10-Q 1 ipcc10q3q2017.htm 3Q17 10-Q 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 September 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 October 31, 2017, there were 10,926,700 shares of the registrant’s common stock outstanding.


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

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
 
Nine months ended
 
September 30,
 
September 30,
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Earned premium
$
344,964

 
$
342,171

 
0.8
 %
 
$
1,025,480

 
$
1,019,070

 
0.6
 %
Installment and other fee income
26,022

 
26,297

 
(1.0
)%
 
79,432

 
77,200

 
2.9
 %
Net investment income
9,771

 
8,125

 
20.3
 %
 
27,467

 
25,115

 
9.4
 %
Net realized (losses) gains on investments (1)
(431
)
 
1,282

 
(133.6
)%
 
1,964

 
1,257

 
56.2
 %
Other income
376

 
249

 
50.7
 %
 
1,041

 
727

 
43.2
 %
Total revenues
380,701

 
378,124

 
0.7
 %
 
1,135,385

 
1,123,370

 
1.1
 %
Costs and Expenses:
 
 
 
 
 
 
 
 
 
 
 
Losses and loss adjustment expenses
263,186

 
280,866

 
(6.3
)%
 
807,482

 
809,664

 
(0.3
)%
Commissions and other underwriting expenses
89,321

 
88,412

 
1.0
 %
 
265,501

 
266,183

 
(0.3
)%
Interest expense
3,510

 
3,507

 
0.1
 %
 
10,533

 
10,524

 
0.1
 %
Corporate general and administrative expenses
2,158

 
1,768

 
22.0
 %
 
6,876

 
5,532

 
24.3
 %
Other expenses
844

 
375

 
125.1
 %
 
1,673

 
1,455

 
15.0
 %
Total costs and expenses
359,019

 
374,929

 
(4.2
)%
 
1,092,065

 
1,093,358

 
(0.1
)%
Earnings before income taxes
21,683

 
3,196

 
578.5
 %
 
43,320

 
30,012

 
44.3
 %
Provision for income taxes
6,704

 
442

 
NM

 
12,649

 
8,536

 
48.2
 %
Net Earnings
$
14,978

 
$
2,753

 
444.0
 %
 
$
30,671

 
$
21,476

 
42.8
 %
Net Earnings per Common Share:
 
 
 
 
 
 
 
 
 
 
 
Basic
$
1.36

 
$
0.25

 
444.0
 %
 
$
2.79

 
$
1.95

 
43.1
 %
Diluted
1.35

 
0.25

 
440.0
 %
 
2.76

 
1.93

 
43.0
 %
Average Number of Common Shares:
 
 
 
 
 
 
 
 
 
 
 
Basic
10,993

 
11,018

 
(0.2
)%
 
11,004

 
11,022

 
(0.2
)%
Diluted
11,062

 
11,084

 
(0.2
)%
 
11,095

 
11,105

 
(0.1
)%
Cash Dividends per Common Share
$
0.58

 
$
0.52

 
11.5
 %
 
$
1.74

 
$
1.56

 
11.5
 %
(1) Net realized (losses) gains on sales
$
(410
)
 
$
1,282

 
(132.0
)%
 
$
1,996

 
$
1,573

 
26.9
 %
Total other-than-temporary impairment (OTTI) losses
(57
)
 
0

 
NM

 
(102
)
 
(316
)
 
(67.6
)%
Non-credit portion in other comprehensive income
35

 
0

 
NM

 
71

 
0

 
NM

Net impairment losses recognized in earnings
(22
)
 
0

 
NM

 
(31
)
 
(316
)
 
(90.0
)%
Total net realized (losses) gains on investments
$
(431
)
 
$
1,282

 
(133.6
)%
 
$
1,964

 
$
1,257

 
56.2
 %
NM = Not Meaningful
 
 
 
 
 
 
 
 
 
 
 

3

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in thousands)
(unaudited)
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
Net earnings
$
14,978

 
$
2,753

 
$
30,671

 
$
21,476

Other comprehensive income before tax:
 
 
 
 
 
 
 
Net change in post-retirement benefit liability
(13
)
 
(11
)
 
(38
)
 
(32
)
Unrealized gains on investments:
 
 
 
 
 
 
 
Unrealized holding gains arising during the period
6,310

 
4,702

 
26,030

 
30,989

Less: Reclassification adjustments for losses (gains) included in net earnings
431

 
(1,282
)
 
(1,964
)
 
(1,257
)
Unrealized gains on investments, net
6,742

 
3,420

 
24,066

 
29,731

Other comprehensive income, before tax
6,729

 
3,409

 
24,028

 
29,699

Income tax expense related to components of other comprehensive income
(2,355
)
 
(1,193
)
 
(8,410
)
 
(10,395
)
Other comprehensive income, net of tax
4,374

 
2,216

 
15,618

 
19,304

Comprehensive income
$
19,352

 
$
4,969

 
$
46,289

 
$
40,780



4

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts in line descriptions)
 
September 30, 2017
 
December 31, 2016
 
(unaudited)
 
 
Assets
 
 
 
Investments:
 
 
 
Fixed maturities – at fair value (amortized cost $1,439,204 and $1,392,660)
$
1,448,709

 
$
1,390,167

Equity securities – at fair value (cost $74,347 and $77,013)
100,042

 
90,640

Short-term investments – at fair value (amortized cost $2,574 and $2,909)
2,572

 
2,907

Total investments
1,551,323

 
1,483,714

Cash and cash equivalents
102,356

 
92,800

Accrued investment income
12,411

 
12,485

Agents’ balances and premium receivable, net of allowances for doubtful accounts of $13,884 and $14,207
509,210

 
495,157

Property and equipment, net of accumulated depreciation of $81,411 and $70,559
84,485

 
96,166

Prepaid reinsurance premium
2,976

 
3,410

Recoverables from reinsurers (includes $3,288 and $121 on paid losses and LAE)
36,368

 
17,251

Deferred policy acquisition costs
91,418

 
91,136

Current and deferred income taxes
20,050

 
21,635

Receivable for securities sold
2,025

 
795

Other assets
19,968

 
12,777

Goodwill
75,275

 
75,275

Total assets
$
2,507,866

 
$
2,402,601

Liabilities and Shareholders’ Equity
 
 
 
Liabilities:
 
 
 
Unpaid losses and loss adjustment expenses
$
729,280

 
$
685,455

Unearned premium
637,506

 
614,347

Long-term debt (fair value $292,782 and $278,726)
273,753

 
273,591

Commissions payable
15,035

 
16,176

Payable for securities purchased
10,167

 
13,922

Other liabilities
123,513

 
99,924

Total liabilities
1,789,254

 
1,703,414

Commitments and contingencies (See Note 9)


 


Shareholders’ equity:
 
 
 
Common stock, no par value (50,000,000 shares authorized; 21,852,037 and 21,809,954 shares issued)
21,868

 
21,829

Additional paid-in capital
381,928

 
378,745

Retained earnings
789,175

 
777,695

Accumulated other comprehensive income, net of tax
23,526

 
7,907

Treasury stock, at cost (10,883,839 and 10,766,211 shares)
(497,885
)
 
(486,990
)
Total shareholders’ equity
718,612

 
699,187

Total liabilities and shareholders’ equity
$
2,507,866

 
$
2,402,601


5

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
($ in thousands)
(unaudited)
 
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income,
Net of Tax
 
Treasury
Stock
 
Total
Balance at December 31, 2015
$
21,794

 
$
376,025

 
$
757,604

 
$
7,811

 
$
(475,638
)
 
$
687,595

Net earnings

 

 
21,476

 

