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Form 10-Q INFINITY PROPERTY & CASU For: Sep 30

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November 5, 2015 8:04 AM EST
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, 2015
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
x
  
Accelerated filer
¨
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 30, 2015, there were 11,255,768 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 Principal Executive Officer under Exchange Act Rule 13a-14(a)
 
 
 
 
Exhibit 31.2
Certification of the Principal Financial Officer under Exchange Act Rule 13a-14(a)
 
 
 
 
Exhibit 32
Certification of the Principal Executive Officer and Principal 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,
 
2015
 
2014
 
% Change
 
2015
 
2014
 
% Change
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Earned premium
$
338,586

 
$
332,977

 
1.7
 %
 
$
1,011,197

 
$
993,680

 
1.8
 %
Installment and other fee income
24,005

 
23,254

 
3.2
 %
 
73,122

 
71,439

 
2.4
 %
Net investment income
9,970

 
8,754

 
13.9
 %
 
27,908

 
26,663

 
4.7
 %
Net realized (losses) gains on investments1
(410
)
 
1,013

 
(140.5
)%
 
974

 
3,503

 
(72.2
)%
Other income
232

 
162

 
42.8
 %
 
913

 
442

 
106.7
 %
Total revenues
372,383

 
366,160

 
1.7
 %
 
1,114,113

 
1,095,727

 
1.7
 %
Costs and Expenses:
 
 
 
 
 
 
 
 
 
 
 
Losses and loss adjustment expenses
256,063

 
248,483

 
3.1
 %
 
774,489

 
759,120

 
2.0
 %
Commissions and other underwriting expenses
86,779

 
90,560

 
(4.2
)%
 
261,880

 
268,258

 
(2.4
)%
Interest expense
3,457

 
3,450

 
0.2
 %
 
10,375

 
10,354

 
0.2
 %
Corporate general and administrative expenses
1,726

 
1,790

 
(3.6
)%
 
5,752

 
6,012

 
(4.3
)%
Other expenses
1,545

 
151

 
924.7
 %
 
2,900

 
467

 
520.4
 %
Total costs and expenses
349,569

 
344,433

 
1.5
 %
 
1,055,396

 
1,044,211

 
1.1
 %
Earnings before income taxes
22,814

 
21,727

 
5.0
 %
 
58,717

 
51,516

 
14.0
 %
Provision for income taxes
7,077

 
6,872

 
3.0
 %
 
18,333

 
15,667

 
17.0
 %
Net Earnings
$
15,737

 
$
14,855

 
5.9
 %
 
$
40,384

 
$
35,849

 
12.7
 %
Net Earnings per Common Share:
 
 
 
 
 
 
 
 
 
 
 
Basic
$
1.39

 
$
1.30

 
6.9
 %
 
$
3.55

 
$
3.13

 
13.4
 %
Diluted
1.38

 
1.29

 
7.0
 %
 
3.52

 
3.10

 
13.5
 %
Average Number of Common Shares:
 
 
 
 
 
 
 
 
 
 
 
Basic
11,321

 
11,451

 
(1.1
)%
 
11,385

 
11,438

 
(0.5
)%
Diluted
11,383

 
11,554

 
(1.5
)%
 
11,474

 
11,572

 
(0.9
)%
Cash Dividends per Common Share
$
0.43

 
$
0.36

 
19.4
 %
 
$
1.29

 
$
1.08

 
19.4
 %
 
 
 
 
 
 
 
 
 
 
 
 
1Net realized (losses) gains before impairment losses
$
(287
)
 
$
1,034

 
(127.8
)%
 
$
1,686

 
$
3,558

 
(52.6
)%
Total other-than-temporary impairment (OTTI) losses
(123
)
 
(24
)
 
419.2
 %
 
(713
)
 
(917
)
 
(22.3
)%
Non-credit portion in other comprehensive income
0

 
2

 
NM

 
0

 
888

 
NM

OTTI losses reclassified from other comprehensive income
0

 
0

 
NM

 
0

 
(25
)
 
NM

Net impairment losses recognized in earnings
(123
)
 
(21
)
 
475.9
 %
 
(713
)
 
(55
)
 
NM

Total net realized (losses) gains on investments
$
(410
)
 
$
1,013

 
(140.5
)%
 
$
974

 
$
3,503

 
(72.2
)%
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,
 
2015
 
2014
 
2015
 
2014
Net earnings
$
15,737

 
$
14,855

 
$
40,384

 
$
35,849

Other comprehensive income before tax:
 
 
 
 
 
 
 
Net change in postretirement benefit liability
16

 
(3
)
 
49

 
652

Unrealized (losses) gains on investments:
 
 
 
 
 
 
 
Unrealized holding (losses) gains arising during the period
(11,301
)
 
(10,232
)
 
(16,357
)
 
13,138

Less: Reclassification adjustments for losses (gains) included in net earnings
410

 
(1,013
)
 
(974
)
 
(3,503
)
Unrealized (losses) gains on investments, net
(10,891
)
 
(11,245
)
 
(17,331
)
 
9,634

Other comprehensive (loss) income, before tax
(10,875
)
 
(11,247
)
 
(17,281
)
 
10,287

Income tax benefit (expense) related to components of other comprehensive income
3,806

 
3,937

 
6,049

 
(3,600
)
Other comprehensive (loss) income, net of tax
(7,069
)
 
(7,311
)
 
(11,233
)
 
6,686

Comprehensive income
$
8,669

 
$
7,544

 
$
29,151

 
$
42,535




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, 2015
 
December 31, 2014
 
(unaudited)
 
 
Assets
 
 
 
Investments:
 
 
 
Fixed maturities – at fair value (amortized cost $1,404,698 and $1,412,417)
$
1,415,130

 
$
1,431,843

Equity securities – at fair value (cost $81,797 and $77,862)
90,006

 
94,408

Short-term investments - at fair value (amortized cost $5,214 and $803)
5,214

 
803

Total investments
1,510,350

 
1,527,054

Cash and cash equivalents
70,605

 
84,541

Accrued investment income
12,387

 
12,976

Agents’ balances and premium receivable, net of allowances for doubtful accounts of $15,554 and $15,510
537,746

 
483,638

Property and equipment, net of accumulated depreciation of $71,445 and $63,929
79,562

 
55,880

Prepaid reinsurance premium
6,179

 
4,809

Recoverables from reinsurers (includes $775 and $161 on paid losses and LAE)
15,965

 
14,530

Deferred policy acquisition costs
98,573

 
90,428

Current and deferred income taxes
27,297

 
20,022

Receivable for securities sold
2,659

 
4,549

Other assets
16,436

 
11,108

Goodwill
75,275

 
75,275

Total assets
$
2,453,035

 
$
2,384,812

Liabilities and Shareholders’ Equity
 
 
 
Liabilities:
 
 
 
Unpaid losses and loss adjustment expenses
$
679,018

 
$
668,177

Unearned premium
645,047

 
589,260

Long-term debt (fair value $286,223 and $291,044)
275,000

 
275,000

Commissions payable
18,957

 
18,673

Payable for securities purchased
13,016

 
17,173

Other liabilities
124,898

 
118,870

Total liabilities
1,755,937

 
1,687,153

Commitments and contingencies (See Note 9)


 


Shareholders’ equity:
 
 
 
Common stock, no par value (50,000,000 shares authorized; 21,766,073 and 21,728,032 shares issued)
21,776

 
21,745

Additional paid-in capital
374,689

 
372,368

Retained earnings
751,323

 
725,651

Accumulated other comprehensive income, net of tax
12,261

 
23,494

Treasury stock, at cost (10,468,867 and 10,244,672 shares)
(462,951
)
 
(445,599
)
Total shareholders’ equity
697,098

 
697,659

Total liabilities and shareholders’ equity
$
2,453,035

 
$
2,384,812


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,
Net of Tax
 
Treasury
Stock
 
Total
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

Net earnings
—

 
—

 
21,352

 
—

 
—

 
21,352

Net change in postretirement benefit liability
—

 
—

 
—

 
(271
)
 
—

 
(271
)
Change in unrealized gain on investments
—

 
—

 
—

 
380

 
—

 
380

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

 
—

 
—

 
74

 
—

 
74

Comprehensive income
 
 
 
 
 
 
 
 
 
 
21,536

Dividends paid to common shareholders
—

 
—

 
(4,136
)
 
—

 
—

 
(4,136
)
Shares issued and share-based compensation expense, including tax benefit
4

 
173

 
—

 
—

 
—

 
177

Acquisition of treasury stock
—

 
—

 
—

 
—

 
(1,386
)
 
(1,386
)
Balance at December 31, 2014
$
21,745

 
$
372,368

 
$
725,651

 
$
23,494

 
$
(445,599
)
 
$
697,659

Net earnings
—

 
—

 
40,384

 
—

 
—

 
40,384

Net change in postretirement benefit liability
—

 
—

 
—

 
32

 
—

 
32

Change in unrealized gain on investments
—

 
—

 
—

 
(11,703
)
 
—

 
(11,703
)
Change in non-credit component of impairment losses on fixed maturities
—

