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EX-32 - EXHIBIT - INFINITY PROPERTY & CASUALTY CORPipcc10q2q2014ex32.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
FORM 10-Q
(Mark One)
x    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2014
OR
o     Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from              to             
Commission File No. 0-50167
INFINITY PROPERTY AND CASUALTY CORPORATION
(Exact name of registrant as specified in its charter)
Incorporated under
the Laws of Ohio
 
03-0483872
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
3700 Colonnade Parkway, Suite 600, Birmingham, Alabama 35243
(Address of principal executive offices and zip code)
(205) 870-4000
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
 
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  x   No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
  
Accelerated filer
x
Non-accelerated filer
o  (Do not check if smaller reporting company)
  
Smaller reporting company
¨

Indicate by check mark whether the registrant is a shell company (as defined by rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
As of July 31, 2014 there were 11,500,654 shares of the registrant’s common stock outstanding.



INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

INDEX
 
 
 
 
 
 
Page
 
 
 
 
 
Item 1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2
 
 
 
Item 3
 
 
 
Item 4
 
 
 
 
 
 
Item 1
 
 
 
Item 1A
 
 
 
Item 2
 
 
 
Item 6
 
 
 
 
 
 
 
 
EXHIBIT INDEX
 
Exhibit 31.1
Certification of the Chief Executive Officer under Exchange Act Rule 13a-14(a)
 
 
 
 
Exhibit 31.2
Certification of the Chief Financial Officer under Exchange Act Rule 13a-14(a)
 
 
 
 
Exhibit 32
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350
 
 
 
 
101.INS
XBRL Instance Document
 
 
 
 
101.SCH
XBRL Taxonomy Extension Schema
 
 
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
 
 
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase
 
 
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase
 
 
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
 

2

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

PART I
FINANCIAL INFORMATION

ITEM 1
Financial Statements

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
(unaudited)
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
% Change
 
2014
 
2013
 
% Change
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Earned premium
$
333,024

 
$
331,215

 
0.5
 %
 
$
660,703

 
$
649,804

 
1.7
 %
Installment and other fee income
23,845

 
24,952

 
(4.4
)%
 
48,185

 
50,252

 
(4.1
)%
Net investment income
9,110

 
8,622

 
5.7
 %
 
17,909

 
16,960

 
5.6
 %
Net realized gains on investments1
1,846

 
794

 
132.5
 %
 
2,491

 
4,617

 
(46.1
)%
Other income
128

 
73

 
74.9
 %
 
279

 
125

 
123.9
 %
Total revenues
367,954

 
365,656

 
0.6
 %
 
729,567

 
721,758

 
1.1
 %
Costs and Expenses:
 
 
 
 
 
 
 
 
 
 
 
Losses and loss adjustment expenses
256,935

 
257,079

 
(0.1
)%
 
510,637

 
507,449

 
0.6
 %
Commissions and other underwriting expenses
89,725

 
91,937

 
(2.4
)%
 
177,698

 
179,611

 
(1.1
)%
Interest expense
3,451

 
3,460

 
(0.2
)%
 
6,904

 
6,998

 
(1.3
)%
Corporate general and administrative expenses
2,696

 
2,335

 
15.5
 %
 
4,222

 
4,072

 
3.7
 %
Other expenses
5

 
717

 
(99.3
)%
 
317

 
1,394

 
(77.3
)%
Total costs and expenses
352,811

 
355,527

 
(0.8
)%
 
699,777

 
699,524

 
0.0
 %
Earnings before income taxes
15,143

 
10,129

 
49.5
 %
 
29,789

 
22,234

 
34.0
 %
Provision for income taxes
4,476

 
2,721

 
64.5
 %
 
8,795

 
6,164

 
42.7
 %
Net Earnings
$
10,667

 
$
7,408

 
44.0
 %
 
$
20,994

 
$
16,070

 
30.6
 %
Net Earnings per Common Share:
 
 
 
 
 
 
 
 
 
 
 
Basic
$
0.93

 
$
0.65

 
43.1
 %
 
$
1.84

 
$
1.40

 
31.4
 %
Diluted
0.92

 
0.64

 
43.8
 %
 
1.81

 
1.37

 
32.1
 %
Average Number of Common Shares:
 
 
 
 
 
 
 
 
 
 
 
Basic
11,435

 
11,448

 
(0.1
)%
 
11,432

 
11,485

 
(0.5
)%
Diluted
11,583

 
11,643

 
(0.5
)%
 
11,581

 
11,698

 
(1.0
)%
Cash Dividends per Common Share
$
0.36

 
$
0.30

 
20.0
 %
 
$
0.72

 
$
0.60

 
20.0
 %
 
 
 
 
 
 
 
 
 
 
 
 
1Net realized gains before impairment losses
$
1,852

 
$
1,093

 
69.5
 %
 
$
2,524

 
$
4,988

 
(49.4
)%
Total other-than-temporary impairment (OTTI) losses
(1
)
 
(486
)
 
(99.8
)%
 
(894
)
 
(558
)
 
60.3
 %
Non-credit portion in other comprehensive income
0

 
187

 
NM

 
885

 
187

 
374.1
 %
OTTI losses reclassified from other comprehensive income
(5
)
 
0

 
NM

 
(25
)
 
0

 
NM

Net impairment losses recognized in earnings
(6
)
 
(299
)
 
(97.9
)%
 
(33
)
 
(371
)
 
(91.0
)%
Total net realized gains on investments
$
1,846

 
$
794

 
132.5
 %
 
$
2,491

 
$
4,617

 
(46.1
)%
NM = Not Meaningful

3

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
Net earnings
$
10,667

 
$
7,408

 
$
20,994

 
$
16,070

Other comprehensive income (loss) before tax:
 
 
 
 
 
 
 
Net change in postretirement benefit liability
(3
)
 
50

 
655

 
100

Unrealized gains (losses) on investments:
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during the period
15,517

 
(29,998
)
 
23,370

 
(27,310
)
Less: Reclassification adjustments for gains included in net earnings
(1,846
)
 
(794
)
 
(2,491
)
 
(4,617
)
Unrealized gains (losses) on investments, net
13,671

 
(30,792
)
 
20,879

 
(31,928
)
Other comprehensive income (loss), before tax
13,669

 
(30,742
)
 
21,534

 
(31,828
)
Income tax (expense) benefit related to components of other comprehensive income
(4,784
)
 
10,760

 
(7,537
)
 
11,140

Other comprehensive income (loss), net of tax
8,885

 
(19,982
)
 
13,997

 
(20,688
)
Comprehensive income (loss)
$
19,552

 
$
(12,575
)
 
$
34,991

 
$
(4,618
)



4

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts in line descriptions)
 
June 30, 2014
 
December 31, 2013
 
(unaudited)
 
 
Assets
 
 
 
Investments:
 
 
 
Fixed maturities – at fair value (amortized cost $1,418,093 and $1,345,077)
$
1,444,959

 
$
1,354,305

Equity securities – at fair value (cost $73,681 and $74,718)
93,332

 
91,127

Short-term investments - at fair value (amortized cost $200 and $2,595)
200

 
2,596

Total investments
1,538,492

 
1,448,027

Cash and cash equivalents
59,139

 
134,211

Accrued investment income
13,478

 
12,772

Agents’ balances and premium receivable, net of allowances for doubtful accounts of $15,509 and $15,884
494,533

 
451,339

Property and equipment, net of accumulated depreciation of $58,443 and $53,368
55,810

 
48,061

Prepaid reinsurance premium
4,765

 
3,133

Recoverables from reinsurers (includes $897 and $77 on paid losses and LAE)
14,614

 
14,508

Deferred policy acquisition costs
94,017

 
88,258

Current and deferred income taxes
18,668

 
28,648

Receivable for securities sold
0

 
2,791

Other assets
11,221

 
10,242

Goodwill
75,275

 
75,275

Total assets
$
2,380,011

 
$
2,317,265

Liabilities and Shareholders’ Equity
 
 
 
Liabilities:
 
 
 
Unpaid losses and loss adjustment expenses
$
665,222

 
$
646,577

Unearned premium
610,746

 
566,004

Payable to reinsurers
0

 
2

Long-term debt (fair value $287,837 and $272,632)
275,000

 
275,000

Commissions payable
16,163

 
19,100

Payable for securities purchased
11,030

 
39,887

Other liabilities
121,063

 
113,936

Total liabilities
1,699,223

 
1,660,507

Commitments and contingencies (See Note 9)


 


Shareholders’ equity:
 
 
 
Common stock, no par value (50,000,000 shares authorized; 21,678,956 and 21,599,047 shares issued)
21,729

 
21,684

Additional paid-in capital
371,340

 
368,902

Retained earnings
697,722

 
685,011

Accumulated other comprehensive income, net of tax
30,621

 
16,624

Treasury stock, at cost (10,171,221 and 10,095,416 shares)
(440,625
)
 
(435,463
)
Total shareholders’ equity
680,787

 
656,758

Total liabilities and shareholders’ equity
$
2,380,011

 
$
2,317,265


5

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(in thousands)
(unaudited)
 
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss),
Net of Tax
 
Treasury
Stock
 
Total
Balance at December 31, 2012
$
21,529

 
$
361,845

 
$
666,199

 
$
29,851

 
$
(423,181
)
 
$
656,242

Net earnings

 

 
16,070

 

 

 
16,070

Net change in postretirement benefit liability

 

 

 
65

 

 
65

Change in unrealized gain on investments

 

 

 
(20,945
)
 

 
(20,945
)
Change in non-credit component of impairment losses on fixed maturities

 

 

 
192

 

 
192

Comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
(4,618
)
Dividends paid to common shareholders

 

 
(6,928
)
 

 

 
(6,928
)
Shares issued and share-based compensation expense, including tax benefit
60

 
2,754

 

 

 

 
2,814

Acquisition of treasury stock

 

 

 

 
(8,841
)
 
(8,841
)
Balance at June 30, 2013
$
21,589

 
$
364,599

 
$
675,341

 
$
9,163

 
$
(432,022
)
 
$
638,669

Net earnings

 

 
16,563

 

 

 
16,563

Net change in postretirement benefit liability

 

 

 
524

 

 
524

Change in unrealized gain on investments

 

 

 
8,221

 

 
8,221

Change in non-credit component of impairment losses on fixed maturities

 

 

 
(1,283
)
 

 
(1,283
)
Comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
24,025

Dividends paid to common shareholders

 

 
(6,893
)
 

 

 
(6,893
)
Shares issued and share-based compensation expense, including tax benefit
95

 
4,303

 

 

 

 
4,398

Acquisition of treasury stock

 

 

 

 
(3,441
)
 
(3,441
)
Balance at December 31, 2013
$
21,684

 
$
368,902

 
$
685,011

 
$
16,624

 
$
(435,463
)
 
$
656,758

Net earnings

 

 
20,994

 

 

 
20,994

Net change in postretirement benefit liability

 

 

 
426

 

 
426

Change in unrealized gain on investments

 

 

 
13,831

 

 
13,831

Change in non-credit component of impairment losses on fixed maturities

 

 

 
(260
)
 

 
(260
)
Comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
34,991

Dividends paid to common shareholders

 

 
(8,283
)
 

 

 
(8,283
)
Shares issued and share-based compensation expense, including tax benefit
45

 
2,438

 

 

 

 
2,483

Acquisition of treasury stock

 

 

 

 
(5,163
)
 
(5,163
)
Balance at June 30, 2014
$
21,729

 
$
371,340

 
$
697,722

 
$
30,621

 
$
(440,625
)
 
$
680,787


6

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Three months ended June 30,
 
2014
 
2013
Operating Activities:
 
 
 
Net earnings
$
10,667

 
$
7,408

Adjustments:
 
 
 
Depreciation
2,659

 
2,031

Amortization
5,500

 
5,091

Net realized gains on investments
(1,846
)
 
(794
)
(Gain) loss on disposal of property and equipment
0

 
(1
)
Share-based compensation expense
1,876

 
1,446

Excess tax benefits from share-based payment arrangements
(96
)
 
(106
)
Activity related to rabbi trust
43

 
(12
)
Decrease (increase) in accrued investment income
(1,091
)
 
(958
)
Decrease (increase) in agents’ balances and premium receivable
(1,537
)
 
9,676

Decrease (increase) in reinsurance receivables
(592
)
 
240

Decrease (increase) in deferred policy acquisition costs
690

 
3,824

Decrease (increase) in other assets
(709
)
 
2,787

Increase (decrease) in unpaid losses and loss adjustment expenses
2,332

 
15,203

Increase (decrease) in unearned premium
(2,266
)
 
(10,861
)
Increase (decrease) in other liabilities
(1,242
)
 
2,913

Net cash provided by operating activities
14,388

 
37,889

Investing Activities:
 
 
 
Purchases of fixed maturities
(115,716
)
 
(183,985
)
Purchases of equity securities
0

 
(1,100
)
Purchases of short-term investments
0

 
(3,616
)
Purchases of property and equipment
(7,702
)
 
