that the taxpayer voluntarily included in its loss
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