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Guardian in exchange for an annual fee of 1.2 percent of the
outstanding surplus relief.
We do not find that the record supports respondent’s
argument, claim, or conclusion. As is typical with most
reinsurance agreements, petitioner’s profit or loss on the
Agreements was only ascertainable upon the Agreements’
termination. Because petitioner could not terminate the
Agreements, they would continue (and petitioner would remain at
risk) for as long as Guardian left the Agreements intact.
Petitioner faced mortality, surrender, and annuitization risks
for the duration of the Agreements. If cumulative benefit costs
exceeded revenues, petitioner could be left with the losses
permanently at Guardian’s option. Petitioner also was to receive
future profits from the blocks of policies, at a set profit
margin. As Ms. Wallace testified, this method of computing the
profit margin is a very common feature in reinsurance agreements.
She also testified that the 1.2-percent risk charge and the
10-percent profit sharing feature were within the range of common
charges for this type of agreement.
This factor favors petitioner.
iv. Duration of Agreement
A long-standing agreement for automatic reinsurance of
certain types of policies tends to indicate that there is no
significant tax avoidance effect when a coincidental tax benefit
is enjoyed by a ceding company because income arising from the
reinsurance transaction offsets an expiring loss carryover.
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