MIDWEST HOLDING INC. (Form: 10-Q, Received: 05/14/2020 15:40:26)

March 31, 2020

December 31, 2019

Balance sheets:

Benefit and claim reserves ceded

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


(Mark One)
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended March 31, 2020
or

☐	TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 000‑10685

Midwest Holding Inc.

(Exact name of registrant as specified in its charter)


Nebraska		20‑0362426
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

2900 S. 70th, Suite 400, Lincoln, NE		68506
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (402) 489-8266

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:


Title of each class:		Trading Symbol(s):
Voting Common Stock, $0.001 par value		MDWT

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ☐		Accelerated filer ☐
Non-accelerated filer ☐		Smaller reporting company ☒
(Do not check if a		Emerging growth company ☐
smaller reporting company)

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or reviewed financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes ☐ No ☒

As of May 1, 2020, there were 1,360,675,242 shares of Voting Common Stock, par value $0.001 per share, issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE - None

MIDWEST HOLDING INC.

FORM 10-Q

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION


Item No.	Item Caption	Page
Item 1.	Financial Statements	3

	Consolidated Balance Sheets	3

	Consolidated Statements of Comprehensive Loss	4

	Consolidated Statements of Stockholders’ Equity	5

	Consolidated Statements of Cash Flows	6

	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38

Item 4.	Controls and Procedures	38

PART II – OTHER INFORMATION


Item No.	Item Caption	Page
Item 1.	Legal Proceedings	39

Item 1A.	Risk Factors	39

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39

Item 3.	Defaults Upon Senior Securities	39

Item 4.	Mine Safety Disclosures	40

Item 5.	Other Information	40

Item 6.	Exhibits	41

	Signatures	42

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PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

MIDWEST HOLDING INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS


	March 31, 2020		December 31, 2019
		(Unaudited)
Assets
Investments, available for sale, at fair value fixed maturities (amortized cost: $152,339,447 and $116,676,312, respectively) (See Note 5)	$	125,832,863	$	117,241,861
Mortgage loans on real estate, held for investment		48,982,622		13,810,041
Derivatives		463,330		575,294
Other invested assets		2,796,352		2,468,947
Investment escrow		—		3,899,986
Preferred stock		500,000		500,000
Policy loans		128,734		106,014
Total investments		178,703,901		138,602,143
Cash and cash equivalents		25,506,856		43,716,205
Deferred acquisition costs, net		1,633,037		—
Premiums receivable		350,360		355,959
Accrued investment income		2,563,529		1,511,200
Reinsurance recoverables (See Note 9)		51,200,947		30,579,524
Intangible assets		700,000		700,000
Property and equipment, net		81,165		85,395
Operating lease right of use assets		439,648		470,132
Other assets		322,358		241,580
Assets associated with business held for sale (See Note 3)		2,526,376		3,653,748
Total assets	$	264,028,177	$	219,915,886
Liabilities and Stockholders’ Equity
Liabilities:
Benefit reserves	$	16,413,606	$	16,319,912
Policy claims		156,820		225,228
Deposit-type contracts		220,462,679		171,168,785
Advance premiums		8,536		261
Deferred gain on coinsurance transactions		8,612,135		7,578,195
Lease liabilities (See Note 14):
Finance lease		1,860		1,860
Operating lease		490,870		524,248
Other liabilities		6,756,091		6,291,782
Liabilities associated with business held for sale (See Note 3)		2,520,198		3,646,867
Total liabilities		255,422,795		205,757,138
Commitments and Contingencies (See Note 13)
Stockholders’ Equity:
Common stock, $0.001 par value; authorized 1,970,000,000 shares; issued and outstanding as of March 31, 2020 and 1,023,408,553 as of December 31, 2019.		1,023,409		1,023,409
Additional paid-in capital		53,484,922		53,472,988
Accumulated deficit		(19,533,252)		(41,081,710)
Accumulated other comprehensive income (loss) (See Note 6)		(26,556,674)		619,584
Noncontrolling interest
Total Midwest Holding Inc.'s stockholders' equity		8,418,405		14,034,271
Noncontrolling interest		186,977		124,477
Total stockholders' equity		8,605,382		14,158,748
Total liabilities and stockholders' equity	$	264,028,177	$	219,915,886

See Notes to Consolidated Financial Statements.

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MIDWEST HOLDING INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)


	Three months ended March 31,
	2020		2019
Revenues
Insurance premiums	$	21	$	(2,479)
Investment income, net of expenses		1,240,978		190,995
Net realized gains on investments (See Note 5)		22,600,010		(4,397)
Amortization of deferred gain on reinsurance		182,438		806,047
Miscellaneous income		390,044		15,540
Total revenues		24,413,491		1,005,706
Expenses:
Interest credited		211,202		20,821
Benefits		(7,103)		3,395
Amortization of deferred acquisition costs		40,509		2,069
Salaries and benefits		824,896		539,449
Other operating expenses		1,325,113		1,934,990
Total expenses		2,394,617		2,500,724
Gain (loss) from continuing operations before taxes		22,018,874		(1,495,018)
Income tax expense		(407,916)		—
Net gain (loss)		21,610,958		(1,495,018)
Less: Gain attributable to noncontrolling interest		(62,500)		—
Net gain (loss) attributable to Midwest Holding Inc.		21,548,458		(1,495,018)
Comprehensive loss:
Unrealized (losses) gains on investments arising during period, net of tax		(4,170,973)		847,971
Unrealized losses on foreign currency		(405,275)		—
Less: reclassification adjustment for net realized gains on investments		(22,600,010)		4,397
Other comprehensive (loss) income		(27,176,258)		852,368
Comprehensive loss:	$	(5,627,800)	$	(642,650)
Net gain (loss) per common share
Basic	$	0.021	$	(0.07)
Diluted	$	0.016	$	(0.001)

See Notes to Consolidated Financial Statements.

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MIDWEST HOLDING INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)



			Additional								Total
	Common		Paid-In		Accumulated				Noncontrolling		Stockholders’
	Stock		Capital		Deficit		AOCI*		Interests		Equity (Deficit)
Balance, December 31, 2018	$	22,874	$	33,006,242	$	(35,348,052)	$	(1,818,014)	$	—	$	(4,136,950)
Net loss		—		—		(5,733,658)		—		—		(5,733,658)
Xenith note interest waived		—		845,536		—		—		—		845,536
Xenith note conversion		927,680		18,172,320		—		—		—		19,100,000
Class C preferred stock conversion		72,855		1,427,145		—		—		—		1,500,000
Employee stock options		—		21,745		—		—		—		21,745
Change in equity of noncontrolling interests		—		—		—		—		124,477		124,477
Unrealized gains on investments, net of taxes		—		—		—		2,291,413		—		2,291,413
Unrealized gains on foreign currency, net of taxes		—		—		—		146,185		—		146,185
Balance, December 31, 2019		1,023,409		53,472,988		(41,081,710)		619,584		124,477		14,158,748
Net income		—		—		21,548,458		—		—		21,548,458
Employee stock options		—		11,934		—		—		—		11,934
Change in equity of noncontrolling interests		—		—		—		—		62,500		62,500
Unrealized losses on investments (see Note 5)		—		—		—		(26,770,983)		—		(26,770,983)
Unrealized losses on foreign currency		—		—		—		(405,275)		—		(405,275)
Balance, March 31, 2020	$	1,023,409	$	53,484,922	$	(19,533,252)	$	(26,556,674)	$	186,977	$	8,605,382

*Accumulated other comprehensive income (loss)

See Notes to Consolidated Financial Statements.

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MIDWEST HOLDING INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Three months ended March 31,
	2020		2019
Cash Flows from Operating Activities:
Net income (loss)	$	21,548,458	$	(1,495,018)
Adjustments to arrive at cash provided by operating activities:
Net premium and discount on investments		37,978		24,777
Depreciation and amortization		15,321		18,013
Stock options		11,934		—
Net transfers to noncontrolling interest		62,500		—
Amortization of deferred acquisition costs		40,509		2,069
Deferred acquisition costs capitalized		(1,483,941)		(253,186)
Net realized (gains) losses on investments		(22,600,010)		4,397
Deferred coinsurance ceding commission		1,033,940		(792,325)
Notes payable interest accrued		—		271,142
Preferred stock dividend		—		90,667
Changes in operating assets and liabilities:
Reinsurance recoverables		2,617,495		(204,111)
Interest and dividends due and accrued		(1,052,329)		(86,946)
Premiums receivable		5,599		(1,980)
Policy liabilities		1,699,134		276,747
Other assets and liabilities		379,158		2,042,291
Other assets and liabilities - discontinued operations		703		(145,981)
Net cash provided by or (used in) for operating activities		2,316,449		(249,444)
Cash Flows from Investing Activities:
Securities available for sale:
Purchases		(39,723,572)		(7,446,737)
Proceeds from sale or maturity		3,852,943		360,600
Mortgage loans on real estate, held for investment purchases
Purchases		(33,342,545)		—
Proceeds from sale		2,069,950		—
Purchases of derivatives		(651,661)		—
Other invested assets
Purchases		(2,715,965)		—
Proceeds from sale		2,388,560		—
Net change in policy loans		(22,720)		733
Net purchases of property and equipment		(8,998)		(3,818)
Net cash used in investing activities		(68,154,008)		(7,089,222)
Cash Flows from Financing Activities:
Finance lease		(111)		(111)
Receipts on deposit-type contracts		47,815,010		8,320,749
Withdrawals on deposit-type contracts		(186,689)		—
Net cash provided by financing activities		47,628,210		8,320,638
Net increase (decrease) in cash and cash equivalents		(18,209,349)		981,972
Cash and cash equivalents:
Beginning		43,716,205		2,832,567
Ending	$	25,506,856	$	3,814,539

See Notes to Consolidated Financial Statements.

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MIDWEST HOLDING INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Nature of Operations and Basis of Presentation

Nature of Operations

Midwest Holding Inc. (“Midwest,” “the Company,” “we,” “our,” or “us”) was incorporated in Nebraska on October 31, 2003 for the primary purpose of operating a financial services company. The Company is in the life and annuity insurance business and operates through its wholly owned subsidiary, American Life & Security Corp. (“American Life”). As discussed in Note 3, on June 28, 2018, we underwent a change in control as a result of the closing of a Loan, Convertible Preferred Stock and Convertible Senior Secured Note Purchase Agreement dated May 9, 2018 with a non-affiliated third party, Xenith Holdings LLC, a Delaware limited liability company (“Xenith”). On April 2, 2019, we obtained a 51% ownership in 1505 Capital, a Delaware limited liability company, that was established in 2018 to provide financial and investment advisory and management services to clients and related investment activities. 1505 Capital’s financial results are consolidated with the Company’s from the date of its acquisition.

Management evaluates the Company as one reporting segment in the life insurance industry. The Company is primarily engaged in the underwriting and marketing of annuity products and life insurance through American Life. The product offerings, the underwriting processes, and the marketing processes are similar. The Company’s historical product offerings consisted of a multi-benefit life insurance policy that combined cash value life insurance with a tax deferred annuity and a single premium term life product. These product offerings were underwritten, marketed, and managed as a group of similar products on an overall portfolio basis. The American Life presently offers two products, a multi-year guaranteed annuity ("MYGA") and a fixed indexed annuity (“FIA”).

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with United States of America generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions from the Securities and Exchange Commission (“SEC”) Quarterly Report on Form 10‑Q, including Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The information contained in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10‑K for the year ended December 31, 2019 (“2019 Form 10‑K”), should be read in connection with the reading of these interim unaudited consolidated financial statements.

Certain GAAP policies that significantly affect the determination of financial condition, results of operations and cash flows, are summarized in our 2019 Form 10‑K.

In the opinion of management, these statements include all normal recurring adjustments necessary for a fair presentation of the Company’s results. Operating results for the three months ended March 31, 2020, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2020. All intercompany accounts and transactions have been eliminated in consolidation and certain immaterial reclassifications have been made to the prior period results to conform to the current period’s presentation with no impact on results of operations or total stockholders’ equity.

Investments

All fixed maturities and a portion of the equity securities owned by the Company are considered available-for-sale and are included in the consolidated financial statements at their fair value as of the financial statement date. Bond premiums and discounts are amortized using the scientific-yield method over the term of the bonds. Realized gains and losses on securities sold during the year are determined using the specific identification method. Unrealized holding gains and losses, net of applicable income taxes, are included in accumulated other comprehensive income.

Declines in the fair value of available-for-sale securities below their amortized cost are evaluated to assess whether any other-than-temporary impairment loss should be recorded. In determining if these losses are expected to be other-than-

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temporary, the Company considers severity of impairment, duration of impairment, forecasted recovery period, industry outlook, the financial condition of the issuer, issuer credit ratings, and the intent and ability of the Company to hold the investment until the recovery of the cost.

The recognition of other-than-temporary impairment losses on debt securities is dependent on the facts and circumstances related to the specific security. If the Company intends to sell a security or it is more likely than not that the Company would be required to sell a security prior to recovery of the amortized cost, the difference between amortized cost and fair value is recognized in the statement of comprehensive income as an other-than-temporary impairment. If the Company does not expect to recover the amortized basis, does not plan to sell the security and if it is not more likely than not that the Company would be required to sell a security before the recovery of its amortized cost, the recognition of the other-than-temporary impairment is bifurcated. The Company recognizes the credit loss portion in the income statement and the noncredit loss portion in accumulated other comprehensive loss. The credit component of an other-than-temporary impairment is determined by comparing the net present value of projected cash flows with the amortized cost basis of the debt security. The net present value is calculated by discounting the Company’s best estimate of projected future cash flows at the effective interest rate implicit in the fixed income security at the date of acquisition. Cash flow estimates are driven by assumptions regarding probability of default, including changes in credit ratings, and estimates regarding timing and amount of recoveries associated with a default. The Company has analyzed the securities portfolio and determined that there was not an other-than-temporary impairment for the three months ended March 31, 2020.

Investment income consists of interest, dividends, gains and losses from equity method investments, and real estate income, which are recognized on an accrual basis and amortization of premiums and discounts.

Mortgage loans on real estate, held for investment

Mortgage loans on real estate, held for investment are carried at unpaid principal balances. Interest income on mortgage loans on real estate, held for investment is recognized in net investment income at the contract interest rate when earned. A mortgage loan is considered to be impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the mortgage agreement. Valuation allowances on mortgage loans are established based upon losses expected by management to be realized in connection with future dispositions or settlements of mortgage loans, including foreclosures. The Company establishes valuation allowances for estimated impairments on an individual loan basis as of the balance sheet date. Such valuation allowances are based on the excess carrying value of the loan over the present value of expected future cash flows discounted at the loan’s original effective interest rate. These evaluations are revised as conditions change and new information becomes available. No such valuation allowance was established as of March 31, 2020.

Investment escrow

The Company held in escrow as of December 31, 2019, cash used to settle a mortgage loan that closed in January 2020. As of March 31, 2020, the Company did not hold any cash related to investments in escrow.

Other invested assets

The Company purchases and sells leases in its investment portfolio. As of March 31, 2020, the Company owned several lease investments.

Derivative Instruments

Derivatives are used to hedge the risks experienced in our ongoing operations, such as equity, interest rate and cash flow risks, or for other risk management purposes, which primarily involve managing liability risks associated with our indexed annuity products and reinsurance agreements. Derivatives are financial instruments whose values are derived from interest rates, foreign exchange rates, financial indices or other underlying notional amounts. Derivative assets and liabilities are carried at fair value on the consolidated balance sheets.

To qualify for hedge accounting, at the inception of the hedging relationship, we would formally document our designation of the hedge as a cash flow or fair value hedge and our risk management objective and strategy for undertaking the hedging transaction. In this documentation, we would identify how the hedging instrument is expected to hedge the designated risks

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related to the hedged item, the method that would be used to retrospectively and prospectively assess the hedging instrument’s effectiveness and the method which would be used to measure ineffectiveness. A derivative designated as a hedging instrument must be assessed as being highly effective in offsetting the designated risk of the hedged item. Hedge effectiveness is formally assessed at inception and periodically throughout the life of the designated hedging relationship.

In the fourth quarter of 2019, the Company began investing in options to hedge our interest rate risks on our FIA product. Options typically do not qualify for hedge accounting; therefore, we chose not to use hedge accounting for our options that we currently have. We value our derivatives at fair market value with the offset being recorded on our income statement as a realized gain or (loss).

Additionally, reinsurance agreements written on a funds withheld or modified coinsurance basis contain embedded derivatives on our fixed indexed annuity product. Gains or (losses) associated with the performance of assets maintained in the modified coinsurance deposit and funds withheld accounts are reflected as realized gains or (losses ) in the income statement.

Preferred Stock

Preferred stock of a non-affiliated company was purchased during the third quarter of 2019. The Company believes the cost of the preferred stock equals fair market value as of March 31, 2020.

Policy loans

Policy loans are carried at unpaid principal balances. Interest income on policy loans is recognized in net investment income at the contract interest rate when earned. No valuation allowance is established for these policy loans as the amount of the loan is fully secured by the death benefit of the policy and cash surrender value.

Cash and cash equivalents

The Company considers all liquid investments with original maturities of three months or less when purchased to be cash equivalents. At March 31, 2020 and December 31, 2019, the Company had no cash equivalents. At March 31, 2020, the Company held approximately 1.0 million in Great British Pounds in cash in two of our custody accounts. The USD equivalent held was approximately $1.2 million.

Deferred acquisition costs

Deferred acquisition costs (“DAC”) consist of incremental direct costs, net of amounts ceded to reinsurers, that result directly from and are essential to the contract acquisition transaction and would not have been incurred by the Company had the contract acquisition not occurred. These costs are capitalized, to the extent recoverable, and amortized over the life of the premiums produced. The Company evaluates the types of acquisition costs it capitalizes. The Company capitalizes agent compensation and benefits and other expenses that are directly related to the successful acquisition of contracts. The Company also capitalizes expenses directly related to activities performed by the Company, such as underwriting, policy issuance, and processing fees incurred in connection with successful contract acquisitions.

Recoverability of deferred acquisition costs is evaluated periodically by comparing the current estimate of the present value of expected pretax future profits to the unamortized asset balance. If this current estimate is less than the existing balance, the difference is charged to expense. The Company performs a recoverability analysis annually in the fourth quarter unless events occur which require an immediate review. The Company determined that no events occurred in the three months ended March 31, 2020 that suggest a review should be undertaken.

Property and equipment

Property and equipment are stated at cost net of accumulated depreciation. Annual depreciation is primarily computed using straight-line methods for financial reporting and straight-line and accelerated methods for tax purposes. Furniture and equipment is depreciated over 3 to 7 years and computer software and equipment is generally depreciated over 3 years. Depreciation expense totaled $10,316 and $9,506 for the three months ended March 31, 2020 and 2019, respectively. Accumulated depreciation totaled $985,796 and $975,480 as of March 31, 2020 and December 31, 2019, respectively.

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Maintenance and repairs are expensed as incurred. Replacements and improvements which extend the useful life of the asset are capitalized. The net book value of assets sold or retired are removed from the accounts, and any resulting gain or loss is reflected in earnings.

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized if the carrying amount of an asset may not be recoverable and exceeds estimated future undiscounted cash flows of the asset. A recognized impairment loss reduces the carrying amount of the asset to its fair value. Management has determined that no such events occurred in the three months ended March 31, 2020 that would indicate the carrying amounts may not be recoverable.

Reinsurance

As indicated in our 2019 Form 10-K, reinsurance is an integral part of our business plan. We expect to reinsure substantially all of our new insurance policies with a variety of third party reinsurers in exchange for upfront ceding commissions, expense reimbursements and administrative fees. Under these reinsurance agreements, we expect there will be a monthly or quarterly settlement of premiums, claims, surrenders, collateral and other administration fees. We believe this will help preserve American Life’s capital while supporting its growth because American Life will have lower capital requirements when its business is reinsured due to lower overall financial exposure versus retaining the insurance policy business itself.

There are two main categories of reinsurance transactions: 1) “indemnity,” where we cede a portion of our risk but retain the legal responsibility to our policyholders should our reinsurers not meet their financial obligations; and 2) “assumption,” where we transfer the risk and legal responsibilities to the reinsurers. The reinsurers are required to acquire the appropriate regulatory and policyholder approvals to convert indemnity policies to assumption policies.

Our reinsurers may be domestic or foreign capital markets investors or traditional reinsurance companies seeking to assume U.S. insurance business. We plan to mitigate the credit risk relating to reinsurers generally by requiring other financial commitments from the reinsurers to secure the reinsured risks (such as posting substantial collateral). It should be noted that under indemnity reinsurance agreements American Life remains exposed to the credit risk of its reinsurers. If one or more reinsurers becomes insolvent or is otherwise unable or unwilling to pay claims under the terms of the applicable reinsurance agreement, American Life retains legal responsibility to pay policyholder claims, which, in such event would likely materially and adversely affect the capital and surplus of American Life.

Some reinsurers are not and may not be “accredited” or qualified as reinsurers under Nebraska Law. In order to enter into reinsurance agreements with such reinsurers and to reduce potential credit risk, American Life may hold a deposit or withhold funds from the reinsurer or require the reinsurer to maintain a trust that holds assets backing up the reinsurer’s obligation to pay claims on the business it assumes. The reinsurer may also appoint an investment manager for such funds, which is some cases may be our investment adviser subsidiary, 1505 Capital, to manage these assets pursuant to guidelines adopted by us that are consistent with state investment statutes and reinsurance regulations.

American Life has treaties with two third-party reinsurers that have funds withheld provisions. Under those provisions, the assets backing the treaties are maintained by American Life as investments but the assets and total returns or losses on the investments are owned by the reinsurers. Under GAAP this arrangement is considered an embedded derivative as discussed in Note 6 to our consolidated financial statements above. As a result of recent market volatility, assets carried as investments on American Life’s financial statements for the third-party reinsurers contained 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.

American Life currently has five reinsurance agreements in effect and has earned ceding commissions on four out of those agreements. See Note 9 to the consolidated financial statements in this report for further information on each of our reinsurance agreements.

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The table below shows the ceding commissions earned on the four most recent reinsurance transactions where American Life is earning ceding commissions on a statutory accounting principles basis:


		Three months ended March 31,
		2020				2019
Reinsurer	Effective Date of Transaction	Ceding Commission Earned		Expense Allowances(1)		Ceding Commission Earned		Expense Allowances(1)
US Alliance Life and Security Company	September 2017	$	15,262	$	—	$	15,262	$	—
Unified Life Insurance Company	July 2018		60,609		—		702,788		—
Ironbound Reinsurance Company Limited	July 2019		674,645		673,612		—		—
SDA Annuity & Life Re	November 2019		298,982		548,464		—		—
		$	1,049,498	$	1,222,076	$	718,050	$	—

(1)

Includes: acquisition and administrative expenses, commission expense allowance and product development fees.

Under GAAP, the ceding commission is deferred on the balance sheet and are amortized over the period of the policyholder contracts. The tables below shows the ceding commissions from the reinsurers and what was earned on a GAAP accounting basis:


	Three months ended March 31,
	2020										2019
Reinsurer	Gross Ceding Commission		Expense Allowances(1)		Commissions and Acquisition Expenses		Interest on Ceding Commissions		Earned Ceding Commission		Earned Ceding Commission
US Alliance Life and Security Company	$	-	$	-	$	-	$	-	$	12,094	$	25,816
Unified Life Insurance Company		-		-		-		-		67,451		780,231
Ironbound Reinsurance Company Limited		674,645		673,612		615,111		53,602		95,740		—
SDA Annuity & Life Re		298,982		548,464		503,207		12,966		7,153		—
	$	973,627	$	1,222,076	$	1,118,318	$	66,568	$	182,438	$	806,047

(1)

Includes: acquisition and administrative expenses, commission expense allowance and product development fees.