 
—

 
—

 
438

 
—

 
438

Comprehensive income
 
 
 
 
 
 
 
 
 
 
29,151

Dividends paid to common shareholders
—

 
—

 
(14,711
)
 
—

 
—

 
(14,711
)
Shares issued and share-based compensation expense, including tax benefit
31

 
2,321

 
—

 
—

 
—

 
2,352

Acquisition of treasury stock
—

 
—

 
—

 
—

 
(17,353
)
 
(17,353
)
Balance at September 30, 2015
$
21,776

 
$
374,689

 
$
751,323

 
$
12,261

 
$
(462,951
)
 
$
697,098


6
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(unaudited)
 
Three months ended September 30,
 
2015
 
2014
Operating Activities:
 
 
 
Net earnings
$
15,737

 
$
14,855

Adjustments:
 
 
 
Depreciation
3,193

 
2,769

Amortization
5,215

 
5,519

Net realized losses (gains) on investments
410

 
(1,013
)
Loss on disposal of property and equipment
916

 
10

Share-based compensation expense
135

 
732

Excess tax benefits from share-based payment arrangements
0

 
(62
)
Activity related to rabbi trust
(88
)
 
(22
)
Change in accrued investment income
1,133

 
1,278

Change in agents’ balances and premium receivable
3,795

 
(13,222
)
Change in reinsurance receivables
(1,284
)
 
206

Change in deferred policy acquisition costs
771

 
(1,348
)
Change in other assets
(2,898
)
 
(34
)
Change in unpaid losses and loss adjustment expenses
(2,009
)
 
7,976

Change in unearned premium
(7,900
)
 
11,530

Change in other liabilities
1,336

 
3,801

Net cash provided by operating activities
18,461

 
32,976

Investing Activities:
 
 
 
Purchases of fixed maturities
(97,646
)
 
(97,660
)
Purchases of equity securities
(5,000
)
 
0

Purchases of short-term investments
(4,752
)
 
(7,720
)
Purchases of property and equipment
(5,748
)
 
(3,092
)
Maturities and redemptions of fixed maturities
42,600

 
50,767

Maturities and redemptions of short-term investments
500

 
200

Proceeds from sale of fixed maturities
72,846

 
60,915

Proceeds from sale of short-term investments
3,086

 
6,864

Proceeds from sale of property and equipment
0

 
4

Net cash provided by investing activities
5,886

 
10,277

Financing Activities:
 
 
 
Proceeds from stock options exercised and employee stock purchases
58

 
73

Excess tax benefits from share-based payment arrangements
0

 
62

Principal payments under capital lease obligation
(125
)
 
(123
)
Acquisition of treasury stock
(9,297
)
 
(3,589
)
Dividends paid to shareholders
(4,858
)
 
(4,142
)
Net cash used in financing activities
(14,222
)
 
(7,719
)
Net increase in cash and cash equivalents
10,124

 
35,534

Cash and cash equivalents at beginning of period
60,481

 
59,139

Cash and cash equivalents at end of period
$
70,605

 
$
94,672



7
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(unaudited)
 
Nine months ended September 30,
 
2015
 
2014
Operating Activities:
 
 
 
Net earnings
$
40,384

 
$
35,849

Adjustments:
 
 
 
Depreciation
9,116

 
7,967

Amortization
16,314

 
16,786

Net realized gains on investments
(974
)
 
(3,503
)
Loss (gain) on disposal of property and equipment
1,155

 
(17
)
Share-based compensation expense
1,863

 
2,441

Excess tax benefits from share-based payment arrangements
(298
)
 
(213
)
Activity related to rabbi trust
(77
)
 
39

Change in accrued investment income
590

 
572

Change in agents’ balances and premium receivable
(54,108
)
 
(56,416
)
Change in reinsurance receivables
(2,805
)
 
(1,532
)
Change in deferred policy acquisition costs
(8,145
)
 
(7,107
)
Change in other assets
(6,238
)
 
1,811

Change in unpaid losses and loss adjustment expenses
10,841

 
26,621

Change in unearned premium
55,787

 
56,272

Change in other liabilities
6,435

 
8,112

Net cash provided by operating activities
69,839

 
87,681

Investing Activities:
 
 
 
Purchases of fixed maturities
(385,319
)
 
(396,904
)
Purchases of equity securities
(7,000
)
 
(2,600
)
Purchases of short-term investments
(8,413
)
 
(7,920
)
Purchases of property and equipment
(33,953
)
 
(16,043
)
Maturities and redemptions of fixed maturities
149,102

 
123,958

Maturities and redemptions of short-term investments
785

 
2,800

Proceeds from sale of fixed maturities
224,982

 
178,254

Proceeds from sale of equity securities
4,489

 
4,999

Proceeds from sale of short-term investments
3,086

 
6,864

Proceeds from sale of property and equipment
0

 
34

Net cash used in investing activities
(52,240
)
 
(106,558
)
Financing Activities:
 
 
 
Proceeds from stock options exercised and employee stock purchases
191

 
697

Excess tax benefits from share-based payment arrangements
298

 
213

Principal payments under capital lease obligation
(371
)
 
(398
)
Acquisition of treasury stock
(16,942
)
 
(8,749
)
Dividends paid to shareholders
(14,711
)
 
(12,425
)
Net cash used in financing activities
(31,535
)
 
(20,662
)
Net decrease in cash and cash equivalents
(13,936
)
 
(39,539
)
Cash and cash equivalents at beginning of period
84,541

 
134,211

Cash and cash equivalents at end of period
$
70,605

 
$
94,672


8
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
INDEX TO NOTES
 

Note 1 Reporting and Accounting Policies
Nature of Operations
We are a holding company that provides, through our subsidiaries, personal automobile insurance with a focus on the nonstandard market. 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, 2014. 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 have evaluated events that occurred after September 30, 2015, 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.

Recently Issued Accounting Standards
In May 2015 the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) related to the disclosure for short-duration contracts. The guidance requires additional disclosures related to the liability for unpaid claims and claim adjustment expenses in an effort to increase transparency and comparability. The standard is effective for fiscal years beginning after December 15, 2015, and is to be applied retrospectively.  The new guidance will have no material impact on our results of operations or financial position.
In April 2015 the FASB issued an ASU related to the presentation of debt issuance costs. The guidance requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability. The standard is effective for fiscal years beginning after December 15, 2015, and is to be applied retrospectively.  The new guidance will have no material impact on our results of operations or financial position.
In May 2014 the FASB issued an ASU related to the accounting for revenue from contracts with customers. Insurance contracts have been excluded from the scope of the guidance. In August 2015 the FASB issued an ASU to defer the effective date from

9
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

fiscal years beginning after December 15, 2016, to fiscal years beginning after December 15, 2017. 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,
 
2015
 
2014
 
2015
 
2014
Net earnings
$
15,737

 
$
14,855

 
$
40,384

 
$
35,849

Average basic shares outstanding
11,321

 
11,451

 
11,385

 
11,438

Basic net earnings per share
$
1.39

 
$
1.30

 
$
3.55

 
$
3.13

 
 
 
 
 
 
 
 
Average basic shares outstanding
11,321

 
11,451

 
11,385

 
11,438

Restricted stock not yet vested
18

 
23

 
16

 
47

Dilutive effect of assumed option exercises
0

 
0

 
0

 
1

Dilutive effect of Performance Share Plan
45

 
79

 
73

 
86

Average diluted shares outstanding
11,383

 
11,554

 
11,474

 
11,572

Diluted net earnings per share
$
1.38

 
$
1.29

 
$
3.52

 
$
3.10


 

10
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

Note 3 Fair Value
Fair values of instruments are based on:
(i)
quoted prices in active markets for identical assets (Level 1);
(ii)
quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all significant inputs are observable in active markets (Level 2); or
(iii)
valuations derived from valuation techniques in which one or more significant inputs are unobservable in the marketplace (Level 3).
The following tables present, for each of the fair value hierarchy levels, our assets and liabilities for which we report fair value on a recurring basis ($ in thousands):
 
 
Fair Value
September 30, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash and cash equivalents
 
$
70,605

 
$
0

 
$
0

 
$
70,605

Fixed maturity securities:
 
 
 
 
 
 
 
 
U.S. government
 
67,582

 
33

 
0

 
67,614

State and municipal
 
0

 
491,818

 
10

 
491,828

Mortgage-backed securities:
 

 
 
 
 
 
 
Residential
 
0

 
341,554

 
0

 
341,554

Commercial
 
0

 
71,404

 
0

 
71,404

Total mortgage-backed securities
 
0

 
412,958

 
0

 
412,958

Asset-backed securities
 
0

 
58,041

 
0

 
58,041

Corporates
 
0

 
382,699

 
1,989

 
384,688

Total fixed maturities
 
67,582

 
1,345,549

 
1,999

 
1,415,130

Equity securities
 
90,006

 
0

 
0

 
90,006

Short-term investments
 
0

 
5,214

 
0

 
5,214

Total cash and investments
 
$
228,193

 
$
1,350,763

 
$
1,999

 
$
1,580,955

Percentage of total cash and investments
 
14.4
%
 
85.4
%
 
0.1
%
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
Fair Value
December 31, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash and cash equivalents
 
