INFINITY PROPERTY & CASUALTY CORP - FORM 10-Q - November 6, 2014

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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 September 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 October 31, 2014 there were 11,495,254 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 September 30,
 
Nine months ended September 30,
 
2014
 
2013
 
% Change
 
2014
 
2013
 
% Change
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Earned premium
$
332,977

 
$
327,078

 
1.8
 %
 
$
993,680

 
$
976,882

 
1.7
 %
Installment and other fee income
23,254

 
24,183

 
(3.8
)%
 
71,439

 
74,435

 
(4.0
)%
Net investment income
8,754

 
8,141

 
7.5
 %
 
26,663

 
25,101

 
6.2
 %
Net realized gains (losses) on investments1
1,013

 
(546
)
 
NM

 
3,503

 
4,072

 
(14.0
)%
Other income
162

 
289

 
(43.9
)%
 
442

 
414

 
6.7
 %
Total revenues
366,160

 
359,145

 
2.0
 %
 
1,095,727

 
1,080,903

 
1.4
 %
Costs and Expenses:
 
 
 
 
 
 
 
 
 
 
 
Losses and loss adjustment expenses
248,483

 
255,240

 
(2.6
)%
 
759,120

 
762,690

 
(0.5
)%
Commissions and other underwriting expenses
90,560

 
88,508

 
2.3
 %
 
268,258

 
268,119

 
0.1
 %
Interest expense
3,450

 
3,458

 
(0.2
)%
 
10,354

 
10,456

 
(1.0
)%
Corporate general and administrative expenses
1,790

 
1,888

 
(5.2
)%
 
6,012

 
5,960

 
0.9
 %
Other expenses
151

 
409

 
(63.1
)%
 
467

 
1,802

 
(74.1
)%
Total costs and expenses
344,433

 
349,503

 
(1.5
)%
 
1,044,211

 
1,049,027

 
(0.5
)%
Earnings before income taxes
21,727

 
9,643

 
125.3
 %
 
51,516

 
31,877

 
61.6
 %
Provision for income taxes
6,872

 
2,448

 
180.7
 %
 
15,667

 
8,612

 
81.9
 %
Net Earnings
$
14,855

 
$
7,195

 
106.5
 %
 
$
35,849

 
$
23,265

 
54.1
 %
Net Earnings per Common Share:
 
 
 
 
 
 
 
 
 
 
 
Basic
$
1.30

 
$
0.63

 
106.3
 %
 
$
3.13

 
$
2.03

 
54.2
 %
Diluted
1.29

 
0.62

 
108.1
 %
 
3.10

 
1.99

 
55.8
 %
Average Number of Common Shares:
 
 
 
 
 
 
 
 
 
 
 
Basic
11,451

 
11,421

 
0.3
 %
 
11,438

 
11,463

 
(0.2
)%
Diluted
11,554

 
11,622

 
(0.6
)%
 
11,572

 
11,670

 
(0.8
)%
Cash Dividends per Common Share
$
0.36

 
$
0.30

 
20.0
 %
 
$
1.08

 
$
0.90

 
20.0
 %
 
 
 
 
 
 
 
 
 
 
 
 
1Net realized gains before impairment losses
$
1,034

 
$
273

 
278.4
 %
 
$
3,558

 
$
5,262

 
(32.4
)%
Total other-than-temporary impairment (OTTI) losses
(24
)
 
(1,547
)
 
(98.5
)%
 
(917
)
 
(2,105
)
 
(56.4
)%
Non-credit portion in other comprehensive income
2

 
728

 
(99.7
)%
 
888

 
915

 
(3.0
)%
OTTI losses reclassified from other comprehensive income
0

 
0

 
NM

 
(25
)
 
0

 
NM

Net impairment losses recognized in earnings
(21
)
 
(819
)
 
(97.4
)%
 
(55
)
 
(1,190
)
 
(95.4
)%
Total net realized gains (losses) on investments
$
1,013

 
$
(546
)
 
NM

 
$
3,503

 
$
4,072

 
(14.0
)%
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 September 30,
 
Nine months ended September 30,
 
2014
 
2013
 
2014
 
2013
Net earnings
$
14,855

 
$
7,195

 
$
35,849

 
$
23,265

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

 
652

 
150

Unrealized gains (losses) on investments:
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during the period
(10,232
)
 
9,847

 
13,138

 
(17,463
)
Less: Reclassification adjustments for (gains) losses included in net earnings
(1,013
)
 
546

 
(3,503
)
 
(4,072
)
Unrealized gains (losses) on investments, net
(11,245
)
 
10,393

 
9,634

 
(21,534
)
Other comprehensive income (loss), before tax
(11,247
)
 
10,443

 
10,287

 
(21,385
)
Income tax (expense) benefit related to components of other comprehensive income
3,937

 
(3,655
)
 
(3,600
)
 
7,485

Other comprehensive income (loss), net of tax
(7,311
)
 
6,788

 
6,686

 
(13,900
)
Comprehensive income
$
7,544

 
$
13,983

 
$
42,535

 
$
9,364




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)
 
September 30, 2014
 
December 31, 2013
 
(unaudited)
 
 
Assets
 
 
 
Investments:
 
 
 
Fixed maturities – at fair value (amortized cost $1,411,360 and $1,345,077)
$
1,429,734

 
$
1,354,305

Equity securities – at fair value (cost $73,739 and $74,718)
90,638

 
91,127

Short-term investments - at fair value (amortized cost $813 and $2,595)
813

 
2,596

Total investments
1,521,184

 
1,448,027

Cash and cash equivalents
94,672

 
134,211

Accrued investment income
12,200

 
12,772

Agents’ balances and premium receivable, net of allowances for doubtful accounts of $15,410 and $15,884
507,755

 
451,339

Property and equipment, net of accumulated depreciation of $61,188 and $53,368
56,119

 
48,061

Prepaid reinsurance premium
5,220

 
3,133

Recoverables from reinsurers (includes $70 and $77 on paid losses and LAE)
13,953

 
14,508

Deferred policy acquisition costs
95,365

 
88,258

Current and deferred income taxes
21,994

 
28,648

Receivable for securities sold
1,871

 
2,791

Other assets
11,926

 
10,242

Goodwill
75,275

 
75,275

Total assets
$
2,417,536

 
$
2,317,265

Liabilities and Shareholders’ Equity
 
 
 
Liabilities:
 
 
 
Unpaid losses and loss adjustment expenses
$
673,198

 
$
646,577

Unearned premium
622,276

 
566,004

Payable to reinsurers
0

 
2

Long-term debt (fair value $288,824 and $272,632)
275,000

 
275,000

Commissions payable
18,573

 
19,100

Payable for securities purchased
24,654

 
39,887

Other liabilities
122,366

 
113,936

Total liabilities
1,736,067

 
1,660,507

Commitments and contingencies (See Note 9)


 


Shareholders’ equity:
 
 
 
Common stock, no par value (50,000,000 shares authorized; 21,726,573 and 21,599,047 shares issued)
21,742

 
21,684

Additional paid-in capital
372,195

 
368,902

Retained earnings
708,435

 
685,011

Accumulated other comprehensive income, net of tax
23,311

 
16,624

Treasury stock, at cost (10,225,372 and 10,095,416 shares)
(444,213
)
 
(435,463
)
Total shareholders’ equity
681,469

 
656,758

Total liabilities and shareholders’ equity
$
2,417,536

 
$
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
—

 
—

 
23,265

 
—

 
—

 
23,265

Net change in postretirement benefit liability
—

 
—

 
—

 
97

 
—

 
97

Change in unrealized gain on investments
—

 
—

 
—

 
(13,770
)
 
—

 
(13,770
)
Change in non-credit component of impairment losses on fixed maturities
—

 
—

 
—

 
(228
)
 
—

 
(228
)
Comprehensive income
 
 
 
 
 
 
 
 
 
 
9,364

Dividends paid to common shareholders
—

 
—

 
(10,376
)
 
—

 
—

 
(10,376
)
Shares issued and share-based compensation expense, including tax benefit
106

 
4,854

 
—

 
—

 
—

 
4,960

Acquisition of treasury stock
—

 
—

 
—

 
—

 
(11,017
)
 
(11,017
)
Balance at September 30, 2013
$
21,635

 
$
366,698

 
$
679,088

 
$
15,950

 
$
(434,198
)
 
$
649,174

Net earnings
—

 
—

 
9,368

 
—

 
—

 
9,368

Net change in postretirement benefit liability
—

 
—

 
—

 
491

 
—

 
491

Change in unrealized gain on investments
—

 
—

 
—

 
1,045

 
—

 
1,045

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

 
—

 
—

 
(863
)
 
—

 
(863
)
Comprehensive income
 
 
 
 
 
 
 
 
 
