IPCC.10Q.1Q.2015
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, 2015
OR
o     Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from              to             
Commission File No. 0-50167
INFINITY PROPERTY AND CASUALTY CORPORATION
(Exact name of registrant as specified in its charter)
Incorporated under
the Laws of Ohio
 
03-0483872
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
3700 Colonnade Parkway, Suite 600, Birmingham, Alabama 35243
(Address of principal executive offices and zip code)
(205) 870-4000
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.    Yes x   No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x   No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
  
Accelerated filer
¨
Non-accelerated filer
o  (Do not check if smaller reporting company)
  
Smaller reporting company
¨

Indicate by check mark whether the registrant is a shell company (as defined by rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
As of April 30, 2015 there were 11,466,399 shares of the registrant’s common stock outstanding.



Table of Contents
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

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

2

Table of Contents
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

PART I
FINANCIAL INFORMATION

ITEM 1
Financial Statements

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
($ in thousands, except per share data)
(unaudited)
 
Three months ended March 31,
 
2015
 
2014
 
% Change
Revenues:
 
 
 
 
 
Earned premium
$
332,106

 
$
327,679

 
1.4
 %
Installment and other fee income
24,561

 
24,340

 
0.9
 %
Net investment income
8,736

 
8,798

 
(0.7
)%
Net realized gains on investments1
1,169

 
645

 
81.4
 %
Other income
400

 
151

 
164.9
 %
Total revenues
366,973

 
361,613

 
1.5
 %
Costs and Expenses:
 
 
 
 
 
Losses and loss adjustment expenses
255,643

 
253,702

 
0.8
 %
Commissions and other underwriting expenses
88,828

 
87,973

 
1.0
 %
Interest expense
3,459

 
3,453

 
0.2
 %
Corporate general and administrative expenses
1,903

 
1,526

 
24.7
 %
Other expenses
903

 
312

 
189.5
 %
Total costs and expenses
350,737

 
346,966

 
1.1
 %
Earnings before income taxes
16,236

 
14,647

 
10.9
 %
Provision for income taxes
5,082

 
4,320

 
17.7
 %
Net Earnings
$
11,154

 
$
10,327

 
8.0
 %
Net Earnings per Common Share:
 
 
 
 
 
Basic
$
0.98

 
$
0.90

 
8.9
 %
Diluted
0.97

 
0.89

 
9.0
 %
Average Number of Common Shares:
 
 
 
 
 
Basic
11,427

 
11,429

 
0.0
 %
Diluted
11,551

 
11,580

 
(0.2
)%
Cash Dividends per Common Share
$
0.43

 
$
0.36

 
19.4
 %
 
 
 
 
 
 
1Net realized gains before impairment losses
$
1,551

 
$
672

 
130.9
 %
Total other-than-temporary impairment (OTTI) losses
(381
)
 
(893
)
 
(57.3
)%
Non-credit portion in other comprehensive income
0

 
885

 
(100.0
)%
OTTI losses reclassified from other comprehensive income
0

 
(19
)
 
(100.0
)%
Net impairment losses recognized in earnings
(381
)
 
(27
)
 
NM

Total net realized gains on investments
$
1,169

 
$
645

 
81.4
 %
NM = Not Meaningful
See Condensed Notes to Consolidated Financial Statements.

3

Table of Contents
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in thousands)
(unaudited)
 
Three months ended March 31,
 
2015
 
2014
Net earnings
$
11,154

 
$
10,327

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

 
657

Unrealized gains on investments:
 
 
 
Unrealized holding gains arising during the period
8,416

 
7,852

Less: Reclassification adjustments for losses included in net earnings
(1,169
)
 
(645
)
Unrealized gains on investments, net
7,247

 
7,208

Other comprehensive income, before tax
7,263

 
7,865

Income tax expense related to components of other comprehensive income
(2,542
)
 
(2,753
)
Other comprehensive income, net of tax
4,721

 
5,112

Comprehensive income
$
15,875

 
$
15,439


See Condensed Notes to Consolidated Financial Statements.


4

Table of Contents
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands, except share amounts in line descriptions)
 
March 31, 2015
 
December 31, 2014
 
(unaudited)
 
 
Assets
 
 
 
Investments:
 
 
 
Fixed maturities – at fair value (amortized cost $1,407,631 and $1,412,417)
$
1,433,022

 
$
1,431,843

Equity securities – at fair value (cost $76,625 and $77,862)
94,453

 
94,408

Short-term investments - at fair value (amortized cost $1,820 and $803)
1,819

 
803

Total investments
1,529,294

 
1,527,054

Cash and cash equivalents
96,434

 
84,541

Accrued investment income
12,031

 
12,976

Agents’ balances and premium receivable, net of allowances for doubtful accounts of $14,648 and $15,510
529,969

 
483,638

Property and equipment, net of accumulated depreciation of $66,507 and $63,929
54,923

 
55,880

Prepaid reinsurance premium
5,386

 
4,809

Recoverables from reinsurers (includes $733 and $161 on paid losses and LAE)
14,715

 
14,530

Deferred policy acquisition costs
98,164

 
90,428

Current and deferred income taxes
13,148

 
20,022

Receivable for securities sold
3,650

 
4,549

Other assets
13,714

 
11,108

Goodwill
75,275

 
75,275

Total assets
$
2,446,702

 
$
2,384,812

Liabilities and Shareholders’ Equity
 
 
 
Liabilities:
 
 
 
Unpaid losses and loss adjustment expenses
$
675,755

 
$
668,177

Unearned premium
644,433

 
589,260

Long-term debt (fair value $294,674 and $291,044)
275,000

 
275,000

Commissions payable
19,274

 
18,673

Payable for securities purchased
9,370

 
17,173

Other liabilities
115,542

 
118,870

Total liabilities
1,739,374

 
1,687,153

Commitments and contingencies (See Note 9)


 


Shareholders’ equity:
 
 
 
Common stock, no par value (50,000,000 shares authorized; 21,729,057 and 21,728,032 shares issued)
21,756

 
21,745

Additional paid-in capital
373,082

 
372,368

Retained earnings
731,873

 
725,651

Accumulated other comprehensive income, net of tax
28,216

 
23,494

Treasury stock, at cost (10,270,472 and 10,244,672 shares)
(447,598
)
 
(445,599
)
Total shareholders’ equity
707,328

 
697,659

Total liabilities and shareholders’ equity
$
2,446,702

 
$
2,384,812

See Condensed Notes to Consolidated Financial Statements.

5

Table of Contents
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
($ in thousands)
(unaudited)
 
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income,
Net of Tax
 
Treasury
Stock
 
Total
Balance at December 31, 2013
$
21,684

 
$
368,902

 
$
685,011

 
$
16,624

 
$
(435,463
)
 
$
656,758

Net earnings

 

 
10,327

 

 

 
10,327

Net change in postretirement benefit liability

 

 

 
427

 

 
427

Change in unrealized gain on investments

 

 

 
5,055

 

 
5,055

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

 

 

 
(370
)
 

 
(370
)
Comprehensive income
 
 
 
 
 
 
 
 
 
 
15,439

Dividends paid to common shareholders

 

 
(4,139
)
 

 

 
(4,139
)
Shares issued and share-based compensation expense, including tax benefit
12

 
417

 

 

 

 
429

Acquisition of treasury stock

 

 

 

 
(2,000
)
 
(2,000
)
Balance at March 31, 2014
$
21,696

 
$
369,319

 
$
691,199

 
$
21,737

 
$
(437,463
)
 
$
666,488

Net earnings

 

 
46,874

 

 

 
46,874

Net change in postretirement benefit liability

 

 

 
(274
)
 

 
(274
)
Change in unrealized gain on investments

 

 

 
1,755

 

 
1,755

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

 

 

 
276

 

 
276

Comprehensive income
 
 
 
 
 
 
 
 
 
 
48,632

Dividends paid to common shareholders

 

 
(12,423
)
 

 

 
(12,423
)
Shares issued and share-based compensation expense, including tax benefit
49

 
3,049

 

 

 

 
3,098

Acquisition of treasury stock

 

 

 

 
(8,136
)
 
(8,136
)
Balance at December 31, 2014
$
21,745

 
$
372,368

 
$
725,651

 
$
23,494

 
$
(445,599
)
 
$
697,659

Net earnings

 

 
11,154

 

 

 
11,154

Net change in postretirement benefit liability

 

 

 
11

 

 
11

Change in unrealized gain on investments

 

 

 
4,497

 

 
4,497

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

 

 

 
213

 

 
213

Comprehensive income
 
 
 
 
 
 
 
 
 
 
15,875

Dividends paid to common shareholders

 

 
(4,932
)
 

 

 
(4,932
)
Shares issued and share-based compensation expense, including tax benefit
11

 
714

 

 

 

 
725

Acquisition of treasury stock

 

 

 

 
(1,999
)
 
(1,999
)
Balance at March 31, 2015
$
21,756

 
$
373,082

 
$
731,873

 
$
28,216

 
$
(447,598
)
 
$
707,328

See Condensed Notes to Consolidated Financial Statements.

6

Table of Contents
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(unaudited)
 
 
 
 
 
Three months ended March 31,
 
2015
 
2014
Operating Activities:
 
 
 
Net earnings
$
11,154

 
$
10,327

Adjustments:
 
 
 
Depreciation
2,982

 
2,540

Amortization
5,888

 
5,767

Net realized gains on investments
(1,169
)
 
(645
)
Loss (gain) on disposal of property and equipment
115

 
(27
)
Share-based compensation expense
659

 
(168
)
Excess tax benefits from share-based payment arrangements
0

 
(56
)
Activity related to rabbi trust
27

 
18

Change in accrued investment income
946

 
386

Change in agents’ balances and premium receivable
(46,331
)
 
(41,657
)
Change in reinsurance receivables
(761
)
 
(1,146
)
Change in deferred policy acquisition costs
(7,736
)
 
(6,449
)
Change in other assets
1,732

 
2,555

Change in unpaid losses and loss adjustment expenses
7,578

 
16,313

Change in unearned premium
55,173

 
47,008

Change in other liabilities
(2,790
)
 
5,553

Net cash provided by operating activities
27,467

 
40,318

Investing Activities:
 
 
 
Purchases of fixed maturities
(150,155
)
 
(183,528
)
Purchases of equity securities
(2,000
)
 
(2,600
)
Purchases of short-term investments
(1,032
)
 
(200
)
Purchases of property and equipment
(2,140
)
 
(5,249
)
Maturities and redemptions of fixed maturities
46,727

 
41,201

Maturities and redemptions of short-term investments
0

 
1,400

Proceeds from sale of fixed maturities
95,432

 
64,959

Proceeds from sale of equity securities
4,489

 
0

Proceeds from sale of property and equipment
0

 
30

Net cash used in investing activities
(8,678
)
 
(83,986
)
Financing Activities:
 
 
 
Proceeds from stock options exercised and employee stock purchases
66

 
541

Excess tax benefits from share-based payment arrangements
0

 
56

Principal payments under capital lease obligation
(118
)
 
(134
)
Acquisition of treasury stock
(1,912
)
 
(1,975
)
Dividends paid to shareholders
(4,932
)
 
(4,139
)
Net cash used in financing activities
(6,896
)
 
(5,650
)
Net increase (decrease) in cash and cash equivalents
11,893

 
(49,319
)
Cash and cash equivalents at beginning of period
84,541

 
134,211

Cash and cash equivalents at end of period
$
96,434

 
$
84,892

See Condensed Notes to Consolidated Financial Statements.