The tables below show the ceding commissions deferred on each reinsurance transaction on a GAAP accounting basis:


		March 31, 2020		December 31, 2019
Reinsurer	Effective Date of Transaction	Deferred Ceding Commission		Deferred Ceding Commission
US Alliance Life and Security Company(1)	September 2017	$	846,581	$	858,675
Unified Life Insurance Company(1)	July 2018		515,444		582,894
Ironbound Reinsurance Company Limited(2)	July 2019		5,741,686		5,060,359
SDA Annuity & Life Re(2)	November 2019		1,508,424		1,076,267
		$	8,612,135	$	7,578,195

(1)

These reinsurance transactions received gross ceding commissions on the effective dates of the transaction. The difference between the statutory net adjusted reserves and the GAAP adjusted reserves plus the elimination of DAC and VOBA related to these businesses reduces the gross ceding commission with the remaining deferred and amortized over the lifetime of the blocks of business.

(2)

These reinsurance transactions include the ceding commissions and expense allowances which are accounted for as described in (1).

Benefit reserves

The Company establishes liabilities for amounts payable under insurance policies, including traditional life insurance and annuities. Generally, amounts are payable over an extended period of time. Liabilities for future policy benefits of traditional life insurance have been computed by a net level premium method based upon estimates at the time of issue for investment yields, mortality and withdrawals. These estimates include provisions for experience less favorable than initially expected. Mortality assumptions are based on industry experience expressed as a percentage of standard mortality tables.

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Policy claims

Policy claims are based on reported claims plus estimated incurred but not reported claims developed from trends of historical data applied to current exposure.

Deposit-type contracts

Deposit-type contracts consist of amounts on deposit associated with deferred annuity riders, premium deposit funds and supplemental contracts without life contingencies.

Deferred gain on ceding commissions

American Life has entered into several indemnity reinsurance contracts where it is earning ceding commissions. These ceding commissions are recorded as a deferred liability and amortized over the life of the business ceded. American Life receives commission, administrative, and option allowances from reinsurance transactions that represent recovery of acquisition costs. These allowances first reduce the DAC associated with that reinsured block of business with the remainder being included in the deferred gain on ceding commissions to also be amortized.

Income taxes

The Company is subject to income taxes in the U.S. federal and various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state or local tax examinations by tax authorities for the years before 2015. The Company is not currently under examination for any open years. The provision for income taxes is based on income as reported in the financial statements. The income tax provision is calculated under the asset and liability method. Deferred tax assets are recorded based on the differences between the financial statement and tax basis of assets and liabilities at the enacted tax rates. The principal assets and liabilities giving rise to such differences are investments, insurance reserves, and deferred acquisition costs. A deferred tax asset valuation allowance is established when there is uncertainty that such assets would be realized. The Company has no uncertain tax positions that it believes are more-likely-than not that the benefit will not to be realized. When applicable, the Company recognizes interest accrued related to unrecognized tax benefits and penalties in income tax expense.

Revenue recognition and related expenses

Amounts received as payment for annuities are recognized as deposits to policyholder account balances and included in future insurance policy benefits. Revenues from these contracts are comprised of fees earned for administrative and contract-holder services and cost of insurance, which are recognized over the period of the contracts, and included in revenue. Deposits are shown as a financing activity in the consolidated statements of cash flows.

Revenues on traditional life insurance products consist of direct and assumed premiums reported as earned when due.

Liabilities for future policy benefits are provided and acquisition costs are amortized by associating benefits and expenses with earned premiums to recognize related profits over the life of the contracts. Acquisition costs are amortized over the expected life of the annuity contracts.

Comprehensive loss

Comprehensive loss is comprised of net loss and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses from marketable securities classified as available for sale and unrealized gains and losses from foreign currency transactions, net of applicable taxes. 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 are owned by the reinsurers, thus, the total return on the asset portfolio belongs to the reinsurers. Under GAAP this is considered an embedded derivative as discussed in Note 6 below. As a result of recent volatility, the investments carried by American Life for the third-party reinsurers contained unrealized losses of approximately $23.2 million as of March 31, 2020. The terms of the contracts with the third-party reinsurers, provided that unrealized losses on the portfolios

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shall accrue to the reinsurers. We account for this loss pass through by booking equivalent realized gains on our income statement. Accordingly, for the first quarter of 2020, our recognized embedded derivative gains were $23.2 million.

The remaining unrealized loss of approximately $3.3 million is related to the investments retained by American Life. The majority of these unrealized losses are related to our asset-backed securities or collateralized loan obligations (“CLOs”). CLOs are typically illiquid and are intended to be held to maturity thus loss risk is minimal, the Company has monitored the underlying unrealized losses and believe they pose little chance of loss in the long-term due to the quality of the underlying credits.

Basic earnings per share in the first quarter of fiscal 2020 were $0.021 which included the aforementioned gain of $23.2 million. Basic loss per share in the first quarter of fiscal 2020 without the aforementioned gain was ($0.002).

Common and preferred stock and earnings (loss) per share

The par value per each Company share is $0.001 with 1,970,000,000 voting common shares authorized, 20,000,000 non-voting common shares authorized, and 10,000,000 preferred shares authorized. On June 18, 2019, Xenith exercised the right to convert its 1,500,000 Series C preferred stock and the $19,100,000 notes payable to voting common stock at the conversion rate of approximately $0.02 per common share. At March 31, 2020 and December 31, 2019, the Company had 1,023,408,553 voting common shares issued and outstanding.

The Series C preferred shares were converted by Xenith to voting common shares on June 18, 2019 at a rate of approximately $0.02 per share for 72,854,474 voting common shares. The stated annual dividend rate on the Series C preferred shares was 8%. At the time of the conversion, Xenith forgave all previously accrued dividends from June 28, 2018 through the conversion date.

Loss per basic share attributable to the Company’s common stockholders was computed based on the weighted average number of shares outstanding during each period. The weighted average number of shares outstanding during the three months ended March 31, 2020 and the year ended December 31, 2019 were 1,023,408,553 and 576,594,387 shares, respectively.

Loss per diluted share attributable to the Company’s common stockholders was computed based on the average shares outstanding and options granted under our Long-Term Incentive Plan (“LTIP”), as if all were vested and exercised, which for the three months ended March 31, 2020 and the year ended December 31, 2019 were 1,361,622,261 and 577,541,406 shares, respectively.

Note 2. New Accounting Standards

Adoption of New Accounting Standards

In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2018‑15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350‑40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computer Arrangement That is a Service Contract. Under ASU No. 2018‑15, the amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. In order to determine which costs can be capitalized, we are to follow the guidance in Subtopic 350‑40. Cost for implementation activities in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and the post-implementation stage are expensed as the activities are performed. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The amendments in this update should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Management has reviewed and evaluated the impact of this pending new standard and will implement this starting in fiscal year 2020. We reviewed our software enhancements as of March 31, 2020 to determine the impact of implementing ASU No. 2018‑12 and determined that none of those enhancements should be capitalized as they did not meet the requirements of this ASU.

In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016‑02, Leases (Topic 842). The guidance in this ASU supersedes the leasing guidance in Topic 840, Leases. Under the new guidance, lessees are required to recognize

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lease assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The lease liability is measured at the present value of the lease payments over the lease term with the right-of-use asset measured as the lease liability amount and including adjustments for certain lease incentives and initial direct costs. Lease expense recognition will continue to differentiate between finance leases and operating leases resulting in a similar pattern of lease expense recognition as under current GAAP. This ASU permitted a modified retrospective adoption approach that includes a number of optional practical expedients that entities may elect upon adoption. On January 1, 2019, the Company adopted this standard using a modified retrospective adoption approach. The adoption resulted in the Company identifying three operating leases and one financial lease which were subject to this guidance. The impact to the Consolidated Statements of Comprehensive Income (Loss) was minimal. We identified four leases with net assets of $439,648 and $473,045, and lease liabilities of $492,730 and $526,108 for the three months ended March 31, 2020 and the year ended December 31, 2019, respectively.

Future adoption of New Accounting Standards

In January 2020, the FASB issued ASU No. 2020-2, Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)-Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. The amendments in this Update clarify certain interactions between the guidance to account for certain equity securities under Topic 321, the guidance to account for investments under the equity method of accounting in Topic 323, and the guidance in Topic 815, which could change how an entity accounts for an equity security under the measurement alternative or a forward contract or purchased option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting or the fair value option in accordance with Topic 825, Financial Instruments. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. We are unable to determine the impact at this time of ASU No. 2020-1 as we are still in the process of evaluating the standard.

In February 2020, the FASB issued ASU No. 2020-02, Financials Services Instruments-Credit Losses (Topic 326), and Leases (topic 842). The amendments in this Update adds language to Accounting Bulletin N. 119. In November 2019, the FASB issued ASU No. 2019-10, Financials Services Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (topic 842). The Board developed a philosophy to extend and simplify how effective dates are staggered between larger public companies and all other entities. For business entities that meet the definition of a smaller reporting company (“SRC”), the amendments in ASU 2018-12 are effective for fiscal years beginning after December 15, 2021. In August 2018, the FASB issued ASU No. 2018‑12, Financial Services-Insurance (Topic 944). This update 1) modifies the timeliness of recognizing changes in the liability for future policy benefits and modifies the rate used to discount future cash flows, 2) simplifies the accounting for certain market-based options or guarantees associated with deposit contracts, 3) simplifies the amortization of deferred acquisition costs, and 4) addresses the effectiveness of the required disclosures. This ASU becomes effective for fiscal years, and interim periods within those years, beginning after December 15, 2023. We anticipate that the adoption of ASU 2018‑12 will have a broad impact on our consolidated financial statements and related disclosures and will require us to make changes to certain of our processes, systems and controls. We are unable to determine the impact at this time of ASU No. 2018‑12 as we are still in the process of evaluating the standard.

In March 2020, the FASB issued ASU No. 2020-03, Codification Improvements to Topic 326, Financial Instruments—Credit Losses. The scope of this amendment is to clarify the interaction of ASC 842 (Leases) and ASC 326 (credit losses). In November 2018, the FASB issued ASU No. 2018‑10, Codification Improvements to Topic 326, Financial Instruments—Credit Losses. The amendments in this update include items brought to the Board’s attention by stakeholders to clarify the guidance in the amendments in ASU 2016‑13, Financial Instruments – Credit Losses (Topic 326) which was issued in June 2016. These updated amendments clarify that receivables arising from operating leases are not within the scope of Subtopic 326‑20. Under ASU 2016‑13, this replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to perform credit loss estimates. This update changes the methodology from an incurred loss to an expected credit loss. An allowance for the expected credit loss will be set up and the net income will be impacted. The credit losses will be evaluated in the current period and an adjustment to the allowance can be made. The new standard becomes effective after December 15, 2022. We are currently evaluating the impact of our pending adoption of the new standard on our consolidated financial statements.

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Note 3. Assets and Liabilities Held for Sale

On November 30, 2018, American Life entered into an Assumption and Indemnity Reinsurance Agreement (“Reinsurance Agreement”) with Unified Life Insurance Company (“Unified”), a Texas domiciled stock insurance company. The Reinsurance Agreement provides that American Life ceded and Unified agreed to reinsure, on an indemnity reinsurance basis, 100% of the liabilities and obligations under substantially all of American Life’s life, annuity and health policies (“Policies”). The Agreement closed on December 10, 2018, as previously disclosed in Midwest’s Current Report on Form 8‑K filed with the Securities and Exchange Commission (the “SEC”) on December 12, 2018. The effective date of the Agreement was July 1, 2018.

After the closing of the Reinsurance Agreement, Unified began the process of preparing and delivering certificates of assumption and other materials to policyholders of American Life in order to effect an assumption of the Policies by Unified such that all of American Life’s rights and obligations under the policies arising on and after July 1, 2018 would be completely assumed by Unified without further indemnification or other obligations, except for liabilities, claims and obligations incurred before July 1, 2018. Unified is obligated to indemnify American Life against all liabilities and claims and all of its policy obligations from and after the July 1, 2018.

As of March 31, 2020, 81% of the indemnity policies were converted to assumptive policies thereby releasing American Life from its legal obligations related to those policies.

The consideration paid by Unified to American Life under the Reinsurance Agreement upon closing was $3,500,000 (“Ceding Commission”), subject to minor settlement adjustments. At closing, American Life transferred the Statutory Reserves and Liabilities, as defined in the Reinsurance Agreement, directly related to the policies, to Unified.

The Ceding Commission is being amortized on a straight-line basis over the life of the policies. When the policies are converted to assumptive, meaning American Life has no liability exposure for those policies, the remaining Ceding Commission will be recognized in our income statement.

Our balance sheet was required to be restated for all periods shown with the assets and liabilities which were ceded by American Life to Unified into separate line items as assets and liabilities held for sale. The table below summarizes the assets and liabilities that are included in discontinued operations as of March 31, 2020 and as of December 31, 2019:


	As of March 31,		As of December 31,
	2020		2019
Carrying amounts of major classes of assets included as part of discontinued operations:
Policy loans	$	45,491	$	50,387
Reinsurance recoverables		2,430,884		3,569,849
Premiums receivable		50,001		33,512
Total assets held for sale in the Consolidated Balance Sheet	$	2,526,376	$	3,653,748

Carrying amounts of major classes of liabilities included as part of discontinued operations:
Benefit reserves	$	1,021,284	$	1,403,953
Policy claims		35,431		28,203
Deposit-type contracts		1,457,536		2,209,195
Advance premiums		2,327		2,226
Accounts payable and accrued expenses		3,620		3,290
Total liabilities held for sale in the Consolidated Balance Sheets	$	2,520,198	$	3,646,867

Note 4. Non-controlling Interest

On April 2, 2019, Midwest entered into a contract to acquire a 51% ownership in 1505 Capital LLC (“1505 Capital”), a Delaware limited liability company, located in New York. 1505 Capital was organized to provide financial and investment advisory and management services to clients and any related investment, trading or financial activities. Class A Units were

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authorized to be issued up to 1,000 shares. Midwest purchased for $1 a total of 510 of the Class A Units and Aurora Financial Services, Inc. owns the remaining 490 Class A Units.

As of March 31, 2020, Midwest consolidated the 1505 Capital income of $260,345 into the consolidated financials. Midwest’s portion of income was $197,845 and the non-controlling interest income was $62,500.

Note 5. Investments

The cost or amortized cost and estimated fair value of investments classified as available-for-sale as of March 31, 2020 and December 31, 2019 are as follows:


	Cost or		Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
March 31, 2020:
Fixed maturities:
U.S. government obligations	$	2,086,391	$	129,809	$	—	$	2,216,200
Mortgage-backed securities		764,277		957		12,254		752,980
Asset-backed securities		128,469,099		66,021		25,756,095		102,779,025
States and political subdivisions -- general obligations		239,454		11,779		—		251,233
States and political subdivisions -- special revenue		2,884,223		95,600		8,112		2,971,711
Corporate		17,896,003		227,680		1,261,969		16,861,714
Total fixed maturities	$	152,339,447	$	531,846	$	27,038,430	$	125,832,863
Mortgage loans on real estate, held for investment		48,982,622		—		—		48,982,622
Derivatives		1,142,492		68,904		748,066		463,330
Investment Escrow		—		—		—		—
Other invested assets		2,796,352		—		—		2,796,352
Preferred stock		500,000		—		—		500,000
Total Investments	$	205,760,913	$	600,750	$	27,786,496	$	178,575,167

December 31, 2019:
U.S. government obligations		2,091,710		7,073		17,559		2,081,224
Mortgage-backed securities		819,678		—		21,070		798,608
Asset-backed securities		95,006,241		646,335		404,752		95,247,824
States and political subdivisions -- general obligations		240,494		8,788		—		249,282
States and political subdivisions -- special revenue		25,112		179		—		25,291
Corporate		18,493,077		501,022		154,467		18,839,632
Total fixed maturities		116,676,312		1,163,397		597,848		117,241,861
Mortgage loans on real estate, held for investment		13,810,041		—		—		13,810,041
Derivatives		490,831		87,684		3,221		575,294
Investment Escrow		3,899,986		—		—		3,899,986
Other invested assets		2,468,947		—		—		2,468,947
Preferred stock		500,000		—		—		500,000
Total fixed maturities	$	137,846,117	$	1,251,081	$	601,069	$	138,496,129

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The Company has two securities that individually exceed 10% of the total of the state and political subdivisions categories as of March 31, 2020. The amortized cost, fair value, credit ratings, and description of each security is as follows:


	Amortized		Estimated
	Cost		Fair Value		Credit Rating
March 31, 2020:
Fixed maturities:
States and political subdivisions -- general obligations
Bellingham, Washington	$	107,420	$	118,061	AA+
Longview, Washington Refunding		132,034		133,172	Aa3
Total	$	239,454	$	251,233

The following table summarizes, for all securities in an unrealized loss position at March 31, 2020 and December 31, 2019, the estimated fair value, pre-tax gross unrealized loss and number of securities by consecutive months they have been in an unrealized loss position.


	March 31, 2020						December 31, 2019
			Gross		Number				Gross		Number
	Estimated		Unrealized		of		Estimated		Unrealized		of
	Fair Value		Loss		Securities(1)		Fair Value		Loss		Securities(1)
Fixed Maturities:
Less than 12 months:
U.S. government obligations	$	—	$	—		—	$	1,518,772	$	14,935		9
Asset-backed securities		95,658,862		25,665,232		67		39,114,732		404,752		26
Mortgage-back securities		165,282		589		4		160,010		4,844		4
States and political subdivisions -- general obligations		1,764,400		8,112		1		—		—		—
Corporate		8,965,800		854,457		27		2,800,815		13,618		4
Greater than 12 months:
U.S. government obligations		—		—		—		353,834		2,624		2
Asset-backed securities		909,767		90,863		1		—		—		—
Mortgage-back securities		464,615		11,665		8		638,598		16,226		14
Corporate		491,033		407,512		4		2,201,658		140,849		13
Total fixed maturities	$	108,419,759	$	27,038,430		112	$	46,788,419	$	597,848		72

(1)

We may reflect a security in more than one aging category based on various purchase dates.

Due to significant price decreases in the capital markets because of the coronavirus (“COVID-19”) pandemic, our securities positions resulted in a substantial unrealized loss at March 31, 2020. We performed an analysis of the unrealized losses and determined that since they had only been in that position for less than three months, and approximately 80% had durations of 10 to 20 years, it would not be appropriate to write down any investments as of March 31, 2020. Management believes that the Company will fully recover its cost basis in the securities held at March 31, 2020, and management does not have the intent to sell, nor is it more likely than not that the Company will be required to sell, such securities until they recover or mature. We will continue to monitor the world and U.S. economy and the capital markets throughout the remainder of 2020 to determine if any impairment is required.

The majority of the unrealized losses are related to our CLOs. CLOs are typically illiquid and are intended to be held to maturity thus risk of loss is minimal. The Company has monitored the underlying unrealized losses and believes they pose little chance of loss in the long-term due to the quality of the underlying credits.

American Life has treaties with two reinsurance companies that have funds withheld and modified coinsurance provisions. Under these provisions, the assets backing the treaties are maintained by American Life as collateral but the assets and the total return on the asset portfolios are owned by the reinsurers. The mortgage loans and CLOs primarily make up that asset portfolio. Under GAAP, these assets are considered embedded derivatives.

The impact of these embedded derivatives is shown below in Note 6 Derivative investments.

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The amortized cost and estimated fair value of fixed maturities at March 31, 2020, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. No securities due in the next year are in an unrealized loss position, further supporting management’s decision not to recognize an other-than-temporary impairment.


	Amortized		Estimated
	Cost		Fair Value
Due in one year or less	$	202,956	$	204,177
Due after one year through five years		3,284,845		3,281,374
Due after five years through ten years		27,511,001		23,467,777
Due after ten years through twenty years		109,927,220		88,586,999
Due after twenty years		11,413,425		10,292,536
	$	152,339,447	$	125,832,863

The Company is required to hold assets on deposit for the benefit of policyholders in accordance with statutory rules and regulations. At March 31, 2020 and December 31, 2019, these required deposits had a total amortized cost of $3,361,830 and $3,611,292 and fair values of $3,486,914 and $3,612,844, respectively.

The following table presents a reconciliation of the beginning balance for investments measured at fair value on a recurring basis using Level 3 inputs at March 31, 2020 and December 31, 2019:



		Carrying Value		Interest Income Accrued		Interest Income Earned
March 31, 2020:
Industrial	$	500,000	$	2,708	$	8,215
Commercial mortgage loan - multi-family		46,423,549		348,699		652,708
Other		2,059,073		18,251		49,633
Total mortgage loans	$	48,982,622	$	369,658	$	710,556
December 31, 2019:
Industrial	$	500,000	$	—	$	15,889
Commercial mortgage loan - multi-family		11,320,924		116,860		329,684
Other		1,989,117		195,168		7,386
Total mortgage loans	$	13,810,041	$	312,028	$	352,959

American Life has treaties with two third-party reinsurers that have funds withheld and modified coinsurance provisions. Under those provisions, the mortgage loans 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; therefore, the Company derives minimal investment income from these mortgages.

The components of net investment income for the three months ended March 31, 2020 and 2019 are as follows:


	Three months ended March 31,
	2020		2019
Fixed maturities	$	1,167,614	$	195,691
Mortgage loans		2,524		—
Other		—		1,244
Gross investment income		1,170,138		196,935
Less: refund received on investment expenses (investment expense)		70,840		(5,940)
Investment income, net of expenses	$	1,240,978	$	190,995

Proceeds for the three months ended March 31, 2020 and 2019 from sales of investments classified as available-for-sale were $3,852,943 and $360,600, respectively. Gross gains of $149,548 and $1,624 and gross losses of $24,832 and $6,021 were realized on those sales during the three months ended March 31, 2020 and 2019, respectively.

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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.

Note 7. Fair Values of Financial Instruments

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. We use valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, accounting standards establish

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a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the valuation inputs, or their ability to be observed, may result in a reclassification for certain financial assets or liabilities. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in/out of the Level 3 category as of the beginning of the period in which the reclassifications occur.

A description of the valuation methodologies used for assets measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

Level 1 measurements

Cash: The carrying value of cash and cash equivalents and short-term investments approximate the fair value because of the short maturity of the instruments.

Level 2 measurements

Fixed maturities: Fixed maturities are recorded at fair value on a recurring basis utilizing a third-party pricing source. The valuations are reviewed and validated quarterly through random testing by comparisons to separate pricing models or other third party pricing services. For the period ended March 31, 2020, there were no material changes to the valuation methods or assumptions used to determine fair values, and no broker or third party prices were changed from the values received.

Derivatives: Derivatives are reported at fair market value utilizing a third-party pricing source.

Investment escrow: The Company held in escrow as of December 31, 2019, cash that was used to settle a mortgage loan that did not close until January 2020.

Level 3 measurements

Mortgage loans on real estate, held for investment: Mortgage loans are carried at their unpaid principal value as there are no traded market values for these loans.

Other invested assets: Short-term equipment leases are carried at their principal value as there are no traded market values for these leases.

Preferred stock: The preferred stock investment was recorded at its principal value as there was no traded market values for this stock.

