ATLANTIC AMERICAN CORP

Overview - The Company establishes insurance reserves by line of business within each insurance subsidiary based on the classification of the underlying products as either short-duration or long-duration in accordance with applicable accounting guidance. The determination of insurance reserves, particularly liabilities for future policy benefits, and the liability for losses and claims, involves significant judgment and estimation uncertainty and are considered critical accounting estimates.

American Southern records short-duration property and casualty loss and loss adjustment expense (“LAE”) reserves. Bankers Fidelity records group accident and health policies as short duration.

Long Duration Contracts

Bankers Fidelity primarily records reserves for life and health insurance contracts, including liabilities for future policy benefits (“LFPB”) for long-duration contracts. Reserves are determined using actuarial methodologies and assumptions that reflect management’s current best estimate of future experience, without provision for adverse deviation. Key assumptions include mortality, voluntary policyholder terminations and claim costs for accident and health policies and the discount rate. These assumptions are based on Company-specific experience, industry data, and anticipated trends and are reviewed at least annually and updated when they no longer represent management’s best estimates. Actual experience is incorporated into the measurement of reserves each reporting period. Differences between actual and expected experience, as well as impacts related to changes in assumptions, are recognized in earnings. Changes in discount rates for long-duration contracts are recognized in other comprehensive income (“OCI”). Under LDTI, the Company remeasures the LFPB each reporting period to reflect actual experience and current discount rates and updates its cash flow assumptions when its periodic reviews indicate that those assumptions no longer represent management’s best estimates. Due to the inherent uncertainty in estimating insurance liabilities, particularly for long-duration obligations, actual results may differ materially from recorded estimates. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” for additional discussion.

Short-duration contracts. American Southern maintains short-duration property and casualty loss and claim reserves for unpaid losses and LAE. These reserves include (i) case reserves established through claim-by-claim evaluations for known, reported claims and (ii) incurred but not reported (“IBNR”) reserves, which include estimates for claims not yet reported as well as future development on reported claims. Such reserves are not discounted and represent management’s estimate, based on known facts and circumstances as of the reporting date, of amounts expected to be paid on incurred claims. Reserve estimates are influenced by, among other factors, reported claim counts and severities, paid loss emergence, case reserve adequacy, claim development patterns, expense patterns, and changes in claim settlement practices.

Longer tail exposures. Certain coverages (e.g., general liability) are subject to extended reporting and settlement patterns, which may increase estimation uncertainty due to longer development periods and variability in claim outcomes. Management considers these factors in evaluating reserve adequacy.

Short-duration contracts. Bankers Fidelity classifies its group accident and health policies (group critical illness, group disability income, group hospital indemnity, and group accident and medical expense) as short duration because Bankers Fidelity may unilaterally terminate coverage at each policy anniversary (and may terminate certain groups of ported certificates subject to statutory notice), such that coverage can be terminated within one year. Liabilities associated with these contracts are recorded as short-duration insurance reserves, including claim liabilities, rather than as long-duration liabilities for future policy benefits.

Long-duration contracts. Bankers Fidelity classifies individual and group life policies, Medicare Supplement policies, and other individual accident and health policies as long-duration and records a LFPB. The LFPB is calculated as the present value of expected future benefits and claim-related expenses, less the present value of expected future net premiums, using cohorts that do not span more than one issue year. The locked-in discount rate is the rate established for each cohort and used to calculate interest accretion and measure changes in cash flow assumptions recognized in earnings. For policies issued after January 1, 2024 (“the Transition Date”), the locked- in discount rate is based on the current discount rate in effect during the quarter of issuance, while for policies issued prior to the Transition Date, it reflects the historical expected investment yield at policy issuance. The current discount rate is updated quarterly, with changes from the locked-in discount rate recognized in OCI. Assumptions other than the discount rate reflect management’s current best estimate of future experience and are reviewed at least annually and updated when they no longer represent best estimates. Actual experience replaces projected experience each reporting period (referred to as “retrospective unlocking”) as part of the determination of the LFPB.

Assumptions. The Net Premium Ratio (“NPR”) is updated each reporting period and capped at 100%, with any excess recognized in earnings as an increase in the LFPB. The LFPB is floored at zero for cohorts where the present value of expected future premiums exceeds expected future benefits. Changes in the LFPB resulting from updates to the current discount rate are recorded in OCI, while the liability presented on the balance sheet reflects the current discount rate. The development of long-duration reserves involves significant judgment due to the long-term nature of the underlying obligations and the sensitivity of the LFPB to changes in assumptions.

See Notes 7 and 8 of Notes to Consolidated Financial Statements for more information on future policy benefits and other insurance reserves and policyholder funds.