7

Table of Contents
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015
INDEX TO NOTES
 
1.
7.
 
 
 
2.
8.
 
 
 
3.
9.
 
 
 
4.
10.
 
 
 
 
5.
11.
 
 
 
 
6.
 
 

Note 1 Reporting and Accounting Policies
Nature of Operations
We are a holding company that provides, through our subsidiaries, personal automobile insurance with a focus on the nonstandard market. Although licensed to write insurance in all 50 states and the District of Columbia, we focus on select states that we believe offer the greatest opportunity for premium growth and profitability.
Basis of Consolidation and Reporting
The accompanying consolidated financial statements are unaudited and should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2014. This Quarterly Report on Form 10-Q, including the Condensed Notes to Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations, focuses on our financial performance since the beginning of the year.
These financial statements reflect certain adjustments necessary for a fair presentation of our results of operations and financial position. Such adjustments consist of normal, recurring accruals recorded to match expenses with their related revenue streams and the elimination of all significant inter-company transactions and balances.
We have evaluated events that occurred after March 31, 2015, for recognition or disclosure in our financial statements and the notes to the financial statements.
Schedules may not foot due to rounding.

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

Recently Issued Accounting Standards
In April 2015 the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) related to the presentation of debt issuance costs. The guidance requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability. The standard is effective for fiscal years beginning after December 15, 2015 and is to be applied retrospectively.  The new guidance will have no impact on our results of operations or financial position.
In May 2014 the FASB issued an ASU related to the accounting for revenue from contracts with customers. Insurance contracts have been excluded from the scope of the guidance, which is effective for fiscal years beginning after December 15, 2016. We do not expect the adoption of this standard to have a material impact on our financial condition or results of operations.

8

Table of Contents
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

Note 2 Computation of Net Earnings per Share

The following table illustrates our computations of basic and diluted net earnings per common share ($ in thousands, except per
share figures):
 
Three months ended March 31,
 
2015
 
2014
Net earnings
$
11,154

 
$
10,327

Average basic shares outstanding
11,427

 
11,429

Basic net earnings per share
$
0.98

 
$
0.90

 
 
 
 
Average basic shares outstanding
11,427

 
11,429

Restricted stock not yet vested
11

 
57

Dilutive effect of assumed option exercises
0

 
2

Dilutive effect of Performance Share Plan
113

 
92

Average diluted shares outstanding
11,551

 
11,580

Diluted net earnings per share
$
0.97

 
$
0.89


 

9

Table of Contents
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

Note 3 Fair Value
Fair values of instruments are based on:
(i)
quoted prices in active markets for identical assets (Level 1);
(ii)
quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all significant inputs are observable in active markets (Level 2); or
(iii)
valuations derived from valuation techniques in which one or more significant inputs are unobservable in the marketplace (Level 3).
The following tables present, for each of the fair value hierarchy levels, our assets and liabilities for which we report fair value on a recurring basis ($ in thousands):
 
 
Fair Value
March 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash and cash equivalents
 
$
96,434

 
$
0

 
$
0

 
$
96,434

Fixed maturity securities:
 
 
 
 
 
 
 
 
U.S. government
 
66,511

 
58

 
0

 
66,569

State and municipal
 
0

 
504,690

 
10

 
504,700

Mortgage-backed securities:
 

 
 
 
 
 
 
Residential
 
0

 
345,884

 
0

 
345,884

Commercial
 
0

 
66,992

 
0

 
66,992

Total mortgage-backed securities
 
0

 
412,876

 
0

 
412,876

Asset-backed securities
 
0

 
62,302

 
46

 
62,348

Corporates
 
0

 
383,583

 
2,946

 
386,529

Total fixed maturities
 
66,511

 
1,363,509

 
3,002

 
1,433,022

Equity securities
 
94,453

 
0

 
0

 
94,453

Short-term investments
 
0

 
1,819

 
0

 
1,819

Total cash and investments
 
$
257,398

 
$
1,365,328

 
$
3,002

 
$
1,625,728

Percentage of total cash and investments
 
15.8
%
 
84.0
%
 
0.2
%
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
Fair Value
December 31, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash and cash equivalents
 
$
84,541

 
$
0

 
$
0

 
$
84,541

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

 
87

 
0

 
66,933

State and municipal
 
0

 
503,650

 
0

 
503,650

Mortgage-backed securities:
 
 
 
 
 
 
 
 
Residential
 
0

 
354,528

 
0

 
354,528

Commercial
 
0

 
50,838

 
0

 
50,838

Total mortgage-backed securities
 
0

 
405,366

 
0

 
405,366

Asset-backed securities
 
0

 
58,457

 
150

 
58,607

Corporates
 
0

 
394,152

 
3,134

 
397,286

Total fixed maturities
 
66,847

 
1,361,711

 
3,285

 
1,431,843

Equity securities
 
94,408

 
0

 
0

 
94,408

Short-term investments
 
0

 
803

 
0

 
803

Total cash and investments
 
$
245,795

 
$
1,362,514

 
$
3,285

 
$
1,611,594

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

10

Table of Contents
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

We do not report our long-term debt at fair value in the Consolidated Balance Sheets. The $294.7 million and $291.0 million fair value of our long-term debt at March 31, 2015, and December 31, 2014, respectively, would be included in Level 2 of the fair value hierarchy if it were reported at fair value.
Level 1 includes cash and cash equivalents, U.S. Treasury securities, an exchange-traded fund and equities held in a rabbi trust which funds our Supplemental Employee Retirement Plan ("SERP"). Level 2 includes securities whose fair value was determined using observable market inputs. Level 3 securities are comprised of (i) securities for which there is no active or inactive market for similar instruments; (ii) securities whose fair value is determined based on unobservable inputs; and (iii) securities, other than those backed by the U.S. Government, that are not rated by a nationally recognized statistical rating organization ("NRSRO"). We recognize transfers between levels at the beginning of the reporting period.
A third party nationally recognized pricing service provides the fair value of securities in Level 2. We review the third party pricing methodologies quarterly and test for significant differences between the market price used to value the security and recent sales activity.
The following tables present the progression in the Level 3 fair value category ($ in thousands): 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2015
 
State and
Municipal
 
Corporates
 
Asset-Backed Securities
 
Total
Balance at beginning of period
$
0

 
$
3,134

 
$
150

 
$
3,285

Total gains or (losses), unrealized or realized
 
 
 
 
 
 
 
Included in net earnings
(0
)
 
(95
)
 
0

 
(95
)
Included in other comprehensive income
0

 
(14
)
 
0

 
(14
)
Settlements
0

 
(80
)
 
(105
)
 
(184
)
Transfers in
10

 
0

 
0

 
10

Balance at end of period
$
10

 
$
2,946

 
$
46

 
$
3,002

 
 
 
 
 
 
 
 
 
Three months ended March 31, 2014
 
State and
Municipal
 
Corporates
 
Asset-Backed Securities
 
Total
Balance at beginning of period
$
0

 
$
5,175

 
$
686

 
$
5,860

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

 
9

 
0

 
9

Included in other comprehensive income
0

 
(56
)
 
0

 
(56
)
Settlements
0

 
(74
)
 
(156
)
 
(230
)
Transfers in
0

 
0

 
0

 
0

Balance at end of period
$
0

 
$
5,054

 
$
530

 
$
5,583


Of the $3.0 million fair value of securities in Level 3 at March 31, 2015, which consists of eight securities, we priced five based on non-binding broker quotes, one price was provided by our unaffiliated money manager and two securities, which were included in Level 3 because they were not rated by a nationally recognized statistical rating organization, were priced by a nationally recognized pricing service.
During the three months ended March 31, 2015, one security was transferred from Level 2 into Level 3 because it was no longer rated by a nationally recognized statistical rating organization. There were no transfers of securities between Levels 1 and 2.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

The gains or losses included in net earnings are included in the line item "Net realized gains on investments" in the Consolidated Statements of Earnings. We recognize the net gains or losses included in other comprehensive income in the line item "Unrealized gains on investments, net" in the Consolidated Statements of Comprehensive Income and the line item "Change in unrealized gain on investments" or the line item "Change in non-credit component of impairment losses on fixed maturities" in the Consolidated Statements of Changes in Shareholders’ Equity.