Policy loans: Policy loans are stated at unpaid principal balances. As these loans are fully collateralized by the cash surrender value of the underlying insurance policies, the carrying value of the policy loans approximates their fair value.

Deposit-type contracts: The fair value for direct and assumed liabilities under deposit-type insurance contracts (accumulation annuities) is calculated using a discounted cash flow approach. Cash flows are projected using actuarial

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assumptions and discounted to the valuation date using risk-free rates adjusted for credit risk and nonperformance risk of the liabilities. The fair values for insurance contracts other than deposit-type contracts are not required to be disclosed.

The following table presents the Company’s fair value hierarchy for those financial instruments measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019.


			Significant
	Quoted		Other		Significant
	In Active		Observable		Unobservable		Estimated
	Markets		Inputs		Inputs		Fair
	(Level 1)		(Level 2)		(Level 3)		Value
March 31, 2020
Financial assets
Fixed maturities:
U.S. government obligations	$	—	$	2,216,200	$	—	$	2,216,200
Mortgage-backed securities		—		752,980		—		752,980
Asset-backed securities		—		102,779,025		—		102,779,025
States and political subdivisions — general obligations		—		251,233		—		251,233
States and political subdivisions — special revenue		—		2,971,711		—		2,971,711
Corporate		—		16,861,714		—		16,861,714
Total fixed maturities		—		125,832,863		—		125,832,863
Mortgage loans on real estate, held for investment		—		—		48,982,622		48,982,622
Derivatives		—		463,330		—		463,330
Investment escrow		—		—		—		—
Other invested assets		—		—		2,796,352		2,796,352
Preferred stock		—		—		500,000		500,000
Total Investments	$	—	$	126,296,193	$	52,278,974	$	178,575,167
Financial liabilities
Embedded derivative for equity-indexed contracts	$	—	$	561,759	$	—		561,759
December 31, 2019
Fixed maturities:		—
U.S. government obligations		—		2,081,224		—		2,081,224
Mortgage-backed securities		—		798,608		—		798,608
Asset-backed securities		—		95,247,824		—		95,247,824
States and political subdivisions — general obligations		—		249,282		—		249,282
States and political subdivisions — special revenue		—		25,291		—		25,291
Corporate		—		18,839,632		—		18,839,632
Total fixed maturities		—		117,241,861		—		117,241,861
Mortgage loans on real estate, held for investment		—		—		13,810,041		13,810,041
Derivatives		—		575,294		—		575,294
Investment escrow		—		3,899,986		—		3,899,986
Other invested assets		—		—		2,468,947		2,468,947
Preferred stock		—		—		500,000		500,000
Total Investments	$	—	$	121,717,141	$	16,778,988	$	138,496,129
Financial liabilities
Embedded derivative for equity-indexed contracts	$	—	$	576,634	$	—		576,634

There were no transfers of financial instruments between any levels during the three months ended March 31, 2020 or during the year ended December 31, 2019.

Accounting standards require disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring basis are discussed above. There were no financial assets or financial liabilities measured at fair value on a non-recurring basis.

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The following disclosure contains the carrying values, estimated fair values and their corresponding placement in the fair value hierarchy for financial assets and financial liabilities as of March 31, 2020 and December 31, 2019, respectively:


	March 31, 2020
			Fair Value Measurements Using
			Quoted Prices in
			Active Markets		Significant Other		Significant
			for Identical Assets		Observable		Unobservable
	Carrying		and Liabilities		Inputs		Inputs		Fair
	Amount		(Level 1)		(Level 2)		(Level 3)		Value
Assets:
Policy loans	$	128,734	$	—	$	—	$	128,734	$	128,734
Cash		25,506,856		25,506,856		—		—		25,506,856
Liabilities:
Policyholder deposits (Deposit-type contracts)		220,462,679		—		—		220,462,679		220,462,679


	December 31, 2019
			Fair Value Measurements Using
			Quoted Prices in
			Active Markets		Significant Other		Significant
			for Identical Assets		Observable		Unobservable
	Carrying		and Liabilities		Inputs		Inputs		Fair
	Amount		(Level 1)		(Level 2)		(Level 3)		Value
Assets:
Policy loans	$	106,014	$	—	$	—	$	106,014	$	106,014
Cash		43,716,205		43,716,205		—		—		43,716,205
Liabilities:
Policyholder deposits (Deposit-type contracts)		171,168,785		—		—		171,168,785		171,168,785

The following tables present a reconciliation of the beginning balance for all investments measured at fair value on a recurring basis using level three inputs during the three months ended March 31, 2020.



	Beginning								Ending
	Balance						Realized		Balance
	As of						Gain/		As of
	December 31, 2019		Additions		Sales		(Loss)		March 31, 2020
Assets
Policy loans	$	106,014	$	22,720	$	—	$	—	$	128,734
Mortgage loans on real estate,
held for investment		13,810,041		37,242,531		2,100,192		30,242		48,982,622
Other invested assets		2,468,947		2,458,792		2,131,387		—		2,796,352
Preferred stock		500,000		—		—		—		500,000
Total Investments	$	16,885,002	$	39,724,043	$	4,231,579	$	30,242	$	52,407,708

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Note 8. Income Tax Matters

Significant components of the Company’s deferred tax assets and liabilities as of March 31, 2020 and December 31, 2019 are as follows:


	March 31, 2020		December 31, 2019
Deferred tax assets:
Loss carryforwards	$	427,075	$	436,777
Capitalized costs		210,030		221,918
Stock option granted		7,072		4,566
Unrealized losses on investments		5,568,896		—
Policy acquisition costs		1,728,134		1,468,030
Charitable contribution carryforward		1,230		1,020
Property and equipment		23,362		15,508
Benefit reserves		1,338,072		848,643
Total deferred tax assets		9,303,871		2,996,462
Less valuation allowance		(4,156,035)		(2,618,741)
Total deferred tax assets, net of valuation allowance		5,147,836		377,721
Deferred tax liabilities:
Unrealized losses on investments		4,880,173		116,088
Due premiums		84,076		81,789
Intangible assets		147,000		147,000
Policy loans		36,587		32,844
Property and equipment		—		—
Total deferred tax liabilities		5,147,836		377,721
Net deferred tax assets	$	—	$	—

At March 31, 2020 and December 31, 2019, the Company recorded a valuation allowance of $4,156,035 and $2,618,741, respectively, on the deferred tax assets to reduce the total to an amount that management believes will ultimately be realized. Realization of deferred tax assets is dependent upon sufficient future taxable income during the period that deductible temporary differences and carryforwards are expected to be available to reduce taxable income.

There was income tax expense of $407,916 for the three months ended March 31, 2020 and no income tax expense for the three months ended March 31, 2019. This differed from the amounts computed by applying the statutory U.S. federal income tax rate of 21% to pretax income, as a result of the following:


	Three months ended March 31,
	2020		2019
Computed expected income tax benefit	$	4,610,839	$	(313,954)
Increase (reduction) in income taxes resulting from:
Meals, entertainment and political contributions		2,611		2,583
Change in valuation allowance		(4,147,690)		234,398
Other		(57,844)		76,973
Subtotal of increases		(4,202,923)		313,954
Tax expense (benefit)		407,916		—

Section 382 of the Internal Revenue Code limits the utilization of U.S. net operating loss (“NOL”) carryforwards following a change of control, which occurred on June 28, 2018. As of March 31, 2020, the deferred tax assets included the expected tax benefit attributable to federal NOLs of $1,896,207. The federal NOLs generated prior to June 28, 2018 which are subject to Section 382 limitation can be carried forward. If not utilized, the NOLs of $890,636 prior to 2017 will expire through the year of 2032, and the NOLs generated from June 28, 2018 to March 31, 2020 do not expire and will carry forward indefinitely, but their utilization in any carry forward year is limited to 80% of taxable income in that year.

Loss carry forwards for tax purposes as of March 31, 2020, have expiration dates that range from 2024 through 2039.

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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.

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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.

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Note 10. Notes Payable

On June 28, 2018, we underwent a change in control as a result of the closing of a Loan, Convertible Preferred Stock and Convertible Senior Secured Note Purchase Agreement dated May 9, 2018 (the “Agreement”) with a non-affiliated third party, Xenith. Vespoint LLC, a Delaware limited liability company (“Vespoint”), owns 100% of the voting stock of Xenith. Vespoint is owned and managed by AMS Advisors LLC, a Delaware limited liability company, and Rendezvous Capital LLC, a New York limited liability company. Each of these three companies is a private investment company; they are controlled by Michael Minnich and A. Michael Salem, who are Co-Chief Executive Officers of Vespoint and Executive Officers of Midwest and American Life.

At closing of the Agreement with Xenith, it loaned a total of $600,000 to Midwest, repayable upon maturity in 10 years with interest of 8% per annum with 4% payable quarterly and another 4% accrued and payable upon maturity. The loans were made under two notes of $500,000 and $100,000, respectively. The Agreement further provided that Xenith, in its sole discretion, could loan up to an additional $23,500,000 to Midwest. Any loans made by Xenith under this election (“Subsequent Loans”) could also to be converted into Midwest’s voting common stock at $0.02 per share. Xenith contributed an additional $18,500,000 in the fourth quarter of 2018 following the amendment of the Midwest Articles of Incorporation to increase its authorized voting common shares to 1,970,000,000. All loans were later converted into Midwest voting common stock on June 18, 2019. Any additional borrowing capacity was terminated by written mutual consent in April 2020.

The Company had total accrued interest of $845,536 on the Xenith notes through June 18, 2019. All interest on the notes from inception through June 18, 2019 was waived by Xenith. The accrued interest was accounted for as an additional capital contribution. The legal fees of $161,000 associated with the Xenith transaction were capitalized and subsequently written off when the notes were converted.

The following table sets forth information regarding loans made to us by Xenith through June 18, 2019 and the number of shares of voting common stock each loan was converted into on June 28, 2019:


			Shares of Common
	Loan		Stock into which
	Principal		Loans Were
Date of Loan	Amount		Converted
June 28, 2018	$	500,000	24,284,825
June 28, 2018		100,000	4,856,965
October 10, 2018		1,000,000	48,569,650
December 7, 2018		17,500,000	849,968,875
Total	$	19,100,000	927,680,315

As of March 31, 2020, Midwest had no notes outstanding to Xenith.

Note 11. Long-Term Incentive Plan

On June 11, 2019, our Board of Directors (the “Board”) approved the Midwest Holding Inc. Long-Term Incentive Plan. The purposes of this Long-Term Incentive Plan (“LTIP”) is to create incentives which are designed to motivate participants to put forth maximum effort toward the success and growth of the Company and to enable the Company to attract and retain experienced individuals who by their position, ability and diligence are able to make important contributions to the Company’s success. Toward these objectives, this Plan provides for the grant of Options, Restricted Stock Awards, Restricted Stock Units, SARs, Performance Units, Performance Bonuses, Stock Awards and Other Incentive Awards to Eligible Employees and the grant of Nonqualified Stock Options, Restricted Stock Awards, Restricted Stock Units, SARs, Performance Units, Stock Awards and Other Incentive Awards to Consultants and Eligible Directors, subject to the conditions set forth in this Plan. All awards are required to be established, approved and/or granted by our Board.

On July 19, 2019, the Company granted stock options for 8,950,000 shares at an exercisable during a ten year period after the date of grant at a price of $0.05 per share with one-third exercisable after July 17, 2021 and two-thirds exercisable after July 17, 2023. The fair market value of the shares was approximately $0.016 a share at grant date.

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The Company’s management team considered the stock options as compensation. Using the Black-Scholes Model we determined the consideration should be $143,200. The factors we used to determine the consideration were the following: the weighted average fair market value at grant date of $0.016 a share, exercise price of $0.05 a share, time to maturity of 10 years, annual risk-free interest rate of 1.84% based upon the 10 year U.S. Treasury rate at grant date, and a 200% volatility based on the change in price of the stock between the decision and grant date, the amount of shares and the closely held nature of the stock before the grant. As of March 31, 2020, we have amortized the consideration over the two and four year vesting tranches for an expense and additional paid in capital of $11,933. As of March 31, 2020, and December 31, 2019, the cumulative amortization and additional paid in capital was $33,678 and $21,745, respectively. No options had been or forfeited as of March 31, 2020 or December 31, 2019.

Note 12. Deposit-Type Contracts

The Company’s deposit-type contracts represent the contract value that has accrued to the benefit of policyholders as of the balance sheet date. Liabilities for these deposit-type contracts are included without reduction for potential surrender charges. This liability is equal to the accumulated account deposits, plus interest credited, and less policyholder withdrawals. The following table provides information about deposit-type contracts for the three months ended March 31, 2020 and the year ended December 31, 2019:


	March 31, 2020		December 31, 2019
Beginning balance	$	171,168,785	$	7,234,927
US Alliance		190,802		657,986
Ironbound Reinsurance Company Limited		—		1,839,551
SDA Annuity & Life Re (includes MVA adjustment and embedded derivative)		—		194,940
Deposits received		47,815,010		161,392,700
Investment earnings (includes MVA adjustment and embedded derivative)		1,474,771		9,271
Withdrawals		(186,689)		(160,590)
Ending balance	$	220,462,679	$	171,168,785

Note 13. Contingencies and Commitments

Legal Proceedings: We are involved in litigation incidental to our operations from time to time. We are not presently a party to any legal proceedings other than litigation arising in the ordinary course of our business, and we are not aware of any claims that could materially affect our financial position or results of operations.

Regulatory Matters: State regulatory bodies and other regulatory bodies regularly make inquiries and conduct examinations or investigations concerning the Company’s compliance with laws in relation to, but not limited to, insurance and securities matters. American Life received a Certificate of Authority to conduct business in Iowa during the first quarter of 2019. American Life received a Certificate of Authority to conduct business during 2020 from each of the following states: Utah, Montana, Louisiana, Ohio, and the District of Columbia. American Life has pending applications six additional states that are expected to be approved by the end of 2020. The Nebraska Department of Insurance (“NDOI”) granted American Life approval to enter into the Funds Withheld Coinsurance and Modified Coinsurance Agreement with Ironbound prior to closing of the agreement in July 2019. The NDOI granted American Life approval to enter into the Funds Withheld Coinsurance and Modified Coinsurance Agreement with SDA prior to closing of the agreement in December 2019.

Note 14. Leases

Our operating lease activities consist of leases for office space and equipment. Our finance lease activities consist of leases for hardware which we will own at the end of the lease agreement. None of our lease agreements include variable lease payments. See the discussion of our January 1, 2019 implementation of a new accounting standard for leases and its impact on our Consolidated Financial Statements in Note 2. New Accounting Standards.

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Supplemental balance sheet information as of March 31, 2020 regarding our leases is as follows:


		As of		As of
Leases	Classification	March 31, 2020		December 31, 2019
Assets
Noncurrent:
Finance	Office and other equipment, net of accumulated depreciation and amortization	$	—	$	2,913
Operating	Operating lease right-of-use assets		439,648		470,132
Total leased assets		$	439,648	$	473,045

Liabilities
Current:
Finance lease	Finance lease liabilities	$	—	$	1,860
Noncurrent:
Operating lease	Operating lease liabilities		492,730		524,248
Total leased liabilities		$	492,730	$	526,108

Our operating and finance leases expenses for the three months ended March 31, 2020 and 2019, were as follows:


		Three months ended March 31,
Leases	Classification	2020		2019
Operating	General and administrative expense	$	2,092	$	3,766

Finance lease cost:
	Amortization expense		2,913		2,914
	Interest expense		111		111

Minimum contractual obligations for our operating leases at March 31, 2020, are as follows:


	Operating Leases
2020 (excluding three months ended March 31, 2020)	$	121,279
2021		164,081
2022		156,608
2023		161,674
2024		13,508
Total remaining lease payments	$	617,150

Supplemental cash flow information related to leases was as follows:


	Three months ended March 31,
	2020		2019
Cash payments
Operating cash flows from operating leases	$	(1,035)	$	232
Operating cash flows from finance leases		1,164		1,165
Financing cash flows from finance leases		(111)		(111)

The weighted average remaining lease terms and discount rate of our finance and operating leases was follows:


	As of		As of
	March 31, 2020			December 31, 2019
Weighted Average Remaining Lease Term
Finance lease		—		3 months
Operating lease		2.2 years		2.5 years
Weighted Average Discount Rate
Finance lease		6%		6%
Operating lease		8%		8%

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Note 15. Statutory Net Income and Surplus

American Life is required to prepare statutory financial statements in accordance with statutory accounting practices prescribed or permitted by the Nebraska Department of Insurance. Statutory practices primarily differ from GAAP by charging policy acquisition costs to expense as incurred, establishing future policy benefit liabilities using different actuarial assumptions as well as valuing investments and certain assets and accounting for deferred taxes on a different basis. As filed in the statutory-basis annual statement with the Nebraska Department of Insurance, American Life’s statutory net gains (losses) for the three months ended March 31, 2020 and 2019 were $423,474 and $(1,308,563), respectively. Capital and surplus of American Life as of March 31, 2020 and December 31, 2019 was $18,504,524 and $19,507,325, respectively. The net gain was primarily due to the ceding commission and reserve adjustments earned on the Ironbound and SDA reinsurance transactions; offset by continuing expenses incurred to provide services on new software and related technology to distribute products through national marketing organizations. For the quarter ended March 31, 2020, the MYGA and FIA sales were $31,565,506 and $16,249,504 compared to the $8,292,617 of MYGA sales as of March 31, 2019. An additional $8,092,612 of MYGA and $6,786,557 of FIA sales were pending as of March 31, 2020.

As discussed in Note 9 Reinsurance above, American Life entered into the FW/Modco Agreement with Ironbound to cede 95% of American Life’s MYGA business. On March 1, 2020, the quota share ceded to Ironbound was reduced to 30% and on March 11, 2020 the quota share was further reduced to 0%. Premiums net of commissions and ceding commission and administrative fees ceded to Ironbound were $17,757,301 and $128,760,161 and the reserve requirement of $20,701,016 and $139,093,289 was ceded to Ironbound as of March 31, 2020 and December 31, 2019, respectively.

Also included in Note 9. Reinsurance above, American Life entered into the FW/Modco Agreement with SDA to cede 5% of the MYGA and 95% of the FIA business through December 31, 2019. Effective January 1, 2020, the FIA quota share was reduced to 30%. Premiums net of commissions and ceding commission and administrative fees ceded to SDA were $5,427,396 and $18,984,045 and the reserve requirements of $6,111,782 and $20,822,364 were ceded to SDA for the quarter ended March 31, 2020 and the year ended December 31, 2019.

State insurance laws require American Life to maintain certain minimum capital and surplus amounts on a statutory basis. Our insurance subsidiary is subject to regulations that restrict the payment of dividends from statutory surplus and may require prior approval from its domiciliary insurance regulatory authorities. American Life is also subject to risk-based capital (“RBC”) requirements that may further affect its ability to pay dividends. American Life’s statutory capital and surplus as March 31, 2020 and December 31, 2019, exceeded the amount of statutory capital and surplus necessary to satisfy regulatory requirements, including the RBC requirements.

As of March 31, 2020, and December 31, 2019, American Life did not hold any participating policyholder contracts where dividends were required to be paid.

Note 16. Third Party Administration

The Company commenced its third party administrative (“TPA”) services in 2012 as an additional revenue source. These services are offered to non-affiliated entities. These agreements, for various levels of administrative services on behalf of each company, generate fee income for the Company. Services provided vary based on their needs and can include some or all aspects of back-office accounting and policy administration. We have been able to perform our TPA services using our existing in-house resources. Fees earned during the three months ended March 31, 2020 and 2019 amounted to $8,160 and $15,540, respectively.

Note 17. Subsequent Events

COVID-19 Pandemic

Beginning in March 2020, the global pandemic associated with novel COVI-19 and related economic conditions began to impact the Company’s results. Due to the unprecedented volatility in the economy related to COVID-19, the Company’s available for sale assets values were reduced by approximately $26.5 million and was reflected in the accumulated other comprehensive income on the balance sheet. This was offset by a realized gain of $23.2 million on the related embedded derivative. Also, the derivative assets were reduced by $679,000 and were reflected in our realized gains and losses in the

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income statement. Approximately 80% of the unrealized losses were in our CLO portfolio and are typically illiquid which are intended to be held to maturity, thus we believe the risk of loss is not significant. The Company has monitored the underlying unrealized losses and believe they pose little threat in the long-term due to the quality of the underlying credits. We believe that the quality and duration of our investments provide reasonable assurance of continued performance of the portfolio despite the recent economic volatility. As mentioned above in Items Impacting Comparability, the assets backing the treaties are maintained by American Life as collateral whereas the assets and total return on the asset portfolios are owned by the reinsurers. The Company has only contingent exposure to these losses as the CLO’s are held as collateral in and funds withheld and modification coinsurance accounts for the performance of the reinsurers under the coinsurance treaties. The reinsurer bears the risk of loss. Under GAAP, this arrangement is considered an embedded derivative as discussed in Note 6 to our consolidated financial statements.

The COVD-19 pandemic has not materially impacted our sales of our annuity products as evidenced by new sales of $47.8 million in issued premium and pending applications of $14.9 million. Our policies sold have surrender charges over their duration that would tend to offset future income accruals.

Operationally, the Company has the vast majority of its workforce working remotely with a skeleton crew in the office. Our technology has allowed us to move to this work environment without a reduction in our productivity. The Company’s business continuity plan has performed as expected.

The Company’s management will continue to monitor our investments and cash flows to evaluate the impact as this pandemic evolves.

On April 7, 2020, the Nebraska Department of Insurance (“NDOI”) approved the Funds Withheld and Funds Paid Coinsurance Agreement (“US Alliance Agreement”) between American Life and US Alliance Life and Security Company, a Kansas reinsurance company (“US Alliance”). The US Alliance Agreement closed on April 15, 2020. Under the US Alliance Agreement, American Life will cede to US Alliance, on a funds withheld and funds paid coinsurance basis, an initial forty-nine percent (49%) quota share of certain liabilities with respect to American Life’s FIA business effective January 1, 2020 through March 31, 2020. Effective from March 1, 2020 through March 10, 2020, American Life will cede a forty-five point five percent (45.5%) quota share of certain liabilities with respect to its MYGA business to US Alliance. Effective March 11, 2020 through March 31, 2020, on a funds withheld and funds paid coinsurance basis, the quota share will increase to sixty-six point five percent (66.5%) of certain liabilities with respect to its MYGA business. Effective April 1, 2020, the FIA quota share was reduced to forty (40%) and the MYGA quota share was reduced to twenty-five percent (25%). American Life has established a US Alliance Funds Withheld Account to hold the assets for the US Alliance Agreement. The NDOI approved the inclusion of the US Alliance coinsurance in American Life’s March 31, 2020 statutory financials.

Effective March 12, 2020, Seneca Reinsurance Company, LLC (“Seneca Re”), a Vermont limited liability company was formed to operate as a sponsored captive insurance company for the purpose of insuring and reinsuring various types of risks of its participants through one or more protected cells and to carry on and conduct any other business or activity that is permitted for sponsored captive insurance companies under Vermont regulations. On March 30, 2020, Seneca Re received its Certification of Authority to transact the business of a captive insurance company. On May 12, 2020, Midwest contributed $300,000 to Seneca Re for a 100% ownership in it. On April 15, 2020, Midwest entered into an operating agreement with Seneca Re.

