Note 9. Reinsurance

A summary of significant reinsurance amounts affecting the accompanying consolidated financial statements as of March 31, 2020 and December 31, 2019 and for the three months ended March 31, 2020 and 2019 is as follows:


	Three months ended March 31,
	2020		2019
Statements of comprehensive income:
Premiums ceded		231,674		273,101
Benefits ceded		31,287		77,703
Commissions ceded		3,108		2,914

The following table provides a summary of the significant reinsurance balances recoverable on paid and unpaid policy claims by reinsurers except for a reinsurance with Unified as it was accounted for as discontinued operations:


							Recoverable on				Total Amount
			Recoverable		Recoverable		Benefit		Ceded		Recoverable
	AM Best		on Paid		on Unpaid		Reserves/Deposit-		Due		from
Reinsurer	Rating		Losses		Losses		type Contracts		Premiums		Reinsurer
Ironbound Reinsurance Company Limited		NR	$	—	$	—	$	21,325,367	$	—	$	21,325,367
Optimum Re Insurance Company		A		—		—		479,884		—		479,884
Sagicor Life Insurance Company		A-		—		134,417		11,367,938		267,808		11,234,546
SDA Annuity & Life Re		NR		—		—		5,761,090		—		5,761,088
US Alliance Life and Security Company		NR		—		—		12,458,766		58,704		12,400,062
			$	—	$	134,417	$	51,393,045	$	326,512	$	51,200,947

Due to the volatility of the markets resulting from the COVID-19 pandemic, certain assets that were carried on our balance sheet have resulted in approximately $27 million of unrealized losses. American Life has treaties with two third-party reinsurers that have funds withheld and modified coinsurance provisions. Under those provisions, the assets backing the treaties are maintained by American Life as collateral but the assets and total returns or losses on the asset portfolios belong to the reinsurers. Under GAAP this arrangement is considered an embedded derivative as discussed in Note 6. As a result of the COVID-19 pandemic, the assets had unrealized losses of approximately $23.2 million as of March 31, 2020. The terms of the contracts with the third party reinsurers provide that unrealized losses on the portfolios accrue to the reinsurers. We account for this loss pass through by recording equivalent realized gains on our income statement. Accordingly, the unrealized losses on the assets held by American Life were offset by a gain in the embedded derivative of $23.2 million. The remaining unrealized loss of approximately $3.3 million related to the investments retained by American Life primarily in CLOs. The CLOs have unique characteristics, including being typically illiquid and usually intended by us to be held to term.

Effective November 7, 2019, American Life entered into a Funds Withheld Coinsurance and Modified Coinsurance Agreement (“FW/Modco SDA Agreement”) with SDA Annuity & Life Re (“SDA”), a Cayman Islands-domiciled reinsurance company. In a modified coinsurance arrangement (“Modco”), the ceding entity retains the assets equal to the modified coinsurance reserves retained. In a funds withheld coinsurance agreement (“FW”), assets that would normally be paid over to a reinsurer are withheld by the ceding company to permit statutory credit for unauthorized reinsurance, to reduce the potential credit risk. Under the FW/Modco SDA Agreement, American Life cedes to SDA, on a funds withheld coinsurance and modified coinsurance basis, (5%) quota share of certain liabilities with respect to its multi-year guaranteed annuity (“MYGA”) business and an initial ninety-five (95%) quota share of certain liabilities with respect to its fixed indexed annuity (“FIA”) through December 31, 2019 and thirty (30%) through March 31, 2020. American Life has established two accounts to hold the assets for the FW/Modco Agreement, a Funds Withheld Account and a Modco Deposit Account.

In addition, a trust account was established on November 7, 2019 among American Life, SDA and Wells Fargo Bank, National Association for the sole benefit of American Life to fund the SDA Funds Withheld Account and the SDA Modco deposit account for any shortage in required reserves.