 

 
21,476

Net change in post-retirement benefit liability

 

 

 
(21
)
 

 
(21
)
Change in unrealized gain on investments

 

 

 
19,109

 

 
19,109

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

 

 

 
216

 

 
216

Comprehensive income
 
 
 
 
 
 
 
 
 
 
40,780

Dividends paid to common shareholders

 

 
(17,249
)
 

 

 
(17,249
)
Shares issued and share-based compensation expense, including tax benefit
22

 
1,731

 

 

 

 
1,753

Acquisition of treasury stock

 

 

 

 
(10,079
)
 
(10,079
)
Balance at September 30, 2016
$
21,816

 
$
377,757

 
$
761,831

 
$
27,115

 
$
(485,717
)
 
$
702,801

Net earnings

 

 
21,609

 

 

 
21,609

Net change in post-retirement benefit liability

 

 

 
78

 

 
78

Change in unrealized gain on investments

 

 

 
(19,347
)
 

 
(19,347
)
Change in non-credit component of impairment losses on fixed maturities

 

 

 
61

 

 
61

Comprehensive income
 
 
 
 
 
 
 
 
 
 
2,401

Dividends paid to common shareholders

 

 
(5,744
)
 

 

 
(5,744
)
Shares issued and share-based compensation expense, including tax benefit
13

 
989

 

 

 

 
1,002

Acquisition of treasury stock

 

 

 

 
(1,273
)
 
(1,273
)
Balance at December 31, 2016
$
21,829

 
$
378,745

 
$
777,695

 
$
7,907

 
$
(486,990
)
 
$
699,187

Net earnings

 

 
30,671

 

 

 
30,671

Net change in post-retirement benefit liability

 

 

 
(24
)
 

 
(24
)
Change in unrealized gain on investments

 

 

 
15,539

 

 
15,539

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

 

 

 
103

 

 
103

Comprehensive income
 
 
 
 
 
 
 
 
 
 
46,289

Dividends paid to common shareholders

 

 
(19,191
)
 

 

 
(19,191
)
Shares issued and share-based compensation expense
39

 
3,183

 

 

 

 
3,222

Acquisition of treasury stock

 

 

 

 
(10,895
)
 
(10,895
)
Balance at September 30, 2017
$
21,868

 
$
381,928

 
$
789,175

 
$
23,526

 
$
(497,885
)
 
$
718,612


6

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands, unaudited)
 
Three months ended September 30,
 
2017
 
2016
Operating Activities:
 
 
 
Net earnings
$
14,978

 
$
2,753

Adjustments:
 
 
 
Depreciation
4,008

 
3,930

Amortization
5,436

 
5,643

Net realized losses (gains) on investments
431

 
(1,282
)
Loss on disposal of property and equipment
1

 
143

Share-based compensation expense
390

 
1,060

Activity related to rabbi trust
55

 
46

Change in accrued investment income
1,060

 
482

Change in agents’ balances and premium receivable
(11,155
)
 
(15,356
)
Change in reinsurance receivables
(18,295
)
 
465

Change in deferred policy acquisition costs
(1,016
)
 
(1,627
)
Change in other assets
295

 
(2,363
)
Change in unpaid losses and loss adjustment expenses
28,182

 
10,316

Change in unearned premium
14,040

 
14,911

Change in other liabilities
12,068

 
(3,179
)
Net cash provided by operating activities
50,479

 
15,943

Investing Activities:
 
 
 
Purchases of fixed maturities
(136,834
)
 
(117,638
)
Purchases of short-term investments
(2,594
)
 
(3,110
)
Purchases of property and equipment
(987
)
 
(253
)
Maturities and redemptions of fixed maturities
73,361

 
39,703

Maturities and redemptions of short-term investments
425

 
1,300

Proceeds from sale of fixed maturities
44,201

 
62,429

Proceeds from sale of equity securities
0

 
2,000

Proceeds from sale of short-term investments
0

 
3,592

Proceeds from sale of property and equipment
1

 
0

Net cash used in investing activities
(22,428
)
 
(11,977
)
Financing Activities:
 
 
 
Proceeds from stock options exercised and employee stock purchases
66

 
60

Principal payments under capital lease obligations
(135
)
 
(131
)
Acquisition of treasury stock
(6,857
)
 
(543
)
Dividends paid to shareholders
(6,378
)
 
(5,751
)
Net cash used in financing activities
(13,303
)
 
(6,366
)
Net increase (decrease) in cash and cash equivalents
14,748

 
(2,400
)
Cash and cash equivalents at beginning of period
87,608

 
76,016

Cash and cash equivalents at end of period
$
102,356

 
$
73,616



7

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands, unaudited)
 
Nine months ended September 30,
 
2017
 
2016
Operating Activities:
 
 
 
Net earnings
$
30,671

 
$
21,476

Adjustments:
 
 
 
Depreciation
12,304

 
10,451

Amortization
16,459

 
16,482

Net realized gains on investments
(1,964
)
 
(1,257
)
(Gain) loss on disposal of property and equipment
(7
)
 
544

Share-based compensation expense
3,012

 
1,411

Excess tax benefits from share-based payment arrangements
0

 
157

Activity related to rabbi trust
183

 
112

Change in accrued investment income
74

 
992

Change in agents’ balances and premium receivable
(14,053
)
 
(40,372
)
Change in reinsurance receivables
(18,684
)
 
(1,602
)
Change in deferred policy acquisition costs
(283
)
 
(4,292
)
Change in other assets
(12,925
)
 
940

Change in unpaid losses and loss adjustment expenses
43,825

 
6,562

Change in unearned premium
23,158

 
43,657

Change in other liabilities
22,388

 
(6,924
)
Net cash provided by operating activities
104,159

 
48,339

Investing Activities:
 
 
 
Purchases of fixed maturities
(412,675
)
 
(379,135
)
Purchases of equity securities
(1,900
)
 
0

Purchases of short-term investments
(3,019
)
 
(8,250
)
Purchases of property and equipment
(2,571
)
 
(15,648
)
Maturities and redemptions of fixed maturities
181,839

 
115,848

Maturities and redemptions of short-term investments
925

 
1,300

Proceeds from sale of fixed maturities
163,359

 
265,544

Proceeds from sale of equity securities
7,002

 
2,000

Proceeds from sale of short-term investments
2,400

 
9,258

Proceeds from sale of property and equipment
26

 
2

Net cash used in investing activities
(64,614
)
 
(9,081
)
Financing Activities:
 
 
 
Proceeds from stock options exercised and employee stock purchases
210

 
185

Principal payments under capital lease obligations
(403
)
 
(380
)
Acquisition of treasury stock
(10,603
)
 
(10,681
)
Dividends paid to shareholders
(19,191
)
 
(17,249
)
Net cash used in financing activities
(29,988
)
 
(28,125
)
Net increase in cash and cash equivalents
9,556

 
11,133

Cash and cash equivalents at beginning of period
92,800

 
62,483

Cash and cash equivalents at end of period
$
102,356

 
$
73,616


8

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
INDEX TO NOTES
 

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 September 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 the nine months ended September 30, 2016. The adoption of this standard did not have a material impact on our financial condition or results of operations.

9

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 periods 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 September 30, 2017, we have $16.7 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. As an insurance-entity, we are largely exempt from the provisions of this standard, with only fee income subject to this new standard. Processing and policy fees, which totaled $19.7 million for the year ended December 31, 2016, and are largely earned at the inception of the policy under current guidance, will be earned over the life of the policy under the new revenue recognition guidance. We do not expect the adoption of this standard to have a material impact on our financial condition or results of operations.