$
84,541

 
$
0

 
$
0

 
$
84,541

Fixed maturity securities:
 
 
 
 
 
 
 
 
U.S. government
 
66,847

 
87

 
0

 
66,933

State and municipal
 
0

 
503,650

 
0

 
503,650

Mortgage-backed securities:
 
 
 
 
 
 
 
 
Residential
 
0

 
354,528

 
0

 
354,528

Commercial
 
0

 
50,838

 
0

 
50,838

Total mortgage-backed securities
 
0

 
405,366

 
0

 
405,366

Asset-backed securities
 
0

 
58,457

 
150

 
58,607

Corporates
 
0

 
394,152

 
3,134

 
397,286

Total fixed maturities
 
66,847

 
1,361,711

 
3,285

 
1,431,843

Equity securities
 
94,408

 
0

 
0

 
94,408

Short-term investments
 
0

 
803

 
0

 
803

Total cash and investments
 
$
245,795

 
$
1,362,514

 
$
3,285

 
$
1,611,594

Percentage of total cash and investments
 
15.3
%
 
84.5
%
 
0.2
%
 
100.0
%

11
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

We do not report our long-term debt at fair value in the Consolidated Balance Sheets. The $286.2 million and $291.0 million fair value of our long-term debt at September 30, 2015, and December 31, 2014, 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. A summary of the significant valuation techniques and market inputs for each class of security follows:
U.S. Government: In determining the fair value for U.S. Government securities we use the market approach. The primary inputs to the valuation include reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads, reference data and industry and economic events.
State and municipal: In determining the fair value for state and municipal securities we use the market approach. The primary inputs to the valuation include reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads, reference data and industry and economic events.
Mortgage-backed securities: In determining the fair value for mortgage-backed securities we use the market approach and to a lesser extent the income approach. The primary inputs to the valuation include reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads, reference data, industry and economic events and monthly payment information.
Asset-backed securities: In determining the fair value for asset-backed securities we use the market approach and to a lesser extent the income approach. The primary inputs to the valuation include reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads, reference data, industry and economic events, monthly payment information and collateral performance.
Corporate: In determining the fair value for corporate securities we use the fair value approach. The primary inputs to the valuation models include reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads (for investment grade securities), observations of equity and credit default swap curves (for high-yield corporates), reference data and industry and economic events.
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.












12
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

The following tables present the progression in the Level 3 fair value category ($ in thousands): 
 
Three months ended September 30, 2015
 
State and
Municipal
 
Corporates
 
Asset-Backed Securities
 
Total
Balance at beginning of period
$
10

 
$
2,423

 
$
0

 
$
2,434

Total gains or (losses), unrealized or realized
 
 
 
 
 
 
 
Included in net earnings
(0
)
 
6

 
0

 
6

Included in other comprehensive income
(0
)
 
(10
)
 
0

 
(10
)
Sales
0

 
0

 
0

 
0

Settlements
0

 
(83
)
 
0

 
(83
)
Transfers in
0

 
0

 
0

 
0

Transfers out
0

 
(347
)
 
0

 
(347
)
Balance at end of period
$
10

 
$
1,989

 
$
0

 
$
1,999

 
 
 
 
 
 
 
 
 
Three months ended September 30, 2014
 
State and
Municipal
 
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
0

 
(690
)
 
0

 
(690
)
Settlements
0

 
(271
)
 
(118
)
 
(389
)
Transfers in
0

 
0

 
0

 
0

Transfers out
0

 
0

 
0

 
0

Balance at end of period
$
0

 
$
3,709

 
$
262

 
$
3,971


13
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

 
Nine months ended September 30, 2015
 
State and
Municipal
 
Corporates
 
Asset-Backed Securities
 
Total
Balance at beginning of period
$
0

 
$
3,134

 
$
150

 
$
3,285

Total gains or (losses), unrealized or realized
 
 
 
 
 
 
 
Included in net earnings
(0
)
 
(77
)
 
0

 
(77
)
Included in other comprehensive income
0

 
(53
)
 
0

 
(53
)
Sales
0

 
0

 
0

 
0

Settlements
0

 
(669
)
 
(150
)
 
(819
)
Transfers in
10

 
0

 
0

 
10

Transfers out
0

 
(347
)
 
0

 
(347
)
Balance at end of period
$
10

 
$
1,989

 
$
0

 
$
1,999

 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2014
 
State and
Municipal
 
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
0

 
(690
)
 
0

 
(690
)
Settlements
0

 
(846
)
 
(422
)
 
(1,268
)
Transfers in
0

 
0

 
0

 
0

Transfers out
0

 
0

 
0

 
0

Balance at end of period
$
0

 
$
3,709

 
$
262

 
$
3,971



Of the $2.0 million fair value of securities in Level 3 at September 30, 2015, which consisted of five securities, we priced two based on non-binding broker quotes, one price was provided by our unaffiliated money manager and two securities, which were included in Level 3 because they were not rated by a nationally recognized statistical rating organization, were priced by a nationally recognized pricing service.
During the nine months ended September 30, 2015, one security was transferred from Level 2 into Level 3 because it was no longer rated by a nationally recognized statistical rating organization, and one security was transferred from Level 3 into Level 2 because its fair value was determinable using observable market inputs. There were no transfers of securities between Levels 1 and 2.
The gains or losses included in net earnings are included in the line item "Net realized (losses) gains on investments" in the Consolidated Statements of Earnings. We recognize the net gains or losses included in other comprehensive income in the line item "Unrealized (losses) gains 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.


14
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, 2015
 
December 31, 2014
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
70,605

 
$
70,605

 
$
84,541

 
$
84,541

Investments
 
 
 
 
 
 
 
Fixed maturities
1,415,130

 
1,415,130

 
1,431,843

 
1,431,843

Equity securities
90,006

 
90,006

 
94,408

 
94,408

Short-term
5,214

 
5,214

 
803

 
803

Total cash and investments
$
1,580,955

 
$
1,580,955

 
$
1,611,594

 
$
1,611,594

Liabilities:
 
 
 
 
 
 
 
Long-term debt
$
275,000

 
$
286,223

 
$
275,000

 
$
291,044

Refer to 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.


15
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, 2015, were $75.9 million and $232.6 million, respectively. The proceeds for the three and nine months ended September 30, 2014, were $67.8 million and $190.1 million, respectively. The proceeds for the nine months ended September 30, 2015, were net of $2.7 million of receivable for unsettled sales as of September 30, 2015. 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.
Gross gains of $1.6 million and gross losses of $1.9 million were realized on sales of available for sale securities during the three months ended September 30, 2015, compared with gross gains of $1.1 million and gross losses of $0.1 million realized on sales during the three months ended September 30, 2014. Gross gains of $4.3 million and gross losses of $2.6 million were realized on sales of available for sale securities during the nine months ended September 30, 2015, compared with gross gains of $3.9 million and gross losses of $0.3 million realized on sales during the nine months ended September 30, 2014. Gains or losses on securities are determined on a specific identification basis.

16
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, 2015
 
Amortized
Cost or Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
OTTI
Recognized in
Accumulated
OCI(1)
Fixed maturities:
 
 
 
 
 
 
 
 
 
U.S. government
$
67,219

 
$
400

 
$
(5
)
 
$
67,614

 
$
0

State and municipal
482,611

 
9,347

 
(130
)
 
491,828

 
(51
)
Mortgage-backed securities:

 

 

 
 
 
 
Residential
337,487

 
5,403

 
(1,336
)
 
341,554

 
(2,510
)
Commercial
71,479

 
189

 
(264
)
 
71,404

 
0

Total mortgage-backed securities
408,966

 
$
5,592

 
(1,600
)
 
$
412,958

 
(2,510
)
Asset-backed securities
57,771

 
279

 
(10
)
 
58,041

 
(8
)
Corporates
388,130

 
2,672

 
(6,114
)
 
384,688

 
(190
)
Total fixed maturities
1,404,698

 
18,290

 
(7,859
)
 
1,415,130

 
(2,760
)
Equity securities
81,797

 
8,209

 
0

 
90,006

 
0

Short-term investments
5,214

 
0

 
(0
)
 
5,214

 
0

Total
$
1,491,710

 
$
26,500

 
$
(7,859
)
 
$
1,510,350

 
$
(2,760
)
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
Amortized
Cost or Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
OTTI
Recognized in
Accumulated
OCI(1)
Fixed maturities:
 
 
 
 
 
 
 
 
 
U.S. government
$
66,625

 
$
502

 
$
(193
)
 
$
66,933

 
$
0

State and municipal
493,350

 
10,637

 
(337
)
 
503,650

 
(69
)
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Residential
349,371

 
6,547

 
(1,390
)
 
354,528

 
(2,914
)
Commercial
50,914

 
182

 
(258
)
 
50,838

 
0

Total mortgage-backed securities
400,285

 
6,729

 
(1,648
)
 
405,366

 
(2,914
)
Asset-backed securities
58,546

 
131

 
(70
)
 
58,607

 
(8
)
Corporates
393,611

 
5,999

 
(2,324
)
 
397,286

 
(441
)
Total fixed maturities
1,412,417

 
23,998

 
(4,572
)
 
1,431,843

 
(3,433
)
Equity securities
77,862

 
16,546

 
0

 
94,408

 
0

Short-term investments
803

 
0

 
(1
)
 
803

 
0

Total
$
1,491,082

 
$
40,544

 
$
(4,573
)
 
$
1,527,054

 
$
(3,433
)
 
 
 
 
 
 
 
 
 
 
(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.