(7,463
)
Maturities and redemptions of fixed maturities
31,990

 
57,128

Maturities and redemptions of short-term investments
1,200

 
0

Proceeds from sale of fixed maturities
52,380

 
88,206

Proceeds from sale of equity securities
4,999

 
3,726

Net cash used in investing activities
(32,849
)
 
(47,105
)
Financing Activities:
 
 
 
Proceeds from stock options exercised and employee stock purchases
83

 
94

Excess tax benefits from share-based payment arrangements
96

 
106

Principal payments under capital lease obligation
(141
)
 
(145
)
Acquisition of treasury stock
(3,185
)
 
(5,167
)
Dividends paid to shareholders
(4,144
)
 
(3,453
)
Net cash used in financing activities
(7,292
)
 
(8,564
)
Net decrease in cash and cash equivalents
(25,753
)
 
(17,781
)
Cash and cash equivalents at beginning of period
84,892

 
133,641

Cash and cash equivalents at end of period
$
59,139

 
$
115,861




7

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Six months ended June 30,
 
2014
 
2013
Operating Activities:
 
 
 
Net earnings
$
20,994

 
$
16,070

Adjustments:
 
 
 
Depreciation
5,199

 
4,053

Amortization
11,267

 
9,714

Net realized gains on investments
(2,491
)
 
(4,617
)
(Gain) loss on disposal of property and equipment
(27
)
 
0

Share-based compensation expense
1,708

 
2,087

Excess tax benefits from share-based payment arrangements
(151
)
 
(157
)
Activity related to rabbi trust
61

 
25

Decrease (increase) in accrued investment income
(706
)
 
(858
)
Decrease (increase) in agents’ balances and premium receivable
(43,194
)
 
(29,291
)
Decrease (increase) in reinsurance receivables
(1,738
)
 
(1,088
)
Decrease (increase) in deferred policy acquisition costs
(5,759
)
 
(4,017
)
Decrease (increase) in other assets
1,845

 
4,634

Increase (decrease) in unpaid losses and loss adjustment expenses
18,645

 
39,110

Increase (decrease) in unearned premium
44,742

 
43,653

Increase (decrease) in payable to reinsurers
(2
)
 
(137
)
Increase (decrease) in other liabilities
4,313

 
205

Net cash provided by operating activities
54,705

 
79,386

Investing Activities:
 
 
 
Purchases of fixed maturities
(299,244
)
 
(490,415
)
Purchases of equity securities
(2,600
)
 
(1,100
)
Purchases of short-term investments
(200
)
 
(3,616
)
Purchases of property and equipment
(12,951
)
 
(9,231
)
Maturities and redemptions of fixed maturities
73,191

 
103,282

Maturities and redemptions of short-term investments
2,600

 
0

Proceeds from sale of fixed maturities
117,339

 
280,935

Proceeds from sale of equity securities
4,999

 
7,244

Proceeds from sale of property and equipment
30

 
0

Net cash used in investing activities
(116,836
)
 
(112,901
)
Financing Activities:
 
 
 
Proceeds from stock options exercised and employee stock purchases
624

 
571

Excess tax benefits from share-based payment arrangements
151

 
157

Principal payments under capital lease obligation
(275
)
 
(449
)
Acquisition of treasury stock
(5,160
)
 
(9,157
)
Dividends paid to shareholders
(8,283
)
 
(6,928
)
Net cash used in financing activities
(12,942
)
 
(15,806
)
Net decrease in cash and cash equivalents
(75,072
)
 
(49,321
)
Cash and cash equivalents at beginning of period
134,211

 
165,182

Cash and cash equivalents at end of period
$
59,139

 
$
115,861


8

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
INDEX TO NOTES
 

Note 1 Reporting and Accounting Policies
Nature of Operations
We are a holding company that, through subsidiaries, provides personal automobile insurance with a concentration on nonstandard auto insurance. Although licensed to write insurance in all 50 states and the District of Columbia, we focus on select states that we believe offer the greatest opportunity for premium growth and profitability.
Basis of Consolidation and Reporting
The accompanying consolidated financial statements are unaudited and should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2013. This Quarterly Report on Form 10-Q, including the Condensed Notes to Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations, focuses on our financial performance since the beginning of the year.
These financial statements reflect certain adjustments necessary for a fair presentation of our results of operations and financial position. Such adjustments consist of normal, recurring accruals recorded to match expenses with their related revenue streams and the elimination of all significant inter-company transactions and balances.

We revised the presentation of our Consolidated Statements of Earnings for the three and six months ended June 30, 2013 to correctly classify $25.0 million and $50.3 million, respectively, of installment and other fee income as a component of total revenues and to conform to our current-year presentation. Previously, installment and other fee income was presented net within our commissions and other underwriting expenses, which was not in compliance with GAAP, thereby understating both total revenues and total expenses by an equivalent amount. This revision is not considered to be material to previously issued financial statements since it has no effect on the results of operations, financial condition or cash flows in any period presented or in any previously issued financial statements.
We have evaluated events that occurred after June 30, 2014 for recognition or disclosure in our financial statements and the notes to the financial statements.

Schedules may not foot due to rounding.

Estimates
We based certain accounts and balances within these financial statements upon our estimates and assumptions. The amount of reserves for claims not yet paid, for example, is an item that we can only record by estimation. Unrealized capital gains and losses on investments are subject to market fluctuations, and we use judgment in the determination of whether unrealized losses on certain securities are temporary or other-than-temporary. Should actual results differ significantly from these estimates, the effect on our results of operations could be material. The results of operations for the periods presented may not be indicative of our results for the entire year.







9

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) related to the accounting for revenue from contracts with customers. Insurance contracts have been excluded from the scope of the guidance, which is effective for fiscal years beginning after December 15, 2016. We do not expect the adoption of this standard to have a material impact on our financial condition or results of operations.



Note 2 Computation of Net Earnings per Share

The following table illustrates our computations of basic and diluted net earnings per common share (in thousands, except per
share figures):
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
Net earnings
$
10,667

 
$
7,408

 
$
20,994

 
$
16,070

Average basic shares outstanding
11,435

 
11,448

 
11,432

 
11,485

Basic net earnings per share
$
0.93

 
$
0.65

 
$
1.84

 
$
1.40

 
 
 
 
 
 
 
 
Average basic shares outstanding
11,435

 
11,448

 
11,432

 
11,485

Restricted stock not yet vested
62

 
47

 
59

 
45

Dilutive effect of assumed option exercises
0

 
31

 
1

 
34

Dilutive effect of Performance Share Plan
86

 
117

 
89

 
135

Average diluted shares outstanding
11,583

 
11,643

 
11,581

 
11,698

Diluted net earnings per share
$
0.92

 
$
0.64

 
$
1.81

 
$
1.37


 

10

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

Note 3 Fair Value
Fair values of instruments are based on:
(i)
quoted prices in active markets for identical assets (Level 1),
(ii)
quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all significant inputs are observable in active markets (Level 2) or
(iii)
valuations derived from valuation techniques in which one or more significant inputs are unobservable in the marketplace (Level 3).
The following tables present, for each of the fair value hierarchy levels, our assets and liabilities for which we report fair value on a recurring basis (in thousands):
 
 
Fair Value
June 30, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash and cash equivalents
 
$
59,139

 
$
0

 
$
0

 
$
59,139

Fixed maturity securities:
 
 
 
 
 
 
 
 
U.S. government
 
66,926

 
121

 
0

 
67,047

State and municipal
 
0

 
510,844

 
0

 
510,844

Mortgage-backed securities:
 

 
 
 
 
 
 
Residential
 
0

 
351,520

 
0

 
351,520

Commercial
 
0

 
40,391

 
0

 
40,391

Total mortgage-backed securities
 
0

 
391,911

 
0

 
391,911

Asset-backed securities
 
0

 
66,256

 
380

 
66,635

Corporates
 
0

 
403,953

 
4,569

 
408,522

Total fixed maturities
 
66,926

 
1,373,084

 
4,949

 
1,444,959

Equity securities
 
93,332

 
0

 
0

 
93,332

Short-term investments
 
200

 
0

 
0

 
200

Total cash and investments
 
$
219,597

 
$
1,373,084

 
$
4,949

 
$
1,597,630

Percentage of total cash and investments
 
13.7
%
 
85.9
%
 
0.3
%
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
Fair Value
December 31, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash and cash equivalents
 
$
134,211

 
$
0

 
$
0

 
$
134,211

Fixed maturity securities:
 
 
 
 
 
 
 
 
U.S. government
 
64,496

 
171

 
0

 
64,666

State and municipal
 
0

 
487,111

 
0

 
487,111

Mortgage-backed securities:
 
 
 
 
 
 
 
 
Residential
 
0

 
323,346

 
0

 
323,346

Commercial
 
0

 
35,816

 
0

 
35,816

Total mortgage-backed securities
 
0

 
359,162

 
0

 
359,162

Collateralized mortgage obligations
 
0

 
1,291

 
0

 
1,291

Asset-backed securities
 
0

 
70,573

 
686

 
71,259

Corporates
 
0

 
365,642

 
5,175

 
370,816

Total fixed maturities
 
64,496

 
1,283,949

 
5,860

 
1,354,305

Equity securities
 
91,127

 
0

 
0

 
91,127

Short-term investments
 
1,200

 
1,396

 
0

 
2,596

Total cash and investments
 
$
291,033

 
$
1,285,345

 
$
5,860

 
$
1,582,238

Percentage of total cash and investments
 
18.4
%
 
81.2
%
 
0.4
%
 
100.0
%

11

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

We do not report our long-term debt at fair value in the Consolidated Balance Sheets. The $287.8 million and $272.6 million fair value of our long-term debt at June 30, 2014 and December 31, 2013, respectively, would be included in Level 2 of the fair value hierarchy if it were reported at fair value.
Level 1 includes cash and cash equivalents, U.S. Treasury securities, an exchange-traded fund and equities held in a rabbi trust which funds our Supplemental Employee Retirement Plan ("SERP"). Level 2 includes securities whose fair value was determined using observable market inputs. Level 3 securities are comprised of (i) securities for which there is no active or inactive market for similar instruments, (ii) securities whose fair value is determined based on unobservable inputs and (iii) securities, other than those backed by the U.S. Government, that are not rated by a nationally recognized statistical rating organization ("NRSRO"). We recognize transfers between levels at the beginning of the reporting period.
A third party nationally recognized pricing service provides the fair value of securities in Level 2. We review the third party pricing methodologies quarterly and test for significant differences between the market price used to value the security and recent sales activity.
The following tables present the progression in the Level 3 fair value category (in thousands): 
 
Three months ended June 30, 2014
 
U.S.
Government
 
Corporates
 
Asset-Backed Securities
 
Total
Balance at beginning of period
$
0

 
$
5,054

 
$
530

 
$
5,583

Total gains or (losses), unrealized or realized
 
 
 
 
 
 
 
Included in net earnings
0

 
20

 
0

 
20

Included in other comprehensive income
0

 
(3
)
 
(2
)
 
(4
)
Settlements
0

 
(501
)
 
(148
)
 
(649
)
Balance at end of period
$
0

 
$
4,569

 
$
380

 
$
4,949

 
 
 
 
 
 
 
 
 
Three months ended June 30, 2013
 
U.S.
Government
 
Corporates
 
Asset-Backed Securities
 
Total
Balance at beginning of period
$
3,115

 
$
8,899

 
$
0

 
$
12,014

Total gains or (losses), unrealized or realized
 
 
 
 
 
 
 
Included in net earnings
(9
)
 
350

 
0

 
341

Included in other comprehensive income
18

 
(216
)
 
0

 
(198
)
Settlements
0

 
(979
)
 
0

 
(979
)
Balance at end of period
$
3,124

 
$
8,055

 
$
0

 
$
11,179


12

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

 
Six months ended June 30, 2014
 
U.S.
Government
 
Corporates
 
Asset-Backed Securities
 
Total
Balance at beginning of period
$
0

 
$
5,175

 
$
686

 
$
5,860

Total gains or (losses), unrealized or realized
 
 
 
 
 
 
 
Included in net earnings
0

 
29

 
0

 
29

Included in other comprehensive income
0

 
(59
)
 
(2
)
 
(60
)
Settlements
0

 
(575
)
 
(304
)
 
(879
)
Balance at end of period
$
0

 
$
4,569

 
$
380

 
$
4,949

 
 
 
 
 
 
 
 
 
Six months ended June 30, 2013
 
U.S.
Government
 
Corporates
 
Asset-Backed Securities
 
Total
Balance at beginning of period
$
3,712

 
$
9,101

 
$
0

 
$
12,813

Total gains or (losses), unrealized or realized
 
 
 
 
 
 
 
Included in net earnings
(31
)
 
472

 
0

 
441

Included in other comprehensive income
(71
)
 
(321
)
 
0

 
(393
)
Settlements
(485
)
 
(1,197
)
 
0

 
(1,682
)
Balance at end of period
$
3,124

 
$
8,055

 
$
0

 
$
11,179


Of the $4.9 million fair value of securities in Level 3 at June 30, 2014, which consists of nine securities, we priced six based on non-binding broker quotes, one price was provided by our unaffiliated money manager and one security, which was included in Level 3 because it was not rated by a nationally recognized statistical rating organization, was priced by a nationally recognized pricing service. We manually calculated the remaining security, which had a fair value of $0.1 million.
Quantitative information about the significant unobservable input used in the fair value measurement of the manually priced security at June 30, 2014 is as follows (in millions):
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Value Used
Corporate bond
$
0.1

 
Recovery rate1
 
Probability of default
 
100%
 
 
 
 
 
 
 
 
1 Recovery rate for senior unsecured bonds as indicated in Moody's Investor's Service Annual Default Study: Corporate Default and Recovery Rates, 1920-2013.