On May 13, 2020 the Nebraska Department of Insurance (“NDOI”) approved the Funds Withheld and Modified Coinsurance Agreement (“Seneca Re Agreement”) between American Life and Seneca Re, which is entering into this Seneca Re Agreement by and through Protected Cell 2020-01 (“SRC1”). The Seneca Re Agreement closed on May 13, 2020. Under the Seneca Re Agreement, American Life will cede to SRC1, on a funds withheld and modified coinsurance basis, an initial twenty-one percent (21%) quota share of certain liabilities with respect to American Life’s FIA business effective January 1, 2020 through March 31, 2020. Effective from March 1, 2020 through March 10, 2020, American Life will cede a nineteen point five percent (19.5%) quota share of certain liabilities with respect to its MYGA business to SRC1. Effective March 11, 2020 through March 31, 2020, on a funds withheld and funds paid coinsurance basis, the quota share will increase to twenty-eight point five percent (28.5%) of certain liabilities with respect to its MYGA business. Effective April 1, 2020, the FIA quota share was increased to forty-five (45%) and the MYGA quota share was increased to seventy-two point five percent (72.5%). American Life has established a SRC1 Funds Withheld Account to hold the assets for the Seneca Re Agreement. The NDOI approved the inclusion of the SRC1 coinsurance in American Life’s March 31, 2020 statutory financials.

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On April 24, 2020, the Company entered into a Securities Purchase Agreement with Xenith, Vespoint LLC, and Crestline Assurance Holdings LLC, a Delaware limited liability company (“Crestline”). Pursuant to the Agreement, Crestline purchased 222,222,222 shares of the Company’s voting common stock, par value $0.001 per share, at a purchase price of $0.045 per share for $10 million. Also on April 24, 2020, in a separate transaction, the Company sold 115,044,467 shares of common stock to various investors at $0.045 per share for $5.177 million. Midwest will contribute $5 million of proceeds received under this agreement to American Life. The remaining proceeds will be used by the Company for general working capital and corporate purposes. For more information, see the Current Report on Form 8-K that was filed with the Securities and Exchange Commission on April 24, 2020.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the financial condition of the Company as of March 31, 2020, compared with December 31, 2019, and the results of operations for the three months ended March 31, 2020, compared with the corresponding period in 2019 of Midwest Holding Inc. and its consolidated subsidiaries. The MD&A is provided as a supplement to, and should be read in conjunction with our consolidated financial statements and the accompanying notes to the consolidated financial statements (“Notes”) presented in “Part 1 – Item 1. Financial Statements” of this Report; and our Form 10‑K for the year ended December 31, 2019 (“2019 Form 10‑K”), including the sections entitled “Part I – Item 1A. Risk Factors,” and “Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Cautionary Note Regarding Forward-Looking Statements and Risk Factors

Except for certain historical information contained herein, this report contains certain statements that may be considered “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and such statements are subject to the safe harbor created by those sections. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including without limitation: any projections of revenues, earnings, cash flows, capital expenditures, or other financial items; any statement of plans, strategies, and objectives of management for future operations; any statements concerning new services, or developments; any statements regarding future economic conditions or performance; and any statements of belief and any statement of assumptions underlying any of the foregoing. Words such as “believe,” “may,” “could,” “expects,” “hopes,” “estimates,” “projects,” “intends,” “anticipates,” and “likely,” and variations of these words, or similar expressions, terms, or phrases, are intended to identify such forward-looking statements. Forward-looking statements are inherently subject to risks, assumptions, and uncertainties, many of which cannot be predicted or quantified, which could cause future events and actual results to differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in “Item 1A. Risk Factors” of our 2019 Form 10-K and below in Part III – Other Information – Item 1A Risk Factors.

All such forward-looking statements speak only as of the date of this report. You are cautioned not to place undue reliance on such forward-looking statements. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in the events, conditions, or circumstances on which any such statements are based.

Overview

We were formed on October 31, 2003 for the primary purpose of becoming a financial services company. We operate our business through two subsidiaries: 1) American Life, a Nebraska-domiciled life insurance company and 2) 1505 Capital, a Delaware limited liability company in which we own a 51% interest and which provides investment advisory and related asset management services. In 2009, American Life was issued a certificate of authority to conduct life insurance business in Nebraska. We have incurred losses since inception that resulted primarily from costs incurred while raising capital and establishing and operating American Life and other entities.

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On June 28, 2018 we underwent a change in control as a result of the closing of a Loan, Convertible Preferred Stock and Convertible Senior Secured Note Purchase Agreement dated May 9, 2018 (the “Agreement”) with a non-affiliated third party, Xenith Holdings LLC, a Delaware limited liability company (“Xenith”). Xenith is a wholly controlled subsidiary of Vespoint LLC, a Delaware limited liability company (“Vespoint”), which is also the manager of Xenith. Vespoint is owned and managed by AMS Advisors LLC, a Delaware limited liability company, and Rendezvous Capital LLC, a New York limited liability company. Each of these three companies is a private investment company; they are controlled by Michael Minnich and A. Michael Salem, who are Co-Chief Executive Officers of Vespoint and executive officers and directors of Midwest and American Life.

Following the closing of the Agreement, we began implementation of a new business plan whose primary purpose is to leverage technology and reinsurance to distribute competitive insurance products through third-party marketing organizations.

The terms and conditions of the Agreement are described in our Current Report on Form 8‑K filed with the Securities and Exchange Commission (“SEC”) on May 14, 2018. The Agreement was filed as an exhibit to the referenced Current Report on Form 8‑K.

On April 24, 2020, we raised additional capital of $5.177 million from various third-party investors and issued 115,044,467 shares of voting common stock at $0.045 per share. Also on April 24, 2020, we signed a Securities Purchase Agreement with Crestline for additional capital of $10.0 million and issued 222,222,222 shares of our voting common stock $0.045 per share.

The Business Plan.

In 2018, subsequent to the change in control described above, we embarked upon our new business plan to become a leading, capital efficient, technology-enabled, services-oriented life and annuity fronting insurance company. Our objective is to leverage American Life, and our ancillary services business, to create and sell life and annuity products through third party independent marketing organizations using third-party reinsurance as the primary form of capital to support our growth and to bear the financial risk associated with out insurance products. Our targeted third party field marketing organizations offer products, infrastructure and other services to independent insurance agents across the United States. Although we may retain some business, we expect third-party reinsurers to ultimately assume substantially all of the insurance risk on our business through reinsurance agreements. In connection with these arrangements we will earn ceding fees from the reinsurers. We currently offer multi-year guaranteed annuity (“MYGA”) and fixed index annuity (“FIA”) through several independent marketing organizations.

We are seeking to create value through our ability to compete in the areas of:

life and annuity product innovation;

speed to market of new products;

competitive insurance rates and commissions;

streamlined customer and agent experience;

ease and efficient cost of doing business using our technology;

asset management for insurers and reinsurers; and

lower capital requirements through our use of reinsurance.

Technology: As an integral part of our new business plan, American Life implemented and integrated a modern technology platform designed to facilitate our business activities. American Life contracted with a third-party software company to license a new policy administration system known as “FAST,” an end-to-end product development, new business, distribution, management and policy administration platform that utilizes state-of-the-art technology that American Life hosts in the Amazon Web Services cloud. Functional implementation was completed in November 2018, and testing completed in January 2019. In addition, several core technology integrations were added, including document management, electronic application capability, secure log-ins and an agent and policyholder portal. Management believes this new technology should enhance cost effective product sales and development and policy administration as we scale up, as well as provide American Life with the ability to seek to expand its third party administrative services (which were a minor part of our legacy business) in the future.

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American Life is licensed to sell, underwrite, and market life insurance and annuity products in 20 states and has pending applications in six additional states in 2020. Sales have continued consistently and the Company’s investments continue to perform.

Critical Accounting Policies and Estimates

The MD&A included in our 2019 Form 10‑K contains a detailed discussion of our critical accounting policies and estimates. This report should be read in conjunction with the “Critical Accounting Policies and Estimates” discussed in our 2019 Form 10‑K.

Consolidated Results of Operations - Three Months Ended March 31, 2020

On June 28, 2018, Midwest closed on the Agreement with Xenith as discussed above under “Overview.” Following the closing, we embarked upon a new business plan which includes leveraging technology to distribute insurance products through Independent Marketing Organizations.

We also reinsured our existing legacy block of insurance business through a reinsurance agreement with a third party reinsurer in exchange for a ceding commission of $3.5 million. In addition, American Life obtained an A.M. Best Rating of B++ in December 2018 that was affirmed in 2019. We purchased and installed comprehensive new technology during the fourth quarter of 2018 and we began selling our first MYGA and FIA products in 2019 through the IMOs.

American Life closed the Legacy Reinsurance agreement on December 10, 2018 with a third party insurance company to cede 100% of the remaining legacy block of its business, with the transaction being effective July 1, 2018. See Note 3 Assets and Liabilities Held for Sale in the Notes to Consolidated Financial Statements above. Due to the assumptive nature of this agreement, this transaction qualified to be reported as Discontinued Operations under ASC 2014‑08 Presentation of Financial Statements (Topic 205).

American Life began selling its first MYGA and FIA products during 2019 resulting in gross premiums of $145,747,737 and $15,616,831, respectively, for the year ended December 31, 2019 on a statutory basis. For GAAP, such premiums are considered deposits and are not shown as premium income. For the three months ended March 31, 2020, and March 31, 2019, such gross premiums for MYGA and FIA products were $31,565,506 and $16,249,504, respectively.

On July 25, 2019, American Life closed a reinsurance agreement with a third party insurance company to cede 95% of American Life’s MYGA business, with the transaction being effective from inception of the sales of the MYGA product. This transaction eliminated 95% of the interest credited on the MYGA deposit-type contracts. On March 1, 2020, American Life reduced the quota share ceded to the third party reinsurer to 30% and again on March 11, 2020 to 0% at the request of the NDOI. See Note 9. Reinsurance to our Consolidated Financial Statements, above, for further discussion.

On November 7, 2019 American Life closed a second reinsurance agreement with a third party insurance company to cede the remaining 5% of the MYGA product and 95% of the FIA product to a third party reinsurer through December 31, 2019, at which time the FIA product was reduced to 30% ceded as of January 1, 2020. See Note 9. Reinsurance to our Consolidated Financial Statements, above, for further discussion.

Item Impacting Comparability

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, whereas the assets and the total return on the asset portfolios belong to the reinsurers. Under GAAP this arrangement is considered an embedded derivative as discussed in Note 6 to our consolidated financial statements. As a result of recent market volatility, assets carried as investments on American Life’s financial statements for the third-party reinsurers contained 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 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.

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Basie earnings per share in the first quarter of fiscal 2020 were $0.021 which included the aforementioned gain of $23.2 million. Basic loss per share in the first quarter of fiscal 2020 without the aforementioned gain was ($0.002) per share.

If prices of investments recover, the unrealized gains may be reduced; therefore, the associated embedded derivative gain recognized in the first quarter of 2020, could be reduced accordingly,

COVID-19

The effect of the COVID-19 pandemic on the Company’s operations is not known as this time. Due to the unprecedented volatility in the economy related to COVID-19, the Company’s available for sale assets values were reduced by approximately $26.5 million and was reflected in the accumulated other comprehensive income on the balance sheet. This was offset by a realized gain of $23.2 million on the related embedded derivative. Also, the derivative assets were reduced by $679,000 and were reflected in our realized gains and losses in the income statement. Approximately 80% of the unrealized losses were in our CLO portfolio and are typically illiquid which are intended to be held to maturity, thus we believe the risk of loss is not significant. The Company has monitored the underlying unrealized losses and believe they pose little threat in the long-term due to the quality of the underlying credits. We believe that the quality and duration of our investments provide reasonable assurance of continued performance of the portfolio despite the recent economic volatility. As mentioned above in Items Impacting Comparability, the assets backing the treaties are maintained by American Life as collateral whereas the assets and total return on the asset portfolios belong to the reinsurers. The Company has only contingent exposure to these losses as the CLO’s are held as collateral in and funds withheld and modification coinsurance accounts for the performance of the reinsurers under the coinsurance treaties. The reinsurer bears the risk of loss. Under GAAP, this arrangement is considered an embedded derivative as discussed in Note 6 to our consolidated financial statements.

The Company’s management will continue to monitor our investments and cash flows to evaluate the impact as this pandemic evolves.

Revenues:

The following summarizes the sources of our revenue for the periods indicated:


	Three months ended March 31,
	2020		2019
Premiums revenues	$	21	$	(2,479)
Investment (losses) income, net of expenses		1,240,978		190,995
Net realized gains (losses) on investments		22,600,010		(4,397)
Amortization of deferred gain on reinsurance		182,438		806,047
Miscellaneous income		390,044		15,540
	$	24,413,491	$	1,005,706

Premium revenue: Premium revenue was flat for the three months ended March 31, 2020 compared to the same period in 2019. The introduction of our MYGA and FIA products discussed above generated a meaningful annuity policy sales; however, under GAAP, these products are considered investment contracts and GAAP requires that premiums be deferred and classified as deposit-type liabilities on our balance sheet. We expect that premium income under GAAP from our annuity products will not be a significant source of revenue until American Life develops new life insurance products in the future and achieves significant additional product sales.

The table below shows premiums under statutory accounting principles on our two annuity products:

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	Three months ended March 31,
	2020				2019
		MYGA		FIA		MYGA		FIA
	Premium(1)		Premium(1)(2)		Premium(1)		Premium(1)(2)
As of March 31, 2020	$	31,565,506	$	16,249,504	$	8,292,617	$	—

(1)

Under statutory accounting principles, the MYGA and FIA premiums are treated as premium revenue. Under GAAP these products are defined as deposit-type contracts; therefore, the premium revenue is accounted under GAAP as deposit-type liabilities on our balance sheet and is not recognized in our income statement.

(2)

We began selling the MYGA product in January 2019 and the FIA product in November 2019.

Investment (loss) income, net of expenses: The components of our net investment (loss) income are as follows:


	Three months ended March 31,
	2020		2019
Fixed maturities	$	1,167,614	$	195,691
Mortgage loans		2,524		—
Other		—		1,244
Gross investment income		1,170,138		196,935
Less: refund received on investment expenses (investment expense)		70,840		(5,940)
Investment income, net of expenses	$	1,240,978	$	190,995

The large increase over the prior period was due to the investment income earned on the bonds purchased with the sales of our MYGA and FIA products. Our investment portfolio grew from $25,289,696 as of March 31, 2019 compared to $177,960,625 as of March 31, 2020 due to the sales of the MYGA and FIA products which American Life used to purchase investments. American Life ceded $25,728,698 of premiums to third party reinsurers and transferred $1,495,179 of its investment income as required by the terms of the reinsurance agreements. The increase was also due to an over payment of investment expenses at year end December 31, 2019 of approximately $117,000 that was refunded in 2020.

Net realized gains and losses on investments: The net realized gain for 2020 was primarily due to the contracts to third-party reinsurers. Due to the COVID-19 pandemic and the volatility of the capital markets, the assets that were carried on the balance sheet resulted in approximately $26.0 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 return 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 recent market volatility, assets carried as investments on American Life’s financial statements for the third-party reinsurers contained 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 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. In the event asset prices recover, the unrealized losses may be reduced; therefore, the associated embedded derivative gain recognized in the first quarter of 2020, could be reduced. 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.

Amortization of deferred gain on reinsurance: The increase was due to the indemnity coinsurance converted to 28% assumptive reinsurance in 2019 compared to only 2% in 2020 under assumptive reinsurance we no longer have a legal obligation for policies subject to such agreement. This decrease was offset by the amortization of the ceding commission deferred from the two additional reinsurance agreements with third-party reinsurers which were not in effect in 2019.

Miscellaneous income: Miscellaneous income increased due to the consolidation of our investment advisor subsidiary as of April 2, 2019. This was offset by the decrease in third party administrative (“TPA”) fees. We had only one customer for whom we performed these services. TPA fees earned during the three months ended March 31, 2020 and 2019 were $8,160 and $15,540, respectively.

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Expenses are summarized in the table below.


	Three months ended March 31,
	2020		2019
Interest credited	$	211,202	$	20,821
Death and other benefits		(7,103)		3,395
Amortization of deferred acquisition costs		40,509		2,069
Salaries and benefits		824,896		539,449
Other operating expenses		1,325,113		1,934,990
	$	2,394,617	$	2,500,724

Interest credited: The decrease in the three months ended March 31, 2020 compared to the same period in 2019 was due to not ceding the interest earned on the initial sale of the MYGA product in 2019 to a third-party reinsurer. In 2020, American Life began retaining a portion of the annuity contracts which is reflected in the balance above.

Death and other benefits: Death benefits decreased due the reduction of the amount of our accrual during 2020.

Amortization of deferred acquisition costs: The increase was due to the deferred acquisition costs deferred on the sale of American Life’s MYGA product starting in late January 2019 and the subsequent amortization and the restatement of prior year for the legacy block of business amortization as an expense for discontinued operations.

Salaries and benefits: The increase was due to the addition of personnel to service our new business growth. We do not expect significant increase in these costs as we continue to implement our business plan.

Other operating expenses: Other operating expenses decreased primarily due to approximately $526,000 of Xenith note interest in 2019 which did not occur in 2020, and the decrease in the expenses related to technology and software development of approximately $58,000. These decreases were offset by the consolidation of 1505 Capital into Midwest and their expenses of approximately $138,000, an increase actuarial fees of $137,000 and the increase in legal fees of approximately $88,000 related to subsequent event transactions above in Note 17. Subsequent Events.

Investments

The Company’s overall investment philosophy is reflected in the allocation of its investments. The Company emphasizes investment grade debt securities, mortgages, and policy loans. The Company has modified its investment strategy to purchase larger position securities with increased yields compared to prior years. 1505 Capital will be providing investment and management services to the Company going forward. The following table shows the carrying value of our investments by investment category and cash and cash equivalents, and the percentage of each to total invested assets as of March 31, 2020 and December 31, 2019.


	March 31, 2020				December 31, 2019
	Carrying		Percent		Carrying		Percent
	Value		of Total		Value		of Total
Fixed maturity securities:
U.S. government obligations	$	2,216,200	1.1	%	$	2,081,224	1.1	%
Mortgage-backed securities		752,980	0.4			798,608	0.4
Asset-backed securities		102,779,025	50.3			95,247,824	52.2
States and political subdivisions - general obligation		251,233	0.1			249,282	0.1
States and political subdivisions - special revenue		2,971,711	1.5			25,291	—
Corporate		16,861,714	8.2			18,839,632	10.4
Total fixed maturity securities		125,832,863	61.6			117,241,861	64.2
Mortgage loans on real estate, held for investment		48,982,622	24.0			13,810,041	7.6
Derivatives		463,330	0.2			575,294	0.3
Investment escrow		-	-			3,899,986	2.1
Other invested assets		2,796,352	1.4			2,468,947	1.4
Preferred stock		500,000	0.2			500,000	0.3
Cash and cash equivalents		25,506,856	12.5			43,716,205	24.0

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Policy Loans

128,734

0.1

106,014

0.1

204,210,757

100.0

182,318,348

100.0

The following table shows the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of March 31, 2020 and December 31, 2019.


	March 31, 2020				December 31, 2019
	Carrying				Carrying
	Value		Percent		Value		Percent
AAA and U.S. Government	$	2,702,882	2.1	%	$	2,885,004	2.5	%
AA		10,415,734	8.3			6,658,274	5.7
A		28,797,795	22.9			23,812,502	20.3
BBB		79,429,527	63.1			79,996,081	68.2
Total investment grade		121,345,938	96.4			113,351,861	96.7
BB and other		4,486,925	3.6			3,890,000	3.3
Total	$	125,832,863	100.0	%	$	117,241,861	100.0	%

We expect that our annuity products sales will increase investable assets in future periods.

Market Risks of Financial Instruments

We hold a portfolio of investments that primarily includes cash, asset-backed securities, bonds, stocks, CLOs, mortgage loans, and notes receivable. Each of these investments is subject to market risks that can affect their return and their fair value. Further, our portfolio may be considered to have a concentration in CLOs. These securities have unique characteristics, including being typically illiquid and usually intended by us to be held to term. A majority of the investments are fixed maturity securities including debt issues of corporations, U.S. Treasury securities, mortgage-backed securities, CLOs and mortgage loans or securities issued by government agencies. The primary market risks affecting the investment portfolio are interest rate risk, credit risk, equity risk, and liquidity risk.

Interest Rate Risk

Interest rate risk arises from the price sensitivity of investments to changes in interest rates. Interest and dividend income represent the greatest portion of an investment’s return for most fixed maturity securities in stable interest rate environments. The changes in the fair value of such investments are inversely related to changes in market interest rates. As interest rates fall, the interest and dividend streams of existing fixed-rate investments become more valuable and fair values rise. As interest rates rise, the opposite effect occurs. We attempt to mitigate our exposure to adverse interest rate movements through staggering the maturities of the fixed maturity investments and through maintaining cash and other short term investments to assure sufficient liquidity to meet its obligations and to address reinvestment risk considerations. Due to the composition of our book of insurance business, we believe it is unlikely that we would encounter large surrender activity due to an interest rate increase that would force the disposal of fixed maturities at a loss.

Credit Risk

We are exposed to credit risk through counterparties and within the investment portfolio. Credit risk relates to the uncertainty associated with an obligor’s ability to make timely payments of principal and interest in accordance with the contractual terms of an instrument or contract. We manage our credit risk through diversification of investments amongst many corporations and numerous industries. Additionally, our investment policy limits the size of holding in any particular issuer.

Liquidity and Capital Resources

At March 31, 2020, the Company had cash and cash equivalents totaling $25,506,856. We believe that our existing cash and cash equivalents will be sufficient to fund the anticipated operating expenses and capital transaction expenditures for the foreseeable future.

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The National Association of Insurance Commissioners (“NAIC”) has established minimum capital requirements in the form of Risk-Based Capital (“RBC”). RBC factors the type of business written by an insurance company, the quality of its assets and various other aspects of an insurance company’s business to develop a minimum level of capital called “authorized control level risk-based capital” and compares this level to adjusted statutory capital that includes capital and surplus as reported under statutory accounting principles, plus certain investment reserves. Should the ratio of adjusted statutory capital to control level RBC fall below 200%, a series of remedial actions by the affected company would be required. As of December 31, 2019, the RBC ratio was 840%.

Net cash provided by operating activities was $2,316,449 for March 31, 2020, which was comprised primarily by net income of $21,956,374, an increase in recoverable from reinsurers of $2,617,495 policy liabilities of $1,699,134 primarily due increase in deposit-type contracts ceded to reinsurers, and an increase in deferred coinsurance ceding commissions due to the reinsurance agreements with third-party reinsurers of $1,033,940, offset by gain on investments due to the Swap Value discussed in Note 6 of $22,600,010 and the deferred acquisition costs capitalized of $1,483,941. Net cash used for investing activities was $68,154,008. The primary use of cash used was for purchase of our investments of $76,733,743. Offsetting this use of cash was our sale of investments in available-for-sale securities for proceeds of $8,311,453. Net cash provided by financing activities was $47,628,245. The primary source of cash was net receipts on the MYGA and FIA products of $47,815,010.

