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of the Agreements to obtain risk coverage and to get surplus
relief of $1 million. Guardian would not have entered into
either Agreement had the Agreement not increased its surplus by
$1 million. Guardian earned a spread on the difference between
the risk fees it paid petitioner under the Agreements and the
risk fees it received from the underlying agreements.
Petitioner entered into the Agreements to: (1) Retain its
profitable credit disability business, (2) retain the credit
disability business’ assets, on which it was earning investment
income, and (3) maintain its life insurance status by obtaining
enough life reserves (on a coinsurance basis) to satisfy the Life
Ratio. The Agreements also gave petitioner the ability to
withhold the ceding commissions, while earning 1.2 percent on the
risk charge and continuing to earn approximately 8 percent on the
amount of the commission.
Petitioner wanted to be a life insurance company for Federal
income tax purposes, and petitioner would not have qualified as a
life insurance company during any of the subject years if the
reserves associated with the Agreements were not included in the
calculation of the Life Ratio (ignoring petitioner's alternative
argument that its disability policies were noncancellable); the
Life Ratio would have been less than 50 percent in each year.
Petitioner’s Life Ratio for 1989 through 1992 was greater than
50 percent when the reserves associated with the Agreements are
included in the calculation of the Life Ratio.
Qualification as a life insurance company was petitioner's
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