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provided in the reinsured contracts.
Petitioner did not pay claims, make refunds directly to the
insured, otherwise contact the insured, or perform administrative
functions with respect to the policies underlying the 1988
Agreement.
d. Ceding Commission and Risk Charge
The ceding commission was recorded as a negative $1 million
in the EAB as of October 1, 1988, and represented the pretax
surplus relief generated for Guardian and the pretax statutory
cost to petitioner as of that date. Petitioner deducted the
$1 million ceding commission on its 1988 Form 1120L.
The NAIC regulations applicable to the 1988 Agreement
required that a reinsurer such as petitioner participate
significantly in the risk of mortality, surrender, or investment.
In the case of the reinsured business, the 1988 Agreement
transferred to petitioner the risk of investment, surrender,
excess mortality, and annuitization. If losses were incurred and
profits were insufficient to recoup the losses, petitioner
maintained the burden of the losses. The 1988 Agreement passed
to petitioner the risk of paying 100 percent of the benefits on
the portion of the underlying policies that it assumed.
During the period that the agreement was in effect, Guardian
paid petitioner risk fees totaling $4,676. Three thousand
dollars of this amount was paid in 1988, and the remaining $1,666
was paid in 1995. Guardian paid petitioner the $1,666 amount
after petitioner discovered that the amount had not been paid as
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