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c. Underlying Business
The insurance business underlying the 1989 Agreement was
volatile and risky. UPL and Guardian entered into a reinsurance
agreement on November 25, 1987, under which Guardian reinsured a
portion of a block of single premium deferred annuity (SPDA)
policies written from January 1 through December 31, 1987, and a
portion of a block of single premium whole life (SPWL) policies
written from January 1 through December 31, 1987. Pursuant to
the 1989 Agreement, petitioner assumed 30 percent of Guardian’s
interest in the individual life portion of the reinsurance
agreement between UPL and Guardian. The 1989 Agreement did not
reinsure with petitioner any deficiency or excess interest
reserves. The reserves for the business underlying the 1989
Agreement were smaller than the reserves associated with the 1988
Agreement.
Petitioner did not pay claims, make refunds directly to the
insured, or otherwise contact the insured or perform
administrative functions with respect to the policies underlying
the 1989 Agreement.
d. Ceding Commission and Risk Charge
The ceding commission for the 1989 Agreement was recorded as
a negative $1 million in the EAB as of June 30, 1989, and
represented the pretax surplus relief generated for Guardian and
the pretax statutory loss to petitioner as of that date. The
$1 million ceding commission was approximately 13 percent of the
reserves attributable to petitioner under the 1989 Agreement
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