The following table presents the carrying value and estimated fair value of our financial instruments ($ in thousands):
 
March 31, 2015
 
December 31, 2014
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
96,434

 
$
96,434

 
$
84,541

 
$
84,541

Investments
 
 
 
 
 
 
 
Fixed maturities
1,433,022

 
1,433,022

 
1,431,843

 
1,431,843

Equity securities
94,453

 
94,453

 
94,408

 
94,408

Short-term
1,819

 
1,819

 
803

 
803

Total cash and investments
$
1,625,728

 
$
1,625,728

 
$
1,611,594

 
$
1,611,594

Liabilities:
 
 
 
 
 
 
 
Long-term debt
$
275,000

 
$
294,674

 
$
275,000

 
$
291,044


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


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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

Note 4 Investments
We consider all fixed maturity and equity securities to be available-for-sale and report them at fair value with the net unrealized gains or losses reported after-tax (net of any valuation allowance) as a component of other comprehensive income. The proceeds from sales of securities for the three months ended March 31, 2015, and March 31, 2014, were $99.9 million and $65.0 million, respectively. The proceeds for the three months ended March 31, 2015, were net of $3.6 million of receivable for securities sold during the first quarter of 2015 that had not settled at March 31, 2015. The proceeds for the three months ended March 31, 2014, were net of $0.2 million of receivable for securities sold during the first quarter of 2014 that had not settled at March 31, 2014.
Gross gains of $2.1 million and gross losses of $0.6 million were realized on sales of available for sale securities during the three months ended March 31, 2015, compared with gross gains of $0.8 million and gross losses of $0.1 million realized on sales during the three months ended March 31, 2014. Gains or losses on securities are determined on a specific identification basis.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

Summarized information for the major categories of our investment portfolio follows ($ in thousands):
 
March 31, 2015
 
Amortized
Cost or Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
OTTI
Recognized in
Accumulated
OCI(1)
Fixed maturities:
 
 
 
 
 
 
 
 
 
U.S. government
$
66,013

 
$
582

 
$
(26
)
 
$
66,569

 
$
0

State and municipal
493,901

 
10,923

 
(124
)
 
504,700

 
(69
)
Mortgage-backed securities:

 

 

 
 
 
 
Residential
339,035

 
7,487

 
(638
)
 
345,884

 
(2,781
)
Commercial
66,885

 
315

 
(208
)
 
66,992

 
0

Total mortgage-backed securities
405,920

 
$
7,802

 
(846
)
 
$
412,876

 
(2,781
)
Asset-backed securities
62,107

 
259

 
(19
)
 
62,348

 
(8
)
Corporates
379,689

 
7,684

 
(843
)
 
386,529

 
(246
)
Total fixed maturities
1,407,631

 
27,249

 
(1,858
)
 
1,433,022

 
(3,105
)
Equity securities
76,625

 
17,828

 
0

 
94,453

 
0

Short-term investments
1,820

 
0

 
(1
)
 
1,819

 
0

Total
$
1,486,075

 
$
45,077

 
$
(1,859
)
 
$
1,529,294

 
$
(3,105
)
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
Amortized
Cost or Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
OTTI
Recognized in
Accumulated
OCI(1)
Fixed maturities:
 
 
 
 
 
 
 
 
 
U.S. government
$
66,625

 
$
502

 
$
(193
)
 
$
66,933

 
$
0

State and municipal
493,350

 
10,637

 
(337
)
 
503,650

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

 
6,547

 
(1,390
)
 
354,528

 
(2,914
)
Commercial
50,914

 
182

 
(258
)
 
50,838

 
0

Total mortgage-backed securities
400,285

 
6,729

 
(1,648
)
 
405,366

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

 
131

 
(70
)
 
58,607

 
(8
)
Corporates
393,611

 
5,999

 
(2,324
)
 
397,286

 
(441
)
Total fixed maturities
1,412,417

 
23,998

 
(4,572
)
 
1,431,843

 
(3,433
)
Equity securities
77,862

 
16,546

 
0

 
94,408

 
0

Short-term investments
803

 
0

 
(1
)
 
803

 
0

Total
$
1,491,082

 
$
40,544

 
$
(4,573
)
 
$
1,527,054

 
$
(3,433
)
 
 
 
 
 
 
 
 
 
 
(1) The total non-credit portion of OTTI recognized in Accumulated OCI reflecting the original non-credit loss at the time the credit impairment was determined.


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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

The following tables set forth the amount of unrealized loss by investment category and length of time that individual securities have been in a continuous unrealized loss position ($ in thousands):
 
Less than 12 Months
 
12 Months or More
 
Number of
Securities
with
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Unrealized
Losses as
% of Cost
 
Number of
Securities
with
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Unrealized
Losses as
% of Cost
March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government
3
 
$
10,945

 
$
(9
)
 
0.1
%
 
4

 
$
5,172

 
$
(17
)
 
0.3
%
State and municipal
22
 
49,505

 
(124
)
 
0.2
%
 
0

 
0

 
0

 
0.0
%
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
34
 
24,701

 
(94
)
 
0.4
%
 
70

 
52,776

 
(544
)
 
1.0
%
Commercial
8
 
24,585

 
(135
)
 
0.5
%
 
5

 
21,091

 
(73
)
 
0.3
%
Total mortgage-backed securities
42
 
49,286

 
(230
)
 
0.5
%
 
75

 
73,867

 
(616
)
 
0.8
%
Asset-backed securities
11
 
8,417

 
(9
)
 
0.1
%
 
2

 
1,150

 
(10
)
 
0.8
%
Corporates
39
 
49,860

 
(739
)
 
1.5
%
 
7

 
9,711

 
(104
)
 
1.1
%
Total fixed maturities
117
 
168,014

 
(1,110
)
 
0.7
%
 
88

 
89,900

 
(747
)
 
0.8
%
Equity securities
0
 
0

 
0

 
0.0
%
 
0

 
0

 
0

 
0.0
%
Short-term investments
2
 
1,531

 
(1
)
 
0.1
%
 
0

 
0

 
0

 
0.0
%
Total
119
 
$
169,545

 
$
(1,111
)
 
0.7
%
 
88

 
$
89,900

 
$
(747
)
 
0.8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government
2

 
$
5,275

 
$
(13
)
 
0.3
%
 
8

 
$
21,051

 
$
(180
)
 
0.8
%
State and municipal
45

 
108,721

 
(290
)
 
0.3
%
 
2

 
4,183

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

 
12,855

 
(34
)
 
0.3
%
 
109

 
100,752

 
(1,356
)
 
1.3
%
Commercial
8

 
15,638

 
(122
)
 
0.8
%
 
5

 
9,519

 
(136
)
 
1.4
%
Total mortgage-backed securities
32

 
28,493

 
(156
)
 
0.5
%
 
114

 
110,271

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

 
23,351

 
(60
)
 
0.3
%
 
2

 
1,150

 
(9
)
 
0.8
%
Corporates
103

 
142,046

 
(1,820
)
 
1.3
%
 
16

 
19,865

 
(503
)
 
2.5
%
Total fixed maturities
206

 
307,886

 
(2,340
)
 
0.8
%
 
142

 
156,521

 
(2,232
)
 
1.4
%
Equity securities
0

 
0

 
0

 
0.0
%
 
0

 
0

 
0

 
0.0
%
Short-term investments
2

 
803

 
(1
)
 
0.1
%
 
0

 
0

 
0

 
0.0
%
Total
208

 
$
308,689

 
$
(2,341
)
 
0.8
%
 
142

 
$
156,521

 
$
(2,232
)
 
1.4
%






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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

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

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

The following table summarizes those securities, excluding the rabbi trust, with unrealized gains or losses:
 
March 31,
2015
 
December 31,
2014
Number of positions held with unrealized:
 
 
 
Gains
930

 
778

Losses
207

 
350

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

 
3

Losses of $500,000
0

 
0

Percentage of positions held with unrealized:
 
 
 
Gains that were investment grade
92
%
 
92
%
Losses that were investment grade
85
%
 
84
%
Percentage of fair value held with unrealized:
 
 
 
Gains that were investment grade
92
%
 
94
%
Losses that were investment grade
86
%
 
86
%

 The following table sets forth the amount of unrealized loss, excluding the rabbi trust, by age and severity at March 31, 2015 ($ in thousands):
Age of Unrealized Losses:
Fair Value of
Securities with
Unrealized
Losses
 
Total Gross
Unrealized
Losses
 
Less Than 5%*
 
5% - 10%*
 
Greater
Than 10%*
Three months or less
$
121,145

 
$
(469
)
 
$
(396
)
 
$
(73
)
 
$
0

Four months through six months
30,368

 
(351
)
 
(270
)
 
(37
)
 
(45
)
Seven months through nine months
17,986

 
(291
)
 
(291
)
 
0

 
0

Ten months through twelve months
4,828

 
(16
)
 
(16
)
 
0

 
0

Greater than twelve months
85,117

 
(731
)
 
(731
)
 
0

 
0

Total
$
259,444

 
$
(1,859
)
 
$
(1,704
)
 
$
(110
)
 
$
(45
)
* As a percentage of amortized cost or cost.
The change in unrealized gains (losses) on marketable securities included the following ($ in thousands):
 
Pre-tax
 
 
 
 
 
Fixed
Maturities
 
Equity
Securities
 
Short-Term Investments
 
Tax
Effects
 
Net
Three months ended March 31, 2015
 
 
 
 
 
 
 
 
 
Unrealized holding gains (losses) on securities arising during the period
$
6,036

 
$
2,380

 
$
(0
)
 
$
(2,946
)
 
$
5,470

Realized gains on securities sold
(452
)
 
(1,098
)
 
0

 
543

 
(1,008
)
Impairment loss recognized in earnings
381

 
0

 
0

 
(134
)
 
248

Change in unrealized gains (losses) on marketable securities, net
$
5,966

 
$
1,282

 
$
(0
)
 
$
(2,536
)
 
$
4,711

Three months ended March 31, 2014
 
 
 
 
 
 
 
 
 
Unrealized holding gains on securities arising during the period
$
7,389

 
$
458

 
$
5

 
$
(2,748
)
 
$
5,104

Realized gains on securities sold
(666
)
 
0

 
(5
)
 
235

 
(437
)
Impairment loss recognized in earnings
27

 
0

 
0

 
(9
)
 
17

Change in unrealized gains (losses) on marketable securities, net
$
6,750

 
$
458

 
$
(1
)
 
$
(2,523
)
 
$
4,685

 

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

For fixed maturity securities that are other-than-temporarily impaired, we assess our intent to sell and the likelihood that we will be required to sell the security before recovery of our amortized cost. If a fixed maturity security is considered other-than-temporarily impaired but we do not intend to and are not more than likely to be required to sell the security before our recovery of amortized cost, we separate the amount of the impairment into a credit loss component and the amount due to all other factors ("non-credit component"). The excess of the amortized cost over the present value of the expected cash flows determines the credit loss component of an impairment charge on a fixed maturity security. The present value is determined using the best estimate of cash flows discounted at (1) the effective interest rate implicit at the date of acquisition for non-structured securities or (2) the book yield for structured securities. The techniques and assumptions for determining the best estimate of cash flows vary depending on the type of security. We recognize the credit loss component of an impairment charge in net earnings and the non-credit component in accumulated other comprehensive income. If we intend to sell or will, more likely than not, be required to sell a security, we treat the entire amount of the impairment as a credit loss.
 