10

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 September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Net earnings
$
14,978

 
$
2,753

 
$
30,671

 
$
21,476

Average basic shares outstanding
10,993

 
11,018

 
11,004

 
11,022

Basic net earnings per share
$
1.36

 
$
0.25

 
$
2.79

 
$
1.95

 
 
 
 
 
 
 
 
Average basic shares outstanding
10,993

 
11,018

 
11,004

 
11,022

Restricted stock not vested
17

 
27

 
28

 
24

Dilutive effect of Performance Share Plan
52

 
39

 
63

 
59

Average diluted shares outstanding
11,062

 
11,084

 
11,095

 
11,105

Diluted net earnings per share
$
1.35

 
$
0.25

 
$
2.76

 
$
1.93


11

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

Note 3 Fair Value
Fair values of instruments are based on:
(i)
quoted prices in active markets for identical assets (Level 1);
(ii)
quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all significant inputs are observable in active markets (Level 2); or
(iii)
valuations derived from valuation techniques in which one or more significant inputs are unobservable in the marketplace (Level 3).
The following tables present, for each of the fair value hierarchy levels, our assets and liabilities for which we report fair value on a recurring basis ($ in thousands):
 
Fair Value
September 30, 2017
Level 1
 
Level 2
 
Level 3
 
Total
Cash and cash equivalents
$
102,356

 
$
0

 
$
0

 
$
102,356

Fixed maturity securities:
 
 
 
 
 
 
 
U.S. government
61,894

 
0

 
0

 
61,894

State and municipal
0

 
498,849

 
3,537

 
502,386

Mortgage-backed securities:

 
 
 
 
 
 
Residential
0

 
355,257

 
0

 
355,257

Commercial
0

 
34,890

 
0

 
34,890

Total mortgage-backed securities
0

 
390,148

 
0

 
390,148

Asset-backed securities
0

 
55,906

 
200

 
56,106

Corporates
0

 
437,962

 
213

 
438,175

Total fixed maturities
61,894

 
1,382,865

 
3,950

 
1,448,709

Equity securities
100,042

 
0

 
0

 
100,042

Short-term investments
0

 
2,572

 
0

 
2,572

Total cash and investments
$
264,292

 
$
1,385,437

 
$
3,950

 
$
1,653,679

Percentage of total cash and investments
16.0
%
 
83.8
%
 
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
%

12

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 $292.8 million and $278.7 million fair value of our long-term debt at September 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.
















13

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

The following tables present the progression in the Level 3 fair value category ($ in thousands): 
Three months ended September 30, 2017
State and
Municipal
 
Asset-Backed Securities
 
Corporates
 
Total
Balance at beginning of period
$
3,447

 
$
249

 
$
215

 
$
3,910

Total (losses) gains, unrealized or realized
 
 
 
 
 
 
 
Included in net earnings
(30
)
 
0

 
(0
)
 
(30
)
Included in other comprehensive income
2

 
(1
)
 
(1
)
 
(0
)
Settlements
0

 
(48
)
 
0

 
(48
)
Transfers in
118

 
0

 
0

 
118

Balance at end of period
$
3,537

 
$
200

 
$
213

 
$
3,950

 
 
 
 
 
 
 
 
Three months ended September 30, 2016
 
 
 
 
 
 
 
Balance at beginning of period
$
626

 
$
1,959

 
$
1,107

 
$
3,692

Total (losses) gains, unrealized or realized
 
 
 
 
 
 
 
Included in net earnings
(6
)
 
(0
)
 
2

 
(4
)
Included in other comprehensive income
(1
)
 
1

 
(16
)
 
(17
)
Purchases
0

 
0

 
0

 
0

Settlements
0

 
(125
)
 
(89
)
 
(214
)
Transfers in
0

 
0

 
0

 
0

Transfers out
0

 
(1,339
)
 
0

 
(1,339
)
Balance at end of period
$
618

 
$
495

 
$
1,005

 
$
2,118

 
 
 
 
 
 
 
 
Nine months ended September 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
(90
)
 
0

 
2

 
(89
)
Included in other comprehensive income
14

 
25

 
(28
)
 
11

Purchases
0

 
4,259

 
2,000

 
6,259

Sales
(694
)
 
0

 
0

 
(694
)
Settlements
0

 
(213
)
 
(427
)
 
(640
)
Transfers in
447

 
0

 
0

 
447

Transfers out
0

 
(4,283
)
 
(2,000
)
 
(6,283
)
Balance at end of period
$
3,537

 
$
200

 
$
213

 
$
3,950

 
 
 
 
 
 
 
 
Nine months ended September 30, 2016
 
 
 
 
 
 
 
Balance at beginning of period
$
10

 
$
0

 
$
1,524

 
$
1,534

Total (losses) gains, unrealized or realized
 
 
 
 
 
 
 
Included in net earnings
(10
)
 
0

 
9

 
(1
)
Included in other comprehensive income
(0
)
 
2

 
(42
)
 
(40
)
Purchases
0

 
620

 
0

 
620

Settlements
(10
)
 
(125
)
 
(487
)
 
(622
)
Transfers in
628

 
1,338

 
0

 
1,966

Transfers out
0

 
(1,339
)
 
0

 
(1,339
)
Balance at end of period
$
618

 
$
495

 
$
1,005

 
$
2,118



14

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

Of the $4.0 million fair value of securities in Level 3 at September 30, 2017, which consisted of six securities, we priced two based on non-binding broker quotes and four securities, which were included in Level 3 because they were not rated by a nationally recognized statistical rating organization, were priced by a nationally recognized pricing service.
During the nine months ended September 30, 2017, one security, which was an exchange of a rated municipal bond for an unrated refunded bond, was transferred from Level 2 into Level 3, and zero security was transferred from Level 2 into Level 3 because it was not rated by a recognized statistical rating organization. There were no transfers of securities between Levels 1 and 2. Zero security was transferred from Level 2 into Level 3 during the first quarter of 2016 because a price could not be determined using observable market inputs. However, during the third quarter of 2016, a price was obtained using market observable inputs and the security was transferred back into Level 2.
The gains or losses included in net earnings are included in the line item "Net realized (losses) gains on investments" in the Consolidated Statements of Earnings. We recognize the net gains or losses included in other comprehensive income in the line item "Unrealized gains on investments, net" in the Consolidated Statements of Comprehensive Income and the line item "Change in unrealized gain on investments" or the line item "Change in non-credit component of impairment losses on fixed maturities" in the Consolidated Statements of Changes in Shareholders’ Equity.
The following table presents the carrying value and estimated fair value of our financial instruments ($ in thousands):
 
September 30, 2017
 
December 31, 2016
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
102,356

 
$
102,356

 
$
92,800

 
$
92,800

Available-for-sale securities:
 
 
 
 
 
 
 
Fixed maturities
1,448,709

 
1,448,709

 
1,390,167

 
1,390,167

Equity securities
100,042

 
100,042

 
90,640

 
90,640

Short-term investments
2,572

 
2,572

 
2,907

 
2,907

Total cash and investments
$
1,653,679

 
$
1,653,679

 
$
1,576,514

 
$
1,576,514

Liabilities:
 
 
 
 
 
 
 
Long-term debt
$
273,753

 
$
292,782

 
$
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 nine months ended September 30, 2017, were $44.2 million and $172.8 million respectively, while the proceeds from sales of securities for the three and nine months ended September 30, 2016, were $68.0 million and $276.8 million, respectively. The proceeds for the nine months ended September 30, 2017, were net of $2.0 million of receivable for unsettled sales as of September 30, 2017. The proceeds for the nine months ended September 30, 2016, were net of $1.7 million of receivable for securities sold during the third quarter of 2016 that had not settled as of September 30, 2016.
Gross gains of $0.3 million and gross losses of $0.7 million were realized on sales of available-for-sale securities during the three months ended September 30, 2017, compared with gross gains of $1.3 million and gross losses of $42.0 thousand realized on sales during the three months ended September 30, 2016. Gross gains of $3.3 million and gross losses of $1.3 million were realized on sales of available-for-sale securities during the nine months ended September 30, 2017, compared with gross gains of $3.5 million and gross losses of $1.9 million realized on sales during the nine months ended September 30, 2016. Gains or losses on securities are determined on a specific identification basis.

