10-Q
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, 2016
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 29, 2016, there were 11,056,531 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

TABLE OF CONTENTS
 
 
 
 
 
 
Page
 
 
 
 
 
Item 1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2
 
 
 
Item 3
 
 
 
Item 4
 
 
 
 
 
 
Item 1
 
 
 
Item 1A
 
 
 
Item 2
 
 
 
Item 6
 
 
 
 
 
 
 

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,
 
2016
 
2015
 
% Change
Revenues:
 
 
 
 
 
Earned premium
$
336,184

 
$
332,106

 
1.2
 %
Installment and other fee income
25,518

 
24,561

 
3.9
 %
Net investment income
8,063

 
8,736

 
(7.7
)%
Net realized gains on investments (1)
139

 
1,169

 
(88.1
)%
Other income
258

 
400

 
(35.6
)%
Total revenues
370,162

 
366,973

 
0.9
 %
Costs and Expenses:
 
 
 
 
 
Losses and loss adjustment expenses
265,284

 
255,643

 
3.8
 %
Commissions and other underwriting expenses
88,607

 
88,828

 
(0.2
)%
Interest expense
3,509

 
3,507

 
0.0
 %
Corporate general and administrative expenses
1,704

 
1,855

 
(8.1
)%
Other expenses
282

 
903

 
(68.7
)%
Total costs and expenses
359,386

 
350,737

 
2.5
 %
Earnings before income taxes
10,776

 
16,236

 
(33.6
)%
Provision for income taxes
3,068

 
5,082

 
(39.6
)%
Net Earnings
$
7,708

 
$
11,154

 
(30.9
)%
Net Earnings per Common Share:
 
 
 
 
 
Basic
$
0.70

 
$
0.98

 
(28.6
)%
Diluted
0.69

 
0.97

 
(28.9
)%
Average Number of Common Shares:
 
 
 
 
 
Basic
11,036

 
11,427

 
(3.4
)%
Diluted
11,134

 
11,551

 
(3.6
)%
Cash Dividends per Common Share
$
0.52

 
$
0.43

 
20.9
 %
(1) Net realized gains on sales
$
257

 
$
1,551

 
(83.4
)%
Total other-than-temporary impairment (OTTI) losses
(118
)
 
(381
)
 
(69.2
)%
Total net realized gains on investments
$
139

 
$
1,169

 
(88.1
)%
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,
 
2016
 
2015
Net earnings
$
7,708

 
$
11,154

Other comprehensive income before tax:
 
 
 
Net change in post-retirement benefit liability
(11
)
 
16

Unrealized gains on investments:
 
 
 
Unrealized holding gains arising during the period
15,459

 
8,416

Less: Reclassification adjustments for gains included in net earnings
(139
)
 
(1,169
)
Unrealized gains on investments, net
15,320

 
7,247

Other comprehensive income, before tax
15,309

 
7,263

Income tax expense related to components of other comprehensive income
(5,358
)
 
(2,542
)
Other comprehensive income, net of tax
9,951

 
4,721

Comprehensive income
$
17,659

 
$
15,875


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, 2016
 
December 31, 2015
 
(unaudited)
 
 
Assets
 
 
 
Investments:
 
 
 
Fixed maturities – at fair value (amortized cost $1,392,299 and $1,381,510)
$
1,407,446

 
$
1,381,467

Equity securities – at fair value (cost $78,810 and $78,815)
90,055

 
89,935

Short-term investments - at fair value (amortized cost $0 and $4,656)
0

 
4,651

Total investments
1,497,501

 
1,476,053

Cash and cash equivalents
43,623

 
62,483

Accrued investment income
11,421

 
12,245

Agents’ balances and premium receivable, net of allowances for doubtful accounts of $14,201 and $15,385
542,603

 
511,543

Property and equipment, net of accumulated depreciation of $75,619 and $72,892
91,567

 
89,707

Prepaid reinsurance premium
5,708

 
5,385

Recoverables from reinsurers (includes $739 and $362 on paid losses and LAE)
18,463

 
15,056

Deferred policy acquisition costs
97,213

 
93,157

Current and deferred income taxes
25,500

 
33,926

Receivable for securities sold
2,142

 
0

Other assets
16,500

 
10,306

Goodwill
75,275

 
75,275

Total assets
$
2,427,516

 
$
2,385,135

Liabilities and Shareholders’ Equity
 
 
 
Liabilities:
 
 
 
Unpaid losses and loss adjustment expenses
$
673,475

 
$
669,965

Unearned premium
652,499

 
616,649

Long-term debt (fair value $288,613 and $281,581)
273,434

 
273,383

Commissions payable
15,524

 
17,406

Payable for securities purchased
10,479

 
7,264

Other liabilities
110,609

 
112,873

Total liabilities
1,736,020

 
1,697,540

Commitments and contingencies (See Note 9)


 


Shareholders’ equity:
 
 
 
Common stock, no par value (50,000,000 shares authorized; 21,775,372 and 21,774,520 shares issued)
21,799

 
21,794

Additional paid-in capital
376,400

 
376,025

Retained earnings
759,567

 
757,604

Accumulated other comprehensive income, net of tax
17,762

 
7,811

Treasury stock, at cost (10,729,904 and 10,623,138 shares)
(484,032
)
 
(475,638
)
Total shareholders’ equity
691,496

 
687,595

Total liabilities and shareholders’ equity
$
2,427,516

 
$
2,385,135

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, 2014
$
21,745

 
$
372,368

 
$
725,651

 
$
23,494

 
$
(445,599
)
 
$
697,659

Net earnings

 

 
11,154

 

 

 
11,154

Net change in post-retirement 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

Net earnings

 

 
40,327

 

 

 
40,327

Net change in post-retirement benefit liability

 

 

 
490

 

 
490

Change in unrealized gain on investments

 

 

 
(21,292
)
 

 
(21,292
)
Change in non-credit component of impairment losses on fixed maturities

 

 

 
397

 

 
397

Comprehensive income
 
 
 
 
 
 
 
 
 
 
19,922

Dividends paid to common shareholders

 

 
(14,596
)
 

 

 
(14,596
)
Shares issued and share-based compensation expense, including tax benefit
38

 
2,944

 

 

 

 
2,982

Acquisition of treasury stock

 

 

 

 
(28,041
)
 
(28,041
)
Balance at December 31, 2015
$
21,794

 
$
376,025

 
$
757,604

 
$
7,811

 
$
(475,638
)
 
$
687,595

Net earnings

 

 
7,708

 

 

 
7,708

Net change in post-retirement benefit liability

 

 

 
(7
)
 

 
(7
)
Change in unrealized gain on investments

 

 

 
9,906

 

 
9,906

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

 

 

 
52

 

 
52

Comprehensive income
 
 
 
 
 
 
 
 
 
 
17,659

Dividends paid to common shareholders

 

 
(5,744
)
 

 

 
(5,744
)
Shares issued and share-based compensation expense, including tax benefit
5

 
375

 

 

 

 
380

Acquisition of treasury stock

 

 

 

 
(8,394
)
 
(8,394
)
Balance at March 31, 2016
$
21,799

 
$
376,400

 
$
759,567

 
$
17,762

 
$
(484,032
)
 
$
691,496

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,
 
2016
 
2015
Operating Activities:
 
 
 
Net earnings
$
7,708

 
$
11,154

Adjustments:
 
 
 
Depreciation
3,083

 
2,982

Amortization
5,801

 
5,936

Net realized gains on investments
(139
)
 
(1,169
)
Loss on disposal of property and equipment
3

 
115

Share-based compensation expense
323

 
659

Activity related to rabbi trust
18

 
27

Change in accrued investment income
823

 
946

Change in agents’ balances and premium receivable
(31,061
)
 