The significant unobservable input used in the fair value measurement of our manually-priced corporate bond is a probability of default assumption. Significant changes in this input could result in a significant change in fair value measurement for this corporate bond.  Generally, a reduction in probability of default would increase security valuation.
There were no transfers between Levels 1, 2 or 3 during the six months ended June 30, 2014.
The gains or losses included in net earnings are included in the line item "Net realized gains on investments" in the Consolidated Statements of Earnings. We recognize the net gains or losses included in other comprehensive income in the line item "Unrealized gains (losses) on investments, net" in the Consolidated Statements of Comprehensive Income and the line item "Change in unrealized gain on investments" or the line item "Change in non-credit component of impairment losses on fixed maturities" in the Consolidated Statements of Changes in Shareholders’ Equity.


13

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

The following table presents the carrying value and estimated fair value of our financial instruments (in thousands):
 
 
June 30, 2014
 
December 31, 2013
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
59,139

 
$
59,139

 
$
134,211

 
$
134,211

Investments
 
 
 
 
 
 
 
Fixed maturities
1,444,959

 
1,444,959

 
1,354,305

 
1,354,305

Equity securities
93,332

 
93,332

 
91,127

 
91,127

Short-term
200

 
200

 
2,596

 
2,596

Total cash and investments
$
1,597,630

 
$
1,597,630

 
$
1,582,238

 
$
1,582,238

Liabilities:
 
 
 
 
 
 
 
Long-term debt
$
275,000

 
$
287,837

 
$
275,000

 
$
272,632


See Note 4 to the Consolidated Financial Statements for additional information on investments and Note 5 to the Consolidated Financial Statements for additional information on long-term debt.


14

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

Note 4 Investments
We consider all fixed maturity and equity securities to be available-for-sale and report them at fair value with the net unrealized gains or losses reported after-tax (net of any valuation allowance) as a component of other comprehensive income. The proceeds from sales of securities for the three and six months ended June 30, 2014 were $57.4 million and $122.3 million, respectively. The proceeds from the sales of securities for the three and six months ended June 30, 2013 were $91.9 million and $288.2 million, respectively. The proceeds for the six months ended June 30, 2013 were net of $5.4 million of receivable for securities sold during the second quarter of 2013 that had not settled at June 30, 2013. There was no receivable for unsettled sales as of June 30, 2014.
Gross gains of $1.9 million and gross losses of $0.1 million were realized on sales of available for sale securities during the three months ended June 30, 2014, compared with gross gains of $1.8 million and gross losses of $0.7 million realized on sales during the three months ended June 30, 2013. Gross gains of $2.7 million and gross losses of $0.2 million were realized on sales of available for sale securities during the six months ended June 30, 2014, compared with gross gains of $6.1 million and gross losses of $1.1 million realized on sales during the six months ended June 30, 2013. Gains or losses on securities are determined on a specific identification basis.

15

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

Summarized information for the major categories of our investment portfolio follows (in thousands):
 
June 30, 2014
 
Amortized
Cost or Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
OTTI
Recognized in
Accumulated
OCI(1)
Fixed maturities:
 
 
 
 
 
 
 
 
 
U.S. government
$
66,505

 
$
768

 
$
(226
)
 
$
67,047

 
$
0

State and municipal
498,188

 
12,853

 
(198
)
 
510,844

 
(87
)
Mortgage-backed securities:

 

 

 
 
 
 
Residential
348,802

 
5,496

 
(2,778
)
 
351,520

 
(3,144
)
Commercial
40,295

 
240

 
(143
)
 
40,391

 
0

Total mortgage-backed securities
389,097

 
$
5,736

 
(2,922
)
 
$
391,911

 
(3,144
)
Asset-backed securities
66,332

 
313

 
(9
)
 
66,635

 
(8
)
Corporates
397,971

 
10,920

 
(369
)
 
408,522

 
(450
)
Total fixed maturities
1,418,093

 
30,590

 
(3,724
)
 
1,444,959

 
(3,689
)
Equity securities
73,681

 
19,651

 
0

 
93,332

 
0

Short-term investments
200

 
0

 
0

 
200

 
0

Total
$
1,491,975

 
$
50,241

 
$
(3,724
)
 
$
1,538,492

 
$
(3,689
)
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
Amortized
Cost or Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
OTTI
Recognized in
Accumulated
OCI(1)
Fixed maturities:
 
 
 
 
 
 
 
 
 
U.S. government
$
64,194

 
$
900

 
$
(427
)
 
$
64,666

 
$
0

State and municipal
478,092

 
10,789

 
(1,771
)
 
487,111

 
(73
)
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Residential
330,169

 
1,985

 
(8,809
)
 
323,346

 
(2,435
)
Commercial
35,781

 
339

 
(304
)
 
35,816

 
0

Total mortgage-backed securities
365,950

 
2,324

 
(9,113
)
 
359,162

 
(2,435
)
Collateralized mortgage obligations
1,228

 
63

 
0

 
1,291

 
(161
)
Asset-backed securities
71,183

 
178

 
(103
)
 
71,259

 
(8
)
Corporates
364,430

 
9,086

 
(2,700
)
 
370,816

 
(612
)
Total fixed maturities
1,345,077

 
23,340

 
(14,112
)
 
1,354,305

 
(3,290
)
Equity securities
74,718

 
16,409

 
0

 
91,127

 
0

Short-term investments
2,595

 
1

 
0

 
2,596

 
0

Total
$
1,422,390

 
$
39,750

 
$
(14,112
)
 
$
1,448,027

 
$
(3,290
)
 
 
 
 
 
 
 
 
 
 
(1) The total non-credit portion of OTTI recognized in Accumulated OCI reflecting the original non-credit loss at the time the credit impairment was determined.


16

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

The following tables set forth the amount of unrealized loss by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands):
 
Less than 12 Months
 
12 Months or More
 
Number of
Securities
with
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Unrealized
Losses as
% of Cost
 
Number of
Securities
with
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Unrealized
Losses as
% of Cost
June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government
1
 
$
448

 
$
0

 
0.1
%
 
9

 
$
26,148

 
$
(226
)
 
0.9
%
State and municipal
13
 
32,362

 
(32
)
 
0.1
%
 
9

 
17,866

 
(166
)
 
0.9
%
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
25
 
11,292

 
(87
)
 
0.8
%
 
123

 
134,613

 
(2,691
)
 
2.0
%
Commercial
4
 
5,704

 
(4
)
 
0.1
%
 
8

 
15,475

 
(139
)
 
0.9
%
Total mortgage-backed securities
29
 
16,996

 
(92
)
 
0.5
%
 
131

 
150,087

 
(2,830
)
 
1.9
%
Asset-backed securities
4
 
2,203

 
(3
)
 
0.1
%
 
2

 
1,153

 
(7
)
 
0.6
%
Corporates
17
 
20,347

 
(77
)
 
0.4
%
 
18

 
25,089

 
(292
)
 
1.2
%
Total fixed maturities
64
 
72,356

 
(203
)
 
0.3
%
 
169

 
220,343

 
(3,521
)
 
1.6
%
Equity securities
0
 
0

 
0

 
0.0
%
 
0

 
0

 
0

 
0.0
%
Short-term investments
0
 
0

 
0

 
0.0
%
 
0

 
0

 
0

 
0.0
%
Total
64
 
$
72,356

 
$
(203
)
 
0.3
%
 
169

 
$
220,343

 
$
(3,521
)
 
1.6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Less than 12 Months
 
12 Months or More
 
Number of
Securities
with
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Unrealized
Losses as
% of Cost
 
Number of
Securities
with
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Unrealized
Losses as
% of Cost
December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government
11

 
$
26,396

 
$
(427
)
 
1.6
%
 
0

 
$
0

 
$
0

 
0.0
%
State and municipal
51

 
121,431

 
(1,425
)
 
1.2
%
 
4

 
8,062

 
(346
)
 
4.1
%
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
229

 
207,821

 
(7,064
)
 
3.3
%
 
34

 
39,659

 
(1,744
)
 
4.2
%
Commercial
11

 
22,311

 
(290
)
 
1.3
%
 
1

 
756

 
(14
)
 
1.8
%
Total mortgage-backed securities
240

 
230,133

 
(7,354
)
 
3.1
%
 
35

 
40,415

 
(1,758
)
 
4.2
%
Asset-backed securities
18

 
14,738

 
(103
)
 
0.7
%
 
0

 
0

 
0

 
0.0
%
Corporates
90

 
115,735

 
(2,621
)
 
2.2
%
 
1

 
1,212

 
(79
)
 
6.1
%
Total fixed maturities
410

 
508,432

 
(11,929
)
 
2.3
%
 
40

 
49,688

 
(2,183
)
 
4.2
%
Equity securities
0

 
0

 
0

 
0.0
%
 
0

 
0

 
0

 
0.0
%
Short-term investments
0

 
0

 
0

 
0.0
%
 
0

 
0

 
0

 
0.0
%
Total
410

 
$
508,432

 
$
(11,929
)
 
2.3
%
 
40

 
$
49,688

 
$
(2,183
)
 
4.2
%






17

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

The determination of whether unrealized losses are “other-than-temporary” requires judgment based on subjective as well as objective factors. Factors we considered and resources we used in our determination include:
the intent to sell the security;
whether it is more likely than not that there will be a requirement to sell the security before our anticipated recovery;
whether the unrealized loss is credit-driven or a result of changes in market interest rates;
the length of time the security’s fair value has been below our cost;
the extent to which fair value is less than cost basis;
historical operating, balance sheet and cash flow data contained in issuer SEC filings;
issuer news releases;
near-term prospects for improvement in the issuer and/or its industry;
industry research and communications with industry specialists and
third-party research and credit rating reports.
We regularly evaluate for potential impairment each security position that has either of the following: a fair value of less than 95% of its book value or an unrealized loss that equals or exceeds $100,000.

18

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

The following table summarizes those securities, excluding the rabbi trust, with unrealized gains or losses:
 
June 30,
2014
 
December 31,
2013
Number of positions held with unrealized:
 
 
 
Gains
872

 
590

Losses
233

 
450

Number of positions held that individually exceed unrealized:
 
 
 
Gains of $500,000
2

 
1

Losses of $500,000
0

 
0

Percentage of positions held with unrealized:
 
 
 
Gains that were investment grade
87
%
 
81
%
Losses that were investment grade
93
%
 
93
%
Percentage of fair value held with unrealized:
 
 
 
Gains that were investment grade
89
%
 
88
%
Losses that were investment grade
94
%
 
95
%

 The following table sets forth the amount of unrealized loss, excluding the rabbi trust, by age and severity at June 30, 2014 (in thousands):
Age of Unrealized Losses:
Fair Value of
Securities with
Unrealized
Losses
 
Total Gross
Unrealized
Losses
 
Less Than 5%*
 
5% - 10%*
 
Greater
Than 10%*
Three months or less
$
58,415

 
$
(100
)
 
$
(100
)
 
$
0

 
$
0

Four months through six months
8,052

 
(35
)
 
(35
)
 
0

 
0

Seven months through nine months
5,321

 
(50
)
 
(46
)
 
(4
)
 
0

Ten months through twelve months
572

 
(18
)
 
(18
)
 
0

 
0

Greater than twelve months
220,340

 
(3,521
)
 
(3,358
)
 
(163
)
 
0

Total
$
292,699

 
$
(3,724
)
 
$
(3,557
)
 
$
(167
)
 
$
0

* As a percentage of amortized cost or cost.
The change in unrealized gains (losses) on marketable securities included the following (in thousands):
 
Pre-tax
 
 
 
 
 
Fixed
Maturities
 
Equity
Securities
 
Short-Term Investments
 
Tax
Effects
 
Net
Six months ended June 30, 2014
 
 
 
 
 
 
 
 
 
Unrealized holding gains (losses) on securities arising during the period
$
18,850

 
$
4,515

 
$
5

 
$
(8,179
)
 
$
15,190

Realized (gains) losses on securities sold
(1,246
)
 
(1,273
)
 
(5
)
 
883

 
(1,641
)
Impairment loss recognized in earnings
33

 
0

 
0

 
(12
)
 
22

Change in unrealized gains (losses) on marketable securities, net
$
17,638

 
$
3,242

 
$
(1
)
 
$
(7,308
)
 
$
13,571

Six months ended June 30, 2013
 
 
 
 
 
 
 
 
 
Unrealized holding gains (losses) on securities arising during the period
$
(30,328
)
 
$
3,018

 
$
0

 
$
9,558

 
$
(17,751
)
Realized (gains) losses on securities sold
(4,329
)
 
(660
)
 
0

 
1,746

 
(3,242
)
Impairment loss recognized in earnings
371

 
0

 
0

 
(130
)
 
241

Change in unrealized gains (losses) on marketable securities, net
$
(34,286
)
 
$
2,358

 
$
0

 
$
11,175

 
$
(20,753
)
 

19

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

For fixed maturity securities that are other-than-temporarily impaired, we assess our intent to sell and the likelihood that we will be required to sell the security before recovery of our amortized cost. If a fixed maturity security is considered other-than-temporarily impaired but we do not intend to and are not more than likely to be required to sell the security before our recovery of amortized cost, we separate the amount of the impairment into a credit loss component and the amount due to all other factors ("non-credit component"). The excess of the amortized cost over the present value of the expected cash flows determines the credit loss component of an impairment charge on a fixed maturity security. The present value is determined using the best estimate of cash flows discounted at (1) the effective interest rate implicit at the date of acquisition for non-structured securities or (2) the book yield for structured securities. The techniques and assumptions for determining the best estimate of cash flows vary depending on the type of security. We recognize the credit loss component of an impairment charge in net earnings and the non-credit component in accumulated other comprehensive income. If we intend to sell or will, more likely than not, be required to sell a security, we treat the entire amount of the impairment as a credit loss.
 