The initial settlement included net premium income of $3,970,509 and net statutory reserves of $3,986,411. The initial settlement for the Funds Withheld Account was $2,256,802 and for the Modco Deposit Account was $1,504,535 and the reserves required was $2,391,847 and $1,594,564, respectively. The amount owed to the Funds Withheld Account and the Modco Deposit Account from the trust account was $135,044 and $90,029, respectively which was funded at the closing of the SDA transaction. American Life earned a ceding commission of $298,982 and $996,701 and commission and administrative allowances of $548,464 and $1,734,184 as of March 31, 2020 and December 31, 2019, respectively. The commission and administrative allowances of $548,464 and $1,734,184 first reduced costs that would have been deferred acquisitions costs incurred and the remainder of the allowances were classified as deferred ceding commissions along with the $298,982 and $996,701 ceding commission earned as of March 31, 2020 and December 31, 2019, respectively.

Effective July 25, 2019, American Life entered into a Funds Withheld Coinsurance and Modified Coinsurance Agreement (“FW/Modco Ironbound Agreement”) with Ironbound Reinsurance Company Limited, an unaffiliated reinsurance company organized under the laws of Barbados (“Ironbound”). Under the FW/Modco Ironbound Agreement, American Life ceded to Ironbound, on a funds withheld coinsurance and modified coinsurance basis, an initial ninety-five (95%) quota share of certain liabilities with respect to its MYGA business. Starting on March 1, 2020, the quota share dropped to (30%) and then again on March 11, 2020 the quota share dropped to (0%). American Life has established two accounts to hold the assets for the FW/Modco Ironbound Agreement, a Funds Withheld Account and a Modco Deposit Account.

In addition, a trust account was established on June 30, 2019 among American Life, Ironbound and Wells Fargo Bank, National Association for the sole benefit of American Life to fund the Funds Withheld Account and the Modco Deposit Account for any shortage in required reserves.

The initial settlement included net premium income of $45,005,536 (gross premiums of $46,568,321 minus gross commissions paid of $1,562,786) and net statutory reserves of $47,271,267. The initial settlement for the Funds Withheld Account was $24,928,934 and for the Modco Deposit Account was $16,619,289 and the reserves required was $26,944,622 and $17,963,081, respectively. The amount owed to the Funds Withheld Account and the Modco Deposit Account from the trust account was $2,015,688 and $1,343,792, respectively which was funded at the closing of the Ironbound transaction. American Life earned a ceding commission of $674,645 and $4,843,120 and commission and administrative allowances of $673,612 and $4,734,926 as of March 31, 2020 and December 31, 2019, respectively. The commission and administrative allowances of $673,612 and $4,734,926 first reduced costs that would have been deferred acquisitions costs incurred and the remainder of the allowances were classified as deferred ceding commissions along with the $674,645 and $4,843,120 ceding commission earned as of March 31, 2020 and December 31, 2019, respectively.

At March 31, 2020 and December 31, 2019 total benefit reserves, policy claims, deposit-type contracts, and due premiums ceded by American Life to Sagicor were $11,234,546 and $11,208,227, respectively. At March 31, 2020 and December 31, 2019, total benefit reserves, policy claims, deposit-type contracts, and due premiums ceded by American Life to US Alliance were $12,400,062 and $12,160,917, respectively. American Life remains contingently liable on the ceded reinsurance should Sagicor or US Alliance be unable to meet their respective obligations. At March 31, 2020 and December 31, 2019, total deposit-type contract ceded by American Life to Ironbound were $21,325,367 and $4,213,699, respectively. At March 31, 2020 and December 31, 2019, total deposit-type contract ceded by American Life to SDA were $5,761,088 and $2,506,911, respectively.

The use of reinsurance does not relieve American Life of its primary liability to pay the full amount of the insurance benefit in the event of the failure of a reinsurer to honor its contractual obligation for all blocks of business except what is included in the Unified transaction. The reinsurance agreement with Unified discharges American Life’s responsibilities once all the policies have changed from indemnity to assumptive reinsurance. No reinsurer of business ceded by American Life has failed to pay policy claims (individually or in the aggregate) with respect to our ceded business.

American Life monitors several factors that it considers relevant to satisfy itself as to the ongoing ability of a reinsurer to meet all obligations of the reinsurance agreements. These factors include the credit rating of the reinsurer, the financial strength of the reinsurer, significant changes or events of the reinsurer, and any other relevant factors. If American Life believes that any reinsurer would not be able to satisfy its obligations with American Life, separate contingency reserves may be established. At March 31, 2020 and December 31, 2019, no contingency reserves was established.

March 31, 2020

December 31, 2019

Balance sheets:

Benefit and claim reserves ceded