(46,331
)
Change in reinsurance receivables
(3,730
)
 
(761
)
Change in deferred policy acquisition costs
(4,056
)
 
(7,736
)
Change in other assets
(3,130
)
 
1,684

Change in unpaid losses and loss adjustment expenses
3,511

 
7,578

Change in unearned premium
35,850

 
55,173

Change in other liabilities
(4,039
)
 
(2,790
)
Net cash provided by operating activities
10,965

 
27,467

Investing Activities:
 
 
 
Purchases of fixed maturities
(157,887
)
 
(150,155
)
Purchases of equity securities
0

 
(2,000
)
Purchases of short-term investments
0

 
(1,032
)
Purchases of property and equipment
(4,945
)
 
(2,140
)
Maturities and redemptions of fixed maturities
39,298

 
46,727

Proceeds from sale of fixed maturities
103,935

 
95,432

Proceeds from sale of equity securities
0

 
4,489

Proceeds from sale of short-term investments
4,602

 
0

Net cash used in investing activities
(14,996
)
 
(8,678
)
Financing Activities:
 
 
 
Proceeds from stock options exercised and employee stock purchases
57

 
66

Principal payments under capital lease obligations
(120
)
 
(118
)
Acquisition of treasury stock
(9,021
)
 
(1,912
)
Dividends paid to shareholders
(5,744
)
 
(4,932
)
Net cash used in financing activities
(14,829
)
 
(6,896
)
Net (decrease) increase in cash and cash equivalents
(18,860
)
 
11,893

Cash and cash equivalents at beginning of period
62,483

 
84,541

Cash and cash equivalents at end of period
$
43,623

 
$
96,434

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, 2016
INDEX TO NOTES
 
1.
6.
 
 
 
2.
7.
 
 
 
3.
8.
 
 
 
4.
9.
 
 
 
5.
10.

Note 1 Significant Reporting and Accounting Policies
Nature of Operations
We are a holding company that provides insurance through our subsidiaries for personal automobiles with a concentration on nonstandard risks, commercial vehicles and classic collectors. 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 (Form 10-K) for the year ended December 31, 2015. 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 accurately match expenses with their related revenue streams and the elimination of all significant intercompany transactions and balances.
We have evaluated events that occurred after March 31, 2016, 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 Adopted 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. We adopted this standard retrospectively as of January 1, 2016.

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

Condensed Notes to Consolidated Financial Statements

The following table illustrates the effect of adopting this standard on the Consolidated Balance Sheets ($ in millions):
 
December 31, 2015
 
As Reported
 
As Adjusted
 
Difference
Other assets
$
11.9

 
$
10.3

 
$
(1.6
)
Total assets
2,386.8

 
2,385.1

 
(1.6
)
Long-term debt
275.0

 
273.4

 
(1.6
)
Total liabilities
1,699.2

 
1,697.5

 
(1.6
)
Total liabilities and shareholders' equity
2,386.8

 
2,385.1

 
(1.6
)
Recently Issued Accounting Standards
In March 2016 the FASB issued an ASU related to the accounting for employee share-based payments. The guidance addresses the recognition, presentation and classification of awards, forfeitures and shares withheld for tax purposes. The standard is effective for fiscal periods beginning after December 15, 2016, with each provision having a different application method. We do not expect the adoption of this standard to have a material impact on our financial condition or results of operations.
In February 2016 the FASB issued an ASU related to the accounting for leases. The guidance requires lessees to recognize lease assets and liabilities on the balance sheet. The standard is effective for fiscal years beginning after December 15, 2018, and is to be applied retrospectively, with an option to use a modified retrospective approach for leases which commenced prior to the effective date of this ASU. We are still evaluating the impact this ASU will have on the Company's consolidated financial statements.
In January 2016 the FASB issued an ASU amending the guidance on classifying and measuring financial instruments. The guidance requires equity securities to be measured at fair value and changes in that fair value to be recognized through net income. The standard is effective for fiscal years beginning after December 15, 2017, with a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. We currently record equity securities at fair value and as of March 31, 2016, we have $7.3 million net unrealized gains, net of tax, recognized as a component of other comprehensive income.
In May 2015 the FASB issued an ASU related to the disclosure for short-duration contracts. The guidance requires additional disclosures related to the liability for unpaid claims and claim adjustment expenses in an effort to increase transparency and comparability. The standard is effective for fiscal years beginning after December 15, 2015, and is to be applied retrospectively.  The new guidance will have no material impact on our results of operations or financial position.
In May 2014 the FASB issued an ASU related to the accounting for revenue from contracts with customers. Insurance contracts have been excluded from the scope of the guidance. In August 2015 the FASB issued an ASU to defer the effective date from fiscal years beginning after December 15, 2016, to fiscal years beginning after December 15, 2017. We do not expect the adoption of this standard to have a material impact on our financial condition or results of operations.
Note 2 Computation of Net Earnings per Share
The following table illustrates our computations of basic and diluted net earnings per common share ($ in thousands, except per
share figures):
 
Three months ended March 31,
 
2016
 
2015
Net earnings
$
7,708

 
$
11,154

Average basic shares outstanding
11,036

 
11,427

Basic net earnings per share
$
0.70

 
$
0.98

 
 
 
 
Average basic shares outstanding
11,036

 
11,427

Restricted stock not vested
21

 
11

Dilutive effect of Performance Share Plan
77

 
113

Average diluted shares outstanding
11,134

 
11,551

Diluted net earnings per share
$
0.69

 
$
0.97


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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, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash and cash equivalents
 
$
43,623

 
$
0

 
$
0

 
$
43,623

Fixed maturity securities:
 
 
 
 
 
 
 
 
U.S. government
 
64,836

 
14

 
0

 
64,850

State and municipal
 
0

 
486,212

 
0

 
486,212

Mortgage-backed securities:
 

 
 
 
 
 
 
Residential
 
0

 
340,971

 
0

 
340,971

Commercial
 
0

 
65,532

 
0

 
65,532

Total mortgage-backed securities
 
0

 
406,503

 
0

 
406,503

Asset-backed securities
 
0

 
49,183

 
1,338

 
50,522

Corporates
 
0

 
397,917

 
1,442

 
399,359

Total fixed maturities
 
64,836

 
1,339,830

 
2,781

 
1,407,446

Equity securities
 
90,055

 
0

 
0

 
90,055

Short-term investments
 
0

 
0

 
0

 
0

Total cash and investments
 
$
198,513

 
$
1,339,830

 
$
2,781

 
$
1,541,124

Percentage of total cash and investments
 
12.9
%
 
86.9
%
 
0.2
%
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
Fair Value
December 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash and cash equivalents
 
$
62,483

 
$
0

 
$
0

 
$
62,483

Fixed maturity securities:
 
 
 
 
 
 
 
 
U.S. government
 
64,638

 
32

 
0

 
64,669

State and municipal
 
0

 
479,656

 
10

 
479,666

Mortgage-backed securities:
 
 
 
 
 
 
 