15

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

Summarized information for the major categories of our investment portfolio follows ($ in thousands):
September 30, 2017
Amortized
Cost or Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
OTTI
Recognized in
Accumulated
OCI(1)
Fixed maturities:
 
 
 
 
 
 
 
 
 
U.S. government
$
62,099

 
$
49

 
$
(254
)
 
$
61,894

 
$
0

State and municipal
497,868

 
5,336

 
(818
)
 
502,386

 
(46
)
Mortgage-backed securities:

 

 

 
 
 
 
Residential
356,172

 
2,592

 
(3,507
)
 
355,257

 
(1,823
)
Commercial
35,292

 
38

 
(440
)
 
34,890

 
0

Total mortgage-backed securities
391,463

 
2,631

 
(3,946
)
 
390,148

 
(1,823
)
Asset-backed securities
56,031

 
114

 
(39
)
 
56,106

 
(8
)
Corporates
431,742

 
6,922

 
(490
)
 
438,175

 
(31
)
Total fixed maturities
1,439,204

 
15,053

 
(5,548
)
 
1,448,709

 
(1,909
)
Equity securities
74,347

 
25,695

 
0

 
100,042

 
0

Short-term investments
2,574

 
0

 
(2
)
 
2,572

 
0

Total
$
1,516,125

 
$
40,748

 
$
(5,550
)
 
$
1,551,323

 
$
(1,909
)
 
 
 
 
 
 
 
 
 
 
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

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
September 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
23
 
$
44,656

 
$
(162
)
 
0.4
%
 
9

 
$
4,489

 
$
(93
)
 
2.0
%
State and municipal
60
 
119,086

 
(491
)
 
0.4
%
 
16

 
35,590

 
(328
)
 
0.9
%
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
315
 
158,772

 
(2,004
)
 
1.2
%
 
94

 
50,661

 
(1,503
)
 
2.9
%
Commercial
3
 
7,719

 
(87
)
 
1.1
%
 
7

 
19,659

 
(353
)
 
1.8
%
Total mortgage-backed securities
318
 
166,491

 
(2,091
)
 
1.2
%
 
101

 
70,320

 
(1,855
)
 
2.6
%
Asset-backed securities
19
 
21,159

 
(32
)
 
0.1
%
 
3

 
2,534

 
(7
)
 
0.3
%
Corporates
48
 
67,708

 
(306
)
 
0.4
%
 
19

 
20,627

 
(184
)
 
0.9
%
Total fixed maturities
468
 
419,100

 
(3,081
)
 
0.7
%
 
148

 
133,560

 
(2,467
)
 
1.8
%
Short-term investments
2
 
2,572

 
(2
)
 
0.5
%
 
0

 
0

 
0

 
0.0
%
Total
470
 
$
421,672

 
$
(3,083
)
 
0.7
%
 
148

 
$
133,560

 
$
(2,467
)
 
1.8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

The following table summarizes those securities, excluding the rabbi trust, with unrealized gains or losses:
 
September 30, 2017
 
December 31, 2016
Number of positions held with unrealized:
 
 
 
Gains
728

 
527

Losses
618

 
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
85
%
 
85
%
Losses that were investment grade
97
%
 
97
%
Percentage of fair value held with unrealized:
 
 
 
Gains that were investment grade
86
%
 
84
%
Losses that were investment grade
97
%
 
97
%
The following table sets forth the amount of unrealized losses, excluding the rabbi trust, by age and severity at September 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
$
262,514

 
$
(943
)
 
$
(943
)
 
$
0

 
$
0

Four months through six months
13,342

 
(46
)
 
(46
)
 
0

 
0

Seven months through nine months
4,313

 
(24
)
 
(18
)
 
(6
)
 
0

Ten months through twelve months
186,054

 
(2,999
)
 
(2,999
)
 
0

 
0

Greater than twelve months
89,009

 
(1,537
)
 
(1,408
)
 
(129
)
 
(0
)
Total
$
555,232

 
$
(5,550
)
 
$
(5,415
)
 
$
(135
)
 
$
(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
 
 
 
 
Nine months ended September 30, 2017
Fixed
Maturities
 
Equity
Securities
 
Short-Term Investments
 
Tax
Effects
 
Net
Unrealized holding gains on securities arising during the period
$
11,805

 
$
14,223

 
$
1

 
$
(9,110
)
 
$
16,919

Realized losses (gains) on securities sold
161

 
(2,155
)
 
(1
)
 
698

 
(1,297
)
Impairment loss recognized in earnings
31

 
0

 
0

 
(11
)
 
20

Change in unrealized, net
$
11,998

 
$
12,068

 
$
(0
)
 
$
(8,423
)
 
$
15,643

 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2016
 
 
 
 
 
 
 
 
 
Unrealized holding gains on securities arising during the period
$
25,941

 
$
5,047

 
$
0

 
$
(10,846
)
 
$
20,143

Realized (gains) losses on securities sold
(1,106
)
 
(470
)
 
3

 
551

 
(1,023
)
Impairment loss recognized in earnings
316

 
0

 
0

 
(111
)
 
205

Change in unrealized, net
$
25,151

 
$
4,577

 
$
3

 
$
(10,406
)
 
$
19,325




18

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

For fixed maturity securities that are other-than-temporarily impaired, we assess our intent to sell and the likelihood that we will be required to sell the security before recovery of our amortized cost. If a fixed maturity security is considered other-than-temporarily impaired but we do not intend to and are not more than likely to be required to sell the security before our recovery to amortized 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):
 
Nine months ended September 30,
 
2017
 
2016
Beginning balance
$
557

 
$
683

Additions for:
 
 
 
Newly impaired securities
13

 
0

Reductions for:
 
 
 
Securities sold and paid down
(98
)
 
(105
)
Ending balance
$
472

 
$
579

The table below sets forth the scheduled maturities of fixed maturity securities at September 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
$
36,440

 
$
24,407

 
$
5,699

 
$
66,545

 
$
66,395

After one year through five years
477,237

 
211,513

 
1,656

 
690,405

 
684,589

After five years through ten years
186,952

 
56,236

 
0

 
243,188

 
238,518

After ten years
2,317

 
0

 
0

 
2,317

 
2,207

Mortgage- and asset-backed securities
185,749

 
260,504

 
0

 
446,253

 
447,494

Total
$
888,695

 
$
552,659

 
$
7,354

 
$
1,448,709

 
$
1,439,204

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

 
$
275,000

Unamortized debt issuance costs
1,247

 
1,409

Long-term debt less unamortized debt issuance costs
$
273,753

 
$
273,591



19

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

In September 2012 we issued $275 million principal of senior notes due September 2022 (the “5.0% Senior Notes”). The 5.0% Senior Notes accrue interest at 5.0%, payable semiannually. At the time we issued the 5.0% Senior Notes, we capitalized $2.2 million of debt issuance costs, which we are amortizing over the term of the 5.0% Senior Notes. We calculated the September 30, 2017, fair value of $292.8 million using a 123 basis point spread to the 10-year U.S. Treasury Note Yield of 2.335%.
In August 2017 we renewed our agreement for a $50 million three-year revolving credit facility (the “Credit Agreement”) that requires us to meet certain financial and other covenants. We are currently in compliance with all covenants under the Credit Agreement, and as of September 30, 2017, there were no borrowings outstanding against it.
Note 6 Income Taxes
The following is a reconciliation of income taxes at the statutory rate of 35.0% to the effective provision for income taxes as shown in the Consolidated Statements of Earnings ($ in thousands):
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
Earnings before income taxes
$
21,683