17
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, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government
0
 
$
0

 
$
0

 
0.0
%
 
4

 
$
5,184

 
$
(5
)
 
0.1
%
State and municipal
14
 
24,885

 
(130
)
 
0.5
%
 
0

 
0

 
0

 
0.0
%
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
140
 
90,978

 
(523
)
 
0.6
%
 
62

 
41,491

 
(813
)
 
1.9
%
Commercial
10
 
38,825

 
(182
)
 
0.5
%
 
6

 
18,087

 
(82
)
 
0.5
%
Total mortgage-backed securities
150
 
129,803

 
(705
)
 
0.5
%
 
68

 
59,578

 
(895
)
 
1.5
%
Asset-backed securities
9
 
6,138

 
(8
)
 
0.1
%
 
2

 
1,158

 
(2
)
 
0.1
%
Corporates
135
 
180,710

 
(5,461
)
 
2.9
%
 
9

 
11,439

 
(653
)
 
5.4
%
Total fixed maturities
308
 
341,536

 
(6,304
)
 
1.8
%
 
83

 
77,359

 
(1,554
)
 
2.0
%
Short-term investments
1
 
567

 
(0
)
 
0.1
%
 
0

 
0

 
0

 
0.0
%
Total
309
 
$
342,103

 
$
(6,305
)
 
1.8
%
 
83

 
$
77,359

 
$
(1,554
)
 
2.0
%

 
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, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government
2

 
$
5,275

 
$
(13
)
 
0.3
%
 
8

 
$
21,051

 
$
(180
)
 
0.8
%
State and municipal
45

 
108,721

 
(290
)
 
0.3
%
 
2

 
4,183

 
(47
)
 
1.1
%
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
24

 
12,855

 
(34
)
 
0.3
%
 
109

 
100,752

 
(1,356
)
 
1.3
%
Commercial
8

 
15,638

 
(122
)
 
0.8
%
 
5

 
9,519

 
(136
)
 
1.4
%
Total mortgage-backed securities
32

 
28,493

 
(156
)
 
0.5
%
 
114

 
110,271

 
(1,492
)
 
1.3
%
Asset-backed securities
24

 
23,351

 
(60
)
 
0.3
%
 
2

 
1,150

 
(9
)
 
0.8
%
Corporates
103

 
142,046

 
(1,820
)
 
1.3
%
 
16

 
19,865

 
(503
)
 
2.5
%
Total fixed maturities
206

 
307,886

 
(2,340
)
 
0.8
%
 
142

 
156,521

 
(2,232
)
 
1.4
%
Short-term investments
2

 
803

 
(1
)
 
0.1
%
 
0

 
0

 
0

 
0.0
%
Total
208

 
$
308,689

 
$
(2,341
)
 
0.8
%
 
142

 
$
156,521

 
$
(2,232
)
 
1.4
%









18
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:
•
whether the unrealized loss is credit-driven or a result of changes in market interest rates;
•
the length of time the security’s market value has been below its cost;
•
the extent to which fair value is less than cost basis;
•
the intent to sell the security;
•
whether it is more likely than not that there will be a requirement to sell the security before its anticipated recovery;
•
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.

19
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,
2015
 
December 31,
2014
Number of positions held with unrealized:
 
 
 
Gains
762

 
778

Losses
392

 
350

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

 
3

Losses of $500,000
0

 
0

Percentage of positions held with unrealized:
 
 
 
Gains that were investment grade
96
%
 
92
%
Losses that were investment grade
81
%
 
84
%
Percentage of fair value held with unrealized:
 
 
 
Gains that were investment grade
97
%
 
94
%
Losses that were investment grade
79
%
 
86
%

The following table sets forth the amount of unrealized loss, excluding the rabbi trust, by age and severity at September 30, 2015 ($ 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
$
108,257

 
$
(2,103
)
 
$
(951
)
 
$
(772
)
 
$
(380
)
Four months through six months
164,828

 
(3,162
)
 
(1,147
)
 
(1,376
)
 
(639
)
Seven months through nine months
49,379

 
(571
)
 
(392
)
 
(90
)
 
(89
)
Ten months through twelve months
21,591

 
(483
)
 
(135
)
 
0

 
(347
)
Greater than twelve months
75,408

 
(1,540
)
 
(1,033
)
 
(323
)
 
(184
)
Total
$
419,462

 
$
(7,859
)
 
$
(3,659
)
 
$
(2,561
)
 
$
(1,639
)
* 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, 2015
 
 
 
 
 
 
 
 
 
Unrealized holding gains (losses) on securities arising during the period
$
(9,119
)
 
$
(7,238
)
 
$
0

 
$
5,725

 
$
(10,632
)
Realized gains on securities sold
(588
)
 
(1,099
)
 
(0
)
 
590

 
(1,096
)
Impairment loss recognized in earnings
713

 
0

 
0

 
(249
)
 
463

Change in unrealized gains (losses) on marketable securities, net
$
(8,994
)
 
$
(8,337
)
 
$
0

 
$
6,066

 
$
(11,265
)
Nine months ended September 30, 2014
 
 
 
 
 
 
 
 
 
Unrealized holding gains on securities arising during the period
$
11,371

 
$
1,762

 
$
4

 
$
(4,598
)
 
$
8,539

Realized gains 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



20
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.
For our securities held with unrealized losses, we believe, based on our analysis, that we will recover our cost basis in these securities and 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.
 
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,
 
2015
 
2014
Beginning balance
$
852

 
$
956

Additions for:
 
 
 
Previously impaired securities
0

 
19

Newly impaired securities
0

 
15

Reductions for:
 
 
 
Securities sold and paid down
(139
)
 
(110
)
Ending balance
$
712

 
$
881

The table below sets forth the scheduled maturities of fixed maturity securities at September 30, 2015, 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
$
75,522

 
$
3,649

 
$
5,030

 
$
84,201

 
$
83,699

After one year through five years
481,816

 
111,282

 
2,257

 
595,355

 
588,714

After five years through ten years
148,090

 
103,898

 
729

 
252,717

 
254,023

After ten years
5,900

 
3,388

 
2,569

 
11,857

 
11,524

Mortgage- and asset-backed securities
274,322

 
196,677

 
0

 
471,000

 
466,738

Total
$
985,650

 
$
418,895

 
$
10,585

 
$
1,415,130

 
$
1,404,698


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, 2015, fair value of $286.2 million using a 228 basis point spread to the ten-year U.S. Treasury Note of 2.039%.
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, 2015, 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,
 
2015
 
2014
 
2015
 
2014
Earnings before income taxes
$
22,814

 
$
21,727

 
$
58,717

 
$
51,516

Income taxes at statutory rate
7,985

 
7,604

 
20,551

 
18,031

Effect of:
 
 
 
 
 
 
 
Dividends-received deduction
(89
)
 
(90
)
 
(337
)
 
(341
)
Tax-exempt interest
(725
)
 
(700
)
 
(2,033
)
 
(2,103
)
Other
(94
)
 
58

 
152

 
81

Provision for income taxes as shown on the Consolidated Statements of Earnings
$
7,077

 
$
6,872

 
$
18,333

 
$
15,667

GAAP effective tax rate
31.0
%
 
31.6
%
 
31.2
%
 
30.4
%


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,
 
2015
 
2014
 
2015
 
2014
Income tax payments
$
6,511

 
$
6,200

 
$
19,261

 
$
12,400

Interest payments on debt
6,875

 
6,875

 
13,750

 
13,750

Interest payments on capital leases
19

 
12

 
62

 
41

Negative Cash Book Balances
Negative cash book balances, included in the line item “Other liabilities” in the Consolidated Balance Sheets, were $60.0 million and $51.2 million at September 30, 2015, and December 31, 2014, respectively.

