Form 10-Q
Table of Contents

 

 

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 March 31, 2011

OR

 

¨ 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  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (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 April 30, 2011, there were 12,400,475 shares of the registrant’s common stock outstanding.

 

 

 


Table of Contents

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

INDEX

 

          Page  
   PART I – FINANCIAL INFORMATION   

Item 1

  

Financial Statements

  
  

Consolidated Statements of Earnings

     3  
  

Consolidated Balance Sheets

     4  
  

Consolidated Statements of Changes in Shareholders’ Equity

     5  
  

Consolidated Statements of Cash Flows

     6  
  

Condensed Notes to Consolidated Financial Statements

     8  

Item 2

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     22  

Item 3

  

Quantitative and Qualitative Disclosures About Market Risk

     36  

Item 4

  

Controls and Procedures

     36  
   PART II – OTHER INFORMATION   

Item 1

  

Legal Proceedings

     36   

Item 1A

  

Risk Factors

     36   

Item 2

  

Unregistered Sales of Equity Securities and Use of Proceeds

     37  

Item 6

  

Exhibits

     38  
  

Signature

     39  
   EXHIBIT INDEX   

Exhibit 31.1

  

Certification of the Chief Executive Officer under Exchange Act Rule 13a-14(a)

  

Exhibit 31.2

  

Certification of the Chief Financial Officer under Exchange Act Rule 13-a-14(a)

  

Exhibit 32

  

Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

  

Exhibit 101

  

XBRL Instance Document

  

 

2


Table of Contents

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

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 March 31,  
     2011     2010     % Change  

Revenues:

      

Earned premium

   $ 238,981      $ 212,066        12.7

Net investment income

     10,332        11,295        (8.5 )% 

Net realized gains (losses) on investments*

     2,923        (455     NM   

Other income

     52        23        126.1
                        

Total revenues

     252,288        222,929        13.2

Costs and Expenses:

      

Losses and loss adjustment expenses

     178,957        146,643        22.0

Commissions and other underwriting expenses

     55,087        48,154        14.4

Interest expense

     2,701        2,700        0.0

Corporate general and administrative expenses

     1,738        1,872        (7.2 )% 

Other expenses

     44        732        (94.0 )% 
                        

Total costs and expenses

     238,528        200,101        19.2

Earnings before income taxes

     13,761        22,828        (39.7 )% 

Provision for income taxes

     2,780        7,206        (61.4 )% 
                        

Net Earnings

   $ 10,981      $ 15,621        (29.7 )% 
                        

Earnings per Common Share:

      

Basic

   $ 0.89      $ 1.17        (23.9 )% 

Diluted

     0.87        1.15        (24.3 )% 

Average Number of Common Shares:

      

Basic

     12,345        13,319        (7.3 )% 

Diluted

     12,685        13,620        (6.9 )% 

Cash Dividends per Common Share

   $ 0.18      $ 0.14        28.6

 

*  Net realized gains before impairment losses

   $ 3,547      $ 1,078        229.0

Total other-than-temporary impairment (OTTI) losses

     (1,608     (99     NM   

Non-credit portion in other comprehensive income

     1,017        0        0.0

OTTI losses reclassified from other comprehensive income

     (33     (1,434     (97.7 )% 
                        

Net impairment losses recognized in earnings

     (624     (1,533     (59.3 )% 
                        

Total net realized gains (losses) on investments

   $ 2,923      $ (455     NM   
                        

NM = Not meaningful

See Condensed Notes to Consolidated Financial Statements.

 

3


Table of Contents

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

     March 31, 2011     December 31, 2010  
     (unaudited)        

Assets

    

Investments:

    

Fixed maturities – at fair value (amortized cost $1,182,952 and $1,153,802)

   $ 1,204,586      $ 1,177,718   

Equity securities – at fair value (cost $26,196 and $29,333)

     39,899        42,301   
                

Total investments

   $ 1,244,485      $ 1,220,019   

Cash and cash equivalents

     55,521        63,605   

Accrued investment income

     11,395        12,033   

Agents’ balances and premium receivable, net of allowances for doubtful accounts of $11,170 and $12,323

     369,345        336,676   

Property and equipment, net of accumulated depreciation of $45,994 and $43,731

     24,301        25,132   

Prepaid reinsurance premium

     2,126        1,890   

Recoverables from reinsurers (includes $761 and $289 on paid losses and LAE)

     16,875        16,809   

Deferred policy acquisition costs

     88,264        79,398   

Current and deferred income taxes

     13,165        14,867   

Receivable for securities sold

     430        0   

Other assets

     7,988        6,653   

Goodwill

     75,275        75,275   
                

Total assets

   $ 1,909,170      $ 1,852,357   
                

Liabilities and Shareholders’ Equity

    

Liabilities:

    

Unpaid losses and loss adjustment expenses

   $ 473,527      $ 477,833   

Unearned premium

     460,087        417,371   

Payable to reinsurers

     0        42   

Long-term debt (fair value $200,216 and $199,132)

     194,749        194,729   

Commissions payable

     29,161        24,232   

Payable for securities purchased

     8,251        419   

Other liabilities

     79,286        76,548   
                

Total liabilities

   $ 1,245,060      $ 1,191,173   

Commitments and contingencies (See Note 10)

    

Shareholders’ equity:

    

Common stock, no par value (50,000,000 shares authorized; 21,214,366 and 21,167,947 shares issued)

   $ 21,288      $ 21,228   

Additional paid-in capital

     351,773        349,742   

Retained earnings

     634,241        625,492   

Accumulated other comprehensive income, net of tax

     23,473        24,488   

Treasury stock, at cost (8,813,094 and 8,698,962 shares)

     (366,665     (359,766
                

Total shareholders’ equity

   $ 664,110      $ 661,184   
                

Total liabilities and shareholders’ equity

   $ 1,909,170      $ 1,852,357   
                

See Condensed Notes to Consolidated Financial Statements.

 

4


Table of Contents

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(in thousands)

(unaudited)

 

     Common
Stock
     Additional
Paid-in
Capital
     Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss),
Net of Tax
    Treasury
Stock
    Total  

Balance at December 31, 2009

   $ 21,064       $ 344,031       $ 541,167      $ 19,500      $ (307,602   $ 618,160   

Net earnings

   $ —         $ —         $ 15,621      $ —        $ —        $ 15,621   

Net change in postretirement benefit liability

     —           —           —          (17     —          (17

Change in unrealized gain on investments

     —           —           —          3,702        —          3,702   

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

     —           —           —          1,761        —          1,761   
                    

Comprehensive income

               $ 21,067   

Dividends paid to common shareholders

     —           —           (1,864     —          —          (1,864

Shares issued and share-based compensation expense

     45         1,264         —          —          —          1,309   

Acquisition of treasury stock

     —           —           —          —          (10,412     (10,412
                                                  

Balance at March 31, 2010

   $ 21,108       $ 345,296       $ 554,925      $ 24,945      $ (318,014   $ 628,260   
                                                  

Net earnings

   $ —         $ —         $ 75,902      $ —        $ —        $ 75,902   

Net change in postretirement benefit liability

     —           —           —          (103     —          (103

Change in unrealized gain on investments

     —           —           —          (2,831     —          (2,831

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

     —           —           —          2,477        —          2,477   
                    

Comprehensive income

               $ 75,444   

Dividends paid to common shareholders

     —           —           (5,335     —          —          (5,335

Shares issued and share-based compensation expense

     120         4,446         —          —          —          4,566   

Acquisition of treasury stock

     —           —           —          —          (41,752     (41,752
                                                  

Balance at December 31, 2010

   $ 21,228       $ 349,742       $ 625,492      $ 24,488      $ (359,766   $ 661,184   
                                                  

Net earnings

   $ —         $ —         $ 10,981      $ —        $ —        $ 10,981   

Net change in postretirement benefit liability

     —           —           —          (10     —          (10

Change in unrealized gain on investments

     —           —           —          (929     —          (929

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

     —           —           —          (76     —          (76
                    

Comprehensive income

               $ 9,966   

Dividends paid to common shareholders

     —           —           (2,232     —          —          (2,232

Shares issued and share-based compensation expense

     61         2,031         —          —          —          2,092   

Acquisition of treasury stock

     —           —           —          —          (6,898     (6,898
                                                  

Balance at March 31, 2011

   $ 21,288       $ 351,773       $ 634,241      $ 23,473      $ (366,665   $ 664,110   
                                                  

See Condensed Notes to Consolidated Financial Statements.