 
10,042

Dividends paid to common shareholders
—

 
—

 
(3,445
)
 
—

 
—

 
(3,445
)
Shares issued and share-based compensation expense, including tax benefit
49

 
2,204

 
—

 
—

 
—

 
2,252

Acquisition of treasury stock
—

 
—

 
—

 
—

 
(1,265
)
 
(1,265
)
Balance at December 31, 2013
$
21,684

 
$
368,902

 
$
685,011

 
$
16,624

 
$
(435,463
)
 
$
656,758

Net earnings
—

 
—

 
35,849

 
—

 
—

 
35,849

Net change in postretirement benefit liability
—

 
—

 
—

 
424

 
—

 
424

Change in unrealized gain on investments
—

 
—

 
—

 
6,430

 
—

 
6,430

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

 
—

 
—

 
(168
)
 
—

 
(168
)
Comprehensive income
 
 
 
 
 
 
 
 
 
 
42,535

Dividends paid to common shareholders
—

 
—

 
(12,425
)
 
—

 
—

 
(12,425
)
Shares issued and share-based compensation expense, including tax benefit
58

 
3,293

 
—

 
—

 
—

 
3,350

Acquisition of treasury stock
—

 
—

 
—

 
—

 
(8,750
)
 
(8,750
)
Balance at September 30, 2014
$
21,742

 
$
372,195

 
$
708,435

 
$
23,311

 
$
(444,213
)
 
$
681,469


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)


7
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

 
Three months ended September 30,
 
2014
 
2013
Operating Activities:
 
 
 
Net earnings
$
14,855

 
$
7,195

Adjustments:
 
 
 
Depreciation
2,769

 
2,259

Amortization
5,519

 
5,357

Net realized (gains) losses on investments
(1,013
)
 
546

(Gain) loss on disposal of property and equipment
10

 
(121
)
Share-based compensation expense
732

 
956

Excess tax benefits from share-based payment arrangements
(62
)
 
(218
)
Activity related to rabbi trust
(22
)
 
50

Change in accrued investment income
1,278

 
687

Change in agents’ balances and premium receivable
(13,222
)
 
(4,849
)
Change in reinsurance receivables
206

 
765

Change in deferred policy acquisition costs
(1,348
)
 
1,034

Change in other assets
(34
)
 
(2,418
)
Change in unpaid losses and loss adjustment expenses
7,976

 
20,857

Change in unearned premium
11,530

 
(927
)
Change in payable to reinsurers
0

 
159

Change in other liabilities
3,801

 
11,000

Net cash provided by operating activities
32,976

 
42,334

Investing Activities:
 
 
 
Purchases of fixed maturities
(97,660
)
 
(148,160
)
Purchases of equity securities
0

 
(1,000
)
Purchases of short-term investments
(7,720
)
 
(575
)
Purchases of property and equipment
(3,092
)
 
(5,908
)
Maturities and redemptions of fixed maturities
50,767

 
46,100

Maturities and redemptions of short-term investments
200

 
0

Proceeds from sale of fixed maturities
60,915

 
42,909

Proceeds from sale of short-term investments
6,864

 
125

Proceeds from sale of property and equipment
4

 
171

Net cash provided by (used in) investing activities
10,277

 
(66,338
)
Financing Activities:
 
 
 
Proceeds from stock options exercised and employee stock purchases
73

 
972

Excess tax benefits from share-based payment arrangements
62

 
218

Principal payments under capital lease obligation
(123
)
 
(133
)
Acquisition of treasury stock
(3,589
)
 
(2,208
)
Dividends paid to shareholders
(4,142
)
 
(3,448
)
Net cash used in financing activities
(7,719
)
 
(4,600
)
Net increase (decrease) in cash and cash equivalents
35,534

 
(28,604
)
Cash and cash equivalents at beginning of period
59,139

 
115,861

Cash and cash equivalents at end of period
$
94,672

 
$
87,257





8
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)


9
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

 
Nine months ended September 30,
 
2014
 
2013
Operating Activities:
 
 
 
Net earnings
$
35,849

 
$
23,265

Adjustments:
 
 
 
Depreciation
7,967

 
6,312

Amortization
16,786

 
15,072

Net realized gains on investments
(3,503
)
 
(4,072
)
Gain on disposal of property and equipment
(17
)
 
(120
)
Share-based compensation expense
2,441

 
3,043

Excess tax benefits from share-based payment arrangements
(213
)
 
(375
)
Activity related to rabbi trust
39

 
75

Change in accrued investment income
572

 
(171
)
Change in agents’ balances and premium receivable
(56,416
)
 
(34,140
)
Change in reinsurance receivables
(1,532
)
 
(323
)
Change in deferred policy acquisition costs
(7,107
)
 
(2,983
)
Change in other assets
1,811

 
2,217

Change in unpaid losses and loss adjustment expenses
26,621

 
59,966

Change in unearned premium
56,272

 
42,726

Change in payable to reinsurers
(2
)
 
23

Change in other liabilities
8,114

 
11,205

Net cash provided by operating activities
87,681

 
121,720

Investing Activities:
 
 
 
Purchases of fixed maturities
(396,904
)
 
(638,575
)
Purchases of equity securities
(2,600
)
 
(2,100
)
Purchases of short-term investments
(7,920
)
 
(4,191
)
Purchases of property and equipment
(16,043
)
 
(15,139
)
Maturities and redemptions of fixed maturities
123,958

 
149,382

Maturities and redemptions of short-term investments
2,800

 
0

Proceeds from sale of fixed maturities
178,254

 
323,845

Proceeds from sale of equity securities
4,999

 
7,244

Proceeds from sale of short-term investments
6,864

 
125

Proceeds from sale of property and equipment
34

 
171

Net cash used in investing activities
(106,558
)
 
(179,239
)
Financing Activities:
 
 
 
Proceeds from stock options exercised and employee stock purchases
697

 
1,543

Excess tax benefits from share-based payment arrangements
213

 
375

Principal payments under capital lease obligation
(398
)
 
(582
)
Acquisition of treasury stock
(8,749
)
 
(11,365
)
Dividends paid to shareholders
(12,425
)
 
(10,376
)
Net cash used in financing activities
(20,662
)
 
(20,406
)
Net decrease in cash and cash equivalents
(39,539
)
 
(77,925
)
Cash and cash equivalents at beginning of period
134,211

 
165,182

Cash and cash equivalents at end of period
$
94,672

 
$
87,257


10
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 nine months ended September 30, 2013 to correctly classify $24.2 million and $74.4 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 September 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.







11
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 September 30,
 
Nine months ended September 30,
 
2014
 
2013
 
2014
 
2013
Net earnings
$
14,855

 
$
7,195

 
$
35,849

 
$
23,265

Average basic shares outstanding
11,451

 
11,421

 
11,438

 
11,463

Basic net earnings per share
$
1.30

 
$
0.63

 
$
3.13

 
$
2.03

 
 
 
 
 
 
 
 
Average basic shares outstanding
11,451

 
11,421

 
11,438

 
11,463

Restricted stock not yet vested
23

 
49

 
47

 
44

Dilutive effect of assumed option exercises
0

 
26

 
1

 
31

Dilutive effect of Performance Share Plan
79

 
127

 
86

 
132

Average diluted shares outstanding
11,554

 
11,622

 
11,572

 
11,670

Diluted net earnings per share
$
1.29

 
$
0.62

 
$
3.10

 
$
1.99


 

12
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
September 30, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash and cash equivalents
 
$
94,672

 
$
0

 
$
0

 
$
94,672

Fixed maturity securities:
 
 
 
 
 
 
 
 
U.S. government
 
65,646

 
92

 
0

 
65,738

State and municipal
 
0

 
502,672

 
0

 
502,672

Mortgage-backed securities:
 

 
 
 
 
 
 
Residential
 
0

 
352,412

 
0

 
352,412

Commercial
 
0

 
46,253

 
0

 
46,253

Total mortgage-backed securities
 
0

 
398,665

 
0

 
398,665

Asset-backed securities
 
0

 
61,634

 
262

 
61,896

Corporates
 
0

 
397,054

 
3,709

 
400,763

Total fixed maturities
 
65,646

 
1,360,117

 
3,971

 
1,429,734

Equity securities
 
90,638

 
0

 
0

 
90,638

Short-term investments
 
0

 
813

 
0

 
813

Total cash and investments
 
$
250,956

 
$
1,360,929

 
$
3,971

 
$
1,615,856

Percentage of total cash and investments
 
15.5
%
 
84.2
%
 
0.2
%
 
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
%

13
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 $288.8 million and $272.6 million fair value of our long-term debt at September 30, 2014 and December 31, 2013, respectively, would be included in Level 2 of the fair value hierarchy if it were reported at fair value.
Level 1 includes cash and cash equivalents, U.S. Treasury securities, an exchange-traded fund and equities held in a rabbi trust which funds our Supplemental Employee Retirement Plan ("SERP"). Level 2 includes securities whose fair value was determined using observable market inputs. Level 3 securities are comprised of (i) securities for which there is no active or inactive market for similar instruments, (ii) securities whose fair value is determined based on unobservable inputs and (iii) securities, other than those backed by the U.S. Government, that are not rated by a nationally recognized statistical rating organization ("NRSRO"). We recognize transfers between levels at the beginning of the reporting period.
A third party nationally recognized pricing service provides the fair value of securities in Level 2. We review the third party pricing methodologies quarterly and test for significant differences between the market price used to value the security and recent sales activity.
The following tables present the progression in the Level 3 fair value category ($ in thousands): 
 