 
Residential
 
0

 
334,784

 
0

 
334,784

Commercial
 
0

 
70,224

 
0

 
70,224

Total mortgage-backed securities
 
0

 
405,008

 
0

 
405,008

Asset-backed securities
 
0

 
54,018

 
0

 
54,018

Corporates
 
0

 
376,582

 
1,524

 
378,105

Total fixed maturities
 
64,638

 
1,315,295

 
1,534

 
1,381,467

Equity securities
 
89,935

 
0

 
0

 
89,935

Short-term investments
 
0

 
4,651

 
0

 
4,651

Total cash and investments
 
$
217,056

 
$
1,319,946

 
$
1,534

 
$
1,538,536

Percentage of total cash and investments
 
14.1
%
 
85.8
%
 
0.1
%
 
100.0
%

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

We do not report our long-term debt at fair value in the Consolidated Balance Sheets. The $288.6 million and $281.6 million fair value of our long-term debt at March 31, 2016, and December 31, 2015, respectively, would be included in Level 2 of the fair value hierarchy if it were reported at fair value.
Level 1 includes cash and cash equivalents, U.S. Treasury securities, an exchange-traded fund and equities held in a rabbi trust which funds our Supplemental Employee Retirement Plan (SERP). Level 2 includes securities whose fair value was determined using observable market inputs. Level 3 securities are comprised of (i) securities for which there is no active or inactive market for similar instruments; (ii) securities whose fair value is determined based on unobservable inputs; and (iii) securities, other than those backed by the U.S. Government, that are not rated by a nationally recognized statistical rating organization (NRSRO). We recognize transfers between levels at the beginning of the reporting period.
A third party nationally recognized pricing service provides the fair value of securities in Level 2. A summary of the significant valuation techniques and market inputs for each class of security follows:
U.S. Government: In determining the fair value for U.S. Government securities we use the market approach. The primary inputs to the valuation include reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads, reference data and industry and economic events.
State and municipal: In determining the fair value for state and municipal securities we use the market approach. The primary inputs to the valuation include reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads, reference data and industry and economic events.
Mortgage-backed securities: In determining the fair value for mortgage-backed securities we use the market approach and to a lesser extent the income approach. The primary inputs to the valuation include reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads, reference data, industry and economic events and monthly payment information.
Asset-backed securities: In determining the fair value for asset-backed securities we use the market approach and to a lesser extent the income approach. The primary inputs to the valuation include reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads, reference data, industry and economic events, monthly payment information and collateral performance.
Corporate: In determining the fair value for corporate securities we use the market approach. The primary inputs to the valuation include reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads (for investment grade securities), observations of equity and credit default swap curves (for high-yield corporates), reference data and industry and economic events.
We review the third party pricing methodologies quarterly and test for significant differences between the market price used to value the security and recent sales activity.












11

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

Condensed Notes to Consolidated Financial Statements

The following tables present the progression in the Level 3 fair value category ($ in thousands): 
 
Three months ended March 31, 2016
 
State and
Municipal
 
Corporates
 
Asset-Backed Securities
 
Total
Balance at beginning of period
$
10

 
$
1,524

 
$
0

 
$
1,534

Total gains or (losses), unrealized or realized
 
 
 
 
 
 
 
Included in net earnings
(0
)
 
3

 
0

 
3

Included in other comprehensive income
(0
)
 
1

 
1

 
1

Settlements
(10
)
 
(86
)
 
0

 
(96
)
Transfers in
0

 
0

 
1,338

 
1,338

Balance at end of period
$
0

 
$
1,442

 
$
1,338

 
$
2,781

 
 
 
 
 
 
 
 
 
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 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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Of the $2.8 million fair value of securities in Level 3 at March 31, 2016, which consisted of four securities, we priced three based on non-binding broker quotes and one price was provided by our unaffiliated money manager.
During the three months ended March 31, 2016, one security was transferred from Level 2 into Level 3 because a price could not be determined using observable market inputs. There were no transfers of securities between Levels 1 and 2.
The gains or losses included in net earnings are included in the line item "Net realized gains on investments" in the Consolidated Statements of Earnings. We recognize the net gains or losses included in other comprehensive income in the line item "Unrealized gains on investments, net" in the Consolidated Statements of Comprehensive Income and the line item "Change in unrealized gain on investments" or the line item "Change in non-credit component of impairment losses on fixed maturities" in the Consolidated Statements of Changes in Shareholders’ Equity.
The following table presents the carrying value and estimated fair value of our financial instruments ($ in thousands):
 
March 31, 2016
 
December 31, 2015
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
43,623

 
$
43,623

 
$
62,483

 
$
62,483

Available-for-sale securities:
 
 
 
 
 
 
 
Fixed maturities
1,407,446

 
1,407,446

 
1,381,467

 
1,381,467

Equity securities
90,055

 
90,055

 
89,935

 
89,935

Short-term investments
0

 
0

 
4,651

 
4,651

Total cash and investments
$
1,541,124

 
$
1,541,124

 
$
1,538,536

 
$
1,538,536

Liabilities:
 
 
 
 
 
 
 
Long-term debt
$
273,434

 
$
288,613

 
$
273,383

 
$
281,581

Refer to Note 4 – Investments to the Consolidated Financial Statements for additional information on investments and Note 5 – Long-Term Debt 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, 2016, and March 31, 2015, were $108.5 million and $99.9 million, respectively. The proceeds for the three months ended March 31, 2016, were net of $2.1 million of receivable for unsettled sales as of March 31, 2016. 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.
Gross gains of $1.3 million and gross losses of $1.0 million were realized on sales of available-for-sale securities during the three months ended March 31, 2016, compared with gross gains of $2.1 million and gross losses of $0.6 million realized on sales during the three months ended March 31, 2015. Gains or losses on securities are determined on a specific identification basis.

13

Table of Contents
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, 2016
 
Amortized
Cost or Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
OTTI
Recognized in
Accumulated
OCI(1)
Fixed maturities:
 
 
 
 
 
 
 
 
 
U.S. government
$
64,232

 
$
624

 
$
(6
)
 
$
64,850

 
$
0

State and municipal
477,530

 
8,908

 
(226
)
 
486,212

 
(51
)
Mortgage-backed securities:

 

 

 
 
 
 
Residential
334,746

 
6,652

 
(427
)
 
340,971

 
(2,303
)
Commercial
65,947

 
163

 
(578
)
 
65,532

 
0

Total mortgage-backed securities
400,693

 
$
6,815

 
(1,005
)
 
$
406,503

 
(2,303
)
Asset-backed securities
50,475

 
114

 
(67
)
 
50,522

 
(8
)
Corporates
399,369

 
4,258

 
(4,267
)
 
399,359

 
(51
)
Total fixed maturities
1,392,299

 
20,718

 
(5,570
)
 
1,407,446

 
(2,414
)
Equity securities
78,810

 
11,245

 
0

 
90,055

 
0

Short-term investments
0

 
0

 
0

 
0

 
0

Total
$
1,471,109

 
$
31,962

 
$
(5,570
)
 
$
1,497,501

 
$
(2,414
)
 
 
 
 
 
 
 
 
 
 
 
December 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
$
64,849

 
$
103

 
$
(282
)
 
$
64,669

 
$
0

State and municipal
472,402

 
7,393

 
(129
)
 
479,666

 
(51
)
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Residential
333,554

 
3,678

 
(2,448
)
 
334,784

 
(2,374
)
Commercial
71,137

 
16

 
(929
)
 
70,224

 
0

Total mortgage-backed securities
404,691

 
3,694

 
(3,377
)
 
405,008

 
(2,374
)
Asset-backed securities
54,106

 
50

 
(138
)
 
54,018

 
(8
)
Corporates
385,462

 
1,281

 
(8,638
)
 
378,105

 
(61
)
Total fixed maturities
1,381,510

 
12,521

 
(12,564
)
 
1,381,467

 
(2,495
)
Equity securities
78,815

 
11,120

 
0

 
89,935

 
0

Short-term investments
4,656

 
0

 
(4
)
 
4,651

 
0

Total
$
1,464,981

 
$
23,640

 
$
(12,568
)
 
$
1,476,053

 
$
(2,495
)
 
 
 
 
 
 
 
 
 
 
(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.