The following table is a progression of credit losses on fixed maturity securities that were bifurcated between a credit and non-credit component (in thousands):
 
Six months ended June 30,
 
2014
 
2013
Beginning balance
$
956

 
$
487

Additions for:
 
 
 
Previously impaired securities
19

 
0

Newly impaired securities
13

 
48

Reductions for:
 
 
 
Securities sold and paid down
(74
)
 
(164
)
Ending balance
$
914

 
$
371

The table below sets forth the scheduled maturities of fixed maturity securities at June 30, 2014, based on their fair values (in thousands). We report securities that do not have a single maturity date at average maturity. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid by the issuers.
 
 
Fair Value
 
Amortized
Cost
Maturity
Securities
with
Unrealized
Gains
 
Securities
with
Unrealized
Losses
 
Securities
with No
Unrealized
Gains or
Losses
 
All Fixed
Maturity
Securities
 
All Fixed
Maturity
Securities
One year or less
$
85,567

 
$
1,250

 
$
7,351

 
$
94,168

 
$
93,186

After one year through five years
536,545

 
66,920

 
2,500

 
605,965

 
591,519

After five years through ten years
219,104

 
51,466

 
1,305

 
271,875

 
264,506

After ten years
11,781

 
2,624

 
0

 
14,405

 
13,454

Mortgage-backed and asset-backed securities
288,106

 
170,440

 
0

 
458,546

 
455,429

Total
$
1,141,104

 
$
292,699

 
$
11,156

 
$
1,444,959

 
$
1,418,093


Note 5 Long-Term Debt

In September 2012, we issued $275 million principal of senior notes due September 2022 (the “5.0% Senior Notes”). The 5.0% Senior Notes accrue interest at 5.0%, payable semiannually. At the time we issued the 5.0% Senior Notes, we capitalized $2.2 million of debt issuance costs, which we are amortizing over the term of the 5.0% Senior Notes. We calculated the June 30, 2014 fair value of $287.8 million using a 179 basis point spread to the ten-year U.S. Treasury Note of 2.532%.


20

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

In August 2011, we renewed our agreement for a $50 million three-year revolving credit facility (the “Credit Agreement”) that requires us to meet certain financial and other covenants. We are currently in compliance with all covenants under the Credit
Agreement. At June 30, 2014, there were no borrowings outstanding under the Credit Agreement. We expect to renew our line of credit in August 2014.
 
Note 6 Income Taxes

The following is a reconciliation of income taxes at the statutory rate of 35.0% to the effective provision for income taxes as shown in the Consolidated Statements of Earnings (in thousands):
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
Earnings before income taxes
$
15,143

 
$
10,129

 
$
29,789

 
$
22,234

Income taxes at statutory rate
5,300

 
3,545

 
10,426

 
7,782

Effect of:
 
 
 
 
 
 
 
Dividends-received deduction
(144
)
 
(130
)
 
(251
)
 
(179
)
Tax-exempt interest
(701
)
 
(716
)
 
(1,403
)
 
(1,465
)
Other
20

 
22

 
23

 
27

Provision for income taxes as shown on the Consolidated Statements of Earnings
$
4,476

 
$
2,721

 
$
8,795

 
$
6,164

GAAP effective tax rate
29.6
%
 
26.9
%
 
29.5
%
 
27.7
%


Note 7 Additional Information
Supplemental Cash Flow Information
We made the following payments that we do not separately disclose in the Consolidated Statements of Cash Flows (in thousands):
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
Income tax payments
$
6,200

 
$
0

 
$
6,200

 
$
0

Interest payments on debt
0

 
0

 
6,875

 
6,951

Negative Cash Book Balances
Negative cash book balances, included in the line item “Other liabilities” in the Consolidated Balance Sheets, were $57.2 million and $50.5 million, respectively, at June 30, 2014 and December 31, 2013.




 

21

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

Note 8 Insurance Reserves
Insurance reserves include liabilities for unpaid losses, both known and estimated for incurred but not reported (“IBNR”), and unpaid loss adjustment expenses (“LAE”). The following table provides an analysis of changes in the liability for unpaid losses and LAE on a GAAP basis (in thousands): 
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
Balance at Beginning of Period
 
 
 
 
 
 
 
Unpaid losses on known claims
$
226,659

 
$
218,835

 
$
221,447

 
$
205,589

IBNR losses
272,159

 
223,898

 
262,660

 
218,552

LAE
164,072

 
154,068

 
162,469

 
148,753

Total unpaid losses and LAE
662,890

 
596,800

 
646,577

 
572,894

Reinsurance recoverables
(14,544
)
 
(13,793
)
 
(14,431
)
 
(13,678
)
Unpaid losses and LAE, net of reinsurance recoverables
648,346

 
583,008

 
632,146

 
559,215

Current Activity
 
 
 
 
 
 
 
Loss and LAE incurred:
 
 
 
 
 
 
 
Current accident year
257,098

 
255,650

 
513,874

 
506,149

Prior accident years
(163
)
 
1,428

 
(3,237
)
 
1,300

Total loss and LAE incurred
256,935

 
257,079

 
510,637

 
507,449

Loss and LAE payments:
 
 
 
 
 
 
 
Current accident year
(153,772
)
 
(150,335
)
 
(234,590
)
 
(228,191
)
Prior accident years
(100,005
)
 
(91,567
)
 
(256,688
)
 
(240,290
)
Total loss and LAE payments
(253,776
)
 
(241,902
)
 
(491,278
)
 
(468,480
)
Balance at End of Period
 
 
 
 
 
 
 
Unpaid losses and LAE, net of reinsurance recoverables
651,505

 
598,184

 
651,505

 
598,184

Add back reinsurance recoverables
13,717

 
13,819

 
13,717

 
13,819

Total unpaid losses and LAE
665,222

 
612,004

 
665,222

 
612,004

Unpaid losses on known claims
225,040

 
222,138

 
225,040

 
222,138

IBNR losses
274,830

 
232,546

 
274,830

 
232,546

LAE
165,352

 
157,320

 
165,352

 
157,320

Total unpaid losses and LAE
$
665,222

 
$
612,004

 
$
665,222

 
$
612,004


The $3.2 million of favorable reserve development during the six months ended June 30, 2014 was primarily due to a decrease in frequency in accident year 2013 in Florida personal injury protection and material damage coverages in the states of California and Pennsylvania.

Note 9 Commitments and Contingencies
Commitments
There have been no material changes from the commitments discussed in the Form 10-K for the year ended December 31, 2013. For a description of our previously reported commitments, refer to Note 14 Commitments and Contingencies in the Form 10-K for the year ended December 31, 2013.
Contingencies
From time to time, we and our subsidiaries are named as defendants in various lawsuits incidental to our insurance operations. We consider legal actions relating to claims made in the ordinary course of seeking indemnification for a loss covered by the insurance policy in establishing loss and LAE reserves. We also face in the ordinary course of business lawsuits that seek

22

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

damages beyond policy limits, commonly known as extra-contractual or “bad faith” claims, as well as class action and individual lawsuits that involve issues not unlike those facing other insurance companies and employers. We continually evaluate potential liabilities and reserves for litigation of these types using the criteria established by the Contingencies topic of the FASC. Under this guidance, we may only record reserves for a loss if the likelihood of occurrence is probable and we can reasonably estimate the amount. If a material loss, while not probable, is judged to be reasonably possible we will disclose the nature of the contingency and a possible range of loss if estimable.
In Reyes v. Infinity Indemnity Insurance Company, formerly reported as Estate of Jorge Luis Arroyo, Jr., et al. v. Gustavo M. Rodriguez,et al., (Circuit Court of Miami-Dade County, Florida), a third party claimant is attempting to recover from Infinity a $30 million consent judgment obtained against an Infinity policyholder for personal injuries suffered by plaintiff. Infinity believes any claims of bad faith are unfounded and has denied any and all liability to plaintiff. While the outcome of this case, as with litigation generally, cannot be predicted with certainty, at this stage of the litigation we do not believe that the likelihood of a material loss is probable.
For a description of previously reported contingencies, refer to Note 14 Commitments and Contingencies in the Form 10-K for the year ended December 31, 2013.


Note 10 Accumulated Other Comprehensive Income

The components of other comprehensive income before and after tax are as follows (in thousands):
 
 
Three months ended June 30,
 
 
2014
 
2013
 
 
Before Tax
 
Income Tax
 
Net
 
Before Tax
 
Income Tax
 
Net
Accumulated change in postretirement benefit liability, beginning of period
 
$
595

 
$
(208
)
 
$
387

 
$
(918
)
 
$
321

 
$
(596
)
Effect on other comprehensive income
 
(3
)
 
1

 
(2
)
 
50

 
(17
)
 
32

Accumulated change in postretirement benefit liability, end of period
 
593

 
(208
)
 
385

 
(868
)
 
304

 
(564
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated unrealized gains on investments, net, beginning of period
 
32,846

 
(11,496
)
 
21,350

 
45,756

 
(16,015
)
 
29,741

Other comprehensive income before reclassification
 
15,517

 
(5,431
)
 
10,086

 
(29,998
)
 
10,499

 
(19,499
)
Reclassification adjustment for other-than-temporary impairments included in net income
 
6

 
(2
)
 
4

 
299

 
(105
)
 
194

Reclassification adjustment for realized gains included in net income
 
(1,852
)
 
648

 
(1,204
)
 
(1,093
)
 
382

 
(710
)
Effect on other comprehensive income
 
13,671

 
(4,785
)
 
8,886

 
(30,792
)
 
10,777

 
(20,015
)
Accumulated unrealized gains on investments, net, end of period
 
46,517

 
(16,281
)
 
30,236

 
14,964

 
(5,237
)
 
9,727

 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive income, beginning of period
 
33,441

 
(11,704
)
 
21,737

 
44,838

 
(15,693
)
 
29,145

Change in postretirement benefit liability
 
(3
)
 
1

 
(2
)
 
50

 
(17
)
 
32

Change in unrealized gains on investments, net
 
13,671

 
(4,785
)
 
8,886

 
(30,792
)
 
10,777

 
(20,015
)
Effect on other comprehensive income
 
13,669

 
(4,784
)
 
8,885

 
(30,742
)
 
10,760

 
(19,982
)
Accumulated other comprehensive income, end of period
 
$
47,110

 
$
(16,488
)
 
$
30,621

 
$
14,096

 
$
(4,934
)
 
$
9,163


23

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

 
 
Six months ended June 30,
 
 
2014
 
2013
 
 
Before Tax
 
Income Tax
 
Net
 
Before Tax
 
Income Tax
 
Net
Accumulated change in postretirement benefit liability, beginning of period
 
$
(62
)
 
$
22

 
$
(40
)
 
$
(967
)
 
$
339

 
$
(629
)
Effect on other comprehensive income
 
655

 
(229
)
 
426

 
100

 
(35
)
 
65

Accumulated change in postretirement benefit liability, end of period
 
593

 
(208
)
 
385

 
(868
)
 
304

 
(564
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated unrealized gains on investments, net, beginning of period
 
25,638

 
(8,973
)
 
16,665

 
46,892

 
(16,412
)
 
30,480

Other comprehensive income before reclassification
 
23,370

 
(8,179
)
 
15,190

 
(27,310
)
 
9,559

 
(17,752
)
Reclassification adjustment for other-than-temporary impairments included in net income
 