 

21
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

Note 8 Insurance Reserves
Insurance reserves include liabilities for unpaid losses, both known and estimated for incurred but not reported (“IBNR”), and unpaid loss adjustment expenses (“LAE”). The following table provides an analysis of changes in the liability for unpaid losses and LAE on a GAAP basis ($ in thousands): 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
Balance at Beginning of Period
 
 
 
 
 
 
 
Unpaid losses on known claims
$
245,863

 
$
225,040

 
$
235,037

 
$
221,447

IBNR losses
281,147

 
274,830

 
277,482

 
262,660

LAE
154,017

 
165,352

 
155,658

 
162,469

Total unpaid losses and LAE
681,028

 
665,222

 
668,177

 
646,577

Reinsurance recoverables
(14,155
)
 
(13,717
)
 
(14,370
)
 
(14,431
)
Unpaid losses and LAE, net of reinsurance recoverables
666,873

 
651,505

 
653,808

 
632,146

Current Activity
 
 
 
 
 
 
 
Loss and LAE incurred:
 
 
 
 
 
 
 
Current accident year
267,412

 
253,847

 
798,442

 
767,721

Prior accident years
(11,349
)
 
(5,364
)
 
(23,953
)
 
(8,601
)
Total loss and LAE incurred
256,063

 
248,483

 
774,489

 
759,120

Loss and LAE payments:
 
 
 
 
 
 
 
Current accident year
(192,850
)
 
(171,210
)
 
(439,519
)
 
(405,800
)
Prior accident years
(66,257
)
 
(69,462
)
 
(324,949
)
 
(326,150
)
Total loss and LAE payments
(259,107
)
 
(240,673
)
 
(764,469
)
 
(731,951
)
Balance at End of Period
 
 
 
 
 
 
 
Unpaid losses and LAE, net of reinsurance recoverables
663,829

 
659,316

 
663,829

 
659,316

Add back reinsurance recoverables
15,190

 
13,883

 
15,190

 
13,883

Total unpaid losses and LAE
679,018

 
673,198

 
679,018

 
673,198

Unpaid losses on known claims
246,015

 
229,425

 
246,015

 
229,425

IBNR losses
282,658

 
278,572

 
282,658

 
278,572

LAE
150,345

 
165,200

 
150,345

 
165,200

Total unpaid losses and LAE
$
679,018

 
$
673,198

 
$
679,018

 
$
673,198


The $24.0 million of favorable reserve development during the nine months ended September 30, 2015, was primarily due to decreases in severity as well as decreases in loss adjustment expenses related to Florida bodily injury coverages in accident years 2013 and 2014. A decrease in loss adjustment expenses related to California bodily injury coverages in accident years 2013 and 2014 also contributed to the $11.3 million of favorable reserve development during the three months ended September 30, 2015.

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, 2014. 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, 2014.

22
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

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 claims, as well as class action and individual lawsuits that involve issues not unlike those facing other insurance companies and employers. We continually evaluate potential liabilities and reserves for litigation of these types using the criteria established by the Contingencies topic of the FASC. Under this guidance we may only record reserves for a loss if the likelihood of occurrence is probable and we can reasonably estimate the amount. If a material loss is judged to be reasonably possible, we will disclose an estimated range of loss or state that an estimate cannot be made. We consider each legal action using this guidance and record reserves for losses as warranted by establishing a reserve captured within our Consolidated Balance Sheets line-items “Unpaid losses and loss adjustment expenses” for extra-contractual claims and “Other liabilities” for class action and other non-claims related lawsuits. We record amounts incurred on the Consolidated Statements of Earnings within “Losses and loss adjustment expenses” for extra-contractual claims and “Other expenses” for class action and other non-claims related lawsuits.
Certain claims and legal actions have been brought against us for which we have accrued no loss, and for which an estimate of a possible range of loss cannot be made under the above rules. While it is not possible to predict the ultimate outcome of these claims or lawsuits, we do not believe they are likely to have a material effect on our financial condition or liquidity. However, losses incurred because of these cases could have a material adverse impact on net earnings in a given period.
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, 2014.



23
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

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,
 
 
2015
 
2014
 
 
Before Tax
 
Income Tax
 
Net
 
Before Tax
 
Income Tax
 
Net
Accumulated change in postretirement benefit liability, beginning of period
 
$
206

 
$
(72
)
 
$
134

 
$
593

 
$
(208
)
 
$
385

Effect on other comprehensive income
 
16

 
(6
)
 
11

 
(3
)
 
1

 
(2
)
Accumulated change in postretirement benefit liability, end of period
 
223

 
(78
)
 
145

 
590

 
(207
)
 
384

 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated unrealized gains on investments, net, beginning of period
 
29,532

 
(10,336
)
 
19,196

 
46,517

 
(16,281
)
 
30,236

Other comprehensive loss before reclassification
 
(11,301
)
 
3,955

 
(7,346
)
 
(10,232
)
 
3,581

 
(6,651
)
Reclassification adjustment for other-than-temporary impairments included in net income
 
123

 
(43
)
 
80

 
21

 
(7
)
 
14

Reclassification adjustment for realized losses (gains) included in net income
 
287

 
(100
)
 
187

 
(1,034
)
 
362

 
(672
)
Effect on other comprehensive income
 
(10,891
)
 
3,812

 
(7,079
)
 
(11,245
)
 
3,936

 
(7,309
)
Accumulated unrealized gains on investments, net, end of period
 
18,641

 
(6,524
)
 
12,116

 
35,272

 
(12,345
)
 
22,927

 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive income, beginning of period
 
29,738

 
(10,408
)
 
19,330

 
47,110

 
(16,488
)
 
30,621

Change in postretirement benefit liability
 
16

 
(6
)
 
11

 
(3
)
 
1

 
(2
)
Change in unrealized gains on investments, net
 
(10,891
)
 
3,812

 
(7,079
)
 
(11,245
)
 
3,936

 
(7,309
)
Effect on other comprehensive income
 
(10,875
)
 
3,806

 
(7,069
)
 
(11,247
)
 
3,937

 
(7,311
)
Accumulated other comprehensive income, end of period
 
$
18,864

 
$
(6,602
)
 
$
12,261

 
$
35,863

 
$
(12,552
)
 
$
23,311


24
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

 
 
Nine months ended September 30,
 
 
2015
 
2014
 
 
Before Tax
 
Income Tax
 
Net
 
Before Tax
 
Income Tax
 
Net
Accumulated change in postretirement benefit liability, beginning of period
 
$
174

 
$
(61
)
 
$
113

 
$
(62
)
 
$
22

 
$
(40
)
Effect on other comprehensive income
 
49

 
(17
)
 
32

 
652

 
(228
)
 
424

Accumulated change in postretirement benefit liability, end of period
 
223

 
(78
)
 
145

 
590

 
(207
)
 
384

 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated unrealized gains on investments, net, beginning of period
 
35,972

 
(12,590
)
 
23,382

 
25,638

 
(8,973
)
 
16,665

Other comprehensive (loss) income before reclassification
 
(16,357
)
 
5,725

 
(10,632
)
 
13,138

 
(4,598
)
 
8,539

Reclassification adjustment for other-than-temporary impairments included in net income
 
713

 
(249
)
 
463

 
55

 
(19
)
 
36

Reclassification adjustment for realized gains included in net income
 
(1,686
)
 
590

 
(1,096
)
 
(3,558
)
 
1,245

 
(2,313
)
Effect on other comprehensive income
 
(17,331
)
 
6,066

 
(11,265
)
 
9,634

 
(3,372
)
 
6,262

Accumulated unrealized gains on investments, net, end of period
 
18,641

 
(6,524
)
 
12,116

 
35,272

 
(12,345
)
 
22,927

 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive income, beginning of period
 
36,145

 
(12,651
)
 
23,494

 
25,576

 
(8,952
)
 
16,624

Change in postretirement benefit liability
 
49

 
(17
)
 
32

 
652

 
(228
)
 
424

Change in unrealized gains on investments, net
 
(17,331
)
 
6,066

 
(11,265
)
 
9,634

 
(3,372
)
 
6,262

Effect on other comprehensive income
 
(17,281
)
 
6,049

 
(11,233
)
 
10,287

 
(3,600
)
 
6,686

Accumulated other comprehensive income, end of period
 
$
18,864

 
$
(6,602
)
 
$
12,261

 
$
35,863

 
$
(12,552
)
 
$
23,311



25
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, and competitive conditions in our key Focus States (defined below). 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, 2014.

OVERVIEW
During the third quarter of 2015 total gross written premium decreased 3.8% but increased 1.8% during the first nine months of 2015 compared with the same periods of 2014. The majority of the growth during the nine months ended September 30, 2015, came from California personal auto and countrywide Commercial Vehicle, which grew a combined 2.6% and 11.0%, respectively, compared with the prior year. Partially offsetting premium growth in these two areas was premium decline of 47.0% and 42.8%, respectively, for the combined states of Georgia, Nevada and Pennsylvania as we have shifted our focus in these states to renewal only business. See Results of Operations – Underwriting – Premium for a more detailed discussion of our gross written premium.
Net earnings and diluted earnings per share for the three months ended September 30, 2015, were $15.7 million and $1.38, respectively, compared with $14.9 million and $1.29, respectively, for the three months ended September 30, 2014. Net earnings and diluted earnings per share for the nine months ended September 30, 2015, were $40.4 million and $3.52, respectively, compared with $35.8 million and $3.10, respectively, for the nine months ended September 30, 2014. The increase in diluted earnings per share for the three and nine months ended September 30, 2015, was primarily due to an increase in favorable development on prior accident year loss and loss adjustment expense reserves recognized during the third quarter and first nine months of 2015.
Included in net earnings for the three and nine months ended September 30, 2015, was $7.4 million ($11.3 million pre-tax) and $15.6 million ($24.0 million pre-tax) of favorable development on prior accident year loss and LAE reserves. The development during the nine months ended September 30, 2015, was primarily due to decreases in severity as well as decreases in loss adjustment expenses related to Florida bodily injury coverages in accident years 2013 and 2014. A decrease in loss adjustment expenses related to California bodily injury coverages in accident years 2013 and 2014 also contributed to the development during the third quarter. Included in net earnings for the three and nine months ended September 30, 2014, was $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.