 

5


Table of Contents

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     Three months ended March 31,  
     2011     2010  

Operating Activities:

    

Net earnings

   $ 10,981      $ 15,621   

Adjustments:

    

Depreciation

     2,544        2,680   

Amortization

     2,073        1,576   

Net realized (gains) losses on investments

     (2,923     455   

Loss on disposal of property and equipment

     201        0   

Share-based compensation expense

     641        672   

Non-cash activity related to rabbi trust

     15        0   

Decrease (increase) in accrued investment income

     637        (982

Increase in agents’ balances and premium receivable

     (32,669     (33,461

Increase in reinsurance receivables

     (302     (1,508

Increase in deferred policy acquisition costs

     (8,865     (6,918

Decrease in other assets

     909        525   

Decrease in unpaid losses and loss adjustment expenses

     (4,305     (3,889

Increase in unearned premium

     42,716        43,190   

Decrease in payable to reinsurers

     (42     (58

Increase (decrease) in other liabilities

     7,597        (2,298
                

Net cash provided by operating activities

     19,208        15,605   

Investing Activities:

    

Purchases of and additional investments in:

    

Fixed maturities

     (142,612     (95,514

Property and equipment

     (1,915     (2,115

Maturities and redemptions of fixed maturities

     67,353        39,752   

Sales of:

    

Fixed maturities

     52,855        11,717   

Equity securities

     4,877        0   
                

Net cash used in investing activities

     (19,441     (46,161

Financing Activities:

    

Proceeds from stock options exercised and employee stock purchases, including tax benefit

     1,450        637   

Acquisition of treasury stock

     (7,069     (10,328

Dividends paid to shareholders

     (2,232     (1,864
                

Net cash used in financing activities

     (7,851     (11,555
                

Net decrease in cash and cash equivalents

     (8,084     (42,111

Cash and cash equivalents at beginning of period

     63,605        99,700   
                

Cash and cash equivalents at end of period

   $ 55,521      $ 57,589   
                

See Condensed Notes to Consolidated Financial Statements.

 

6


Table of Contents

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

INDEX TO NOTES

 

1.     Reporting and Accounting Policies    6.     Long-Term Debt
2.     Share-Based Compensation    7.     Income Taxes
3.     Computation of Earnings Per Share    8.     Additional Information
4.     Fair Value    9.     Insurance Reserves
5.     Investments    10.   Commitments and Contingencies

Note 1 Reporting and Accounting Policies

Nature of Operations

We are a holding company that, through subsidiaries, provides personal automobile insurance with a concentration on nonstandard auto insurance. Although licensed to write insurance in all 50 states and the District of Columbia, we focus on select states that management believes 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, 2010. 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 March 31, 2011 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 management’s 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 management uses 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.

Reclassifications

We have reclassified certain amounts in the prior period consolidated financial statements to conform to the current period presentation. These reclassifications had no effect on total shareholders’ equity, net cash flow or net earnings as previously reported.

 

7


Table of Contents

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

Condensed Notes to Consolidated Financial Statements

 

Note 2 Share-Based Compensation

Restricted Stock Plan

We established the Restricted Stock Plan in 2002 and amended it on July 31, 2007. There are 500,000 shares of our common stock reserved for issuance under the Restricted Stock Plan, of which we have issued 206,609 shares as of March 31, 2011. We expense the fair value of shares issued under the Restricted Stock Plan over the vesting periods of the awards based on the market value of our stock on the date of grant.

On July 31, 2007, our Compensation Committee (the “Committee”) approved the grant of 72,234 shares of restricted stock to certain officers under the Restricted Stock Plan. These shares of restricted stock will vest in full on July 31, 2011. During the vesting period, the shares of restricted stock will not have voting rights and will accrue dividends, which we will not pay until the shares have vested. We treat the restricted shares as issued and outstanding for calculation of diluted earnings per share only. Until fully vested, we will not consider the shares issued and outstanding for purposes of the basic earnings per share calculation.

Non-employee Directors’ Stock Ownership Plan

In May 2005, our shareholders approved the Non-employee Directors’ Stock Ownership Plan (“Directors’ Plan”). The purpose of the Directors’ Plan is to include our common stock as part of the compensation provided to our non-employee directors and to provide for stock ownership requirements for our non-employee directors. There are 200,000 shares of our common stock reserved for issuance under the Directors’ Plan, of which we have issued 37,302 shares as of March 31, 2011. Under the terms of the Directors’ Plan, we grant shares on or about June 1 of each year and we restrict these shares from sale or transfer by any recipient for six months from the date of grant. In June of 2010, we issued 7,672 shares of our common stock, valued pursuant to the plan at $350,000, to our non-employee directors. We treat participants’ shares as issued and outstanding for basic and diluted earnings per share calculations.

Employee Stock Purchase Plan

We established our Employee Stock Purchase Plan (“ESPP”) in 2004 and amended and restated it on August 3, 2010. Under the ESPP, all eligible full-time employees may purchase shares of our common stock at a 15% discount to the current market price. Employees may allocate up to 25% of their base salary with a maximum annual participation amount of $25,000. If a participant sells any shares purchased under the plan within one year, we preclude that employee from participating in the plan for one year from the date of sale. The source of shares issued to participants is treasury shares and/or authorized but previously unissued shares. The maximum number of shares that we may issue under the ESPP may not exceed 1,000,000, of which we have issued 43,671 as of March 31, 2011. Our ESPP is qualified under Section 423 of the Internal Revenue Code of 1986, as amended. We treat participants’ shares as issued and outstanding for basic and diluted earnings per share calculations.

Performance Share Plan

Our shareholders approved the Performance Share Plan (“PSP”) on May 20, 2008 and an amended and restated performance share plan on May 26, 2010. The purpose of the PSP is to align further the interest of management with our long-term shareholders by including performance-based compensation, payable in shares of common stock, as a component of an executive’s annual compensation. The Committee administers the PSP and will (i) establish the performance goals, which may include but are not limited to, combined ratio, premium growth, growth within certain specific geographic areas and earnings per share or return on equity over the course of the upcoming three year period, (ii) determine the PSP participants, (iii) set the performance share units to be awarded to such participants, and (iv) set the rate at which performance share units will convert to shares of common stock based upon attainment of the performance goals. The number of shares of common stock that we may issue under the PSP is limited to 500,000 shares. In April 2011, we issued 32,957 shares under this plan.

Stock Option Plan

We amended our Stock Option Plan (“SOP”) to prohibit any future grant of stock options from the plan after May 20, 2008. We have granted no options since 2004. We generally granted options with an exercise price near the closing price of our stock at the date of grant and these options have a 10-year contractual life. All of the options under the SOP have fully vested. Subject to specific limitations contained in the SOP, our Board of Directors has the ability to amend, suspend or terminate the plan at any time without shareholder approval. The SOP will continue in effect until the exercise or expiration of all options granted under the plan.

 

8


Table of Contents

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

Condensed Notes to Consolidated Financial Statements

 

As permitted by the Stock Compensation topic of the FASB Accounting Standards Codification, we used the modified Black-Scholes model with the assumptions noted below to estimate the value of employee stock options on the date of grant. Expected volatilities are based on historical volatilities of our stock. We selected the expected option life to be 7.5 years, which represents the midpoint between the last vesting date and the end of the contractual term. The risk-free rate for periods within the contractual life of the options is based on the yield on 10-year Treasury notes in effect at the time of grant. The dividend yield was based on expected dividends at the time of grant.

We estimated the weighted-average grant date fair values of options granted during 2004 and 2003 using the modified Black-Scholes valuation model and the following weighted-average assumptions:

 

     2004 Grants     2003 Grants  

Weighted-average grant date fair value

   $ 13.87      $ 5.97   

Dividend yield

     0.7     1.4

Expected volatility

     33.0     33.0

Risk-free interest rate

     4.3     4.0

Expected life

     7.5 years        7.5 years   

Weighted-average grant exercise price

   $ 33.56      $ 16.11   

Outstanding as of March 31, 2011

     79,050        114,458   

The following table describes activity for our Stock Option Plan:

 

     Number of Options     Weighted-Average
Exercise Price
     Weighted-
Average
Remaining
Term (in years)
     Aggregate
Intrinsic
Value (a) (in
millions)
 

Outstanding at December 31, 2010

     238,758      $ 22.52         

Granted

     0        0         

Exercised

     (45,250   $ 18.72         

Forfeited

     0        0         
                

Outstanding at March 31, 2011

     193,508      $ 23.41         2.30       $ 7.0   
                

Vested as of March 31, 2011

     193,508      $ 23.41         2.30       $ 7.0   

Exercisable as of March 31, 2011

     193,508      $ 23.41         2.30       $ 7.0   

 

(a) We calculated the intrinsic value for the stock options based on the difference between the exercise price of the underlying awards and our closing stock price as of the reporting date.

The Stock Compensation topic of the FASB Accounting Standards Codification requires the recognition of share-based compensation for the number of awards that we ultimately expect to vest. As of March 31, 2011, we used an estimated forfeiture rate of 0%. We will reassess estimated forfeitures in subsequent periods and may change this rate based on new facts and circumstances.

Cash received from option exercises for the three months ended March 31, 2011 and 2010 was approximately $0.8 million and $0.5 million, respectively. The actual tax benefit realized for the tax deductions from options exercised of share-based payment arrangements was approximately $0.5 million and $0.1 million, respectively, for the three months ended March 31, 2011 and 2010. The total intrinsic value of options exercised during the three months ended March 31, 2011 and 2010 was approximately $1.8 million and $0.7 million, respectively.

We have a policy of issuing new stock for the exercise of stock options.