 
$
3,196

 
$
43,320

 
$
30,012

Income taxes at statutory rate
7,589

 
1,119

 
15,162

 
10,504

Effect of:
 
 
 
 
 
 
 
Dividends-received deduction
(104
)
 
(101
)
 
(318
)
 
(322
)
Tax-exempt interest
(595
)
 
(600
)
 
(1,844
)
 
(1,858
)
Other
(185
)
 
24

 
(350
)
 
212

Provision for income taxes as shown on the Consolidated Statements of Earnings
$
6,704

 
$
442

 
$
12,649

 
$
8,536

GAAP effective tax rate
30.9
%
 
13.8
%
 
29.2
%
 
28.4
%
Note 7 Additional Information
Supplemental Cash Flow Information
We made the following payments that we do not separately disclose in the Consolidated Statements of Cash Flows ($ in thousands):
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
Income tax payments
$
6,575

 
$
3,100

 
$
19,475

 
$
6,651

Interest payments on debt
6,875

 
6,875

 
13,750

 
13,750

Interest payments on capital leases
18

 
18

 
58

 
57

Negative Cash Book Balances
Negative cash book balances, included in the line item “Other liabilities” in the Consolidated Balance Sheets, were $63.5 million and $40.6 million at September 30, 2017, and December 31, 2016, respectively.

20

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
 
Nine months ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
Balance at Beginning of Period
 
 
 
 
 
 
 
Unpaid losses on known claims
$
235,400

 
$
236,947

 
$
238,412

 
$
237,660

IBNR losses
323,184

 
290,767

 
306,641

 
290,097

LAE
142,513

 
138,496

 
140,402

 
142,207

Total unpaid losses and LAE
701,097

 
666,210

 
685,455

 
669,965

Reinsurance recoverables
(17,425
)
 
(18,487
)
 
(17,130
)
 
(14,694
)
Unpaid losses and LAE, net of reinsurance recoverables
683,673

 
647,723

 
668,325

 
655,271

Current Activity
 
 
 
 
 
 
 
Loss and LAE incurred:
 
 
 
 
 
 
 
Current accident year
267,319

 
281,456

 
824,719

 
828,310

Prior accident years
(4,134
)
 
(590
)
 
(17,237
)
 
(18,646
)
Total loss and LAE incurred
263,186

 
280,866

 
807,482

 
809,664

Loss and LAE payments:
 
 
 
 
 
 
 
Current accident year
(186,335
)
 
(197,437
)
 
(447,115
)
 
(461,020
)
Prior accident years
(64,324
)
 
(72,205
)
 
(332,493
)
 
(344,969
)
Total loss and LAE payments
(250,659
)
 
(269,642
)
 
(779,608
)
 
(805,989
)
Balance at End of Period
 
 
 
 
 
 
 
Unpaid losses and LAE, net of reinsurance recoverables
696,199

 
658,946

 
696,199

 
658,946

Add back reinsurance recoverables
33,080

 
17,580

 
33,080

 
17,580

Total unpaid losses and LAE
729,280

 
676,526

 
729,280

 
676,526

Unpaid losses on known claims
255,368

 
240,935

 
255,368

 
240,935

IBNR losses
330,553

 
299,143

 
330,553

 
299,143

LAE
143,359

 
136,449

 
143,359

 
136,449

Total unpaid losses and LAE
$
729,280

 
$
676,526

 
$
729,280

 
$
676,526

Contributing to the $4.1 million and $17.2 million of favorable reserve development during the three and nine months ended September 30, 2017, respectively, was a decrease in ultimate severity estimates in California related to bodily injury and material damage coverages for accident year 2016. Also contributing to the $17.2 million of favorable reserve development for the nine months ended September 30, 2017 was a decrease in ultimate frequency estimates in Florida related to material damage and uninsured motorist bodily injury coverage for accident year 2016. This favorable development was partially offset by increases in ultimate severity estimates in bodily injury coverages in our commercial auto product.
The $0.6 million and $18.6 million of favorable reserve development during the three and nine months ended September 30, 2016, respectively, was primarily due to decreases in severity estimates related to Florida personal injury protection and bodily injury coverages related to accident years 2015 and prior, partially offset by unfavorable development from accident year 2015 in California material damage coverages and in bodily injury coverages in our commercial auto product, driven by an increase in severity.

21

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 September 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.
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.


22

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

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 were 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 September 30,
 
2017
 
2016
 
Before Tax
 
Income Tax
 
Net
 
Before Tax
 
Income Tax
 
Net
Accumulated change in post-retirement benefit liability, beginning of period
$
1,007

 
$
(353
)
 
$
655

 
$
923

 
$
(323
)
 
$
600

Effect on other comprehensive income
(13
)
 
4

 
(8
)
 
(11
)
 
4

 
(7
)
Accumulated change in post-retirement benefit liability, end of period
995

 
(348
)
 
647

 
912

 
(319
)
 
593

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

 
(9,960
)
 
18,497

 
37,383

 
(13,084
)
 
24,299

Other comprehensive income before reclassification
6,310

 
(2,209
)
 
4,102

 
4,702

 
(1,646
)
 
3,056

Reclassification adjustment for other-than-temporary impairments included in net income
22

 
(8
)
 
14

 
0

 
0

 
0

Reclassification adjustment for realized losses (gains) included in net income
410

 
(143
)
 
266

 
(1,282
)
 
449

 
(833
)
Effect on other comprehensive income
6,742

 
(2,360
)
 
4,382

 
3,420

 
(1,197
)
 
2,223

Accumulated unrealized gains on investments, net, end of period
35,198

 
(12,319
)
 
22,879

 
40,803

 
(14,281
)
 
26,522

Accumulated other comprehensive income, beginning of period
29,464

 
(10,312
)
 
19,152

 
38,306

 
(13,407
)
 
24,899

Change in post-retirement benefit liability
(13
)
 
4

 
(8
)
 
(11
)
 
4

 
(7
)
Change in unrealized gains on investments, net
6,742

 
(2,360
)
 
4,382

 
3,420

 
(1,197
)
 
2,223

Effect on other comprehensive income
6,729

 
(2,355
)
 
4,374

 
3,409

 
(1,193
)
 
2,216

Accumulated other comprehensive income, end of period
$
36,193

 
$
(12,668
)
 
$
23,526

 
$
41,715

 
$
(14,600
)
 
$
27,115


23

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

 
Nine months ended September 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
(38
)
 
13

 
(24
)
 
(32
)
 
11

 
(21
)
Accumulated change in post-retirement benefit liability, end of period
995

 
(348
)
 
647

 
912

 
(319
)
 
593

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
26,030

 
(9,110
)
 
16,919

 
30,989

 
(10,846
)
 
20,143

Reclassification adjustment for other-than-temporary impairments included in net income
31

 
(11
)
 
20

 
316

 
(111
)
 
205

Reclassification adjustment for realized gains included in net income
(1,996
)
 
698

 
(1,297
)
 
(1,573
)
 
551

 
(1,023
)
Effect on other comprehensive income
24,066

 
(8,423
)
 
15,643

 
29,731

 
(10,406
)
 
19,325

Accumulated unrealized gains on investments, net, end of period
35,198

 
(12,319
)
 
22,879

 
40,803

 
(14,281
)
 
26,522

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
(38
)
 
13

 
(24
)
 
(32
)
 
11

 
(21
)
Change in unrealized gains on investments, net
24,066

 
(8,423
)
 
15,643

 
29,731

 
(10,406
)
 
19,325

Effect on other comprehensive income
24,028

 
(8,410
)
 
15,618

 
29,699

 
(10,395
)
 
19,304

Accumulated other comprehensive income, end of period
$
36,193

 
$
(12,668
)
 
$
23,526

 
$
41,715

 
$
(14,600
)
 
$
27,115

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.