14

Table of Contents
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
March 31, 2016
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
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government
1
 
$
3,894

 
$
(3
)
 
0.1
%
 
3

 
$
3,406

 
$
(3
)
 
0.1
%
State and municipal
22
 
47,615

 
(226
)
 
0.5
%
 
0

 
0

 
0

 
0.0
%
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
35
 
13,838

 
(50
)
 
0.4
%
 
74

 
42,056

 
(377
)
 
0.9
%
Commercial
6
 
17,216

 
(126
)
 
0.7
%
 
11

 
39,953

 
(452
)
 
1.1
%
Total mortgage-backed securities
41
 
31,053

 
(177
)
 
0.6
%
 
85

 
82,009

 
(828
)
 
1.0
%
Asset-backed securities
19
 
18,395

 
(61
)
 
0.3
%
 
3

 
2,008

 
(6
)
 
0.3
%
Corporates
66
 
84,680

 
(2,895
)
 
3.3
%
 
25

 
32,720

 
(1,372
)
 
4.0
%
Total fixed maturities
149
 
185,638

 
(3,361
)
 
1.8
%
 
116

 
120,144

 
(2,210
)
 
1.8
%
Equity securities
0
 
0

 
0

 
0.0
%
 
0

 
0

 
0

 
0.0
%
Short-term investments
0
 
0

 
0

 
0.0
%
 
0

 
0

 
0

 
0.0
%
Total
149
 
$
185,638

 
$
(3,361
)
 
1.8
%
 
116

 
$
120,144

 
$
(2,210
)
 
1.8
%

 
Less than 12 Months
 
12 Months or More
December 31, 2015
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
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government
18

 
$
36,024

 
$
(241
)
 
0.7
%
 
4

 
$
4,687

 
$
(41
)
 
0.9
%
State and municipal
27

 
54,680

 
(129
)
 
0.2
%
 
0

 
0

 
0

 
0.0
%
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
205

 
133,814

 
(1,436
)
 
1.1
%
 
64

 
39,001

 
(1,012
)
 
2.5
%
Commercial
9

 
28,733

 
(349
)
 
1.2
%
 
10

 
34,169

 
(580
)
 
1.7
%
Total mortgage-backed securities
214

 
162,547

 
(1,785
)
 
1.1
%
 
74

 
73,170

 
(1,592
)
 
2.1
%
Asset-backed securities
36

 
35,313

 
(132
)
 
0.4
%
 
2

 
1,153

 
(7
)
 
0.6
%
Corporates
172

 
239,440

 
(7,149
)
 
2.9
%
 
12

 
14,373

 
(1,488
)
 
9.4
%
Total fixed maturities
467

 
528,003

 
(9,436
)
 
1.8
%
 
92

 
93,384

 
(3,128
)
 
3.2
%
Equity securities
0

 
0

 
0

 
0.0
%
 
0

 
0

 
0

 
0.0
%
Short-term investments
2

 
4,651

 
(4
)
 
0.1
%
 
0

 
0

 
0

 
0.0
%
Total
469

 
$
532,654

 
$
(9,440
)
 
1.7
%
 
92

 
$
93,384

 
$
(3,128
)
 
3.2
%









15

Table of Contents
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.
The following table summarizes those securities, excluding the rabbi trust, with unrealized gains or losses:
 
March 31,
2016
 
December 31,
2015
Number of positions held with unrealized:
 
 
 
Gains
918

 
602

Losses
265

 
561

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

 
2

Losses of $500,000
0

 
0

Percentage of positions held with unrealized:
 
 
 
Gains that were investment grade
94
%
 
94
%
Losses that were investment grade
83
%
 
89
%
Percentage of fair value held with unrealized:
 
 
 
Gains that were investment grade
94
%
 
95
%
Losses that were investment grade
84
%
 
88
%
The following table sets forth the amount of unrealized losses, excluding the rabbi trust, by age and severity at March 31, 2016, ($ in thousands):
 
Fair Value of
Securities with
Unrealized
Losses
 
Total Gross
Unrealized
Losses
 
Less  Than 5%*
 
5% - 10%*
 
Total Gross Greater
Than 10%*
Age of Unrealized Losses
 
 
 
 
 
 
 
 
 
Three months or less
$
71,462

 
$
(341
)
 
$
(341
)
 
$
0

 
$
0

Four months through six months
41,617

 
(572
)
 
(319
)
 
(253
)
 
0

Seven months through nine months
27,755

 
(1,578
)
 
(272
)
 
(216
)
 
(1,090
)
Ten months through twelve months
55,845

 
(1,066
)
 
(522
)
 
(331
)
 
(213
)
Greater than twelve months
109,102

 
(2,014
)
 
(1,049
)
 
(336
)
 
(629
)
Total
$
305,782

 
$
(5,570
)
 
$
(2,502
)
 
$
(1,136
)
 
$
(1,932
)
* As a percentage of amortized cost or cost.

16

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

Condensed Notes to Consolidated Financial Statements

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, 2016
 
 
 
 
 
 
 
 
 
Unrealized holding gains on securities arising during the period
$
15,332

 
$
125

 
$
2

 
$
(5,411
)
 
$
10,048

Realized (gains) losses on securities sold
(259
)
 
0

 
2

 
90

 
(167
)
Impairment loss recognized in earnings
118

 
0

 
0

 
(41
)
 
76

Change in unrealized gains on securities, net
$
15,190

 
$
125

 
$
4

 
$
(5,362
)
 
$
9,958

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 securities, net
$
5,966

 
$
1,282

 
$
(0
)
 
$
(2,536
)
 
$
4,711

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 (i) the effective interest rate implicit at the date of acquisition for non-structured securities; or (ii) the book yield for structured securities. The techniques and assumptions for determining the best estimate of cash flows vary depending on the type of security. We recognize the credit loss component of an impairment charge in net earnings and the non-credit component in accumulated other comprehensive income. If we intend to sell or will, more likely than not, be required to sell a security, we treat the entire amount of the impairment as a credit loss.
For our securities held with unrealized losses, we believe, based on our analysis, that we will recover our cost basis in these securities and we do not intend to sell the securities nor is it more likely than not that there will be a requirement to sell the securities before they recover in value.
The following table is a progression of credit losses on fixed maturity securities that were bifurcated between a credit and non-credit component ($ in thousands):
 
Three months ended March 31,
 
2016
 
2015
Beginning balance
$
683

 
$
852

Securities sold and paid down
(26
)
 
(52
)
Ending balance
$
658

 
$
799


17

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

Condensed Notes to Consolidated Financial Statements

The table below sets forth the scheduled maturities of fixed maturity securities at March 31, 2016, 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
 
Securities with Unrealized Gains
 
Securities with Unrealized Losses
 
Securities with No Unrealized Gains or Losses
 
All Fixed Maturity Securities
 
All Fixed Maturity Securities
Maturity
 
 
 
 
 
 
 
 
 
One year or less
$
66,163

 
$
536

 
$
4,000

 
$
70,699

 
$
70,101

After one year through five years
485,671

 
107,271

 
0

 
592,942

 
587,296

After five years through ten years
216,409

 
64,508

 
1,504

 
282,421

 
279,469

After ten years
4,359

 
0

 
0

 
4,359

 
4,265

Mortgage- and asset-backed securities
323,559

 
133,466

 
0

 
457,025

 
451,168

Total
$
1,096,160

 
$
305,782

 
$
5,504

 
$
1,407,446

 
$
1,392,299

Note 5 Long-Term Debt
($ in thousands)
March 31, 2016
 
December 31, 2015
Principal
$
275,000

 
$
275,000

Less unamortized debt issuance costs
1,566

 
1,617

Long-term debt less unamortized debt issuance costs
$
273,434

 
$
273,383

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, 2016, fair value of $288.6 million using a 235 basis point spread to the 10-year U.S. Treasury Note of 1.77%.
In August 2014 we renewed our agreement for a $50 million three-year revolving credit facility (the “Credit Agreement”) that requires us to meet certain financial and other covenants. We are currently in compliance with all covenants under the Credit Agreement, and as of March 31, 2016, there were no borrowings outstanding against it.
Note 6 Income Taxes
The following is a reconciliation of income taxes at the statutory rate of 35.0% to the effective provision for income taxes as shown in the Consolidated Statements of Earnings ($ in thousands):
 
