Note 6. Derivative Instruments

The Company entered into derivative instruments to hedge fixed indexed annuity products that guarantee the return of principal to the policyholders and credit interest based on a percentage of the gain in a specified market index. To hedge against adverse changes in equity indices, the Company entered into contracts to buy equity indexed options. However, these derivatives are not designated as hedge under GAAP.

American Life has treaties with two reinsurance companies that have funds withheld and modified coinsurance provisions. Under those provisions, the assets backing the treaties are maintained by American Life as collateral and are carried on the balance sheet for A but are owned by the reinsurer, thus, the total return on the asset portfolio belongs to the reinsurers. Under GAAP this is considered an embedded derivative. However, this embedded derivative is not designated as a hedge under GAAP.

The following is a summary of the asset derivatives not designated as hedges and embedded derivatives in our FIA product as of March 31, 2020 and December 31, 2019:


		March 31, 2020					December 31, 2019
	Location in the
Derivatives Not Designated	Consolidated Statement	Notional		Number of	Estimated		Notional		Number of	Estimated
as Hedging Instruments	of Balance Sheets	Amount		Contracts	Fair Value		Amount		Contracts	Fair Value
Equity-indexed options	Derivatives	$	24,097,066	54	$	463,330	$	9,698,863	24	$	575,294
Equity-indexed embedded derivative	Deposit-type contracts		24,374,089	243		561,759		10,720,324	108		576,634

Due to significant price decreases in the capital markets because of the COVID-19 pandemic, our securities positions resulted in a substantial unrealized loss at March 31, 2020, reported in accumulated other comprehensive loss on the balance sheet.

The following table summarizes the impact of those embedded derivatives related to the Funds Withheld provision where the total return on the asset portfolio belongs to the reinsurers:


	March 31, 2020

	Book Value of			Market Value of		Total Return
Portfolio	Assets			Assets		Swap Value
Ironbound	$	97,863,315	$	78,198,346	$	19,664,969
SDA		17,756,548		14,182,598		3,573,950
Total	$	115,619,863	$	92,380,944	$	23,238,919

This was recorded as an increase in our amounts recoverable from reinsurers of $23,238,919 on our balance sheet and a realized gains of $23,238,919 on our income statement.