Document
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 June 30, 2017
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.)
2201 4th Avenue North, Birmingham, Alabama 35203
(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 (or for such shorter period that the registrant was required to file such reports), 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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth 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
¨
Emerging growth company
o  
 
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨

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 July 28, 2017, there were 11,037,459 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 June 30,
 
Six months ended June 30,
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Earned premium
$
339,147

 
$
340,715

 
(0.5
)%
 
$
680,516

 
$
676,899

 
0.5
 %
Installment and other fee income
26,461

 
25,385

 
4.2
 %
 
53,410

 
50,903

 
4.9
 %
Net investment income
9,001

 
8,927

 
0.8
 %
 
17,696

 
16,990

 
4.2
 %
Net realized gains (losses) on investments (1)
1,886

 
(164
)
 
NM

 
2,396

 
(25
)
 
NM

Other income
391

 
220

 
77.3
 %
 
666

 
478

 
39.2
 %
Total revenues
376,886

 
375,084

 
0.5
 %
 
754,683

 
745,246

 
1.3
 %
Costs and Expenses:
 
 
 
 
 
 
 
 
 
 
 
Losses and loss adjustment expenses
273,621

 
263,514

 
3.8
 %
 
544,296

 
528,798

 
2.9
 %
Commissions and other underwriting expenses
90,241

 
89,164

 
1.2
 %
 
176,180

 
177,771

 
(0.9
)%
Interest expense
3,511

 
3,508

 
0.1
 %
 
7,023

 
7,017

 
0.1
 %
Corporate general and administrative expenses
2,447

 
2,060

 
18.8
 %
 
4,718

 
3,764

 
25.4
 %
Other expenses
507

 
797

 
(36.4
)%
 
829

 
1,080

 
(23.2
)%
Total costs and expenses
370,327

 
359,043

 
3.1
 %
 
733,046

 
718,429

 
2.0
 %
Earnings before income taxes
6,559

 
16,040

 
(59.1
)%
 
21,637

 
26,816

 
(19.3
)%
Provision for income taxes
1,513

 
5,026

 
(69.9
)%
 
5,945

 
8,094

 
(26.5
)%
Net Earnings
$
5,046

 
$
11,015

 
(54.2
)%
 
$
15,692

 
$
18,723

 
(16.2
)%
Net Earnings per Common Share:
 
 
 
 
 
 
 
 
 
 
 
Basic
$
0.46

 
$
1.00

 
(54.0
)%
 
$
1.43

 
$
1.70

 
(15.9
)%
Diluted
0.46

 
0.99

 
(53.5
)%
 
1.41

 
1.68

 
(16.1
)%
Average Number of Common Shares:
 
 
 
 
 
 
 
 
 
 
 
Basic
11,006

 
11,012

 
(0.1
)%
 
11,002

 
11,024

 
(0.2
)%
Diluted
11,082

 
11,096

 
(0.1
)%
 
11,105

 
11,115

 
(0.1
)%
Cash Dividends per Common Share
$
0.58

 
$
0.52

 
11.5
 %
 
$
1.16

 
$
1.04

 
11.5
 %
(1) Net realized gains on sales
$
1,886

 
$
34

 
NM

 
$
2,406

 
$
291

 
726.3
 %
Total other-than-temporary impairment (OTTI) losses
0

 
(198
)
 
NM

 
(46
)
 
(316
)
 
(85.6
)%
Non-credit portion in other comprehensive income
0

 
0

 
0.0
 %
 
36

 
0

 
NM

Net impairment losses recognized in earnings
0

 
(198
)
 
NM

 
(10
)
 
(316
)
 
(96.9
)%
Total net realized gains (losses) on investments
$
1,886

 
$
(164
)
 
NM

 
$
2,396

 
$
(25
)
 
NM

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 June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
Net earnings
$
5,046

 
$
11,015

 
$
15,692

 
$
18,723

Other comprehensive income before tax:
 
 
 
 
 
 
 
Net change in post-retirement benefit liability
(13
)
 
(11
)
 
(25
)
 
(22
)
Unrealized gains on investments:
 
 
 
 
 
 
 
Unrealized holding gains arising during the period
9,055

 
10,828

 
19,720

 
26,287

Less: Reclassification adjustments for (gains) losses included in net earnings
(1,886
)
 
164

 
(2,396
)
 
25

Unrealized gains on investments, net
7,169

 
10,992

 
17,324

 
26,311

Other comprehensive income, before tax
7,156

 
10,981

 
17,299

 
26,290

Income tax expense related to components of other comprehensive income
(2,505
)
 
(3,843
)
 
(6,055
)
 
(9,201
)
Other comprehensive income, net of tax
4,652

 
7,137

 
11,244

 
17,088

Comprehensive income
$
9,698

 
$
18,152

 
$
26,937

 
$
35,811

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)
 
June 30, 2017
 
December 31, 2016
 
(unaudited)
 
 
Assets
 
 
 
Investments:
 
 
 
Fixed maturities – at fair value (amortized cost $1,431,815 and $1,392,660)
$
1,439,034

 
$
1,390,167

Equity securities – at fair value (cost $74,270 and $77,013)
95,508

 
90,640

Short-term investments – at fair value (amortized cost $425 and $2,909)
425

 
2,907

Total investments
1,534,967

 
1,483,714

Cash and cash equivalents
87,608

 
92,800

Accrued investment income
13,471

 
12,485

Agents’ balances and premium receivable, net of allowances for doubtful accounts of $13,216 and $14,207
498,055

 
495,157

Property and equipment, net of accumulated depreciation of $77,591 and $70,559
87,507

 
96,166

Prepaid reinsurance premium
3,186

 
3,410

Recoverables from reinsurers (includes $439 and $121 on paid losses and LAE)
17,864

 
17,251

Deferred policy acquisition costs
90,403

 
91,136

Current and deferred income taxes
22,536

 
21,635

Receivable for securities sold
0

 
795

Other assets
20,523

 
12,777

Goodwill
75,275

 
75,275

Total assets
$
2,451,396

 
$
2,402,601

Liabilities and Shareholders’ Equity
 
 
 
Liabilities:
 
 
 
Unpaid losses and loss adjustment expenses
$
701,097

 
$
685,455

Unearned premium
623,466

 
614,347

Long-term debt (fair value $294,132 and $278,726)
273,699

 
273,591

Commissions payable
13,836

 
16,176

Payable for securities purchased
14,525

 
13,922

Other liabilities
112,648

 
99,924

Total liabilities
1,739,271

 
1,703,414

Commitments and contingencies (See Note 9)


 


Shareholders’ equity:
 
 
 
Common stock, no par value (50,000,000 shares authorized; 21,851,207 and 21,809,954 shares issued)
21,862

 
21,829

Additional paid-in capital
381,477

 
378,745

Retained earnings
780,575

 
777,695

Accumulated other comprehensive income, net of tax
19,152

 
7,907

Treasury stock, at cost (10,807,816 and 10,766,211 shares)
(490,941
)
 
(486,990
)
Total shareholders’ equity
712,125

 
699,187

Total liabilities and shareholders’ equity
$
2,451,396

 
$
2,402,601

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, 2015
$
21,794

 
$
376,025

 
$
757,604

 
$
7,811

 
$
(475,638
)
 
$
687,595

Net earnings

 

 
18,723

 

 

 
18,723

Net change in post-retirement benefit liability

 

 

 
(14
)
 

 
(14
)
Change in unrealized gain on investments

 

 

 
16,960

 

 
16,960

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

 

 

 
142

 

 
142

Comprehensive income
 
 
 
 
 
 
 
 
 
 
35,811

Dividends paid to common shareholders

 

 
(11,497
)
 

 

 
(11,497
)
Shares issued and share-based compensation expense, including tax benefit
7

 
627

 

 

 

 
633

Acquisition of treasury stock

 

 

 

 
(9,486
)
 
(9,486
)
Balance at June 30, 2016
$
21,801

 
$
376,652

 
$
764,829

 
$
24,899

 
$
(485,124
)
 
$
703,057

Net earnings

 

 
24,362

 

 

 
24,362

Net change in post-retirement benefit liability

 

 

 
71

 

 
71

Change in unrealized gain on investments

 

 

 
(17,198
)
 

 
(17,198
)
Change in non-credit component of impairment losses on fixed maturities

 

 

 
135

 

 
135

Comprehensive income
 
 
 
 
 
 
 
 
 
 
7,371

Dividends paid to common shareholders

 

 
(11,496
)
 

 

 
(11,496
)
Shares issued and share-based compensation expense, including tax benefit
29

 
2,093

 

 

 

 
2,122

Acquisition of treasury stock

 

 

 

 
(1,866
)
 
(1,866
)
Balance at December 31, 2016
$
21,829

 
$
378,745

 
$
777,695

 
$
7,907

 
$
(486,990
)
 
$
699,187

Net earnings

 

 
15,692

 

 

 
15,692

Net change in post-retirement benefit liability

 

 

 
(16
)
 

 
(16
)
Change in unrealized gain on investments

 

 

 
11,179

 

 
11,179

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

 

 

 
82

 

 
82

Comprehensive income
 
 
 
 
 
 
 
 
 
 
26,937

Dividends paid to common shareholders

 

 
(12,813
)
 

 

 
(12,813
)
Shares issued and share-based compensation expense
33

 
2,732

 

 

 

 
2,765

Acquisition of treasury stock

 

 

 

 
(3,951
)
 
(3,951
)
Balance at June 30, 2017
$
21,862

 
$
381,477

 
$
780,575

 
$
19,152

 
$
(490,941
)
 
$
712,125

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 June 30,
 
2017
 
2016
Operating Activities:
 
 
 
Net earnings
$
5,046

 
$
11,015

Adjustments:
 
 
 
Depreciation
4,120

 
3,438

Amortization
5,695

 
5,037

Net realized (gains) losses on investments
(1,886
)
 
164

(Gain) loss on disposal of property and equipment
(5
)
 
399

Share-based compensation expense
1,238

 
28

Excess tax benefits from share-based payment arrangements
0

 
157

Activity related to rabbi trust
59

 
48

Change in accrued investment income
(1,233
)
 
(314
)
Change in agents’ balances and premium receivable
14,207

 
6,044

Change in reinsurance receivables
(1,307
)
 
1,663

Change in deferred policy acquisition costs
3,690

 
1,392

Change in other assets
(8,789
)
 
6,433

Change in unpaid losses and loss adjustment expenses
22,151

 
(7,265
)
Change in unearned premium
(17,825
)
 
(7,103
)
Change in other liabilities
4,980

 
295

Net cash provided by operating activities
30,141

 
21,431

Investing Activities:
 
 
 
Purchases of fixed maturities
(155,009
)
 
(103,611
)
Purchases of short-term investments
(425
)
 