26
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, 2015:
 
Accident Year Combined Ratio
Developed Through

 
Prior Accident Year
(Favorable) / Unfavorable
Development
 
($ in millions)
Prior Accident Year
(Favorable) / Unfavorable
Development
Accident Year
Dec 2013
 
Sept 2014
 
Dec 2014
 
Mar 2015
 
June 2015
 
Sept 2015
 
Q3 2015
 
YTD 2015
 
Q3 2015
 
YTD 2015
Prior
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
$
0.0

 
$
(0.4
)
2007
92.2
%
 
92.1
%
 
92.1
%
 
92.1
%
 
92.1
%
 
92.1
%
 
0.0
 %
 
0.0
 %
 
(0.0
)
 
(0.3
)
2008
91.3
%
 
91.3
%
 
91.2
%
 
91.1
%
 
91.1
%
 
91.1
%
 
0.0
 %
 
(0.1
)%
 
0.0

 
(0.7
)
2009
92.3
%
 
92.4
%
 
92.4
%
 
92.4
%
 
92.4
%
 
92.3
%
 
(0.1
)%
 
0.0
 %
 
(0.6
)
 
(0.1
)
2010
99.6
%
 
99.3
%
 
99.2
%
 
99.3
%
 
99.3
%
 
99.3
%
 
0.1
 %
 
0.1
 %
 
0.6

 
1.2

2011
100.3
%
 
100.2
%
 
100.1
%
 
100.1
%
 
100.0
%
 
100.0
%
 
0.0
 %
 
(0.1
)%
 
(0.1
)
 
(0.7
)
2012
99.8
%
 
100.1
%
 
100.1
%
 
100.0
%
 
99.9
%
 
99.9
%
 
0.0
 %
 
(0.2
)%
 
(0.1
)
 
(1.8
)
2013
97.7
%
 
97.1
%
 
96.8
%
 
96.6
%
 
96.3
%
 
95.7
%
 
(0.6
)%
 
(1.1
)%
 
(7.7
)
 
(14.3
)
2014
 
 
97.1
%
 
96.4
%
 
96.4
%
 
96.2
%
 
95.9
%
 
(0.3
)%
 
(0.5
)%
 
(3.6
)
 
(6.8
)
2015 YTD
 
 
 
 
 
 
97.0
%
 
97.7
%
 
97.6
%
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
(11.3
)
 
$
(24.0
)
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, 2015, was $10.0 million compared with $8.8 million for the three months ended September 30, 2014. Pre-tax net investment income for the nine months ended September 30, 2015, was $27.9 million compared with $26.7 million for the nine months ended September 30, 2014.
Our book value per share increased 1.6% from $60.75 at December 31, 2014, to $61.71 at September 30, 2015. This increase was primarily due to earnings partially offset by share repurchases, dividends and a decrease in unrealized gains for the nine months ended September 30, 2015.

27
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 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 (defined below) 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” – Arizona, California, Florida and Texas.
•
“Other States” – Georgia, Nevada and Pennsylvania where we currently offer renewals only, as well as additional states where we are 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.

28
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,
 
2015
 
2014
 
Change
 
% Change
Net earned premium
 
 
 
 
 
 
 
Gross written premium
 
 
 
 
 
 
 
Personal Auto:
 
 
 
 
 
 
 
Focus States
$
287,388

 
$
294,187

 
$
(6,799
)
 
(2.3
)%
Other States
11,550

 
21,799

 
(10,250
)
 
(47.0
)%
Total Personal Auto
298,938

 
315,986

 
(17,048
)
 
(5.4
)%
Commercial Vehicle
31,130

 
27,654

 
3,477

 
12.6
 %
Classic Collector
4,140

 
3,900

 
240

 
6.1
 %
Total gross written premium
334,209

 
347,540

 
(13,332
)
 
(3.8
)%
Ceded reinsurance
(3,568
)
 
(3,478
)
 
(90
)
 
2.6
 %
Net written premium
330,641

 
344,063

 
(13,422
)
 
(3.9
)%
Change in unearned premium
7,946

 
(11,086
)
 
19,031

 
(171.7
)%
Net earned premium
$
338,586

 
$
332,977

 
$
5,610

 
1.7
 %
 
 
 
 
 
 
 
 
 
Nine months ended September 30,
 
2015
 
2014
 
Change
 
% Change
Net earned premium
 
 
 
 
 
 
 
Gross written premium
 
 
 
 
 
 
 
Personal Auto:
 
 
 
 
 
 
 
Focus States
$
931,606

 
$
896,451

 
$
35,155

 
3.9
 %
Other States
39,145

 
69,060

 
(29,914
)
 
(43.3
)%
Total Personal Auto
970,751

 
965,511

 
5,240

 
0.5
 %
Commercial Vehicle
94,620

 
81,630

 
12,990

 
15.9
 %
Classic Collector
11,983

 
11,262

 
721

 
6.4
 %
Total gross written premium
1,077,354

 
1,058,403

 
18,951

 
1.8
 %
Ceded reinsurance
(11,028
)
 
(9,944
)
 
(1,083
)
 
10.9
 %
Net written premium
1,066,326

 
1,048,458

 
17,868

 
1.7
 %
Change in unearned premium
(55,130
)
 
(54,779
)
 
(351
)
 
0.6
 %
Net earned premium
$
1,011,197

 
$
993,680

 
$
17,517

 
1.8
 %

The following table summarizes our policies in force:
 
At September 30,
 
2015
 
2014
 
Change
 
% Change
Policies in Force
 
 
 
 
 
 
 
Personal Auto:
 
 
 
 
 
 
 
Focus States
756,690

 
773,408

 
(16,718
)
 
(2.2
)%
Other States
30,548

 
57,070

 
(26,522
)
 
(46.5
)%
Total Personal Auto
787,238

 
830,478

 
(43,240
)
 
(5.2
)%
Commercial Vehicle
48,151

 
44,047

 
4,104

 
9.3
 %
Classic Collector
41,065

 
40,665

 
400

 
1.0
 %
Total policies in force
876,454

 
915,190

 
(38,736
)
 
(4.2
)%


29
INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
Management’s Discussion and Analysis of Financial Condition and Results of Operations


Gross written premium decreased 3.8% during the third quarter but grew 1.8% during the first nine months of 2015, compared with the same periods of 2014. During the first nine months of 2015, Infinity implemented rate revisions in various states with an overall rate increase of 8.6%. Policies in force at September 30, 2015, decreased 4.2% compared with the same period in 2014. Gross written premium for the nine months ended September 30, 2015, increased despite the decline in policies in force primarily due to an increase in average premiums per policy.
Personal auto insurance gross written premium in our Focus States decreased 2.3% during the third quarter of 2015 and increased 3.9% for the first nine months of 2015 compared with the same periods of 2014. The decrease in gross written premium for the third quarter of 2015 compared with the same period of 2014 was primarily due to premium declines in Florida and Texas, slightly offset by 0.9% growth in California. The increase in gross written premium for the first nine months of 2015 compared with the same period of 2014 was primarily due to 10.2% growth in California. California's premium growth, most of which occurred during the first half of 2015, was primarily due to an increase in new business as a result of an improving economy and higher average written premiums. Gross written premium growth during the first nine months of 2015 was partially offset by a decline in the Other States as we discontinued writing new business in Georgia, Nevada and Pennsylvania effective January 1, 2015.
Commercial Vehicle gross written premium grew 12.6% and 15.9% during the third quarter and first nine months of 2015, respectively, when compared with the same periods of 2014. This growth was primarily due to renewal premium growth and higher average premiums in California, Florida and Texas.
    

30
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 combined ratio represents 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.
The discussion of underwriting results that follows will focus on statutory ratios and the components thereof, unless otherwise indicated.