Three months ended March 31,
 
2016
 
2015
Earnings before income taxes
$
10,776

 
$
16,236

Income taxes at statutory rate
3,772

 
5,683

Effect of:
 
 
 
Dividends-received deduction
(72
)
 
(104
)
Tax-exempt interest
(639
)
 
(724
)
Other
8

 
228

Provision for income taxes as shown on the Consolidated Statements of Earnings
$
3,068

 
$
5,082

GAAP effective tax rate
28.5
%
 
31.3
%

18

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

Condensed Notes to Consolidated Financial Statements

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,
 
2016
 
2015
Income tax payments
$
0

 
$
750

Interest payments on debt
6,875

 
6,875

Interest payments on capital leases
20

 
22

Negative Cash Book Balances
Negative cash book balances, included in the line item “Other liabilities” in the Consolidated Balance Sheets, were $47.0 million and $41.4 million at March 31, 2016, and December 31, 2015, respectively.
Note 8 Insurance Reserves
Insurance reserves include liabilities for unpaid losses, both known and estimated for incurred but not reported (IBNR), and unpaid loss adjustment expenses (LAE). The following table provides an analysis of changes in the liability for unpaid losses and LAE on a GAAP basis ($ in thousands): 
 
Three months ended March 31,
 
2016
 
2015
Balance at Beginning of Period
 
 
 
Unpaid losses on known claims
$
237,660

 
$
235,037

IBNR losses
290,097

 
277,482

LAE
142,207

 
155,658

Total unpaid losses and LAE
669,965

 
668,177

Reinsurance recoverables
(14,694
)
 
(14,370
)
Unpaid losses and LAE, net of reinsurance recoverables
655,271

 
653,808

Current Activity
 
 
 
Loss and LAE incurred:
 
 
 
Current accident year
271,167

 
257,785

Prior accident years
(5,883
)
 
(2,142
)
Total loss and LAE incurred
265,284

 
255,643

Loss and LAE payments:
 
 
 
Current accident year
(89,444
)
 
(81,907
)
Prior accident years
(175,360
)
 
(165,770
)
Total loss and LAE payments
(264,804
)
 
(247,677
)
Balance at End of Period
 
 
 
Unpaid losses and LAE, net of reinsurance recoverables
655,751

 
661,773

Add back reinsurance recoverables
17,724

 
13,982

Total unpaid losses and LAE
673,475

 
675,755

Unpaid losses on known claims
236,701

 
241,483

IBNR losses
295,281

 
278,863

LAE
141,493

 
155,409

Total unpaid losses and LAE
$
673,475

 
$
675,755

The $5.9 million of favorable reserve development during the three months ended March 31, 2016, was primarily due to decreases in severity estimates and loss adjustment expenses related to Florida and California bodily injury coverages as well as a decrease

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

in severity estimates in Florida personal injury protection, all related to accident years 2014 and prior. This was partially offset by unfavorable development from accident year 2015 in California material damage coverages, driven by an increase in severity.
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.
Note 9 Commitments and Contingencies
Commitments
There have been no material changes from the commitments discussed on Form 10-K for the year ended December 31, 2015. For a description of our previously reported commitments, refer to Note 14 Commitments and Contingencies of our Form 10-K for the year ended December 31, 2015.
Contingencies
From time to time we and our subsidiaries are named as defendants in various lawsuits incidental to our insurance operations. We consider legal actions relating to claims made in the ordinary course of seeking indemnification for a loss covered by the insurance policy in establishing loss and LAE reserves.
We also face, in the ordinary course of business, lawsuits that seek damages beyond policy limits, commonly known as extra-contractual claims, as well as class action and individual lawsuits that involve issues not unlike those facing other insurance companies and employers. We continually evaluate potential liabilities and reserves for litigation of these types using the criteria established by the Contingencies topic of the FASC. Under this guidance we may only record reserves for a loss if the likelihood of occurrence is probable and we can reasonably estimate the amount. If a material loss is judged to be reasonably possible, we will disclose an estimated range of loss or state that an estimate cannot be made. We consider each legal action using this guidance and record reserves for losses as warranted by establishing a reserve captured within our Consolidated Balance Sheets line-items “Unpaid losses and loss adjustment expenses” for extra-contractual claims and “Other liabilities” for class action and other non-claims related lawsuits. We record amounts incurred on the Consolidated Statements of Earnings within “Losses and loss adjustment expenses” for extra-contractual claims and “Other expenses” for class action and other non-claims related lawsuits.
Certain claims and legal actions have been brought against us for which we have accrued no loss, and for which an estimate of a possible range of loss cannot be made under the above rules. While it is not possible to predict the ultimate outcome of these claims or lawsuits, we do not believe they are likely to have a material effect on our financial condition or liquidity. However, losses incurred because of these cases could have a material adverse impact on net earnings in a given period.
For a description of previously reported contingencies, refer to Note 14 Commitments and Contingencies of our Form 10-K for the year ended December 31, 2015.

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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,
 
2016
 
2015
 
Before Tax
 
Income Tax
 
Net
 
Before Tax
 
Income Tax
 
Net
Accumulated change in post-retirement benefit liability, beginning of period
$
944

 
$
(331
)
 
$
614

 
$
174

 
$
(61
)
 
$
113

Effect on other comprehensive income
(11
)
 
4

 
(7
)
 
16

 
(6
)
 
11

Accumulated change in post-retirement benefit liability, end of period
934

 
(327
)
 
607

 
190

 
(66
)
 
123

 
 
 
 
 
 
 
 
 
 
 
 
Accumulated unrealized gains on investments, net, beginning of period
11,072

 
(3,875
)
 
7,197

 
35,972

 
(12,590
)
 
23,382

Other comprehensive income before reclassification
15,459

 
(5,411
)
 
10,048

 
8,416

 
(2,946
)
 
5,470

Reclassification adjustment for other-than-temporary impairments included in net income
118

 
(41
)
 
76

 
381

 
(134
)
 
248

Reclassification adjustment for realized gains included in net income
(257
)
 
90

 
(167
)
 
(1,551
)
 
543

 
(1,008
)
Effect on other comprehensive income
15,320

 
(5,362
)
 
9,958

 
7,247

 
(2,536
)
 
4,711

Accumulated unrealized gains on investments, net, end of period
26,392

 
(9,237
)
 
17,155

 
43,218

 
(15,126
)
 
28,092

 
 
 
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive income, beginning of period
12,016

 
(4,206
)
 
7,811

 
36,145

 
(12,651
)
 
23,494

Change in post-retirement benefit liability
(11
)
 
4

 
(7
)
 
16

 
(6
)
 
11

Change in unrealized gains on investments, net
15,320

 
(5,362
)
 
9,958

 
7,247

 
(2,536
)
 
4,711

Effect on other comprehensive income
15,309

 
(5,358
)
 
9,951

 
7,263

 
(2,542
)
 
4,721

Accumulated other comprehensive income, end of period
$
27,326

 
$
(9,564
)
 
$
17,762

 
$
43,408

 
$
(15,193
)
 
$
28,216

 
 
 
 
 
 
 
 
 
 
 
 
 