(5,140
)
Purchases of property and equipment
(695
)
 
(10,450
)
Maturities and redemptions of fixed maturities
65,159

 
36,847

Maturities and redemptions of short-term investments
500

 
0

Proceeds from sale of fixed maturities
81,487

 
99,180

Proceeds from sale of equity securities
5,000

 
0

Proceeds from sale of short-term investments
0

 
1,064

Proceeds from sale of property and equipment
6

 
2

Net cash (used in) provided by investing activities
(3,978
)
 
17,892

Financing Activities:
 
 
 
Proceeds from stock options exercised and employee stock purchases
78

 
68

Principal payments under capital lease obligations
(134
)
 
(129
)
Acquisition of treasury stock
(1,450
)
 
(1,116
)
Dividends paid to shareholders
(6,411
)
 
(5,753
)
Net cash used in financing activities
(7,916
)
 
(6,930
)
Net increase in cash and cash equivalents
18,247

 
32,393

Cash and cash equivalents at beginning of period
69,361

 
43,623

Cash and cash equivalents at end of period
$
87,608

 
$
76,016

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

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands, unaudited)
 
Six months ended June 30,
 
2017
 
2016
Operating Activities:
 
 
 
Net earnings
$
15,692

 
$
18,723

Adjustments:
 
 
 
Depreciation
8,296

 
6,521

Amortization
11,023

 
10,839

Net realized (gains) losses on investments
(2,396
)
 
25

(Gain) loss on disposal of property and equipment
(8
)
 
401

Share-based compensation expense
2,622

 
351

Excess tax benefits from share-based payment arrangements
0

 
157

Activity related to rabbi trust
128

 
66

Change in accrued investment income
(986
)
 
509

Change in agents’ balances and premium receivable
(2,898
)
 
(25,016
)
Change in reinsurance receivables
(389
)
 
(2,067
)
Change in deferred policy acquisition costs
733

 
(2,664
)
Change in other assets
(13,220
)
 
3,303

Change in unpaid losses and loss adjustment expenses
15,643

 
(3,755
)
Change in unearned premium
9,118

 
28,747

Change in other liabilities
10,321

 
(3,745
)
Net cash provided by operating activities
53,679

 
32,396

Investing Activities:
 
 
 
Purchases of fixed maturities
(275,840
)
 
(261,498
)
Purchases of equity securities
(1,900
)
 
0

Purchases of short-term investments
(425
)
 
(5,140
)
Purchases of property and equipment
(1,584
)
 
(15,395
)
Maturities and redemptions of fixed maturities
108,478

 
76,145

Maturities and redemptions of short-term investments
500

 
0

Proceeds from sale of fixed maturities
119,158

 
203,115

Proceeds from sale of equity securities
7,002

 
0

Proceeds from sale of short-term investments
2,400

 
5,666

Proceeds from sale of property and equipment
25

 
2

Net cash (used in) provided by investing activities
(42,187
)
 
2,896

Financing Activities:
 
 
 
Proceeds from stock options exercised and employee stock purchases
143

 
126

Principal payments under capital lease obligations
(269
)
 
(249
)
Acquisition of treasury stock
(3,746
)
 
(10,137
)
Dividends paid to shareholders
(12,813
)
 
(11,497
)
Net cash used in financing activities
(16,684
)
 
(21,759
)
Net (decrease) increase in cash and cash equivalents
(5,192
)
 
13,533

Cash and cash equivalents at beginning of period
92,800

 
62,483

Cash and cash equivalents at end of period
$
87,608

 
$
76,016

See Condensed Notes to Consolidated Financial Statements.

8

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

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
INDEX TO NOTES
 
1.
7.
 
 
 
2.
8.
 
 
 
3.
9.
 
 
 
4.
10.
 
 
 
5.
11.
 
 
 
 
6.
 
 

Note 1 Significant Reporting and Accounting Policies
Nature of Operations
We are a holding company that provides insurance through our subsidiaries for personal auto with a concentration on nonstandard risks, commercial auto 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, 2016. 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 June 30, 2017, 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 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. We adopted the change to the presentation of excess tax benefits on the consolidated statements of cash flow retrospectively and all other portions of the standard prospectively as of January 1, 2017. We reclassified $0.2 million of excess tax benefits from financing activities to operating activities for both the three and six months ended June 30, 2016, respectively. The adoption of this standard did not have a material impact on our financial condition or results of operations.

9

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

Condensed Notes to Consolidated Financial Statements

Recently Issued Accounting Standards
In March 2017 the FASB issued an ASU related to the amortization of premium on purchased callable debt securities. The guidance amends the amortization period for certain purchased callable debt securities held at a premium. Securities that contain explicit, noncontingent call features that are callable at fixed prices and on preset dates should shorten the amortization period for the premium to the earliest call date (and if the call option is not exercised, the effective yield is reset using the payment terms of the debt security). The standard is effective for fiscal years, and interim period within those years, beginning after December 15, 2018, and is to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings. We do not expect the adoption of this standard to have a material impact on our financial condition or results of operations.
In October 2016 the FASB issued an ASU related to the recognition of income tax on intra-entity transfers of assets other than inventory. The guidance requires the income tax to be recognized when the transfer occurs rather than when the asset is sold to an outside party. The standard is effective for annual periods beginning after December 15, 2017, and interim periods within the year of adoption, and is to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We do not expect the adoption of this standard to have a material impact on our financial condition or results of operations.
In June 2016 the FASB issued an ASU related to the accounting for credit losses. The guidance generally requires credit losses on available-for-sale debt securities to be recognized as an allowance rather than as a reduction to the amortized cost of a security. The standard is effective for fiscal periods beginning after December 15, 2019, and interim periods within the year of adoption, with prospective application of the ASU required for debt securities for which an other-than-temporary impairment has been recognized before the implementation date. 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 do not expect the adoption of this standard to have a material impact on our financial condition or results of operations.
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 June 30, 2017, we have $13.8 million net unrealized gains, net of tax, recognized as a component of other comprehensive income.
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. As an insurance-entity, we are largely exempt from the provisions of this standard, with only fee income totaling $107.4 million for the year ended December 31, 2016, subject to this new standard.

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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 June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
Net earnings
$
5,046

 
$
11,015

 
$
15,692

 
$
18,723

Average basic shares outstanding
11,006

 
11,012

 
11,002

 
11,024

Basic net earnings per share
$
0.46

 
$
1.00

 
$
1.43

 
$
1.70

 
 
 
 
 
 
 
 
Average basic shares outstanding
11,006

 
11,012

 
11,002

 
11,024

Restricted stock not vested
36

 
24

 
34

 
22

Dilutive effect of Performance Share Plan
41

 
60

 
68

 
69

Average diluted shares outstanding
11,082

 
11,096

 
11,105

 
11,115

Diluted net earnings per share
$
0.46

 
$
0.99

 
$
1.41

 
$
1.68


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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
June 30, 2017
Level 1
 
Level 2
 
Level 3
 
Total
Cash and cash equivalents
$
87,608

 
$
0

 
$
0

 
$
87,608

Fixed maturity securities:
 
 
 
 
 
 
 
U.S. government
64,025

 
0

 
0

 
64,025

State and municipal
0

 
498,709

 
3,447

 
502,156

Mortgage-backed securities:

 
 
 
 
 
 
Residential
0

 
351,766

 
0

 
351,766

Commercial
0

 
42,060

 
0

 
42,060

Total mortgage-backed securities
0

 
393,826

 
0

 
393,826

Asset-backed securities
0

 
51,527

 
249

 
51,775

Corporates
0

 
427,038

 
215

 
427,252

Total fixed maturities
64,025

 
1,371,099

 
3,910

 
1,439,034

Equity securities
95,508

 
0

 
0

 
95,508

Short-term investments
0

 
425

 
0

 
425

Total cash and investments
$
247,141

 
$
1,371,524

 
$
3,910

 
$
1,622,575

Percentage of total cash and investments
15.2
%
 
84.5
%
 
0.2
%
 
100.0
%
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
Cash and cash equivalents
$
92,800

 
$
0

 
$
0

 
$
92,800

Fixed maturity securities:
 
 
 
 
 
 
 
U.S. government
62,480

 
5

 
0

 
62,485

State and municipal
0

 
472,471

 
3,860

 
476,331

Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
0

 
340,367

 
0

 
340,367

Commercial
0

 
69,801

 
0

 
69,801

Total mortgage-backed securities
0

 
410,169

 
0

 
410,169

Asset-backed securities
0

 
37,196

 
412

 
37,608

Corporates
0

 
402,909

 
666

 
403,575

Total fixed maturities
62,480

 
1,322,749

 
4,938

 
1,390,167

Equity securities
90,640

 
0

 
0

 
90,640

Short-term investments
769

 
2,139

 
0

 
2,907

Total cash and investments
$
246,689

 
$
1,324,888

 
$
4,938

 
$
1,576,514

Percentage of total cash and investments
15.6
%
 
84.0
%
 
0.3
%
 
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 $294.1 million and $278.7 million fair value of our long-term debt at June 30, 2017, and December 31, 2016, 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.
















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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 June 30, 2017
State and
Municipal
 
Asset-Backed Securities
 
Corporates
 
Total
Balance at beginning of period
$
3,479

 
$
4,584

 
$
2,553

 
$
10,616

Total (losses) gains, unrealized or realized
 
 
 
 
 
 
 
Included in net earnings
(29
)
 
0

 
0

 
(29
)
Included in other comprehensive income
(3
)
 
1

 
(4
)
 
(6
)
Settlements
0

 
(76
)
 
(335
)
 
(411
)
Transfers out
0

 
(4,259
)
 
(2,000
)
 
(6,259
)
Balance at end of period
$
3,447

 
$
249

 
$
215

 
$
3,910

 
 
 
 
 
 
 
 
Three months ended June 30, 2016
 
 
 
 
 
 
 
Balance at beginning of period
$
0

 
$
1,338

 
$
1,442

 
$
2,781

Total (losses) gains, unrealized or realized
 
 
 
 
 
 
 
Included in net earnings
(4
)
 
0

 
4

 
(0
)
Included in other comprehensive income
1

 
1

 
(26
)
 
(24
)
Purchases
0

 
620

 
0

 
620

Settlements
0

 
0

 
(312
)
 
(312
)
Transfers in
628

 
0

 
0

 
628

Balance at end of period
$
626

 
$
1,959

 
$
1,107

 
$
3,692

 
 
 
 
 
 
 
 
Six months ended June 30, 2017
State and
Municipal
 
Asset-Backed Securities
 
Corporates
 
Total
Balance at beginning of period
$
3,860

 
$
412

 
$
666

 
$
4,938

Total (losses) gains, unrealized or realized
 
 
 
 
 
 
 
Included in net earnings
(60
)
 