The following table is a progression of credit losses on fixed maturity securities that were bifurcated between a credit and non-credit component ($ in thousands):
 
Three months ended March 31,
 
2015
 
2014
Beginning balance
$
852

 
$
956

Additions for:
 
 
 
Previously impaired securities
0

 
19

Newly impaired securities
0

 
8

Reductions for:
 
 
 
Securities sold and paid down
(52
)
 
(40
)
Ending balance
$
799

 
$
943

The table below sets forth the scheduled maturities of fixed maturity securities at March 31, 2015, based on their fair values ($ in thousands). We report securities that do not have a single maturity date at average maturity. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid by the issuers.
 
 
Fair Value
 
Amortized
Cost
Maturity
Securities
with
Unrealized
Gains
 
Securities
with
Unrealized
Losses
 
Securities
with No
Unrealized
Gains or
Losses
 
All Fixed
Maturity
Securities
 
All Fixed
Maturity
Securities
One year or less
$
93,229

 
$
12,491

 
$
3,206

 
$
108,925

 
$
108,112

After one year through five years
504,782

 
57,388

 
0

 
562,170

 
551,461

After five years through ten years
219,377

 
55,314

 
467

 
275,158

 
269,159

After ten years
11,545

 
0

 
0

 
11,545

 
10,871

Mortgage- and asset-backed securities
342,503

 
132,720

 
0

 
475,224

 
468,027

Total
$
1,171,436

 
$
257,913

 
$
3,673

 
$
1,433,022

 
$
1,407,631


Note 5 Long-Term Debt

In September 2012 we issued $275 million principal of senior notes due September 2022 (the “5.0% Senior Notes”). The 5.0% Senior Notes accrue interest at 5.0%, payable semiannually. At the time we issued the 5.0% Senior Notes, we capitalized $2.2 million of debt issuance costs, which we are amortizing over the term of the 5.0% Senior Notes. We calculated the March 31, 2015, fair value of $294.7 million using a 196 basis point spread to the ten-year U.S. Treasury Note of 1.925%.
In August 2014 we renewed our agreement for a $50 million three-year revolving credit facility (the “Credit Agreement”) that requires us to meet certain financial and other covenants. We are currently in compliance with all covenants under the Credit
Agreement. At March 31, 2015, there were no borrowings outstanding under the Credit Agreement.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements


Note 6 Income Taxes

The following is a reconciliation of income taxes at the statutory rate of 35.0% to the effective provision for income taxes as shown in the Consolidated Statements of Earnings ($ in thousands):
 
Three months ended March 31,
 
2015
 
2014
Earnings before income taxes
$
16,236

 
$
14,647

Income taxes at statutory rate
5,683

 
5,126

Effect of:
 
 
 
Dividends-received deduction
(104
)
 
(107
)
Tax-exempt interest
(724
)
 
(702
)
Other
228

 
3

Provision for income taxes as shown on the Consolidated Statements of Earnings
$
5,082

 
$
4,320

GAAP effective tax rate
31.3
%
 
29.5
%


Note 7 Additional Information
Supplemental Cash Flow Information
We made the following payments that we do not separately disclose in the Consolidated Statements of Cash Flows ($ in thousands):
 
 
Three months ended March 31,
 
2015
 
2014
Income tax payments
$
750

 
$
0

Interest payments on debt
6,875

 
6,875

Interest payments on capital leases
22

 
16

Negative Cash Book Balances
Negative cash book balances, included in the line item “Other liabilities” in the Consolidated Balance Sheets, were $54.5 million and $51.2 million, respectively, at March 31, 2015, and December 31, 2014.




 

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

Note 8 Insurance Reserves
Insurance reserves include liabilities for unpaid losses, both known and estimated for incurred but not reported (“IBNR”), and unpaid loss adjustment expenses (“LAE”). The following table provides an analysis of changes in the liability for unpaid losses and LAE on a GAAP basis ($ in thousands): 
 
Three months ended March 31,
 
2015
 
2014
Balance at Beginning of Period
 
 
 
Unpaid losses on known claims
$
235,037

 
$
221,447

IBNR losses
277,482

 
262,660

LAE
155,658

 
162,469

Total unpaid losses and LAE
668,177

 
646,577

Reinsurance recoverables
(14,370
)
 
(14,431
)
Unpaid losses and LAE, net of reinsurance recoverables
653,808

 
632,146

Current Activity
 
 
 
Loss and LAE incurred:
 
 
 
Current accident year
257,785

 
256,776

Prior accident years
(2,142
)
 
(3,074
)
Total loss and LAE incurred
255,643

 
253,702

Loss and LAE payments:
 
 
 
Current accident year
(81,907
)
 
(80,818
)
Prior accident years
(165,770
)
 
(156,683
)
Total loss and LAE payments
(247,677
)
 
(237,502
)
Balance at End of Period
 
 
 
Unpaid losses and LAE, net of reinsurance recoverables
661,773

 
648,346

Add back reinsurance recoverables
13,982

 
14,544

Total unpaid losses and LAE
675,755

 
662,890

Unpaid losses on known claims
241,483

 
226,659

IBNR losses
278,863

 
272,159

LAE
155,409

 
164,072

Total unpaid losses and LAE
$
675,755

 
$
662,890


The $2.1 million of favorable reserve development during the three months ended March 31, 2015, was primarily due to decreases in loss adjustment expense in Florida bodily injury coverages and in California property damage and bodily injury coverages related to accident year 2013.

The $3.1 million of favorable reserve development during the three months ended March 31, 2014, was primarily due to a decrease in frequency in accident year 2013 in Florida personal injury protection and material damage coverages in the states of California, Georgia and Pennsylvania.


Note 9 Commitments and Contingencies
Commitments
There have been no material changes from the commitments discussed in the Form 10-K for the year ended December 31, 2014. For a description of our previously reported commitments, refer to Note 14 Commitments and Contingencies in the Form 10-K for the year ended December 31, 2014.


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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

Contingencies
From time to time we and our subsidiaries are named as defendants in various lawsuits incidental to our insurance operations. We consider legal actions relating to claims made in the ordinary course of seeking indemnification for a loss covered by the insurance policy in establishing loss and LAE reserves.
We also face, in the ordinary course of business, lawsuits that seek damages beyond policy limits, commonly known as extra-contractual claims, as well as class action and individual lawsuits that involve issues not unlike those facing other insurance companies and employers. We continually evaluate potential liabilities and reserves for litigation of these types using the criteria established by the Contingencies topic of the FASB. Under this guidance we may only record reserves for a loss if the likelihood of occurrence is probable and we can reasonably estimate the amount. If a material loss is judged to be reasonably possible, we will disclose an estimated range of loss or state that an estimate cannot be made. We consider each legal action using this guidance and record reserves for losses as warranted by establishing a reserve captured within our Consolidated Balance Sheets line-items “Unpaid losses and LAE” for extra-contractual claims and “Other liabilities” for class action and other non-claims related lawsuits. We record amounts incurred on the Consolidated Statements of Earnings within “Losses and LAE” for extra-contractual claims and “Other expenses” for class action and other non-claims related lawsuits.
Certain claims and legal actions have been brought against us for which we have accrued no loss, and for which an estimate of a possible range of loss cannot be made under the above rules. While it is not possible to predict the ultimate outcome of these claims or lawsuits, we do not believe they are likely to have a material effect on our financial condition or liquidity. However, losses incurred because of these cases could have a material adverse impact on net earnings in a given period.
For a description of previously reported contingencies, refer to Note 14 Commitments and Contingencies in the Form 10-K for the year ended December 31, 2014.



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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements


Note 10 Accumulated Other Comprehensive Income

The components of other comprehensive income before and after tax are as follows ($ in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31,
 
 
2015
 
2014
 
 
Before Tax
 
Income Tax
 
Net
 
Before Tax
 
Income Tax
 
Net
Accumulated change in postretirement benefit liability, beginning of period
 
$
174

 
$
(61
)
 
$
113

 
$
(62
)
 
$
22

 
$
(40
)
Effect on other comprehensive income
 
16

 
(6
)
 
11

 
657

 
(230
)
 
427

Accumulated change in postretirement benefit liability, end of period
 
190

 
(66
)
 
123

 
595

 
(208
)
 
387

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

 
(12,590
)
 
23,382

 
25,638

 
(8,973
)
 
16,665

Other comprehensive income before reclassification
 
8,416

 
(2,946
)
 
5,470

 
7,852

 
(2,748
)
 
5,104

Reclassification adjustment for other-than-temporary impairments included in net income
 
381

 
(134
)
 
248

 
27

 
(9
)
 
17

Reclassification adjustment for realized gains included in net income
 
(1,551
)
 
543

 
(1,008
)
 
(672
)
 
235

 
(437
)
Effect on other comprehensive income
 
7,247

 
(2,536
)
 
4,711

 
7,208

 
(2,523
)
 
4,685

Accumulated unrealized gains on investments, net, end of period
 
43,218

 
(15,126
)
 
28,092

 
32,846

 
(11,496
)
 
21,350

 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive income, beginning of period
 
36,145

 
(12,651
)
 
23,494

 
25,576

 
(8,952
)
 
16,624

Change in postretirement benefit liability
 
16

 
(6
)
 
11

 
657

 
(230
)
 
427

Change in unrealized gains on investments, net
 
7,247

 
(2,536
)
 
4,711

 
7,208

 
(2,523
)
 
4,685

Effect on other comprehensive income
 
7,263

 
(2,542
)
 
4,721

 
7,865

 
(2,753
)
 
5,112

Accumulated other comprehensive income, end of period
 
$
43,408

 
$
(15,193
)
 
$
28,216

 
$
33,441

 
$
(11,704
)
 
$
21,737



Note 11 Subsequent Event

On April 21, 2015, we closed on a $20 million purchase for a 120,493 square foot building located in Birmingham, Alabama. The purchase was made with internally generated funds. The building will serve as our new headquarters, replacing our currently leased building. We expect to see a reduction in net operating expenses once employees are relocated to the new headquarters, which is currently planned for the first half of 2016, although no assurances can be made in this regard.