24

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 September 30,
 
Nine months ended September 30,
Gross written premium:
2017
 
2016
 
2017
 
2016
Personal Auto
$
319,242

 
$
319,771

 
$
920,522

 
$
951,925

Commercial Auto
38,617

 
35,326

 
123,207

 
107,975

Classic Collector
4,358

 
4,280

 
12,979

 
12,406

Total gross written premium
362,217

 
359,377

 
1,056,709

 
1,072,306

 
 
 
 
 
 
 
 
Ceded reinsurance:
 
 
 
 
 
 
 
Personal Auto
(1,627
)
 
(977
)
 
(3,615
)
 
(2,989
)
Commercial Auto(1)
(1,311
)
 
(1,137
)
 
(1,470
)
 
(2,887
)
Classic Collector
(275
)
 
(198
)
 
(696
)
 
(635
)
Total ceded reinsurance
(3,213
)
 
(2,312
)
 
(5,782
)
 
(6,511
)
 
 
 
 
 
 
 
 
Net written premium:
 
 
 
 
 
 
 
Personal Auto
317,615

 
318,794

 
916,907

 
948,936

Commercial Auto
37,306

 
34,190

 
121,737

 
105,088

Classic Collector
4,084

 
4,081

 
12,283

 
11,771

Total net written premium
359,004

 
357,065

 
1,050,927

 
1,065,795

 
 
 
 
 
 
 
 
Change in unearned premium:
 
 
 
 
 
 
 
Personal Auto
(14,075
)
 
(13,652
)
 
(12,532
)
 
(34,081
)
Commercial Auto
307

 
(881
)
 
(12,071
)
 
(11,869
)
Classic Collector
(272
)
 
(362
)
 
(844
)
 
(775
)
Total change in unearned premium
(14,040
)
 
(14,895
)
 
(25,447
)
 
(46,725
)
 
 
 
 
 
 
 
 
Earned premium:
 
 
 
 
 
 
 
Personal Auto
303,540

 
305,142

 
904,375

 
914,855

Commercial Auto
37,612

 
33,309

 
109,666

 
93,219

Classic Collector
3,812

 
3,720

 
11,439

 
10,996

Total earned premium
344,964

 
342,171

 
1,025,480

 
1,019,070

 
 
 
 
 
 
 
 
Installment and other fee income:
 
 
 
 
 
 
 
Personal Auto
23,133

 
23,760

 
70,839

 
69,783

Commercial Auto
2,889

 
2,537

 
8,593

 
7,417

Classic Collector
0

 
0

 
0

 
0

Total installment and other fee income
26,022

 
26,297

 
79,432

 
77,200

 
 
 
 
 
 
 
 
Net investment income
9,771

 
8,125

 
27,467

 
25,115

Net realized gains on investments
(431
)
 
1,282

 
1,964

 
1,257

Other income
376

 
249

 
1,041

 
727

Total revenues
$
380,701

 
$
378,124

 
$
1,135,385

 
$
1,123,370

 
 
 
 
 
 
 
 
(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 nine months ended September 30, 2017 includes the return of $2.6 million of unearned premium due to the termination of the previous excess of loss contract.

25

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 September 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
$
14,571

 
94.4
%
 
$
156

 
99.7
%
 
$
(1,268
)
 
130.9
%
 
$
13,459

 
95.4
%
Bad debt charge-offs
3,302

 
 
 
588

 
 
 
9

 
 
 
3,900

 
 
Favorable (unfavorable) development on prior accident years
4,803

 
 
 
(907
)
 
 
 
237

 
 
 
4,134

 
 
Statutory calendar year underwriting income
22,676

 
91.7
%
 
(162
)
 
100.6
%
 
(1,022
)
 
124.4
%
 
21,492

 
93.1
%
Statutory-to-GAAP underwriting income differences
 
 
 
 
 
 
 
 
 
 
 
 
(3,013
)
 
 
GAAP calendar year underwriting income
 
 
 
 
 
 
 
 
 
 
 
 
18,479

 
94.6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
 
 
 
 
 
 
 
 
 
 
 
9,771

 
 
Net realized gains on investments
 
 
 
 
 
 
 
 
 
 
 
 
(431
)
 
 
Other income
 
 
 
 
 
 
 
 
 
 
 
 
376

 
 
Interest expense
 
 
 
 
 
 
 
 
 
 
 
 
(3,510
)
 
 
Corporate general and administrative expenses
 
 
 
 
 
 
 
 
 
 
 
 
(2,158
)
 
 
Other expenses
 
 
 
 
 
 
 
 
 
 
 
 
(844
)
 
 
Earnings before income taxes
 
 
 
 
 
 
 
 
 
 
 
 
$
21,683

 
 
(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.

26

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

 
Three months ended September 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
$
(2,394
)
 
100.0
%
 
$
(336
)
 
100.5
%
 
$
(87
)
 
99.0
%
 
$
(2,817
)
 
100.1
%
Bad debt charge-offs
3,682

 
 
 
509

 
 
 
21

 
 
 
4,212

 
 
Favorable (unfavorable) development on prior accident years
5,997

 
 
 
(5,315
)
 
 
 
(92
)
 
 
 
590

 
 
Statutory calendar year underwriting income
7,285

 
96.8
%
 
(5,142
)
 
115.0
%
 
(157
)
 
100.9
%
 
1,985

 
98.7
%
Statutory-to-GAAP underwriting income differences
 
 
 
 
 
 
 
 
 
 
 
 
(2,795
)
 
 
GAAP calendar year underwriting income
 
 
 
 
 
 
 
 
 
 
 
 
(810
)
 
100.2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
 
 
 
 
 
 
 
 
 
 
 
8,125

 
 
Net realized gains on investments
 
 
 
 
 
 
 
 
 
 
 
 
1,282

 
 
Other income
 
 
 
 
 
 
 
 
 
 
 
 
249

 
 
Interest expense
 
 
 
 
 
 
 
 
 
 
 
 
(3,507
)
 
 
Corporate general and administrative expenses
 
 
 
 
 
 
 
 
 
 
 
 
(1,768
)
 
 
Other expenses
 
 
 
 
 
 
 
 
 
 
 
 
(375
)
 
 
Earnings before income taxes
 
 
 
 
 
 
 
 
 
 
 
 
$
3,196

 
 
(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.
 