Three months ended September 30, 2014
 
U.S.
Government
 
Corporates
 
Asset-Backed Securities
 
Total
Balance at beginning of period
$
0

 
$
4,569

 
$
380

 
$
4,949

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

 
191

 
0

 
191

Included in other comprehensive income
0

 
(90
)
 
0

 
(90
)
Sales


 
(690
)
 
0

 
(690
)
Settlements
0

 
(271
)
 
(118
)
 
(389
)
Balance at end of period
$
0

 
$
3,709

 
$
262

 
$
3,971

 
 
 
 
 
 
 
 
 
Three months ended September 30, 2013
 
U.S.
Government
 
Corporates
 
Asset-Backed Securities
 
Total
Balance at beginning of period
$
3,124

 
$
8,055

 
$
0

 
$
11,179

Total gains or (losses), unrealized or realized
 
 
 
 
 
 
 
Included in net earnings
(7
)
 
22

 
0

 
15

Included in other comprehensive income
(66
)
 
(72
)
 
0

 
(138
)
Settlements
(109
)
 
(147
)
 
0

 
(255
)
Balance at end of period
$
2,942

 
$
7,858

 
$
0

 
$
10,800


14
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

 
Nine months ended September 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

 
220

 
0

 
220

Included in other comprehensive income
0

 
(149
)
 
(1
)
 
(151
)
Sales


 
(690
)
 
0

 
(690
)
Settlements
0

 
(846
)
 
(422
)
 
(1,268
)
Balance at end of period
$
0

 
$
3,709

 
$
262

 
$
3,971

 
 
 
 
 
 
 
 
 
Nine months ended September 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
(39
)
 
494

 
0

 
455

Included in other comprehensive income
(137
)
 
(393
)
 
0

 
(530
)
Settlements
(594
)
 
(1,343
)
 
0

 
(1,938
)
Balance at end of period
$
2,942

 
$
7,858

 
$
0

 
$
10,800


Of the $4.0 million fair value of securities in Level 3 at September 30, 2014, which consists of seven securities, we priced five 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.
There were no transfers between Levels 1, 2 or 3 during the nine months ended September 30, 2014.
The gains or losses included in net earnings are included in the line item "Net realized gains (losses) 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.


15
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):
 
 
September 30, 2014
 
December 31, 2013
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
94,672

 
$
94,672

 
$
134,211

 
$
134,211

Investments
 
 
 
 
 
 
 
Fixed maturities
1,429,734

 
1,429,734

 
1,354,305

 
1,354,305

Equity securities
90,638

 
90,638

 
91,127

 
91,127

Short-term
813

 
813

 
2,596

 
2,596

Total cash and investments
$
1,615,856

 
$
1,615,856

 
$
1,582,238

 
$
1,582,238

Liabilities:
 
 
 
 
 
 
 
Long-term debt
$
275,000

 
$
288,824

 
$
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.


16
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 nine months ended September 30, 2014 were $67.8 million and $190.1 million, respectively. The proceeds from the sales of securities for the three and nine months ended September 30, 2013 were $43.0 million and $331.2 million, respectively. The proceeds for the nine months ended September 30, 2014 were net of $1.9 million of receivable for securities sold during the third quarter of 2014 that had not settled at September 30, 2014. The proceeds for the nine months ended September 30, 2013 were net of $0.5 million of receivable for securities sold during the third quarter of 2013 that had not settled at September 30, 2013.
Gross gains of $1.1 million and gross losses of $0.1 million were realized on sales of available for sale securities during the three months ended September 30, 2014, compared with gross gains of $0.7 million and gross losses of $0.4 million realized on sales during the three months ended September 30, 2013. Gross gains of $3.9 million and gross losses of $0.3 million were realized on sales of available for sale securities during the nine months ended September 30, 2014, compared with gross gains of $6.8 million and gross losses of $1.5 million realized on sales during the nine months ended September 30, 2013. Gains or losses on securities are determined on a specific identification basis.

17
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):
 
September 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
$
65,416

 
$
627

 
$
(305
)
 
$
65,738

 
$
0

State and municipal
490,333

 
12,456

 
(118
)
 
502,672

 
(69
)
Mortgage-backed securities:

 

 

 
 
 
 
Residential
351,137

 
4,476

 
(3,201
)
 
352,412

 
(3,029
)
Commercial
46,360

 
148

 
(256
)
 
46,253

 
0

Total mortgage-backed securities
397,497

 
$
4,624

 
(3,457
)
 
$
398,665

 
(3,029
)
Asset-backed securities
61,808

 
175

 
(86
)
 
61,896

 
(8
)
Corporates
396,305

 
6,875

 
(2,417
)
 
400,763

 
(441
)
Total fixed maturities
1,411,360

 
24,757

 
(6,383
)
 
1,429,734

 
(3,548
)
Equity securities
73,739

 
16,898

 
0

 
90,638

 
0

Short-term investments
813

 
0

 
(0
)
 
813

 
0

Total
$
1,485,912

 
$
41,655

 
$
(6,383
)
 
$
1,521,184

 
$
(3,548
)
 
 
 
 
 
 
 
 
 
 
 
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.


18
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
September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government
6
 
$
4,863

 
$
(15
)
 
0.3
%
 
9

 
$
26,082

 
$
(290
)
 
1.1
%
State and municipal
13
 
28,559

 
(65
)
 
0.2
%
 
4

 
7,753

 
(52
)
 
0.7
%
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
57
 
40,672

 
(130
)
 
0.3
%
 
131

 
130,149

 
(3,071
)
 
2.3
%
Commercial
11
 
20,966

 
(80
)
 
0.4
%
 
8

 
13,391

 
(176
)
 
1.3
%
Total mortgage-backed securities
68
 
61,638

 
(210
)
 
0.3
%
 
139

 
143,540

 
(3,247
)
 
2.2
%
Asset-backed securities
23
 
19,949

 
(74
)
 
0.4
%
 
2

 
1,148

 
(12
)
 
1.0
%
Corporates
95
 
127,191

 
(1,776
)
 
1.4
%
 
18

 
24,036

 
(640
)
 
2.6
%
Total fixed maturities
205
 
242,200

 
(2,141
)
 
0.9
%
 
172

 
202,559

 
(4,242
)
 
2.1
%
Equity securities
0
 
0

 
0

 
0.0
%
 
0

 
0

 
0

 
0.0
%
Short-term investments
2
 
813

 
0

 
0.0
%
 
0

 
0

 
0

 
0.0
%
Total
207
 
$
243,013

 
$
(2,141
)
 
0.9
%
 
172

 
$
202,559

 
$
(4,242
)
 
2.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
%






19
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.

20
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:
 
September 30,
2014
 
December 31,
2013
Number of positions held with unrealized:
 
 
 
Gains
738

 
590

Losses
379

 
450

Number of positions held that individually exceed unrealized:
 
 
 
Gains of $500,000
3

 
1

Losses of $500,000
0

 
0

Percentage of positions held with unrealized:
 
 
 
Gains that were investment grade
91
%
 
81
%
Losses that were investment grade
83
%
 
93
%
Percentage of fair value held with unrealized:
 
 
 
Gains that were investment grade
94
%
 
88
%
Losses that were investment grade
83
%
 
95
%

 The following table sets forth the amount of unrealized loss, excluding the rabbi trust, by age and severity at September 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
$
218,857

 
$
(1,779
)
 
$
(1,562
)
 
$
(218
)
 
$
0

Four months through six months
18,838

 
(269
)
 
(241
)
 
(28
)
 
0

Seven months through nine months
5,242

 
(91
)
 
(91
)
 
0

 
0

Ten months through twelve months
4,470

 
(59
)
 
(59
)
 
0

 
0

Greater than twelve months
198,164

 
(4,185
)
 
(3,944
)
 
(242
)
 
0

Total
$
445,572

 
$
(6,383
)
 
$
(5,896
)
 
$
(487
)
 
$
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
Nine months ended September 30, 2014
 
 
 
 
 
 
 
 
 
Unrealized holding gains (losses) on securities arising during the period
$
11,371

