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C. Determination of Fair and Reasonable Unpaid Losses
for 1994 and 1995
For taxable years 1994 and 1995, Streff estimated
petitioner’s reserves to be lower than their 1993 levels. This
analysis is difficult to square with the undisputed facts, which
show that from 1993 to 1995, petitioner’s operations were
increasing, as measured by numbers of attorneys insured,
policies issued, and premiums written, and that petitioner was
assuming a larger share of risks formerly ceded to reinsurers.
Streff’s testimony indicates that his downward-trending
estimates for 1994 and 1995 were predicated on his assumptions
regarding a perceived increase in petitioner’s average open
claim reserve in 1993. His report indicates that while such a
phenomenon might indicate a true increase in ultimate claim
costs, it might also represent a change in case reserve
attitude, or “reserve strengthening”. He testified that for
1993 he assumed that the increases were “real”, but then
adjusted his estimates downward for 1994 and 1995 on the basis
of his conclusion that the 1993 increases had resulted from
reserve strengthening. On cross-examination, however, Streff
admitted that he had neither heard nor seen any evidence to lead
30(...continued)
issue, petitioner’s estimates of reinsurance proceeds recoverable
are significantly lower than the estimates used by its appointed
actuaries–-thus tending to result in higher net unpaid loss
reserves than recommended by the actuaries. Neither party has
specifically addressed these variances.
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