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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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