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


ITEM 2
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain “forward-looking statements” which anticipate results based on our estimates, assumptions and plans that are subject to uncertainty. We make these statements subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements in this report not dealing with historical results or current facts are forward-looking and we base them on estimates, assumptions and projections. Statements which include the words “assumes,” “believes,” “seeks,” “expects,” “may,” “should,” “intends,” “likely,” “targets,” “plans,” “anticipates,” “estimates” or the negative version of those words and similar statements of a future or forward-looking nature identify forward-looking statements. Examples of such forward-looking statements include statements relating to expectations concerning market conditions, premium growth, earnings, investment performance, expected losses, rate changes and loss experience.
The primary events or circumstances that could cause actual results to differ materially from what we expect include determinations with respect to reserve adequacy, realized gains or losses on the investment portfolio (including other-than-temporary impairments for credit losses), loss cost trends, and competitive conditions in our key Focus States (defined in Results of Operations – Underwriting – Premium). 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 refer to Part I, Item 1A, Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2015.
OVERVIEW
During the first quarter of 2016 total gross written premium decreased 3.8% compared with the same period of 2015. Premium growth in Texas and our Commercial Vehicle product was more than offset by declines in the other states. Refer to Results of Operations – Underwriting – Premium for a more detailed discussion of our gross written premium.
Net earnings and diluted earnings per share for the three months ended March 31, 2016, were $7.7 million and $0.69, respectively, compared with $11.2 million and $0.97, respectively, for the three months ended March 31, 2015. The decrease in diluted earnings per share for the three months ended March 31, 2016, was primarily due to an increase in the calendar year combined ratio from 96.3% at March 31, 2015, to 97.7% at March 31, 2016.
Included in net earnings for the three months ended March 31, 2016, was $3.8 million ($5.9 million pre-tax) of favorable development on prior accident year loss and LAE reserves. The development during the three months ended March 31, 2016, was primarily due to decreases in severity estimates and loss adjustment expenses related to Florida and California bodily injury coverages as well as a decrease in severity estimates in Florida personal injury protection, all related to accident years 2014 and prior. This was partially offset by unfavorable development from accident year 2015 in California material damage coverages, driven by an increase in severity. 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.

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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, 2016:
 
Accident Year Combined Ratio
Developed Through
 
Prior Accident Year
(Favorable) / Unfavorable
Development
($ in millions)
 
Dec 2014
 
Mar 2015
 
Dec 2015
 
Mar 2016
 
YTD 2016
 
YTD 2016
Accident Year
 
 
 
 
 
 
 
 
 
 
 
Prior
 
 
 
 
 
 
 
 

 
$
0.3

2008
91.2
%
 
91.1
%
 
91.1
%
 
91.1
%
 
(0.0
)%
 
(0.2
)
2009
92.4
%
 
92.4
%
 
92.4
%
 
92.4
%
 
(0.0
)%
 
(0.3
)
2010
99.2
%
 
99.3
%
 
99.4
%
 
99.3
%
 
(0.1
)%
 
(1.2
)
2011
100.1
%
 
100.1
%
 
100.2
%
 
100.0
%
 
(0.1
)%
 
(1.3
)
2012
100.1
%
 
100.0
%
 
100.1
%
 
99.9
%
 
(0.2
)%
 
(2.2
)
2013
96.8
%
 
96.6
%
 
95.5
%
 
95.3
%
 
(0.2
)%
 
(3.0
)
2014
96.4
%
 
96.4
%
 
95.4
%
 
95.0
%
 
(0.4
)%
 
(5.2
)
2015
 
 
97.0
%
 
97.8
%
 
98.3
%
 
0.5
 %
 
7.1

2016 YTD
 
 
 
 
 
 
99.4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
(5.9
)
Refer to 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, 2016, was $8.1 million compared with $8.7 million for the three months ended March 31, 2015.
Our book value per share increased 1.5% from $61.66 at December 31, 2015, to $62.60 at March 31, 2016. This increase was primarily due to earnings and an increase in unrealized gains, partially offset by share repurchases and shareholder dividends during the year.

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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, due to factors such as their driving record, driving experience, lapse in, or the absence of, prior insurance, or credit history, represent a higher than normal risk. Customers in the market for nonstandard auto insurance generally seek minimum required liability limits and are willing to accept restrictive coverages in exchange for more affordable insurance, given their risk profile. We also write commercial vehicle insurance and insurance for classic collectible automobiles (Classic Collector).
We are licensed to write insurance in all 50 states and the District of Columbia, but we focus our operations in targeted urban areas identified in selected Focus States (defined below) that we believe offer the greatest opportunity for premium growth and profitability.
We classify the states in which we operate into two categories:
“Focus States” – Arizona, California, Florida and Texas.
“Other States” – States where we are running off our business.
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,
 
2016
 
2015
 
Change
 
% Change
Net earned premium
 
 
 
 
 
 
 
Gross written premium
 
 
 
 
 
 
 
Personal Auto:
 
 
 
 
 
 
 
Focus States
$
327,667

 
$
341,302

 
$
(13,635
)
 
(4.0
)%
Other States
9,833

 
14,927

 
(5,094
)
 
(34.1
)%
Total Personal Auto
337,500

 
356,229

 
(18,729
)
 
(5.3
)%
Commercial Vehicle
35,240

 
31,276

 
3,964

 
12.7
 %
Classic Collector
3,229

 
3,141

 
88

 
2.8
 %
Total gross written premium
375,968

 
390,645

 
(14,677
)
 
(3.8
)%
Ceded reinsurance
(4,256
)
 
(3,572
)
 
(684
)
 
19.1
 %
Net written premium
371,712

 
387,073

 
(15,361
)
 
(4.0
)%
Change in unearned premium
(35,528
)
 
(54,966
)
 
19,439

 
(35.4
)%
Net earned premium
$
336,184

 
$
332,106

 
$
4,078

 
1.2
 %
The following table summarizes our policies in force:
 
At March 31,
 
2016
 
2015
 
Change
 
% Change
Policies in Force
 
 
 
 
 
 
 
Personal Auto:
 
 
 
 
 
 
 
Focus States
742,047

 
773,928

 
(31,881
)
 
(4.1
)%
Other States
24,119

 
41,744

 
(17,625
)
 
(42.2
)%
Total Personal Auto
766,166

 
815,672

 
(49,506
)
 
(6.1
)%
Commercial Vehicle
50,531

 
46,357

 
4,174

 
9.0
 %
Classic Collector
41,226

 
40,983

 
243

 
0.6
 %
Total policies in force
857,923

 
903,012

 
(45,089
)
 
(5.0
)%

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


During the first three months of 2016, we implemented rate revisions in various states with an overall rate increase of 6.8%. Policies in force at March 31, 2016, decreased 5.0% compared with the same period in 2015.
The decrease in gross written premium in our Focus States was primarily due to premium declines in Florida and California, partially offset by new business growth in Texas. New business in California declined during the first quarter of 2016 following a 5.3% rate increase implemented in February 2016, and premium in Florida declined primarily as a result of rate increases implemented during 2015 totaling nearly 14%.
The gross written premium growth in our Commercial Vehicle product was primarily due to renewal policy growth and higher average premium in California and Florida.
    

