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90 percent of the net cash-flow of the retroceded insurance.
Petitioner’s portion of the total reserves on the business
reinsured under the 1989 Agreement was approximately $7.4
million, and an experience refund provision of 90 percent would
have meant that the reinsured business would have had to earn
$10 million in profits on assets attributable to reserves of
$7.4 million, in order for petitioner to recover its $1 million
ceding commission. Mr. Starr recognized the error and advised
petitioner of the error shortly after the 1989 Agreement was
executed. Mr. Starr found the error when he was reviewing the
agreement in connection with signing his actuarial opinion.
The second amendment, effective December 31, 1991, changed
the agreement from indemnity reinsurance on a combined
coinsurance, modified coinsurance plan to indemnity reinsurance
on a coinsurance, funds withheld plan basis. Guardian asked for
this amendment because California had changed its regulations
concerning modified coinsurance, and Guardian wanted to assure
itself that the 1989 Agreement complied with the new regulations.
Petitioner agreed to the second amendment because it had the
potential to decrease petitioner’s exposure under the 1989
Agreement, and petitioner’s actuary was concerned that the
business was not as profitable as expected.
The third amendment, completed on December 28, 1993,
terminated the 1989 Agreement effective as of 12 a.m. on
October 1, 1993.
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