Impact of Inflation

Insurance premiums are established before the amount of losses and loss adjustment expenses, or the extent to which inflation may affect such losses and expenses, are known. We attempt, in establishing premiums, to anticipate the potential impact of inflation. If, for competitive reasons, premiums cannot be increased to anticipate inflation, this cost would be absorbed by us. Inflation also affects the rate of investment return on the investment portfolio with a corresponding effect on investment income. CLOs are typically illiquid and usually intended to be held by us to maturity.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Contractual Obligations

As a “smaller reporting company,” the Company is not required to provide the table of contractual obligations required pursuant to this Item.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

As a “smaller reporting company,” the Company is not required to provide disclosure pursuant to this Item.

ITEM 4. CONTROLS AND PROCEDURES.

We have established disclosure controls and procedures to ensure, among other things, material information relating to our Company, including our consolidated subsidiary, is made known to our officers who certify our financial reports and to the other members of our senior management and the Board of Directors.

Management, (with the participation of our principal executive officer), carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a‑15(e) and 15d‑15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of March 31, 2020. Based on this evaluation, our principal executive officer concluded that, as of the end of the period covered in this report, our disclosure controls and procedures along with the related internal controls over financial reporting were effective to provide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and is

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accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

We are involved in litigation incidental to our operations from time to time. We are not presently a party to any legal proceedings other than litigation arising in the ordinary course of our business, and we are not aware of any claims that could materially affect our financial position or results of operations.

ITEM 1A. RISK FACTORS.

In addition to the risks previously disclosed in Item 1A – Risk Factors of our 2019 10-K, readers of this report should also consider that since March 13, 2020, the United States has been operating under a state of emergency declared by President Trump in response to the spread of COVID-19. COVID-19 and related federal, state and local governmental responses have affected economic and financial market conditions as well as the operations, results and prospects of companies across many industries.

More specifically, readers of this report should consider the following additional risk factor relating to the Company.

Major public health issues, such as the novel coronavirus COVID-19, could have an adverse impact on our business and results of operations.

We are monitoring developments related to the COVID-19 pandemic to assess its impact on our business; however, due to the evolving and highly uncertain nature of this event, it currently is not possible to estimate the direct and indirect impact of COVID-19 on our business, results of operations, financial condition or liquidity. COVID-19, or other major public health issues, could impact us in a number of ways. We may face increased costs associated with claims under our annuity and life insurance products. The cost of reinsurance, a major component of our business strategy, could increase, and we may encounter decreased availability of such reinsurance or our reinsurers.

Our investment portfolio may be adversely affected by market volatility, changes in interest rates, reduced liquidity, or by a slowdown in U.S. or global economic conditions caused by the COVID-19 pandemic or the uncertainty of its outcome. Extreme market volatility may leave us unable to react to market events in a prudent manner consistent with our historical practices in dealing with more orderly markets.

Our workforce, including particularly our executive officers, and the workforces of our vendors, service providers and counterparties, may also be affected, which could result in an adverse impact on our ability to conduct business. The efforts of governmental and non-governmental organizations in combating the spread and severity of COVID-19 or other major public health issues may not be effective. Further, we cannot predict how legal and regulatory responses to concerns about COVID-19 or other major public health issues, including the possible extension of insurance coverage beyond our policy language, will impact our business.

The extent to which COVID-19 impacts our business, results of operations, financial condition, or liquidity will depend on future developments which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions taken to contain or treat its impact.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

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ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

None.

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ITEM 6. EXHIBITS.


EXHIBIT NUMBER		DESCRIPTION
10.1**		Funds Withheld and Modified Coinsurance Agreement between SDA Annuity & Life Re and American Life & Security Corp dated
31.1*		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS *		XBRL Instance Document.
101.SCH *		XBRL Taxonomy Extension Schema Document.
101.CAL *		XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB *		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE *		XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF *		XBRL Taxonomy Extension Definition Linkbase Document.

*Filed herewith.

** Portions of this exhibit have been redacted in compliance with Regulation S-K Item 601(b)(10).

EXPLANATORY NOTE: [REDACTED] INDICATES THE PORTION OF THIS EXHIBIT THAT HAS BEEN OMITTED BECAUSE IT IS BOTH (I) NOT MATERIAL AND (II) WOULD BE COMPETITIVELY HARMFUL IN PUBLICLY DISCLOSED.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: May 14, 2020


	MIDWEST HOLDING INC.


	By:	/s/ A. Michael Salem
	Name:	A. Michael Salem
	Title:	Chief Executive Officer, Principal Executive Officer

Exhibit 10.1

EXECUTION COPY

FUNDS WITHHELD COINSURANCE AND MODIFIED COINSURANCE AGREEMENT

(MYGA and FIA BUSINESS)

between

SDA ANNUITY & LIFE RE

and

AMERICAN LIFE & SECURITY CORP.

effective as of September 30, 2019

Treaty Number 01

TABLE OF CONTENTS


		Page
ARTICLE I	GENERAL PROVISIONS	1
Section 1.01	Defined Terms	1
Section 1.02	Other Definitional Provisions	6
ARTICLE II	COVERAGE	7
Section 2.01	Scope and Basis of Reinsurance	7
Section 2.02	Policy Changes	8
Section 2.03	Reinstatement of Surrendered Policies	8
Section 2.04	Misstatement of Fact	8
Section 2.05	Non-Guaranteed Elements	8
Section 2.06	Crediting Rates	8
Section 2.07	Programs of Internal Replacement	9
Section 2.08	Conservation Program	9
Section 2.09	Retrocession	9
Section 2.10	Interest Maintenance Reserve	9
Section 2.11	Valuation of Liabilities	9
ARTICLE III	REINSURANCE PREMIUMS	11
Section 3.01	Reinsurance Premiums	11
Section 3.02	Initial Settlement Amount	11
ARTICLE IV	CEDING COMMISSION	11
Section 4.01	Ceding Commission	11
ARTICLE V	ADMINISTRATION FEE	11
Section 5.01	Policy Expenses	11
ARTICLE VI	REINSURED LIABILITIES	12
Section 6.01	Reinsured Liabilities	12
Section 6.02	Claims Settlement	12
Section 6.03	Recoveries	12
ARTICLE VII	REPORTING AND SETTLEMENTS	12
Section 7.01	Ceding Company Reporting	12
Section 7.02	Reinsurer Reporting	13
Section 7.03	Settlements & Adjustments	14
ARTICLE VIII	THE MODCO ACCOUNT, THE FUNDS WITHHELD ACCOUNT AND THE TRUST ACCOUNT	16
Section 8.01	ModCo Deposit	16
Section 8.02	Funds Withheld Account	17
Section 8.03	Trust Account	17
ARTICLE IX	[RESERVED]	19
ARTICLE X	ADMINISTRATION	19
Section 10.01	Policy Administration	19
Section 10.02	Record-Keeping	19
ARTICLE XI	TERM AND TERMINATION	20
Section 11.01	Duration of Agreement	20
Section 11.02	Recapture	20

TABLE OF CONTENTS

(continued)

		Page
Section 11.03	Recapture Payment	21
Section 11.04	Survival	22
ARTICLE XII	ERRORS AND OMISSIONS	22
Section 12.01	Errors and Omissions	22
ARTICLE XIII	DISPUTE RESOLUTION	22
Section 13.01	Negotiation	22
Section 13.02	Arbitration; Waiver of Trial by Jury	22
ARTICLE XIV	INSOLVENCY	24
Section 14.01	Insolvency	24
ARTICLE XV	TAXES	25
Section 15.01	Taxes	25
ARTICLE XVI	REPRESENTATIONS, WARRANTIES AND COVENANTS	25
Section 16.01	Representations and Warranties of the Ceding Company	25
Section 16.02	Covenants of the Ceding Company	27
Section 16.03	Representations and Warranties of the Reinsurer	28
Section 16.04	Covenants of the Reinsurer	29
ARTICLE XVII	MISCELLANEOUS	30
Section 17.01	Currency	30
Section 17.02	Interest	30
Section 17.03	Right of Setoff and Recoupment	30
Section 17.04	No Third-Party Beneficiaries	30
Section 17.05	Amendment	30
Section 17.06	Notices	31
Section 17.07	Consent to Jurisdiction	32
Section 17.08	Service of Process	32
Section 17.09	Inspection of Records	32
Section 17.10	Confidentiality	33
Section 17.11	Successors	34
Section 17.12	Entire Agreement	34
Section 17.13	Severability	34
Section 17.14	Construction	34
Section 17.15	Non-Waiver	34
Section 17.16	Further Assurances	35
Section 17.17	Governing Law	35
Section 17.18	Counterparts	35

Schedules

Policy Forms and Riders

II.

Policy Expenses

III.

Initial ModCo Assets and Funds Withheld Assets

IV.

Permitted Ex-Gratia Payments

Determination of Crediting Rate and Quota Share

VI.

§1.848-2(g)(8) Election

VII.

Determination of Cede Commission

VIII.

Allocation Percentage

IX.

Reinsured Policies issued prior to the Effective Date

Leverage Measure

XI.

Asset Reserves

XII.

Hedging Returns

XIII.

Trust Account Funding

XIV.

Investment Manager

XV.

Non-Guaranteed Elements

Exhibits

Form of Monthly Accounting Report

Trust Agreement

iii

FUNDS WITHHELD COINSURANCE AND MODIFIED COINSURANCE AGREEMENT

(MYGA and FIA BUSINESS)

This FUNDS WITHHELD COINSURANCE and MODIFIED COINSURANCE AGREEMENT (this “Agreement”), effective as of September 30, 2019 (the “Effective Date”), is made by and between American Life & Security Corp., an insurance company organized under the laws of the State of Nebraska (the “Ceding Company”) and SDA ANNUITY & LIFE RE, a Cayman Islands-domiciled reinsurance company (the “Reinsurer”).

W I T N E S S E T H:

WHEREAS, subject to the terms, conditions and limitations contained herein, the Ceding Company desires to cede, on a funds withheld coinsurance and modified coinsurance basis, and the Reinsurer desires to accept, a Quota Share of certain liabilities with respect to certain MYGA and FIA business of the Ceding Company (the “Reinsurance Treaty”);

WHEREAS, the parties have entered into a letter of intent with respect to the Reinsurance Treaty with an effective date of September 30, 2019;

NOW, THEREFORE, in consideration of the mutual promises and agreements contained herein, the Ceding Company and the Reinsurer hereby agree as follows:

ARTICLE I
GENERAL PROVISIONS

Section 1.01 Defined Terms. As used in this Agreement, the following terms shall have the following meanings:

“3rd Party Actuary” shall initially mean a member of the Academy of Actuaries that meets the Academy of Actuaries Qualifications Standards for issuing an actuarial opinion related to the matters of this agreement to be mutually agreed-upon by the parties no later than 30 days following the Initial Settlement Date but may be replaced by the Ceding Company with the consent of the Reinsurer (such consent not to be unreasonably withheld).

“Accounts” shall mean collectively the ModCo Deposit and the Funds Withheld Account, each one an “Account.”

“Account Adjustment” shall mean a payment made pursuant to Section 7.03(b).

“Accounts Balance” shall mean the aggregate of book value the ModCo Deposit Balance and Funds Withheld Account Balance, as of any date of determination, as such book value is determined in accordance with Nebraska SAP.

“Accounts Required Reserves” shall mean Accounts Required Reserves-Funds Withheld plus Accounts Required Reserves-ModCo, as of any date of determination.

“Accounts Required Reserves-Funds Withheld” shall mean an amount equal to the Quota Share of the Net Statutory Reserves times the Funds Withheld Allocation Percentage plus the Asset Reserves for assets included in the Funds Withheld Account, as of any date of determination.

“Accounts Required Reserves-ModCo” shall mean an amount equal to the Quota Share of the Net Statutory Reserves times the ModCo Allocation Percentage plus the Asset Reserves for assets included in the ModCo Deposit, as of any date of determination.

“Action” shall mean (a) any civil, criminal or administrative action, suit, claim, litigation, arbitration or similar proceeding, in each case, before a Governmental Entity, or (b) any investigation or written inquiry by a Governmental Entity other than any examination by a taxing authority, including a tax audit.

“Affiliate” shall mean, with respect to any Person, another Person that directly or indirectly, through one or more intermediaries, controls, is controlled by or is under common control with, such first Person, and the term “Affiliated” shall have a correlative meaning. For the purposes of this definition, “control”, when used with respect to any Person, means the power to direct the management and policies of such Person, directly or indirectly through the ownership of voting securities, and the terms “controlling” and “controlled” have the meanings correlative to the foregoing. For the avoidance of doubt, the Ceding Company and the Reinsurer shall not be deemed “Affiliates” for purposes of this Agreement.

“Agreement” shall have the meaning specified in the Preamble hereto.

“Allocation Percentage” shall mean the percentages set forth in Schedule VIII for the ModCo Deposit and the Funds Withheld Account.

“Asset Reserves” shall have the meaning specified in Schedule XI.

“Authorized Representative” shall have the meaning specified in Section 14.01(a)(i).

“Business Day” shall mean any day other than a Saturday, Sunday or any other day on which banking institutions are authorized or required by Law to close in New York, New York.

“Ceding Commission” shall mean the percentage initially as set forth on Schedule VII, as may be amended by mutual agreement of the parties from time to time.

“Ceding Company” shall have the meaning specified in the Preamble hereto.

“Code” shall mean the Internal Revenue Code of 1986, as amended.

“Covered Business” shall have the meaning specified in Section 2.01(b)(i).

“Crediting Rate” shall be the percentage determined based on the procedures set forth on Schedule V.

“Custodian” shall have the meaning specified in Section 8.01.

“Effective Date” shall have the meaning specified in the Preamble hereto.

“Excluded Liabilities” shall mean without duplication (a) all Extra-Contractual Obligations other than Reinsurer Extra-Contractual Obligations, (b) any liabilities resulting from any change to the terms of any Reinsured Policy after the Effective Date, unless such change is required by applicable Law or by the express terms of the Reinsured Policies, or has been approved in writing in advance by the Reinsurer, (c) any ex gratia payments made by the Ceding Company (i.e., payments the Ceding Company is not required to make under the terms of the Reinsured Policies) unless such payment has been approved in writing in advance by the Reinsurer, or is set forth in Schedule IV.

“Extra-Contractual Obligations” shall mean any and all costs, expenses, damages, liabilities or obligations of any kind or nature which arise out of, result from or relate to any act or omission, whether or not in bad faith, intentional, willful, negligent, reckless, careless or otherwise, in connection with a Reinsured Policy, and which are not contractually covered by the terms and conditions of the Reinsured Policy.

“Factual Information” shall have the meaning specified in Section 16.01(d).

“Fair Market Value” means with respect to any asset, and as of any date of determination, the price that would be received in a sale of such asset in accordance with GAAP accounting at the determination date (the “Price”), determined as: (i) for liquid assets, the Price for such asset as published by a nationally recognized pricing service where such prices are available and (ii) otherwise, the Price for such asset as determined by a qualified independent securities valuation firm, each pricing service or valuation firm to be selected by the Investment Manager with the consent of the Ceding Company, such consent not to be unreasonably withheld, conditioned or delayed. In the event that the Ceding Company and the Investment Manager cannot agree on a valuation firm, such valuation firm shall be Houlihan Lokey. The “fair market value” of any asset shall include any accrued but unpaid interest or dividend on such asset.

“Funds Withheld Account” shall have the meaning specified in Section 8.02(a).

“Funds Withheld Account Balance” shall mean the Statutory Carrying Value of assets in the Funds Withheld Account, as of any date of determination.

“GAAP” means generally accepted accounting principles in effect in the United States, consistently applied.

“Governmental Entity” shall mean any foreign, federal, state, local or other governmental, legislative, judicial, administrative or regulatory authority, agency, commission, board, body, court or entity or any instrumentality thereof or any self-regulatory body or arbitral body or arbitrator.

“Initial Settlement Amount” shall have the meaning set forth in Section 3.02.

“Initial Settlement Date” shall mean November 7, 2019.

“Investment Guidelines” shall be as set forth in the Investment Management Agreement, as may be amended from time to time.

“Investment Manager” shall have the meaning specified in Schedule XIV.

“Investment Management Agreement” shall have the meaning specified in Section 8.04 (as may be amended or supplemented from time to time).

“Investment Manager” shall have the meaning specified in Section 8.04 and in the Investment Management Agreement.

“Law” shall mean any law, statute, ordinance, written rule or regulation, order, injunction, judgment, decree, principle of common law, constitution or treaty enacted, promulgated, issued, enforced or entered by any Governmental Entity.

“Leverage Measure” shall have the meaning set forth in Schedule X.

“Leverage Measure Limit” shall have the meaning set forth in Schedule X.

“Loss” or “Losses” shall mean claim payments (including returns and waivers of premium and other adjustments), Loss Adjustment Expenses, and reasonable legal fees and settlements, commissions, general expenses, premium taxes, assessments, filing fees, fines, penalties, in each case, actually incurred by, and as determined by, the Ceding Company in good faith but in any event excluding Extra Contractual Obligations other than Reinsurer Extra Contractual Obligations.

“Loss Adjustment Expenses” shall mean loss adjustment expenses incurred in investigating, processing and settling losses that can be attributed to specific claims, including payments to outside vendors, such as lawyers and independent claim adjusters.

“ModCo Deposit” shall have the meaning specified in Section 8.01(a).

“ModCo Deposit Balance” shall mean the Statutory Carrying Value of assets in the ModCo Deposit, as of any date of determination.

“Monthly Accounting Period” shall have the meaning specified in Section 7.01(a).

“Monthly Settlement” shall mean the making of all payments and adjustments specified in Section 7.03, including, without limitation, Account Adjustments and Reinsurer Top-Up Payments.

“Nebraska SAP” shall mean the statutory accounting principles and practices prescribed or permitted for Nebraska domiciled life insurance companies by the Nebraska Department of Insurance, or, if different, of the state of domicile of the Ceding Company, consistently applied .

“Net Statutory Reserves” shall mean the statutory reserves of the Ceding Company in respect of the Reinsured Policies, which shall be calculated in good faith in accordance with Nebraska SAP and determined in a manner consistent with the Ceding Company’s historical practices; provided, however, that Net Statutory Reserves shall not include (a) any asset valuation

reserves (as used in connection with Nebraska SAP) established by the Ceding Company, (b) any interest maintenance reserves (as used in connection with Nebraska SAP) established by the Ceding Company, (c) any additional actuarial reserves (as used in connection with Nebraska SAP), if any, established by the Ceding Company as a result of its annual cash flow testing or (d) any other reserve not directly attributable to specific Reinsured Policies.

“Non-Guaranteed Elements” shall have the meaning specified in Schedule XV.

“Non-Public Personal Information” shall have the meaning specified in Section 17.10.

“Permits” shall mean any licenses, certificates of authority or other similar certificates, registrations, franchises, permits, approvals or other similar authorizations issued to a Person by a Governmental Entity.

“Permitted Assets” shall mean any asset which: (i) is a permitted asset under applicable Law, (ii) is an admitted asset of the Ceding Company under the applicable Laws of the State of Nebraska and (iii) is permitted under the Investment Guidelines set forth in the Investment Management Agreement, and (iv) solely with respect to the Accounts, is a permissible asset to provide credit for reinsurance with respect to the ModCo Deposit or Funds Withheld Account (as the case may be) under Nebraska SAP.

“Person” shall mean an individual, corporation, partnership, joint venture, limited liability company, association, trust, unincorporated organization, Governmental Entity or other entity.

“Policy Expenses” shall have the meaning specified in Section 5.01.

“Proprietary Information” shall have the meaning specified in Section 17.10(a).

“Quota Share” shall have the meaning specified in Schedule V.

“Recapture Effective Date” shall mean the date on which the liability of the Reinsurer with respect to all of the Reinsured Liabilities is terminated pursuant to Section 11.02 or the effective date of the rejection of this Agreement by any Receiver or of a recapture in full.

“Reallocation Payment” shall mean a payment made pursuant to Section 7.03(a)(iii).

“Receiver” shall have the meaning specified in Section 11.03(a).

“Reinsurance Premiums” shall mean the Quota Share of the premiums, policy loan principal and interest payments, and other fees, amounts, payments, and collections received by the Ceding Company with respect to the Reinsured Policies.

“Reinsured Block” shall have the meaning specified in Section 2.01(b)(ii).

“Reinsured Liabilities” shall mean the Quota Share of (a) Losses and liabilities of the Ceding Company with respect to the Reinsured Policies, (b) the Reinsurer Extra-Contractual Obligations divided by the applicable Quota Share, (c) liabilities with respect to premium taxes payable by the Ceding Company to the extent relating to premiums with respect to the Reinsured

Policies and (d) trail commissions payable to producers with respect to the Reinsured Policies and other commissions payable with respect to premiums received by the Ceding Company after the Effective Date and paid to the Reinsurer; provided, that in no event shall “Reinsured Liabilities” include any Excluded Liabilities.

“Reinsured Policies” shall mean all insurance policies of the Ceding Company hereunder, written on the policy forms that are listed on Schedule I and (i) in the case of policies listed on Schedule IX in force on the Effective Date, and (ii) policies entered into after the Effective Date and ceded in accordance with the provisions of this Agreement (including without limitation Schedule V) and including any riders that are listed on Schedule I and any amendments or endorsements attached thereto as of the Effective Date

“Reinsurer” shall have the meaning specified in the Preamble hereto.

“Reinsurer Extra-Contractual Obligations” shall mean Extra-Contractual Obligations relating to the Reinsured Policies to the extent caused by, arising from or related to any act of, or failure to act by, the Reinsurer or any of its Affiliates following the Effective Date.

“Reinsurer Top-Up Payment” shall have the meaning specified in Section 7.03(c).

“Statutory Carrying Value” shall mean, with respect to any asset, as of the relevant date of determination, the carrying value amount permitted to be carried by the Ceding Company as an admitted asset consistent with Nebraska SAP in its statutory financial statements.

“Terminal Accounting Report” shall have the meaning specified in Section 11.03(a).

“Treasury Regulations” shall mean all proposed, temporary and final regulations promulgated under the Code, as such regulations may be amended from time to time.

“Trust Account” shall have the meaning specified in Section 8.03 and attached as Exhibit B.

“Trust IMA” shall have the meaning specified in Section 8.04 (as may be amended or supplemented from time to time).

“Trustee” shall have the meaning specified in Section 8.03.

Section 1.02 Other Definitional Provisions.

(a) For purposes of this Agreement, the words “hereof,” “herein,” “hereby” and other words of similar import refer to this Agreement as a whole, including all Schedules and Exhibits to this Agreement, unless otherwise indicated.

(b) Whenever the singular is used herein, the same shall include the plural, and whenever the plural is used herein, the same shall include the singular, where appropriate.

(d) Whenever used in this Agreement, the masculine gender shall include the feminine and neutral genders and vice versa.

(e) The Schedules and Exhibits hereto are hereby incorporated by reference into the body of this Agreement.

(f) All references herein to Articles, Sections, Subsections, Paragraphs, Exhibits and Schedules shall be deemed references to Articles and Sections and Subsections and Paragraphs of, and Exhibits and Schedules to, this Agreement unless the context shall otherwise require.

(g) All terms defined in this Agreement shall have the defined meaning when used in any Schedule, Exhibit, certificate, report or other documents attached hereto or made or delivered pursuant hereto unless otherwise defined therein.

(h) Any reference to an agreement, statute, regulation or rule is to the same as amended from time to time, and at any time.

ARTICLE II
COVERAGE

Section 2.01 Scope and Basis of Reinsurance.

(a) This Agreement shall be effective as of 12:00:01 a.m. Eastern Time on the Effective Date.