 
$
1,762

 
$
4

 
$
(4,598
)
 
$
8,539

Realized (gains) losses on securities sold
(2,280
)
 
(1,273
)
 
(5
)
 
1,245

 
(2,313
)
Impairment loss recognized in earnings
55

 
0

 
0

 
(19
)
 
36

Change in unrealized gains (losses) on marketable securities, net
$
9,146

 
$
489

 
$
(1
)
 
$
(3,372
)
 
$
6,262

Nine months ended September 30, 2013
 
 
 
 
 
 
 
 
 
Unrealized holding gains (losses) on securities arising during the period
$
(25,913
)
 
$
8,449

 
$
1

 
$
6,112

 
$
(11,351
)
Realized (gains) losses on securities sold
(4,602
)
 
(660
)
 
0

 
1,842

 
(3,420
)
Impairment loss recognized in earnings
1,190

 
0

 
0

 
(416
)
 
773

Change in unrealized gains (losses) on marketable securities, net
$
(29,325
)
 
$
7,790

 
$
1

 
$
7,537

 
$
(13,997
)
 

21
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):
 
Nine months ended September 30,
 
2014
 
2013
Beginning balance
$
956

 
$
487

Additions for:
 
 
 
Previously impaired securities
19

 
0

Newly impaired securities
15

 
541

Reductions for:
 
 
 
Securities sold and paid down
(110
)
 
(189
)
Ending balance
$
881

 
$
839

The table below sets forth the scheduled maturities of fixed maturity securities at September 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
$
87,114

 
$
0

 
$
5,325

 
$
92,439

 
$
91,535

After one year through five years
466,028

 
129,653

 
1,671

 
597,351

 
586,340

After five years through ten years
180,426

 
86,244

 
0

 
266,670

 
262,126

After ten years
10,125

 
2,587

 
0

 
12,712

 
12,053

Mortgage-backed and asset-backed securities
233,506

 
226,275

 
780

 
460,561

 
459,305

Total
$
977,200

 
$
444,759

 
$
7,776

 
$
1,429,734

 
$
1,411,360


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 September 30, 2014 fair value of $288.8 million using a 176 basis point spread to the ten-year U.S. Treasury Note of 2.491%.


22
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

In August 2014, 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 September 30, 2014, there were no borrowings outstanding under the Credit Agreement.
 
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 September 30,
 
Nine months ended September 30,
 
2014
 
2013
 
2014
 
2013
Earnings before income taxes
$
21,727

 
$
9,643

 
$
51,516

 
$
31,877

Income taxes at statutory rate
7,604

 
3,375

 
18,031

 
11,157

Effect of:
 
 
 
 
 
 
 
Dividends-received deduction
(90
)
 
(70
)
 
(341
)
 
(249
)
Tax-exempt interest
(700
)
 
(664
)
 
(2,103
)
 
(2,129
)
Other
58

 
(193
)
 
81

 
(166
)
Provision for income taxes as shown on the Consolidated Statements of Earnings
$
6,872

 
$
2,448

 
$
15,667

 
$
8,612

GAAP effective tax rate
31.6
%
 
25.4
%
 
30.4
%
 
27.0
%


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 September 30,
 
Nine months ended September 30,
 
2014
 
2013
 
2014
 
2013
Income tax payments
$
6,200

 
$
5,100

 
$
12,400

 
$
5,100

Interest payments on debt
6,875

 
6,875

 
13,750

 
13,826

Negative Cash Book Balances
Negative cash book balances, included in the line item “Other liabilities” in the Consolidated Balance Sheets, were $55.3 million and $50.5 million, respectively, at September 30, 2014 and December 31, 2013.




 

23
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 September 30,
 
Nine months ended September 30,
 
2014
 
2013
 
2014
 
2013
Balance at Beginning of Period
 
 
 
 
 
 
 
Unpaid losses on known claims
$
225,040

 
$
222,138

 
$
221,447

 
$
205,589

IBNR losses
274,830

 
232,546

 
262,660

 
218,552

LAE
165,352

 
157,320

 
162,469

 
148,753

Total unpaid losses and LAE
665,222

 
612,004

 
646,577

 
572,894

Reinsurance recoverables
(13,717
)
 
(13,819
)
 
(14,431
)
 
(13,678
)
Unpaid losses and LAE, net of reinsurance recoverables
651,505

 
598,184

 
632,146

 
559,215

Current Activity
 
 
 
 
 
 
 
Loss and LAE incurred:
 
 
 
 
 
 
 
Current accident year
253,847

 
254,381

 
767,721

 
760,530

Prior accident years
(5,364
)
 
859

 
(8,601
)
 
2,160

Total loss and LAE incurred
248,483

 
255,240

 
759,120

 
762,690

Loss and LAE payments:
 
 
 
 
 
 
 
Current accident year
(171,210
)
 
(171,924
)
 
(405,800
)
 
(400,114
)
Prior accident years
(69,462
)
 
(62,844
)
 
(326,150
)
 
(303,133
)
Total loss and LAE payments
(240,673
)
 
(234,767
)
 
(731,951
)
 
(703,248
)
Balance at End of Period
 
 
 
 
 
 
 
Unpaid losses and LAE, net of reinsurance recoverables
659,316

 
618,658

 
659,316

 
618,658

Add back reinsurance recoverables
13,883

 
14,203

 
13,883

 
14,203

Total unpaid losses and LAE
673,198

 
632,860

 
673,198

 
632,860

Unpaid losses on known claims
229,425

 
219,330

 
229,425

 
219,330

IBNR losses
278,572

 
249,213

 
278,572

 
249,213

LAE
165,200

 
164,317

 
165,200

 
164,317

Total unpaid losses and LAE
$
673,198

 
$
632,860

 
$
673,198

 
$
632,860


The $8.6 million of favorable reserve development during the nine months ended September 30, 2014 was primarily due to a decrease in severity in accident year 2013 in Florida bodily injury and in California property damage.

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 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

24
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

evaluate potential liabilities and reserves for litigation of these types using the criteria established by the Contingencies topic of the FASB. 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 September 30,
 
 
2014
 
2013
 
 
Before Tax
 
Income Tax
 
Net
 
Before Tax
 
Income Tax
 
Net
Accumulated change in postretirement benefit liability, beginning of period
 
$
593

 
$
(208
)
 
$
385

 
$
(868
)
 
$
304

 
$
(564
)
Effect on other comprehensive income
 
(3
)
 
1

 
(2
)
 
50

 
(17
)
 
32

Accumulated change in postretirement benefit liability, end of period
 
590

 
(207
)
 
384

 
(818
)
 
286

 
(532
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated unrealized gains on investments, net, beginning of period
 
46,517

 
(16,281
)
 
30,236

 
14,964

 
(5,237
)
 
9,727

Other comprehensive income before reclassification
 
(10,232
)
 
3,581

 
(6,651
)
 
9,847

 
(3,447
)
 
6,401

Reclassification adjustment for other-than-temporary impairments included in net income
 
21

 
(7
)
 
14

 
819

 
(287
)
 
532

Reclassification adjustment for realized gains included in net income
 
(1,034
)
 
362

 
(672
)
 
(273
)
 
96

 
(178
)
Effect on other comprehensive income
 
(11,245
)
 
3,936

 
(7,309
)
 
10,393

 
(3,638
)
 
6,755

Accumulated unrealized gains on investments, net, end of period
 
35,272

 
(12,345
)
 
22,927

 
25,357

 
(8,875
)
 
16,482

 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive income, beginning of period
 
47,110

 
(16,488
)
 
30,621

 
14,096

 
(4,934
)
 
9,163

Change in postretirement benefit liability
 
(3
)
 
1

 
(2
)
 
50

 
(17
)
 
32

Change in unrealized gains on investments, net
 
(11,245
)
 
3,936

 
(7,309
)
 
10,393

 
(3,638
)
 
6,755

Effect on other comprehensive income
 
(11,247
)
 
3,937

 
(7,311
)
 
10,443

 
(3,655
)
 
6,788

Accumulated other comprehensive income, end of period
 
$
35,863

 
$
(12,552
)
 
$
23,311

 
$
24,539

 
$
(8,589
)
 
$
15,950


25
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

 
 
Nine months ended September 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
 
652

 
(228
)
 
424

 
150

 
(52
)
 
97

Accumulated change in postretirement benefit liability, end of period
 
590

 
(207
)
 
384

 
(818
)
 
286

 
(532
)
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
13,138

 
(4,598
)
 
8,539

 
(17,463
)
 
6,112

 
(11,351
)
Reclassification adjustment for other-than-temporary impairments included in net income
 
55

 
(19
)
 
36

 
1,190

 
(416
)
 
773

Reclassification adjustment for realized gains included in net income
 
(3,558
)
 