 

9


Table of Contents

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

Condensed Notes to Consolidated Financial Statements

 

The amount of total compensation cost, by plan, for share-based compensation arrangements is as follows (in thousands):

 

     Three months ended March 31,  
     2011      2010  
     Expense
Recognized
in Income
     Tax
Benefit
     Expense
Recognized
in Income
     Tax
Benefit
 

Restricted Stock Plan

   $ 199       $ 70       $ 199       $ 70   

Non-employee Directors’ Stock Ownership Plan

     0         0         0         0   

Employee Stock Purchase Plan

     10         4         8         3   

Performance Share Plan

     443         155         473         166   

Stock Option Plan

     0         0         0         0   
                                   

Total

   $ 652       $ 229       $ 680       $ 239   
                                   

Note 3 Computation of Earnings per Share

The following table illustrates the computation of our basic and diluted earnings per common share (in thousands, except per share figures):

 

     For the three months ended
March 31,
 
     2011      2010  

Net earnings for basic and diluted earnings per share

   $ 10,981       $ 15,621   

Average basic shares outstanding

     12,345         13,319   

Basic earnings per share

   $ 0.89       $ 1.17   
                 

Average basic shares outstanding

     12,345         13,319   

Restricted stock not yet vested

     72         72   

Dilutive effect of assumed option exercises

     143         136   

Dilutive effect of Performance Share Plan

     125         93   
                 

Average diluted shares outstanding

     12,685         13,620   

Diluted earnings per share

   $ 0.87       $ 1.15   
                 

 

10


Table of Contents

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

Condensed Notes to Consolidated Financial Statements

 

Note 4 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 table presents for each of the fair value hierarchy levels our assets and liabilities that are measured at fair value on a recurring basis at March 31, 2011 (in thousands):

 

     Fair Value  
     Level 1     Level 2     Level 3     Total  

Cash and cash equivalents

   $ 55,521      $ 0      $ 0      $ 55,521   

Fixed maturity securities:

        

U.S. government

     159,209        583        4,413        164,205   

Government-sponsored entities

     0        39,813        0        39,813   

State and municipal

     0        390,623        0        390,623   

Mortgage-backed securities:

        

Residential

     0        234,799        1,747        236,547   

Commercial

     0        32,933        0        32,933   
                                

Total mortgage-backed securities

   $ 0      $ 267,732      $ 1,747      $ 269,479   

Collateralized mortgage obligations

     0        40,271        741        41,012   

Asset-backed securities

     0        47,833        0        47,833   

Corporates

     0        240,399        11,221        251,621   
                                

Total fixed maturities

   $ 159,209      $ 1,027,255      $ 18,123      $ 1,204,586   

Equity securities

     39,898        1        0        39,899   
                                

Total

   $ 254,627      $ 1,027,255      $ 18,123      $ 1,300,006   
                                

Percentage of total

     19.6     79.0     1.4     100.0

Level 1 includes cash and cash equivalents, U.S. Treasury securities, an exchange-traded fund and equities invested in a rabbi trust. Level 2 securities are comprised of securities whose fair value was determined using observable market inputs. Level 3 securities are comprised of (i) securities for which there is no active or inactive market for similar instruments, (ii) securities whose fair value is determined based on unobservable inputs and (iii) securities, other than those backed by the U.S. Government, that are not rated by a nationally recognized statistical rating organization. We recognize transfers between levels at the beginning of the reporting period.

A third party nationally recognized pricing service provides the fair value of securities in Level 2. We periodically review the third party pricing methodologies and test for significant differences between the market price used to value the security and recent sales activity.

 

11


Table of Contents

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

Condensed Notes to Consolidated Financial Statements

 

The following table presents the changes in the Level 3 fair value category at March 31, 2011 (in thousands):

 

     For the three months ended
March 31, 2011
 
     U.S.
Government
Securities
    Mortgage-
Backed
Securities
    Collateralized
Mortgage
Obligations
    Corporates     Total  

Balance at beginning of period

   $ 4,950      $ 0      $ 1,043      $ 21,482      $ 27,476   

Total gains or (losses), unrealized or realized

          

Included in net earnings

     0        0        (2     (39     (41

Included in other comprehensive income

     (114     8        9        836        739   

Purchases

     0        0        0        0        0   

Sales

     0        0        0        0        0   

Settlements

     (423     (8     (309     (381     (1,121

Transfers in

     0        1,747        0        0        1,747   

Transfers out

     0        0        0        (10,677     (10,677
                                        

Balance at end of period

   $ 4,413      $ 1,747      $ 741      $ 11,221      $ 18,123   
                                        

Of the $18.1 million fair value of securities in Level 3, which consists of 15 securities, we priced 14 based on non-binding broker quotes. We manually calculated the price of the remaining security, which has a fair value of $0.2 million, based on expected principal repayments from Bloomberg, the zero spot Treasury curve at March 31, 2011 and the average spreads to Treasury for the type and rating of the security being priced.

We transferred approximately $10.7 million of securities in Level 3 at December 31, 2010 to Level 2 during the three months ended March 31, 2011 because we obtained a price for those securities from a third party nationally recognized pricing service. We transferred approximately $1.7 million of securities into Level 3 from Level 2 during the three months ended March 31, 2011 because we could not obtain a price from a third party nationally recognized pricing service. There were no transfers between Levels 1 and 2.

The gains or losses included in net earnings are included in the line item net realized gains (losses) on investments in the Consolidated Statements of Earnings. We recognize the net gains or losses included in other comprehensive income in the line item 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.

 

12


Table of Contents

INFINITY PROPERTY AND CASUALTY CORPORATION 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):

 

     March 31, 2011      December 31, 2010  
     Carrying
Value
     Fair
Value
     Carrying
Value
     Fair
Value
 

Assets:

           

Cash and cash equivalents

   $ 55,521       $ 55,521       $ 63,605       $ 63,605   

Available-for-sale securities

           

Fixed maturities

     1,204,586         1,204,586         1,177,718         1,177,718   

Equity securities

     39,899         39,899         42,301         42,301   
                                   

Total cash and investments

   $ 1,300,006       $ 1,300,006       $ 1,283,624       $ 1,283,624   
                                   

Liabilities:

           

Long-term debt

   $ 194,749       $ 200,216       $ 194,729       $ 199,132   
                                   

See Note 5 to the Consolidated Financial Statements for additional information on investments and Note 6 for additional information on long-term debt.

 

13


Table of Contents

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

Condensed Notes to Consolidated Financial Statements

 

Note 5 Investments

We consider all fixed maturity and equity securities 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 months ended March 31, 2011 and 2010 were $57.7 million and $11.7 million, respectively. Gains or losses on securities are determined on a specific identification basis.

Summarized information for the major categories of our investment portfolio follows (in thousands):

 

     March 31, 2011  
     Amortized
Cost or Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    OTTI
Recognized in
Accumulated
OCI
    Fair Value  

Fixed maturities:

            

U.S. government

   $ 162,042       $ 2,570       $ (406   $ 0      $ 164,205   

Government-sponsored entities

     39,279         664         (129     0        39,813   

State and municipal

     386,158         7,717         (2,995     (258     390,623   

Mortgage-backed securities:

            

Residential

     234,171         4,395         (624     (1,396     236,547   

Commercial

     32,120         945         (132     0        32,933   
                                          

Total mortgage-backed securities

   $ 266,291       $ 5,339       $ (755   $ (1,396   $ 269,479   

Collateralized mortgage obligations

     40,251         891         (26     (103     41,012   

Asset-backed securities

     47,723         238         (128     0        47,833   

Corporates

     241,207         10,918         (504     0        251,621   
                                          

Total fixed maturities

   $ 1,182,952       $ 28,337       $ (4,946   $ (1,757   $ 1,204,586   

Equity securities

     26,196         13,708         (5     0        39,899   
                                          

Total

   $ 1,209,147       $ 42,046       $ (4,951   $ (1,757   $ 1,244,485   
                                          
     December 31, 2010  
     Amortized
Cost or Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    OTTI
Recognized in
Accumulated
OCI
    Fair Value  

Fixed maturities:

            

U.S. government

   $ 167,729       $ 2,897       $ (340   $ 0      $ 170,286   

Government-sponsored entities

     40,025         1,231         (104     0        41,152   

State and municipal

     392,057         8,395         (3,170     (287     396,995   

Mortgage-backed securities:

            

Residential

     195,003         4,561         (1,533     (416     197,615   

Commercial

     34,095         1,083         (107     0        35,070   
                                          

Total mortgage-backed securities

   $ 229,098       $ 5,644       $ (1,640   $ (416   $ 232,685   

Collateralized mortgage obligations

     41,530         1,011         (30     (112     42,398   

Asset-backed securities

     27,286         266         (64     (1     27,486   

Corporates

     256,079         11,080         (442     0        266,717   
                                          

Total fixed maturities

   $ 1,153,802       $ 30,523       $ (5,790   $ (817   $ 1,177,718   

Equity securities

     29,333         12,987         (20     0        42,301   
                                          

Total

   $ 1,183,135       $ 43,510       $ (5,810   $ (817   $ 1,220,019   
                                          

 

14


Table of Contents

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

Condensed Notes to Consolidated Financial Statements

 