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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM 2
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain “forward-looking statements” which anticipate results based on our estimates, assumptions and plans that are subject to uncertainty. We make these statements subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements in this report not dealing with historical results or current facts are forward-looking and we base them on estimates, assumptions and projections. Statements which include the words “assumes,” “believes,” “seeks,” “expects,” “may,” “should,” “intends,” “likely,” “targets,” “plans,” “anticipates,” “estimates” or the negative version of those words and similar statements of a future or forward-looking nature identify forward-looking statements. Examples of such forward-looking statements include statements relating to expectations concerning market conditions, premium growth, earnings, investment performance, expected losses, rate changes and loss experience.
The primary events or circumstances that could cause actual results to differ materially from what we expect include determinations with respect to reserve adequacy, realized gains or losses on the investment portfolio (including other-than temporary impairments for credit losses), loss cost trends, and competitive conditions in our key Focus States. We undertake no obligation to publicly update or revise any of the forward-looking statements. For a more detailed discussion of some of the foregoing risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements see “Risk Factors” contained in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014.

OVERVIEW
During the first three months of 2015 total gross written premium grew 3.6% compared with the same period of 2014. The majority of this growth came from California personal auto and countrywide Commercial Vehicle, which grew a combined 14.6% compared with the prior year. Partially offsetting premium growth in these two areas was premium decline of 42.7% for the combined states of Georgia, Nevada and Pennsylvania as we have shifted our focus in these states to renewal only business. See Results of Operations – Underwriting – Premium for a more detailed discussion of our gross written premium growth.
Net earnings and diluted earnings per share for the three months ended March 31, 2015, were $11.2 million and $0.97, respectively, compared with $10.3 million and $0.89, respectively, for the three months ended March 31, 2014. The increase in diluted earnings per share for the three months ended March 31, 2015, was primarily due to an improvement in underwriting profitability.
Included in net earnings for the three months ended March 31, 2015, was $1.4 million ($2.1 million pre-tax) of favorable development on prior accident year loss and LAE reserves. The development was primarily due to decreases in loss adjustment expense in Florida bodily injury coverages and in California property damage and bodily injury coverages related to accident year 2013. Included in net earnings for the three months ended March 31, 2014, was $2.0 million ($3.1 million pre-tax) of favorable development on prior accident year loss and LAE reserves.








    






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


The following table displays combined ratio results by accident year developed through March 31, 2015.
 
 
Accident Year Combined Ratio
Developed Through

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

 
$
0.3

2007
92.2
%
 
92.2
%
 
92.1
%
 
92.1
%
 
(0.0
)%
 
(0.2
)
2008
91.3
%
 
91.3
%
 
91.2
%
 
91.1
%
 
(0.0
)%
 
(0.4
)
2009
92.3
%
 
92.3
%
 
92.4
%
 
92.4
%
 
0.1
 %
 
0.5

2010
99.6
%
 
99.5
%
 
99.2
%
 
99.3
%
 
0.1
 %
 
0.7

2011
100.3
%
 
100.2
%
 
100.1
%
 
100.1
%
 
0.0
 %
 
0.1

2012
99.8
%
 
100.1
%
 
100.1
%
 
100.0
%
 
(0.0
)%
 
(0.5
)
2013
97.7
%
 
97.4
%
 
96.8
%
 
96.6
%
 
(0.2
)%
 
(2.3
)
2014
 
 
97.8
%
 
96.4
%
 
96.4
%
 
(0.0
)%
 
(0.3
)
2015 YTD
 
 
 
 
 
 
97.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
(2.1
)
See Results of Operations – Underwriting – Profitability for a more detailed discussion of our underwriting results.
Pre-tax net investment income for the three months ended March 31, 2015, was $8.7 million compared with $8.8 million for the three months ended March 31, 2014.
Our book value per share increased 1.6% from $60.75 at December 31, 2014, to $61.73 at March 31, 2015. This increase was primarily due to an increase in unrealized gains and earnings partially offset by dividends for the three months ended March 31, 2015.


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


RESULTS OF OPERATIONS
Underwriting
Premium
Our insurance subsidiaries provide personal automobile insurance products with a concentration on nonstandard auto insurance. While there is no industry-recognized definition of nonstandard auto insurance, we believe that it is generally understood to mean coverage for drivers who, because of their driving record, age or vehicle type, represent higher than normal risks and pay higher rates for comparable coverage. We also write commercial vehicle insurance and insurance for classic collectible automobiles (“Classic Collector”).
We are licensed to write insurance in all 50 states and the District of Columbia, but we focus our operations in targeted urban areas identified in selected Focus States that we believe offer the greatest opportunity for premium growth and profitability.
We classify the states in which we operate into two categories:
“Focus States” – These states include Arizona, California, Florida, and Texas.
“Other States” – Includes Georgia, Nevada and Pennsylvania where we currently offer renewals only, as well as additional states where we are running off our writings.
Georgia, Nevada and Pennsylvania were previously included in the Focus States category. All prior period data has been adjusted to reflect the updated state classification.
We continually evaluate our market opportunities; thus, the Focus States and Other States may change over time as new market opportunities arise, as the allocation of resources changes or as regulatory environments change.
Our net earned premium was as follows ($ in thousands):
 
Three months ended March 31,
 
2015
 
2014
 
Change
 
% Change
Net earned premium
 
 
 
 
 
 
 
Gross written premium
 
 
 
 
 
 
 
Personal Auto:
 
 
 
 
 
 
 
Focus States
$
341,302

 
$
322,454

 
$
18,848

 
5.8
 %
Other States
14,927

 
26,357

 
(11,429
)
 
(43.4
)%
Total Personal Auto
356,229

 
348,811

 
7,418

 
2.1
 %
Commercial Vehicle
31,276

 
25,464

 
5,812

 
22.8
 %
Classic Collector
3,141

 
2,906

 
234

 
8.1
 %
Total gross written premium
390,645

 
377,181

 
13,464

 
3.6
 %
Ceded reinsurance
(3,572
)
 
(2,931
)
 
(641
)
 
21.9
 %
Net written premium
387,073

 
374,249

 
12,823

 
3.4
 %
Change in unearned premium
(54,966
)
 
(46,570
)
 
(8,396
)
 
18.0
 %
Net earned premium
$
332,106

 
$
327,679

 
$
4,427

 
1.4
 %


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


The following table summarizes our policies in force:
 
At March 31,
 
2015
 
2014
 
Change
 
% Change
Policies in Force
 
 
 
 
 
 
 
Personal Auto
 
 
 
 
 
 
 
Focus States
773,928

 
781,107

 
(7,179
)
 
(0.9
)%
Other States
41,744

 
68,052

 
(26,308
)
 
(38.7
)%
Total Personal Auto
815,672

 
849,159

 
(33,487
)
 
(3.9
)%
Commercial Vehicle
46,357

 
40,750

 
5,607

 
13.8
 %
Classic Collector
40,983

 
39,705

 
1,278

 
3.2
 %
Total policies in force
903,012

 
929,614

 
(26,602
)
 
(2.9
)%

Gross written premium grew 3.6% during the first three months of 2015 when compared with the same period of 2014. During the first three months of 2015 Infinity implemented rate revisions in various states with an overall rate increase of 1.5%. Excluding the effect of rate changes in California and Florida, the states in which we write the most premium, the overall rate increase was 0.8%. Policies in force at March 31, 2015, decreased 2.9% compared with the same period in 2014. Gross written premium grew despite the decline in policies in force primarily due to an increase in average premiums per policy in California.
During the first three months of 2015 personal auto insurance gross written premium in our Focus States grew 5.8% when compared with the same period of 2014. The increase in gross written premium was primarily due to growth in California, which grew 13.3% during the first three months of 2015 when compared with the first three months of 2014, and was primarily due to our focus on territories with higher average written premium and an increase in new business. The growth in the Focus States during the first three months of 2015 was partially offset by declining gross written premium in the Other States as we discontinued writing new business in Georgia, Nevada and Pennsylvania effective January 1, 2015.
Commercial Vehicle gross written premium grew 22.8% during the first three months of 2015 when compared with the same period of 2014. This growth was primarily due to new and renewal policy growth and higher average premium in Florida, California and Texas.
Gross written premium in our Classic Collector product grew 8.1% during the first three months of 2015 when compared with the same period of 2014. This growth was primarily due to growth in renewal business in Florida, Texas, North Carolina and California.

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


Profitability
A key operating performance measure of insurance companies is underwriting profitability, as opposed to overall profitability or net earnings. We measure underwriting profitability by the combined ratio. When the combined ratio is under 100%, we consider underwriting results profitable; when the ratio is over 100%, we consider underwriting results unprofitable. The combined ratio does not reflect investment income, other income, interest expense, corporate general and administrative expenses, other expenses or federal income taxes.
While we report financial results in accordance with GAAP for shareholder and other users’ purposes, we report it on a statutory basis for insurance regulatory purposes. We evaluate underwriting profitability based on a combined ratio calculated using statutory accounting principles. The statutory combined ratio represents the sum of the following ratios: (i) losses and LAE incurred as a percentage of net earned premium; and (ii) underwriting expenses incurred, net of installment and other fees, as a percentage of net written premium. Certain expenses are treated differently under statutory and GAAP accounting principles. Under GAAP, commissions, premium taxes and other variable costs incurred in connection with writing new and renewal business are capitalized as deferred policy acquisition costs and amortized on a pro rata basis over the period in which the related premium is earned; on a statutory basis these items are expensed as incurred. Additionally, bad debt charge-offs on agent balances and premium receivables are included only in the GAAP combined ratios.
The following tables present the statutory and GAAP combined ratios: 
 
Three months ended March 31,
 
 
 
 
 
2015
 
2014
 
% Point Change
 
Loss &
LAE
Ratio
Underwriting
Ratio
Combined
Ratio
 
Loss &
LAE
Ratio
Underwriting
Ratio
Combined
Ratio
 
Loss &
LAE
Ratio
Underwriting
Ratio
Combined
Ratio
Personal Auto:
 
 
 
 
 
 
 
 
 
 
 
Focus States
77.2
%
17.2
%
94.4
%
 
78.6
%
17.5
%
96.1
%
 
(1.4
)%
(0.3
)%
(1.8
)%
Other States
90.4
%
16.1
%
106.5
%
 
76.4
%
17.8
%
94.3
%
 
14.0
 %
(1.7
)%
12.2
 %
Total Personal Auto
78.0
%
17.1
%
95.1
%
 
78.4
%
17.5
%
95.9
%
 
(0.4
)%
(0.4
)%
(0.8
)%
Commercial Vehicle
71.7
%
16.9
%
88.6
%
 
73.7
%
17.6
%
91.3
%
 
(2.0
)%
(0.7
)%
(2.7
)%
Classic Collector
39.4
%
30.3
%
69.7
%
 
45.8
%
34.1
%
79.9
%
 
(6.4
)%
(3.8
)%
(10.2
)%
Total statutory ratios
77.2
%
17.3
%
94.5
%
 
77.5
%
17.8
%
95.3
%
 
(0.4
)%
(0.4
)%
(0.8
)%
Total statutory ratios excluding development
77.8
%
17.3
%
95.2
%
 
78.5
%
17.8
%
96.2
%
 
(0.7
)%
(0.4
)%
(1.1
)%
GAAP ratios
77.0
%
19.4
%
96.3
%
 
77.4
%
19.4
%
96.8
%
 
(0.4
)%
(0.1
)%
(0.5
)%
GAAP ratios excluding development
77.6
%
19.4
%
97.0
%
 
78.4
%
19.4
%
97.8
%
 
(0.7
)%
(0.1
)%
(0.8
)%
 
In evaluating the profit performance of our business, we review underwriting profitability using statutory combined ratios. Accordingly, the discussion of underwriting results that follows will focus on these ratios and the components thereof, unless otherwise indicated.