1,245

 
(2,313
)
 
(5,262
)
 
1,842

 
(3,420
)
Effect on other comprehensive income
 
9,634

 
(3,372
)
 
6,262

 
(21,534
)
 
7,537

 
(13,997
)
Accumulated unrealized gains on investments, net, end of period
 
35,272

 
(12,345
)
 
22,927

 
25,357

 
(8,875
)
 
16,482

 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive income, beginning of period
 
25,576

 
(8,952
)
 
16,624

 
45,924

 
(16,073
)
 
29,851

Change in postretirement benefit liability
 
652

 
(228
)
 
424

 
150

 
(52
)
 
97

Change in unrealized gains on investments, net
 
9,634

 
(3,372
)
 
6,262

 
(21,534
)
 
7,537

 
(13,997
)
Effect on other comprehensive income
 
10,287

 
(3,600
)
 
6,686

 
(21,385
)
 
7,485

 
(13,900
)
Accumulated other comprehensive income, end of period
 
$
35,863

 
$
(12,552
)
 
$
23,311

 
$
24,539

 
$
(8,589
)
 
$
15,950




26
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
During 2014, we have focused on growing premium in California, Florida and Texas personal auto and countrywide Commercial Vehicle while improving the profitability in Arizona, Georgia, Nevada and Pennsylvania. Although we have seen improvement in the combined ratios, we have determined that our personal auto business in Georgia, Nevada and Pennsylvania, which accounted for 6.1% of our total gross written premium as of September 30, 2014, no longer meets our long-term strategic and financial objectives. As a result, we will no longer accept new business beginning January 1, 2015 and will maintain only a renewal book in these three states. In conjunction with the planned reduction in premium in these states, we expect to reduce staff and incur severance charges of approximately $1.7 million during the fourth quarter of 2014. In addition, we will evaluate strategic alternatives for our Classic Collector book of business, which was 1.1% of our business as of September 30, 2014.
In the third quarter and first nine months of 2014, our total gross written premium grew 5.8% and 3.1%, respectively, compared with the same periods of 2013. In the third quarter and first nine months of 2014, gross written premium in Arizona, California, Florida, and Texas personal auto and Commercial Vehicle grew 9.7% and 7.5%, respectively, compared with the same periods of 2013. 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 September 30, 2014 were $14.9 million and $1.29, respectively, compared with $7.2 million and $0.62, respectively, for the three months ended September 30, 2013. Net earnings and diluted earnings per share for the nine months ended September 30, 2014 were $35.8 million and $3.10, respectively, compared with $23.3 million and $1.99, respectively, for the nine months ended September 30, 2013. The increase in diluted earnings per share for the three and nine months ended September 30, 2014 was primarily due to an improvement in underwriting profitability.
Included in net earnings for the three and nine months ended September 30, 2014 were $3.5 million ($5.4 million pre-tax) and $5.6 million ($8.6 million pre-tax) of favorable development on prior accident year loss and LAE reserves. The development was primarily due to a decrease in severity in accident year 2013 in Florida bodily injury and in California property damage. Included in net earnings for the three and nine months ended September 30, 2013 were $0.6 million ($0.9 million pre-tax) and $1.4 million ($2.2 million pre-tax) of unfavorable development on prior accident year loss and LAE reserves.







27
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 September 30, 2014.
 
 
Accident Year Combined Ratio
Developed Through
 
Prior Accident Year
Favorable / (Unfavorable)
Development
 
($ in millions)
Prior Accident Year
Favorable / (Unfavorable)
Development
Accident Year
Dec 2013
 
Mar 2014
 
Jun 2014
 
Sept 2014
 
Q3 2014
 
YTD 2014
 
Q3 2014
 
YTD 2014
Prior
 
 
 
 
 
 
 
 
 
 

 
$
(0.1
)
 
$
(0.2
)
2006
90.3
%
 
90.3
%
 
90.2
%
 
90.2
%
 
0.0
 %
 
0.1
 %
 
0.0

 
0.6

2007
92.2
%
 
92.2
%
 
92.2
%
 
92.1
%
 
0.0
 %
 
0.0
 %
 
0.2

 
0.3

2008
91.3
%
 
91.3
%
 
91.3
%
 
91.3
%
 
0.0
 %
 
0.1
 %
 
0.1

 
0.5

2009
92.3
%
 
92.3
%
 
92.3
%
 
92.4
%
 
(0.1
)%
 
(0.1
)%
 
(1.0
)
 
(0.9
)
2010
99.6
%
 
99.5
%
 
99.3
%
 
99.3
%
 
0.0
 %
 
0.3
 %
 
0.3

 
2.7

2011
100.3
%
 
100.2
%
 
100.4
%
 
100.2
%
 
0.2
 %
 
0.1
 %
 
1.6

 
0.6

2012
99.8
%
 
100.1
%
 
100.2
%
 
100.1
%
 
0.1
 %
 
(0.3
)%
 
0.6

 
(3.2
)
2013
97.7
%
 
97.4
%
 
97.4
%
 
97.1
%
 
0.3
 %
 
0.6
 %
 
3.6

 
8.1

2014 YTD

 
97.8
%
 
97.4
%
 
97.1
%
 
0.3
 %
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
5.4

 
$
8.6

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 September 30, 2014 was $8.8 million compared with $8.1 million for the three months ended September 30, 2013. Pre-tax net investment income for the nine months ended September 30, 2014 was $26.7 million compared with $25.1 million for the nine months ended September 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 3.8% from $57.09 at December 31, 2013 to $59.25 at September 30, 2014. This increase was primarily due to an increase in unrealized gains and earnings partially offset by dividends for the nine months ended September 30, 2014.


28
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, and Texas.
•
“Other States” – Includes Georgia, Nevada and Pennsylvania where we will be offering renewals only beginning January 1, 2015, as well as nine states where we are currently running off our writings.
Georgia, Nevada and Pennsylvania were previously included in the Focus States category. All prior period data has been adjusted to reflect the updated state classification.
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.

29
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 September 30,
 
2014
 
2013
 
Change
 
% Change
Net earned premium
 
 
 
 
 
 
 
Gross written premium
 
 
 
 
 
 
 
Personal Auto
 
 
 
 
 
 
 
Focus States
$
294,187

 
$
272,478

 
$
21,709

 
8.0
 %
Other States
21,799

 
31,443

 
(9,643
)
 
(30.7
)%
Total Personal Auto
315,986

 
303,921

 
12,065

 
4.0
 %
Commercial Vehicle
27,654

 
21,004

 
6,650

 
31.7
 %
Classic Collector
3,900

 
3,630

 
270

 
7.4
 %
Total gross written premium
347,540

 
328,556

 
18,985

 
5.8
 %
Ceded reinsurance
(3,478
)
 
(2,529
)
 
(949
)
 
37.5
 %
Net written premium
344,063

 
326,026

 
18,036

 
5.5
 %
Change in unearned premium
(11,086
)
 
1,052

 
(12,137
)
 
(1,154.3
)%
Net earned premium
$
332,977

 
$
327,078

 
$
5,899

 
1.8
 %
 
 
 
 
 
 
 
 
 
Nine months ended September 30,
 
2014
 
2013
 
Change
 
% Change
Net earned premium
 
 
 
 
 
 
 
Gross written premium
 
 
 
 
 
 
 
Personal Auto
 
 
 
 
 
 
 
Focus States
$
896,451

 
$
845,821

 
$
50,630

 
6.0
 %
Other States
69,060

 
106,707

 
(37,647
)
 
(35.3
)%
Total Personal Auto
965,511

 
952,528

 
12,983

 
1.4
 %
Commercial Vehicle
81,630

 
63,675

 
17,954

 
28.2
 %
Classic Collector
11,262

 
10,407

 
855

 
8.2
 %
Total gross written premium
1,058,403

 
1,026,611

 
31,792

 
3.1
 %
Ceded reinsurance
(9,944
)
 
(7,439
)
 
(2,505
)
 
33.7
 %
Net written premium
1,048,458

 
1,019,172

 
29,287

 
2.9
 %
Change in unearned premium
(54,779
)
 
(42,290
)
 
(12,489
)
 
29.5
 %
Net earned premium
$
993,680

 
$
976,882

 
$
16,798

 
1.7
 %

The following table summarizes our policies in force:
 
At September 30,
 
2014
 
2013
 
Change
 
% Change
Policies in Force
 
 
 
 
 
 
 
Personal Auto
 
 
 
 
 
 
 
Focus States
773,408

 
774,637

 
(1,229
)
 
(0.2
)%
Other States
57,070

 
92,122

 
(35,052
)
 
(38.0
)%
Total Personal Auto
830,478

 
866,759

 
(36,281
)
 