The following table sets 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
 

March 31, 2011

               

Fixed maturities:

               

U.S. government

    9      $ 30,916      $ (406     1.3     0      $ 0      $ 0        0.0

Government-sponsored entities

    5        12,957        (129     1.0     0        0        0        0.0

State and municipal

    66        121,715        (3,253     2.6     0        0        0        0.0

Mortgage-backed securities:

               

Residential

    20        94,235        (2,019     2.1     0        0        0        0.0

Commercial

    7        8,850        (131     1.5     1        50        (0     0.9
                                                               

Total mortgage-backed securities

    27      $ 103,084      $ (2,151     2.0     1      $ 50      $ (0     0.9

Collateralized mortgage obligations

    3        4,422        (26     0.6     2        741        (103     12.3

Asset-backed securities

    6        19,348        (75     0.4     1        380        (53     12.3

Corporates

    27        39,781        (504     1.3     0        0        0        0.0
                                                               

Total fixed maturities

    143      $ 332,222      $ (6,545     1.9     4      $ 1,172      $ (157     11.8

Equity securities

    0        0        0        0.0     0        0        0        0.0
                                                               

Total

    143      $ 332,222      $ (6,545     1.9     4      $ 1,172      $ (157     11.8
                                                               
    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, 2010

               

Fixed maturities:

               

U.S. government

    5      $ 13,700      $ (340     2.4     0      $ 0      $ 0        0.0

Government-sponsored entities

    3        4,442        (104     2.3     0        0        0        0.0

State and municipal

    65        125,781        (3,457     2.7     0        0        0        0.0

Mortgage-backed securities:

               

Residential

    15        73,059        (1,949     2.6     0        0        0        0.0

Commercial

    6        9,846        (99     1.0     3        343        (8     2.3
                                                               

Total mortgage-backed securities

    21      $ 82,904      $ (2,048     2.4     3      $ 343      $ (8     2.3

Collateralized mortgage obligations

    3        4,433        (30     0.7     2        1,043        (112     9.7

Asset-backed securities

    2        1,487        (15     1.0     2        455        (50     9.9

Corporates

    22        29,475        (442     1.5     0        0        0        0.0
                                                               

Total fixed maturities

    121      $ 262,222      $ (6,436     2.4     7      $ 1,841      $ (170     8.5

Equity securities

    0        0        0        0.0     0        0        0        0.0
                                                               

Total

    121      $ 262,222      $ (6,436     2.4     7      $ 1,841      $ (170     8.5
                                                               

The table excludes unrealized losses on equities invested in a rabbi trust of $5,000 and $20,000 at March 31, 2011 and December 31, 2010, respectively.

 

15


Table of Contents

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

Condensed Notes to Consolidated Financial Statements

 

Gross unrealized losses at March 31, 2011 were attributable to general rise in interest rates.

The determination of whether unrealized losses are “other-than-temporary” requires judgment based on subjective as well as objective factors. Factors considered and resources used by management include:

 

   

whether the unrealized loss is credit-driven or a result of changes in market interest rates;

 

   

the length of time the security’s fair value has been below our cost;

 

   

the extent to which fair value is less than cost basis;

 

   

the intent to sell the security;

 

   

whether it is more likely than not that there will be a requirement to sell the security before our anticipated recovery;

 

   

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.

Management regularly evaluates for potential impairment each security position that has any of the following: a fair value of less than 95% of our book value, an unrealized loss that equals or exceeds $100,000 or one or more impairment charges recorded in the past. In addition, management reviews positions held related to an issuer of a previously impaired security.

The following table summarizes those securities, excluding the rabbi trust, with unrealized gains or losses:

 

     March 31,
2011
    December 31,
2010
 

Number of positions held with unrealized:

    

Gains

     474        466   

Losses

     147        128   

Number of positions held that individually exceed unrealized:

    

Gains of $500,000

     4        4   

Losses of $500,000

     0        0   

Percentage of positions held with unrealized:

    

Gains that were investment grade

     78     75

Losses that were investment grade

     91     91

Percentage of fair value held with unrealized:

    

Gains that were investment grade

     89     89

Losses that were investment grade

     98     98

 

16


Table of Contents

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

Condensed Notes to Consolidated Financial Statements

 

The following table sets forth the amount of unrealized loss, excluding the rabbi trust, by age and severity at March 31, 2011 (in thousands):

 

     Fair Value of
Securities with
Unrealized
Losses
     Total Gross
Unrealized
Losses
    Less than 5%*     5% - 10%*     Total Gross
Greater
than 10%*
 

Age of Unrealized Losses:

           

Less than or equal to:

           

Three months

   $ 110,798       $ (481   $ (481   $ 0      $ 0   

Six months

     203,613         (5,568     (3,976     (1,592     0   

Nine months

     17,054         (483     (483     0        0   

Twelve months

     757         (13     (13     0        0   

Greater than twelve months

     1,172         (157     (1     0        (156
                                         

Total

   $ 333,394       $ (6,703   $ (4,954   $ (1,592   $ (156
                                         

 

* 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
    Tax Effects     Net  

Three months ended March 31, 2011

        

Unrealized holding gains (losses) on securities arising during the period

   $ (1,043   $ 2,420      $ (482   $ 895   

Realized (gains) losses on securities sold

     (1,862     (1,685     1,241        (2,305

Impairment loss recognized in earnings

     624        0        (218     406   
                                

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

   $ (2,282   $ 736      $ 541      $ (1,005
                                

Three months ended March 31, 2010

        

Unrealized holding gains (losses) on securities arising during the period

   $ 5,697      $ 2,253      $ (2,782   $ 5,167   

Realized (gains) losses on securities sold

     (1,078     0        377        (701

Impairment loss recognized in earnings

     1,533        0        (537     997   
                                

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

   $ 6,152      $ 2,253      $ (2,942   $ 5,463   
                                

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 to amortized cost, we separate the amount of the impairment into a credit loss component and the amount due to all other factors. 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.

 

17


Table of Contents

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

Condensed Notes to Consolidated Financial Statements

 

The following table is a progression of credit losses on fixed maturity securities for which a portion was recognized in accumulated other comprehensive income (in thousands):

 

Balance at December 31, 2010

   $ 1,828   

Additions for:

  

Previously impaired securities

     33   

Newly impaired securities

     544   

Reductions for:

  

Securities sold and pay downs

     (134

Securities that no longer have a non-credit component

     0   
        

Balance at March 31, 2011

   $ 2,271   
        

The table below sets forth the scheduled maturities of fixed maturity securities at March 31, 2011, 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

   $ 89,728       $ 20       $ 0       $ 89,748       $ 88,995   

After one year through five years

     344,500         94,256         0         438,756       $ 427,341   

After five years through ten years

     169,804         69,829         3,464         243,097       $ 237,344   

After ten years

     33,397         41,263         0         74,660       $ 75,006   

Mortgage-backed, asset-backed and collateralized mortgage obligations

     230,299         128,026         0         358,324       $ 354,266   
                                            
   $ 867,728       $ 333,394       $ 3,464       $ 1,204,586       $ 1,182,952   
                                            

Note 6 Long-Term Debt

In February 2004, we issued $200 million principal of senior notes due February 2014 (the “Senior Notes”). The Senior Notes accrue interest at an effective yield of 5.55% and bear a coupon of 5.5%, payable semiannually. At the time we issued the notes, we capitalized $2.1 million of debt issuance costs, which we are amortizing over the term of the Senior Notes. During 2009, we repurchased $5.0 million of our debt, bringing the outstanding principal to $195.0 million. We calculated the March 31, 2011 fair value of $200.2 million using a 320 basis point spread to the three-year U.S. Treasury Note of 1.301%.

In August 2008, we entered into an 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 March 31, 2011, there were no borrowings outstanding under the Credit Agreement. We intend to renew this agreement prior to its expiration in August 2011.

 

18


Table of Contents

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

Condensed Notes to Consolidated Financial Statements

 

Note 7 Income Taxes

The provision for income taxes for the three months ended March 31, 2011 was $2.8 million compared to $7.2 million for the same period of 2010. The following table reconciles our income taxes at statutory rates to our effective provision for income taxes (in thousands):

 

     For the three months
ended March 31,
 
     2011     2010  

Earnings before income taxes

   $ 13,761      $ 22,828   

Income taxes at statutory rates

     4,816        7,990   

Effect of:

    

Dividends-received deduction

     (35     (34

Tax-exempt interest

     (876     (882

Adjustment to valuation allowance

     (1,134     112   

Other

     8        21   
                

Provision for income taxes

   $ 2,780      $ 7,206   
                

GAAP effective tax rate

     20.2     31.6
                

During the first quarter of 2011, we decreased our tax valuation allowance by approximately $1.1 million. This adjustment is due to both a decrease in the reserve for other-than-temporary impaired securities and utilization of our capital loss carryforward.

In the first quarter of 2010, we increased our tax valuation allowance by approximately $0.1 million, primarily due to an increase in the reserve for other-than-temporary impaired securities.

