Capital Blue Cross and Subsidiaries - Page 41

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          that are in issue in this case as if the 376 contracts were sold            
          in a reinsurance transaction that occurred on January 1, 1987, as           
          part of a larger sale for $131.7 million of all 23,526 of                   
          petitioner’s group contracts in effect on that date.                        
               In treating the 376 group contracts as if they were sold               
          together in one transaction, along with the balance of                      
          petitioner’s 23,526 group contracts, petitioner’s expert                    
          erroneously minimizes the risk inherent in each separate group              
          contract, maximizes the value of petitioner’s group contracts,              
          and, for loss deduction purposes, overstates their value.                   
          Petitioner’s expert’s $131.7 million reflects the cumulative                
          total value of petitioner’s 23,526 group contracts as a whole,              
          and the expert appears to include therein the value of                      
          petitioner’s other intangible assets (e.g., goodwill, trade name,           
          and provider network).                                                      
               Petitioner’s expert acknowledged that under his method he              
          valued petitioner’s group contracts in a way that reflected more            
          than just the value of each separate group contract.  In his                
          report and testimony, petitioner’s expert states as follows:                

               as in the case of most intangible assets, the value of                 
               group health insurance contracts can be realized in a                  
               market transaction where the contracts are transferred                 
               together with other assets.  In this case, the                         
               hypothetical market transaction to realize that value                  
               could be a transfer that includes all of * * *                         
               [petitioner’s] assets, including such assets as the                    
               provider network.  As I indicated earlier, a                           
               hypothetical market transaction that realizes the full                 
               economic value of the contracts could be structured as                 
               a sale by reinsurance.                                                 






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