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(i.e., $1 million ceding commission/$7.8 million of reserves.14
The $1 million ceding commission resulted in taxable income to
Guardian and an increase in Guardian’s equity tax. Petitioner
did not deduct the net loss attributable to the 1989 Agreement,
but capitalized it (to be amortized) under the principles of
Colonial Am. Life Ins. Co. v. Commissioner, 491 U.S. 244 (1989).
On its 1990 through 1992 Forms 1120L, petitioner claimed
deductions of $125,719, $161,613 and $165,605, respectively, for
the amortization of the loss associated with the 1989 Agreement.
Guardian paid petitioner $36,768 for risk charges on the
1989 Agreement. The market place, through competition, limits
the upside that a reinsurer can earn on a risk charge, but does
not limit a reinsurer’s downside risk. The risk charges did not
limit petitioner’s downside risk because of its obligation to pay
benefits under the Agreements. The risk charges that a
retrocessionaire like petitioner will earn are generally less
than the risk charges that a ceding reinsurer such as Guardian
would earn. If the experience under the reinsured policies was
bad, both Guardian and petitioner could be adversely affected.
The 1989 Agreement met the risk transfer regulations then in
effect under the laws of the State of New York. The 1989
Agreement also met the risk transfer requirements under the 1985
NAIC model regulation concerning risk transfer. The risks
involved with SPWL policies include: (1) Investment, (2) excess
14 Guardian also paid UPL an allowance under the reinsurance
agreement between them. This allowance was approximately
10 percent of the reserves attributable to Guardian under the
agreement.
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