INFINITY PROPERTY & CASUALTY CORP - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

For the Quarterly Period Ended
June 30, 2003

Commission File
No. 0-50167

INFINITY PROPERTY AND CASUALTY CORPORATION

Incorporated under
the Laws of Ohio

IRS Employer I.D.
No. 03-0483872

2204 Lakeshore Drive, Birmingham, Alabama 35209

(205) 870-4000

       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, and (2) has been subject to such filing requirements for the past 90 days. Yes   X      No

       Indicate by check mark whether the Registrant is an accelerated filer. Yes           No   X

       As of August 1, 2003, there were 20,481,458 shares of the Registrant's Common Stock outstanding.

Page 1 of 19

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

INDEX

	Page
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheet	3
Consolidated Statement of Earnings	4
Consolidated Statement of Changes in Shareholders' Equity	5
Consolidated Statement of Cash Flows	6
Notes to Consolidated Financial Statements	7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations	13
Item 3 - Quantitative and Qualitative Disclosure of Market Risk	18
Item 4 - Controls and Procedures	18


Part II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K	19
Signature	19

Exhibit Index
Exhibit 31(a) - Certification of the Chief Executive Officer Pursuant to
Section 302(a) of the Sarbanes-Oxley Act of 2002	E-1
Exhibit 31(b) - Certification of the Chief Financial Officer Pursuant to
Section 302(a) of the Sarbanes-Oxley Act of 2002	E-2
Exhibit 32 - Certification of the Chief Executive Officer and Chief
Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002	E-3

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

PART I

FINANCIAL INFORMATION

ITEM 1

Financial Statements

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(Dollars In Thousands)

	June 30,	December 31,
	2003	2002
Assets:
Investments:
Fixed maturities - at market
(amortized cost - $1,035,607 and $917,104)	$1,106,035	$ 955,576
Equity securities - at market
(cost - $20,628 and $19,136)	20,462	17,623
Total investments	1,126,497	973,199

Cash and cash equivalents	93,230	88,053
Accrued investment income	14,413	13,644
Agents' balances and premiums receivable	260,895	188,109
Prepaid reinsurance premiums	113,505	91,924
Recoverables from reinsurers	52,735	34,826
Deferred policy acquisition costs	39,124	21,894
Receivable from affiliates	14,555	33,988
Prepaid expenses, deferred charges and
other assets	41,104	29,241
Goodwill	75,275	70,322

	$1,831,333	$1,545,200

Liabilities and Shareholders' Equity:
Unpaid losses and loss adjustment expenses	$ 708,018	$ 604,026
Unearned premiums	389,005	302,627
Payable to reinsurers	99,374	72,701
Note payable to AFG	55,000	55,000
Payable to affiliates	383	4,755
Accounts payable, accrued expenses and
other liabilities	145,501	119,288
Total liabilities	1,397,281	1,158,397


Shareholders' Equity:
Common Stock, no par value
- 50,000,000 and 1,000 shares authorized
- 20,481,458 and 1,000 shares outstanding	20,481	1
Additional paid-in capital	326,889	342,743
Retained earnings	42,677	20,000
Unearned compensation (restricted stock)	(1,657)	-
Unrealized gain on marketable securities, net	45,662	24,059
Total shareholders' equity	434,052	386,803

	$1,831,333	$1,545,200

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EARNINGS

(In Thousands, Except Per Share Data)

	Three months ended		Six months ended
	June 30,		June 30,
	2003	2002	2003	2002
Income:
Earned premiums	$165,853	$165,805	$331,381	$335,862
Net investment income	13,449	15,453	27,617	32,514
Realized gains (losses) on investments	195	(11,436)	522	(11,834)
Other income	826	1,002	1,826	2,128
	180,323	170,824	361,346	358,670
Costs and Expenses:
Losses and loss adjustment expenses	128,594	132,346	263,126	267,889
Commissions and other underwriting
expenses	24,368	28,813	45,747	60,626
Interest expense	1,184	-	2,350	-
Corporate general and administrative
expenses	2,056	-	3,090	-
Other expenses	5,463	5,319	10,717	9,567
	161,665	166,478	325,030	338,082

