An increase in surplus net of Federal income tax resulting from arrangements described in § 162.5 (relating to agreements to be filed with Commissioner) shall be identified separately on the insurer’s statutory financial statement as a surplus item (aggregate write-ins for gains and losses in surplus in the capital and surplus account) and recognition of the surplus increase as income shall be reflected on a net of tax basis in the ‘‘reinsurance ceded’’ line of the Annual Statement as earnings emerge from the business reinsured.

For example: On the last day of calendar year N, company XYZ pays a $20 million initial commission and expense allowance to company ABC for reinsuring an existing block of business. Assuming a 34% tax rate, the net increase in surplus at inception is $13.2 million ($20 million - $6.8 million) which is reported on the ‘‘Aggregate write-ins for gains and losses in surplus’’ line in the Capital and Surplus account. $6.8 million (34% of $20 million) is reported as income on the ‘‘Commissions and expense allowances on reinsurance ceded’’ line of the Summary of Operations. At the end of year N+1 the business has earned $4 million. ABC has paid $.5 million in profit and risk charges in arrears for the year and has received a $1 million experience refund. Company ABC’s annual statement would report $1.65 million (66% of (4 million - $1 million - $.5 million) up to a maximum of $13.2 million) on the ‘‘Commissions and expense allowance on reinsurance ceded’’ line of the Summary of Operations, and -$1.65 million on the ‘‘Aggregate write-ins for gains and losses in surplus’’ line of the Capital and Surplus account. The experience refund would be reported separately as a miscellaneous income item in the Summary of Operations.