0

 
2

 
(59
)
Included in other comprehensive income
12

 
1

 
(26
)
 
(12
)
Purchases
0

 
4,259

 
2,000

 
6,259

Sales
(694
)
 
0

 
0

 
(694
)
Settlements
0

 
(165
)
 
(427
)
 
(591
)
Transfers in
329

 
0

 
0

 
329

Transfers out
0

 
(4,259
)
 
(2,000
)
 
(6,259
)
Balance at end of period
$
3,447

 
$
249

 
$
215

 
$
3,910

 
 
 
 
 
 
 
 
Six months ended June 30, 2016
 
 
 
 
 
 
 
Balance at beginning of period
$
10

 
$
0

 
$
1,524

 
$
1,534

Total losses, unrealized or realized
 
 
 
 
 
 
 
Included in net earnings
(4
)
 
0

 
7

 
3

Included in other comprehensive income
1

 
1

 
(25
)
 
(23
)
Purchases
0

 
620

 
0

 
620

Sales
0

 
0

 
0

 
0

Settlements
(10
)
 
0

 
(398
)
 
(408
)
Transfers in
628

 
1,338

 
0

 
1,966

Transfers out
0

 
0

 
0

 
0

Balance at end of period
$
626

 
$
1,959

 
$
1,107

 
$
3,692



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

Condensed Notes to Consolidated Financial Statements

Of the $3.9 million fair value of securities in Level 3 at June 30, 2017, which consisted of five securities, we priced two based on non-binding broker quotes and three securities, which were included in Level 3 because they were not rated by a nationally recognized statistical rating organization, were priced by a nationally recognized pricing service.
During the six months ended June 30, 2017, one security, which was an exchange of a rated municipal bond for an unrated refunded bond, was transferred from Level 2 into Level 3 . There were no transfers of securities between Levels 1 and 2.
The gains or losses included in net earnings are included in the line item "Net realized gains (losses) on investments" in the Consolidated Statements of Earnings. We recognize the net gains or losses included in other comprehensive income in the line item "Unrealized gains on investments, net" in the Consolidated Statements of Comprehensive Income and the line item "Change in unrealized gain on investments" or the line item "Change in non-credit component of impairment losses on fixed maturities" in the Consolidated Statements of Changes in Shareholders’ Equity.
The following table presents the carrying value and estimated fair value of our financial instruments ($ in thousands):
 
June 30, 2017
 
December 31, 2016
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
87,608

 
$
87,608

 
$
92,800

 
$
92,800

Available-for-sale securities:
 
 
 
 
 
 
 
Fixed maturities
1,439,034

 
1,439,034

 
1,390,167

 
1,390,167

Equity securities
95,508

 
95,508

 
90,640

 
90,640

Short-term investments
425

 
425

 
2,907

 
2,907

Total cash and investments
$
1,622,575

 
$
1,622,575

 
$
1,576,514

 
$
1,576,514

Liabilities:
 
 
 
 
 
 
 
Long-term debt
$
273,699

 
$
294,132

 
$
273,591

 
$
278,726

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.
Note 4 Investments
We consider all fixed maturity and equity securities to be available-for-sale and report them at fair value with the net unrealized gains or losses reported after-tax (net of any valuation allowance) as a component of other comprehensive income. The proceeds from sales of securities for the three and six months ended June 30, 2017, were $86.5 million and $128.6 million respectively, while the proceeds from sales of securities for the three and six months ended June 30, 2016, were $100.2 million and $208.8 million, respectively. There was no receivable for unsettled sales as of June 30, 2017, or June 30, 2016.
Gross gains of $2.3 million and gross losses of $0.4 million were realized on sales of available-for-sale securities during the three months ended June 30, 2017, compared with gross gains of $0.9 million and gross losses of $0.9 million realized on sales during the three months ended June 30, 2016. Gross gains of $3.0 million and gross losses of $0.6 million were realized on sales of available-for-sale securities during the six months ended June 30, 2017, compared with gross gains of $2.2 million and gross losses of $1.9 million realized on sales during the six months ended June 30, 2016. Gains or losses on securities are determined on a specific identification basis.

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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):
June 30, 2017
Amortized
Cost or Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
OTTI
Recognized in
Accumulated
OCI(1)
Fixed maturities:
 
 
 
 
 
 
 
 
 
U.S. government
$
64,192

 
$
66

 
$
(234
)
 
$
64,025

 
$
0

State and municipal
497,850

 
5,085

 
(778
)
 
502,156

 
(47
)
Mortgage-backed securities:

 

 

 
 
 
 
Residential
353,813

 
2,264

 
(4,311
)
 
351,766

 
(1,856
)
Commercial
42,609

 
65

 
(614
)
 
42,060

 
0

Total mortgage-backed securities
396,422

 
2,328

 
(4,924
)
 
393,826

 
(1,856
)
Asset-backed securities
51,668

 
130

 
(22
)
 
51,775

 
(8
)
Corporates
421,684

 
6,476

 
(908
)
 
427,252

 
(31
)
Total fixed maturities
1,431,815

 
14,085

 
(6,866
)
 
1,439,034

 
(1,942
)
Equity securities
74,270

 
21,238

 
0

 
95,508

 
0

Short-term investments
425

 
0

 
(0
)
 
425

 
0

Total
$
1,506,511

 
$
35,323

 
$
(6,866
)
 
$
1,534,967

 
$
(1,942
)
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
U.S. government
$
62,808

 
$
55

 
$
(377
)
 
$
62,485

 
$
0

State and municipal
477,834

 
2,313

 
(3,816
)
 
476,331

 
(51
)
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Residential
343,095

 
2,306

 
(5,034
)
 
340,367

 
(1,967
)
Commercial
70,676

 
63

 
(939
)
 
69,801

 
0

Total mortgage-backed securities
413,772

 
2,369

 
(5,972
)
 
410,169

 
(1,967
)
Asset-backed securities
37,562

 
93

 
(47
)
 
37,608

 
(8
)
Corporates
400,685

 
4,389

 
(1,499
)
 
403,575

 
(41
)
Total fixed maturities
1,392,660

 
9,219

 
(11,711
)
 
1,390,167

 
(2,068
)
Equity securities
77,013

 
13,627

 
0

 
90,640

 
0

Short-term investments
2,909

 
0

 
(2
)
 
2,907

 
0

Total
$
1,472,582

 
$
22,846

 
$
(11,713
)
 
$
1,483,714

 
$
(2,068
)
 
 
 
 
 
 
 
 
 
 
(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.

16

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
June 30, 2017
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
30
 
$
48,093

 
$
(233
)
 
0.5
%
 
1

 
$
765

 
$
(1
)
 
0.1
%
State and municipal
81
 
157,706

 
(713
)
 
0.4
%
 
1

 
3,743

 
(66
)
 
1.7
%
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
382
 
220,947

 
(3,790
)
 
1.7
%
 
46

 
13,071

 
(520
)
 
3.8
%
Commercial
11
 
28,392

 
(602
)
 
2.1
%
 
3

 
5,027

 
(12
)
 
0.2
%
Total mortgage-backed securities
393
 
249,339

 
(4,392
)
 
1.7
%
 
49

 
18,098

 
(532
)
 
2.9
%
Asset-backed securities
9
 
8,653

 
(17
)
 
0.2
%
 
1

 
1,455

 
(5
)
 
0.3
%
Corporates
74
 
98,429

 
(756
)
 
0.8
%
 
6

 
5,975

 
(152
)
 
2.5
%
Total fixed maturities
587
 
562,220

 
(6,111
)
 
1.1
%
 
58

 
30,036

 
(755
)
 
2.5
%
Short-term investments
1
 
425

 
(0
)
 
0.0
%
 
0

 
0

 
0

 
0.0
%
Total
588
 
$
562,645

 
$
(6,111
)
 
1.1
%
 
58

 
$
30,036

 
$
(755
)
 
2.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government
31
 
$
47,640

 
$
(377
)
 
0.8
%
 
0

 
$
0

 
$
0

 
0.0
%
State and municipal
146
 
303,428

 
(3,816
)
 
1.2
%
 
0

 
0

 
0

 
0.0
%
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
381
 
225,117

 
(4,559
)
 
2.0
%
 
40

 
11,891

 
(474
)
 
3.8
%
Commercial
14
 
38,002

 
(788
)
 
2.0
%
 
7

 
26,537

 
(150
)
 
0.6
%
Total mortgage-backed securities
395
 
263,119

 
(5,347
)
 
2.0
%
 
47

 
38,428

 
(625
)
 
1.6
%
Asset-backed securities
9
 
7,836

 
(46
)
 
0.6
%
 
1

 
519

 
(1
)
 
0.1
%
Corporates
98
 
145,089

 
(1,272
)
 
0.9
%
 
7

 
7,745

 
(227
)
 
2.8
%
Total fixed maturities
679
 
767,112

 
(10,859
)
 
1.4
%
 
55

 
46,693

 
(852
)
 
1.8
%
Short-term investments
3
 
2,907

 
(2
)
 
0.1
%
 
0

 
0

 
0

 
0.0
%
Total
682
 
$
770,019

 
$
(10,861
)
 
1.4
%
 
55

 
$
46,693

 
$
(852
)
 
1.8
%
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.