Note 8 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):

 

     For the three months ended
March 31,
 
     2011      2010  

Income tax payments

   $ 0       $ 5,500   

Interest payments on debt

     5,363         5,363   

Negative Cash Book Balances

Negative cash book balances, included in the line item “Other liabilities” in the Consolidated Balance Sheets, were $35.8 million and $27.7 million, respectively, at March 31, 2011 and December 31, 2010.

 

19


Table of Contents

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

Condensed Notes to Consolidated Financial Statements

 

Note 9 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
March 31,
 
     2011     2010  

Balance at Beginning of Period

    

Unpaid losses on known claims

   $ 180,334      $ 164,134   

IBNR losses

     164,140        193,790   

LAE

     133,359        151,191   
                

Total unpaid losses and LAE

     477,833        509,114   

Reinsurance recoverables

     (16,521     (17,715
                

Unpaid losses and LAE, net of reinsurance recoverables

     461,312        491,399   

Current Activity

    

Loss and LAE incurred:

    

Current accident year

     182,380        163,332   

Prior accident years

     (3,423     (16,689
                

Total loss and LAE incurred

     178,957        146,643   

Loss and LAE payments:

    

Current accident year

     (59,053     (51,006

Prior accident years

     (123,803     (100,545
                

Total loss and LAE payments

     (182,856     (151,551

Balance at End of Period

    

Unpaid losses and LAE, net of reinsurance recoverables

     457,413        486,491   

Add back reinsurance recoverables

     16,115        18,735   
                

Total unpaid losses and LAE

   $ 473,527      $ 505,225   
                

Unpaid losses on known claims

   $ 181,980      $ 168,918   

IBNR losses

     158,956        185,538   

LAE

     132,592        150,769   
                

Total unpaid losses and LAE

   $ 473,527      $ 505,225   
                

Bodily injury coverage in California related to accident years prior to 2009 was the primary source of the $3.4 million of favorable reserve development during the three months ended March 31, 2011.

The $16.7 million of favorable reserve development during the three months ended March 31, 2010 primarily relates to personal auto coverage in California, Arizona, Connecticut and Pennsylvania.

 

20


Table of Contents

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

Condensed Notes to Consolidated Financial Statements

 

Note 10 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, 2010. For a description of our previously reported commitments, refer to Note 14 in the Form 10-K for the year ended December 31, 2010.

Contingencies

There have been no material changes from the contingencies discussed in the Form 10-K for the year ended December 31, 2010. For a description of our previously reported contingencies, refer to Note 14 Commitments and Contingencies, in the Form 10-K for the year

ended December 31, 2010.

 

21


Table of Contents

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

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), rising bodily injury loss cost trends, undesired business mix or risk profile for new business, elevated unemployment rates and the proliferation of illegal immigration legislation in key Focus States. We undertake no obligation to publicly update or revise any of the forward-looking statements. For a more detailed discussion of some of the foregoing risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements see “Risk Factors” contained in Part I, Item 1A of our Annual Report on Form 10-K for the twelve months ended December 31, 2010.

OVERVIEW

We continued to generate strong premium growth in the first quarter of 2011. This quarter marks the sixth consecutive quarter that we have experienced growth in written premiums. This increase is a result of aggressive marketing efforts intended to expand our presence in our target markets, including the appointment of new agents in the Urban Zones and increased advertising. See Results of Operations – Underwriting – Premium for a more detailed discussion of our gross written premium growth.

Net earnings and diluted earnings per share for the three months ended March 31, 2011 were $11.0 million and $0.87, respectively, compared to $15.6 million and $1.15, respectively, for the three months ended March 31, 2010. The decrease in diluted earnings per share for the three months ended March 31, 2011 is primarily due to a decline in favorable development on prior year accident year loss and LAE reserves compared to March 31, 2010.

Included in net earnings for the three months ended March 31, 2011 was $2.2 million ($3.4 million pre-tax) of favorable development on prior accident period loss and LAE reserves compared with $10.8 million ($16.7 million pre-tax) for the three months ended March 31, 2010. Favorable development in the first quarter of 2011 was primarily attributable to accident years prior to 2009. See Results of Operations – Underwriting – Profitability for a more detailed discussion of our underwriting results.

We had net realized gains on investments of $2.9 million for the first quarter of 2011 compared to a net realized loss of $0.5 million in the first quarter of 2010. Included in net realized gains for the first quarter of 2011 is $0.6 million of other-than-temporary impairments on fixed income securities compared with $1.5 million of impairments during the first quarter of 2010.

Our book value per share increased 1.0% from $53.03 at December 31, 2010 to $53.55 at March 31, 2011. This increase was primarily due to earnings, net of shareholder dividends, for the three months ended March 31, 2011. Annualized return on equity for the three months ended March 31, 2011 was 6.6% compared with 10.0% for the same period of 2010.

 

22


Table of Contents

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

RESULTS OF OPERATIONS

Underwriting

Premium

Our insurance subsidiaries provide personal automobile insurance products with a concentration on nonstandard auto insurance. While there is no industry-recognized definition of nonstandard auto insurance, we believe that it is generally understood to mean coverage for drivers who, because of their driving record, age or vehicle type, represent higher than normal risks and pay higher rates for comparable coverage. We also write commercial vehicle insurance and insurance for classic collectible automobiles (“Classic Collector”).

We offer three primary products to individual drivers: the Low Cost product, which offers the most restrictive coverage, the Value Added product, which offers broader coverage and higher limits, and the Premier product, which we designed to offer the broadest coverage for standard and preferred risk drivers.

We are licensed to write insurance in all 50 states and the District of Columbia, but we focus our operations in targeted urban areas (“Urban Zones”) identified within selected Focus States that management believes offer the greatest opportunity for premium growth and profitability.

We classify the states in which we operate into three categories:

 

   

“Focus States” – We have identified Urban Zones in these states, which include Arizona, California, Florida, Georgia, Illinois, Nevada, Pennsylvania and Texas.

 

   

“Maintenance States” – We are maintaining our writings in these states, which include Alabama, Colorado, South Carolina and Tennessee. We believe each state offers us an opportunity for underwriting profit.

 

   

“Other States” – Includes 8 states where we maintain a renewal book of personal auto business.

We further classify territories within the Focus States into two categories:

 

   

“Urban Zones” – include the following urban areas:

 

   

Arizona – Phoenix and Tucson

 

   

California – Bay Area, Los Angeles, Sacramento, San Diego, and San Joaquin Valley

 

   

Florida – Jacksonville, Miami, Orlando, Sarasota and Tampa

 

   

Georgia – Atlanta

 

   

Illinois – Chicago

 

   

Nevada – Las Vegas

 

   

Pennsylvania – Allentown and Philadelphia

 

   

Texas – Dallas, Fort Worth, Houston and San Antonio

 

   

“Non-urban Zones” – include all remaining areas in the Focus States located outside of a designated Urban Zone.

We continually evaluate our market opportunities; thus, the Focus States, Urban Zones, Maintenance States and Other States may change over time as new market opportunities arise, as the allocation of resources changes or as regulatory environments change. In the tables below, we have restated 2010 premium, policies-in-force and combined ratios to be consistent with the 2011 definition of Urban Zones, Focus States, Maintenance States and Other States.

 

23


Table of Contents

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 March 31,  
     2011     2010     Change     % Change  

Net earned premium

        

Gross written premium

        

Personal Auto

        

Focus States

        

Urban Zones

   $ 226,227      $ 200,904      $ 25,323        12.6

Non-urban Zones

     32,293        30,945        1,349        4.4
                                

Total Focus States

     258,521        231,849        26,672        11.5

Maintenance States

     4,518        4,638        (121     (2.6 )% 

Other States

     2,069        2,596        (527     (20.3 )% 
                                

Total Personal Auto

     265,107        239,082        26,025        10.9

Commercial Vehicle

     15,850        15,300        550        3.6

Classic Collector

     2,159        2,064        95        4.6
                                

Total gross written premium

     283,116        256,446        26,670        10.4

Ceded reinsurance

     (1,579     (1,263     (316     25.0
                                

Net written premium

     281,537        255,183        26,353        10.3

Change in unearned premium

     (42,555     (43,117     562        (1.3 )% 
                                

Net earned premium

   $ 238,981      $ 212,066      $ 26,915        12.7
                                

The following table shows our policies in force:

 

     At March 31,  
     2011      2010      Change     %
Change
 

Policies in Force

          

Personal Auto

          

Focus States

          

Urban Zones

     692,576         623,731         68,845        11.0

Non-urban Zones

     87,589         78,349         9,240        11.8
                                  

Total Focus States

     780,165         702,080         78,085        11.1

Maintenance States

     15,191         15,516         (325     (2.1 )% 

Other States

     4,906         6,979         (2,073     (29.7 )% 
                                  

Total Personal Auto

     800,262         724,575         75,687        10.4

Commercial Vehicle

     33,046         30,221         2,825        9.3

Classic Collector

     34,444         36,044         (1,600     (4.4 )% 
                                  

Total policies in force

     867,752         790,840         76,912        9.7

 

24


Table of Contents

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Gross written premium grew 10.4% during the first quarter of 2011 compared with the same period of 2010. During the first quarter of 2011, we implemented 4 rate revisions in various states with an overall rate increase of 1.1%. Policies in force at March 31, 2011 increased 9.7% compared with the same period in 2010. Gross written premium grew more than policies in force due to a shift in business mix toward policies offering broader coverage. These policies typically generate a higher premium per policy than those with coverage that is more restricted.