33

 
(12
)
 
22

 
371

 
(130
)
 
241

Reclassification adjustment for realized gains included in net income
 
(2,524
)
 
883

 
(1,641
)
 
(4,988
)
 
1,746

 
(3,242
)
Effect on other comprehensive income
 
20,879

 
(7,308
)
 
13,571

 
(31,928
)
 
11,175

 
(20,753
)
Accumulated unrealized gains on investments, net, end of period
 
46,517

 
(16,281
)
 
30,236

 
14,964

 
(5,237
)
 
9,727

 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive income, beginning of period
 
25,576

 
(8,952
)
 
16,624

 
45,924

 
(16,073
)
 
29,851

Change in postretirement benefit liability
 
655

 
(229
)
 
426

 
100

 
(35
)
 
65

Change in unrealized gains on investments, net
 
20,879

 
(7,308
)
 
13,571

 
(31,928
)
 
11,175

 
(20,753
)
Effect on other comprehensive income
 
21,534

 
(7,537
)
 
13,997

 
(31,828
)
 
11,140

 
(20,688
)
Accumulated other comprehensive income, end of period
 
$
47,110

 
$
(16,488
)
 
$
30,621

 
$
14,096

 
$
(4,934
)
 
$
9,163




24

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM 2
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain “forward-looking statements” which anticipate results based on our estimates, assumptions and plans that are subject to uncertainty. We make these statements subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements in this report not dealing with historical results or current facts are forward-looking and we base them on estimates, assumptions and projections. Statements which include the words “assumes,” “believes,” “seeks,” “expects,” “may,” “should,” “intends,” “likely,” “targets,” “plans,” “anticipates,” “estimates” or the negative version of those words and similar statements of a future or forward-looking nature identify forward-looking statements. Examples of such forward-looking statements include statements relating to expectations concerning market conditions, premium growth, earnings, investment performance, expected losses, rate changes and loss experience.
The primary events or circumstances that could cause actual results to differ materially from what we expect include determinations with respect to reserve adequacy, realized gains or losses on the investment portfolio (including other-than temporary impairments for credit losses), loss cost trends, undesired business mix or risk profile for new business and competitive conditions in our key Focus States. We undertake no obligation to publicly update or revise any of the forward-looking statements. For a more detailed discussion of some of the foregoing risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements see “Risk Factors” contained in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013.

OVERVIEW
In the second quarter and first six months of 2014, our gross written premium grew 3.4% and 1.8%, respectively, compared with the same periods of 2013. Our plan for 2014 calls for premium growth in our profitable Focus States of California, Florida, and Texas personal auto and countrywide Commercial Vehicle, while returning our remaining four Focus States of Arizona, Georgia, Nevada and Pennsylvania to profitability. While this plan will mean reduced gross written premium for four of our Focus States, we expect to see continued premium growth in our largest and most profitable markets. In the second quarter and first six months of 2014, gross written premium in California, Florida, Texas and Commercial Vehicle grew 8.6% and 7.3%, respectively, compared with the same periods of 2013, while the remaining Focus States declined 25.9% and 27.6%, respectively. See Results of Operations – Underwriting – Premium for a more detailed discussion of our gross written premium growth.
Net earnings and diluted earnings per share for the three months ended June 30, 2014 were $10.7 million and $0.92, respectively, compared with $7.4 million and $0.64, respectively, for the three months ended June 30, 2013. Net earnings and diluted earnings per share for the six months ended June 30, 2014 were $21.0 million and $1.81, respectively, compared with $16.1 million and $1.37, respectively, for the six months ended June 30, 2013. The increase in diluted earnings per share for the three and six months ended June 30, 2014 was primarily due to an improvement in underwriting profitability.
Included in net earnings for the three and six months ended June 30, 2014 were $0.1 million ($0.2 million pre-tax) and $2.1 million ($3.2 million pre-tax) of favorable development on prior accident year loss and LAE reserves. The development was primarily due to a decrease in frequency in accident year 2013 in Florida personal injury protection and material damage coverages in California and Pennsylvania. Included in net earnings for the three and six months ended June 30, 2013 were $0.9 million ($1.4 million pre-tax) and $0.8 million ($1.3 million pre-tax) of unfavorable development on prior accident year loss and LAE reserves.










25

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
Management’s Discussion and Analysis of Financial Condition and Results of Operations



The following table displays combined ratio results by accident year developed through June 30, 2014.
 
 
Accident Year Combined Ratio
Developed Through
 
Prior Accident Year
Favorable / (Unfavorable)
Development
 
($ in millions)
Prior Accident Year
Favorable / (Unfavorable)
Development
Accident Year
Mar 2013
 
June 2013
 
Sept 2013
 
Dec 2013
 
Mar 2014
 
June 2014
 
Q2 2014
 
YTD 2014
 
Q2 2014
 
YTD 2014
Prior
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
$
(0.9
)
 
$
(0.1
)
2006
90.3
%
 
90.3
%
 
90.3
%
 
90.3
%
 
90.3
%
 
90.2
%
 
0.1
 %
 
0.1
 %
 
0.7

 
0.6

2007
92.2
%
 
92.2
%
 
92.2
%
 
92.2
%
 
92.2
%
 
92.2
%
 
0.0
 %
 
0.0
 %
 
0.2

 
0.2

2008
91.4
%
 
91.4
%
 
91.3
%
 
91.3
%
 
91.3
%
 
91.3
%
 
0.0
 %
 
0.0
 %
 
0.4

 
0.4

2009
92.4
%
 
92.3
%
 
92.2
%
 
92.3
%
 
92.3
%
 
92.3
%
 
0.0
 %
 
0.0
 %
 
0.2

 
0.1

2010
99.8
%
 
99.7
%
 
99.8
%
 
99.6
%
 
99.5
%
 
99.3
%
 
0.2
 %
 
0.3
 %
 
1.7

 
2.4

2011
100.5
%
 
100.4
%
 
100.4
%
 
100.3
%
 
100.2
%
 
100.4
%
 
(0.2
)%
 
(0.1
)%
 
(1.6
)
 
(1.0
)
2012
99.2
%
 
99.5
%
 
99.6
%
 
99.8
%
 
100.1
%
 
100.2
%
 
0.0
 %
 
(0.3
)%
 
(0.3
)
 
(3.9
)
2013
98.2
%
 
97.8
%
 
97.7
%
 
97.7
%
 
97.4
%
 
97.4
%
 
0.0
 %
 
0.3
 %
 
(0.3
)
 
4.5

2014 YTD

 

 

 

 
97.8
%
 
97.4
%
 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
0.2

 
$
3.2

See Results of Operations – Underwriting – Profitability for a more detailed discussion of our underwriting results.
Pre-tax net investment income for the three months ended June 30, 2014 was $9.1 million compared with $8.6 million for the three months ended June 30, 2013. Pre-tax net investment income for the six months ended June 30, 2014 was $17.9 million compared with $17.0 million for the six months ended June 30, 2013. The increase in pre-tax net investment income is a result of a 4.0% increase in average invested assets (at cost). Average investments have increased as a result of positive cashflow from operations due to growth in premiums and improved margins.
Our book value per share increased 3.6% from $57.09 at December 31, 2013 to $59.16 at June 30, 2014. This increase was primarily due to an increase in unrealized gains and earnings partially offset by dividends for the six months ended June 30, 2014.


26

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
Management’s Discussion and Analysis of Financial Condition and Results of Operations


RESULTS OF OPERATIONS
Underwriting
Premium
Our insurance subsidiaries provide personal automobile insurance products with a concentration on nonstandard auto insurance. While there is no industry-recognized definition of nonstandard auto insurance, we believe that it is generally understood to mean coverage for drivers who, because of their driving record, age or vehicle type, represent higher than normal risks and pay higher rates for comparable coverage. We also write commercial vehicle insurance and insurance for classic collectible automobiles (“Classic Collector”).
We offer three primary products to individual drivers: the Low Cost product, which offers the most restrictive coverage, the Value Added product, which offers broader coverage and higher limits, and the Premier product, which we designed to offer the broadest coverage for standard and preferred risk drivers.
We are licensed to write insurance in all 50 states and the District of Columbia, but we focus our operations in targeted urban areas identified in selected Focus States that we believe offer the greatest opportunity for premium growth and profitability.
We classify the states in which we operate into two categories:
“Focus States” – These states include Arizona, California, Florida, Georgia, Nevada, Pennsylvania and Texas.
“Other States” – Includes nine states where we are currently running off our writings.
We continually evaluate our market opportunities; thus, the Focus States and Other States may change over time as new market opportunities arise, as the allocation of resources changes or as regulatory environments change.

27

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
Management’s Discussion and Analysis of Financial Condition and Results of Operations


Our net earned premium was as follows ($ in thousands):
 
Three months ended June 30,
 
2014
 
2013
 
Change
 
% Change
Net earned premium
 
 
 
 
 
 
 
Gross written premium
 
 
 
 
 
 
 
Personal Auto
 
 
 
 
 
 
 
Focus States
$
299,057

 
$
290,238

 
$
8,819

 
3.0
 %
Other States
1,657

 
7,006

 
(5,348
)
 
(76.3
)%
Total Personal Auto
300,714

 
297,243

 
3,471

 
1.2
 %
Commercial Vehicle
28,512

 
21,413

 
7,099

 
33.2
 %
Classic Collector
4,455

 
4,056

 
399

 
9.8
 %
Total gross written premium
333,681

 
322,712

 
10,969

 
3.4
 %
Ceded reinsurance
(3,535
)
 
(2,535
)
 
(1,000
)
 
39.5
 %
Net written premium
330,146

 
320,177

 
9,969

 
3.1
 %
Change in unearned premium
2,878

 
11,037

 
(8,160
)
 
(73.9
)%
Net earned premium
$
333,024

 
$
331,215

 
$
1,809

 
0.5
 %
 
 
 
 
 
 
 
 
 
Six months ended June 30,
 
2014
 
2013
 
Change
 
% Change
Net earned premium
 
 
 
 
 
 
 
Gross written premium
 
 
 
 
 
 
 
Personal Auto
 
 
 
 
 
 
 
Focus States
$
646,035

 
$
633,359

 
$
12,676

 
2.0
 %
Other States
3,490

 
15,248

 
(11,758
)
 
(77.1
)%
Total Personal Auto
649,525

 
648,607

 
918

 
0.1
 %
Commercial Vehicle
53,976

 
42,671

 
11,305

 
26.5
 %
Classic Collector
7,362

 
6,777

 
585

 
8.6
 %
Total gross written premium
710,862

 
698,055

 
12,807

 
1.8
 %
Ceded reinsurance
(6,466
)
 
(4,910
)
 
(1,557
)
 
31.7
 %
Net written premium
704,396

 
693,145

 
11,250

 
1.6
 %
Change in unearned premium
(43,693
)
 
(43,342
)
 
(351
)
 
0.8
 %
Net earned premium
$
660,703

 
$
649,804

 
$
10,899

 
1.7
 %

The following table summarizes our policies in force:
 
At June 30,
 
2014
 
2013
 
Change
 
% Change
Policies in Force
 
 
 
 
 
 
 
Personal Auto
 
 
 
 
 
 
 
Focus States
830,595

 
869,649

 
(39,054
)
 
(4.5
)%
Other States
6,649

 
25,123

 
(18,474
)
 
(73.5
)%
Total Personal Auto
837,244

 
894,772

 
(57,528
)
 
(6.4
)%
Commercial Vehicle
42,507

 
40,800

 
1,707

 
4.2
 %
Classic Collector
40,287

 
38,828

 
1,459

 
3.8
 %
Total policies in force
920,038

 
974,400

 
(54,362
)
 
(5.6
)%


28

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
Management’s Discussion and Analysis of Financial Condition and Results of Operations


Gross written premium grew 3.4% and 1.8% during the second quarter and first six months of 2014, respectively, compared with the same periods of 2013. During the first six months of 2014, Infinity implemented rate revisions in various states with an overall rate increase of 2.3%. Excluding the effect of rate changes in California and Florida, our largest states, the overall rate increase was 2.0%. Policies in force at June 30, 2014 decreased 5.6% compared with the same period in 2013. Gross written premium grew despite the decline in policies in force due primarily to growth in our Florida business, which has a higher average premium per policy than our other states.
During the second quarter and first six months of 2014, personal auto insurance gross written premium in our Focus States grew 3.0% and 2.0%, respectively, when compared with the same periods of 2013. The increase in gross written premium is primarily due to growth in California, Florida, and Texas, which grew a combined 6.6% and 5.9% during the second quarter and first six months of 2014, respectively. The growth in California was primarily due to higher average premium and renewal business growth. Average written premiums in Florida and Texas also increased along with an increase in new business growth. The growth in California, Florida, and Texas during the second quarter and first six months of 2014 was partially offset by declines in the remaining Focus States.
Our Commercial Vehicle gross written premium grew 33.2% and 26.5% during the second quarter and first six months of 2014, respectively, when compared with the same periods of 2013. This growth is primarily due to higher average premium and growth in new business.
Gross written premium in our Classic Collector product grew 9.8% and 8.6% during the second quarter and first six months of 2014, respectively, when compared with the same periods of 2013. This growth is primarily due to growth in renewal business.