17

Table of Contents
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:
 
June 30, 2017
 
December 31, 2016
Number of positions held with unrealized:
 
 
 
Gains
677

 
527

Losses
646

 
737

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

 
1

Losses of $500,000
0

 
0

Percentage of positions held with unrealized:
 
 
 
Gains that were investment grade
86
%
 
85
%
Losses that were investment grade
96
%
 
97
%
Percentage of fair value held with unrealized:
 
 
 
Gains that were investment grade
87
%
 
84
%
Losses that were investment grade
96
%
 
97
%
The following table sets forth the amount of unrealized losses, excluding the rabbi trust, by age and severity at June 30, 2017 ($ in thousands):
Age of Unrealized Losses
Fair Value of
Securities with
Unrealized
Losses
 
Total Gross
Unrealized
Losses
 
Less  Than 5%*
 
5% - 10%*
 
Total Gross Greater
Than 10%*
Three months or less
$
203,738

 
$
(638
)
 
$
(638
)
 
$
0

 
$
0

Four months through six months
18,639

 
(53
)
 
(53
)
 
0

 
0

Seven months through nine months
249,433

 
(4,058
)
 
(4,058
)
 
0

 
0

Ten months through twelve months
96,024

 
(1,447
)
 
(1,447
)
 
0

 
0

Greater than twelve months
24,847

 
(669
)
 
(543
)
 
(127
)
 
(0
)
Total
$
592,681

 
$
(6,866
)
 
$
(6,740
)
 
$
(127
)
 
$
(0
)
* As a percentage of amortized cost or cost.
The change in unrealized gains (losses) on marketable securities included the following ($ in thousands):
 
Pre-tax
 
 
 
 
Six months ended June 30, 2017
Fixed
Maturities
 
Equity
Securities
 
Short-Term Investments
 
Tax
Effects
 
Net
Unrealized holding gains on securities arising during the period
$
9,950

 
$
9,766

 
$
3

 
$
(6,902
)
 
$
12,818

Realized gains on securities sold
(249
)
 
(2,155
)
 
(1
)
 
842

 
(1,564
)
Impairment loss recognized in earnings
10

 
0

 
0

 
(3
)
 
6

Change in unrealized, net
$
9,711

 
$
7,611

 
$
2

 
$
(6,063
)
 
$
11,261

 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2016
 
 
 
 
 
 
 
 
 
Unrealized holding gains on securities arising during the period
$
25,531

 
$
753

 
$
3

 
$
(9,200
)
 
$
17,086

Realized (gains) losses on securities sold
(293
)
 
(0
)
 
2

 
102

 
(189
)
Impairment loss recognized in earnings
316

 
0

 
0

 
(111
)
 
205

Change in unrealized, net
$
25,553

 
$
753

 
$
5

 
$
(9,209
)
 
$
17,102

For fixed maturity securities that are other-than-temporarily impaired, we assess our intent to sell and the likelihood that we will be required to sell the security before recovery of our amortized cost. If a fixed maturity security is considered other-than-temporarily impaired but we do not intend to and are not more than likely to be required to sell the security before our recovery to amortized

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

cost, the amount of the impairment is separated 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, the entire amount of the impairment is treated 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):
 
Six months ended June 30,
 
2017
 
2016
Beginning balance
$
557

 
$
683

Additions for:
 
 
 
Newly impaired securities
10

 
0

Reductions for:
 
 
 
Securities sold and paid down
(57
)
 
(65
)
Ending balance
$
509

 
$
618

The table below sets forth the scheduled maturities of fixed maturity securities at June 30, 2017, 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
$
36,678

 
$
41,079

 
$
11,151

 
$
88,909

 
$
88,803

After one year through five years
438,388

 
209,919

 
0

 
648,308

 
643,656

After five years through ten years
190,801

 
57,673

 
0

 
248,474

 
243,611

After ten years
1,703

 
6,040

 
0

 
7,742

 
7,655

Mortgage- and asset-backed securities
168,056

 
277,545

 
0

 
445,602

 
448,090

Total
$
835,627

 
$
592,256

 
$
11,151

 
$
1,439,034

 
$
1,431,815

Note 5 Long-Term Debt
($ in thousands)
June 30, 2017
 
December 31, 2016
Principal
$
275,000

 
$
275,000

Unamortized debt issuance costs
1,301

 
1,409

Long-term debt less unamortized debt issuance costs
$
273,699

 
$
273,591

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 June 30, 2017, fair value of $294.1 million using a 122 basis point spread to the 10-year U.S. Treasury Note Yield of 2.305%.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

In August 2014 we renewed our agreement for a $50 million three-year revolving credit facility (the “Credit Agreement”) that requires us to meet certain financial and other covenants. We are currently in compliance with all covenants under the Credit Agreement, and as of June 30, 2017, there were no borrowings outstanding against it.
Note 6 Income Taxes
The following is a reconciliation of income taxes at the statutory rate of 35.0% to the effective provision for income taxes as shown in the Consolidated Statements of Earnings ($ in thousands):
 
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
Earnings before income taxes
$
6,559

 
$
16,040

 
$
21,637

 
$
26,816

Income taxes at statutory rate
2,296

 
5,614

 
7,573

 
9,386

Effect of:
 
 
 
 
 
 
 
Dividends-received deduction
(136
)
 
(150
)
 
(214
)
 
(222
)
Tax-exempt interest
(616
)
 
(619
)
 
(1,248
)
 
(1,258
)
Other
(31
)
 
180

 
(165
)
 
188

Provision for income taxes as shown on the Consolidated Statements of Earnings
$
1,513

 
$
5,026

 
$
5,945

 
$
8,094

GAAP effective tax rate
23.1
%
 
31.3
%
 
27.5
%
 
30.2
%
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 June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
Income tax payments
$
9,800

 
$
3,551

 
$
12,900

 
$
3,551

Interest payments on debt
0

 
0

 
6,875

 
6,875

Interest payments on capital leases
19

 
19

 
40

 
40

Negative Cash Book Balances
Negative cash book balances, included in the line item “Other liabilities” in the Consolidated Balance Sheets, were $40.6 million at June 30, 2017 and December 31, 2016.

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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 June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
Balance at Beginning of Period
 
 
 
 
 
 
 
Unpaid losses on known claims
$
233,303

 
$
236,701

 
$
238,412

 
$
237,660

IBNR losses
307,932

 
295,281

 
306,641

 
290,097

LAE
137,712

 
141,493

 
140,402

 
142,207

Total unpaid losses and LAE
678,947

 
673,475

 
685,455

 
669,965

Reinsurance recoverables
(16,133
)
 
(17,724
)
 
(17,130
)
 
(14,694
)
Unpaid losses and LAE, net of reinsurance recoverables
662,814

 
655,751

 
668,325

 
655,271

Current Activity
 
 
 
 
 
 
 
Loss and LAE incurred:
 
 
 
 
 
 
 
Current accident year
280,356

 
275,687

 
557,400

 
546,854

Prior accident years
(6,736
)
 
(12,173
)
 
(13,104
)
 
(18,056
)
Total loss and LAE incurred
273,621

 
263,514

 
544,296

 
528,798

Loss and LAE payments:
 
 
 
 
 
 
 
Current accident year
(163,911
)
 
(174,138
)
 
(260,780
)
 
(263,582
)
Prior accident years
(88,850
)
 
(97,405
)
 
(268,169
)
 
(272,764
)
Total loss and LAE payments
(252,761
)
 
(271,543
)
 
(528,948
)
 
(536,347
)
Balance at End of Period
 
 
 
 
 
 
 
Unpaid losses and LAE, net of reinsurance recoverables
683,673

 
647,723

 
683,673

 
647,723

Add back reinsurance recoverables
17,425

 
18,487

 
17,425

 
18,487

Total unpaid losses and LAE
701,097

 
666,210

 
701,097

 
666,210

Unpaid losses on known claims
235,400

 
236,947

 
235,400

 
236,947

IBNR losses
323,184

 
290,767

 
323,184

 
290,767

LAE
142,513

 
138,496

 
142,513

 
138,496

Total unpaid losses and LAE
$
701,097

 
$
666,210

 
$
701,097

 
$
666,210

The $6.7 million and $13.1 million of favorable reserve development during the three and six months ended June 30, 2017, respectively, was primarily due to decreases in ultimate frequency and severity estimates in California along with lower ultimate frequency estimates in Florida related to material damage and uninsured motorists bodily injury coverages for accident year 2016.  This favorable development was partially offset by increases in ultimate severity estimates in bodily injury and personal injury protection coverages in our commercial auto product as well as from personal injury protection in our personal auto product.
The $12.2 million and $18.1 million of favorable reserve development during the three and six months ended June 30, 2016, respectively, was primarily due to decreases in severity estimates related to Florida personal injury protection and bodily injury coverages and a decrease in California bodily injury loss adjustment expenses, and primarily related to accident years 2014 and prior. The favorable development for the six months ended June 30, 2016, was partially offset by unfavorable development from accident year 2015 in California material damage coverages, driven by an increase in severity.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

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, 2016. 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, 2016.
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 Accounting Standards Codification. 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 or range of the loss. When disclosing litigation or claims where 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.

The following 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 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.

In Reyes v. Infinity Indemnity Insurance Company (Circuit Court of Miami-Dade County, Florida), which was initially filed on June 4, 2014, a third-party claimant is attempting to recover from Infinity a $30 million consent judgment obtained against an Infinity policyholder for personal injuries suffered by the claimant. In December 2014 the trial court granted Infinity's motion for partial summary judgment, finding the consent judgment unenforceable and that no bad faith claim could exist as a matter of law. The plaintiff successfully appealed that ruling. Petitions for Rehearing and for Certiorari Review by the Florida Supreme Court were denied on March 10, 2017 and June 14, 2017, respectively sending the matter back to the trial court, where resumed litigation is expected to focus next on the issues of coverage and duty to defend. We will continue to vigorously defend against all claims in this case.

As of June 30, 2017, pending putative (i.e., not certified) class action lawsuits that challenge certain of Infinity’s business operations and practices included the following:
allegations we sold a lessor liability endorsement affording only illusory coverage.
a challenge to denial of personal injury protection benefits to a class of injured third parties in vehicle accidents.
a challenge to our payment of a percentage of arbitration awards to collection agencies in successful intercompany arbitrations.
allegations that we are obligated to reimburse Medicare or secondary payers for accident-related medical payments in which personal injury protection benefits were denied.

In addition to lawsuits, regulatory bodies, including state insurance departments and the Securities and Exchange Commission, among others, may make inquiries, investigate consumer complaints or conduct on-site examinations concerning specific business practices or compliance more generally. Such inquiries, investigations or examinations have in the past and may in the future directly or indirectly result in regulatory orders requiring remedial, injunctive or other actions or the assessment of substantial fines or other penalties.


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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

During the first quarter of 2017, as a result of our review of certain business practices surrounding a California consumer complaint to the California Department of Insurance (CDI), a $3.8 million adjustment was made to written and earned premium, reflecting premium to be returned to policyholders.

During the second quarter, the CDI inquired about how we estimate and adjust an insured's annual mileage driven. Under California's auto insurance regulations, annual miles driven is one of three mandatory factors used to determine insurance premium rates. Although we believe we are in compliance with applicable regulations, we opted to revise the methodology we employ during the renewal process for estimating changes in annual miles. This change resulted in lowering mileage on approximately 200,000 policies renewed predominately in years 2016 and 2017, and correspondingly lowering rates on those policies. Any excess premiums collected are being returned to policyholders, which resulted in premium adjustments to written and earned premium for the second quarter of $18.3 million and $12.4 million, respectively. While we believe our policies fully comply with all state regulations, given the broad administrative and interpretative powers of state insurance departments, future and unanticipated judicial, regulatory or legislative changes may raise challenges over established rate, underwriting or claims practices.   

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, 2016.