During the first quarter of 2011, personal auto insurance gross written premium in our Focus States grew 11.5% when compared with the same period of 2010, with growth in all states excluding Arizona and Florida. The increase in gross written premium is primarily a result of growth in California, Georgia, Pennsylvania and Texas.

 

   

California gross written premium grew 14.5% during the first quarter of 2011 compared to the same period of 2010. Increased agency incentives, coupled with rate actions taken by competitors, have stimulated growth in the state. Additionally, we are writing more multicar and Full coverage policies, which generate higher average premium.

 

   

Georgia gross written premium grew 21.1% during the first quarter of 2011 compared to the same period of 2010. This growth is a result of recent rate decreases coupled with aggressive agency promotions and competitor rate increases.

 

   

Pennsylvania gross written premium increased by 15.0% during the first quarter of 2011 compared with the same period of 2010. This increase is a result of new agency appointments and rate increases taken by competitors as well as growth in the Premier product.

 

   

Texas gross written premium grew by 37.0% during the first quarter of 2011 compared with the same period of 2010. The growth in premiums in Texas primarily relates to a shift in business mix to the Premier product, which we introduced in late 2009 in this state.

Gross written premium in the Maintenance States declined 2.6% during the first quarter of 2011 compared with the same period of 2010, with declines in all states except Tennessee.

Our Commercial Vehicle gross written premium increased 3.6% during the first quarter of 2011. This growth is primarily due to growth in California resulting from the appointment of new agents.

 

25


Table of Contents

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, other expenses or federal income taxes.

While we report financial results in accordance with GAAP for shareholder and other investment 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 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. We capitalize costs for computer software developed or obtained for internal use under GAAP and amortized over their useful life, rather than expensed as incurred, as required for statutory purposes. Additionally, bad debt charge-offs on agent balances and premium receivables are included only in the GAAP combined ratios.

The following table presents the statutory and GAAP combined ratios:

 

    Three months ended March 31,        
    2011     2010     % 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:

                 

Urban Zones

    74.9     21.6     96.6     69.0     20.5     89.5     6.0     1.1     7.1

Non-urban Zones

    77.5     19.8     97.4     76.5     19.8     96.2     1.1     0.1     1.1
                                                                       

Total Focus States

    75.3     21.4     96.7     69.9     20.4     90.3     5.4     1.0     6.4

Maintenance States

    84.5     27.6     112.1     74.8     29.2     104.0     9.6     (1.5 )%      8.1

Other States

    NM        NM        NM        NM        NM        NM        NM        NM        NM   
                                                                       

Subtotal

    75.6     21.5     97.0     69.3     20.6     89.9     6.3     0.8     7.1

Commercial Vehicle

    76.3     18.2     94.6     75.9     19.8     95.8     0.4     (1.6 )%      (1.2 )% 

Classic Collector

    62.6     44.8     107.5     33.6     45.2     78.8     29.0     (0.4 )%      28.6

Other

    NM        NM        NM        NM        NM        NM        NM        NM        NM   
                                                                       

Total statutory ratios

    74.9     21.3     96.2     69.1     20.8     89.9     5.7     0.5     6.3
                                                                       

Total statutory ratios excluding development

    76.3     21.3     97.7     77.0     20.8     97.8     (0.7 %)      0.5     (0.1 %) 

GAAP ratios

    74.9     23.1     97.9     69.1     22.7     91.9     5.7     0.3     6.1

GAAP ratios excluding development

    76.3     23.1     99.4     77.0     22.7     99.7     (0.7 )%      0.3     (0.4 )% 

 

NM: not meaningful due to the low premium.

In evaluating the profit performance of our business, management reviews underwriting profitability using statutory combined ratios. Accordingly, the discussion of underwriting results that follows will focus on these ratios and the components thereof, unless otherwise indicated.

Overall, the statutory combined ratio for the three months ended March 31, 2011 of 96.2% deteriorated by 6.3 points from 89.9% for the first three months of 2010. The first quarter of 2011 benefited from $3.4 million of favorable development on loss and LAE reserves compared to $16.7 million for the first quarter of 2010. Bodily injury coverage in California related to accident years prior to 2009 drove favorable development during 2011. Excluding the favorable development from both periods, the statutory combined ratio decreased from 97.8% in the first quarter of 2010 to 97.7% in the first quarter of 2011. The GAAP combined ratio for 2011

 

26


Table of Contents

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

increased by 6.1 points from 91.9% at March 31, 2010 to 97.9% at March 31, 2011. Excluding the effect of favorable development, the GAAP combined ratio for the first quarter of 2011 was 99.4%, compared to 99.7% for the same period of 2010. We expect the GAAP combined ratio, excluding redundancy releases, to be between 98.0% and 99.0% during 2011.

Catastrophe related losses were less than $0.1 million during the first quarter of 2011 and $0.3 million during the first quarter of 2010.

An increase in the loss and LAE ratio in the Urban Zones drove the 6.4 point increase in the Focus States’ combined ratio for the three months ended March 31, 2011. Arizona, California and Texas loss ratios drove this increase. The loss and LAE ratio has increased due to a decline in favorable development coupled with higher loss and LAE ratios on new business.

The loss and LAE ratio in the Maintenance States increased 9.6 points during the first quarter of 2011 compared to the first quarter of 2010 because of increases in the loss ratios in Alabama, Colorado and Tennessee.

The loss and LAE ratio for the Classic Collector product increased by 29.0% because of several large losses during the quarter. Excluding the effect of these losses, the Classic Collector loss and LAE ratio would be 46.3% for the three months ended March 31, 2011.

Net Investment Income

Net investment income is comprised of gross investment income and investment management fees and expenses, as shown in the following table (in thousands):

 

     Three months ended March 31,  
     2011     2010  

Investment income:

    

Interest income on fixed maturities, cash and cash equivalents

   $ 10,690      $ 11,646   

Dividends on equity securities

     165        165   
                

Gross investment income

   $ 10,855      $ 11,811   

Investment expenses

     (523     (517
                

Net investment income

   $ 10,332      $ 11,295   
                

Average investment balance, at cost

   $ 1,251,487      $ 1,240,124   

Annualized returns excluding realized gains and losses

     3.5     3.8

Changes in investment income reflect fluctuations in market rates and changes in average invested assets. Net investment income for the three months ended March 31, 2011 declined compared to the same period in 2010 primarily due to a decline in book yields because of a general decline in market interest rates for high quality bonds.

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 March 31, 2011      Three months ended March 31, 2010  
     Impairments
Recognized in
Earnings
    Realized
Gains (Losses)
on Sales
     Total Realized
Gains (Losses)
     Impairments
Recognized in
Earnings
    Realized
Gains (Losses)
on Sales
     Total Realized
Gains (Losses)
 

Fixed maturities

   $ (624   $ 1,862       $ 1,238       $ (1,533   $ 1,078       $ (455

Equities

     0        1,685         1,685         0        0         0   
                                                   

Total

   $ (624   $ 3,547       $ 2,923       $ (1,533   $ 1,078       $ (455
                                                   

For our securities held with unrealized losses, management believes, 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.

 

27


Table of Contents

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Interest Expense

The Senior Notes accrue interest at an effective yield of 5.55%. Refer to Note 6 to the Consolidated Financial Statements for additional information on the Senior Notes. We recognized $2.7 million and $2.7 million, respectively, in interest expense on the Senior Notes in the Consolidated Statements of Earnings for the three months ended March 31, 2011 and 2010.

Other Expenses

Other expenses were less than $0.1 million and $0.7 million for the three months ended March 31, 2011 and 2010, respectively. The decline is primarily due to a $0.7 million decrease in sublease loss expense during 2011.

Income Taxes

Our GAAP effective tax rate for the three months ended March 31, 2011 was 20.2% compared to 31.6% for the same period of 2010. See Note 7 to the Consolidated Financial Statements for additional information.

LIQUIDITY AND CAPITAL RESOURCES

Sources and Uses 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.

At March 31, 2011, we had outstanding $195.0 million principal of Senior Notes due 2014, bearing a fixed 5.5% interest rate. Interest payments on the Senior Notes of $5.4 million are due each February and August through maturity in February 2014. Refer to Note 6 to the Consolidated Financial Statements for more information on the Senior Notes.

In August 2010, we filed a “shelf” registration with the Securities and Exchange Commission, 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.

In February 2011, we increased our quarterly dividend to $0.18 per share from $0.14 per share. At this current amount, our 2011 annualized dividend payments would be approximately $8.9 million.