29

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
Management’s Discussion and Analysis of Financial Condition and Results of Operations


Profitability
A key operating performance measure of insurance companies is underwriting profitability, as opposed to overall profitability or net earnings. We measure underwriting profitability by the combined ratio. When the combined ratio is under 100%, we consider underwriting results profitable; when the ratio is over 100%, we consider underwriting results unprofitable. The combined ratio does not reflect investment income, other income, interest expense, corporate general and administrative expenses, other expenses or federal income taxes.
While we report financial results in accordance with GAAP for shareholder and other users’ purposes, we report it on a statutory basis for insurance regulatory purposes. We evaluate underwriting profitability based on a combined ratio calculated using statutory accounting principles. The statutory and combined ratios represent the sum of the following ratios: (i) losses and LAE incurred as a percentage of net earned premium and (ii) underwriting expenses incurred, net of installment and other fees, as a percentage of net written premium. Certain expenses are treated differently under statutory and GAAP accounting principles. Under GAAP, commissions, premium taxes and other variable costs incurred in connection with writing new and renewal business are capitalized as deferred policy acquisition costs and amortized on a pro rata basis over the period in which the related premium is earned; on a statutory basis these items are expensed as incurred. Additionally, bad debt charge-offs on agent balances and premium receivables are included only in the GAAP combined ratios.

30

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
Management’s Discussion and Analysis of Financial Condition and Results of Operations


The following tables present the statutory and GAAP combined ratios: 
 
Three months ended June 30,
 
 
 
 
 
2014
 
2013
 
% Point Change
 
Loss &
LAE
Ratio
Underwriting
Ratio
Combined
Ratio
 
Loss &
LAE
Ratio
Underwriting
Ratio
Combined
Ratio
 
Loss &
LAE
Ratio
Underwriting
Ratio
Combined
Ratio
Personal Auto:
 
 
 
 
 
 
 
 
 
 
 
Focus States
78.3
 %
17.8
%
96.1
%
 
78.1
%
17.7
%
95.8
%
 
0.2
 %
0.2
 %
0.3
 %
Other States
(9.9
)%
22.9
%
13.0
%
 
73.8
%
20.5
%
94.3
%
 
(83.7
)%
2.4
 %
(81.3
)%
Total Personal Auto
77.5
 %
17.9
%
95.4
%
 
78.0
%
17.7
%
95.7
%
 
(0.5
)%
0.1
 %
(0.3
)%
Commercial Vehicle
75.4
 %
17.5
%
92.9
%
 
75.3
%
17.2
%
92.6
%
 
0.1
 %
0.3
 %
0.3
 %
Classic Collector
56.6
 %
31.2
%
87.9
%
 
56.1
%
32.6
%
88.7
%
 
0.5
 %
(1.3
)%
(0.8
)%
Total statutory ratios
77.3
 %
18.0
%
95.2
%
 
77.8
%
17.9
%
95.7
%
 
(0.5
)%
0.1
 %
(0.4
)%
Total statutory ratios excluding development
79.0
 %
18.0
%
97.0
%
 
80.9
%
17.9
%
98.8
%
 
(1.9
)%
0.1
 %
(1.8
)%
GAAP ratios
77.2
 %
19.8
%
96.9
%
 
77.6
%
20.2
%
97.8
%
 
(0.5
)%
(0.4
)%
(0.9
)%
GAAP ratios excluding development
78.9
 %
19.8
%
98.7
%
 
80.7
%
20.2
%
100.9
%
 
(1.8
)%
(0.4
)%
(2.3
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30,
 
 
 
 
 
2014
 
2013
 
% Point Change
 
Loss &
LAE
Ratio
Underwriting
Ratio
Combined
Ratio
 
Loss &
LAE
Ratio
Underwriting
Ratio
Combined
Ratio
 
Loss &
LAE
Ratio
Underwriting
Ratio
Combined
Ratio
Personal Auto:
 
 
 
 
 
 
 
 
 
 
 
Focus States
78.4
 %
17.6
%
96.1
%
 
78.9
%
17.4
%
96.3
%
 
(0.4
)%
0.2
 %
(0.2
)%
Other States
36.5
 %
27.6
%
64.2
%
 
78.1
%
21.4
%
99.5
%
 
(41.6
)%
6.3
 %
(35.3
)%
Total Personal Auto
78.0
 %
17.7
%
95.7
%
 
78.8
%
17.5
%
96.4
%
 
(0.9
)%
0.2
 %
(0.7
)%
Commercial Vehicle
74.6
 %
17.6
%
92.1
%
 
73.0
%
16.6
%
89.6
%
 
1.6
 %
0.9
 %
2.5
 %
Classic Collector
51.2
 %
32.4
%
83.6
%
 
49.0
%
34.6
%
83.5
%
 
2.2
 %
(2.2
)%
0.1
 %
Total statutory ratios
77.4
 %
17.9
%
95.3
%
 
78.2
%
17.7
%
95.9
%
 
(0.9
)%
0.2
 %
(0.7
)%
Total statutory ratios excluding development
77.9
 %
17.9
%
95.7
%
 
78.0
%
17.7
%
95.7
%
 
(0.2
)%
0.2
 %
0.0
 %
GAAP ratios
77.3
 %
19.6
%
96.9
%
 
78.1
%
19.9
%
98.0
%
 
(0.8
)%
(0.3
)%
(1.1
)%
GAAP ratios excluding development
77.8
 %
19.6
%
97.4
%
 
77.9
%
19.9
%
97.8
%
 
(0.1
)%
(0.3
)%
(0.4
)%
 
In evaluating the profit performance of our business, we review underwriting profitability using statutory combined ratios. Accordingly, the discussion of underwriting results that follows will focus on these ratios and the components thereof, unless otherwise indicated.

The statutory combined ratio for the three and six months ended June 30, 2014 decreased by 0.4 point and 0.7 point from the same periods of 2013. The second quarter and first six months of 2014 included $0.2 million and $3.2 million of favorable development on prior year loss and LAE reserves, respectively, while the second quarter and first six months of 2013 included $1.4 million and $1.3 million of unfavorable development on prior year loss and LAE reserves, respectively. Excluding the effect of development, the statutory combined ratio decreased 1.8 points and 0.0 point, respectively, for the three and six months ended June 30, 2014 compared with the same periods of 2013.
The GAAP combined ratio for the three and six months ended June 30, 2014 decreased by 0.9 point and 1.1 points, respectively, from the same periods of 2013. Excluding the effect of development, the GAAP combined ratio decreased by 2.3 points and 0.4 point, respectively, for the three and six months ended June 30, 2014, compared with the same periods of 2013.

31

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
Management’s Discussion and Analysis of Financial Condition and Results of Operations


Losses from catastrophes were $1.9 million for both the three and six months ended June 30, 2014, compared with $1.1 million and $1.7 million for the same periods of 2013, respectively.
The combined ratio in the Other States decreased by 81.3 points and 35.3 points, respectively, during the three and six months ended June 30, 2014. The improvement in the loss and LAE ratio in the Other States is primarily due to favorable development on prior accident year loss and LAE reserves recognized during the first six months of 2014 of approximately $1.4 million. Earned premium and losses in these states continue to decline as we run off business.
The combined ratio in Commercial Vehicle increased by 0.3 point and 2.5 points, during the three and six months ended June 30, 2014, respectively, compared with the same periods of 2013 primarily due to an increase in the loss and LAE ratio in both periods in 2014. The increase is due to several large losses incurred during the second quarter of 2014.


32

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
Management’s Discussion and Analysis of Financial Condition and Results of Operations


Net Investment Income
Net investment income is comprised of gross investment income and investment management fees and expenses, as shown in the following table ($ in thousands):
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
Investment income:
 
 
 
 
 
 
 
Interest income on fixed maturities, cash and cash equivalents
$
8,963

 
$
8,607

 
$
17,795

 
$
17,202

Dividends on equity securities
689

 
625

 
1,204

 
858

Gross investment income
9,652

 
9,232

 
18,999

 
18,060

Investment expenses
(542
)
 
(610
)
 
(1,090
)
 
(1,100
)
Net investment income
9,110

 
8,622

 
17,909

 
16,960

Average investment balance, at cost
$
1,554,125

 
$
1,489,599

 
$
1,554,837

 
$
1,495,490

Annualized returns excluding realized gains and losses
2.3
%
 
2.3
%
 
2.3
%
 
2.3
%
Annualized returns including realized gains and losses
2.8
%
 
2.5
%
 
2.6
%
 
2.9
%
Changes in investment income reflect fluctuations in market rates and changes in average invested assets. Net investment income for the three and six months ended June 30, 2014 increased compared to the same periods of 2013 primarily due to growth in average investment balances.
The book yield on our portfolio continues to exceed our new money rates. Therefore, we expect that investment returns will continue to decline gradually as proceeds from maturing or prepaid investments are expected to be reinvested at yields lower than the average book yield for the total portfolio.

The following table provides information about our fixed maturity investments at June 30, 2014, which are sensitive to interest rate risk. The table shows expected principal cash flows by expected maturity date for each of the five subsequent years and collectively for all years thereafter. Callable bonds and notes are included based on call date or maturity date depending upon which date produces the most conservative yield. MBS and sinking fund issues are included based on maturity year adjusted for expected payment patterns. 

(in thousands)
Expected Principal Cash Flows
 
 
 
MBS, CMO and
ABS only
 
Excluding MBS,
CMO and ABS
 
Total
 
Maturing Book Yield
For the period ending December 31,
 
 
 
 
 
 
 
2014
$
30,672

 
$
41,776

 
$
72,448

 
2.3
%
2015
67,630

 
164,387

 
232,017

 
2.5
%
2016
71,214

 
174,166

 
245,380

 
2.4
%
2017
53,496

 
200,395

 
253,892

 
2.3
%
2018
35,923

 
90,835

 
126,758

 
2.7
%
Thereafter
178,865

 
233,705

 
412,570

 
3.1
%
Total
$
437,800

 
$
905,264

 
$
1,343,064

 
2.6
%
The cash flows presented take into consideration historical relationships of market yields and prepayment rates. However, the actual prepayment rate may differ from historical trends, resulting in actual principal cash flows that differ from those presented above.





33

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
Management’s Discussion and Analysis of Financial Condition and Results of Operations


Realized Gains (Losses) on Investments
We recorded impairments for unrealized losses deemed other-than-temporary and realized gains and losses on sales and disposals, as follows (before tax, in thousands):
 
Three months ended June 30, 2014
 
Three months ended June 30, 2013
 
Impairments
Recognized
in Earnings
 
Net Realized
Gains  (Losses)
on Sales
 
Total Realized
Gains (Losses)
 
Impairments
Recognized in
Earnings
 
Net Realized
Gains (Losses)
on Sales
 
Total Realized
Gains (Losses)
Fixed maturities
$
(6
)
 
$
580

 
$
573

 
$
(299
)
 
$
807

 
$
508

Equities
0

 
1,273

 
1,273

 
0

 
286

 
286

Short-term investments
0

 
0

 
0

 
0

 
0

 
0

Total
$
(6
)
 
$
1,852

 
$
1,846

 
$
(299
)
 
$
1,093

 
$
794

 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2014
 
Six months ended June 30, 2013
 
Impairments
Recognized
in Earnings
 
Net Realized
Gains  (Losses)
on Sales
 
Total Realized
Gains (Losses)
 
Impairments
Recognized in
Earnings
 
Net Realized
Gains (Losses)
on Sales
 
Total Realized
Gains (Losses)
Fixed maturities
$
(33
)
 
$
1,246

 
$
1,213

 
$
(371
)
 
$
4,329

 
$
3,958

Equities
0

 
1,273

 
1,273

 
0

 
660

 
660

Short-term investments
0

 
5

 
5

 
0

 
0

 
0

Total
$
(33
)
 
$
2,524

 
$
2,491

 
$
(371
)
 
$
4,988

 
$
4,617

 
For our securities held with unrealized losses, we believe, based on our analysis, that (i) we will recover our cost basis in these securities and (ii) we do not intend to sell the securities nor is it more likely than not that there will be a requirement to sell the securities before they recover in value. Should either of these beliefs change with regard to a particular security, a charge for impairment would likely be required. While it is not possible to predict accurately if or when a specific security will become impaired, charges for other-than-temporary impairments could be material to results of operations in a future period.

Interest Expense
At June 30, 2014, we had $275 million of Senior Notes outstanding that accrue interest at 5.0% (the "5.0% Senior Notes"). We recognized $3.4 million and $6.9 million of interest expense on the Senior Notes in the Consolidated Statements of Earnings for the three and six months ended June 30, 2014, respectively, compared to $3.4 million and $7.0 million for the same periods of 2013. Refer to Note 5 to the Consolidated Financial Statements for additional information on the Senior Notes.
Income Taxes
Our GAAP effective tax rate for the three and six months ended June 30, 2014 was 29.6% and 29.5%, respectively, compared with 26.9% and 27.7% for the same periods of 2013. Refer to Note 6 to the Consolidated Financial Statements for additional information on income taxes.

