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determined that no unpaid loss adjustment was necessary for
financial statement purposes. As stated in an undated Coopers
working paper, the somewhat “conservative” nature of petitioner’s
carried reserves for financial statement purposes was supported
by several factors, including the following:
[Petitioner] is a relatively young company with
adequate, but not extremely significant, amounts of
historical results to access the adequacy of loss
reserves.
[Petitioner] writes only medical malpractice liability
policies * * * [which are] considered extremely
volatile and may be subject to significant swings in
experience between years. * * * [Petitioner’s]
management has stated that as recently as the first
quarter of 1993 their reserve projections indicated
deficiencies for the first time in Company history.
Although the impact on current year net income is
considered significant, the impact on retained earnings
(slightly over 5%) is not considered overly
significant.
The establishment of reserves does not effect [sic] the
trend in earnings and does not have a significant
impact on management incentive or other bonus plans.
The Company is not publicly traded and there is
currently no active market for the existing outstanding
shares.
1994 Audit
In connection with Coopers’s 1994 yearend audit of
petitioner’s 1994 financial statements, Coopers actuary Don
Skrodenis (Skrodenis) reviewed a draft of Tillinghast’s 1994
report, Tillinghast’s 1994 rate review, and certain underlying
exposure data from petitioner. On the basis of his review,
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