The statutory combined ratio for the three months ended March 31, 2015, decreased by 0.8 point from the same period of 2014. The first three months of 2015 included $2.1 million of favorable development on prior accident year loss and LAE reserves, while the first three months of 2014 included $3.1 million of favorable development on prior accident year loss and LAE reserves. Excluding the effect of development, the statutory combined ratio decreased 1.1 points for the three months ended March 31, 2015, compared with the same period of 2014.
The GAAP combined ratio for the three months ended March 31, 2015, decreased by 0.5 point from the same period of 2014. Excluding the effect of development, the GAAP combined ratio decreased by 0.8 point for the three months ended March 31, 2015, compared with the same period of 2014. The decline in both the statutory and GAAP combined ratios excluding development is primarily due to a decrease in the California accident year combined ratio.
Losses from catastrophes were $0.1 million for the three months ended March 31, 2015. There were no catastrophe losses for the three months ended March 31, 2014.

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


The 1.4 points decline in the Focus States loss & LAE ratio for the three months ended March 31, 2015, is primarily due to improvement in calendar year loss ratios in Florida, Texas and California as a result of favorable development from prior accident year loss and LAE reserves as well as an increase in average earned premiums.
The combined ratio in the Other States increased by 12.2 points during the three months ended March 31, 2015. The increase is primarily due to unfavorable development from prior accident year loss and LAE reserves in the states of Georgia and Nevada.
The combined ratio in Commercial Vehicle decreased by 2.7 points, during the three months ended March 31, 2015, compared with the same period of 2014, primarily due to favorable development from prior accident year loss and LAE reserves.


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


Installment and Other Fee Income
Installment and other fee income, which is primarily made up of installment and other fees charged to policyholders, was relatively flat for the three months ended March 31, 2015, compared with the same period of 2014, increasing from $24.3 million to $24.6 million.
Net Investment Income
Net investment income is comprised of gross investment income and investment management fees and expenses, as shown in the following table ($ in thousands):
 
Three months ended March 31,
 
2015
 
2014
Investment income:
 
 
 
Interest income on fixed maturities, cash and cash equivalents
$
8,815

 
$
8,833

Dividends on equity securities
500

 
514

Gross investment income
9,314

 
9,347

Investment expenses
(578
)
 
(549
)
Net investment income
8,736

 
8,798

Average investment balance, at cost
$
1,578,750

 
$
1,556,841

Annualized returns excluding realized gains and losses
2.2
%
 
2.3
%
Annualized returns including realized gains and losses
2.5
%
 
2.4
%
The book yield on our portfolio continues to exceed our new money rates. Therefore, we expect that investment returns will continue to decline gradually as proceeds from maturing or prepaid investments are expected to be reinvested at yields lower than the average book yield for the total portfolio.

The following table provides information about our fixed maturity investments at March 31, 2015, which are sensitive to interest rate risk. The table shows expected principal cash flows by expected maturity date for each of the five subsequent years and collectively for all years thereafter. Callable bonds and notes are included based on call date or maturity date depending upon which date produces the most conservative yield. MBS and sinking fund issues are included based on maturity year adjusted for expected payment patterns. 

($ in thousands)
Expected Principal Cash Flows
 
 
 
MBS and
ABS only
 
Excluding MBS and ABS
 
Total
 
Maturing Book Yield
For the period ending December 31,
 
 
 
 
 
 
 
2015
$
53,054

 
$
104,270

 
$
157,323

 
2.3%
2016
78,348

 
141,030

 
219,378

 
2.4%
2017
95,036

 
202,032

 
297,068

 
2.2%
2018
51,183

 
97,760

 
148,944

 
2.5%
2019
33,410

 
119,467

 
152,877

 
2.6%
Thereafter
138,593

 
222,011

 
360,604

 
3.0%
Total
$
449,623

 
$
886,571

 
$
1,336,193

 
2.5%
The cash flows presented take into consideration historical relationships of market yields and prepayment rates. However, the actual prepayment rate may differ from historical trends, resulting in actual principal cash flows that differ from those presented above.





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


Realized Gains (Losses) on Investments
We recorded impairments for unrealized losses deemed other-than-temporary and realized gains and losses on sales and disposals, as follows (before tax, $ in thousands):
 
Three months ended March 31, 2015
 
Three months ended March 31, 2014
 
Impairments
Recognized
in Earnings
 
Net Realized
Gains (Losses)
on Sales
 
Total Realized
Gains (Losses)
 
Impairments
Recognized in
Earnings
 
Net Realized
Gains (Losses)
on Sales
 
Total Realized
Gains (Losses)
Fixed maturities
$
(381
)
 
$
452

 
$
71

 
$
(27
)
 
$
666

 
$
639

Equities
0

 
1,098

 
1,098

 
0

 
0

 
0

Short-term investments
0

 
0

 
0

 
0

 
5

 
5

Total
$
(381
)
 
$
1,551

 
$
1,169

 
$
(27
)
 
$
672

 
$
645

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

Interest Expense
At March 31, 2015, we had $275 million of Senior Notes outstanding that accrue interest at 5.0% (the "5.0% Senior Notes"). We recognized $3.4 million of interest expense on the Senior Notes in the Consolidated Statements of Earnings for both the three months ended March 31, 2015, and 2014. Refer to Note 5 to the Consolidated Financial Statements for additional information on the Senior Notes.
Income Taxes
Our GAAP effective tax rate for the three months ended March 31, 2015, was 31.3% compared with 29.5% for the same period of 2014. The GAAP effective tax rate has increased in 2015 primarily as a result of an improvement in the underwriting profit, which is taxed at 35%. Refer to Note 6 to the Consolidated Financial Statements for additional information on income taxes.

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


LIQUIDITY AND CAPITAL RESOURCES
Sources of Funds
We are a holding company and our insurance subsidiaries conduct our operations. Accordingly, we will have continuing cash needs for administrative expenses, the payment of interest on borrowings, shareholder dividends, share repurchases and taxes.
Funds to meet expenditures at the holding company level come primarily from dividends and tax payments from the insurance subsidiaries, as well as cash and investments held by the holding company. As of March 31, 2015, the holding company had $136.3 million of cash and investments. In 2015 our insurance subsidiaries may pay us up to $68.1 million in ordinary dividends without prior regulatory approval. For the three months ended March 31, 2015, our insurance subsidiaries have paid us ordinary dividends of $15.0 million.
Our insurance subsidiaries generate liquidity to satisfy their obligations primarily by collecting and investing premium in advance of paying claims and generating investment income on their $1.4 billion investment portfolio. Our insurance subsidiaries generated positive cash flows from operations of $33.9 million during the three months ended March 31, 2015, compared with positive operating cash flows of $54.5 million during the three months ended March 31, 2014.
At March 31, 2015, we had $275 million principal outstanding of Senior Notes. The Senior Notes accrue interest at 5.0%, payable semiannually each March and September. Refer to Note 5 to the Consolidated Financial Statements for more information on our long-term debt.
In August 2014 we renewed our agreement for a $50 million three-year revolving credit facility (the “Credit Agreement”) that requires us to meet certain financial and other covenants. We are currently in compliance with all covenants under the Credit Agreement. At March 31, 2015, there were no borrowings outstanding under the credit agreement.
In June 2013 we filed a "shelf" registration statement with the Securities and Exchange Commission registering $300.0 million of our securities, which will allow us to sell any combination of senior or subordinated debt securities, common stock, preferred stock, warrants, depositary shares and units in one or more offerings should we choose to do so in the future.
Uses of Funds
In February 2015 we increased our quarterly dividend to $0.43 per share from $0.36 per share. At this current amount, our 2015 annualized dividend payments would be approximately $19.7 million.
 
On November 4, 2014, our Board of Directors increased the authority of our share and debt repurchase program to a total of $75 million and extended the date to execute the program from December 31, 2014, to December 31, 2016. During the first quarter of 2015 we repurchased 25,800 shares at an average cost, excluding commissions, of $77.46 per share.
We believe that cash balances, cash flows generated from operations or borrowings, and maturities and sales of investments are adequate to meet our future liquidity needs and those of our insurance subsidiaries.
Reinsurance
We use excess of loss, catastrophe and extra-contractual loss reinsurance to mitigate the financial impact of large or
catastrophic losses. During 2015 our catastrophe reinsurance protection covers 100% of $55 million in excess of $5 million. Our excess of loss reinsurance provides protection for commercial auto losses up to $700,000 for claims in excess of $300,000 per occurrence. Our extra-contractual loss reinsurance provides protection for losses up to $10 million in excess of $5 million for any single extra-contractual loss. We also use reinsurance to mitigate losses on our Classic Collector business.
Premium ceded under all reinsurance agreements for the three months ended March 31, 2015, was $3.6 million, compared with $2.9 million for the same period of 2014.