Earnings before income taxes	18,658	4,346	36,316	20,588
Provision for income taxes	6,402	1,442	12,513	7,043

Net Earnings	$ 12,256	$ 2,904	$ 23,803	$ 13,545

Earnings per Common Share:
Basic	$.60	n/a	$1.17	n/a
Diluted	$.60	n/a	$1.16	n/a

Average number of Common Shares:
Basic	20,347	n/a	20,347	n/a
Diluted	20,586	n/a	20,503	n/a

Cash dividends per Common Share	$.055	n/a	$.055	n/a

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

(In Thousands)

	Common Stock and Paid-in Capital		Retained Earnings	Unrealized Gain (Loss) on Securities	Unearned Compensation	Total

Balance at January 1, 2003	$342,744		$20,000	$24,059	$ -	$386,803


Net earnings	-		23,803	-	-	23,803
Change in unrealized	-		-	21,603	-	21,603
Comprehensive income						45,406

Dividends on Common Stock	-		(1,126)	-	-	(1,126)
Issuance of restricted stock awards	2,150		-	-	(2,150)	-
Amortization of unearned compensation		-	-	-	493	493
Capital contribution	2,476		-	-	-	2,476

Balance at June 30, 2003	$347,370		$42,677	$45,662	($1,657)	$434,052




Balance at January 1, 2002	$585,699		($25,870)	$ 2,928	$ -	$562,757


Net earnings	-		13,545	-	-	13,545
Change in unrealized	-		-	8,042	-	8,042
Comprehensive income						21,587

Return of capital	(57,000)		-	-	-	(57,000)
Other	(103)		-	-	-	(103)

Balance at June 30, 2002	$528,596		($12,325)	$10,970	$ -	$527,241

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(In Thousands)

	Six months ended
	June 30,
	2003	2002
Operating Activities:
Net earnings	$ 23,803	$ 13,545
Adjustments:
Depreciation and amortization	7,672	6,594
Realized (gains) losses on investments	(522)	11,834
Increase in agents balances and premiums receivable	(32,561)	(20,541)
Increase in reinsurance receivables	(209)	(31,578)
Decrease (increase) in deferred policy acquisition
costs	(6,078)	6,032
Decrease (increase) in other assets	(6,995)	3,829
Change in balances with affiliates	(6,327)	(3,732)
Increase (decrease) in insurance claims and reserves	(22,512)	18,827
Increase in payable to reinsurers	26,673	17,071
Increase in other liabilities	18,970	5,427
Other, net	1,511	678
	3,425	27,986
Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments	(165,605)	(141,198)
Equity securities	(2,150)	(2,134)
Property and equipment	(1,242)	(1,516)
Maturities and redemptions of fixed maturity
investments	96,434	41,915
Sales of:
Fixed maturity investments	74,896	125,639
Equity securities	527	9,633
Property and equipment	18	323
	2,878	32,662
Financing Activities:
Return of capital distributions	-	(57,000)
Cash dividends paid	(1,126)	-
	(1,126)	(57,000)

Net Increase in Cash and Cash Equivalents	5,177	3,648

Cash and cash equivalents at beginning of period	88,053	60,701

Cash and cash equivalents at end of period	$ 93,230	$ 64,349

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Description of the Company

Infinity Property and Casualty Corporation ("Infinity") was formed in September 2002 as an indirect wholly-owned subsidiary of American Financial Group, Inc. ("AFG") to acquire and conduct, as a separate public company, AFG's personal insurance business written through independent agents. At December 31, 2002, AFG transferred to Infinity all of the issued and outstanding capital stock of the following personal auto insurance subsidiaries: Atlanta Casualty Company, Infinity Insurance Company, Leader Insurance Company and Windsor Insurance Company (collectively the "NSA Group").