In October 2006, the Board of Directors approved a share repurchase program whereby we may repurchase up to an aggregate amount of $100 million of our outstanding common shares. On August 6, 2009, the Board of Directors increased the authority by $28.8 million to $50.0 million as of that date and modified the authority to include the repurchase of our debt. During the third quarter of 2010, we exhausted the remaining repurchase authority under this program. On August 3, 2010, our Board of Directors approved a $50.0 million share and debt repurchase program expiring on December 31, 2011. During the first quarter of 2011, we repurchased 112,000 shares at an average cost, excluding commissions, of $60.39. As of March 31, 2011, we had $31.3 million of authority remaining under this program.

Funds to meet expenditures at the holding company come primarily from dividends and tax payments from the insurance subsidiaries as well as cash and investments held by the holding company. As of March 31, 2011, the holding company had $217.2 million of cash and investments. In 2011, our insurance subsidiaries may pay the holding company up to $96.0 million in ordinary dividends without prior regulatory approval. For the three months ended March 31, 2011, the subsidiaries paid $12.5 million of dividends to the holding company.

In August 2008, we entered into an 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 March 31, 2011, there were no borrowings outstanding under the Credit Agreement. We intend to renew this agreement prior to its expiration in August 2011.

Our insurance subsidiaries generate liquidity to satisfy their obligations primarily by collecting and investing premium in advance of paying claims and generating investment income on their $1.0 billion investment portfolio. Our insurance subsidiaries’ generated a positive cash flow of approximately $26.9 million and $21.7 million for the three months ended March 31, 2011 and 2010, respectively.

 

28


Table of Contents

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Management believes 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 2010, the catastrophe reinsurance provided protection for losses up to $15 million in excess of $5 million for any single event. Effective April 1, 2011, we added an additional layer of catastrophe reinsurance that will cover 75% of $5 million of losses in excess of $20 million for any single event. Our excess of loss reinsurance provides reinsurance protection for commercial auto losses up to $700,000 for claims in excess of $300,000 per occurrence. Our extra-contractual loss reinsurance provides for protection for losses up to $15 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 months ended March 31, 2011 and 2010 was $1.6 million and $1.3 million, respectively.

Investments

Our consolidated investment portfolio at March 31, 2011 contained approximately $1.2 billion in fixed maturity securities and $39.9 million in equity securities, all carried at fair value with unrealized gains and losses reported as a separate component of shareholders’ equity on an after-tax basis. At March 31, 2011, we had pre-tax net unrealized gains of $21.6 million on fixed maturities and pre-tax net unrealized gains of $13.7 million on equity securities. Combined, the pre-tax net unrealized gain declined by $1.5 million for the three months ended March 31, 2011.

Approximately 93.9% of our fixed maturity investments at March 31, 2011 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. Management believes that a high quality investment portfolio is more likely to generate a stable and predictable investment return.

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. The average option adjusted duration of our fixed maturity portfolio is 3.6 years at March 31, 2011.

Fair values of instruments are based on (i) quoted prices in active markets for identical assets (Level 1), (ii) quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all significant inputs are observable in active markets (Level 2) or (iii) valuations derived from valuation techniques in which one or more significant inputs are unobservable in the marketplace (Level 3).

Level 1 securities are U.S. Treasury securities, an exchange-traded fund and equity securities held in a rabbi trust. Level 2 securities are comprised of securities whose fair value was determined using observable market inputs. Level 3 securities are comprised of (i) securities for which there is no active or inactive market for similar instruments, (ii) securities whose fair value is determined based on unobservable inputs and (iii) securities that nationally recognized statistical rating organizations do not rate.

 

29


Table of Contents

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 March 31, 2011 is as follows (in thousands):

 

     Amortized
Cost
     Fair Value      % of
Total Fair
Value
 

U.S. government and agencies:

        

U.S. government

   $ 162,042       $ 164,205         13.2

Government-sponsored entities

     39,279         39,813         3.2
                          

Total U.S. government and agencies

     201,321         204,019         16.4

State and municipal

     386,158         390,623         31.4

Mortgage-backed, CMOs and asset-backed:

        

Residential mortgage-backed securities

     234,171         236,547         19.0

Commercial mortgage-backed securities

     32,120         32,933         2.6

Collateralized mortgage obligations:

        

PAC

     20,325         20,805         1.7

Sequentials

     17,138         17,496         1.4

Junior

     654         551         0.0

Accretion directed

     190         190         0.0

Whole loan

     1,943         1,971         0.2
                          

Total CMO

     40,251         41,012         3.3

Asset-backed securities:

        

Auto loans

     18,040         18,112         1.5

Home equity

     766         720         0.1

Credit card receivables

     28,918         29,001         2.3
                          

Total ABS

     47,723         47,833         3.8
                          

Total mortgage-backed, CMOs and asset-backed

     354,266         358,324         28.8

Corporates

        

Investment grade

     173,566         178,954         14.4

Non-investment grade

     67,640         72,666         5.8
                          

Total corporates

     241,207         251,621         20.2

Total fixed maturities

     1,182,952         1,204,586         96.8

Equity securities

     26,196         39,899         3.2
                          

Total investment portfolio

   $ 1,209,147       $ 1,244,485         100.0
                          

 

30


Table of Contents

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following table presents the credit rating and fair value (in thousands) of our fixed maturity portfolio by major security type:

 

     Rating              
     AAA     AA     A     BBB     Non-
investment
Grade
    Fair Value     % of Total
Exposure
 

U.S. government and agencies

   $ 204,019      $ 0      $ 0      $ 0      $ 0      $ 204,019        16.9

State and municipal

     49,349        236,790        96,438        8,046        0        390,623        32.4

Mortgage-backed, asset-backed and CMO

     353,168        5,117        0        0        39        358,324        29.7

Corporates

     12,794        13,928        126,928        25,305        72,666        251,621        20.9
                                                        

Total fair value

   $ 619,329      $ 255,835      $ 223,366      $ 33,350      $ 72,706      $ 1,204,586        100.0
                                                        

% of Total fair value

     51.4     21.2     18.5     2.8     6.0     100.0  
                                                  

Other than securities backed by the U.S. government or issued by its agencies, our fixed income portfolio contains no securities issued by any single issuer that exceed 1% of the fair value of the fixed income portfolio.

Since 2007, the mortgage industry has experienced a rise in mortgage delinquencies and foreclosures, particularly among lower quality exposures (“sub-prime” and “Alt-A”). As a result, many securities with underlying sub-prime and Alt-A mortgages as collateral experienced significant drops in market value. We have only modest exposure to these types of investments. At March 31, 2011, our fixed maturity portfolio included four securities having a fair value of $1.0 million with exposure to sub-prime and Alt-A mortgages. Although these securities have sub-prime mortgages as underlying collateral, three are rated AA or better. The remaining security has a fair value of less than $0.1 million and is rated B+.

The following table presents the credit rating and fair value of our residential mortgage backed securities at March 31, 2011 by deal origination year (in thousands):

 

     Rating              

Deal Origination Year

   AAA     AA     A     BBB     Non-
investment
Grade
    Fair Value     % of Total
Exposure
 

2006

   $ 1,991      $ 0      $ 0      $ 0      $ 0      $ 1,991        0.8

2007

     8,865        0        0        0        0        8,865        3.7

2008

     40,429        0        0        0        0        40,429        17.1

2009

     55,386        0        0        0        0        55,386        23.4

2010

     93,269        0        0        0        0        93,269        39.4

2011

     36,606        0        0        0        0        36,606        15.5
                                                        

Total fair value

   $ 236,547      $ 0      $ 0      $ 0      $ 0      $ 236,547        100.0
                                                        

% of total fair value

     100.0     0.0     0.0     0.0     0.0     100.0  
                                                  

All of the $236.5 million of residential mortgage backed securities were issued by government-sponsored enterprises (“GSE”).

 

31


Table of Contents

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following table presents the credit rating and fair value of our commercial mortgage-backed securities at March 31, 2011 by deal origination year (in thousands):

 

     Rating              

Deal Origination Year

   AAA     AA     A     BBB     Non-
investment
Grade
    Fair Value     % of Total
Exposure
 

2002

   $ 4,662      $ 0      $ 0      $ 0      $ 0      $ 4,662        14.2

2003

     527        0        0        0        0        527        1.6

2004

     4,344        0        0        0        0        4,344        13.2

2005

     7,612        0        0        0        0        7,612        23.1

2006

     13,709        0        0        0        0        13,709        41.6

2007

     2,080        0        0        0        0        2,080        6.3
                                                        

Total fair value

   $ 32,933      $ 0      $ 0      $ 0      $ 0      $ 32,933        100.0
                                                        

% of total fair value

     100.0     0.0     0.0     0.0     0.0     100.0  
                                                  

None of the $32.9 million of commercial mortgage-backed securities were issued by GSEs.

