Trans City Life Insurance Company, an Arizona Corporation - Page 20

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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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