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it did not limit the risk transferred from Guardian to
petitioner.
The insurance industry is heavily regulated. Petitioner was
obligated under statutory accounting principles to establish
reserves for the liabilities it incurred under each of the
Agreements. Guardian would not have legitimately obtained the
surplus relief it sought under the Agreements if the National
Association of Insurance Commissioners (NAIC) and New York State
requirements for risk transfer had not been met.11 Guardian
would also have violated its own rules and policies, as well as
State law, if it reported a statutory credit for ceding to
petitioner liabilities associated with the Agreements, absent an
actual transfer of risk to petitioner. The Agreements passed to
petitioner almost 100 percent of the risk held by Guardian for
mortality, surrender, and investment.
b. Purpose of the Agreements
The relationship between Guardian and petitioner was
arm’s-length, and each had differing interests. Both petitioner
and Guardian derived valid and substantial benefits from the
Agreements, without regard to taxes. Guardian entered into each
11 The NAIC is an organization of insurance commissioners
from various States who are responsible for the regulation of
insurance. The NAIC accredits State insurance departments, and
it issues model regulations (which are not law unless and until
they are adopted by a State) to promote uniform insurance regulation
throughout the nation. The financial statement form prescribed by
the NAIC is known in the life insurance industry as the “annual
statement” (annual statement), and the annual statement must be
filed annually in each State in which the life insurance company
does business.
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