Through a reinsurance transaction effective January 1, 2003, Infinity assumed the personal lines business written through agents (the "Assumed Agency Business") by AFG's principal property and casualty subsidiary, Great American Insurance Company ("GAI"). GAI, in turn, transferred to Infinity assets (primarily investment securities) with a market value of $125.3 million and allows Infinity to continue to write standard and preferred insurance on policies issued by the same GAI companies that had previously issued such policies. The business assumed from GAI is not included in the historical consolidated statements of Infinity prior to 2003.

In February of 2003, AFG sold 12.5 million shares of Infinity in an initial public offering. At June 30, 2003, AFG beneficially owned 38% of Infinity's Common Stock.

Accounting Policies

Basis of Presentation The accompanying consolidated financial statements for Infinity and subsidiaries are unaudited; however, management believes that all adjustments (consisting only of normal recurring accruals unless otherwise disclosed herein) necessary for fair presentation have been made. The results of operations for interim periods are not necessarily indicative of results to be expected for the year. The financial statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes necessary to be in conformity with generally accepted accounting principles.

Infinity's financial statements for periods prior to December 31, 2002, represent the combined statements of the NSA Group. Earnings per share data for the quarter and six months ended June 30, 2002 is not applicable because the Consolidated Statement of Earnings for these periods represents the combined statements of wholly-owned subsidiaries.

The accompanying income statement for the quarter and six months ended June 30, 2002, include expenses incurred directly by Infinity as well as charges for fees allocated by other AFG subsidiaries to Infinity for various services. Charges billed by AFG for corporate staff services, including human resources, risk management, legal, and financial reporting were based on the percentage of capital that each of the AFG property and casualty insurance subsidiaries needs to run its business, which approximates estimated usage. Investment management fees have been based on the proportion each subsidiary's portfolio (at market value) bears to the total portfolios being managed. Management believes that these charges billed by AFG are reasonable and the accompanying consolidated financial statements are representative of the costs of Infinity doing business on a stand-alone basis. Beginning in 2003, Infinity and AFG entered into agreements under which AFG will continue to provide investment advisory and certain other services to Infinity at established rates.

All significant intercompany balances and transactions have been eliminated. The results of operations of companies since their formation or acquisition are included in the consolidated financial statements.

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

The acquisition of the NSA Group and assumption of the Assumed Agency Business have been accounted for at AFG's historical carrying amounts as transfers of net assets between entities under common control in accordance with Statement of Financial Accounting Standards No. 141.

The preparation of the financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Changes in circumstances could cause actual results to differ materially from those estimates.

Investments All fixed maturity securities are considered "available for sale" and reported at fair value with unrealized gains and losses reported as a separate component of shareholders' equity. Premiums and discounts on mortgage-backed securities are amortized over a period based on estimated future principal payments, including prepayments. Prepayment assumptions are reviewed periodically and adjusted to reflect actual prepayments and changes in expectations. The most significant determinants of prepayments are the difference between interest rates on the underlying mortgages and current mortgage loan rates and the structure of the security. Other factors affecting prepayments include the size, type and age of underlying mortgages, the geographic location of the mortgaged properties and the credit worthiness of the borrowers. Variations from anticipated prepayments will affect the life and yield of these securities.< /P>

Gains or losses on securities are determined on the specific identification basis. When a decline in the value of a specific investment is considered to be other than temporary, a provision for impairment is charged to earnings and the cost basis of that investment is reduced.

