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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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