Note 10 Accumulated Other Comprehensive Income
The components of other comprehensive income before and after tax are as follows ($ in thousands):
 
Three months ended June 30,
 
2017
 
2016
 
Before Tax
 
Income Tax
 
Net
 
Before Tax
 
Income Tax
 
Net
Accumulated change in post-retirement benefit liability, beginning of period
$
1,020

 
$
(357
)
 
$
663

 
$
934

 
$
(327
)
 
$
607

Effect on other comprehensive income
(13
)
 
4

 
(8
)
 
(11
)
 
4

 
(7
)
Accumulated change in post-retirement benefit liability, end of period
1,007

 
(353
)
 
655

 
923

 
(323
)
 
600

Accumulated unrealized gains on investments, net, beginning of period
21,288

 
(7,451
)
 
13,837

 
26,392

 
(9,237
)
 
17,155

Other comprehensive income before reclassification
9,055

 
(3,169
)
 
5,886

 
10,828

 
(3,790
)
 
7,038

Reclassification adjustment for other-than-temporary impairments included in net income
0

 
0

 
0

 
198

 
(69
)
 
129

Reclassification adjustment for realized gains included in net income
(1,886
)
 
660

 
(1,226
)
 
(34
)
 
12

 
(22
)
Effect on other comprehensive income
7,169

 
(2,509
)
 
4,660

 
10,992

 
(3,847
)
 
7,144

Accumulated unrealized gains on investments, net, end of period
28,457

 
(9,960
)
 
18,497

 
37,383

 
(13,084
)
 
24,299

Accumulated other comprehensive income, beginning of period
22,308

 
(7,808
)
 
14,500

 
27,326

 
(9,564
)
 
17,762

Change in post-retirement benefit liability
(13
)
 
4

 
(8
)
 
(11
)
 
4

 
(7
)
Change in unrealized gains on investments, net
7,169

 
(2,509
)
 
4,660

 
10,992

 
(3,847
)
 
7,144

Effect on other comprehensive income
7,156

 
(2,505
)
 
4,652

 
10,981

 
(3,843
)
 
7,137

Accumulated other comprehensive income, end of period
$
29,464

 
$
(10,312
)
 
$
19,152

 
$
38,306

 
$
(13,407
)
 
$
24,899


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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

 
Six months ended June 30,
 
2017
 
2016
 
Before Tax
 
Income Tax
 
Net
 
Before Tax
 
Income Tax
 
Net
Accumulated change in post-retirement benefit liability, beginning of period
$
1,033

 
$
(361
)
 
$
671

 
$
944

 
$
(331
)
 
$
614

Effect on other comprehensive income
(25
)
 
9

 
(16
)
 
(22
)
 
8

 
(14
)
Accumulated change in post-retirement benefit liability, end of period
1,007

 
(353
)
 
655

 
923

 
(323
)
 
600

Accumulated unrealized gains on investments, net, beginning of period
11,133

 
(3,896
)
 
7,236

 
11,072

 
(3,875
)
 
7,197

Other comprehensive income before reclassification
19,720

 
(6,902
)
 
12,818

 
26,287

 
(9,200
)
 
17,086

Reclassification adjustment for other-than-temporary impairments included in net income
10

 
(3
)
 
6

 
316

 
(111
)
 
205

Reclassification adjustment for realized gains included in net income
(2,406
)
 
842

 
(1,564
)
 
(291
)
 
102

 
(189
)
Effect on other comprehensive income
17,324

 
(6,063
)
 
11,261

 
26,311

 
(9,209
)
 
17,102

Accumulated unrealized gains on investments, net, end of period
28,457

 
(9,960
)
 
18,497

 
37,383

 
(13,084
)
 
24,299

Accumulated other comprehensive income, beginning of period
12,165

 
(4,258
)
 
7,907

 
12,016

 
(4,206
)
 
7,811

Change in post-retirement benefit liability
(25
)
 
9

 
(16
)
 
(22
)
 
8

 
(14
)
Change in unrealized gains on investments, net
17,324

 
(6,063
)
 
11,261

 
26,311

 
(9,209
)
 
17,102

Effect on other comprehensive income
17,299

 
(6,055
)
 
11,244

 
26,290

 
(9,201
)
 
17,088

Accumulated other comprehensive income, end of period
$
29,464

 
$
(10,312
)
 
$
19,152

 
$
38,306

 
$
(13,407
)
 
$
24,899

Note 11 Segment Information
We manage our business based on product line and have three operating segments: Personal Auto, Commercial Auto and Classic Collector (our reportable segments are Personal Auto and Commercial Auto).
Our Personal Auto product provides coverage to individuals for liability to others for bodily injury and property damage and for physical damage to an insured's own vehicle from collision and various other perils. In addition, some states require policies to provide for first party personal injury protection, frequently referred to as no-fault coverage.
Our Commercial Auto product provides coverage to businesses for liability to others for bodily injury and property damage and for physical damage to vehicles from collision and various other perils. We primarily target businesses with fleets of 20 or fewer vehicles and average 1.9 vehicles per policy. We avoid businesses that are involved in what we consider to be hazardous operations or interstate commerce.
Our Classic Collector product provides coverage to individuals with classic or antique automobiles for liability to others for bodily injury and property damage and for physical damage to an insured's own vehicle from collision and various other perils.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

All segment revenues are generated from external customers. The following table provides revenues by segment and a reconciliation to "Total revenues" as reported on the Consolidated Statements of Earnings ($ in thousands):
 
Three months ended June 30,
 
Six months ended June 30,
Gross written premium:
2017
 
2016
 
2017
 
2016
Personal Auto
$
276,928

 
$
294,654

 
$
601,280

 
$
632,154

Commercial Auto
41,806

 
37,409

 
84,591

 
72,649

Classic Collector
5,056

 
4,898

 
8,621

 
8,126

Total gross written premium
323,790

 
336,961

 
694,491

 
712,929

 
 
 
 
 
 
 
 
Ceded reinsurance:
 
 
 
 
 
 
 
Personal Auto
(1,005
)
 
(1,000
)
 
(1,988
)
 
(2,012
)
Commercial Auto(1)
1,253

 
1,244

 
(159
)
 
(1,750
)
Classic Collector
(209
)
 
(187
)
 
(422
)
 
(437
)
Total ceded reinsurance
39

 
57

 
(2,569
)
 
(4,199
)
 
 
 
 
 
 
 
 
Net written premium:
 
 
 
 
 
 
 
Personal Auto
275,923

 
293,654

 
599,292

 
630,142

Commercial Auto
43,059

 
38,653

 
84,432

 
70,899

Classic Collector
4,848

 
4,711

 
8,199

 
7,689

Total net written premium
323,829

 
337,018

 
691,923

 
708,730

 
 
 
 
 
 
 
 
Change in unearned premium:
 
 
 
 
 
 
 
Personal Auto
22,526

 
12,270

 
1,543

 
(20,429
)
Commercial Auto
(6,208
)
 
(7,555
)
 
(12,378
)
 
(10,988
)
Classic Collector
(1,000
)
 
(1,019
)
 
(572
)
 
(413
)
Total change in unearned premium
15,318

 
3,697

 
(11,407
)
 
(31,830
)
 
 
 
 
 
 
 
 
Earned premium:
 
 
 
 
 
 
 
Personal Auto
298,449

 
305,925

 
600,835

 
609,713

Commercial Auto
36,851

 
31,098

 
72,054

 
59,911

Classic Collector
3,848

 
3,692

 
7,627

 
7,276

Total earned premium
339,147

 
340,715

 
680,516

 
676,899

 
 
 
 
 
 
 
 
Installment and other fee income:
 
 
 
 
 
 
 
Personal Auto
23,558

 
22,851

 
47,706

 
46,023

Commercial Auto
2,903

 
2,534

 
5,705

 
4,880

Classic Collector
0

 
0

 
0

 
0

Total installment and other fee income
26,461

 
25,385

 
53,410

 
50,903

 
 
 
 
 
 
 
 
Net investment income
9,001

 
8,927

 
17,696

 
16,990

Net realized gains on investments
1,886

 
(164
)
 
2,396

 
(25
)
Other income
391

 
220

 
666

 
478

Total revenues
$
376,886

 
$
375,084

 
$
754,683

 
$
745,246

 
 
 
 
 
 
 
 
(1) Effective June 1, 2017, the premium paid for our excess of loss reinsurance contract for our commercial auto business is now based on earned premium rather than written premium. Premium ceded during the three and six months ended June 30, 2017 includes the return of $2.6 million of unearned premium due to the termination of the previous excess of loss contract.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements


Our management uses underwriting income and combined ratios calculated on a statutory accident year basis as primary measures of profitability. Statutory accident year underwriting income is calculated by subtracting losses and loss adjustment expenses and commissions and other underwriting expenses (including bad debt charge-offs on agents' balances and premium receivables) from the total of earned premium and installment and other fee income. The statutory accident year combined ratio represents the sum of the following ratios: (i) losses and LAE incurred, excluding development from prior accident years, as a percentage of net earned premium; and (ii) underwriting expenses incurred, including bad debt and net of fees, as a percentage of net written premium.
The primary differences between the calculation of the statutory accident year used by management and the statutory calendar year combined ratios is the exclusion of bad debt charge-offs and the inclusion of development on prior accident year loss and LAE reserves.
Certain expenses are treated differently under statutory accounting principles. Under GAAP, commissions, premium taxes and other variable costs incurred in connection with successfully 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 agents' balances and premium receivables are included in the GAAP combined ratios.
The following tables present the underwriting income and combined ratio on a statutory accident year basis with reconciliations to "Earnings before income taxes" as presented on the Consolidated Statements of Earnings ($ in thousands). We do not allocate assets or "Provision for income taxes" to operating segments.
 
