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During policy years after 1981, General Re and Parthenon
entered into an agreement rescinding the reinsurance formerly
provided by General Re in the layer $650,000 excess of $350,000,
with the result that Parthenon thereafter effectively retained $1
million in liability exposure for its own account until 1986,
when the retention was increased to $2 million. Through policy
year 1986, Parthenon reinsured its excess exposures in a manner
similar to the reinsurance arrangements described above for
policy year 1981. Respondent does not dispute deductions for the
reinsurance premiums.
Formation of Parthenon Casualty Insurance Company
During 1984, HCA's management decided to form a company to
enter into the business of marketing professional liability
insurance to physicians who practiced at petitioners' hospitals.
Under applicable State law, that insurance could be provided only
by an insurance company licensed on an admitted or surplus lines
basis in each relevant jurisdiction. That company could not at
the same time qualify as a captive insurance company under the
Tennessee captive insurance statute. In order to meet the
requirements of relevant States that the carriers they admit have
a prescribed period of operating history in their domiciliary
jurisdiction, HCA decided to use Parthenon (Old Parthenon) as the
corporate entity that would qualify as a new surplus lines
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