31
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,
 
 
 
 
 
2015
 
2014
 
% 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
73.9
%
17.0
%
90.9
%
 
74.6
%
18.4
%
93.1
%
 
(0.7
)%
(1.5
)%
(2.2
)%
Other States
71.4
%
14.0
%
85.4
%
 
71.9
%
17.7
%
89.5
%
 
(0.5
)%
(3.7
)%
(4.2
)%
Total Personal Auto
73.8
%
16.8
%
90.7
%
 
74.4
%
18.4
%
92.8
%
 
(0.6
)%
(1.5
)%
(2.2
)%
Commercial Vehicle
100.7
%
16.1
%
116.8
%
 
81.3
%
17.4
%
98.7
%
 
19.4
 %
(1.3
)%
18.1
 %
Classic Collector
49.3
%
28.4
%
77.7
%
 
58.7
%
31.3
%
90.0
%
 
(9.4
)%
(2.9
)%
(12.3
)%
Total statutory ratios
75.7
%
16.9
%
92.6
%
 
74.8
%
18.5
%
93.2
%
 
1.0
 %
(1.6
)%
(0.6
)%
Total statutory ratios excluding development
78.4
%
16.9
%
95.3
%
 
78.3
%
18.5
%
96.7
%
 
0.1
 %
(1.6
)%
(1.5
)%
GAAP ratios
75.6
%
18.5
%
94.2
%
 
74.6
%
20.2
%
94.8
%
 
1.0
 %
(1.7
)%
(0.7
)%
GAAP ratios excluding development
78.3
%
18.5
%
96.8
%
 
78.2
%
20.2
%
98.4
%
 
0.1
 %
(1.7
)%
(1.6
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30,
 
 
 
 
 
2015
 
2014
 
% 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
75.1
%
17.0
%
92.1
%
 
77.0
%
17.9
%
94.9
%
 
(1.9
)%
(1.0
)%
(2.8
)%
Other States
93.7
%
14.5
%
108.1
%
 
74.6
%
17.7
%
92.3
%
 
19.0
 %
(3.2
)%
15.9
 %
Total Personal Auto
76.1
%
16.9
%
93.0
%
 
76.8
%
17.9
%
94.7
%
 
(0.7
)%
(1.1
)%
(1.8
)%
Commercial Vehicle
88.1
%
16.1
%
104.2
%
 
77.0
%
17.5
%
94.5
%
 
11.1
 %
(1.4
)%
9.8
 %
Classic Collector
54.4
%
28.4
%
82.7
%
 
53.8
%
32.0
%
85.8
%
 
0.6
 %
(3.6
)%
(3.1
)%
Total statutory ratios
76.8
%
17.0
%
93.7
%
 
76.5
%
18.1
%
94.6
%
 
0.2
 %
(1.1
)%
(0.9
)%
Total statutory ratios excluding development
79.1
%
17.0
%
96.1
%
 
77.4
%
18.1
%
95.4
%
 
1.8
 %
(1.1
)%
0.6
 %
GAAP ratios
76.6
%
18.7
%
95.3
%
 
76.4
%
19.8
%
96.2
%
 
0.2
 %
(1.1
)%
(0.9
)%
GAAP ratios excluding development
79.0
%
18.7
%
97.6
%
 
77.3
%
19.8
%
97.1
%
 
1.7
 %
(1.1
)%
0.6
 %
 
The statutory combined ratio for the three and nine months ended September 30, 2015, decreased by 0.6 point and 0.9 point from the same periods of 2014. The third quarter and first nine months of 2015 included $11.3 million and $24.0 million, respectively, of favorable development on prior accident year loss and LAE reserves primarily due to decreases in severity as well as decreases in loss adjustment expenses related to Florida bodily injury coverages in accident years 2013 and 2014. A decrease in loss adjustment expenses related to California bodily injury coverages in accident years 2013 and 2014 also contributed to the development in the third quarter. The third quarter and first nine months of 2014 included $5.4 million and $8.6 million, respectively, of favorable development on prior accident year loss and LAE reserves. The third quarter of 2015 included $2.4 million of unfavorable development from the first two accident quarters of the year compared with $6.4 million of favorable development recognized from the first two accident quarters of 2014 during the third quarter of 2014. Excluding the effect of development, the statutory combined ratio decreased 1.5 points during the third quarter, but increased 0.6 point for the nine months ended September 30, 2015, compared with the same periods of 2014.
The GAAP combined ratio for the three and nine months ended September 30, 2015, decreased by 0.7 point and 0.9 point, respectively, from the same periods of 2014. Excluding the effect of development, the GAAP combined ratio decreased by 1.6 points during the third quarter of 2015. For the nine months ended September 30, 2015, the GAAP combined ratio excluding

32
INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
Management’s Discussion and Analysis of Financial Condition and Results of Operations


development increased 0.6 point, primarily due to a higher accident year loss ratio as a result of increasing loss costs in personal injury protection, collision coverages and property damage, somewhat offset by a declining expense ratio primarily due to lower salary expenses.
Losses from catastrophes were $0.3 million and $1.4 million for the three and nine months ended September 30, 2015, respectively, compared with $0.4 million and $2.2 million for the same periods of 2014.
The 2.2 points and 2.8 points decline in the Focus States combined ratio for the three and nine months ended September 30, 2015, was primarily due to improvement in calendar year loss ratios as a result of favorable development from prior accident year loss and LAE reserves in Florida and California, as well as an increase in average written premiums in each of the four states.
The combined ratio in the Other States decreased by 4.2 points and increased by 15.9 points during the three and nine months ended September 30, 2015, respectively, from the same periods of 2014. The increase was primarily due to a deterioration in the current accident year combined ratio in Pennsylvania, as well as favorable development in the first nine months of 2014 from prior accident year loss and LAE reserves in Pennsylvania.
The combined ratio in Commercial Vehicle increased by 18.1 points and 9.8 points during the three and nine months ended September 30, 2015, respectively, compared with the same periods of 2014, primarily due to increases in both frequency and severity, resulting in higher new business loss ratios, particularly in Florida.


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


Installment and Other Fee Income
Installment and other fees charged to policyholders was $24.0 million and $73.1 million for the three and nine months ended September 30, 2015, respectively, compared with $23.3 million and $71.4 million, respectively, for the three and nine months ended September 30, 2014. The increase in fee income during the first nine months of 2015 was primarily related to the premium growth in California.
Net Investment Income
Net investment income is comprised of gross investment income less investment management fees and expenses, as shown in the following table ($ in thousands):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
Investment income:
 
 
 
 
 
 
 
Interest income on fixed maturities, cash and cash equivalents
$
10,103

 
$
8,887

 
$
27,999

 
$
26,683

Dividends on equity securities
426

 
432

 
1,614

 
1,636

Gross investment income
10,529

 
9,319

 
29,613

 
28,318

Investment expenses
(559
)
 
(565
)
 
(1,704
)
 
(1,655
)
Net investment income
9,970

 
8,754

 
27,908

 
26,663

Average investment balance, at cost
$
1,555,905

 
$
1,563,093

 
$
1,567,328

 
$
1,559,967

Annualized returns excluding realized gains and losses
2.6
%
 
2.2
%
 
2.4
%
 
2.3
%
Annualized returns including realized gains and losses
2.5
%
 
2.5
%
 
2.5
%
 
2.6
%

Gross and net investment income for the three and nine months ended September 30, 2015, includes $1.1 million of make whole proceeds. In prior periods, make whole proceeds were included in realized gains and losses.
The book yield on our portfolio continues to exceed our new money rates. Therefore, we expect that investment returns will gradually decline 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, 2015, 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. Mortgage Backed Securities (MBS) and sinking fund issues are included based on maturity year adjusted for expected payment patterns. 

($ in thousands)
Expected Principal Cash Flows
 
 
 
MBS and
ABS only
 
Excluding MBS and ABS
 
Total
 
Maturing Book Yield
For the period ending December 31,
 
 
 
 
 
 
 
2015
$
14,434

 
$
23,051

 
$
37,484

 
2.3%
2016
77,625

 
105,798

 
183,423

 
2.3%
2017
96,888

 
193,710

 
290,598

 
2.1%
2018
54,522

 
123,084

 
177,606

 
2.4%
2019
36,203

 
128,047

 
164,250

 
2.4%
Thereafter
168,474

 
311,557

 
480,032

 
2.7%
Total
$
448,147

 
$
885,246

 
$
1,333,393

 
2.4%

34
INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
Management’s Discussion and Analysis of Financial Condition and Results of Operations


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.

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, 2015
 
Three months ended September 30, 2014
 
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
$
(123
)
 
$
(287
)
 
$
(410
)
 
$
(21
)
 
$
1,034

 
$
1,013

Equities
0

 
0

 
0

 
0

 
0

 
0

Short-term investments
0

 
0

 
0

 
0

 
0

 
0

Total
$
(123
)
 
$
(287
)
 
$
(410
)
 
$
(21
)
 
$
1,034

 
$
1,013

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2015
 
Nine months ended September 30, 2014
 
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
$
(713
)
 
$
588

 
$
(125
)
 
$
(55
)
 
$
2,280

 
$
2,225

Equities
0

 
1,099

 
1,099

 
0

 
1,273

 
1,273

Short-term investments
0

 
0

 
0

 
0

 
5

 
5

Total
$
(713
)
 
$
1,686

 
$
974

 
$
(55
)
 
$
3,558

 
$
3,503

 
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, 2015, we had $275 million principal outstanding of Senior Notes 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 5.0% Senior Notes in the Consolidated Statements of Earnings for the three and nine months ended September 30, 2015, and 2014, respectively. Refer to Note 5 to the Consolidated Financial Statements for additional information on the 5.0% Senior Notes.
Income Taxes
Our GAAP effective tax rate for the three and nine months ended September 30, 2015, was 31.0% and 31.2%, respectively, compared with 31.6% and 30.4% for the three and nine months ended September 30, 2014. The GAAP effective tax rate has increased in 2015 primarily 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.

