Trans City Life Insurance Company, an Arizona Corporation - Page 17

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          January 2, 1991, Guardian could not recapture any of the policies           
          underlying the 1988 Agreement and the 1989 Agreement,                       
          respectively.  Beginning with each of those dates, Guardian had             
          discretion to recapture policies under the related Agreement.               
          If Guardian exercised this right before January 2, 1992, it had             
          to pay an early recapture fee equal to the absolute value of any            
          negative EAB.10  If Guardian exercised this right after January             
          1, 1992, or chose to leave the reinsurance in place after that              
          date, Guardian did not have to pay a recapture fee, and                     
          petitioner had no recourse to recover its loss.  Neither Guardian           
          nor any of its representatives promised petitioner that Guardian            
          would make petitioner whole if it recaptured either of the                  
          Agreements after January 1, 1992, and Guardian undertook no                 
          obligation to make petitioner whole.                                        
               The Agreements were structured so that Guardian had an                 
          economic incentive to terminate the Agreements when the surplus             
          relief, as measured by the EAB, was zero.  If business was                  
          profitable, Guardian could have terminated the Agreements.                  
          Guardian also could have left the Agreements in place, when the             
          EAB was equal to or greater than zero, if the underlying                    
          businesses generated a loss or if Guardian did not want to assume           
          the risk of recapture.  Business could have been so volatile, for           
          example, that Guardian could have wanted to leave the Agreements            
          in place because the cost of reinsurance would have been less               


          10 This type of early recapture fee arrangement was common                  
          in the industry.                                                            




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