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


Profitability
A key operating performance measure of insurance companies is underwriting profitability, as opposed to overall profitability or net earnings. We measure underwriting profitability by the combined ratio. When the combined ratio is under 100%, we consider underwriting results profitable; when the ratio is over 100%, we consider underwriting results unprofitable. The combined ratio does not reflect investment income, other income, interest expense, corporate general and administrative expenses, other expenses or federal income taxes.
While we report financial results in accordance with GAAP for shareholder and other users’ purposes, we report it on a statutory basis for insurance regulatory purposes. We evaluate underwriting profitability based on a combined ratio calculated using statutory accounting principles. The statutory combined ratio represents the sum of the following ratios: (i) losses and LAE incurred as a percentage of net earned premium; and (ii) underwriting expenses incurred, net of installment and other fees, as a percentage of net written premium. Certain expenses are treated differently under statutory and GAAP accounting principles. Under GAAP, commissions, premium taxes and other variable costs incurred in connection with writing new and renewal business are capitalized as deferred policy acquisition costs and amortized on a pro rata basis over the period in which the related premium is earned. On a statutory basis, these items are expensed as incurred. Additionally, bad debt charge-offs on agent balances and premium receivables are included only in the GAAP combined ratios.
The discussion of underwriting results that follows focuses on statutory ratios and the components thereof, unless otherwise indicated.
The following table presents statutory and GAAP combined ratios: 
 
Three months ended March 31,
 
 
 
 
 
2016
 
2015
 
% 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
80.4
%
16.8
%
97.1
%
 
76.7
%
17.2
%
93.9
%
 
3.7
 %
(0.4
)%
3.3
 %
Other States
57.7
%
20.5
%
78.3
%
 
90.4
%
16.1
%
106.5
%
 
(32.7
)%
4.4
 %
(28.2
)%
Total Personal Auto
79.6
%
16.9
%
96.4
%
 
77.5
%
17.1
%
94.7
%
 
2.1
 %
(0.3
)%
1.8
 %
Commercial Vehicle
77.3
%
15.6
%
92.9
%
 
77.5
%
16.9
%
94.4
%
 
(0.3
)%
(1.3
)%
(1.6
)%
Classic Collector
41.3
%
32.0
%
73.3
%
 
39.4
%
30.3
%
69.7
%
 
1.9
 %
1.7
 %
3.7
 %
Total statutory ratios
79.1
%
17.0
%
96.0
%
 
77.2
%
17.3
%
94.5
%
 
1.9
 %
(0.4
)%
1.5
 %
Total statutory ratios excluding development
80.8
%
17.0
%
97.8
%
 
77.8
%
17.3
%
95.2
%
 
3.0
 %
(0.4
)%
2.6
 %
GAAP ratios
78.9
%
18.8
%
97.7
%
 
77.0
%
19.4
%
96.3
%
 
1.9
 %
(0.6
)%
1.3
 %
GAAP ratios excluding development
80.7
%
18.8
%
99.4
%
 
77.6
%
19.4
%
97.0
%
 
3.0
 %
(0.6
)%
2.5
 %
The statutory combined ratio for the three months ended March 31, 2016, increased by 1.5 points from the same period of 2015. The first quarter of 2016 included $5.9 million of favorable development on prior accident year loss and LAE reserves primarily due to decreases in severity estimates and loss adjustment expenses related to Florida and California bodily injury coverages as well as a decrease in severity estimates in Florida personal injury protection, all related to accident years 2014 and prior. This was partially offset by unfavorable development from accident year 2015 in California material damage coverages, driven by an increase in severity. The first quarter of 2015 included $2.1 million of favorable development on prior accident year loss and LAE reserves. Excluding the effect of development, the statutory combined ratio increased 2.6 points during the first quarter, compared with the same period of 2015.
The GAAP combined ratio for the three months ended March 31, 2016, increased by 1.3 points from the same period of 2015. Excluding the effect of development, the GAAP combined ratio increased by 2.5 points during the first quarter of 2016, primarily due to a higher accident year loss ratio as a result of increasing loss costs in material damage and personal injury protection coverages.
Losses from catastrophes were $1.2 million for the three months ended March 31, 2016, compared with $0.1 million for the same period of 2015.

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


The 3.3 points increase in the Focus States combined ratio for the three months ended March 31, 2016, was primarily due to an increase in the 2016 accident year loss ratio in California, compared with the same period of 2015, as a result of higher loss costs from the collision coverage.
The 1.6 points decrease in the Commercial Vehicle combined ratio for the three months ended March 31, 2016, was primarily due to a reduction in commission expense and an increase in fee income.
Installment and Other Fee Income
 
Three months ended March 31,
($ in thousands)
2016
 
2015
Installment and other fee income
$
25,518

 
$
24,561

The increase in installment and other fee income charged to policyholders during the first three months of 2016 was primarily related to an increase in processing fees.
Net Investment Income
Net investment income is comprised of gross investment income less investment management fees and expenses, as shown in the following table ($ in thousands):
 
Three months ended March 31,
 
2016
 
2015
Investment income:
 
 
 
Interest income on fixed maturities, cash and cash equivalents
$
8,280

 
$
8,815

Dividends on equity securities
345

 
500

Gross investment income
8,626

 
9,314

Investment expenses
(563
)
 
(578
)
Net investment income
8,063

 
8,736

Average investment balance, at cost
$
1,506,349

 
$
1,578,750

Annualized returns excluding realized gains and losses
2.1
%
 
2.2
%
Annualized returns including realized gains and losses
2.2
%
 
2.5
%
The book yield on our portfolio continues to exceed our new money rates. Therefore, we expect that investment returns will gradually decline as proceeds from maturing or prepaid investments are expected to be reinvested at yields lower than the average book yield for the total portfolio.

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


The following table provides information about our fixed maturity investments at March 31, 2016, which are sensitive to interest rate risk. The table shows expected principal cash flows by expected maturity date for each of the five subsequent years and collectively for all years thereafter. Callable bonds and notes are included based on call date or maturity date depending upon which date produces the most conservative yield. Mortgage Backed Securities (MBS) and sinking fund issues are included based on maturity year adjusted for expected payment patterns.
 
Expected Principal Cash Flows
 
 
($ in thousands)
MBS and
ABS only
 
Excluding
MBS and ABS
 
Total
 
Maturing Book Yield
For the period ending December 31,
 
 
 
 
 
 
 
2016
$
66,040

 
$
58,572

 
$
124,612

 
2.4%
2017
100,685

 
157,611

 
258,296

 
2.1%
2018
61,419

 
133,411

 
194,831

 
2.2%
2019
42,713

 
156,499

 
199,212

 
2.3%
2020
32,189

 
148,580

 
180,769

 
2.6%
Thereafter
131,880

 
233,907

 
365,788

 
2.9%
Total
$
434,926

 
$
888,580

 
$
1,323,506

 
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.
Net Realized Gains on Investments
We recorded net realized gains on sales and impairments for unrealized losses deemed other-than-temporary as follows (before tax, $ in thousands):
 
Three months ended March 31, 2016
 
Three months ended March 31, 2015
 
Net Realized Gains on Sales
 
Net Impairment Losses Recognized in Earnings
 
Total Net Realized Gains on Investments
 
Net Realized Gains on Sales
 
Net Impairment Losses Recognized in Earnings
 
Total Net Realized Gains on Investments
Fixed maturities
$
259

 
$
(118
)
 
$
141

 
$
452

 
$
(381
)
 
$
71

Equity securities
0

 
0

 
0

 
1,098

 
0

 
1,098

Short-term investments
(2
)
 
0

 
(2
)
 
0

 
0

 
0

Total
$
257

 
$
(118
)
 
$
139

 
$
1,551

 
$
(381
)
 
$
1,169

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.

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


Interest Expense
 
Three months ended March 31,
($ in thousands)
2016
 
2015
5.0% Senior Notes
$
3,438

 
$
3,438

Amortization of debt issuance costs
51

 
48

Capital leases
20

 
22

Total
$
3,509

 
$
3,507

At March 31, 2016, we had $275 million principal outstanding of senior notes. These notes carry a coupon rate of 5.0% and require no principal payment until maturity in September 2022. Refer to Note 5 – Long-Term Debt to the Consolidated Financial Statements for additional information on the 5.0% Senior Notes.
Income Taxes
Our GAAP effective tax rate for the three months ended March 31, 2016, was 28.5% compared with 31.3% for the three months ended March 31, 2015. The GAAP effective tax rate has decreased in 2016 primarily as a result of a decrease in pre-tax income. Refer to Note 6 – Income Taxes to the Consolidated Financial Statements for additional information on income taxes.