35
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, 2015, the holding company had $136.8 million of cash and investments. In 2015 our insurance subsidiaries may pay us up to $68.1 million in ordinary dividends without prior regulatory approval. For the nine months ended September 30, 2015, 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 premiums 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 $23.8 million and $79.9 million during the three and nine months ended September 30, 2015, respectively, compared with positive operating cash flows of $38.7 million and $101.2 million, respectively, during the three and nine months ended September 30, 2014.
At September 30, 2015, we had $275 million principal outstanding of 5.0% Senior Notes. The 5.0% 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, 2015, 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 2015 we increased our quarterly dividend to $0.43 per share from $0.36 per share. At this current amount, our 2015 annualized dividend payments would be approximately $19.6 million.
 
On November 4, 2014, our Board of Directors increased the authority of our share and debt repurchase program to a total of $75 million and extended the date to execute the program from December 31, 2014, to December 31, 2016. During the first quarter of 2015 we repurchased 25,800 shares at an average cost, excluding commissions, of $77.46 per share. During the second quarter of 2015 we repurchased 60,300 shares at an average cost, excluding commissions, of $75.56 per share. During the third quarter of 2015 we repurchased 121,378 shares at an average cost, excluding commissions, of $77.91 per share. As of September 30, 2015, we had $58.0 million of authority remaining under this program.
We believe that cash balances, cash flows generated from operations or borrowings, and maturities and sales of investments are adequate to meet our future liquidity needs and those of our insurance subsidiaries.
Reinsurance
We use excess of loss, catastrophe and extra-contractual loss reinsurance to mitigate the financial impact of large or
catastrophic losses. During 2015 our catastrophe reinsurance protection covers 100% of $55 million in excess of $5 million per event. 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, 2015, was $3.6 million and $11.0 million, respectively, compared with $3.5 million and $9.9 million for the same periods of 2014.




36
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, 2015, contained approximately $1.4 billion in fixed maturity securities, $90.0 million in equity securities and $5.2 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, 2015, we had pre-tax net unrealized gains of $10.4 million on fixed maturities and pre-tax net unrealized gains of $8.2 million on equity securities. Combined, the pre-tax net unrealized gain declined by $17.3 million for the nine months ended September 30, 2015. This decrease occurred as a result of higher market interest rates affecting our fixed portfolio as well as lower equity markets. The average option adjusted duration of our fixed maturity portfolio was 3.2 years at September 30, 2015, compared with 3.1 years at December 31, 2014.
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 91.5% of our fixed maturity investments at September 30, 2015, 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).
Our Level 1 securities are U.S. Treasury securities, an exchange-traded fund and equity securities held in a rabbi trust. Our Level 2 securities are comprised of securities whose fair value was determined using observable market inputs. Our 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.


37
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, 2015, was as follows ($ in thousands):
 
Amortized
Cost
 
Fair Value
 
% of
Total Fair
Value
Fixed Maturities:
 
 
 
 
 
U.S. government
$
67,219

 
$
67,614

 
4.5
%
State and municipal
482,611

 
491,828

 
32.6
%
Mortgage- and asset-backed:
 
 
 
 
 
Residential mortgage-backed securities
337,487

 
341,554

 
22.6
%
Commercial mortgage-backed securities
71,479

 
71,404

 
4.7
%
Asset-backed securities (ABS):
 
 
 
 
 
Auto loans
41,555

 
41,700

 
2.8
%
Equipment leases
9,559

 
9,637

 
0.6
%
Credit card receivables
4,515

 
4,517

 
0.3
%
Rate reduction bond
776

 
784

 
0.1
%
Whole business
751

 
756

 
0.1
%
Home equity
505

 
532

 
0.0
%
Student loans
110

 
116

 
0.0
%
Total ABS
57,771

 
58,041

 
3.8
%
Total mortgage- and asset-backed
466,738

 
471,000

 
31.2
%
Corporates
 
 
 
 
 
Investment grade
263,227

 
263,894

 
17.5
%
Non-investment grade
124,904

 
120,794

 
8.0
%
Total corporates
388,130

 
384,688

 
25.5
%
Total fixed maturities
1,404,698

 
1,415,130

 
93.7
%
Equity securities
81,797

 
90,006

 
6.0
%
Short-term investments
5,214

 
5,214

 
0.3
%
Total investments
$
1,491,710

 
$
1,510,350

 
100.0
%
We categorize securities by rating based upon available ratings issued by Moody's, Standard & Poor's or Fitch. 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, 2015, ($ in thousands): 
 
Rating
 
 
 
 
 
AAA
 
AA
 
A
 
BBB
 
Non-
investment
Grade
 
Total Fair
Value
 
% of
Total
Exposure
U.S. government
$
67,614

 
$
0

 
$
0

 
$
0

 
$
0

 
$
67,614

 
4.8
%
State and municipal
132,643

 
282,470

 
76,705

 
0

 
10

 
491,828

 
34.8
%
Mortgage- and asset-backed
433,412

 
29,393

 
5,975

 
2,220

 
0

 
471,000

 
33.3
%
Corporates
1,698

 
19,247

 
115,997

 
126,952

 
120,794

 
384,688

 
27.2
%
Total fair value
$
635,367

 
$
331,110

 
$
198,676

 
$
129,172

 
$
120,805

 
$
1,415,130

 
100.0
%
% of total fair value
44.9
%
 
23.4
%
 
14.0
%
 
9.1
%
 
8.5
%
 
100.0
%
 
 

38
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, 2015, there were no material changes to the information provided in our Form 10-K for the year ended December 31, 2014, 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, 2014.

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 Principal Executive Officer and Principal 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, 2015. 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 Principal Executive Officer and Principal Financial Officer, as appropriate.
Changes in Internal Control over Financial Reporting
During the fiscal quarter ended September 30, 2015, 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.

39
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, 2014. For a description of our previously reported legal proceedings, refer to Part I, Item 3, Legal Proceedings, in our Form 10-K for the year ended December 31, 2014.

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, 2014. For a description of our previously reported risk factors, refer to Part I, Item 1A, Risk Factors, in our Form 10-K for the year ended December 31, 2014.

ITEM 2
Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities
Period
 
Total Number
of Shares
Purchased
 
Average Price
Paid per Share (a)
 
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
 
Approximate Dollar
Value that May Yet Be
Purchased Under the
Plans or Programs (b)
July 1, 2015 - July 31, 2015
 
41,578

 
$
77.49

 
41,578

 
$
64,283,610

August 1, 2015 - August 31, 2015
 
36,900

 
78.45

 
36,900

 
61,387,568

September 1, 2015 - September 30, 2015
 
42,900

 
77.85

 
42,900

 
58,046,651

Total
 
121,378

 
$
77.91

 
121,378

 
$
58,046,651

 

(a)
Average price paid per share excludes commissions.
(b)
On November 4, 2014, our Board of Directors increased the authority under our current share and debt repurchase plan to a total of $75.0 million and extended the date to execute the program from December 31, 2014, to December 31, 2016.


40
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

ITEM 6
Exhibit 31.1 -     Certification of the Principal Executive Officer under Exchange Act Rule 13a-14(a)
Exhibit 31.2 -     Certification of the Principal Financial Officer under Exchange Act Rule 13a-14(a)
Exhibit 32 -
Certification of the Principal Executive Officer and Principal 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.



 

41
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/ AMY K. JORDAN
November 5, 2015
 
Amy K. Jordan
 
 
Acting Interim Principal Financial and Accounting Officer

42


Exhibit 31.1
CERTIFICATIONS
I, James R. Gober, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Infinity Property and Casualty Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

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

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



November 5, 2015
BY:
/s/ JAMES R. GOBER
 
 
James R. Gober
 
 
Chief Executive Officer
 
 
(Principal Executive Officer)




Exhibit 31.2
CERTIFICATIONS
I, Amy K. Jordan, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Infinity Property and Casualty Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



 
November 5, 2015
BY:
/s/ AMY K. JORDAN
 
 
Amy K. Jordan
 
 
Vice President and Controller
 
 
Acting Interim Principal Financial and Accounting Officer




Exhibit 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the filing with the Securities and Exchange Commission of the Quarterly Report of Infinity Property and Casualty Corporation (the “Company”) on Form 10-Q for the period ended September 30, 2015 (the “Report”), each of the undersigned officers of the Company certifies, pursuant to 18 U.S.C. Section 1350, that to the best of his knowledge:

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

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

November 5, 2015
BY:
/s/ JAMES R. GOBER
 
 
James R. Gober
President and Chief Executive Officer
 
 
 
November 5, 2015
BY:
/s/ AMY K. JORDAN
 
 
Amy K. Jordan
Acting Interim Principal Financial and Accounting Officer

A signed original of this written statement will be retained by the Registrant and
furnished to the Securities and Exchange Commission or its staff upon request.



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