Nine months ended September 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
$
13,780

 
98.2
%
 
$
1,992

 
96.3
%
 
$
(990
)
 
106.1
%
 
$
14,782

 
98.1
%
Bad debt charge-offs
9,225

 
 
 
1,345

 
 
 
20

 
 
 
10,590

 
 
Favorable (unfavorable) development on prior accident years
20,849

 
 
 
(4,015
)
 
 
 
404

 
 
 
17,237

 
 
Statutory calendar year underwriting income
43,854

 
94.9
%
 
(679
)
 
98.9
%
 
(566
)
 
102.4
%
 
42,610

 
95.4
%
Statutory-to-GAAP underwriting income differences
 
 
 
 
 
 
 
 
 
 
 
 
(10,681
)
 
 
GAAP calendar year underwriting income
 
 
 
 
 
 
 
 
 
 
 
 
31,929

 
96.9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
 
 
 
 
 
 
 
 
 
 
 
27,467

 
 
Net realized gains on investments
 
 
 
 
 
 
 
 
 
 
 
 
1,964

 
 
Other income
 
 
 
 
 
 
 
 
 
 
 
 
1,041

 
 
Interest expense
 
 
 
 
 
 
 
 
 
 
 
 
(10,533
)
 
 
Corporate general and administrative expenses
 
 
 
 
 
 
 
 
 
 
 
 
(6,876
)
 
 
Other expenses
 
 
 
 
 
 
 
 
 
 
 
 
(1,673
)
 
 
Earnings before income taxes
 
 
 
 
 
 
 
 
 
 
 
 
$
43,320

 
 
(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.

27

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

 
Nine months ended September 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
$
(978
)
 
99.5
%
 
$
(1,816
)
 
99.6
%
 
$
731

 
91.1
%
 
$
(2,063
)
 
99.4
%
Bad debt charge-offs
11,048

 
 
 
1,322

 
 
 
39

 
 
 
12,409

 
 
Favorable (unfavorable) development on prior accident years
21,077

 
 
 
(2,393
)
 
 
 
(39
)
 
 
 
18,646

 
 
Statutory calendar year underwriting income
31,148

 
95.9
%
 
(2,887
)
 
100.9
%
 
731

 
91.1
%
 
28,992

 
96.4
%
Statutory-to-GAAP underwriting income differences
 
 
 
 
 
 
 
 
 
 
 
 
(8,568
)
 
 
GAAP calendar year underwriting income
 
 
 
 
 
 
 
 
 
 
 
 
20,424

 
98.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
 
 
 
 
 
 
 
 
 
 
 
25,115

 
 
Net realized gains on investments
 
 
 
 
 
 
 
 
 
 
 
 
1,257

 
 
Other income
 
 
 
 
 
 
 
 
 
 
 
 
727

 
 
Interest expense
 
 
 
 
 
 
 
 
 
 
 
 
(10,524
)
 
 
Corporate general and administrative expenses
 
 
 
 
 
 
 
 
 
 
 
 
(5,532
)
 
 
Other expenses
 
 
 
 
 
 
 
 
 
 
 
 
(1,455
)
 
 
Earnings before income taxes
 
 
 
 
 
 
 
 
 
 
 
 
$
30,012

 
 
(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.

28

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
During the third quarter of 2017, premium growth in Texas, Arizona and Commercial Auto was mostly offset by reductions in new business in Florida and California. Refer to Results of Operations – Underwriting – Premium for a more detailed discussion of our gross written premium.
Net catastrophe losses during the third quarter of 2017 were $15.1 million compared to net recoveries of $0.3 million during the third quarter of 2016.
Net earnings and diluted earnings per share for the three months ended September 30, 2017, were $15.0 million and $1.35, respectively, compared with $2.8 million and $0.25, respectively, for the same periods of 2016. Net earnings and diluted earnings per share for the nine months ended September 30, 2017, were $30.7 million and $2.76, respectively, compared with $21.5 million and $1.93, respectively, for the same periods of 2016. The increase in net earnings and diluted earnings per share for the three and nine months ended September 30, 2017, was primarily due to a decrease in the accident year combined ratio from 99.8% at September 30, 2016, to 98.6% at September 30, 2017.
Included in net earnings for the three and nine months ended September 30, 2017, was $2.7 million ($4.1 million pre-tax) and $11.2 million ($17.2 million pre-tax), respectively, of favorable development on prior accident year loss and LAE reserves. Contributing to the $4.1 million and $17.2 million of favorable reserve development during the three and nine months ended September 30, 2017, respectively, was a decrease in ultimate severity estimates in California related to bodily injury and material damage coverages for accident year 2016. Also contributing to the $17.2 million of favorable reserve development for the nine months ended September 30, 2017 was a decrease in ultimate frequency estimates in Florida related to material damage and uninsured motorist bodily injury coverage for accident year 2016. This favorable development was partially offset by increases in ultimate severity estimates in bodily injury coverages in our commercial auto product.
Included in net earnings for the three and nine months ended September 30, 2016, was $0.4 million ($0.6 million pre-tax) and $12.1 million ($18.6 million pre-tax), respectively, of favorable development on prior accident year loss and LAE reserves. This development was primarily due to decreases in severity estimates related to Florida personal injury protection and bodily injury coverages related to accident years 2015 and prior, partially offset by unfavorable development from accident year 2015 in California material damage coverages and in bodily injury coverages in our commercial auto product, driven by an increase in severity.

29

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


The following table displays combined ratio results by accident year developed through September 30, 2017:
 
Accident Year Combined Ratio
Developed Through
 
Prior Accident Year
(Favorable) / Unfavorable Development
($ in millions)
 
Dec 2015
 
Sept 2016
 
Dec 2016
 
Mar 2017
 
June 2017
 
Sept 2017
 
Q3 2017
 
YTD 2017
Accident Year
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prior
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
(0.1
)
 
 
 
$
0.3

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

 
0.1
 %
 
0.4

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

 
0.1
 %
 
0.5

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

 
0.1
 %
 
0.6

2012
100.1
%
 
99.8
%
 
99.6
%
 
99.5
%
 
99.4
%
 
99.4
%
 
0.0
 %
 
0.3

 
(0.2
)%
 
(2.4
)
2013
95.5
%
 
94.9
%
 
94.8
%
 
94.9
%
 
94.9
%
 
94.8
%
 
(0.1
)%
 
(1.5
)
 
(0.1
)%
 
(0.7
)
2014
95.4
%
 
94.3
%
 
94.4
%
 
94.4
%
 
94.5
%
 
94.5
%
 
0.5
 %
 
0.6

 
0.1
 %
 
1.8

2015
97.8
%
 
98.4
%
 
98.3
%
 
98.4
%
 
98.3
%
 
98.5
%
 
0.2
 %
 
2.2

 
0.2
 %
 
2.3

2016
 
 
99.8
%
 
98.4
%
 
97.8
%
 
97.4
%
 
97.0
%
 
(0.4
)%
 
(6.1
)
 
(1.4
)%
 
(20.1
)
2017 YTD
 
 
 
 
 
 
98.4
%
 
99.9
%
 
98.6
%
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
(4.1
)
 
 
 
$
(17.2
)
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 nine months ended September 30, 2017, was $9.8 million and $27.5 million respectively, compared with $8.1 million and $25.1 million, respectively, for the same periods of 2016. The increase for the three and nine months ended September 30, 2017, was primarily due to lower premium amortization on mortgage-backed securities and an increase in both make whole interest and bond issuer tender offers during 2017.
Our book value per share increased 3.5% from $63.31 at December 31, 2016, to $65.52 at September 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.