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


Investments
Our consolidated investment portfolio at March 31, 2015, contained approximately $1.4 billion in fixed maturity securities, $94.5 million in equity securities and $1.8 million in short-term investments. All of these are carried at fair value with unrealized gains and losses reported in accumulated other comprehensive income, a separate component of shareholders’ equity, on an after-tax basis. At March 31, 2015, we had pre-tax net unrealized gains of $25.4 million on fixed maturities and pre-tax net unrealized gains of $17.8 million on equity securities. Combined, the pre-tax net unrealized gain increased by $7.2 million for the three months ended March 31, 2015. This increase occurred primarily in the fixed portfolio due to lower market interest rates. The average option adjusted duration of our fixed maturity portfolio was 3.0 years at March 31, 2015, compared with 3.1 years at December 31, 2014.
Since we carry all of these securities at fair value in our balance sheet, there is virtually no effect on liquidity or financial condition upon the sale and ultimate realization of unrealized gains and losses.
Approximately 91.3% of our fixed maturity investments at March 31, 2015, were rated “investment grade,” and as of the same date, the average credit rating of our fixed maturity portfolio was AA-. Investment grade securities generally bear lower yields and have lower degrees of risk than those that are unrated or non-investment grade. We believe that a high quality investment portfolio is more likely to generate a stable and predictable investment return.
Fair values of instruments are based on (i) quoted prices in active markets for identical assets (Level 1); (ii) quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all significant inputs are observable in active markets (Level 2); or (iii) valuations derived from valuation techniques in which one or more significant inputs are unobservable in the marketplace (Level 3).
Our Level 1 securities are U.S. Treasury securities, an exchange-traded fund and equity securities held in a rabbi trust. Our Level 2 securities are comprised of securities whose fair value was determined using observable market inputs. Our Level 3 securities are comprised of (i) securities for which there is no active or inactive market for similar instruments; (ii) securities whose fair value is determined based on unobservable inputs; and (iii) securities that nationally recognized statistical rating organizations do not rate.


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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, 2015, was as follows ($ in thousands):
 
Amortized
Cost
 
Fair Value
 
% of
Total Fair
Value
Fixed Maturities:
 
 
 
 
 
U.S. government
$
66,013

 
$
66,569

 
4.4
%
State and municipal
493,901

 
504,700

 
33.0
%
Mortgage- and asset-backed:
 
 
 
 
 
Residential mortgage-backed securities
339,035

 
345,884

 
22.6
%
Commercial mortgage-backed securities
66,885

 
66,992

 
4.4
%
Asset-backed securities ("ABS"):
 
 
 
 
 
          Auto loans
45,994

 
46,127

 
3.0
%
Equipment leases
10,183

 
10,244

 
0.7
%
          Credit card receivables
4,515

 
4,516

 
0.3
%
          Whole business
755

 
762

 
0.0
%
          Home equity
505

 
535

 
0.0
%
Student loans
110

 
118

 
0.0
%
Tax liens
46

 
46

 
0.0
%
Total ABS
62,107

 
62,348

 
4.1
%
Total mortgage- and asset-backed
468,027

 
475,224

 
31.1
%
Corporates
 
 
 
 
 
Investment grade
256,102

 
261,686

 
17.1
%
Non-investment grade
123,586

 
124,843

 
8.2
%
Total corporates
379,689

 
386,529

 
25.3
%
Total fixed maturities
1,407,631

 
1,433,022

 
93.7
%
Equity securities
76,625

 
94,453

 
6.2
%
Short-term investments
1,820

 
1,819

 
0.1
%
Total investments
$
1,486,075

 
$
1,529,294

 
100.0
%
We categorize securities by rating based upon ratings issued by Moody's, Standard & Poor's or Fitch, where available. If all three ratings are available but not equivalent, we exclude the lowest rating and the lower of the remaining ratings is used. If ratings are only available from two agencies, the lowest is used. This methodology is consistent with that used by the major bond indices.
The following table presents the credit rating and fair value of our fixed maturity portfolio by major security type at March 31, 2015, ($ in thousands):
 
 
Rating
 
 
 
 
 
AAA
 
AA
 
A
 
BBB
 
Non-
investment
Grade
 
Total Fair
Value
 
% of
Total
Exposure
U.S. government
$
66,569

 
$
0

 
$
0

 
$
0

 
$
0

 
$
66,569

 
4.6
%
State and municipal
114,599

 
287,526

 
102,565

 
0

 
10

 
504,700

 
35.2
%
Mortgage- and asset-backed
425,838

 
41,277

 
7,346

 
762

 
0

 
475,224

 
33.2
%
Corporates
0

 
19,748

 
114,843

 
127,095

 
124,843

 
386,529

 
27.0
%
Total fair value
$
607,006

 
$
348,551

 
$
224,754

 
$
127,858

 
$
124,853

 
$
1,433,022

 
100.0
%
% of total fair value
42.4
%
 
24.3
%
 
15.7
%
 
8.9
%
 
8.7
%
 
100.0
%
 
 

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


Our fixed income portfolio contains no securities issued by any single issuer that exceed 1% of the fair value of the fixed income portfolio.
The following table presents the credit rating and fair value of our state and municipal bond portfolio, by state, at March 31, 2015, ($ in thousands):
 
Rating
 
 
 
 
State
AAA
 
AA
 
A
 
BBB
 
Non-
investment
Grade
 
Total Fair Value
 
% of Total
Exposure
NY
$
3,814

 
$
49,179

 
$
16,879

 
$
0

 
$
10

 
$
69,883

 
13.8
%
CA
4,309

 
28,586

 
5,816

 
0

 
0

 
38,712

 
7.7
%
TX
13,834

 
9,708

 
5,607

 
0

 
0

 
29,149

 
5.8
%
WA
648

 
22,955

 
1,652

 
0

 
0

 
25,255

 
5.0
%
GA
11,882

 
2,298

 
9,705

 
0

 
0

 
23,884

 
4.7
%
MD
16,509

 
7,157

 
0

 
0

 
0

 
23,666

 
4.7
%
NC
12,991

 
10,153

 
0

 
0

 
0

 
23,144

 
4.6
%
NJ
1,676

 
1,088

 
17,255

 
0

 
0

 
20,019

 
4.0
%
PA
0

 
10,273

 
8,030

 
0

 
0

 
18,303

 
3.6
%
VA
7,677

 
9,673

 
0

 
0

 
0

 
17,350

 
3.4
%
All other states
41,260

 
136,455

 
37,620

 
0

 
0

 
215,335

 
42.7
%
Total fair value
$
114,599

 
$
287,526

 
$
102,565

 
$
0

 
$
10

 
$
504,700

 
100.0
%
% of total fair value
22.7
%
 
57.0
%
 
20.3
%
 
0.0
%
 
0.0
%
 
100.0
%
 
 
The following table presents the fair value of our state and municipal bond portfolio, by state and type of bond, at March 31, 2015, ($ in thousands):
 
 
Type
 
 
 
 
 
General Obligation
 
 
 
 
 
 
 
 
 
 
State
State
 
Local
 
Revenue
 
Certificate of Participation
 
Other
 
Total Fair Value
 
% of Total
Exposure
NY
$
7,534

 
$
8,305

 
$
54,045

 
$
0

 
$
0

 
$
69,883

 
13.8
%
CA
7,792

 
14,277

 
16,642

 
0

 
0

 
38,712

 
7.7
%
TX
1,400

 
11,217

 
16,532

 
0

 
0

 
29,149

 
5.8
%
WA
7,084

 
2,956

 
15,215

 
0

 
0

 
25,255

 
5.0
%
GA
11,882

 
1,097

 
10,906

 
0

 
0

 
23,884

 
4.7
%
MD
5,190

 
15,585

 
2,892

 
0

 
0

 
23,666

 
4.7
%
NC
6,927

 
2,001

 
14,215

 
0

 
0

 
23,144

 
4.6
%
NJ
3,533

 
0

 
16,486

 
0

 
0

 
20,019

 
4.0
%
PA
5,154

 
774

 
12,375

 
0

 
0

 
18,303

 
3.6
%
VA
1,007

 
6,532

 
9,811

 
0

 
0

 
17,350

 
3.4
%
All other states
52,553

 
23,432

 
132,979

 
4,469

 
1,903

 
215,335

 
42.7
%
Total fair value
$
110,055

 
$
86,176

 
$
302,098


$
4,469


$
1,903

 
$
504,700

 
100.0
%
% of total fair value
21.8
%
 
17.1
%
 
59.9
%
 
0.9
%
 
0.4
%
 
100.0
%
 
 
 







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, 2015, ($ in thousands):
 
 
Revenue Bonds
 
 
State
Transportation
 
Utilities
 
Education
 
Other
 
Total Fair Value
 
% of Total
Exposure
NY
$
27,073

 
$
0

 
$
5,923

 
$
21,049

 
$
54,045

 
17.9
%
CA
8,093

 
5,438

 
0

 
3,112

 
16,642

 
5.5
%
TX
3,518

 
1,872

 
4,241

 
6,902

 
16,532

 
5.5
%
NJ
1,960

 
0

 
6,569

 
7,957

 
16,486

 
5.5
%
WA
0

 
11,892

 
0

 
3,323

 
15,215

 
5.0
%
CO
0

 
0

 
9,073

 
5,164

 
14,237

 
4.7
%
NC
0

 
4,062

 
0

 
10,153

 
14,215

 
4.7
%
PA
8,030

 
0

 
2,742

 
1,602

 
12,375

 
4.1
%
MN
0

 
2,058

 
0

 
9,725

 
11,783

 
3.9
%
GA
6,422

 
3,393

 
0

 
1,090

 
10,906

 
3.6
%
All other states
17,327

 
16,916

 
17,448

 
67,972

 
119,662

 
39.6
%
Total fair value
$
72,424

 
$
45,630

 
$
45,995

 
$
138,048

 
$
302,098

 
100.0
%
% of total fair value
24.0
%
 
15.1
%
 
15.2
%
 
45.7
%
 
100.0
%
 
 
The following table presents the credit rating and fair value of our residential mortgage-backed securities at March 31, 2015, by deal origination year ($ in thousands): 
 
Rating
 
 
 