Reinsurance Infinity's insurance subsidiaries cede reinsurance to other companies. To the extent that any reinsuring companies are unable to meet obligations under agreements covering reinsurance ceded, Infinity's insurance subsidiaries would remain liable. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policies. Infinity's insurance subsidiaries report as assets (a) the estimated reinsurance recoverable on unpaid losses, including an estimate for losses incurred but not reported, and (b) amounts paid to reinsurers applicable to the unexpired terms of policies in force. Payable to reinsurers represents ceded premiums retained by Infinity's insurance subsidiaries to fund ceded losses as they become due. Infinity's insurance subsidiaries also assume reinsurance, primarily from AFG subsidiaries. Income on reinsurance assumed is recognized bas ed on reports received from ceding companies.

Deferred Policy Acquisition Costs ("DPAC") Policy acquisition costs (principally commissions, premium taxes and other marketing and underwriting expenses) related to the production of new business are deferred and charged against income ratably over the terms of the related policies. The method followed in computing DPAC limits the amount of such costs to their estimated realizable value without any consideration for anticipated investment income.

Goodwill Goodwill represents the excess of Infinity's cost basis of its subsidiaries over its equity in the subsidiaries' underlying net assets. Effective January 1, 2002, Infinity implemented Statement of Financial Accounting Standards ("SFAS") No. 142 under which goodwill is no longer amortized but is subject to an impairment test at least annually. The transitional test under the new standard indicated there was no impairment at that date.

Unpaid Losses and Loss Adjustment Expenses The net liabilities stated for unpaid claims and for expenses of investigation and adjustment of unpaid claims are based upon (a) the accumulation of case estimates for losses reported prior to

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

the close of the accounting period on direct business written; (b) estimates received from ceding reinsurers and insurance pools and associations; (c) estimates of unreported losses based on past experience; (d) estimates based on experience of expenses for investigating and adjusting claims; and (e) the current state of the law and coverage litigation. These liabilities are subject to the impact of changes in claim amounts and frequency and other factors. Unpaid losses and loss adjustment expenses have not been reduced for reinsurance recoverables. Changes in estimates of the liabilities for losses and loss adjustment expenses are reflected in the Consolidated Statement of Earnings in the period in which determined. In spite of the variability inherent in such estimates, management believes that the liabilities for unpaid losses and loss adjustment expenses are adequate.

Premium Recognition Premiums are earned over the terms of the policies on a pro rata basis. Unearned premiums represent that portion of premiums written which is applicable to the unexpired terms of policies in force. On reinsurance assumed from other insurance companies or written through various underwriting organizations, unearned premiums are based on reports received from such companies and organizations.

Income Taxes Infinity plans to file a consolidated federal income tax return which will include all 80%-owned subsidiaries for periods following its February 2003 public offering. Prior to the offering, Infinity and its 80%-owned subsidiaries were part of the American Financial Corporation ("AFC", an AFG subsidiary) tax group. Infinity's companies had separate tax allocation agreements with AFC which designated how tax payments were shared by members of the tax group. In general, companies computed taxes on a separate return basis and made payments to (or received benefits from) AFC based on taxable income. The tax allocation agreements with AFC did not impact the recognition of income tax expense or income tax payable in Infinity's financial statements.

Deferred income taxes are calculated using the liability method. Under this method, deferred income tax assets and liabilities are determined based on differences between financial reporting and tax bases and are measured using enacted tax rates. Deferred tax assets are recognized if it is more likely than not that a benefit will be realized. For periods prior to the February 2003 public offering, current and deferred tax assets and liabilities were aggregated with other amounts receivable from affiliates. For subsequent periods, Infinity's net deferred tax asset is included in other assets.

Stock-Based Compensation As permitted under SFAS No. 123, "Accounting for Stock-Based Compensation," Infinity accounts for stock options and other stock-based compensation plans using the intrinsic value based method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The fair value of shares issued under Infinity's Restricted Stock Plan is recorded as unearned compensation and expensed over the vesting periods of the awards. Under Infinity's Stock Option Plan, options are granted to officers, directors and key employees at exercise prices equal to the fair value of the shares at the dates of grant. No compensation expense is recognized for stock option grants.