34

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
Management’s Discussion and Analysis of Financial Condition and Results of Operations


LIQUIDITY AND CAPITAL RESOURCES
Sources of Funds
We are a holding company and our insurance subsidiaries conduct our operations. Accordingly, we will have continuing cash needs for administrative expenses, the payment of interest on borrowings, shareholder dividends, share repurchases and taxes.
Funds to meet expenditures at the holding company level come primarily from dividends and tax payments from the insurance subsidiaries, as well as cash and investments held by the holding company. As of June 30, 2014, the holding company had $122.3 million of cash and investments. In 2014, our insurance subsidiaries may pay us up to $66.8 million in ordinary dividends without prior regulatory approval. For the six months ended June 30, 2014, our insurance subsidiaries have paid us ordinary dividends of $30.0 million.
Our insurance subsidiaries generate liquidity to satisfy their obligations primarily by collecting and investing premium in advance of paying claims and generating investment income on their $1.4 billion investment portfolio. Our insurance subsidiaries generated positive cash flows from operations of $8.0 million and $62.5 million, respectively, during the three and six months ended June 30, 2014 compared to positive operating cash flows of $28.9 million and $81.2 million, respectively, during the three and six months ended June 30, 2013.
At June 30, 2014, we had $275 million principal outstanding of Senior Notes. The Senior Notes accrue interest at 5.0%, payable semiannually each March and September. Refer to Note 5 to the Consolidated Financial Statements for more information on our long-term debt.
In August 2011, we renewed our agreement for a $50 million three-year revolving credit facility (the “Credit Agreement”) that requires us to meet certain financial and other covenants. We are currently in compliance with all covenants under the Credit Agreement. At June 30, 2014 there were no borrowings outstanding under the credit agreement. We expect to renew our line of credit in August 2014.
In June 2013, we filed a "shelf" registration statement with the Securities and Exchange Commission registering $300.0 million of our securities, which will allow us to sell any combination of senior or subordinated debt securities, common stock, preferred stock, warrants, depositary shares and units in one or more offerings should we choose to do so in the future.
Uses of Funds
In February 2014, we increased our quarterly dividend to $0.36 per share from $0.30 per share. At this current amount, our 2014 annualized dividend payments would be approximately $16.6 million.
 
On August 3, 2010 our Board of Directors adopted a share and debt repurchase program set to expire on December 31, 2011. On August 2, 2011 our Board of Directors increased the authority under this program by $50.0 million and extended the date to execute the program to December 31, 2012. On November 6, 2012, our Board of Directors again increased the authority under
this share and debt repurchase plan by $25.0 million and extended the date to execute the program to December 31, 2014. During the first quarter of 2014, we repurchased 24,200 shares at an average cost, excluding commissions, of $72.20. During the second quarter of 2014, we repurchased 22,000 shares at an average cost, excluding commissions, of $65.41. As of June 30, 2014, we had $40.6 million of authority remaining under this program.
We believe that cash balances, cash flows generated from operations or borrowings, and maturities and sales of investments are adequate to meet our future liquidity needs and those of our insurance subsidiaries.
Reinsurance
We use excess of loss, catastrophe and extra-contractual loss reinsurance to mitigate the financial impact of large or
catastrophic losses. During 2014, our catastrophe reinsurance protection covers 100% of $55 million in excess of $5 million. Our excess of loss reinsurance provides protection for commercial auto losses up to $700,000 for claims in excess of $300,000 per occurrence. Our extra-contractual loss reinsurance provides protection for losses up to $10 million in excess of $5 million for any single extra-contractual loss. We also use reinsurance to mitigate losses on our Classic Collector business.
Premium ceded under all reinsurance agreements for the three and six months ended June 30, 2014 was $3.5 million and $6.5 million, respectively, compared with $2.5 million and $4.9 million for the same periods of 2013.



35

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
Management’s Discussion and Analysis of Financial Condition and Results of Operations


Investments
Our consolidated investment portfolio at June 30, 2014 contained approximately $1.4 billion in fixed maturity securities, $93.3 million in equity securities and $0.2 million in short-term investments, all carried at fair value with unrealized gains and losses reported in accumulated other comprehensive income, a separate component of shareholders’ equity, on an after-tax basis. At June 30, 2014, we had pre-tax net unrealized gains of $26.9 million on fixed maturities and pre-tax net unrealized gains of $19.7 million on equity securities. Combined, the pre-tax net unrealized gain increased by $20.9 million for the six months ended June 30, 2014. This increase occurred primarily in the fixed portfolio due to lower market interest rates. The average option adjusted duration of our fixed maturity portfolio was 3.5 years at June 30, 2014 compared with 3.6 years at December 31, 2013.
Since we carry all of these securities at fair value in our balance sheet, there is virtually no effect on liquidity or financial condition upon the sale and ultimate realization of unrealized gains and losses.
Approximately 90.4% of our fixed maturity investments at June 30, 2014 were rated “investment grade,” and as of the same date, the average credit rating of our fixed maturity portfolio was AA-. Investment grade securities generally bear lower yields and have lower degrees of risk than those that are unrated or non-investment grade. We believe that a high quality investment portfolio is more likely to generate a stable and predictable investment return.
Fair values of instruments are based on (i) quoted prices in active markets for identical assets (Level 1), (ii) quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all significant inputs are observable in active markets (Level 2) or (iii) valuations derived from valuation techniques in which one or more significant inputs are unobservable in the marketplace (Level 3).
Level 1 securities are U.S. Treasury securities, an exchange-traded fund and equity securities held in a rabbi trust. Level 2 securities are comprised of securities whose fair value was determined using observable market inputs. Level 3 securities are comprised of (i) securities for which there is no active or inactive market for similar instruments, (ii) securities whose fair value is determined based on unobservable inputs and (iii) securities that nationally recognized statistical rating organizations do not rate.


36

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
Management’s Discussion and Analysis of Financial Condition and Results of Operations


Summarized information for our investment portfolio at June 30, 2014 was as follows ($ in thousands):
 
Amortized
Cost
 
Fair Value
 
% of
Total Fair
Value
Fixed Maturities:
 
 
 
 
 
U.S. government
$
66,505

 
$
67,047

 
4.4
%
State and municipal
498,188

 
510,844

 
33.2
%
Mortgage-backed and asset-backed:
 
 
 
 
 
Residential mortgage-backed securities
348,802

 
351,520

 
22.8
%
Commercial mortgage-backed securities
40,295

 
40,391

 
2.6
%
Asset-backed securities ("ABS"):
 
 
 
 
 
Auto loans
52,439

 
52,680

 
3.4
%
Equipment leases
8,383

 
8,421

 
0.5
%
Home equity
505

 
516

 
0.0
%
Credit card receivables
4,515

 
4,521

 
0.3
%
Tax liens
380

 
380

 
0.0
%
Student loans
110

 
118

 
0.0
%
Total ABS
66,332

 
66,635

 
4.3
%
Total mortgage-backed and ABS
455,429

 
458,546

 
29.8
%
Corporates
 
 
 
 
 
Investment grade
262,890

 
269,649

 
17.5
%
Non-investment grade
135,081

 
138,873

 
9.0
%
Total corporates
397,971

 
408,522

 
26.6
%
Total fixed maturities
1,418,093

 
1,444,959

 
93.9
%
Equity securities
73,681

 
93,332

 
6.1
%
Short-term investments
200

 
200

 
0.0
%
Total investments
$
1,491,975

 
$
1,538,492

 
100.0
%
We categorize securities by rating based upon ratings issued by Moody's, Standard & Poor's or Fitch, where available. If all three ratings are available but not equivalent, we exclude the lowest rating and the lower of the remaining ratings is used. If ratings are only available from two agencies, the lowest is used. This methodology is consistent with that used by the major bond indices.
The following table presents the credit rating and fair value ($ in thousands) of our fixed maturity portfolio by major security type at June 30, 2014:
 
 
Rating
 
 
 
 
 
AAA
 
AA
 
A
 
BBB
 
Non-
investment
Grade
 
Total Fair
Value
 
% of
Total
Exposure
U.S. government
$
67,047

 
$
0

 
$
0

 
$
0

 
$
0

 
$
67,047

 
4.6
%
State and municipal
107,086

 
292,844

 
110,914

 
0

 
0

 
510,844

 
35.4
%
Mortgage-backed and asset-backed
426,081

 
26,778

 
5,687

 
0

 
0

 
458,546

 
31.7
%
Corporates
0

 
18,688

 
118,434

 
132,527

 
138,873

 
408,522

 
28.3
%
Total fair value
$
600,214

 
$
338,310

 
$
235,035

 
$
132,527

 
$
138,873

 
$
1,444,959

 
100.0
%
% of total fair value
41.5
%
 
23.4
%
 
16.3
%
 
9.2
%
 
9.6
%
 
100.0
%
 
 

37

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
Management’s Discussion and Analysis of Financial Condition and Results of Operations


Our fixed income portfolio contains no securities issued by any single issuer that exceed 1% of the fair value of the fixed income portfolio.
The following table presents the credit rating and fair value of our state and municipal bond portfolio, by state, at June 30, 2014 ($ in thousands):
 
Rating
 
 
 
 
State
AAA
 
AA
 
A
 
BBB
 
Non-
investment
Grade
 
Total Fair Value
 
% of Total
Exposure
NY
$
8,795

 
$
43,666

 
$
16,785

 
$
0

 
$
0

 
$
69,245

 
13.6
%
CA
0

 
42,903

 
9,870

 
0

 
0

 
52,773

 
10.3
%
MD
26,326

 
2,946

 
0

 
0

 
0

 
29,272

 
5.7
%
GA
12,814

 
2,402

 
12,178

 
0

 
0

 
27,393

 
5.4
%
TX
10,532

 
9,100

 
5,652

 
0

 
0

 
25,284

 
4.9
%
NC
11,137

 
10,184

 
0

 
0

 
0

 
21,322

 
4.2
%
PA
0

 
12,907

 
8,225

 
0

 
0

 
21,131

 
4.1
%
WA
825

 
18,360

 
1,709

 
0

 
0

 
20,893

 
4.1
%
VA
4,353

 
12,143

 
0

 
0

 
0

 
16,496

 
3.2
%
FL
1,000

 
9,785

 
5,405

 
0

 
0

 
16,191

 
3.2
%
All other states
31,304

 
128,448

 
51,091

 
0

 
0

 
210,843

 
41.3
%
Total fair value
$
107,086

 
$
292,844

 
$
110,914

 
$
0

 
$
0

 
$
510,844

 
100.0
%
% of total fair value
21.0
%
 
57.3
%
 
21.7
%
 
0.0
%
 
0.0
%
 
100.0
%
 
 
The following table presents the fair value of our state and municipal bond portfolio, by state and type of bond, at June 30, 2014 ($ in thousands):
 
 
Type
 
 
 
 
 
General Obligation
 
 
 
 
 
 
 
 
 
 
State
State
 
Local
 
Revenue
 
Certificate of Participation
 
Other
 
Total Fair Value
 
% of Total
Exposure
NY
$
7,681

 
$
8,453

 
$
53,112

 
$
0

 
$
0

 
$
69,245

 
13.6
%
CA
8,432

 
20,204

 
24,138

 
0

 
0

 
52,773

 
10.3
%
MD
11,786

 
14,541

 
2,946

 
0

 
0

 
29,272

 
5.7
%
GA
12,814

 
1,128

 
13,452

 
0

 
0

 
27,393

 
5.4
%
TX
1,451

 
7,798

 
16,035

 
0

 
0

 
25,284

 
4.9
%
NC
3,838

 
3,235

 
14,249

 
0

 
0

 
21,322

 
4.2
%
PA
8,046

 
792

 
12,293

 
0

 
0

 
21,131

 
4.1
%
WA
5,692

 
3,043

 
12,159

 
0

 
0

 
20,893

 
4.1
%
VA
1,035

 
6,732

 
8,729

 
0

 
0

 
16,496

 
3.2
%
FL
1,000

 
0

 
10,595

 
4,595

 
0

 
16,191

 
3.2
%
All other states
45,097

 
23,246

 
140,536

 
0

 
1,964

 
210,843

 
41.3
%
Total fair value
$
106,871

 
$
89,170

 
$
308,243


$
4,595


$
1,964

 
$
510,844

 
100.0
%
% of total fair value
20.9
%
 
17.5
%
 
60.3
%
 
0.9
%
 
0.4
%
 
100.0
%
 
 
 








38

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
Management’s Discussion and Analysis of Financial Condition and Results of Operations




The following table presents the fair value of the revenue category of our state and municipal bond portfolio, by state and further classification, at June 30, 2014 ($ in thousands):
 