(4.2
)%
Commercial Vehicle
44,047

 
40,420

 
3,627

 
9.0
 %
Classic Collector
40,665

 
38,865

 
1,800

 
4.6
 %
Total policies in force
915,190

 
946,044

 
(30,854
)
 
(3.3
)%


30
INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
Management’s Discussion and Analysis of Financial Condition and Results of Operations


Gross written premium grew 5.8% and 3.1% during the third quarter and first nine months of 2014, respectively, compared with the same periods of 2013. During the first nine months of 2014, Infinity implemented rate revisions in various states with an overall rate increase of 3.8%. Excluding the effect of rate changes in California and Florida, our largest states, the overall rate increase was 2.8%. Policies in force at September 30, 2014 decreased 3.3% 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 third quarter and first nine months of 2014, personal auto insurance gross written premium in our Focus States grew 8.0% and 6.0%, 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 8.6% and 6.8% during the third quarter and first nine months of 2014, respectively. The growth during the third quarter of 2014 in California was primarily due to higher average premium and new business growth. During the nine months ended September 30, 2014, average written premiums in Florida and Texas increased, along with an increase in new business.
The growth in the Focus States during the third quarter and first nine months of 2014 was partially offset by declining gross written premium in the Other States as we continue to focus on improving profitability. Upon management's strategic review, beginning in 2015, we will no longer write new business in Georgia, Nevada, and Pennsylvania, previously included in "Focus States", and will maintain renewal business only in these states.
Commercial Vehicle gross written premium grew 31.7% and 28.2% during the third quarter and first nine 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 7.4% and 8.2% during the third quarter and first nine months of 2014, respectively, when compared with the same periods of 2013. This growth is primarily due to growth in renewal business. As we narrow our focus in 2015, we will look for strategic alternatives for our Classic Collector book of business.

31
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.

32
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 September 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
74.6
%
18.4
%
93.1
%
 
78.3
%
17.6
%
95.9
%
 
(3.7
)%
0.8
 %
(2.8
)%
Other States
71.9
%
17.7
%
89.5
%
 
78.7
%
17.6
%
96.3
%
 
(6.8
)%
0.1
 %
(6.8
)%
Total Personal Auto
74.4
%
18.4
%
92.8
%
 
78.4
%
17.6
%
96.0
%
 
(4.0
)%
0.8
 %
(3.2
)%
Commercial Vehicle
81.3
%
17.4
%
98.7
%
 
77.5
%
16.5
%
94.1
%
 
3.8
 %
0.9
 %
4.6
 %
Classic Collector
58.7
%
31.3
%
90.0
%
 
55.6
%
36.7
%
92.3
%
 
3.1
 %
(5.4
)%
(2.3
)%
Total statutory ratios
74.8
%
18.5
%
93.2
%
 
78.2
%
17.7
%
95.8
%
 
(3.4
)%
0.8
 %
(2.6
)%
Total statutory ratios excluding development
78.3
%
18.5
%
96.7
%
 
79.7
%
17.7
%
97.4
%
 
(1.4
)%
0.8
 %
(0.7
)%
GAAP ratios
74.6
%
20.2
%
94.8
%
 
78.0
%
19.7
%
97.7
%
 
(3.4
)%
0.5
 %
(2.9
)%
GAAP ratios excluding development
78.2
%
20.2
%
98.4
%
 
79.6
%
19.7
%
99.3
%
 
(1.4
)%
0.5
 %
(0.9
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 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
77.0
%
17.9
%
94.9
%
 
78.2
%
17.5
%
95.8
%
 
(1.2
)%
0.4
 %
(0.9
)%
Other States
74.6
%
17.7
%
92.3
%
 
81.8
%
17.7
%
99.5
%
 
(7.2
)%
0.0
 %
(7.2
)%
Total Personal Auto
76.8
%
17.9
%
94.7
%
 
78.7
%
17.5
%
96.2
%
 
(1.9
)%
0.4
 %
(1.5
)%
Commercial Vehicle
77.0
%
17.5
%
94.5
%
 
74.6
%
16.6
%
91.1
%
 
2.4
 %
0.9
 %
3.4
 %
Classic Collector
53.8
%
32.0
%
85.8
%
 
51.3
%
35.3
%
86.6
%
 
2.5
 %
(3.3
)%
(0.8
)%
Total statutory ratios
76.5
%
18.1
%
94.6
%
 
78.2
%
17.7
%
95.9
%
 
(1.7
)%
0.4
 %
(1.3
)%
Total statutory ratios excluding development
77.4
%
18.1
%
95.4
%
 
78.0
%
17.7
%
95.7
%
 
(0.6
)%
0.4
 %
(0.3
)%
GAAP ratios
76.4
%
19.8
%
96.2
%
 
78.1
%
19.8
%
97.9
%
 
(1.7
)%
0.0
 %
(1.7
)%
GAAP ratios excluding development
77.3
%
19.8
%
97.1
%
 
77.9
%
19.8
%
97.7
%
 
(0.6
)%
0.0
 %
(0.6
)%
 
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 nine months ended September 30, 2014 decreased by 2.6 points and 1.3 points from the same periods of 2013. The third quarter and first nine months of 2014 included $5.4 million and $8.6 million of favorable development on prior accident year loss and LAE reserves, respectively, while the third quarter and first nine months of 2013 included $0.9 million and $2.2 million of unfavorable development on prior accident year loss and LAE reserves, respectively. The third quarters of 2014 and 2013 include $6.4 million and $6.0 million, respectively, of favorable development from the first two accident quarters of each respective year. Excluding the effect of development, the statutory combined ratio decreased 0.7 point and 0.3 point, respectively, for the three and nine months ended September 30, 2014 compared with the same periods of 2013.
The GAAP combined ratio for the three and nine months ended September 30, 2014 decreased by 2.9 points and 1.7 points, respectively, from the same periods of 2013. Excluding the effect of development, the GAAP combined ratio decreased by 0.9

33
INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
Management’s Discussion and Analysis of Financial Condition and Results of Operations


point and 0.6 point, respectively, for the three and nine months ended September 30, 2014, compared with the same periods of 2013.
Losses from catastrophes were $0.4 million and $2.2 million for the three and nine months ended September 30, 2014, respectively, compared with $0.1 million and $1.7 million for the same periods of 2013.
The 3.7 points and 1.2 points decline in the Focus States loss & LAE ratio for the three and nine months ended September 30, 2014 is primarily due to improvement in the California calendar year loss ratio as a result of favorable development from prior accident year loss and LAE reserves as well as an increase in average earned premiums.
The combined ratio in the Other States decreased by 6.8 points and 7.2 points, respectively, during the three and nine months ended September 30, 2014. The improvement is primarily due to the fact that the business in Georgia, Nevada and Pennsylvania is primarily renewal business only, which has a lower combined ratio. Earned premium and losses in these states are expected to continue to decline as we focus on renewal business only.
The combined ratio in Commercial Vehicle increased by 4.6 points and 3.4 points, during the three and nine months ended September 30, 2014, respectively, compared with the same periods of 2013 primarily due to an increase in the loss and LAE ratio due to new business growth in 2014.


34
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 September 30,
 
Nine months ended September 30,
 
2014
 
2013
 
2014
 
2013
Investment income:
 
 
 
 
 
 
 
Interest income on fixed maturities, cash and cash equivalents
$
8,887

 
$
8,403

 
$
26,683

 
$
25,605

Dividends on equity securities
432

 
337

 
1,636

 
1,195

Gross investment income
9,319

 
8,740

 
28,318

 
26,800

Investment expenses
(565
)
 
(599
)
 
(1,655
)
 
(1,699
)
Net investment income
8,754

 
8,141

 
26,663

 
25,101

Average investment balance, at cost
$
1,563,093

 
$
1,506,332

 
$
1,559,967

 
$
1,500,383

Annualized returns excluding realized gains and losses
2.2
%
 
2.2
%
 
2.3
%
 
2.2
%
Annualized returns including realized gains and losses
2.5
%
 
2.0
%
 
2.6
%
 
2.6
%
Changes in investment income reflect fluctuations in market rates and changes in average invested assets. Net investment income for the three and nine months ended September 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 September 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
$
15,924

 
$
13,936

 
$
29,860

 
2.6
%
2015
71,372

 
140,854

 
212,226

 
2.4
%
2016
76,764

 
158,392

 
235,155

 
2.4
%
2017
65,293

 
195,959

 
261,252

 
2.2
%
2018
36,273

 
93,564

 
129,837

 
2.7
%
Thereafter
175,854

 
292,320

 
468,175

 
3.0
%
Total
$
441,480

 
$
895,025

 
$
1,336,505

 
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.