 
Deal Origination Year
AAA
 
AA
 
A
 
BBB
 
Non-
investment
Grade
 
Total Fair
Value
 
% of Total
Exposure
2003
$
547

 
$
0

 
$
0

 
$
0

 
$
0

 
$
547

 
0.2
%
2004
4,693

 
0

 
0

 
0

 
0

 
4,693

 
1.4
%
2005
1,023

 
0

 
0

 
0

 
0

 
1,023

 
0.3
%
2006
7,931

 
0

 
0

 
0

 
0

 
7,931

 
2.3
%
2007
2,521

 
0

 
0

 
0

 
0

 
2,521

 
0.7
%
2008
7,751

 
0

 
0

 
0

 
0

 
7,751

 
2.2
%
2009
9,695

 
0

 
0

 
0

 
0

 
9,695

 
2.8
%
2010
24,988

 
0

 
0

 
0

 
0

 
24,988

 
7.2
%
2011
50,689

 
0

 
0

 
0

 
0

 
50,689

 
14.7
%
2012
30,551

 
0

 
0

 
0

 
0

 
30,551

 
8.8
%
2013
81,537

 
0

 
0

 
0

 
0

 
81,537

 
23.6
%
2014
79,435

 
0

 
0

 
0

 
0

 
79,435

 
23.0
%
2015
44,524

 
0

 
0

 
0

 
0

 
44,524

 
12.9
%
Total fair value
$
345,884

 
$
0

 
$
0

 
$
0

 
$
0

 
$
345,884

 
100.0
%
% of total fair value
100.0
%
 
0.0
%
 
0.0
%
 
0.0
%
 
0.0
%
 
100.0
%
 
 
All of the $345.9 million of residential mortgage-backed securities were issued by government-sponsored enterprises (“GSE”) or by Government National Mortgage Association ("GNMA").
 

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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, 2015, by deal origination year ($ in thousands):
 
 
Rating
 
 
 
 
Deal Origination Year
AAA
 
AA
 
A
 
BBB
 
Non-
investment
Grade
 
Total Fair
Value
 
% of Total
Exposure
2005
$
1,274

 
$
0

 
$
0

 
$
0

 
$
0

 
$
1,274

 
1.9
%
2006
10,187

 
0

 
0

 
0

 
0

 
10,187

 
15.2
%
2007
24,928

 
7,280

 
0

 
0

 
0

 
32,208

 
48.1
%
2008
2,694

 
5,390

 
0

 
0

 
0

 
8,084

 
12.1
%
2010
3,677

 
0

 
0

 
0

 
0

 
3,677

 
5.5
%
2011
1,243

 
0

 
0

 
0

 
0

 
1,243

 
1.9
%
2012
4,160

 
0

 
0

 
0

 
0

 
4,160

 
6.2
%
2013
1,433

 
0

 
0

 
0

 
0

 
1,433

 
2.1
%
2014
4,726

 
0

 
0

 
0

 
0

 
4,726

 
7.1
%
Total fair value
$
54,322


$
12,670


$
0


$
0


$
0


$
66,992

 
100.0
%
% of total fair value
81.1
%
 
18.9
%
 
0.0
%
 
0.0
%
 
0.0
%
 
100.0
%
 
 
None of the $67.0 million of commercial mortgage-backed securities were issued by GSEs.
 
The following table presents the credit rating and fair value of our ABS portfolio at March 31, 2015, by deal origination year ($ in thousands):
 
Rating
 
 
 
 
Deal Origination Year
AAA
 
AA
 
A
 
BBB
 
Non-
investment
Grade
 
Total Fair
Value
 
% of Total
Exposure
2001
$
85

 
$
0

 
$
0

 
$
0

 
$
0

 
$
85

 
0.1
%
2003
450

 
0

 
0

 
0

 
0

 
450

 
0.7
%
2011
118

 
32

 
0

 
0

 
0

 
150

 
0.2
%
2012
7,054

 
5,848

 
60

 
0

 
0

 
12,962

 
20.8
%
2013
13,281

 
11,043

 
2,051

 
0

 
0

 
26,375

 
42.3
%
2014
4,644

 
8,278

 
1,981

 
0

 
0

 
14,903

 
23.9
%
2015
0

 
3,407

 
3,254

 
762

 
0

 
7,423

 
11.9
%
Total fair value
$
25,632

 
$
28,607

 
$
7,346

 
$
762

 
$
0

 
$
62,348

 
100.0
%
% of total fair value
41.1
%
 
45.9
%
 
11.8
%
 
1.2
%
 
0.0
%
 
100.0
%
 
 

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


The following table presents the credit rating and fair value of our corporate bond portfolio, by industry sector and rating of bond, at March 31, 2015, ($ in thousands):

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

 
$
16,028

 
$
80,053

 
$
36,232

 
$
8,081

 
$
140,395

 
36.3
%
Consumer, Non-cyclical
0

 
2,042

 
14,766

 
16,565

 
19,703

 
53,076

 
13.7
%
Communications
0

 
0

 
1,645

 
17,543

 
25,299

 
44,487

 
11.5
%
Energy
0

 
1,678

 
3,260

 
19,178

 
17,335

 
41,451

 
10.7
%
Consumer, Cyclical
0

 
0

 
6,660

 
14,033

 
19,370

 
40,063

 
10.4
%
Industrial
0

 
0

 
0

 
8,740

 
13,064

 
21,804

 
5.6
%
Utilities
0

 
0

 
4,451

 
8,412

 
4,322

 
17,185

 
4.4
%
Technology
0

 
0

 
1,745

 
1,400

 
11,917

 
15,062

 
3.9
%
Basic Materials
0

 
0

 
594

 
4,991

 
5,565

 
11,150

 
2.9
%
Diversified
0

 
0

 
1,669

 
0

 
187

 
1,856

 
0.5
%
Total fair value
$
0

 
$
19,748

 
$
114,843

 
$
127,095

 
$
124,843

 
$
386,529

 
100.0
%
% of total fair value
0.0
%
 
5.1
%
 
29.7
%
 
32.9
%
 
32.3
%
 
100.0
%
 
 

Included in our investments in corporate fixed income securities at March 31, 2015, are $54.6 million of dollar-denominated investments with issuers or guarantors in foreign countries, as follows ($ in thousands):
 
Rating
 
 
 
 
Issuer or Guarantor
AAA
 
AA
 
A
 
BBB
 
Non-
investment
Grade
 
Total Fair Value
 
% of Total
Exposure
Britain
$
0

 
$
4,452

 
$
13,895

 
$
0

 
$
0

 
$
18,347

 
33.6
%
Canada
0

 
3,777

 
1,737

 
1,649

 
4,642

 
11,806

 
21.6
%
Australia
0

 
1,664

 
3,990

 
0

 
0

 
5,654

 
10.4
%
France
0

 
2,042

 
2,684

 
0

 
0

 
4,726

 
8.7
%
Switzerland
0

 
0

 
2,718

 
0

 
0

 
2,718

 
5.0
%
Japan
0

 
0

 
2,649

 
0

 
0

 
2,649

 
4.8
%
Cayman Islands
0

 
0

 
1,669

 
0

 
279

 
1,948

 
3.6
%
Netherlands
0

 
0

 
1,721

 
0

 
0

 
1,721

 
3.2
%
New Zealand
0

 
1,703

 
0

 
0

 
0

 
1,703

 
3.1
%
Norway
0

 
1,678

 
0

 
0

 
0

 
1,678

 
3.1
%
Sweden
0

 
1,677

 
0

 
0

 
0

 
1,677

 
3.1
%
Total fair value
$
0

 
$
16,992

 
$
31,063

 
$
1,649

 
$
4,922

 
$
54,626

 
100.0
%
% of total fair value
0.0
%
 
31.1
%
 
56.9
%
 
3.0
%
 
9.0
%
 
100.0
%
 
 

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


36

Table of Contents
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

ITEM 3
Quantitative and Qualitative Disclosures about Market Risk
As of March 31, 2015, there were no material changes to the information provided in our Form 10-K for the year ended December 31, 2014, under the caption “Exposure to Market Risk” in Management’s Discussion and Analysis of Financial Condition and Results of Operations. Refer to Item 2 Management’s Discussion and Analysis under the caption “Investments” for updates to disclosures made under the sub caption “Credit Risk” in our Form 10-K for the year ended December 31, 2014.

ITEM 4
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) as of March 31, 2015. Based on that evaluation, we concluded that the controls and procedures are effective in providing reasonable assurance that material information required to be disclosed in our reports filed with or submitted to the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate.
Changes in Internal Control over Financial Reporting
During the fiscal quarter ended March 31, 2015, there have been no changes to our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Condensed Notes to Consolidated Financial Statements


PART II
OTHER INFORMATION

ITEM 1
Legal Proceedings
We have not become a party to any material legal proceedings nor have there been any material developments in our legal proceedings disclosed in our Form 10-K for the year ended December 31, 2014. For a description of our previously reported legal proceedings, refer to Part I, Item 3, Legal Proceedings, in the Form 10-K for the year ended December 31, 2014.

ITEM 1A
Risk Factors
There have been no material changes in our risk factors as disclosed in our Form 10-K for the year ended December 31, 2014. For a description of our previously reported risk factors, refer to Part I, Item 1A, Risk Factors, in the Form 10-K for the year ended December 31, 2014.
ITEM 2
Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
 
Period
 
Total Number
of Shares
Purchased
 
Average Price
Paid per Share (a)
 
Total Number of
Shares Purchased
as Part of
Publicly
Announced Plans
or Programs
 
Approximate Dollar
Value that May Yet Be
Purchased Under the
Plans or Programs (b)
January 1, 2015 - January 31, 2015
 
7,100

 
$
74.56

 
7,100

 
$
73,534,463

February 1, 2015 - February 28, 2015
 
5,700

 
74.13

 
5,700

 
73,111,755

March 1, 2015 - March 31, 2015
 
13,000

 
80.51

 
13,000

 
72,064,780

Total
 
25,800

 
$
77.46

 
25,800

 
$
72,064,780

 

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


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Condensed Notes to Consolidated Financial Statements

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

Exhibit 101.INS - XBRL Instance Document

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

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

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

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

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


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



 

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Condensed Notes to Consolidated Financial Statements

Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, Infinity Property and Casualty Corporation has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
Infinity Property and Casualty Corporation
 
 
 
 
BY:
/s/ ROGER SMITH
May 7, 2015
 
Roger Smith
 
 
Executive Vice President, Chief Financial Officer and Treasurer (principal financial and accounting officer)

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