Three months ended June 30, 2017
 
Personal Auto
 
Commercial Auto
 
Classic Collector
 
Total
 
Pre-tax Profit (Loss)
 
Combined Ratio (1)
 
Pre-tax Profit (Loss)
 
Combined Ratio (1)
 
Pre-tax Profit (Loss)
 
Combined Ratio (1)
 
Pre-tax Profit (Loss)
 
Combined Ratio (1)
Statutory accident year underwriting income
$
(2,384
)
 
102.2
%
 
$
1,207

 
94.0
%
 
$
(57
)
 
92.6
%
 
$
(1,235
)
 
101.2
%
Bad debt charge-offs
3,672

 
 
 
466

 
 
 
1

 
 
 
4,138

 
 
Favorable (unfavorable) development on prior accident years
9,060

 
 
 
(2,234
)
 
 
 
(90
)
 
 
 
6,736

 
 
Statutory calendar year underwriting income
10,347

 
97.8
%
 
(561
)
 
99.0
%
 
(146
)
 
95.0
%
 
9,639

 
97.9
%
Statutory-to-GAAP underwriting income differences
 
 
 
 
 
 
 
 
 
 
 
 
(7,892
)
 
 
GAAP calendar year underwriting income
 
 
 
 
 
 
 
 
 
 
 
 
1,747

 
99.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
 
 
 
 
 
 
 
 
 
 
 
9,001

 
 
Net realized gains on investments
 
 
 
 
 
 
 
 
 
 
 
 
1,886

 
 
Other income
 
 
 
 
 
 
 
 
 
 
 
 
391

 
 
Interest expense
 
 
 
 
 
 
 
 
 
 
 
 
(3,511
)
 
 
Corporate general and administrative expenses
 
 
 
 
 
 
 
 
 
 
 
 
(2,447
)
 
 
Other expenses
 
 
 
 
 
 
 
 
 
 
 
 
(507
)
 
 
Earnings before income taxes
 
 
 
 
 
 
 
 
 
 
 
 
$
6,559

 
 
(1) Management includes the provision for uncollectible accounts in the underwriting income and combined ratio on both statutory accident year and GAAP calendar year bases.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

 
Three months ended June 30, 2016
 
Personal Auto
 
Commercial Auto
 
Classic Collector
 
Total
 
Pre-tax Profit (Loss)
 
Combined Ratio (1)
 
Pre-tax Profit (Loss)
 
Combined Ratio (1)
 
Pre-tax Profit (Loss)
 
Combined Ratio (1)
 
Pre-tax Profit (Loss)
 
Combined Ratio (1)
Statutory accident year underwriting income
$
3,467

 
99.6
%
 
$
(765
)
 
97.6
%
 
$
28

 
90.6
%
 
$
2,730

 
99.4
%
Bad debt charge-offs
4,334

 
 
 
459

 
 
 
7

 
 
 
4,800

 
 
Favorable (unfavorable) development on prior accident years
11,426

 
 
 
1,042

 
 
 
(295
)
 
 
 
12,173

 
 
Statutory calendar year underwriting income
19,227

 
94.4
%
 
736

 
93.0
%
 
(261
)
 
98.5
%
 
19,703

 
94.4
%
Statutory-to-GAAP underwriting income differences
 
 
 
 
 
 
 
 
 
 
 
 
(6,280
)
 
 
GAAP calendar year underwriting income
 
 
 
 
 
 
 
 
 
 
 
 
13,422

 
96.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
 
 
 
 
 
 
 
 
 
 
 
8,927

 
 
Net realized gains on investments
 
 
 
 
 
 
 
 
 
 
 
 
(164
)
 
 
Other income
 
 
 
 
 
 
 
 
 
 
 
 
220

 
 
Interest expense
 
 
 
 
 
 
 
 
 
 
 
 
(3,508
)
 
 
Corporate general and administrative expenses
 
 
 
 
 
 
 
 
 
 
 
 
(2,060
)
 
 
Other expenses
 
 
 
 
 
 
 
 
 
 
 
 
(797
)
 
 
Earnings before income taxes
 
 
 
 
 
 
 
 
 
 
 
 
$
16,040

 
 
(1) Management includes the provision for uncollectible accounts in the underwriting income and combined ratio on both statutory accident year and GAAP calendar year bases.
 
Six months ended June 30, 2017
 
Personal Auto
 
Commercial Auto
 
Classic Collector
 
Total
 
Pre-tax Profit (Loss)
 
Combined Ratio (1)
 
Pre-tax Profit (Loss)
 
Combined Ratio (1)
 
Pre-tax Profit (Loss)
 
Combined Ratio (1)
 
Pre-tax Profit (Loss)
 
Combined Ratio (1)
Statutory accident year underwriting income
$
(790
)
 
100.2
%
 
$
1,836

 
94.6
%
 
$
278

 
93.7
%
 
$
1,323

 
99.5
%
Bad debt charge-offs
5,923

 
 
 
756

 
 
 
11

 
 
 
6,690

 
 
Favorable (unfavorable) development on prior accident years
16,046

 
 
 
(3,108
)
 
 
 
166

 
 
 
13,104

 
 
Statutory calendar year underwriting income
21,178

 
96.4
%
 
(517
)
 
98.0
%
 
456

 
91.4
%
 
21,117

 
96.6
%
Statutory-to-GAAP underwriting income differences
 
 
 
 
 
 
 
 
 
 
 
 
(7,667
)
 
 
GAAP calendar year underwriting income
 
 
 
 
 
 
 
 
 
 
 
 
13,450

 
98.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
 
 
 
 
 
 
 
 
 
 
 
17,696

 
 
Net realized gains on investments
 
 
 
 
 
 
 
 
 
 
 
 
2,396

 
 
Other income
 
 
 
 
 
 
 
 
 
 
 
 
666

 
 
Interest expense
 
 
 
 
 
 
 
 
 
 
 
 
(7,023
)
 
 
Corporate general and administrative expenses
 
 
 
 
 
 
 
 
 
 
 
 
(4,718
)
 
 
Other expenses
 
 
 
 
 
 
 
 
 
 
 
 
(829
)
 
 
Earnings before income taxes
 
 
 
 
 
 
 
 
 
 
 
 
$
21,637

 
 
(1) Management includes the provision for uncollectible accounts in the underwriting income and combined ratio on both statutory accident year and GAAP calendar year bases.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

 
Six months ended June 30, 2016
 
Personal Auto
 
Commercial Auto
 
Classic Collector
 
Total
 
Pre-tax Profit (Loss)
 
Combined Ratio (1)
 
Pre-tax Profit (Loss)
 
Combined Ratio (1)
 
Pre-tax Profit (Loss)
 
Combined Ratio (1)
 
Pre-tax Profit (Loss)
 
Combined Ratio (1)
Statutory accident year underwriting income
$
1,417

 
99.2
%
 
$
(1,480
)
 
99.1
%
 
$
818

 
87.0
%
 
$
754

 
99.0
%
Bad debt charge-offs
7,366

 
 
 
813

 
 
 
17

 
 
 
8,197

 
 
Favorable (unfavorable) development on prior accident years
15,080

 
 
 
2,922

 
 
 
53

 
 
 
18,056

 
 
Statutory calendar year underwriting income
23,863

 
95.4
%
 
2,255

 
93.0
%
 
888

 
86.0
%
 
27,007

 
95.2
%
Statutory-to-GAAP underwriting income differences
 
 
 
 
 
 
 
 
 
 
 
 
(5,773
)
 
 
GAAP calendar year underwriting income
 
 
 
 
 
 
 
 
 
 
 
 
21,234

 
96.9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
 
 
 
 
 
 
 
 
 
 
 
16,990

 
 
Net realized gains on investments
 
 
 
 
 
 
 
 
 
 
 
 
(25
)
 
 
Other income
 
 
 
 
 
 
 
 
 
 
 
 
478

 
 
Interest expense
 
 
 
 
 
 
 
 
 
 
 
 
(7,017
)
 
 
Corporate general and administrative expenses
 
 
 
 
 
 
 
 
 
 
 
 
(3,764
)
 
 
Other expenses
 
 
 
 
 
 
 
 
 
 
 
 
(1,080
)
 
 
Earnings before income taxes
 
 
 
 
 
 
 
 
 
 
 
 
$
26,816

 
 
(1) Management includes the provision for uncollectible accounts in the underwriting income and combined ratio on both statutory accident year and GAAP calendar year bases.

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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. 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, 2016.
OVERVIEW
Gross written premium declined during the quarter driven by an $18.3 million premium adjustment in California. Excluding the adjustment, gross written premium increased 1.5% as a result of new business growth and higher average premium in Texas and Arizona and renewal business growth and higher average premium in Commercial Auto, partially offset by declines in new business in Florida and renewal business in California. Refer to Results of Operations – Underwriting – Premium for a more detailed discussion of our gross written premium and Note 9 - Commitments and Contingencies for a more detailed discussion of the premium adjustment.
Net earnings and diluted earnings per share for the three months ended June 30, 2017, were $5.0 million and $0.46, respectively, compared with $11.0 million and $0.99, respectively, for the same periods of 2016. Net earnings and diluted earnings per share for the six months ended June 30, 2017, were $15.7 million and $1.41, respectively, compared with $18.7 million and $1.68, respectively, for the same periods of 2016. The decrease in net earnings and diluted earnings per share for the three and six months ended June 30, 2017, was primarily due to the premium adjustments recorded during the first six months of 2017.
Included in net earnings for the three and six months ended June 30, 2017, was $4.4 million ($6.7 million pre-tax) and $8.5 million ($13.1 million million pre-tax), respectively, of favorable development on prior accident year loss and LAE reserves. The development during the three and six months ended June 30, 2017, was primarily due to decreases in ultimate frequency and severity estimates in California along with lower ultimate frequency estimates in Florida related to material damage and uninsured motorists bodily injury coverages for accident year 2016.  This favorable development was partially offset by increases in ultimate severity estimates in bodily injury and personal injury protection coverages in our commercial auto product as well as from personal injury protection in our personal auto product.
Included in net earnings for the three and six months ended June 30, 2016, was $7.9 million ($12.2 million pre-tax) and $11.7 million ($18.1 million pre-tax), respectively, of favorable development on prior accident year loss and LAE reserves. The development was primarily due to decreases in severity estimates related to Florida personal injury protection and bodily injury coverages and a decrease in California bodily injury loss adjustment expenses, and primarily related to accident years 2014 and prior. The favorable development for the six months ended June 30, 2016, was partially offset by unfavorable development from accident year 2015 in California material damage coverages, driven by an increase in severity.

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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 June 30, 2017:
 
Accident Year Combined Ratio
Developed Through
 
Prior Accident Year
(Favorable) / Unfavorable Development
($ in millions)
 
Dec 2015
 
June 2016
 
Dec 2016
 
Mar 2017
 
June 2017
 
Q2 2017
 
YTD 2017
Accident Year
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prior
 
 
 
 
 
 
 
 
 
 
 
 
$
0.1

 
 
 
$
0.4

2009
92.4
%
 
92.4
%
 
92.4
%
 
92.4
%
 
92.5
%
 
0.0
 %
 
0.2

 
0.0
 %
 
0.3

2010
99.4
%
 
99.3
%
 
99.3
%
 
99.3
%
 
99.3
%
 
0.0
 %
 
0.2

 
0.0
 %
 
0.3

2011
100.2
%
 
100.0
%
 
99.8
%
 
99.9
%
 
99.9
%
 
0.0
 %
 
0.3

 
0.1
 %
 
0.5

2012
100.1
%
 
99.8
%
 
99.6
%
 
99.5
%
 
99.4
%
 
(0.1
)%
 
(1.1
)
 
(0.2
)%
 
(2.6
)
2013
95.5
%
 
95.1
%
 
94.8
%
 
94.9
%
 
94.9
%
 
(0.0
)%
 
(0.6
)
 
0.1
 %
 
0.8

2014
95.4
%
 
94.6
%
 
94.4
%
 
94.4
%
 
94.5
%
 
0.0
 %
 
0.3

 
0.1
 %
 
1.1

2015
97.8
%
 
98.0
%
 
98.3
%
 
98.4
%
 
98.3
%
 
(0.0
)%
 
(0.2
)
 
0.0
 %
 
0.1

2016
 
 
99.5
%
 
98.4
%
 
97.8
%
 
97.4
%
 
(0.4
)%
 
(6.0
)
 
(1.0
)%
 
(14.0
)
2017 YTD
 
 
 
 
 
 
98.4
%
 
99.9
%
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
(6.7
)
 
 
 
$
(13.1
)
Refer to Results of Operations – Underwriting – Profitability for a more detailed discussion of our underwriting results.
Pre-tax net investment income for the three and six months ended June 30, 2017, was $9.0 million and $17.7 million respectively, compared with $8.9 million and $17.0 million, respectively, for the same periods of 2016. The increase for the six months ended June 30, 2017, was primarily due to lower premium amortization on mortgage-backed securities and an increase in bond issuer tender offers during 2017.
Our book value per share increased 1.8% from $63.31 at December 31, 2016, to $64.48 at June 30, 2017. This increase was primarily due to earnings and an increase in unrealized gains, partially offset by shareholder dividends and share repurchases during the year.
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 auto 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 that we believe offer the greatest opportunity for premium growth and profitability.