35
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 September 30, 2014
 
Three months ended September 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
$
(21
)
 
$
1,034

 
$
1,013

 
$
(819
)
 
$
273

 
$
(546
)
Equities
0

 
0

 
0

 
0

 
0

 
0

Short-term investments
0

 
0

 
0

 
0

 
0

 
0

Total
$
(21
)
 
$
1,034

 
$
1,013

 
$
(819
)
 
$
273

 
$
(546
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2014
 
Nine months ended September 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
$
(55
)
 
$
2,280

 
$
2,225

 
$
(1,190
)
 
$
4,602

 
$
3,412

Equities
0

 
1,273

 
1,273

 
0

 
660

 
660

Short-term investments
0

 
5

 
5

 
0

 
0

 
0

Total
$
(55
)
 
$
3,558

 
$
3,503

 
$
(1,190
)
 
$
5,262

 
$
4,072

 
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 September 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 $10.3 million of interest expense on the Senior Notes in the Consolidated Statements of Earnings for the three and nine months ended September 30, 2014, respectively, compared to $3.4 million and $10.4 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 nine months ended September 30, 2014 was 31.6% and 30.4%, respectively, compared with 25.4% and 27.0% for the same periods of 2013. The GAAP effective tax rate has increased in 2014 as a result of an improvement in the underwriting profit, which is taxed at 35%. Refer to Note 6 to the Consolidated Financial Statements for additional information on income taxes.

36
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 September 30, 2014, the holding company had $124.4 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 nine months ended September 30, 2014, our insurance subsidiaries have paid us ordinary dividends of $45.0 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 $38.7 million and $101.2 million, respectively, during the three and nine months ended September 30, 2014 compared to positive operating cash flows of $46.5 million and $127.7 million, respectively, during the three and nine months ended September 30, 2013.
At September 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 2014, 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 September 30, 2014 there were no borrowings outstanding under the credit agreement.
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.
 
Our Board of Directors have authorized a share and debt repurchase program. The current program, of which we have $39.3 million of repurchase authority remaining, is set to expire on December 31, 2014. On November 4, 2014, our Board of Directors increased the authority to a total of $75 million and extended the date to execute the program to December 31, 2016. During the third quarter of 2014, we repurchased 20,100 shares at an average cost, excluding commissions, of $66.69. Through the first nine months of 2014, we have repurchased 66,300 shares at an average cost, excluding commissions, of $68.28.
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 nine months ended September 30, 2014 was $3.5 million and $9.9 million, respectively, compared with $2.5 million and $7.4 million for the same periods of 2013.




37
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 September 30, 2014 contained approximately $1.4 billion in fixed maturity securities, $90.6 million in equity securities and $0.8 million in short-term investments. All of these are 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 September 30, 2014, we had pre-tax net unrealized gains of $18.4 million on fixed maturities and pre-tax net unrealized gains of $16.9 million on equity securities. Combined, the pre-tax net unrealized gain increased by $9.6 million for the nine months ended September 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 September 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 90.7% of our fixed maturity investments at September 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.


38
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 September 30, 2014 was as follows ($ in thousands):
 
Amortized
Cost
 
Fair Value
 
% of
Total Fair
Value
Fixed Maturities:
 
 
 
 
 
U.S. government
$
65,416

 
$
65,738

 
4.3
%
State and municipal
490,333

 
502,672

 
33.0
%
Mortgage-backed and asset-backed:
 
 
 
 
 
Residential mortgage-backed securities
351,137

 
352,412

 
23.2
%
Commercial mortgage-backed securities
46,360

 
46,253

 
3.0
%
Asset-backed securities ("ABS"):
 
 
 
 
 
Auto loans
48,831

 
48,894

 
3.2
%
Equipment leases
7,584

 
7,590

 
0.5
%
Home equity
505

 
515

 
0.0
%
Credit card receivables
4,515

 
4,518

 
0.3
%
Tax liens
263

 
262

 
0.0
%
Student loans
110

 
117

 
0.0
%
Total ABS
61,808

 
61,896

 
4.1
%
Total mortgage-backed and ABS
459,305

 
460,561

 
30.3
%
Corporates
 
 
 
 
 
Investment grade
263,521

 
267,752

 
17.6
%
Non-investment grade
132,784

 
133,012

 
8.7
%
Total corporates
396,305

 
400,763

 
26.3
%
Total fixed maturities
1,411,360

 
1,429,734

 
94.0
%
Equity securities
73,739

 
90,638

 
6.0
%
Short-term investments
813

 
813

 
0.1
%
Total investments
$
1,485,912

 
$
1,521,184

 
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 of our fixed maturity portfolio by major security type at September 30, 2014 ($ in thousands):
 
 
Rating
 
 
 
 
 
AAA
 
AA
 
A
 
BBB
 
Non-
investment
Grade
 
Total Fair
Value
 
% of
Total
Exposure
U.S. government
$
65,738

 
$
0

 
$
0

 
$
0

 
$
0

 
$
65,738

 
4.6
%
State and municipal
105,777

 
295,446

 
101,449

 
0

 
0

 
502,672

 
35.2
%
Mortgage-backed and asset-backed
426,266

 
28,881

 
5,414

 
0

 
0

 
460,561

 
32.2
%
Corporates
0

 
18,483

 
116,738

 
132,530

 
133,012

 
400,763

 
28.0
%
Total fair value
$
597,781

 
$
342,811

 
$
223,601

 
$
132,530

 
$
133,012

 
$
1,429,734

 
100.0
%
% of total fair value
41.8
%
 
24.0
%
 
15.6
%
 
9.3
%
 
9.3
%
 
100.0
%
 
 

39
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 September 30, 2014 ($ in thousands):
 
Rating
 
 
 
 
State
AAA
 
AA
 
A
 
BBB
 
Non-
investment
Grade
 
Total Fair Value
 
% of Total
Exposure
NY
$
8,773

 
$
49,574

 
$
16,906

 
$
0

 
$
0

 
$
75,253

 
15.0
%
CA
0

 
32,408

 
5,886

 
0

 
0

 
38,294

 
7.6
%
TX
11,614

 
11,680

 
5,689

 
0

 
0

 
28,983

 
5.8
%
GA
11,715

 
1,120

 
12,062

 
0

 
0

 
24,898

 
5.0
%
NC
14,135

 
10,223

 
0

 
0

 
0

 
24,358

 
4.8
%
VA
7,759

 
13,538

 
0

 
0

 
0

 
21,297

 
4.2
%
MD
13,753

 
7,172

 
0

 
0

 
0

 
20,925

 
4.2
%
WA
737

 
18,212

 
1,690

 
0

 
0

 
20,639

 
4.1
%
PA
0

 
11,531

 
8,170

 
0

 
0

 
19,701

 
3.9
%
MA
2,474

 
13,365

 
152

 
0

 
0

 
15,991

 
3.2
%
All other states
34,817

 
126,622

 
50,893

 
0

 
0

 
212,332

 
42.2
%
Total fair value
$
105,777

 
$
295,446

 
$
101,449

 
$
0

 
$
0

 
$
502,672

 
100.0
%
% of total fair value
21.0
%
 
58.8
%
 
20.2
%
 
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 September 30, 2014 ($ in thousands):
 
 
Type
 
 
 
 
 
General Obligation
 
 
 
 
 
 
 
 
 
 
State
State
 
Local
 
Revenue
 
Certificate of Participation
 
Other
 
Total Fair Value
 
% of Total
Exposure
NY
$
7,653

 
$
8,431

 
$
59,169

 
$
0

 
$
0

 
$
75,253

 
15.0
%
CA
7,920

 
14,412

 
15,962

 
0

 
0

 
38,294

 
7.6
%
TX
1,434

 
11,416

 
16,134

 
0

 
0

 
28,983

 
5.8
%
GA
11,715

 
1,120

 
12,062

 
0

 
0

 
24,898

 
5.0
%
NC
1,032

 
9,038

 
14,288

 
0

 
0

 
24,358

 
4.8
%
VA
1,026

 
6,668

 
13,603

 
0

 
0

 
21,297

 
4.2
%
MD
4,107

 
13,890

 
2,928

 
0

 
0

 
20,925

 
4.2
%
WA
5,668

 
3,012

 
11,960

 
0

 
0

 
20,639

 
4.1
%
PA
7,951

 
789

 
10,961

 
0

 
0

 
19,701

 
3.9
%
MA
7,127

 
2,009

 
6,855

 
0

 
0

 
15,991

 
3.2
%
All other states
42,263

 
20,565

 
143,015

 
4,546

 
1,945

 
212,332

 
42.2
%
Total fair value
$
97,895

 
$
91,349

 
$
306,937


$
4,546


$
1,945

 
$
502,672

 
100.0
%
% of total fair value
19.5
%
 
18.2
%
 
61.1
%
 
0.9
%
 
0.4
%
 
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 fair value of the revenue category of our state and municipal bond portfolio, by state and further classification, at September 30, 2014 ($ in thousands):
 