(b) Cession:

(i) Subject to the terms, conditions and limits of this Agreement (including the exclusion from coverage of Excluded Liabilities), the Ceding Company shall automatically cede, and the Reinsurer shall automatically reinsure, on a funds withheld coinsurance and a modified coinsurance basis, respectively based on the Allocation Percentage, the Reinsured Liabilities (the “Covered Business”).

(ii) Subject to the terms, conditions and limits of this Agreement (including the exclusion from coverage of Excluded Liabilities), the Ceding Company shall cede, and the Reinsurer shall reinsure, on a funds withheld coinsurance and a modified coinsurance basis, respectively based on the Allocation Percentage, the Reinsured Policies issued prior to the Effective Date specified in Schedule IX (the “Reinsured Block”).

(c) Subject to the terms, conditions and limits of this Agreement (including the exclusion from coverage of Excluded Liabilities), the Reinsurer shall follow the fortunes of the Ceding Company, and to that end the Reinsurer’s liability for the Reinsured Policies shall be identical to that of the Ceding Company and shall be subject to the same risks, terms, conditions, interpretations, waivers, modifications, alterations and cancellations to which the Ceding Company is subject with respect to the Reinsured Policies, subject in each case to the Ceding Company’s duty to adhere to its obligations pursuant to Article X.

(d) Notwithstanding anything to the contrary herein, the Reinsurer shall not be liable for any Excluded Liabilities.

Section 2.02 Policy Changes.

(a) The Ceding Company shall not, without the prior written consent of the Reinsurer, terminate, amend, modify or waive any provision or provisions of the Reinsured Policies, except to the extent required by applicable Law or the express terms of the Reinsured Policies.

(b) Any such terminations, amendments, modifications or waivers made without the prior written consent of the Reinsurer shall be disregarded for purposes of this Agreement, and the reinsurance with respect to the affected Reinsured Policy will continue as if such termination, amendment, modification or waiver had not been made.

Section 2.03 Reinstatement of Surrendered Policies. If a Reinsured Policy that has been surrendered (other than in connection with a surrender upon maturity) is reinstated according to its terms and the Ceding Company’s reinstatement policies, the Reinsurer will, upon notification, automatically reinstate the reinsurance with respect to such Reinsured Policy; provided, that, to the extent that the reinstatement of such Reinsured Policy requires payment of premiums in arrears or reimbursement of claims paid, the Ceding Company shall pay to the Reinsurer all Reinsurance Premiums in arrears and Reinsurer shall pay all reimbursements of Reinsured Liabilities paid on such Reinsured Policy.

Section 2.04 Misstatement of Fact. In the event of a change in the amount payable under a Reinsured Policy due to a misstatement of fact, the Reinsurer’s liability with respect to such Reinsured Policy will change proportionately. Such Reinsured Policy will be rewritten from commencement on the basis of the adjusted amounts using premiums and such other terms based on the correct facts, and the proper adjustment for the difference in Reinsurance Premiums, without interest, will be made.

Section 2.05 Non-Guaranteed Elements. The Ceding Company will be responsible for determining the Non-Guaranteed Elements of the Reinsured Policies in good faith and consistent with its standard business practices; provided, that the Reinsurer shall be permitted to provide recommendations regarding the Non-Guaranteed Elements and, to the extent such recommendations comply with applicable Law, generally accepted actuarial standards of practice, the terms of the Reinsured Policies and the Ceding Company’s internal policies, the Ceding Company shall not unreasonably take any actions that contravene such recommendations and shall promptly incorporate such recommendations. If the Ceding Company fails to adhere to such recommendations in any material respect, then the Ceding Company shall promptly notify the Reinsurer in writing of such failure. Crediting Rates shall be subject to Section 2.06 exclusively and not to this Section 2.05.

Section 2.06 Crediting Rates. The Ceding Company and the Reinsurer shall establish the Crediting Rate on any date of determination as set forth based on the procedures in Schedule V.

Section 2.07 Programs of Internal Replacement. The Ceding Company shall not solicit, or allow any of its Affiliates to solicit, directly or indirectly, policy holders of the Reinsured Policies in connection with any program of internal replacement without the prior written consent of the Reinsurer. The term “program of internal replacement” means any program sponsored or supported by the Ceding Company or any of its Affiliates that is offered to a class of policy owners and in which a Reinsured Policy or a portion of a Reinsured Policy is exchanged for another policy that is written by the Ceding Company or any Affiliate of the Ceding Company or any successor or assignee of any of them.

Section 2.08 Conservation Program. Upon the request of the Reinsurer, the Ceding Company shall reasonably cooperate and work with the Reinsurer in good faith to develop and implement a conservation program with respect to the Reinsured Policies.

Section 2.09 RESERVED

Section 2.10 Asset Reserves. The Ceding Company and the Reinsurer agree that the Asset Reserves shall be ceded to the Reinsurer and maintained in the ModCo Deposit and/or Funds Withheld Account (as the case may be).

Section 2.11 Valuation of Liabilities. The Ceding Company shall calculate the Net Statutory Reserves with respect to the Reinsured Policies in good faith in accordance with Nebraska SAP and determined in a manner consistent with the Ceding Company’s historical practices; provided, that, the Ceding Company shall provide the Reinsurer supporting information promptly upon request and in the event there is a disagreement with respect to the calculation, the Dispute Resolution procedures herein shall be applied.

Section 2.12 Credit For Reinsurance. In the event the Ceding Company does not receive credit for reinsurance in its statutory financial statements for the Reinsured Liabilities, the parties shall amend this Agreement and take such commercially reasonable actions as are required to provide the Ceding Company with full credit for the reinsurance ceded hereunder.

Section 2.13 ModCo Reserves Allocation. The Ceding Company shall retain a proportional amount of reserves related to the Reinsured Liabilities equal to the Accounts Required Reserves-ModCo.

Section 2.14 Options Budget and Payoff for FIA.

(a) With respect to FIA Reinsured Policies, the Ceding Company shall purchase derivatives in respect of the Reinsured Policies (each, a “Hedge” and collectively, the “Hedges”), in the form of futures contracts and equity index options, to hedge any index risk associated with the Reinsured Policies.

(b) The Reinsurer shall pay to the Ceding Company for each accounting period, in accordance with Section 7.3, the Quota Share of all amounts becoming due in connection with

the purchase of derivatives by the Ceding Company (the “Option Budget”), as defined in Schedule XII.

(c)The Ceding Company shall pay to the Reinsurer for each accounting period, in accordance with Section 7.3, the Quota Share of all amounts becoming due and payable to the Ceding Company during the applicable period in connection with the exercise by the Ceding Company or maturity of any Hedges, whether or not collected (the “Option Payoff”), as defined in Schedule XII.

(d)The Option Budget payable by the Reinsurer to the Ceding Company pursuant to subsection (b) above shall be paid without regard to the actual costs paid by the Ceding Company for the Hedges purchased. The Option Payoff payable by the Ceding Company to the Reinsurer pursuant to subsection (c) above shall be paid without regard to the actual proceeds received by the Ceding Company with respect to the Hedges collected. The Ceding Company shall have no obligation to pay to the Reinsurer any portion of the actual proceeds received by the Ceding Company with respect to the Hedges, or any other amounts in respect of the Hedges, other than the Option Payoff amounts. For the avoidance of doubt, the Reinsurer has no liability for any hedge effectiveness and hedging is assumed to be 100% effective for purposes of Settlement.

(e)The Ceding Company shall use reasonable care in its hedging activities with respect to the Reinsured Policies, and such activities shall (a) be conducted in good faith and (b) conform with Applicable Law.

(f)With respect to a FIA Fixed Interest Account, the Reinsurer shall pay the Option Budget to the Ceding Company and the Ceding Company shall pay an Option Payoff to the Reinsurer equal to the actual fixed interest rate established by the Ceding Company.

Section 2.15 FATCA.

(a) Prior to any payment being made under this Agreement, the Reinsurer shall provide to the Ceding Company (or the applicable withholding agent, as defined in Treasury Regulation Section 1.1471-1(b)(147) a valid IRS Form W-8BEN-E or other documentation establishing that they are not subject to any withholding requirement pursuant to the Foreign Account Tax Compliance Act (Sections 1471-1474 of the Code) (“FATCA”).

(b) The Reinsurer shall update the forms or other documentation referenced herein upon a change in facts or circumstance rendering such previously supplied information incorrect. If the Reinsurer has not provided the Ceding Company with updated documentation attesting to its FATCA compliance within thirty (30) days prior to any premium due date, or becomes non-compliant with FATCA at any later date, the withholding agent (as defined in Treasury Regulation Section 1.1471-1(b)(147)) shall be entitled to 30% (or such other percentage as required by law) of any premium payment to the Reinsurer under this Agreement and shall promptly notify the Reinsurer of such withholding.

ARTICLE III
REINSURANCE PREMIUMS

Section 3.01 Reinsurance Premiums. The payment of Reinsurance Premiums is a condition precedent to the liability of the Reinsurer under this Agreement. All Reinsurance Premiums shall be payable in accordance with this Section on the Initial Settlement Date and in accordance with Section 7.03.

Section 3.02 Initial Settlement Amount.

(a) On the Initial Settlement Date, the Ceding Company shall transfer to the Funds Withheld Account and/or the ModCo Deposit (in accordance with the Allocation Percentage) an amount equal to [Redacted] (the “Initial Settlement Amount”) calculated based on the line items set forth in Schedule III-A, as agreed upon the parties in good faith on the Covered Business and the Reinsured Block

(b) A list of the assets to be deposited in the ModCo Deposit and the Funds Withheld Account in payment of the Initial Settlement Amount is set forth on Schedule III-B attached hereto.

ARTICLE IV
CEDING COMMISSION

Section 4.01 Ceding Commission. The Reinsurer shall pay to the Ceding Company the Ceding Commission on all Reinsurance Premiums paid to the Reinsurer (including on the Initial Settlement Date).

Section 4.02 Excise Tax. In the event that any excise tax is due with respect to any amounts payable by the Ceding Company to the Reinsurer under this Agreement, the Ceding Company shall pay the entire amount of such excise tax. The Reinsurer shall reimburse the Ceding Company for any such excise tax paid by the Ceding Company.

ARTICLE V
ADMINISTRATION FEE

Section 5.01 Policy Expenses. The Reinsurer shall pay the ceding company an administrative expense fee (“Policy Expenses”) to cover the cost of providing all administrative and other services necessary or appropriate in connection with the administration and distribution (including the product development fee) of the Reinsured Policies and the Reinsured Liabilities, determined in accordance with Schedule II attached hereto.

(a) With respect to the Reinsured Block. the Reinsurer shall pay Policy Expenses on the Initial Settlement Date for Policy Expenses that were incurred prior to the Effective Date and on a monthly basis for Policy Expenses incurred after the Effective Date.

(b) With respect to Covered Business, the Reinsurer shall pay the Policy Expenses on a monthly basis.

ARTICLE VI
REINSURED LIABILITIES

Section 6.01 Reinsured Liabilities. Subject to Sections 6.02 and 6.03, the Reinsurer shall pay to the Ceding Company all Losses on Reinsured Liabilities.

Section 6.02 Claims Settlement.

(a) Subject to Section 6.02(b) and 6.03, the Ceding Company shall be responsible for the settlement of claims with respect to the Reinsured Liabilities in accordance with Article X, applicable Law and the terms and conditions of the Reinsured Policies.

(b) The Ceding Company shall notify the Reinsurer in writing if the Ceding Company determines that a claim for payment under a Reinsured Policy either requires investigation or should be contested or denied. The Reinsurer and the Ceding Company shall consult in good faith regarding the disposition of any such claim. The Reinsurer may, but shall not be required to, recommend to the Ceding Company how to handle such claim. In the event of any disagreement between the Ceding Company and the Reinsurer as to the validity or amount of such a claim, the Ceding Company shall have final authority over the disposition of such claim.

Section 6.03 Recoveries. Subject to Section 6.02(b), if the Ceding Company obtains any recoveries in respect of a claim with respect to the Reinsured Liabilities paid by it in accordance with the terms of any Reinsured Policy, the Ceding Company shall promptly pay to the Reinsurer such recoveries (“Recoveries”).

ARTICLE VII
REPORTING AND SETTLEMENTS

Section 7.01 Ceding Company Reporting.

(a) Within ten (10) Business Days of the Initial Settlement Date and within five (5) Business Days following the end of each calendar month following the Initial Settlement Date, the Ceding Company shall deliver to the Reinsurer a monthly accounting report (a “Monthly Accounting Report”) substantially in the form set forth in Exhibit A for such calendar month (a “Monthly Accounting Period”). The parties shall from time to time amend Exhibit A as necessary to appropriately effectuate the terms and conditions of this Agreement and to ensure the accounting and settlements made hereunder are correctly computed. The net amount due as set forth in such Monthly Accounting Report shall be due within five (5) Business Days following the date of delivery of such Monthly Accounting Report.

(b) Within ten (10) Business Days following the end of each calendar quarter and any Recapture Effective Date, the Ceding Company shall deliver to the Reinsurer a report setting forth the Asset Reserves as of the end of such calendar quarter or such Recapture Effective Date, as applicable.

(c) Within ten (10) Business Days following the end of each Monthly Accounting Period or Recapture Effective Date, the Ceding Company shall deliver to the Reinsurer, as of the end of such Monthly Accounting Period or the Recapture Effective Date, as applicable, a report of the Reinsured Policies in the form as mutually agreed by the parties.

(d) The Ceding Company shall deliver to the Reinsurer, as of the end of such Monthly Accounting Period or the Recapture Effective Date, as applicable, within ten (10) Business Days following the end of each Monthly Accounting Period or the Recapture Effective Date, an investment accounting report of the assets held in the Funds Withheld Account, the ModCo Deposit and the Trust Account which shall include the holdings, Statutory Carrying Value, and such other information agreed to by the parties in each case, on a CUSIP level.

(e) The Ceding Company shall deliver to the Reinsurer: (i) within five (5) Business Days following the filing of the Ceding Company’s unaudited annual statement with the Nebraska Department of Insurance but no later than March 20 of each year, a copy of such unaudited annual statement; (ii) within five (5) Business Days of the filing of the Ceding Company’s audited annual statutory financial statements with the Nebraska Department of Insurance but no later than June 20 of each year, a copy of such annual statutory financial statements; and (iii) within five (5) Business Days following the filing of the Ceding Company’s unaudited quarterly statutory financial statements with the Nebraska Department of Insurance but no later than sixty (60) calendar days following the end of each calendar quarter, a copy of such unaudited quarterly statutory financial statements.

(f) Upon request, the Ceding Company will, within a reasonable timeframe, promptly provide the Reinsurer with any additional information related to the Reinsured Policies reasonably available to the Ceding Company and not reasonably available to the Reinsurer which the Reinsurer requires in order to complete its financial statements or is otherwise required to comply with regulatory requirements. The Reinsurer will identify and communicate any such requests to the Ceding Company sufficiently in advance of any required deadlines such that the applicable information and timing for the provision thereof can be mutually agreed by the parties.

Section 7.02 Reinsurer Reporting.

(a) The Reinsurer shall deliver to the Ceding Company: (i) within five (5) Business Days of the filing of the Reinsurer’s audited annual financial statements with the Cayman Islands Monetary Authority (“CIMA”) but no later than June 20 of each year, a copy of such annual financial statements; (ii) within fifteen (15) Business Days following the end of each calendar quarter a calculation of its Leverage Measure, and (iii) within five (5) Business Days following the filing of the Reinsurer’s unaudited quarterly financial statements with CIMA but no later than sixty (60) calendar days following the end of each calendar quarter, a copy of such unaudited quarterly financial statements.

(b) Upon request, the Reinsurer will, within a reasonable timeframe, provide the Ceding Company with any additional information related to the Reinsured Policies available to the Reinsurer and not reasonably available to the Ceding Company which the Ceding Company reasonably requires in order to complete its financial statements or is otherwise required to comply with regulatory requirements (if any). The Ceding Company will identify and communicate any such

requests to the Reinsurer sufficiently in advance of any required deadlines such that the applicable information and timing for the provision thereof can be mutually agreed by the parties.

Section 7.03 Settlements & Adjustments.

(a) Following the Initial Settlement Date, there shall be an adjustment to the Accounts based on the following:

(i) Investment Performance; Transfers. On a monthly basis, the Funds Withheld Account Balance and the ModCo Deposit Balance, as determined as of the end of the immediately preceding Monthly Accounting Period shall be:

(A) increased by the amount of any increase in Statutory Carrying Value of the investments in the applicable Account and any transfers from the Trust Account as set forth in 7.03(b)(i); and

(B) decreased by the amount of any reductions in Statutory Carrying Value of the investments in the applicable Account and any transfers to the Trust Account as set forth in 7.03(b)(ii).

(ii) Additional Premiums and Other Recoveries. On a weekly basis, the Ceding Company shall deliver into the Accounts the Reinsurance Premiums and Recoveries received in connection with the Covered Business and Reinsured Block (allocation between the Funds Withheld Account and the ModCo Deposit shall be in accordance with the Allocation Percentage) and each of the Funds Withheld Account Balance and the ModCo Deposit Balance, as the case may be, shall be increased by such allocation of Reinsurance Premiums and Recoveries.

(iii) Reallocation Payments. On any day that the Allocation Percentage changes, the Ceding Company may reallocate funds between the Accounts by making a transfer from one Account to the other and such reallocation shall be reflected in the Funds Withheld Account Balance and the ModCo Deposit Balance.

(iv) Payments due from Reinsurer. On any day the Ceding Company may apply funds from the Accounts to pay amounts due from Reinsurer and as such the Accounts Balance will be decreased by an amount equal to any payments due from the Reinsurer to the Ceding Company hereunder, such deductions to be allocated between the Accounts according to the Allocation Percentage. All such deductions will be effectuated in cash or by the liquidation of assets (at the direction of the Investment Manager) in the applicable Account(s) into cash (in the event there is insufficient cash in the account) in an amount sufficient to pay all amounts owed by the Reinsurer to the Ceding Company and the transfer of such cash to the Ceding Company in settlement of the payments due from the Reinsurer to the Ceding Company.

(c) As of the end of each Monthly Accounting Period three (3) Business Days following the delivery of each Monthly Accounting Report:

(i) Ceding Company Withdrawals from Trust Account.

(A) In the event the Accounts Required Reserves-Funds Withheld is greater than the Funds Withheld Account Balance, the absolute value of such difference shall be withdrawn from the Trust Account by the Ceding Company (in accordance with the terms of the Trust Agreement) and deposited into the Funds Withheld Account. Any assets other than cash that are withdrawn from the Trust Account and deposited into the Funds Withheld Account must satisfy clause (iv) of the definition of Permitted Asset and shall be valued according to Fair Market Value.

(B) In the event the Accounts Required Reserves-ModCo is greater than the ModCo Deposit Balance, the absolute value of such amount shall be withdrawn from the Trust Account by the Ceding Company (in accordance with the terms of the Trust Agreement) and deposited into the ModCo Deposit. Any assets other than cash that are withdrawn from the Trust Account and deposited into the ModCo Deposit must satisfy clause (iv) of the definition of Permitted Asset and shall be valued according to Fair Market Value.

(ii) Over-Funding of Accounts Balance.

(A) In the event the Funds Withheld Account Balance is greater than the Accounts Required Reserves-Funds Withheld, the absolute value of such difference shall be paid to the Trust Account at the direction of the Reinsurer; provided any payment made hereunder in assets other than cash shall be at the Fair Market Value of such asset.

(B) In the event the ModCo Deposit Balance is greater than the Accounts Required Reserves-ModCo, the absolute value of such difference shall be paid to the Trust Account at the direction of the Reinsurer; provided any payment made hereunder in assets other than cash shall be at the Fair Market Value of such asset.

(d) Reinsurer’s Top-Up Obligation.

In the event there are insufficient funds in the Trust Account to pay an amount required to be withdrawn under clause 7.03(b)(i) above, the Reinsurer shall pay the amount of such insufficiency to the Ceding Company promptly and in any event, within 15 Business Days to the account or accounts designated by the Ceding Company; provided however in the event the Reinsurer disputes any determinations made by the Ceding Company, then the Reinsurer shall pay the full amount until the calculation is re-determined by the 3rd Party Actuary and the determinations of the 3rd Party Actuary shall be conclusive absent manifest error (any such payment by the Reinsurer under this Section 7.03(c) a “Reinsurer Top-Up Payment”).

(e) Other.

(i) The Reinsurer may at any time withdraw amounts from the Trust Account in accordance with Section 8.03 and the terms of the Trust Agreement.

(ii) Except as otherwise set forth herein, any amount due under this Agreement shall be paid by wire transfer of immediately available funds to the account or accounts designated by the recipient thereof.

ARTICLE VIII
THE MODCO DEPOSIT, THE FUNDS
WITHHELD ACCOUNT, THE TRUST ACCOUNT, AND INVESTMENT MANAGEMENT AGREEMENT

Section 8.01 ModCo Deposit.

(a) Prior to the Initial Settlement Date, the Ceding Company shall establish a modified coinsurance account (the “ModCo Deposit”) to hold the modified coinsurance deposit on the books and records of the Ceding Company, which shall consist of a custody account established by the Ceding Company with Wells Fargo Bank N.A. (as custodian of such custody account, the “Custodian”).

(b) The ModCo Deposit and the assets maintained therein will be owned and maintained by the Ceding Company and will be used exclusively for the purposes set forth in this Agreement. The assets maintained in the ModCo Deposit shall be invested by the Investment Manager and consist only of Permitted Assets, and the Permitted Assets shall be valued, for the purposes of this Agreement, according to their Statutory Carrying Value.

(c) Notwithstanding any other provision hereof, assets held in the ModCo Deposit may be withdrawn by the Ceding Company at any time and shall be utilized and applied by the Ceding Company or any of its successors in interest by operation of law, including any liquidator, rehabilitator, receiver or conservator of the Ceding Company, without diminution because of insolvency on the part of the Ceding Company or the Reinsurer, only in accordance with Section 7.03.

(d) Determinations of statutory impairments of assets maintained in the ModCo Deposit shall be made by the Ceding Company and shall be (i) based upon the statutory rules and guidelines and the impairment policy used by the Ceding Company and its auditors for purposes of calculating statutory impairments reflected in the Ceding Company’s statutory financial statements and (ii) subject to consultation between the Investment Manager, the Reinsurer and the Ceding Company. The Ceding Company shall promptly notify the Reinsurer in writing if the Ceding Company determines that any assets maintained in the ModCo Deposit have become impaired for purposes of determining Statutory Carrying Value. Such notice shall describe any such assets, the reason for the impairment and the effect on Statutory Carrying Value of such assets.

(e) The Ceding Company shall bear the administrative costs and expenses related to the establishment and maintenance of the ModCo Deposit, including the fees of the Custodian to the extent relating to the ModCo Deposit.

(f) The performance of the assets maintained in the ModCo Deposit, including of all investment income paid or accrued, investment gains or losses, defaults and/or statutory impairments, will inure to the sole benefit or cost of the Reinsurer.

Section 8.02 Funds Withheld Account.

(a) Prior to the Initial Settlement Date, the Ceding Company shall establish a funds withheld account (the “Funds Withheld Account”) to secure the payment liability of the Reinsurer on the books and records of the Ceding Company, which shall consist of a custody account established by the Ceding Company with the Custodian.

(b) The Funds Withheld Account and the assets maintained therein will be owned and maintained by the Ceding Company and will be used exclusively for the purposes set forth in this Agreement. The assets maintained in the Funds Withheld Account shall be invested by the Investment Manager and consist only of Permitted Assets, and the Permitted Assets shall be valued, for the purposes of this Agreement, according to their Statutory Carrying Value.