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


Our net earned premium was as follows ($ in thousands):
 
Three months ended June 30,
 
2017
 
2016
 
Change
 
% Change
Gross written premium:
 
 
 
 
 
 
 
Personal Auto
$
276,928

 
$
294,654

 
$
(17,726
)
 
(6.0
)%
Commercial Auto
41,806

 
37,409

 
4,396

 
11.8
 %
Classic Collector
5,056

 
4,898

 
159

 
3.2
 %
Total gross written premium
323,790

 
336,961

 
(13,171
)
 
(3.9
)%
Ceded reinsurance
39

 
57

 
(18
)
 
(31.0
)%
Net written premium
323,829

 
337,018

 
(13,189
)
 
(3.9
)%
Change in unearned premium
15,318

 
3,697

 
11,621

 
314.3
 %
Net earned premium
$
339,147

 
$
340,715

 
$
(1,568
)
 
(0.5
)%
 
 
 
 
 
 
 
 
 
Six months ended June 30,
 
2017
 
2016
 
Change
 
% Change
Gross written premium:
 
 
 
 
 
 
 
Personal Auto
$
601,280

 
$
632,154

 
$
(30,874
)
 
(4.9
)%
Commercial Auto
84,591

 
72,649

 
11,942

 
16.4
 %
Classic Collector
8,621

 
8,126

 
495

 
6.1
 %
Total gross written premium
694,491

 
712,929

 
(18,438
)
 
(2.6
)%
Ceded reinsurance
(2,569
)
 
(4,199
)
 
1,631

 
(38.8
)%
Net written premium
691,923

 
708,730

 
(16,807
)
 
(2.4
)%
Change in unearned premium
(11,407
)
 
(31,830
)
 
20,423

 
(64.2
)%
Net earned premium
$
680,516

 
$
676,899

 
$
3,616

 
0.5
 %
The following table summarizes our policies in force:
 
At June 30,
 
2017
 
2016
 
Change
 
% Change
Personal Auto
697,005

 
737,983

 
(40,978
)
 
(5.6
)%
Commercial Auto
55,214

 
51,862

 
3,352

 
6.5
 %
Classic Collector
41,442

 
41,354

 
88

 
0.2
 %
Total policies in force
793,661

 
831,199

 
(37,538
)
 
(4.5
)%
During the first six months of 2017, we implemented rate revisions in various states with an overall rate increase of 2.9%. Policies in force at June 30, 2017, decreased 4.5% compared with the same period in 2016.
The decrease in gross written premium in Personal Auto during the second quarter and first six months of 2017 was primarily due to premium adjustments in California of $18.3 million and $22.2 million, respectively. Refer to Note 9 - Commitments and Contingencies for a more detailed discussion of the premium adjustments. Excluding the premium adjustments, gross written premium increased 1.5% during the quarter and 0.5% during the first six months of 2017 driven by growth in Texas, Arizona and Commercial Auto, partially offset by reductions in new business in Florida and renewal business in California. Growth during the first six months in Texas and Arizona was primarily due to new business growth and higher average premium.
The gross written premium growth during the second quarter and first six months of 2017 in our Commercial Auto product was primarily due to renewal policy growth and higher average premium.
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

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


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.
In addition to reporting financial results in accordance with GAAP, we report results 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 June 30,
 
 
 
 
 
2017
 
2016
 
% 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
80.8
%
17.0
%
97.8
%
 
78.0
%
16.4
%
94.4
%
 
2.8
 %
0.6
 %
3.4
 %
Commercial Auto
84.0
%
15.0
%
99.0
%
 
74.2
%
18.9
%
93.0
%
 
9.8
 %
(3.9
)%
5.9
 %
Classic Collector
61.1
%
33.9
%
95.0
%
 
67.6
%
30.9
%
98.5
%
 
(6.6
)%
3.0
 %
(3.6
)%
Total statutory ratios
80.9
%
17.0
%
97.9
%
 
77.6
%
16.8
%
94.4
%
 
3.4
 %
0.2
 %
3.5
 %
Total statutory ratios excluding development
83.5
%
17.0
%
100.5
%
 
79.1
%
16.8
%
95.9
%
 
4.4
 %
0.2
 %
4.6
 %
GAAP ratios
80.7
%
18.8
%
99.5
%
 
77.3
%
18.7
%
96.1
%
 
3.3
 %
0.1
 %
3.4
 %
GAAP ratios excluding development
83.2
%
18.8
%
102.0
%
 
78.8
%
18.7
%
97.6
%
 
4.4
 %
0.1
 %
4.5
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30,
 
 
 
 
 
2017
 
2016
 
% 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
80.2
%
16.2
%
96.4
%
 
78.8
%
16.6
%
95.4
%
 
1.4
 %
(0.4
)%
1.0
 %
Commercial Auto
82.5
%
15.5
%
98.0
%
 
75.7
%
17.4
%
93.0
%
 
6.9
 %
(1.9
)%
5.0
 %
Classic Collector
56.1
%
35.3
%
91.4
%
 
54.7
%
31.3
%
86.0
%
 
1.4
 %
3.9
 %
5.4
 %
Total statutory ratios
80.2
%
16.4
%
96.6
%
 
78.3
%
16.9
%
95.2
%
 
1.9
 %
(0.5
)%
1.4
 %
Total statutory ratios excluding development
82.1
%
16.4
%
98.5
%
 
81.0
%
16.9
%
97.9
%
 
1.2
 %
(0.5
)%
0.7
 %
GAAP ratios
80.0
%
18.0
%
98.0
%
 
78.1
%
18.7
%
96.9
%
 
1.9
 %
(0.7
)%
1.2
 %
GAAP ratios excluding development
81.9
%
18.0
%
99.9
%
 
80.8
%
18.7
%
99.5
%
 
1.1
 %
(0.7
)%
0.4
 %
During the first six months of 2017, adjustments were made to written and earned premium as a result of premium to be returned to policyholders in California. Refer to Note 9 - Commitments and Contingencies for a more detailed discussion of the premium adjustments. For the three months ended June 30, 2017, written and earned premiums were reduced by $18.3 million and $12.4 million, respectively. For the six months ended June 30, 2017, written and earned premiums were reduced by $22.1 million and $16.2 million, respectively. Excluding the adjustments, the statutory combined ratios for the three and six months ended June 30, 2017 would have both been 94.3%. The GAAP combined ratios for the same periods would have been 95.8% and 95.7%, respectively.

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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 statutory combined ratio for the three and six months ended June 30, 2017, increased by 3.5 points and 1.4 points, respectively, from the same periods of 2016. The second quarter of 2017 included $2.0 million of favorable development from the first accident quarter of 2017 compared with $7.0 million of unfavorable development from the first accident quarter of 2016. The second quarter and six months ended June 30, 2017 included $6.7 million and $13.1 million of favorable reserve development on prior accident year loss and LAE reserves primarily due to decreases in ultimate frequency and severity estimates in California along with lower ultimate frequency estimates in Florida related to material damage and uninsured motorists bodily injury coverages for accident year 2016. This favorable development was partially offset by increases in ultimate severity estimates in bodily injury and personal injury protection coverages in our commercial auto product as well as from personal injury protection in our personal auto product.
The second quarter and first six months of 2016 included $12.2 million and $18.1 million, respectively, of favorable development on prior accident year loss and LAE reserves primarily due to decreases in severity estimates related to Florida personal injury protection and bodily injury coverages and a decrease in California bodily injury loss adjustment expenses, and primarily related to accident years 2014 and prior. The favorable development for the six months ended June 30, 2016, was partially offset by unfavorable development from accident year 2015 in California material damage coverages, driven by an increase in severity.
The GAAP combined ratio for the three and six months ended June 30, 2017, increased by 3.4 points and 1.2 points, respectively, from the same periods of 2016. Excluding the effect of development, the GAAP combined ratio increased by 4.5 points and 0.4 point, respectively, during the second quarter and first six months of 2017, respectively, primarily due to the premium adjustments.
Losses from catastrophes were $1.7 million and $3.2 million for the three and six months ended June 30, 2017, respectively, compared with $5.2 million and $6.3 million for the same periods of 2016.
The 3.4 points and 1.0 point increase in the Personal Auto combined ratio for the three and six months ended June 30, 2017, compared with the same periods of 2016, was primarily due to the premium adjustments in California. Partially offsetting this increase for the six months ending June 30, 2017, was a reduction in commission expense in Florida and Texas and an increase in fee income in Texas.
The 5.9 points and 5.0 points increase in the Commercial Auto combined ratio for the three and six months ended June 30, 2017, was primarily due to an increase in large losses paid during the first six months of 2017.
Installment and Other Fee Income
 
Three months ended June 30,
 
Six months ended June 30,
($ in thousands)
2017
 
2016
 
2017
 
2016
Installment and other fee income
$
26,461

 
$
25,385

 
$
53,410

 
$
50,903

The increase in installment and other fee income charged to policyholders during the first six months of 2017 was primarily related to an increase in installment fees.