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

The following table illustrates the effect on net earnings (in thousands) and earnings per share had compensation cost related to stock options been determined and recognized based on "fair values" at grant dates consistent with the method prescribed by SFAS No. 123. No information is applicable for the three months and six months ended June 30, 2002 as no options had been granted. For SFAS No. 123 purposes, the "fair value" of $5.93 per option granted in 2003 was calculated using the Black-Scholes option pricing model and the following assumptions: dividend yield of 1.4%; expected volatility of 33%; risk-free interest rate of 4.0%; and expected option life of 7.5 years. There is no single reliable method to determine the actual value of options at grant date. Accordingly, actual value of the option grants may be higher or lower than the SFAS No. 123 "fair value". See Note E - "Shareholders' Equity" for further information on stock options.

Three

Six

months ended

months ended

June 30, 2003

June 30, 2003

Net earnings, as reported

$12,256

$23,803

Pro forma stock option expense, net of tax

   (125)

   (184)

Adjusted net earnings

$12,131

$23,619

Earnings per share (as reported):

  Basic

$ .60

$1.17

  Diluted

$ .60

$1.16

Earnings per share (adjusted):

  Basic

$ .60

$1.16

  Diluted

$ .59

$1.15

Benefit Plans Infinity provides retirement benefits to eligible employees through its 401(k) Retirement Plan. Under this defined contribution plan, Infinity has the discretion to match a percentage of employee contributions to the Plan and to make profit-sharing contributions on behalf of all eligible employees. Contributions to the Plan are charged against earnings in the year for which they are declared.

Infinity provides health care and life insurance benefits to eligible retirees. Infinity also provides postemployment benefits to former or inactive employees (primarily those on disability) who were not deemed retired under other company plans. The projected future cost of providing these benefits is expensed over the period the employees earn such benefits.

Derivatives Derivatives included in the Consolidated Balance Sheet consist of investments in common stock warrants (included in Equity securities). The carrying value of these warrants is less than $1 million at June 30, 2003. Changes in fair value of derivatives are included in current earnings as realized gains (losses) on investments.

Earnings Per Share Basic earnings per share is calculated using the weighted average number of shares of common stock outstanding during the period, excluding issued but unvested restricted shares. The calculation of diluted earnings per share includes restricted shares and 105,000 shares and 58,000 shares representing the dilutive effect of common stock options for the quarter and six months ended June 30, 2003.

Statement of Cash Flows For cash flow purposes, "investing activities" are defined as making and collecting loans and acquiring and disposing of debt or equity instruments and property and equipment. "Financing activities" include obtaining resources from owners and providing them with a return on their

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

investments, borrowing money and repaying amounts borrowed. All other activities are considered "operating". Investments having original maturities of three months or less when purchased are considered to be cash equivalents for purposes of the financial statements.

Goodwill The $5 million increase in goodwill during 2003 represents goodwill associated with the Assumed Agency Business.

Note Payable to AFG The note payable to AFG is a $55 million, ten-year promissory note with an interest rate of 8.5% payable semi-annually. Infinity repaid this note in July 2003 using part of the proceeds from a new $200 million term loan, as described in Note F - "Subsequent Event."

Shareholders' Equity For periods prior to December 31, 2002, amounts shown in the Statement of Changes in Shareholders' Equity represent the combined balances of the NSA Group. Accordingly, shares outstanding and earnings per share information for these periods are not applicable.

Infinity issued 100 shares of Common Stock to American Premier Underwriters, Inc. ("APU"), a 100%-owned subsidiary of AFG, in connection with the formation of Infinity in September 2002. On December 31, 2002, Infinity issued an additional 900 shares of Common Stock in exchange for the capital stock of the NSA Group companies. In January 2003, Infinity increased its authorized capital stock to 50,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock and implemented a common stock split. After the stock split, Infinity had 20,347,083 shares of Common Stock outstanding. In February 2003, Infinity issued 134,375 shares under its Restricted Stock Plan. No Preferred Stock has been issued.