The following table presents the credit rating and fair value of our collateralized mortgage obligation portfolio at March 31, 2011 by deal origination year (in thousands):

 

     Rating              

Deal Origination Year

   AAA     AA     A     BBB     Non-
investment
Grade
    Fair Value     % of Total
Exposure
 

1999

   $ 0      $ 551      $ 0      $ 0      $ 0      $ 551        1.3

2002

     4,939        0        0        0        0        4,939        12.0

2003

     8,257        0        0        0        0        8,257        20.1

2004

     4,729        1,459        0        0        0        6,188        15.1

2005

     0        1,734        0        0        0        1,734        4.2

2009

     11,479        0        0        0        0        11,479        28.0

2010

     4,042        0        0        0        0        4,042        9.9

2011

     3,822        0        0        0        0        3,822        9.3
                                                        

Total fair value

   $ 37,268      $ 3,744      $ 0      $ 0      $ 0      $ 41,012        100.0
                                                        

% of total fair value

     90.9     9.1     0.0     0.0     0.0     100.0  
                                                  

Of the $41.0 million of collateralized mortgage obligations, $31.6 million were issued by GSEs.

 

32


Table of Contents

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following table presents the credit rating and fair value of our ABS portfolio at March 31, 2011 by deal origination year (in thousands):

 

     Rating              

Deal Origination Year

   AAA     AA     A     BBB     Non-
investment
Grade
    Fair Value     % of Total
Exposure
 

2001

   $ 77      $ 0      $ 0      $ 0      $ 0      $ 77        0.2

2003

     5,788        0        0        0        0        5,788        12.1

2004

     4,980        0        0        0        39        5,019        10.5

2007

     3,833        0        0        0        0        3,833        8.0

2008

     5,365        0        0        0        0        5,365        11.2

2009

     10,882        547        0        0        0        11,429        23.9

2010

     2,545        825        0        0        0        3,371        7.0

2011

     12,950        0        0        0        0        12,950        27.1
                                                        

Total fair value

   $ 46,421      $ 1,372      $ 0      $ 0      $ 39      $ 47,833        100.0
                                                        

% of total fair value

     97.0     2.9     0.0     0.0     0.1     100.0  
                                                  

In 2008, several state and municipal bond insurers had their credit ratings downgraded or placed under review by one or more nationally recognized statistical rating organizations. These downgrades were a result of a perceived weakening of the insurers’ financial strength because of losses incurred on mortgage-backed and asset-backed securities. These securities experienced increased delinquencies and defaults because of a weakening economy and housing market in particular.

Our investment portfolio consists of $390.6 million of state and municipal bonds, of which $166.2 million are insured. Of the insured bonds, 47.4% are insured with MBIA, 30.4% with Assured Guaranty, 21.9% with AMBAC and 0.3% are insured with XL Capital. The following table presents the underlying ratings, represented by the lower of Standard and Poor’s, Moody’s or Fitch’s ratings, of the state and municipal bond portfolio (in thousands) at March 31, 2011:

 

     Insured     Uninsured     Total  
     Fair
Value
     % of
Fair
Value
    Fair
Value
     % of
Fair
Value
    Fair
Value
     % of
Fair
Value
 

AAA

   $ 7,476         4.5   $ 41,873         18.7   $ 49,349         12.6

AA+, AA, AA-

     92,163         55.5     144,627         64.4   $ 236,790         60.6

A+, A, A-

     58,513         35.2     37,925         16.9   $ 96,438         24.7

BBB+, BBB, BBB-

     8,046         4.8     0         0.0   $ 8,046         2.1
                                                   

Total

   $ 166,198         100.0   $ 224,425         100.0   $ 390,623         100.0
                                                   

 

33


Table of Contents

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following table presents the credit rating and fair value of our state and municipal bond portfolio, by state, at March 31, 2011 (in thousands):

 

     Rating              

State

   AAA     AA     A     BBB     Non-
investment
Grade
    Fair Value     % of Total
Exposure
 

TX

   $ 16,316      $ 17,935      $ 4,409      $ 0      $ 0      $ 38,661        9.9

NY

     0        32,447        0        0        0        32,447        8.3

GA

     9,308        8,402        4,749        4,762        0        27,222        7.0

FL

     0        13,863        11,065        0        0        24,929        6.4

WA

     1,451        14,647        1,773        0        0        17,871        4.6

PA

     0        8,813        8,089        0        0        16,902        4.3

MI

     385        6,621        8,349        0        0        15,354        3.9

IN

     0        12,802        1,514        0        0        14,316        3.7

CO

     1,751        8,957        3,572        0        0        14,280        3.7

TN

     0        8,258        0        0        0        8,258        2.1

All other states

     20,137        104,046        52,918        3,284        0        180,385        46.2
                                                        

Total fair value

   $ 49,349      $ 236,790      $ 96,438      $ 8,046      $ 0      $ 390,623        100.0
                                                        

% of total fair value

     12.6     60.6     24.7     2.1     0.0     100.0  
                                                  

The following table presents the fair value of our state and municipal bond portfolio, by state and type of bond, at March 31, 2011 (in thousands):

 

     Type              
     General Obligation                          

State

   State     Local     Revenue     Other     Fair Value     % of  Total
Exposure
 

TX

   $ 4,298      $ 10,055      $ 24,307      $ 0      $ 38,661        9.9

GA

     7,549        2,239        17,434        0        27,222        7.0

NY

     0        5,856        26,590        0        32,447        8.3

FL

     3,536        0        15,751        5,641        24,929        6.4

WA

     6,180        565        11,125        0        17,871        4.6

PA

     2,081        2,567        12,254        0        16,902        4.3

MI

     0        4,961        10,394        0        15,354        3.9

IN

     0        0        14,316        0        14,316        3.7

CO

     0        1,408        9,421        3,450        14,280        3.7

TN

     0        5,608        2,649        0        8,258        2.1

All other states

     30,635        24,394        124,502        855        180,385        46.2
                                                

Total fair value

   $ 54,278      $ 57,653      $ 268,744      $ 9,947      $ 390,623        100.0
                                                

% of total fair value

     13.9     14.8     68.8     2.5     100.0  
                                          

 

34


Table of Contents

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following table presents the fair value of the revenue category of our state and municipal bond portfolio, by state and further classification, at March 31, 2011 (in thousands):

 

     Revenue Bonds        

State

   Transportation     Utilities     Education     Other     Fair Value     % of Total Exposure  

TX

   $ 11,388      $ 6,368      $ 4,426      $ 2,125      $ 24,307        9.0

GA

     8,488        5,158        1,759        2,029        17,434        6.5

NY

     6,678        0        7,821        12,091        26,590        9.9

FL

     12,511        0        0        3,240        15,751        5.9

WA

     0        7,902        0        3,224        11,125        4.1

PA

     8,089        0        4,165        0        12,254        4.6

MI

     0        0        0        10,394        10,394        3.9

IN

     1,975        0        9,029        3,312        14,316        5.3

CO

     2,202        0        7,219        0        9,421        3.5

TN

     0        0        2,649        0        2,649        1.0

All other states

     34,557        28,817        13,648        47,480        124,502        46.3
                                                

Total fair value

   $ 85,888      $ 48,244      $ 50,718      $ 83,894      $ 268,744        100.0
                                                

% of total fair value

     32.0     18.0     18.9     31.2     100.0  
                                          

 

35


Table of Contents

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

ITEM 3

Quantitative and Qualitative Disclosures about Market Risk

As of March 31, 2011, there were no material changes to the information provided in our Form 10-K for the year ended December 31, 2010 under the caption “Exposure to Market Risk” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

ITEM 4

Controls and Procedures

Our chief executive officer and chief financial officer, with assistance from management, evaluated our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15) as of March 31, 2011. Based on that evaluation, they concluded that the controls and procedures are effective. There has been no change in our internal controls during the first quarter of 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)).

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, 2010. For a description of our previously reported legal proceedings, refer to Part I, Item 3, Legal Proceedings, in the form 10-K for the year ended December 31, 2010.

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, 2010. For a description of our previously reported risk factors, refer to Part I, Item 1A, Risk Factors, in the Form 10-K for the year ended December 31, 2010.

 

36


Table of Contents

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

 

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 (b)
     Maximum Number (or
Approximate Dollar
Value) that May Yet Be
Purchased Under the
Plans or Programs
 

January 1, 2011 – January 31, 2011

     45,600       $ 61.63         45,600       $ 35,244,730   

February 1, 2011 – February 28, 2011

     34,400       $ 60.90         34,400         33,148,775   

March 1, 2011 – March 31, 2011

     32,000       $ 58.07         32,000         31,289,472   
                                   

Total

     112,000       $ 60.39         112,000       $ 31,289,472   
                                   

 

(a) Average price paid per share excludes commissions.
(b) During the third quarter of 2010, we exhausted the remaining authority under our previous share and debt repurchase program. On August 3, 2010, our Board of Directors approved an additional $50.0 million share and debt repurchase program expiring on December 31, 2011.

 

37


Table of Contents

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

 

ITEM 6

Exhibits

 

Exhibit 31.1 -    Certification of the Chief Executive Officer under Exchange Act Rule 13a-14(a).
Exhibit 31.2 -    Certification of the Chief Financial Officer under Exchange Act Rule 13-a-14(a).
Exhibit 32 -    Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
Exhibit 101 -    XBRL Instance Document

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 behalf by the undersigned thereunto duly authorized.

 

  Infinity Property and Casualty Corporation
  BY:  

/s/ ROGER SMITH

May 5, 2011     Roger Smith
   

Executive Vice President, Chief Financial Officer and Treasurer

(principal financial and accounting officer)

 

38