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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, 2016, the holding company had $129.2 million of cash and investments. In 2016 our insurance subsidiaries may pay us up to $65.4 million in ordinary dividends without prior regulatory approval. For the three months ended March 31, 2016, our insurance subsidiaries have paid us ordinary dividends of $12.0 million.
Our insurance subsidiaries generate liquidity to satisfy their obligations primarily by collecting and investing premiums in advance of paying claims and generating investment income on their $1.4 billion investment portfolio. Our insurance subsidiaries generated positive cash flows from operations of $23.1 million during the three months ended March 31, 2016, compared with positive operating cash flows of $33.9 million during the three months ended March 31, 2015.
At March 31, 2016, we had $275 million principal outstanding of 5.0% Senior Notes. The 5.0% Senior Notes accrue interest at 5.0%, payable semiannually each March and September. Refer to Note 5 – Long-Term Debt 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, and as of March 31, 2016, there were no borrowings outstanding against it.
On February 29, 2016, we filed a "shelf" registration statement with the Securities and Exchange Commission registering securities, which will allow us to sell any combination of senior or subordinated debt securities, common stock, preferred stock, warrants, depositary shares, purchase contracts and units in one or more offerings should we choose to do so in the future. This shelf registration statement expires March 1, 2019.
Uses of Funds
In February 2016 we increased our quarterly dividend to $0.52 per share from $0.43 per share. At this current amount, our 2016 annualized dividend payments would be approximately $23.0 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 2016 we repurchased 106,766 shares at an average cost, excluding commissions, of $78.59 per share. As of March 31, 2016, we had $37.0 million of authority remaining under this program.
We believe that cash balances, cash flows generated from operations or borrowings, and maturities and sales of investments are adequate to meet our future liquidity needs and those of our insurance subsidiaries.
Reinsurance
Premium ceded under all reinsurance agreements for the three months ended March 31, 2016, was $4.3 million compared with $3.6 million for the same period of 2015. Refer to Note 11 - Reinsurance to the Consolidated Financial Statements of our Form 10-K for the year ended December 31, 2015 for more information on our reinsurance contracts.
Investments
Our consolidated investment portfolio at March 31, 2016, contained approximately $1.4 billion in fixed maturity securities and $90.1 million in equity securities. 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, 2016, we had pre-tax net unrealized gains of $15.1 million on fixed maturities and pre-tax net unrealized gains of $11.2 million on equity securities. Combined, the pre-tax net unrealized gain increased by $15.3 million for the three months ended March 31, 2016. This increase occurred as a result of lower market interest rates affecting our fixed portfolio. The average option adjusted duration of our fixed maturity portfolio was 3.0 years at March 31, 2016, compared with 3.2 years at December 31, 2015.

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


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 91.6% of our fixed maturity investments at March 31, 2016, 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.
Summarized information for our investment portfolio at March 31, 2016, was as follows ($ in thousands):
 
Amortized
Cost
 
Fair Value
 
% of Total 
Fair Value
Fixed Maturities:
 
 
 
 
 
U.S. government
$
64,232

 
$
64,850

 
4.3
%
State and municipal
477,530

 
486,212

 
32.5
%
Mortgage- and asset-backed:
 
 
 
 
 
Residential mortgage-backed securities
334,746

 
340,971

 
22.8
%
Commercial mortgage-backed securities
65,947

 
65,532

 
4.4
%
Asset-backed securities (ABS):
 
 
 
 
 
Auto loans
37,135

 
37,129

 
2.5
%
Equipment leases
7,589

 
7,619

 
0.5
%
Credit card
2,620

 
2,617

 
0.2
%
All other
3,131

 
3,157

 
0.2
%
Total ABS
50,475

 
50,522

 
3.4
%
Total mortgage- and asset-backed
451,168

 
457,025

 
30.5
%
Corporates
 
 
 
 
 
Investment grade
279,838

 
281,281

 
18.8
%
Non-investment grade
119,530

 
118,078

 
7.9
%
Total corporates
399,369

 
399,359

 
26.7
%
Total fixed maturities
1,392,299

 
1,407,446

 
94.0
%
Equity securities
78,810

 
90,055

 
6.0
%
Total investments
$
1,471,109

 
$
1,497,501

 
100.0
%
We categorize securities by rating based upon available ratings issued by Moody's, Standard & Poor's or Fitch. If all three ratings are available but not equivalent, we exclude the lowest rating and the lower of the remaining ratings is used. If ratings are only available from two agencies, the lowest is used. This methodology is consistent with that used by the major bond indices. State and municipal bond ratings presented are underlying ratings without regard to any insurance.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 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 fixed maturity portfolio by major security type at March 31, 2016, ($ in thousands): 
 
Rating
 
 
 
 
 
AAA
 
AA
 
A
 
BBB
 
Non-investment Grade
 
Total Fair
Value
 
% of Total Exposure
U.S. government
$
64,850

 
$
0

 
$
0

 
$
0

 
$
0

 
$
64,850

 
4.6
%
State and municipal
132,787

 
271,807

 
81,617

 
0

 
0

 
486,212

 
34.5
%
Mortgage- and asset-backed
424,952

 
23,949

 
5,945

 
2,178

 
0

 
457,025

 
32.5
%
Corporates
0

 
21,496

 
131,941

 
128,248

 
117,675

 
399,359

 
28.4
%
Total fair value
$
622,589

 
$
317,252

 
$
219,503

 
$
130,426

 
$
117,675

 
$
1,407,446

 
100.0
%
% of total fair value
44.2
%
 
22.5
%
 
15.6
%
 
9.3
%
 
8.4
%
 
100.0
%
 
 

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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, 2016, there were no material changes to the information provided on Form 10-K for the year ended December 31, 2015, 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 subcaption “Credit Risk” of our Form 10-K for the year ended December 31, 2015.
ITEM 4
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of the Company’s management, including its Principal Executive Officer and Principal Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) as of March 31, 2016. Based on that evaluation, we concluded that the controls and procedures are effective in providing reasonable assurance that material information required to be disclosed in our reports filed with or submitted to the Securities and Exchange Commission (SEC) under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate.
Changes in Internal Control over Financial Reporting
During the fiscal quarter ended March 31, 2016, 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 and there have not been any material developments in our legal proceedings disclosed on Form 10-K for the year ended December 31, 2015. For a description of our previously reported legal proceedings, refer to Part I, Item 3, Legal Proceedings of our Form 10-K for the year ended December 31, 2015.

ITEM 1A
Risk Factors
There have been no material changes in our risk factors as disclosed on Form 10-K for the year ended December 31, 2015. For a description of our previously reported risk factors, refer to Part I, Item 1A, Risk Factors of our Form 10-K for the year ended December 31, 2015.

ITEM 2
Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
 
 
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)
Period:
 
 
 
 
 
 
 
 
January 1, 2016 - January 31, 2016
 
50,766

 
$
78.46

 
50,766

 
$
41,374,754

February 1, 2016 - February 29, 2016
 
53,800

 
78.75

 
53,800

 
37,136,225

March 1, 2016 - March 31, 2016
 
2,200

 
77.45

 
2,200

 
36,965,774

Total
 
106,766

 
$
78.59

 
106,766

 
$
36,965,774

 
(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.

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/ ROBERT H. BATEMAN
May 5, 2016
 
Robert H. Bateman
 
 
Executive Vice President, Chief Financial Officer and Treasurer

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