 
Revenue Bonds
 
 
State
Transportation
 
Utilities
 
Education
 
Other
 
Total Fair Value
 
% of Total
Exposure
NY
$
25,792

 
$
0

 
$
7,112

 
$
20,208

 
$
53,112

 
17.2
%
CA
8,166

 
9,859

 
0

 
6,113

 
24,138

 
7.8
%
TX
2,167

 
2,958

 
3,919

 
6,991

 
16,035

 
5.2
%
NJ
2,015

 
0

 
4,621

 
8,198

 
14,833

 
4.8
%
NC
0

 
4,065

 
0

 
10,184

 
14,249

 
4.6
%
GA
6,640

 
4,417

 
1,274

 
1,120

 
13,452

 
4.4
%
CO
0

 
0

 
7,044

 
5,333

 
12,376

 
4.0
%
PA
8,225

 
0

 
2,819

 
1,250

 
12,293

 
4.0
%
WA
0

 
8,566

 
0

 
3,592

 
12,159

 
3.9
%
IN
3,050

 
0

 
1,405

 
6,631

 
11,087

 
3.6
%
All other states
16,612

 
16,748

 
14,868

 
76,281

 
124,510

 
40.4
%
Total fair value
$
72,667

 
$
46,613

 
$
43,062

 
$
145,902

 
$
308,243

 
100.0
%
% of total fair value
23.6
%
 
15.1
%
 
14.0
%
 
47.3
%
 
100.0
%
 
 
The following table presents the credit rating and fair value of our residential mortgage-backed securities at June 30, 2014 by deal origination year ($ in thousands): 
 
Rating
 
 
 
 
Deal Origination Year
AAA
 
AA
 
A
 
BBB
 
Non-
investment
Grade
 
Total Fair
Value
 
% of Total
Exposure
2002
$
76

 
$
0

 
$
0

 
$
0

 
$
0

 
$
76

 
0.0
%
2003
2,943

 
0

 
0

 
0

 
0

 
2,943

 
0.8
%
2004
2,214

 
0

 
0

 
0

 
0

 
2,214

 
0.6
%
2005
4,055

 
0

 
0

 
0

 
0

 
4,055

 
1.2
%
2006
4,364

 
0

 
0

 
0

 
0

 
4,364

 
1.2
%
2007
3,015

 
0

 
0

 
0

 
0

 
3,015

 
0.9
%
2008
11,008

 
0

 
0

 
0

 
0

 
11,008

 
3.1
%
2009
30,967

 
0

 
0

 
0

 
0

 
30,967

 
8.8
%
2010
48,540

 
0

 
0

 
0

 
0

 
48,540

 
13.8
%
2011
38,436

 
0

 
0

 
0

 
0

 
38,436

 
10.9
%
2012
92,969

 
0

 
0

 
0

 
0

 
92,969

 
26.4
%
2013
82,746

 
0

 
0

 
0

 
0

 
82,746

 
23.5
%
2014
30,185

 
0

 
0

 
0

 
0

 
30,185

 
8.6
%
Total fair value
$
351,520

 
$
0

 
$
0

 
$
0

 
$
0

 
$
351,520

 
100.0
%
% of total fair value
100.0
%
 
0.0
%
 
0.0
%
 
0.0
%
 
0.0
%
 
100.0
%
 
 
All of the $351.5 million of residential mortgage-backed securities were issued by government-sponsored enterprises (“GSE”).
 

39

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
Management’s Discussion and Analysis of Financial Condition and Results of Operations


The following table presents the credit rating and fair value of our commercial mortgage-backed securities at June 30, 2014 by deal origination year ($ in thousands):
 
 
Rating
 
 
 
 
Deal Origination Year
AAA
 
AA
 
A
 
BBB
 
Non-
investment
Grade
 
Total Fair
Value
 
% of Total
Exposure
2005
$
6,503

 
$
0

 
$
0

 
$
0

 
$
0

 
$
6,503

 
16.1
%
2006
12,910

 
0

 
0

 
0

 
0

 
12,910

 
32.0
%
2007
6,884

 
0

 
0

 
0

 
0

 
6,884

 
17.0
%
2008
0

 
752

 
0

 
0

 
0

 
752

 
1.9
%
2010
3,988

 
0

 
0

 
0

 
0

 
3,988

 
9.9
%
2011
1,224

 
0

 
0

 
0

 
0

 
1,224

 
3.0
%
2012
4,029

 
0

 
0

 
0

 
0

 
4,029

 
10.0
%
2013
1,447

 
0

 
0

 
0

 
0

 
1,447

 
3.6
%
2014
2,655

 
0

 
0

 
0

 
0

 
2,655

 
6.6
%
Total fair value
$
39,639


$
752


$
0


$
0


$
0


$
40,391

 
100.0
%
% of total fair value
98.1
%
 
1.9
%
 
0.0
%
 
0.0
%
 
0.0
%
 
100.0
%
 
 
None of the $40.4 million of commercial mortgage-backed securities were issued by GSEs.
 
The following table presents the credit rating and fair value of our ABS portfolio at June 30, 2014 by deal origination year ($ in thousands):
 
Rating
 
 
 
 
Deal Origination Year
AAA
 
AA
 
A
 
BBB
 
Non-
investment
Grade
 
Total Fair
Value
 
% of Total
Exposure
2001
$
81

 
$
0

 
$
0

 
$
0

 
$
0

 
$
81

 
0.1
%
2003
435

 
0

 
0

 
0

 
0

 
435

 
0.7
%
2011
579

 
363

 
0

 
0

 
0

 
941

 
1.4
%
2012
11,037

 
6,005

 
678

 
0

 
0

 
17,720

 
26.6
%
2013
19,522

 
11,664

 
2,387

 
0

 
0

 
33,573

 
50.4
%
2014
3,269

 
7,994

 
2,623

 
0

 
0

 
13,885

 
20.8
%
Total fair value
$
34,922

 
$
26,026

 
$
5,687

 
$
0

 
$
0

 
$
66,635

 
100.0
%
% of total fair value
52.4
%
 
39.1
%
 
8.5
%
 
0.0
%
 
0.0
%
 
100.0
%
 
 

40

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
Management’s Discussion and Analysis of Financial Condition and Results of Operations


The following table presents the credit rating and fair value of our corporate bond portfolio, by industry sector and rating of bond, at June 30, 2014 ($ in thousands):

 
Rating
 
 
 
 
Industry Sector
AAA
 
AA
 
A
 
BBB
 
Non-
investment
Grade
 
Total Fair Value
 
% of Total
Exposure
 Financial
$
0

 
$
14,899

 
$
81,648

 
$
46,569

 
$
13,995

 
$
157,111

 
38.5
%
 Consumer, Non-cyclical
0

 
3,789

 
18,364

 
13,404

 
27,764

 
$
63,320

 
15.5
%
 Communications
0

 
0

 
2,789

 
22,436

 
23,372

 
$
48,597

 
11.9
%
 Consumer, Cyclical
0

 
0

 
2,929

 
11,879

 
21,019

 
$
35,827

 
8.8
%
 Energy
0

 
0

 
7,617

 
10,485

 
17,311

 
$
35,412

 
8.7
%
 Industrial
0

 
0

 
0

 
7,236

 
14,479

 
$
21,716

 
5.3
%
 Utilities
0

 
0

 
2,771

 
9,352

 
5,847

 
$
17,971

 
4.4
%
 Technology
0

 
0

 
1,736

 
5,981

 
8,962

 
$
16,679

 
4.1
%
 Basic Materials
0

 
0

 
580

 
5,185

 
6,124

 
$
11,889

 
2.9
%
Total fair value
$
0

 
$
18,688

 
$
118,434

 
$
132,527

 
$
138,873

 
$
408,522

 
100.0
%
% of total fair value
0.0
%
 
4.6
%
 
29.0
%
 
32.4
%
 
34.0
%
 
100.0
%
 
 

Included in our investments in corporate fixed income securities at June 30, 2014 are $40.0 million of dollar-denominated investments with issuers or guarantors in foreign countries, as follows ($ in thousands):
 
Rating
 
 
 
 
Issuer or Guarantor
AAA
 
AA
 
A
 
BBB
 
Non-
investment
Grade
 
Total Fair Value
 
% of Total
Exposure
 Britain
$
0

 
$
6,354

 
$
11,071

 
$
0

 
$
0

 
$
17,425

 
43.6
%
 Canada
0

 
3,549

 
1,729

 
0

 
448

 
$
5,726

 
14.3
%
 Australia
0

 
1,690

 
3,743

 
0

 
0

 
$
5,432

 
13.6
%
 France
0

 
2,072

 
2,681

 
0

 
0

 
$
4,753

 
11.9
%
 Switzerland
0

 
0

 
4,577

 
0

 
0

 
$
4,577

 
11.4
%
 Sweden
0

 
1,674

 
0

 
0

 
0

 
$
1,674

 
4.2
%
 Cayman Islands
0

 
0

 
0

 
0

 
407

 
$
407

 
1.0
%
Total fair value
$
0

 
$
15,340

 
$
23,800

 
$
0

 
$
855

 
$
39,994

 
100.0
%
% of total fair value
0.0
%
 
38.4
%
 
59.5
%
 
0.0
%
 
2.1
%
 
100.0
%
 
 

We do not own any investments that are denominated in a currency other than the U.S. dollar.


41

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

ITEM 3
Quantitative and Qualitative Disclosures about Market Risk
As of June 30, 2014, there were no material changes to the information provided in our Form 10-K for the year ended December 31, 2013 under the caption “Exposure to Market Risk” in Management’s Discussion and Analysis of Financial Condition and Results of Operations. Refer to Item 2 Management’s Discussion and Analysis under the caption “Investments” for updates to disclosures made under the sub caption “Credit Risk” in our Form 10-K for the year ended December 31, 2013.

ITEM 4
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of Infinity’s disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2014. Based on that evaluation, we concluded that the controls and procedures are effective in providing reasonable assurance that material information required to be disclosed in our reports filed with or submitted to the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate.
Changes in Internal Control over Financial Reporting
During the fiscal quarter ended June 30, 2014, there have been no changes to our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

42

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements


PART II
OTHER INFORMATION

ITEM 1
Legal Proceedings
We have not become a party to any material legal proceedings nor have there been any material developments in our legal proceedings disclosed in our Form 10-K for the year ended December 31, 2013. For a description of our previously reported legal proceedings, refer to Part I, Item 3, Legal Proceedings, in the Form 10-K for the year ended December 31, 2013.

ITEM 1A
Risk Factors
There have been no material changes in our risk factors as disclosed in our Form 10-K for the year ended December 31, 2013. For a description of our previously reported risk factors, refer to Part I, Item 1A, Risk Factors, in the Form 10-K for the year ended December 31, 2013.
ITEM 2
Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
 
Period
Total Number
of Shares
Purchased (a)
 
Average Price
Paid per Share (b)
 
Total Number of
Shares Purchased
as Part of
Publicly
Announced Plans
or Programs (c)
 
Approximate Dollar
Value that May Yet Be
Purchased Under the
Plans or Programs (c)
April 1, 2014 - April 30, 2014
35,044

 
$
65.73

 
8,800

 
$
41,482,782

May 1, 2014 - May 31, 2014
6,900

 
64.62

 
6,900

 
41,036,699

June 1, 2014 - June 30, 2014
6,300

 
65.47

 
6,300

 
40,624,019

Total
48,244

 
$
65.54

 
22,000

 
$
40,624,019

 
(a)
Includes 26,244 shares surrendered to cover the withholding taxes related to the issuance of shares under the performance share plan.
(b)
Average price paid per share excludes commissions.
(c)
On November 6, 2012, our Board of Directors increased the authority under our current share and debt repurchase plan by $25.0 million and extended the date to execute the program to December 31, 2014 from December 31, 2012.


43

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

ITEM 6
Exhibit 31.1 -     Certification of the Chief Executive Officer under Exchange Act Rule 13a-14(a)
Exhibit 31.2 -     Certification of the Chief Financial Officer under Exchange Act Rule 13a-14(a)
Exhibit 32 -    Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350

Exhibit 101.INS - XBRL Instance Document

Exhibit 101.SCH - XBRL Taxonomy Extension Schema Document (1)

Exhibit 101.CAL - XBRL Taxonomy Extension Calculation Linkbase Document (1)

Exhibit 101.DEF - XBRL Taxonomy Extension Definition Linkbase Document (1)

Exhibit 101.LAB - XBRL Taxonomy Extension Label Linkbase Document (1)

Exhibit 101.PRE - XBRL Taxonomy Extension Presentation Linkbase Document (1)


(1) Furnished with this report, in accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be "filed" for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.



 

44

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, Infinity Property and Casualty Corporation has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
Infinity Property and Casualty Corporation
 
 
 
 
BY:
/s/ ROGER SMITH
August 7, 2014
 
Roger Smith
 
 
Executive Vice President, Chief Financial Officer and Treasurer (principal financial and accounting officer)

45