Stock Options and Restricted Stock Infinity established stock option and restricted stock plans in 2002. There were 2 million and 500,000 shares of Infinity Common Stock reserved for issuance under Infinity's Stock Option Plan and Restricted Stock Plan, respectively. No shares were issued under either plan in 2002. As of June 30, 2003, options for 420,180 shares were outstanding and 134,375 shares of restricted stock have been awarded. Options generally become exercisable at the rate of 20% per year commencing one year after grant; those granted to non-employee directors of Infinity are fully exercisable upon grant. Options generally expire ten years after the date of grant. For restricted stock awards, one-third of the shares vest on each of the first three anniversaries of the date of grant of the award.

Unrealized Gain on Marketable Securities The change in unrealized gain on marketable securities for the six months ended June 30 included the following (in millions):

         Pretax

Fixed

Equity

Tax

Maturities

Securities

Effects

  Net

                      2003

Unrealized holding gains on securities

  arising during the period

$32.7

$ 1.1

($11.9)

$21.9

Realized (gains) losses included in net income

  (.7)

   .2

   .2

  (.3)

Change in unrealized gain on marketable

  securities, net

$32.0

$ 1.3

($11.7)

$21.6

                      2002

Unrealized holding gains (losses) on securities

  arising during the period

$ 3.3

($ 2.8)

($  .2)

$  .3

Realized (gains) losses included in net income

  8.3

  3.5

(4.1)

  7.7

Change in unrealized gain on marketable

  securities, net

$11.6

$  .7

($ 4.3)

$ 8.0

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Subsequent Event In July 2003, Infinity borrowed $200 million under a variable rate, seven-year amortizing term loan. The variable rate is based on LIBOR plus 2.50% or Prime plus 1.50%, at Infinity's election. The loan proceeds of $196.3 million (net of issue costs) have been used to supplement the working capital of Infinity's subsidiaries, to repay a $55 million note issued to AFG in conjunction with Infinity's initial public offering, and for general corporate purposes. In conjunction with the loan, Infinity also entered into an interest rate swap for $100 million of the principal, in which the variable rate payments due for the first three years of the term will be exchanged for a fixed rate of 4.88%. The interest rate swap qualifies for hedge accounting treatment under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," in which changes in the fair valu e of the swap will be recorded as an adjustment to comprehensive income within shareholders' equity.

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

ITEM 2

Management's Discussion and Analysis

of Financial Condition and Results of Operations

GENERAL

Infinity is organized as a holding company with all of its operations conducted by subsidiaries. However, Infinity has or will have continuing cash needs for administrative expenses, the payment of principal and interest on borrowings, shareholder dividends and taxes.

Forward-Looking Statements The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. Some of the forward-looking statements can be identified by the use of forward-looking words such as "anticipates", "believes", "estimates", "expects", "intends", "plans", "seeks", "could", "may", "should", "will", or the negative version of those words or other comparable terminology. Examples of such forward-looking statements include statements relating to: expectations concerning market and other conditions, future premiums, revenues, earnings and investment activities, expected losses, rate increases, improved loss experience and expected expense savings from the consolidation of the operations of the Company's subsidiaries.

Actual results could differ materially from those expected by the Company depending on certain risks and uncertainties including but not limited to:

changes in economic conditions and financial markets (including interest rates);
the adequacy or accuracy of its pricing methodologies;
the presence of competitors with greater financial resources and the impact of competitive pricing;
the ability to obtain timely approval for requested rate changes;
judicial and regulatory developments adverse to the automobile insurance industry;
the outcome of pending litigation against the Company;
weather conditions (including the severity and frequency of storms, hurricanes, snowfalls, hail and winter conditions);
changes in driving patterns and loss trends;
acts of war and terrorist activities; and
the challenges posed by consolidating the operations of its insurance subsidiaries.