(c) Notwithstanding any other provision hereof, assets held in the Funds Withheld Account may be withdrawn by the Ceding Company at any time and shall be utilized and applied by the Ceding Company or any of its successors in interest by operation of law, including any liquidator, rehabilitator, receiver or conservator of the Ceding Company, without diminution because of insolvency on the part of the Ceding Company or the Reinsurer, only in accordance with Section 7.03.

(d) Determinations of statutory impairments of assets maintained in the Funds Withheld Account shall be made by the Ceding Company and shall be (i) based upon the statutory rules and guidelines and the impairment policy used by the Ceding Company and its auditors for purposes of calculating statutory impairments reflected in the Ceding Company’s statutory financial statements and (ii) subject to consultation between the Investment Manager, the Reinsurer and the Ceding Company. The Ceding Company shall promptly notify the Reinsurer in writing if the Ceding Company determines that any assets maintained in the Funds Withheld Account have become impaired for purposes of determining Statutory Carrying Value. Such notice shall describe any such assets, the reason for the impairment and the effect on Statutory Carrying Value of such assets.

(e) The Ceding Company shall bear the administrative costs and expenses related to the establishment and maintenance of the Funds Withheld Account, including the fees of the Custodian to the extent relating to the Funds Withheld Account.

(f) The performance of the assets maintained in the Funds Withheld Account, including of all investment income paid or accrued, investment gains or losses, defaults and/or statutory impairments, will inure to the sole benefit or cost of the Reinsurer.

Section 8.03 Trust Account.

(a) Prior to the Initial Settlement Date, the Ceding Company and the Reinsurer shall establish a trust account (the “Trust Account”) with Wells Fargo Bank N.A. (as trustee of such Trust Account, the “Trustee”)with the Reinsurer as grantor thereof, and the Ceding Company as beneficiary. The Trust Account shall initially contain certain capital assets of the Reinsurer (which prior to the Initial Settlement Date shall be set out in Schedule XIII and such additional amounts as distributed in accordance with Section 7.03.

(b) The Reinsurer expects to contribute additional amounts to the Trust Account as set out in Schedule XIII.

(c) The assets maintained in the Trust Account shall be invested by the Investment Manager and consist only of Permitted Assets.

(d) Subject to the requirements of the Trust Agreement, assets held in the Trust Account may be withdrawn by the Reinsurer at any time, and from time to time for any lawful purpose, in accordance with the Trust Agreement.

(e) The administrative costs and expenses related to the establishment and maintenance of the Trust Account shall be paid out of the assets of the Trust Account.

(f) The performance of the assets maintained in the Trust Account, including of all investment income paid or accrued, investment gains or losses, defaults and/or statutory impairments, will inure to the sole benefit or cost of the Reinsurer.

(g) The Reinsurer shall be obligated to deposit assets into the Trust Account as required by the Trust Agreement. Assets may be withdrawn from the Trust Account only in accordance with the provisions of the Trust Agreement.

Section 8.04 Investment Management Agreement.

(a) Pursuant to an investment management agreement (the “Investment Management Agreement”), the Ceding Company shall appoint the Investment Manager as investment manager to provide investment management services with respect to the assets maintained in the ModCo Deposit and the Funds Withheld Account. The Ceding Company shall not amend, modify or change the terms of the Investment Management Agreement, including the Investment Guidelines attached as an exhibit thereto, or remove or replace the Investment Manager without the prior written consent of the Reinsurer, such consent not to be unreasonably withheld. If the Ceding Company and the Reinsurer agree to any amendments, modifications or changes to the investment management agreement, then the Ceding Company shall propose such changes in writing to the Investment Manager in accordance with the terms of the Investment Management Agreement. The Ceding Company shall not propose any additional limitations (including with respect to asset allocations) on the assets maintained in the ModCo Deposit or the Funds Withheld Account without the prior written consent of the Reinsurer. In the event that the Investment Manager is removed or resigns, the Ceding Company and the Reinsurer shall mutually agree (in good faith) on a replacement investment manager. The replacement investment manager shall accept its appointment by entering into an investment management agreement in a form acceptable to the Ceding Company and the Reinsurer.

(b) Pursuant to an investment management agreement (the “Trust IMA”), the Reinsurer shall appoint the Investment Manager to provide investment management services with respect to the assets maintained in the Trust Account. The Reinsurer shall not amend, modify or change the terms of the Trust IMA, including the investment guidelines attached as an exhibit thereto, or remove or replace the Investment Manager without the prior written consent of the Ceding Company, such consent not to be unreasonably withheld. If the Ceding Company and the Reinsurer agree to any amendments, modifications or changes to the investment management agreement, then the Reinsurer shall propose such changes in writing to the Investment Manager in accordance with the terms of the Trust IMA. The Reinsurer shall not propose any additional limitations (including with respect to asset allocations) on the assets maintained in the Trust Account without the prior

written consent of the Ceding Company. In the event that the Investment Manager is removed or resigns, the Ceding Company and the Reinsurer shall mutually agree (in good faith) on a replacement investment manager. The replacement investment manager shall accept its appointment by entering into an investment management agreement in a form acceptable to the Ceding Company and the Reinsurer.

ARTICLE IX
RESERVED

ARTICLE X
ADMINISTRATION

Section 10.01 Policy Administration. The Ceding Company shall provide all required, necessary and appropriate claims, administrative and other services, including reporting under Article VII, with respect to the Reinsured Policies and the Accounts. The Ceding Company shall conduct its administration and claims practices with respect to the Reinsured Policies (a) with a level of skill, diligence and expertise that would reasonably be expected from experienced and qualified personnel performing such duties in similar circumstances, (b) in accordance with applicable Law and the terms of the Reinsured Policies, and (c) in a manner no less favorable to the Reinsurer and the Reinsured Policies than those used by the Ceding Company with respect to other policies of the Ceding Company not reinsured by the Reinsurer hereunder or other hedges of the Ceding Company. The Ceding Company shall not outsource any administrative functions or claims administration to a non-affiliate with respect to the Reinsured Policies or this Agreement without the prior written consent of the Reinsurer, such consent not to be unreasonably withheld. If the Reinsurer consents to any outsourcing of any administrative functions or claims administration with respect to the Reinsured Policies or this Agreement, the Ceding Company shall secure the Reinsurer’s right to audit and inspect the party performing such outsourced services.

Section 10.02 Record-Keeping.

(a) Each of the Ceding Company and Reinsurer shall maintain all records and correspondence for services performed by such party hereunder relating to the Reinsured Policies in accordance with industry standards of insurance record- keeping. In addition, such records shall be made available for examination, audit, and inspection by the other party, or the department of insurance of any jurisdiction within which either the Ceding Company or the Reinsurer operates. The Ceding Company and the Reinsurer further agree that in the event of the termination of this Agreement, any such records in the possession of the Reinsurer shall promptly be duplicated and forwarded to the Ceding Company unless otherwise instructed.

(b) The Ceding Company shall establish and maintain an adequate system of internal controls and procedures for financial reporting relating to the Reinsured Policies and the Accounts, including associated documentation, and shall make such documentation available for examination and inspection by the Reinsurer. All reports provided by the Ceding Company pursuant to Article VII shall be prepared in accordance with such system and procedures and shall be consistent with the Ceding Company’s books and records.

ARTICLE XI
TERM AND TERMINATION

Section 11.01 Duration of Agreement. This Agreement shall continue in force until:

(a) Such time as the Ceding Company has no further liabilities or obligations with respect to the Reinsured Liabilities.

(b) The Agreement is terminated as to new business on 30 days prior written notice by either the Ceding Company or the Reinsurer subject to any limitations in Schedule V.

(c) The Agreement is terminated as to new business on 30 days prior written notice by the Ceding Company following the Reinsurer failing to maintain its Leverage Measure at or above the Leverage Measure Limit for two (2) consecutive quarters.

(d) The Agreement is terminated by mutual agreement of the parties.

Section 11.02 Recapture.

(a) Neither party shall be permitted to cause a recapture of the Reinsured Policies except in accordance with this Section 11.02. For the avoidance of doubt, neither party shall be permitted to cause a partial recapture of the Reinsured Policies pursuant to this Section 11.02 other than as set out in 11.02(c) or 11.02(f).

(b) Recapture for Non-Payment. Either party may cause the Reinsured Policies to be recaptured in full and this Agreement to be terminated as to all Reinsured Policies if the other party fails to pay any amounts due under this Agreement within thirty (30) calendar days following written notice of non-payment from the non-defaulting party. The Ceding Company may cause the Reinsured Policies to be recaptured in full and this Agreement to be terminated as to all Reinsured Policies if the Reinsurer breaches in any material respect any representation, warranty or covenant under this Agreement and fails to cure such breach within thirty (30) days of receipt of written notice thereof.

(c) Recapture of Renewals. In the event that this Agreement has been terminated with respect to new business under 11.01, the Ceding Company may recapture any Reinsured Policy under this Agreement that is either subject to a renewal under its terms for MYGAs or out of its surrender charge period for FIAs; provided the Ceding Company must provide notice to the Reinsurer no later than 10 Business Days prior to the maturity date of each such Reinsured Policy.

(d) Recapture by Ceding Company for Other Material Breach. The Ceding Company may terminate this Agreement and recapture all of the Reinsured Policies in the event the Reinsurer materially breaches this Agreement and fails to substantially cure such material breach within thirty (30) calendar days following written notice thereof from the Ceding Company.

(e) Recapture for Insolvency of Reinsurer. The Ceding Company may terminate this Agreement and recapture all of the Reinsured Policies in the event that the Reinsurer becomes insolvent (as set forth in Article XIV) by promptly providing the Reinsurer or its Authorized

Representative with written notice of recapture, to be effective as of the date on which the Reinsurer’s insolvency is established by the authority responsible for such determination. Any requirement for a notification period prior to the termination of this Agreement shall not apply under such circumstances.

(f) Hedging Recapture Event. The Ceding Company may recapture any FIA Reinsured Policy under this Agreement that has a Guaranteed Minimum Cash Surrender Value that is greater than its Contract Value as such terms are defined in the Reinsured Policy form; and provided the Ceding Company complies with such required timing of notice set out in Schedule XII.

Section 11.03 Recapture Payment.

(a) In the event the Reinsured Policies are recaptured in full (including if this Agreement is rejected by any liquidator, receiver, rehabilitator, trustee or similar Person acting on behalf of the Ceding Company (a “Receiver”)), a net accounting and settlement as to any balance due under this Agreement shall be undertaken by the Ceding Company in accordance with Article VII, which calculations shall be as of the Recapture Effective Date. Within ten (10) Business Days following the later of the Recapture Effective Date or becoming aware that a recapture event has occurred, the Ceding Company shall deliver to the Reinsurer a final Monthly Accounting Report starting as of the prior Monthly Accounting Report and ending on the Recapture Effective Date (the “Terminal Accounting Report”), and all amounts required to be paid in connection with the final settlement (including all Account Adjustments and Reinsurer Top-Up Payments) set forth in such Terminal Accounting Report shall be paid in accordance with Section 7.03 as if the Recapture Effective Date were the end of the month. In addition to all amounts required to be paid in connection with the final settlement, the Reinsurer shall pay an amount equal to the Accounts Required Reserves to the Ceding Company, such payment to be effectuated by the Ceding Company retaining assets in the Accounts with an aggregate fair value equal to the Accounts Required Reserves. Following the making of all payments required to be made by the Reinsurer hereunder (including any Account Adjustments and/or Reinsurer Top-Up Payments and the payment of the Accounts Required Reserves to the Ceding Company) any remaining assets in the Accounts or the Trust Account shall be delivered to one or more accounts as directed by the Reinsurer.

(b) Either party’s right to terminate the reinsurance provided hereunder will not prejudice its right to collect amounts owed to it hereunder, including applicable interest as specified in Section 17.02, for the period during which such reinsurance was in force, through and including any notice period.

(c) In the event of a renewal recapture under Section 11.02(c) or a hedging recapture under 11.02(f), the Reinsured Liability to such Reinsured Policy shall be extinguished upon the Reinsurer’s settlement of those items in Section 7.03 and the payment of the Quota Share of the Net Statutory Reserves with respect to the recaptured policy (such payment to be effectuated by the Ceding Company retaining assets in the Accounts with an aggregate book value equal to the Net Statutory Reserves), and in each case, solely related to such Reinsured Policy.

(d) For the avoidance of doubt, in the event this Agreement terminates for new business pursuant to Section 11.01 Reinsurer shall remain liable for the Reinsured Policies ceded

hereunder in accordance with the terms of this Agreement. Reinsurer shall not be liable for any risks arising after the recapture date of any recaptured Reinsured Policies as provided for in Section 11.02.

Section 11.04 Survival. All provisions of this Agreement will survive any termination of this Agreement and recapture of the Reinsured Policies to the extent necessary to carry out the purpose of this Agreement.

ARTICLE XII
ERRORS AND OMISSIONS

Section 12.01 Errors and Omissions. Any unintentional or accidental failure to comply with the terms of this Agreement which can be shown to be the result of an oversight or clerical error relating to the administration of reinsurance by either party will not constitute a breach of this Agreement; provided, that, upon discovery, the error shall be promptly corrected so that both parties are restored to the position they would have occupied had the oversight or clerical error not occurred. In the event a payment is corrected, the party receiving the payment shall be entitled to interest in accordance with Section 17.02. Should it not be possible to restore both parties to this position, the party responsible for the oversight or clerical error will be responsible for any resulting liabilities and expenses.

ARTICLE XIII
DISPUTE RESOLUTION

Section 13.01 Negotiation.

(a) Within fifteen (15) calendar days after the Reinsurer or the Ceding Company has given the other party written notification of a specific dispute arising out of or relating to this Agreement, each party will appoint a designated officer of its company to attempt to resolve such dispute. The officers will meet at a mutually agreeable time and location as soon as reasonably possible and as often as reasonably necessary in order to gather and furnish the other with all appropriate and relevant information concerning the dispute. Any such meetings may be held by telephone or video conference. The officers will discuss the matter in dispute and will negotiate in good faith without the necessity of formal arbitration proceedings. During the negotiation process, all reasonable requests made by one officer to the other for information will be honored. The specific format for such discussions will be decided by the designated officers.

(b) If the officers cannot resolve the dispute within thirty (30) calendar days of their first meeting, the dispute will be submitted to formal arbitration pursuant to Section 13.02, unless the parties agree in writing to extend the negotiation period for an additional thirty (30) calendar days.

Section 13.02 Arbitration; Waiver of Trial by Jury.

(a) It is the intention of the Reinsurer and the Ceding Company that the customs and practices of the insurance and reinsurance industry will be given full effect in the operation and interpretation of this Agreement. If the Reinsurer and the Ceding Company cannot mutually resolve a dispute that arises out of or relates to this Agreement, including the validity of this Agreement, and

the dispute cannot be resolved through the negotiation process, then the dispute will be finally settled by arbitration in accordance with the provisions of this Section 13.02.

(b) To initiate arbitration, either the Ceding Company or the Reinsurer will notify the other party by certified mail of its desire to arbitrate, stating the nature of the dispute and the remedy sought.

(c) Any arbitration pursuant to this Section 13.02 will be conducted before a panel of three (3) arbitrators who will be current or former officers of life insurance or reinsurance companies other than officers or directors of the parties to this Agreement, their Affiliates or subsidiaries, or other professionals with experience in life insurance or reinsurance; provided, that such professionals shall not have performed services for either party or its Affiliates within the previous three (3) years. Each of the arbitrators will be familiar with the prevailing customs and practices for reinsurance in the life insurance and reinsurance industry in the United States. Each of the parties will appoint one arbitrator and the two (2) so appointed will select the third arbitrator who shall be independent and impartial. If either party refuses or fails to appoint an arbitrator within sixty (60) calendar days after the other party has given written notice to such party of its arbitrator appointment, the party that has given notice may appoint the second arbitrator. If the two (2) arbitrators do not agree on a third arbitrator within thirty (30) calendar days of the appointment of the second arbitrator, then the third arbitrator shall be selected by the ARIAS-U.S. Umpire Selection Procedure (available at www.ARIAS-US.org), subject to the arbitrator qualification requirements of this paragraph.

(d) Each arbitration hearing under this Agreement will be held on the date set by the arbitrators at a mutually agreed upon location. In no event will this date be later than six (6) months after the appointment of the third arbitrator. As soon as possible, the arbitrators will establish arbitration procedures as warranted by the facts and issues of the particular case. Notwithstanding Section 17.17, the arbitration and this Section 13.02 shall be governed by Title 9 (Arbitration) of the United States Code.

(e) The arbitrators will base their decision on the terms and conditions of this Agreement and the customs and practices of the insurance and reinsurance industries rather than on strict interpretation of the law. The decision of the arbitrators will be made by majority rule and will be final and binding on both parties, unless (i) the decision was procured by corruption, fraud or other undue means; (ii) there was evident partiality by an arbitrator or corruption in any of the arbitrators or misconduct prejudicing the rights of any party; or (iii) the arbitrators exceeded their powers. Subject to the preceding sentence, neither party may seek judicial review of the decision of the arbitrators. The arbitrators shall enter an award which shall do justice between the parties and the award shall be supported by written opinion. The parties agree that the federal courts in the State of Nebraska, or the State courts of such State, have jurisdiction to hear any matter relating to compelling arbitration or enforcing the judgment of an arbitral panel, and the parties hereby consent to such jurisdiction. Each party hereby waives, to the fullest extent permitted by Law, any objection it may now or hereafter have to the laying of such venue, or any claim that a proceeding has been brought in an inconvenient forum. In addition, the Ceding Company and the Reinsurer hereby consent to service of process out of such courts at the addresses set forth in Section 17.06.

(f) Unless the arbitrators decide otherwise, each party will bear the expense of its own arbitration activities, including its appointed arbitrator and any outside attorney and witness fees. The parties will jointly bear the expense of the third arbitrator.

(g) Waiver of Trial by Jury. THE REINSURER AND THE CEDING COMPANY HEREBY WAIVE ANY AND ALL RIGHTS TO TRIAL BY JURY IN ANY MATTER ARISING OUT OF OR RELATING TO THIS AGREEMENT.

ARTICLE XIV
INSOLVENCY

Section 14.01 Insolvency.

(a) A party to this Agreement will be deemed “insolvent” when it:

(i) applies for or consents to the appointment of a receiver, rehabilitator, conservator, liquidator or statutory successor (the “Authorized Representative”) of its properties or assets;

(ii) is adjudicated as bankrupt or insolvent;

(iii) files or consents to the filing of a petition in bankruptcy, seeks reorganization or an arrangement with creditors or takes advantage of any bankruptcy, dissolution, liquidation, rehabilitation, conservation or similar Law;

(iv) fails to maintain its Leverage Measure at or above the Leverage Measure Limit for two (2) consecutive quarters, or

(v) becomes the subject of an order to rehabilitate or an order to liquidate as defined by the insurance code of the jurisdiction of the party’s domicile.

(vi) In the event of the insolvency of either party, the rights or remedies of this Agreement will remain in full force and effect.

(b) Insolvency of the Ceding Company. In the event of the insolvency, liquidation or rehabilitation of the Ceding Company or the appointment of a liquidator, receiver or statutory successor of the Ceding Company, the reinsurance coverage provided hereunder shall be payable by the Reinsurer directly to the Ceding Company or to its liquidator, receiver or statutory successor except (1) when the contract or other written agreement specifically provides another payee of such reinsurance in the event of the insolvency of the ceding insurer or (2) when the assuming insurer, with the consent of the direct insured, has assumed such policy obligations of the ceding insurer as direct obligations of the assuming insurer to the payees under such policies and in substitution for the obligations of the ceding insurer to such payees, on the basis of the liability of the Ceding Company for the Reinsured Liabilities without diminution because of such insolvency, liquidation, rehabilitation or appointment or because such liquidator, receiver or statutory successor has failed to pay any claims or any portion thereof. In any such event, the reinsurance being provided hereunder shall be payable immediately upon demand, with reasonable provision for verification, on the basis of claims allowed against the Ceding Company by any court of competent jurisdiction or by any

liquidator, receiver or statutory successor. In any such event, the liquidator, receiver or statutory successor of the Ceding Company shall give written notice to the Reinsurer of the pendency of each claim against the Ceding Company with respect to such Reinsured Liabilities within a reasonable time after each such claim is filed in the insolvency, liquidation or rehabilitation proceeding. During the pendency of any such claims, the Reinsurer may, at its own expense, investigate such claim and interpose in the proceeding in which such claim is to be adjudicated any defense or defenses that the Reinsurer may reasonably deem available to the Ceding Company or its liquidator, receiver or statutory successor. For the avoidance of doubt, the Reinsurer will be liable only for benefits reinsured as benefits become due under the terms of the Reinsured Policies and will not be or become liable for any amounts or reserves to be held by the Ceding Company as to the Reinsured Policies or for any damages or payments resulting from the termination or restructuring of the Reinsured Policies, in each case, that are not otherwise expressly covered by this Agreement.

ARTICLE XV
TAXES

Section 15.01 Taxes. No taxes, allowances, or other expenses will be paid by the Reinsurer to the Ceding Company for any Reinsured Policy, except as specifically referred to in this Agreement.

ARTICLE XVI
REPRESENTATIONS, WARRANTIES AND COVENANTS

Section 16.01 Representations and Warranties of the Ceding Company. The Ceding Company hereby represents and warrants to the Reinsurer, as of the Effective Date, as follows:

(a) Organization and Qualification. The Ceding Company is a corporation duly incorporated, validly existing and in good standing under the Laws of the State of Nebraska and has all requisite corporate power and authority to operate its business as now conducted, and is duly qualified as a foreign corporation to do business, and, to the extent legally applicable, is in good standing, in each jurisdiction where the character of its owned, operated or leased properties or the nature of its activities makes such qualification necessary, except for failures to be so qualified or be in good standing that, individually or in the aggregate, do not have, and would not reasonably be expected to have, a material adverse effect on the Ceding Company’s ability to perform its obligations under this Agreement.

(b) Authorization. The Ceding Company has all requisite corporate power to enter into, consummate the transactions contemplated by and carry out its obligations under, this Agreement. The execution and delivery by the Ceding Company of this Agreement, and the consummation by the Ceding Company of the transactions contemplated by, and the performance by the Ceding Company of its obligations under, this Agreement have been duly authorized by all requisite corporate action on the part of the Ceding Company. This Agreement has been duly executed and delivered by the Ceding Company, and (assuming due authorization, execution and delivery by the Reinsurer) this Agreement constitutes the legal, valid and binding obligation of the Ceding Company, enforceable against it in accordance with its terms, subject to the effect of any

applicable bankruptcy, reorganization, insolvency, moratorium, or similar Laws relating to or affecting creditors’ rights generally.

(c) No Conflict. The execution, delivery and performance by the Ceding Company of, and the consummation by the Ceding Company of the transactions contemplated by, this Agreement do not and will not (i) violate or conflict with the organizational documents of the Ceding Company, (ii) conflict with or violate any Law or Permit of any Governmental Entity applicable to the Ceding Company or by which it or its properties or assets is bound or subject, or (iii) result in any breach of, or constitute a default (or event which, with the giving of notice or lapse of time, or both, would become a default) under, or give to any Person any rights of termination, acceleration or cancellation of, any agreement, lease, note, bond, loan or credit agreement, mortgage, indenture or other instrument, obligation or contract of any kind to which the Ceding Company or any of its subsidiaries is a party or by which the Ceding Company or any of its subsidiaries or any of their respective properties or assets is bound or affected, except, in the case of clause (iii), any such conflicts, violations, breaches, loss of contractual benefits, defaults or rights that, individually or in the aggregate, do not have, and would not reasonably be expected to have, a material adverse effect on the Ceding Company’s ability to perform its obligations under this Agreement.