 
Revenue Bonds
 
 
State
Transportation
 
Utilities
 
Education
 
Other
 
Total Fair Value
 
% of Total
Exposure
NY
$
27,128

 
$
0

 
$
7,049

 
$
24,992

 
$
59,169

 
19.3
%
TX
2,142

 
2,929

 
4,050

 
7,013

 
16,134

 
5.3
%
CA
8,158

 
5,666

 
0

 
2,139

 
15,962

 
5.2
%
NJ
1,996

 
0

 
4,571

 
8,106

 
14,674

 
4.8
%
NC
0

 
4,065

 
0

 
10,223

 
14,288

 
4.7
%
VA
0

 
0

 
3,450

 
10,153

 
13,603

 
4.4
%
CO
0

 
0

 
8,035

 
5,284

 
13,318

 
4.3
%
MN
0

 
1,656

 
1,008

 
9,829

 
12,493

 
4.1
%
GA
6,568

 
4,384

 
0

 
1,110

 
12,062

 
3.9
%
WA
0

 
8,484

 
0

 
3,475

 
11,960

 
3.9
%
All other states
27,492

 
11,118

 
19,134

 
65,530

 
123,275

 
40.2
%
Total fair value
$
73,484

 
$
38,302

 
$
47,297

 
$
147,854

 
$
306,937

 
100.0
%
% of total fair value
23.9
%
 
12.5
%
 
15.4
%
 
48.2
%
 
100.0
%
 
 
The following table presents the credit rating and fair value of our residential mortgage-backed securities at September 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
$
102

 
$
0

 
$
0

 
$
0

 
$
0

 
$
102

 
0.0
%
2003
3,378

 
0

 
0

 
0

 
0

 
3,378

 
1.0
%
2004
3,826

 
0

 
0

 
0

 
0

 
3,826

 
1.1
%
2005
8,714

 
0

 
0

 
0

 
0

 
8,714

 
2.5
%
2006
4,398

 
0

 
0

 
0

 
0

 
4,398

 
1.2
%
2007
5,147

 
0

 
0

 
0

 
0

 
5,147

 
1.5
%
2008
10,408

 
0

 
0

 
0

 
0

 
10,408

 
3.0
%
2009
27,257

 
0

 
0

 
0

 
0

 
27,257

 
7.7
%
2010
43,897

 
0

 
0

 
0

 
0

 
43,897

 
12.5
%
2011
41,780

 
0

 
0

 
0

 
0

 
41,780

 
11.9
%
2012
72,259

 
0

 
0

 
0

 
0

 
72,259

 
20.5
%
2013
72,807

 
0

 
0

 
0

 
0

 
72,807

 
20.7
%
2014
58,442

 
0

 
0

 
0

 
0

 
58,442

 
16.6
%
Total fair value
$
352,412

 
$
0

 
$
0

 
$
0

 
$
0

 
$
352,412

 
100.0
%
% of total fair value
100.0
%
 
0.0
%
 
0.0
%
 
0.0
%
 
0.0
%
 
100.0
%
 
 
All of the $352.4 million of residential mortgage-backed securities were issued by government-sponsored enterprises (“GSE”).
 

41
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 September 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
$
4,578

 
$
0

 
$
0

 
$
0

 
$
0

 
$
4,578

 
9.9
%
2006
14,488

 
0

 
0

 
0

 
0

 
14,488

 
31.3
%
2007
9,780

 
2,735

 
0

 
0

 
0

 
12,516

 
27.1
%
2008
0

 
738

 
0

 
0

 
0

 
738

 
1.6
%
2010
3,752

 
0

 
0

 
0

 
0

 
3,752

 
8.1
%
2011
1,209

 
0

 
0

 
0

 
0

 
1,209

 
2.6
%
2012
3,999

 
0

 
0

 
0

 
0

 
3,999

 
8.6
%
2013
1,445

 
0

 
0

 
0

 
0

 
1,445

 
3.1
%
2014
3,528

 
0

 
0

 
0

 
0

 
3,528

 
7.6
%
Total fair value
$
42,779


$
3,473


$
0


$
0


$
0


$
46,253

 
100.0
%
% of total fair value
92.5
%
 
7.5
%
 
0.0
%
 
0.0
%
 
0.0
%
 
100.0
%
 
 
None of the $46.3 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 September 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
434

 
0

 
0

 
0

 
0

 
434

 
0.7
%
2011
374

 
248

 
0

 
0

 
0

 
622

 
1.0
%
2012
10,068

 
5,934

 
442

 
0

 
0

 
16,444

 
26.6
%
2013
16,856

 
11,410

 
2,375

 
0

 
0

 
30,641

 
49.5
%
2014
3,261

 
7,815

 
2,598

 
0

 
0

 
13,674

 
22.1
%
Total fair value
$
31,074

 
$
25,408

 
$
5,414

 
$
0

 
$
0

 
$
61,896

 
100.0
%
% of total fair value
50.2
%
 
41.0
%
 
8.7
%
 
0.0
%
 
0.0
%
 
100.0
%
 
 

42
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 September 30, 2014 ($ in thousands):

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

 
$
0

 
$
575

 
$
5,140

 
$
5,392

 
$
11,108

 
2.8
%
Communications
0

 
0

 
2,756

 
22,381

 
23,928

 
$
49,065

 
12.2
%
Consumer, Cyclical
0

 
0

 
4,486

 
10,315

 
20,491

 
$
35,292

 
8.8
%
Consumer, Non-cyclical
0

 
3,750

 
17,702

 
19,034

 
25,368

 
$
65,853

 
16.4
%
Energy
0

 
0

 
5,912

 
9,150

 
17,281

 
$
32,342

 
8.1
%
Financial
0

 
14,733

 
80,830

 
46,207

 
14,461

 
$
156,232

 
39.0
%
Industrial
0

 
0

 
0

 
7,736

 
14,813

 
$
22,549

 
5.6
%
Technology
0

 
0

 
1,715

 
3,288

 
7,902

 
$
12,905

 
3.2
%
Utilities
0

 
0

 
2,763

 
9,280

 
3,376

 
$
15,418

 
3.8
%
Total fair value
$
0

 
$
18,483

 
$
116,738

 
$
132,530

 
$
133,012

 
$
400,763

 
100.0
%
% of total fair value
0.0
%
 
4.6
%
 
29.1
%
 
33.1
%
 
33.2
%
 
100.0
%
 
 

Included in our investments in corporate fixed income securities at September 30, 2014 are $42.6 million of dollar-denominated investments with issuers or guarantors in foreign countries, as follows ($ in thousands):
 
Rating
 
 
 
 
Issuer or Guarantor
AAA
 
AA
 
A
 
BBB
 
Non-
investment
Grade
 
Total Fair Value
 
% of Total
Exposure
Britain
$
0

 
$
6,292

 
$
10,969

 
$
0

 
$
0

 
$
17,261

 
40.5
%
Switzerland
0

 
0

 
5,775

 
0

 
0

 
$
5,775

 
13.5
%
Canada
0

 
3,540

 
1,717

 
0

 
431

 
$
5,687

 
13.3
%
France
0

 
2,060

 
2,683

 
0

 
0

 
$
4,744

 
11.1
%
Australia
0

 
1,684

 
2,778

 
0

 
0

 
$
4,462

 
10.5
%
Japan
0

 
0

 
2,633

 
0

 
0

 
$
2,633

 
6.2
%
Sweden
0

 
1,670

 
0

 
0

 
0

 
$
1,670

 
3.9
%
Cayman Islands
0

 
0

 
0

 
0

 
411

 
$
411

 
1.0
%
Total fair value
$
0

 
$
15,246

 
$
26,555

 
$
0

 
$
842

 
$
42,643

 
100.0
%
% of total fair value
0.0
%
 
35.8
%
 
62.3
%
 
0.0
%
 
2.0
%
 
100.0
%
 
 

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


43
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 September 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 our disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 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 September 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.

44
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)
July 1, 2014 - July 31, 2014
7,500

 
$
65.63

 
7,500

 
$
40,131,555

August 1, 2014 - August 31, 2014
40,351

 
66.18

 
6,300

 
39,707,641

September 1, 2014 - September 30, 2014
6,300

 
67.37

 
6,300

 
39,283,007

Total
54,151

 
$
66.24

 
20,100

 
$
39,283,007

 
(a)
Includes 34,051 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 4, 2014, our Board of Directors increased the authority under our current share and debt repurchase plan to a total $75.0 million and extended the date to execute the program to December 31, 2016 from December 31, 2014.


45
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.



 

46
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
November 6, 2014
 
Roger Smith
 
 
Executive Vice President, Chief Financial Officer and Treasurer (principal financial and accounting officer)

47

INFINITY PROPERTY & CASUALTY CORP Reports