The forward-looking statements herein are made only as of the date of this report. Infinity assumes no obligation to publicly update any forward-looking statements.

CRITICAL ACCOUNTING POLICIES

Significant accounting policies are summarized in Note B to the financial statements. The preparation of financial statements requires management to make estimates and assumptions that can have a significant effect on amounts reported in the financial statements. As more information becomes known, these estimates and assumptions could change and thus impact amounts reported in the future. Management believes that the establishment of insurance reserves and the determination of "other than temporary" impairment on investments are the two areas where the degree of judgment required to determine amounts recorded in the financial statements make the accounting policies critical. These two policies are discussed further under the headings "Liquidity and Capital Resources - Investments" and "Liquidity and Capital Resources - Uncertainties - Insurance Reserves."

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

Management's Discussion and Analysis

of Financial Condition and Results of Operations - Continued

LIQUIDITY AND CAPITAL RESOURCES

Sources of Funds In July 2003, Infinity secured a $200 million, seven-year amortizing term loan that also provides Infinity with the flexibility of adding a revolving credit line of up to $20 million. Proceeds of $110 million were contributed to Infinity's insurance subsidiaries to support future growth of their businesses and reduce reliance on reinsurance. Remaining proceeds were used to repay a $55 million promissory note issued in connection with Infinity's initial public offering and for general corporate purposes. The term loan is collateralized by the assets of Infinity and its subsidiaries and by a pledge of stock of several of Infinity's insurance subsidiaries. The loan contains various covenants that require Infinity to meet certain minimum net worth and financial ratio standards. Scheduled mandatory prepayments in each of the first two years of the loan are $9 million and increase in subsequent yea rs. Management believes that Infinity's cash balances and cash flows generated from operations, including dividends and tax payments from its subsidiaries, are adequate to meet its future liquidity needs.

Quota Share Agreement Throughout 2002, Infinity's insurance subsidiaries ceded 90% of their personal auto physical damage business on a funds withheld basis to Inter-Ocean Reinsurance Limited. Infinity renewed this agreement for 2003 on terms substantially equivalent to those in effect in 2002. Infinity has the flexibility to adjust, on a quarterly basis, the percentage of business to be ceded under the reinsurance agreement. The percentage ceded may range from as high as 90% to as low as 20%. As a result of its recent closing of the $200 million term loan facility, Infinity reduced the amount ceded under this agreement from 90% to 20% for the third quarter of 2003. Premiums ceded under this agreement for the second quarter and first six months of 2003 were $71.2 million and $147.6 million compared to $82.5 million and $171.2 million for the 2002 periods.

In September 2002, this agreement was amended to include coverage of Great American's personal lines that Infinity would otherwise assume as part of the Assumed Agency Business. Accordingly, Great American's participation in the Inter-Ocean reinsurance agreement reduces the size of the Assumed Agency Business. Premiums ceded by Great American under this agreement were $8.5 and $18.7 million for the quarter and six months ended June 30, 2003.

Investments Infinity's investment portfolio at June 30, 2003, contained $1.1 billion in fixed maturity securities and $20.5 million in equity securities, all carried at market value with unrealized gains and losses reported as a separate component of shareholders' equity on an after-tax basis. At June 30, 2003, Infinity had a pretax net unrealized gain of $70.4 million on fixed maturities and a pretax unrealized loss of $166,000 on equity securities. The increase in the general level of interest rates during July caused the unrealized gains on fixed maturities to decline by just over half.

Approximately 92% of the fixed maturities that Infinity holds were rated "investment grade" (credit rating of AAA to BBB) by nationally recognized rating agencies at June 30, 2003. Investment grade securities generally bear lower yields and lower degrees of risk than those that are unrated or noninvestment grade. Management believes that a high quality investment portfolio is more likely to generate a stable and predictable investment return.