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


Net Investment Income
Net investment income is comprised of gross investment income less investment management fees and expenses, as shown in the following table ($ in thousands):
 
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
Gross investment income:
 
 
 
 
 
 
 
Interest income on fixed maturities, cash and cash equivalents
$
8,888

 
$
8,766

 
$
17,777

 
$
17,047

Dividends on equity securities
651

 
718

 
1,027

 
1,063

Gross investment income
9,539

 
9,484

 
18,804

 
18,110

Investment expenses
(538
)
 
(557
)
 
$
(1,108
)
 
$
(1,120
)
Net investment income
9,001

 
8,927

 
17,696

 
16,990

Average investment balance, at cost
$
1,556,705

 
$
1,498,837

 
$
1,550,929

 
$
1,502,468

Annualized returns excluding realized gains and losses
2.3%

 
2.4%

 
2.3%

 
2.3%

Annualized returns including realized gains and losses
2.8%

 
2.3%

 
2.6%

 
2.3%

The increase in pre-tax net investment income for the three and six months ended June 30, 2017, was primarily due to lower premium amortization on mortgage-backed securities and an increase in bond issuer tender offers during 2017.
The following table provides information about our fixed maturity investments at June 30, 2017, 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,
 
 
 
 
 
 
 
2017
$
33,977

 
$
65,982

 
$
99,959

 
2.4%
2018
58,836

 
116,538

 
175,374

 
2.3%
2019
53,140

 
184,791

 
237,931

 
2.0%
2020
44,827

 
194,145

 
238,972

 
2.5%
2021
37,449

 
133,246

 
170,695

 
2.8%
Thereafter
203,922

 
236,934

 
440,855

 
2.7%
Total
$
432,152

 
$
931,635

 
$
1,363,787

 
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 FORM 10-Q
Management’s Discussion and Analysis of Financial Condition and Results of Operations


Net Realized Gains (Losses) on Investments
We recorded net realized gains (losses) on sales and impairments for unrealized losses deemed other-than-temporary as follows (before tax, $ in thousands):
 
Three months ended June 30, 2017
 
Three months ended June 30, 2016
 
Net Realized Gains (Losses) on Sales
 
Net Impairment Losses Recognized in Earnings
 
Total Net Realized Gains (Losses) on Investments
 
Net Realized Gains (Losses) on Sales
 
Net Impairment Losses Recognized in Earnings
 
Total Net Realized Losses on Investments
Fixed maturities
$
301

 
$
0

 
$
301

 
$
34

 
$
(198
)
 
$
(164
)
Equity securities
1,586

 
0

 
1,586

 
0

 
0

 
0

Short-term investments
(0
)
 
0

 
(0
)
 
(0
)
 
0

 
(0
)
Total
$
1,886

 
$
0

 
$
1,886

 
$
34

 
$
(198
)
 
$
(164
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2017
 
Six months ended June 30, 2016
 
Net Realized Gains on Sales
 
Net Impairment Losses
Recognized
in Earnings
 
Total Net Realized Gains
on Investments
 
Net Realized
Gains (Losses) on Sales
 
Net Impairment Losses
Recognized
in Earnings
 
Total Net Realized
Losses on Investments
Fixed maturities
$
249

 
$
(10
)
 
$
239

 
$
293

 
$
(316
)
 
$
(23
)
Equity securities
2,155

 
0

 
2,155

 
0

 
0

 
0

Short-term investments
1

 
0

 
1

 
(2
)
 
0

 
(2
)
       Total
$
2,406

 
$
(10
)
 
$
2,396

 
$
291

 
$
(316
)
 
$
(25
)
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
 
Three months ended June 30,
 
Six months ended June 30,
($ in thousands)
2017
 
2016
 
2017
 
2016
5.0% Senior Notes
$
3,438

 
$
3,438

 
$
6,875

 
$
6,875

Amortization of debt issuance costs
54

 
52

 
108

 
102

Capital leases
19

 
19

 
40

 
40

Total
$
3,511

 
$
3,508

 
$
7,023

 
$
7,017

At June 30, 2017, 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 was 23.1% and 27.5% for the three and six months ended June 30, 2017, respectively, compared with 31.3% and 30.2%, respectively, for the same periods of 2016. The GAAP effective tax rate has decreased in 2017 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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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 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 June 30, 2017, the holding company had $163.9 million of cash and investments. In 2017 our insurance subsidiaries may pay us up to $66.2 million in ordinary dividends without prior regulatory approval. For the six months ended June 30, 2017, our insurance subsidiaries have paid us ordinary dividends of $29.0 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 $28.8 million and $57.1 million during the three and six months ended June 30, 2017, respectively, compared with positive operating cash flows of $14.3 million and $37.4 million during the same periods of 2016.
At June 30, 2017, 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 June 30, 2017, there were no borrowings outstanding against it. We intend to renew our line of credit in August 2017.
On February 29, 2016, we filed a "shelf" registration statement with the Securities and Exchange Commission registering securities, and as long as it remains effective, it 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 2017 we increased our quarterly dividend to $0.58 per share from $0.52 per share. At this current amount, our 2017 annualized dividend payments would be approximately $25.6 million.
On November 4, 2014, our Board of Directors increased the authority of our share and debt repurchase program to a total of $75 million and extended the date to execute the program to December 31, 2016, from December 31, 2014. On November 1, 2016, our Board approved the extension of the date to execute the program from December 31, 2016, to December 31, 2017. As of June 30, 2017, we had $32.4 million of authority remaining under this program. Share repurchases during the first six months of 2017 were as follows:
 
Total Number of Shares Purchased
 
Average Price Paid per Share
(Excluding Commissions)
First quarter
8,756

 
$
89.58

Second quarter
17,401

 
94.52

Total
26,157

 
$
92.86

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.

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


Reinsurance
Premium ceded under all reinsurance agreements for the three and six months ended June 30, 2017, was ($0.0) million and $2.6 million, respectively, compared with ($0.1) million and $4.2 million, respectively, for the same periods of 2016. Effective June 1, 2017, the premium paid for our excess of loss reinsurance contract for our commercial auto business is now based on earned premium rather than written premium. Premium ceded for the three and six months ended June 30, 2017, includes the return of $2.6 million of unearned premium due to the termination of the previous excess of loss contract. Refer to Note 11 - Reinsurance to the Consolidated Financial Statements of our Form 10-K for the year ended December 31, 2016, for more information on our reinsurance contracts.
Investments
Our consolidated investment portfolio at June 30, 2017, contained approximately $1.4 billion in fixed maturity securities, $95.5 million in equity securities and $0.4 million of 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 June 30, 2017, we had pre-tax net unrealized gains of $7.2 million on fixed maturities and pre-tax net unrealized gains of $21.2 million on equity securities. Combined, the pre-tax net unrealized gain increased by $17.3 million for the six months ended June 30, 2017. This increase occurred as a result of lower market interest rates and a rise in global equity markets. The average option adjusted duration of our fixed maturity portfolio was 3.3 years at June 30, 2017, and December 31, 2016.
Since we carry all of these securities at fair value in our balance sheet, there is virtually no effect on liquidity or financial condition upon the sale and ultimate realization of unrealized gains and losses.
Approximately 90.8% of our fixed maturity investments at June 30, 2017, 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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Management’s Discussion and Analysis of Financial Condition and Results of Operations


Summarized information for our investment portfolio at June 30, 2017, was as follows ($ in thousands):
 
Amortized
Cost
 
Fair Value
 
% of Total 
Fair Value
Fixed Maturities:
 
 
 
 
 
U.S. government
$
64,192

 
$
64,025

 
4.2
%
State and municipal
497,850

 
502,156

 
32.7
%
Mortgage- and asset-backed:
 
 
 
 
 
Residential mortgage-backed securities
353,813

 
351,766

 
22.9
%
Commercial mortgage-backed securities
42,609

 
42,060

 
2.7
%
Asset-backed securities (ABS):
 
 
 
 
 
Auto loans
29,566

 
29,611

 
1.9
%
Equipment leases
7,405

 
7,424

 
0.5
%
Credit card
10,364

 
10,380

 
0.7
%
All other
4,333

 
4,360

 
0.3
%
Total ABS
51,668

 
51,775

 
3.4
%
Total mortgage- and asset-backed
448,090

 
445,602

 
29.0
%
Corporates
 
 
 
 
 
Investment grade
296,122

 
298,439

 
19.4
%
Non-investment grade
125,562

 
128,813

 
8.4
%
Total corporates
421,684

 
427,252

 
27.8
%
Total fixed maturities
1,431,815

 
1,439,034

 
93.8
%
Equity securities
74,270

 
95,508

 
6.2
%
Short-term investments
425

 
425

 
0.0
%
Total investments
$
1,506,511

 
$
1,534,967

 
100.0
%
We categorize securities by rating based upon available ratings issued by Moody's, Standard & Poor's or Fitch. If all three ratings are available but not equivalent, we exclude the lowest rating and the lower of the remaining ratings is used. If ratings are only available from two agencies, the lowest is used. This methodology is consistent with that used by the major bond indices.
The following table presents the credit rating and fair value of our fixed maturity portfolio by major security type at June 30, 2017 ($ in thousands): 
 
Rating
 
 
 
 
 
AAA
 
AA
 
A
 
BBB
 
Non-investment Grade
 
Total Fair
Value
 
% of Total Exposure
U.S. government
$
64,025

 
$
0

 
$
0

 
$
0

 
$
0

 
$
64,025

 
4.4
%
State and municipal
144,884

 
266,002

 
87,823

 
0

 
3,447

 
502,156

 
34.9
%
Mortgage- and asset-backed
425,276

 
15,588

 
1,636

 
3,102

 
0

 
445,602

 
31.0
%
Corporates
1,704

 
28,801

 
134,874

 
133,060

 
128,813

 
427,252

 
29.7
%
Total fair value
$
635,889

 
$
310,391

 
$
224,333

 
$
136,163

 
$
132,260

 
$
1,439,034

 
100.0
%
% of total fair value
44.2%

 
21.6%

 
15.6%

 
9.5%

 
9.2%

 
100.0%

 
 

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

ITEM 3
Quantitative and Qualitative Disclosures about Market Risk
As of June 30, 2017, there were no material changes to the information provided on Form 10-K for the year ended December 31, 2016, 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, 2016.
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 June 30, 2017. 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 June 30, 2017, 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.
PART II
OTHER INFORMATION

ITEM 1
Legal Proceedings
Refer to Note 9 - Commitments and Contingencies to the Consolidated Financial Statements for a discussion of developments in legal proceedings during the second quarter of 2017. 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, 2016.
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, 2016. 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, 2016.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

ITEM 2
Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Period
 
Total Number of Shares Purchased
 
Average Price Paid per Share (a)
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Approximate Dollar Value that May Yet Be Purchased Under the Plans or Programs (b)
April 1, 2017 - April 30, 2017
 
3,100

 
$
93.60

 
3,100

 
$
33,801,367

May 1, 2017 - May 31, 2017
 
3,001

 
95.57

 
3,001

 
33,513,356

June 1, 2017 - June 30, 2017
 
11,300

 
94.49

 
11,300

 
32,444,051

Total
 
17,401

 
$
94.52

 
17,401

 
$
32,444,051

 
(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 to December 31, 2016, from December 31, 2014. On November 1, 2016, our Board approved the extension of the date to execute the program from December 31, 2016, to December 31, 2017.

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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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q


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
August 3, 2017
 
Robert H. Bateman
 
 
Executive Vice President, Chief Financial Officer and Treasurer

41