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petitioner has done is establish that the group contracts are
capable of being valued in blocks. Petitioner has not, however,
established that the group contracts are capable of being valued
separately and independently as individual assets.13
Contract Characteristics
Even if petitioner’s expert’s valuation model (namely, a
reinsurance transaction involving all 23,526 group contracts)
were to be regarded as a proper model for the valuation for loss
deduction purposes of petitioner’s 376 group contracts terminated
in 1994, petitioner’s expert utilized incomplete information and
made erroneous assumptions relating to the characteristics of the
group contracts that alone would support disallowance of the
$4 million in loss deductions claimed.
First, with regard generally to all of petitioner’s group
contracts (both community rated and experience rated),
petitioner’s expert: (1) Ignored or did not consider historical
premium payment and claim patterns and renewal expectations
13 We note that the appendices to the valuation report of
petitioner’s expert list separate dollar amounts for each of
petitioner’s 23,526 group contracts in effect on Jan. 1, 1987.
The amount shown for each contract, however, was calculated by
petitioner’s expert based on a valuation methodology and
assumptions that relied on the attributes and characteristics of
all of petitioner’s group contracts rather than the attributes
and characteristics of each contract as a separate and discrete
asset. This is not to say that petitioner’s expert assigned to
each of the 23,526 group contracts the same dollar amount based
solely on a pro rata share of petitioner’s expert’s $131.7
million cumulative total valuation. The dollar amount calculated
by petitioner’s expert for each of the group contracts reflected
only limited contract-specific characteristics.
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