(d) Factual Information Relating to the Reinsured Policies. To the knowledge of the Ceding Company, the information relating to the business reinsured under this Agreement and the Reinsured Policies that was supplied by or on behalf of the Ceding Company to the Reinsurer or any of the Reinsurer’s representatives in connection with this Agreement (such information, the “Factual Information”), as of the date supplied (or if later corrected or supplemented prior to the date hereof, as of the date corrected or supplemented), was complete and accurate in all material respects taken as a whole, as of the date of such information, provided that the Ceding Company makes no representation or warranty with respect to any projection, model, methodology, forecasting, analysis, assumption or estimate other than that the projections, models, methodologies, forecasts, analyses, assumptions or estimates on the basis of which such projection, model, methodology, forecasting, analysis, assumption or estimate were prepared (i) are reasonable and (ii) were prepared in good faith and in accordance with sound actuarial principles. The Ceding Company makes no representation or warranty as to the sufficiency or adequacy of any reserves or the future profitability of the Reinsured Policies. Any actuarial data included in the Factual Information was compiled in accordance with generally accepted actuarial principles in all material respects given the intended purpose at the time compiled. The Factual Information was compiled in a commercially reasonable manner given its intended purpose.

(e) Solvency. The Ceding Company is and will be Solvent on a statutory basis immediately after giving effect to this Agreement. For the purposes of this Section 16.01(e), “Solvent” means that: (i) the aggregate assets of the Ceding Company are greater than the aggregate liabilities of the Ceding Company, in each case determined in accordance with Nebraska SAP; (ii) the Ceding Company does not intend to, and does not believe that it will, incur debts or other liabilities beyond its ability to pay such debts and other liabilities as they come due; and (iii) the Ceding Company is not engaged in a business or transaction, and does not contemplate engaging in a business or transaction, for which the Ceding Company’s assets would constitute unreasonably insufficient capital.

(f) Governmental Licenses. The Ceding Company has all Permits necessary to conduct its business as currently conducted and execute and deliver, and perform its obligations under, this Agreement, except in such cases where the failure to have a Permit has not had and would not reasonably be expected to have a material adverse effect on the Ceding Company’s ability to perform its obligations under this Agreement. All Permits that are material to the conduct of the Ceding Company’s business are valid and in full force and effect. The Ceding Company is not subject to any pending Action or, to the knowledge of the Ceding Company, any threatened Action that seeks the revocation, suspension, termination, modification or impairment of any Permit that, if successful, would reasonably be expected to have, or with the passage of time become, a material adverse effect on the Ceding Company’s ability to perform its obligations under this Agreement.

(g) Accounts. Each Account has been maintained in accordance with applicable Law. No plan of operations with respect to the Accounts was required to be filed and approved by any Governmental Entity.

Section 16.02 Covenants of the Ceding Company.

(a) Investigations. To the extent permitted by applicable Law, the Ceding Company shall promptly notify the Reinsurer, in writing, of any and all investigations of the Ceding Company conducted by any Governmental Entity commencing after the date hereof, other than routine State insurance department examinations that do not relate to the business reinsured pursuant to this Agreement or would not otherwise reasonably be expected to adversely affect the performance by the Ceding Company of its obligations under this Agreement.

(b) Statutory Accounting Principles. The Ceding Company shall prepare its financial statements as required by, and in accordance with, Nebraska SAP in all material respects.

(c) Existence; Conduct of Business. The Ceding Company shall do or cause to be done all things reasonably necessary to preserve, renew and keep in full force and effect its legal existence and the rights, Permits and privileges material to the conduct of its business.

(d) Compliance with Law. The Ceding Company shall comply with all Laws applicable to, and all Permits issued by any Governmental Entity to, the Ceding Company or by which it or its properties or assets is bound or subject, except where the failure to do so, individually or in the aggregate, would not reasonably be expected to have a material adverse effect on the Ceding Company’s ability to perform its obligations, or on the Reinsurer’s rights or obligations, under this Agreement.

(e) Governmental Notices. The Ceding Company shall provide the Reinsurer, within five (5) Business Days after receipt thereof, copies of any material written notice or report from any Governmental Entity with respect to the business reinsured under this Agreement and a written summary of any material oral communication with any Governmental Entity with respect to the business reinsured under this Agreement.

(f) Restrictions on Liens. The Ceding Company shall not create, incur, assume or suffer to exist any material liens on the assets in the ModCo Deposit or the Funds Withheld Account or on any interest therein or the proceeds thereof.

(g) Reliance. The Ceding Company hereby represents, warrants and covenants that it has not relied, and shall not rely, on any representation, warranty or statement or duty of the Reinsurer other than the representations and warranties contained in Section 16.03 and the covenants contained in Section 16.04. The Reinsurer makes no representations or warranties in connection herewith other than those contained in Section 16.03 and makes no covenants other than those contained in Section 16.04.

Section 16.03 Representations and Warranties of the Reinsurer. The Reinsurer hereby represents and warrants to the Ceding Company, as of the Effective Date, as follows:

(a) Organization and Qualification. The Reinsurer is a corporation duly incorporated, validly existing and in good standing under the Laws of the Cayman Islands and has all requisite corporate power and authority to operate its business as now conducted, and is duly qualified as a foreign corporation to do business, and, to the extent legally applicable, is in good standing, in each jurisdiction where the character of its owned, operated or leased properties or the nature of its activities makes such qualification necessary, except for failures to be so qualified or be in good standing that, individually or in the aggregate, do not have, and would not reasonably be expected to have, a material adverse effect on the Reinsurer’s ability to perform its obligations under this Agreement.

(b) Authorization. The Reinsurer has all requisite corporate power to enter into, consummate the transactions contemplated by and carry out its obligations under, this Agreement. The execution and delivery by the Reinsurer of this Agreement, and the consummation by the Reinsurer of the transactions contemplated by, and the performance by the Reinsurer of its obligations under, this Agreement have been duly authorized by all requisite corporate action on the part of the Reinsurer. This Agreement has been duly executed and delivered by the Reinsurer, and (assuming due authorization, execution and delivery by the Ceding Company) this Agreement constitutes the legal, valid and binding obligation of the Reinsurer, enforceable against it in accordance with its terms, subject to the effect of any applicable bankruptcy, reorganization, insolvency, moratorium, or similar Laws relating to or affecting creditors’ rights generally.

(c) No Conflict. The execution, delivery and performance by the Reinsurer of, and the consummation by the Reinsurer of the transactions contemplated by, this Agreement do not and will not (i) violate or conflict with the organizational documents of the Reinsurer, (ii) conflict with or violate any Law or Permit of any Governmental Entity applicable to the Reinsurer or by which it or its properties or assets is bound or subject, or (iii) result in any breach of, or constitute a default (or event which, with the giving of notice or lapse of time, or both, would become a default) under, or give to any Person any rights of termination, acceleration or cancellation of, any agreement, lease, note, bond, loan or credit agreement, mortgage, indenture or other instrument, obligation or contract of any kind to which the Reinsurer or any of its subsidiaries is a party or by which the Reinsurer or any of its subsidiaries or any of their respective properties or assets is bound or affected, except, in the case of clause (iii), any such conflicts, violations, breaches, loss of contractual benefits, defaults or rights that, individually or in the aggregate, do not have, and would not reasonably be expected to have, a material adverse effect on the Reinsurer’s ability to perform its obligations under this Agreement.

(d) Governmental Licenses. The Reinsurer has all Permits necessary to conduct its business as currently conducted and execute and deliver, and perform its obligations under, this Agreement, except in such cases where the failure to have a Permit has not had and would not reasonably be expected to have a material adverse effect on the Reinsurer’s ability to perform its obligations under this Agreement. All Permits that are material to the conduct of the Reinsurer’s business are valid and in full force and effect. The Reinsurer is not subject to any pending Action or, to the knowledge of the Reinsurer, any threatened Action that seeks the revocation, suspension, termination, modification or impairment of any Permit that, if successful, would reasonably be expected to have, or with the passage of time become, a material adverse effect on the Reinsurer’s ability to perform its obligations under this Agreement. The Reinsurer is duly licensed as an authorized insurer in the Ceding Company’s state of domicile.

(e) Solvency. The Reinsurer is and will be Solvent on a statutory basis immediately after giving effect to this Agreement. For the purposes of this Section 16.03(e), “Solvent” means that: (i) the aggregate assets of the Reinsurer are greater than the aggregate liabilities of the Reinsurer, in each case determined in accordance with statutory accounting principles and practices prescribed or permitted for life insurance companies in its state of domicile by the insurance regulator in that state, consistently applied by the Reinsurer; (ii) the Reinsurer does not intend to, and does not believe that it will, incur debts or other liabilities beyond its ability to pay such debts and other liabilities as they come due; and (iii) the Reinsurer is not engaged in a business or transaction, and does not contemplate engaging in a business or transaction, for which the Reinsurer’s assets would constitute unreasonably insufficient capital.

Section 16.04 Covenants of the Reinsurer.

(a) Investigations. To the extent permitted by applicable Law, the Reinsurer shall promptly notify the Ceding Company, in writing, of any and all investigations of the Reinsurer conducted by any Governmental Entity commencing after the date hereof, other than routine State insurance department examinations that do not relate to the business reinsured pursuant to this Agreement or would not otherwise reasonably be expected to adversely affect the performance by the Reinsurer of its obligations under this Agreement.

(b) Statutory Accounting Principles. The Reinsurer shall prepare its financial statements as required by, and in accordance with GAAP.

(c) Existence; Conduct of Business. The Reinsurer shall do or cause to be done all things reasonably necessary to preserve, renew and keep in full force and effect its legal existence and the rights, Permits and privileges material to the conduct of its business.

(d) Compliance with Law. The Reinsurer shall comply with all Laws applicable to, and all Permits issued by any Governmental Entity to, the Reinsurer or by which it or its properties or assets is bound or subject, except where the failure to do so, individually or in the aggregate, would not reasonably be expected to have a material adverse effect on the Reinsurer’s ability to perform its obligations, or on the Ceding Company’s rights or obligations, under this Agreement.

(e) Governmental Notices. The Reinsurer shall provide the Ceding Company, within five (5) Business Days after receipt thereof, copies of any written notice or report from any

Governmental Entity with respect to the business reinsured under this Agreement and a written summary of any material oral communication with any Governmental Entity with respect to the business reinsured under this Agreement.

(f) Reliance. The Reinsurer hereby represents, warrants and covenants that it has not relied, and shall not rely, on any representation, warranty or statement or duty of the Ceding Company other than the representations and warranties contained in Section 16.01 and the covenants contained in Section 16.02. The Ceding Company makes no representations or warranties in connection herewith other than those contained in Section 16.01 and makes no covenants other than those contained in Section 16.02.

ARTICLE XVII
MISCELLANEOUS

Section 17.01 Currency. All payments due under this Agreement shall be made in U.S. Dollars.

Section 17.02 Interest. All amounts due and payable by the Ceding Company or the Reinsurer under this Agreement that remain unpaid for more than fifteen (15) calendar days from the date due hereunder will incur interest from the date due hereunder. Except as otherwise set forth in this Agreement, such interest shall accrue at a rate equal to twelve percent (12%) per annum, calculated on a 30/360 basis.

Section 17.03 Right of Setoff and Recoupment.

(a) Each of the Ceding Company and the Reinsurer shall have, and may exercise at any time and from time to time, the right to setoff or recoup any balance or balances, whether on account of Reinsurance Premiums, allowances, credits, Reinsured Liabilities or otherwise, due from one party to the other under this Agreement and may setoff or recoup such balance or balances against any balance or balances due to the former from the latter under this Agreement.

(b) The parties’ setoff rights may be enforced notwithstanding any other provision of this Agreement including the provisions of Article XIV.

Section 17.04 No Third-Party Beneficiaries. This Agreement is an indemnity reinsurance agreement solely between the Ceding Company and the Reinsurer. The acceptance of risks under this Agreement by the Reinsurer will create no right or legal relation between the Reinsurer and the insured, owner, beneficiary, or assignee of any insurance policy of the Ceding Company. In addition, nothing expressed or implied in this Agreement is intended to or shall confer remedies, obligations or liabilities upon any Person other than the parties hereto and their respective administrators, successors, legal representatives and permitted assigns or relieve or discharge the obligation or liability of any third party to any party to this Agreement.

Section 17.05 Amendment. This Agreement may not be changed or modified or in any way amended except by a written instrument duly executed by the proper officers of both parties to this Agreement, and any change or modification to this

Agreement will be null and void unless made by amendment to this Agreement and duly executed by the proper officers of both parties to this Agreement.

Section 17.06 Notices.

(a) All demands, notices, reports and other communications provided for herein shall be delivered by the following means: (i) hand-delivery; (ii) overnight courier service (e.g., FedEx, Airborne Express, or DHL); (iii) registered or certified U.S. mail, postage prepaid and return receipt requested; or (iv) facsimile transmission or e-mail; provided, that the fax or e-mail is confirmed by delivery using one of the three (3) methods identified in clauses (i) through (iii). All such demands, notices, reports and other communications shall be delivered to the parties as follows:

0 S. 70th Street

68506

[Redacted]

if to the Ceding Company:

American Life & Security Corp.

2900 S. 70th Street

Suite 400

Lincoln, NE 68506

Attn: Michael Salem and Mike Minnich

Tel: [Redacted]

Email: [Redacted]

if to the Reinsurer:

SDA Annuity & Life Re

c/o Aon Insurance Managers (Cayman) Limited

18 Forum Lane, Second Floor, Camana Bay,

Grand Cayman, Cayman Islands

Attn: Ghislain Ghyoot

With a copy to:

Maples Corporate Services Limited, Ugland House,

Grand Cayman,

KY1-1104, Cayman Islands

With a copy to the Investment Manager:

1505 Capital LLC

100 Wall Street, 28th Floor

New York, NY 10005

Attn: Richard Vecchiolla

Tel: [Redacted]

Email: [Redacted]

(b) Either party hereto may change the names or addresses where notice is to be given by providing notice to the other party of such change in accordance with this Section 17.06.

(c) If either party hereto becomes aware of any change in applicable Law restricting the transmission of notices or other information in accordance with the foregoing, such party shall notify the other party hereto of such change in Law and such resulting restriction.

Section 17.07 Consent to Jurisdiction. Subject to the terms and conditions of Article XIII, each party hereto hereby irrevocably and unconditionally submits to the non-exclusive jurisdiction of any United States court sitting in Nebraska and of any Nebraska state court for purposes of all legal proceedings arising out of or relating to this Agreement or for recognition and enforcement of any judgment in respect thereof. In any action, suit or other proceeding, each party hereby irrevocably waives, to the fullest extent permitted by applicable Law, any objection that it may now or hereafter have to the laying of the venue of any such proceedings brought in such court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. Each party hereto also agrees that any final and nonappealable judgment against a party in connection with any action, suit or other proceeding shall be conclusive and binding on such party and that such award or judgment may be enforced in any court of competent jurisdiction, either within or outside of the United States. A certified or exemplified copy of such award or judgment shall be conclusive evidence of the fact and amount of such award or judgment. Each party hereto agrees that any process or other paper to be served in connection with any action or proceeding under this Agreement shall, if delivered, sent or mailed in accordance with Section 17.06, constitute good, proper and sufficient service thereof. This Section 17.07 is not intended to conflict with or override Article XIII.

Section 17.08 Service of Process. The Reinsurer hereby designates the CT Corporation as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Ceding Company. A copy of any such process shall be delivered to the Reinsurer in accordance with Section 17.06. This Section is not intended to conflict with or override Article XIII.

Section 17.09 Inspection of Records.

(a) Upon giving at least five (5) Business Days’ prior written notice, the Reinsurer, or its duly authorized representatives, will have the right to audit, examine and copy, electronically or during regular business hours, at the home office of the Ceding Company, any and all books, records, statements, correspondence, reports, and other documents that relate to the Reinsured Policies, the assets maintained in the Funds Withheld Account, the assets maintained in the ModCo Deposit or this Agreement, subject to the confidentiality provisions contained in this Agreement and preservation of attorney-client privilege . In the event the Reinsurer exercises its inspection rights, the Ceding Company must provide a reasonable work space for such audit, examination or copying, cooperate fully and faithfully, and produce any and all materials reasonably requested to be produced, subject to confidentiality provisions contained in this Agreement. The expenses related to any two (2) such inspections in any calendar year shall be borne by the Ceding

Company; provided, that if any breach of this Agreement by the Ceding Company has occurred, the expenses relating to all such inspections shall be borne by the Ceding Company.

(b) The Reinsurer’s right of access as specified above will survive until all of the Reinsurer’s obligations under this Agreement have terminated or been fully discharged.

Section 17.10 Confidentiality.

(a) The parties will keep confidential and not disclose or make competitive use of any shared Proprietary Information, as defined below, unless:

(i) The information becomes publicly available or is obtained other than through unauthorized disclosure by the party seeking to disclose or use such information;

(ii) The information is independently developed by the recipient; or

(iii) The disclosure is required by Law; provided, that, if applicable, the party required to make such disclosure will allow the other party to seek an appropriate protective order.

“Proprietary Information” includes, but is not limited to, underwriting manuals and guidelines, applications, policy forms, agent lists and premium rates and allowances of the Reinsurer and the Ceding Company, but shall not include the existence of this Agreement and the identity of the parties. Additionally, Proprietary Information may be shared by either party on a need-to-know basis with its officers, directors, employees, Affiliates, third-party service providers, auditors, consultants or retrocessionaires, or in connection with the dispute process specified in this Agreement.

(b) Except as embedded in records during an audit as set forth in 17.09, the Ceding Company shall not provide to the Reinsurer, and the Reinsurer shall have no right to access, any Non-Public Personal Information except to the extent (i) necessary for purposes of administration of this Agreement and (ii) requested in writing by a duly authorized representative of the Reinsurer. The Reinsurer and its representatives and service providers will protect the confidentiality and security of Non-Public Personal Information (as defined below) provided to it hereunder by:

(i) holding all Non-Public Personal Information in strict confidence;

(ii) maintaining appropriate measures that are designed to protect the security, integrity and confidentiality of Non-Public Personal Information; and

(iii) disclosing and using Non-Public Personal Information received under this Agreement solely for purposes of carrying out the Reinsurer’s obligations under this Agreement, for purposes of retrocession (provided that the retrocessionaire has agreed to maintain the confidentiality of such Non-Public Personal Information to the same extent as the Reinsurer hereunder), or as may be required or permitted by Law, in each case solely to the extent permitted by Law.

“Non-Public Personal Information” is personally identifiable medical, financial, and other personal information about proposed, current and former applicants, policy owners, contract holders, insureds, annuitants, claimants, and beneficiaries of Reinsured Policies or contracts issued by the Ceding Company, and their representatives, that is not publicly available. Non-Public Personal Information does not include de-identified personal data, i.e., information that does not identify, or could not reasonably be associated with, an individual.

Section 17.11 Successors. This Agreement will be binding upon the parties hereto and their respective successors and assigns including any Authorized Representative of either party. Neither party may effect any novation or assignment of this Agreement without the prior written consent of the other party and the Nebraska Department of Insurance.

Section 17.12 Entire Agreement. This Agreement and the Schedules and Exhibits hereto constitute the entire agreement between the parties with respect to the business reinsured hereunder and supersede any and all prior representations, warranties, prior agreements or understandings between the parties pertaining to the subject matter of this Agreement. There are no understandings between the parties other than as expressed in this Agreement and the Schedules and Exhibits hereto. In the event of any express conflict between this Agreement and the Schedules and Exhibits hereto, the Schedules and Exhibits hereto will control.

Section 17.13 Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. If any provision of this Agreement, or the application thereof to any Person or entity or any circumstance, is found by a court or other Governmental Entity of competent jurisdiction to be invalid or unenforceable, (a) a suitable and equitable provision shall be substituted therefor in order to carry out, so far as may be valid and enforceable, the intent and purpose of such invalid or unenforceable provision and (b) the remainder of this Agreement and the application of such provision to other Persons or circumstances shall not be affected by such invalidity or unenforceability, nor shall such invalidity or unenforceability affect the validity or enforceability of such provision, or the application thereof, in any other jurisdiction.

Section 17.14 Construction. This Agreement will be construed and administered without regard to authorship and without any presumption or rule of construction in favor of either party. This Agreement is between sophisticated parties, each of which has reviewed this Agreement and is fully knowledgeable about its terms and conditions.

Section 17.15 Non-Waiver. Neither the failure nor any delay on the part of the Ceding Company or the Reinsurer to exercise any right, remedy, power, or privilege under this Agreement shall operate as a waiver thereof. No single or partial exercise of any right, remedy, power or privilege shall preclude the further exercise of that right, remedy, power or privilege or the exercise of any other right, remedy, power or privilege. No waiver of any right, remedy, power or privilege with respect to any

occurrence shall be construed as a waiver of that right, remedy, power or privilege with respect to any other occurrence. No prior transaction or dealing between the parties will establish any custom, usage or precedent waiving or modifying any provision of this Agreement. No waiver shall be effective unless it is in writing and signed by the party granting the waiver.

Section 17.16 Further Assurances. From time to time, as and when requested by a party hereto, the other party hereto shall execute and deliver all such documents and instruments and shall take all actions as may be reasonably necessary to consummate the transactions contemplated by this Agreement.

Section 17.17 Governing Law. This Agreement will be governed by and construed in accordance with the Laws of the State of Nebraska without giving effect to any principles of conflicts of law thereof that are not mandatorily applicable by Law and would permit or require the application of the Laws of another jurisdiction.

Section 17.18 Counterparts. This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party hereto and delivered to the other party. Each party hereto may deliver its signed counterpart of this Agreement to the other party by means of electronic mail or any other electronic medium utilizing image scan technology, and such delivery will have the same legal effect as hand delivery of an originally executed counterpart. When this Agreement has been fully executed by the Ceding Company and the Reinsurer, it will become effective as of the Effective Date.

[Remainder of Page Intentionally Blank]

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed effective as of the Effective Date.

AMERICAN LIFE & SECURITY CORP.

By: /s/ Mark A Oliver

Name: Mark A Oliver

Title: Vice President & Secretary

SDA ANNUITY & LIFE RE

By: /s/ Erik Fell

Name: Erik Fell

Title: CFO

Exhibit 31.1

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, A. Michael Salem, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Midwest Holding Inc. (the “Company”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: May 14, 2020		/s/ A. Michael Salem
		A. Michael Salem
		Chief Executive Officer, Principal Executive Officer

Exhibit 31.2

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Debra K. Havranek, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Midwest Holding Inc. (the “Company”);

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: May 14, 2020		/s/ Debra K. Havranek
		Debra K. Havranek
		Vice President, Treasurer, Principal Financial Officer

Exhibit 32.1

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Midwest Holding Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


Date: May 14, 2020		/s/ A. Michael Salem
		A. Michael Salem
		Chief Executive Officer, Principal Executive Officer

Exhibit 32.2

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


Date: May 14, 2020		/s/ Debra K. Havranek
		Debra K. Havranek
		Vice President, Treasurer, Principal Financial Officer