Individual portfolio securities are sold creating gains or losses as market opportunities exist. Since all of these securities are carried at market value in the balance sheet, there is virtually no effect on liquidity or financial condition upon the sale and ultimate realization of unrealized gains and losses.

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

Management's Discussion and Analysis

of Financial Condition and Results of Operations - Continued

Summarized information for fixed maturity securities with unrealized gains and losses in Infinity's balance sheet at June 30, 2003 is shown in the following table (dollars in millions). Approximately $1.5 million of these securities had no unrealized gains or losses at June 30, 2003.

Securities

Securities

With

With

Unrealized

Unrealized

   Gains

  Losses

  Market value of securities

$1,029.0

$75.5

  Amortized cost of securities

$  955.4

$78.7

  Gross unrealized gain (loss)

$   73.6

($ 3.2)

  Market value as a % of amortized cost

107.7%

95.9%

  Number of security positions held

409

34

  Number individually exceeding $500,000 gain or loss

25

-

  Concentration of gains (losses) by type or industry

    (exceeding 5% of unrealized):

      Mortgage-backed securities

$    7.1

($ 0.5)

      State, municipalities and political subdivisions

6.2

(.2)

      Banks and savings institutions

5.3

(.1)

      Electric services

5.1

(.2)

      Fire, marine, and casualty insurance

3.8

(.2)

      U.S. Government and government agencies

3.6

-

      Air transportation

.6

(.8)

  Percentage rated investment grade

93.9%

63.7%

The table below sets forth the scheduled maturities of fixed maturity securities at June 30, 2003 based on their market values. Securities that do not have a single maturity date are reported at average maturity. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid by the issuers.

Securities

Securities

With

With

All Fixed

Unrealized

Unrealized

Maturity

   Gains

  Losses

Securities

Maturity

  One year or less

5%

5%

5%

  After one year through five years

34

31

34

  After five years through ten years

39

32

39

	Three	Six
	months ended	months ended
	June 30, 2003	June 30, 2003
Net earnings, as reported	$12,256	$23,803
Pro forma stock option expense, net of tax	(125)	(184)

Adjusted net earnings	$12,131	$23,619

Earnings per share (as reported):
Basic	$ .60	$1.17
Diluted	$ .60	$1.16

Earnings per share (adjusted):
Basic	$ .60	$1.16
Diluted	$ .59	$1.15

	Pretax
	Fixed	Equity	Tax
	Maturities	Securities	Effects	Net
2003
Unrealized holding gains on securities
arising during the period	$32.7	$ 1.1	($11.9)	$21.9
Realized (gains) losses included in net income	(.7)	.2	.2	(.3)
Change in unrealized gain on marketable
securities, net	$32.0	$ 1.3	($11.7)	$21.6

2002
Unrealized holding gains (losses) on securities
arising during the period	$ 3.3	($ 2.8)	($ .2)	$ .3
Realized (gains) losses included in net income	8.3	3.5	(4.1)	7.7
Change in unrealized gain on marketable
securities, net	$11.6	$ .7	($ 4.3)	$ 8.0

	Securities	Securities
	With	With
	Unrealized	Unrealized
	Gains	Losses
Market value of securities	$1,029.0	$75.5
Amortized cost of securities	$ 955.4	$78.7
Gross unrealized gain (loss)	$ 73.6	($ 3.2)
Market value as a % of amortized cost	107.7%	95.9%
Number of security positions held	409	34
Number individually exceeding $500,000 gain or loss	25	-
Concentration of gains (losses) by type or industry
(exceeding 5% of unrealized):
Mortgage-backed securities	$ 7.1	($ 0.5)
State, municipalities and political subdivisions	6.2	(.2)
Banks and savings institutions	5.3	(.1)
Electric services	5.1	(.2)
Fire, marine, and casualty insurance	3.8	(.2)
U.S. Government and government agencies	3.6	-
Air transportation	.6	(.8)
Percentage rated investment grade	93.9%	63.7%