30

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


Our net earned premium was as follows ($ in thousands):
 
Three months ended September 30,
 
2017
 
2016
 
Change
 
% Change
Gross written premium:
 
 
 
 
 
 
 
Personal Auto
$
319,242

 
$
319,771

 
$
(529
)
 
(0.2
)%
Commercial Auto
38,617

 
35,326

 
3,290

 
9.3
 %
Classic Collector
4,358

 
4,280

 
79

 
1.8
 %
Total gross written premium
362,217

 
359,377

 
2,840

 
0.8
 %
Ceded reinsurance
(3,213
)
 
(2,312
)
 
(901
)
 
39.0
 %
Net written premium
359,004

 
357,065

 
1,939

 
0.5
 %
Change in unearned premium
(14,040
)
 
(14,895
)
 
855

 
(5.7
)%
Net earned premium
$
344,964

 
$
342,171

 
$
2,793

 
0.8
 %
 
 
 
 
 
 
 
 
 
Nine months ended September 30,
 
2017
 
2016
 
Change
 
% Change
Gross written premium:
 
 
 
 
 
 
 
Personal Auto
$
920,522

 
$
951,925

 
$
(31,403
)
 
(3.3
)%
Commercial Auto
123,207

 
107,975

 
15,232

 
14.1
 %
Classic Collector
12,979

 
12,406

 
573

 
4.6
 %
Total gross written premium
1,056,709

 
1,072,306

 
(15,598
)
 
(1.5
)%
Ceded reinsurance
(5,782
)
 
(6,511
)
 
729

 
(11.2
)%
Net written premium
1,050,927

 
1,065,795

 
(14,868
)
 
(1.4
)%
Change in unearned premium
(25,447
)
 
(46,725
)
 
21,278

 
(45.5
)%
Net earned premium
$
1,025,480

 
$
1,019,070

 
$
6,410

 
0.6
 %
The following table summarizes our policies in force:
 
At September 30,
 
2017
 
2016
 
Change
 
% Change
Personal Auto
687,251

 
729,686

 
(42,435
)
 
(5.8
)%
Commercial Auto
55,935

 
51,849

 
4,086

 
7.9
 %
Classic Collector
41,268

 
41,511

 
(243
)
 
(0.6
)%
Total policies in force
784,454

 
823,046

 
(38,592
)
 
(4.7
)%
During the first nine months of 2017, we implemented rate revisions in various states with an overall rate increase of 3.0%. Policies in force at September 30, 2017, decreased 4.7% compared with the same period in 2016.
Gross written premium in Personal Auto was relatively flat during the third quarter of 2017 primarily due to premium declines in California and Florida, offset by growth in Texas and Arizona. The decrease in gross written premium in Personal Auto during the first nine months of 2017 was primarily due to premium adjustments in California of $22.2 million during the first six months of 2017. Refer to Note 9 - Commitments and Contingencies for a more detailed discussion of the premium adjustments. Excluding the premium adjustments, gross written premium increased 0.6% during the first nine months of 2017 driven by growth in Texas, Arizona and Commercial Auto, partially offset by reductions in new business in Florida and California. Growth during the first nine months in Texas and Arizona was primarily due to new business growth and higher average premium in both states as well as renewal premium growth in Texas.
The gross written premium growth during the third quarter and first nine months of 2017 in our Commercial Auto product was primarily due to new and renewal business growth and higher average premium.



31

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


Profitability
A key operating performance measure of insurance companies is underwriting profitability, as opposed to overall profitability or net earnings. We measure underwriting profitability by the combined ratio. When the combined ratio is under 100%, we consider underwriting results profitable; when the ratio is over 100%, we consider underwriting results unprofitable. The combined ratio does not reflect investment income, other income, interest expense, corporate general and administrative expenses, other expenses or federal income taxes.
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 September 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
75.5
%
16.3
%
91.7
%
 
80.7
%
16.2
%
96.8
%
 
(5.2
)%
0.1
 %
(5.1
)%
Commercial Auto
84.0
%
16.6
%
100.6
%
 
98.3
%
16.7
%
115.0
%
 
(14.3
)%
(0.1
)%
(14.4
)%
Classic Collector
91.4
%
33.0
%
124.4
%
 
67.1
%
33.8
%
100.9
%
 
24.3
 %
(0.8
)%
23.5
 %
Total statutory ratios
76.5
%
16.6
%
93.1
%
 
82.3
%
16.4
%
98.7
%
 
(5.8
)%
0.1
 %
(5.6
)%
Total statutory ratios excluding development
81.9
%
16.6
%
98.4
%
 
80.7
%
16.4
%
97.1
%
 
1.2
 %
0.1
 %
1.3
 %
GAAP ratios
76.3
%
18.3
%
94.6
%
 
82.1
%
18.2
%
100.2
%
 
(5.8
)%
0.2
 %
(5.6
)%
GAAP ratios excluding development
81.7
%
18.3
%
100.0
%
 
80.5
%
18.2
%
98.7
%
 
1.2
 %
0.2
 %
1.4
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 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
78.6
%
16.2
%
94.9
%
 
79.4
%
16.5
%
95.9
%
 
(0.8
)%
(0.2
)%
(1.0
)%
Commercial Auto
83.0
%
15.9
%
98.9
%
 
83.7
%
17.2
%
100.9
%
 
(0.7
)%
(1.3
)%
(2.0
)%
Classic Collector
67.9
%
34.5
%
102.4
%
 
58.9
%
32.2
%
91.1
%
 
9.0
 %
2.3
 %
11.3
 %
Total statutory ratios
79.0
%
16.5
%
95.4
%
 
79.6
%
16.8
%
96.4
%
 
(0.7
)%
(0.3
)%
(1.0
)%
Total statutory ratios excluding development
80.7
%
16.5
%
97.1
%
 
81.5
%
16.8
%
98.2
%
 
(0.8
)%
(0.3
)%
(1.1
)%
GAAP ratios
78.7
%
18.1
%
96.9
%
 
79.5
%
18.5
%
98.0
%
 
(0.7
)%
(0.4
)%
(1.1
)%
GAAP ratios excluding development
80.4
%
18.1
%
98.6
%
 
81.3
%
18.5
%
99.8
%
 
(0.9
)%
(0.4
)%
(1.3
)%



32

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


During the first nine 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 nine months ended September 30, 2017, written and earned premiums were reduced by $22.1 million and $16.2 million, respectively. Excluding the adjustments, the statutory combined ratio for the nine months ended September 30, 2017, would have been 93.9%. The GAAP combined ratio for the same period would have been 95.3%.
The statutory combined ratio for the three and nine months ended September 30, 2017, decreased by 5.6 points and 1.0 point, respectively, from the same periods of 2016. The third quarter of 2017 included $14.4 million of favorable development from the first two accident quarters of 2017 compared with $6.0 million of unfavorable development during the third quarter of 2016 from the first two accident quarters of 2016.
The third quarter and first nine months of 2017 included $4.1 million and $17.2 million, respectively, of favorable reserve development on prior accident year loss and LAE reserves. Contributing to the $4.1 million and $17.2 million of favorable reserve development during the three and nine months ended September 30, 2017, respectively, was a decrease in ultimate severity estimates in California related to bodily injury and material damage coverages for accident year 2016. Also contributing to the $17.2 million of favorable reserve development for the nine months ended September 30, 2017 was a decrease in ultimate frequency estimates in Florida related to material damage and uninsured motorist bodily injury coverage for accident year 2016. This favorable development was partially offset by increases in ultimate severity estimates in bodily injury coverages in our commercial auto product. The third quarter and first nine months of 2016 included $0.6 million and $18.6 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 related to accident years 2015 and prior, partially offset by unfavorable development from accident year 2015 in California material damage coverages and in bodily injury coverages in our commercial auto product, driven by an increase in severity.
The GAAP combined ratio for the three and nine months ended September 30, 2017, decreased by 5.6 points and 1.1 points, respectively, from the same periods of 2016. Excluding the effect of development, the GAAP combined ratio increased by 1.4 points and decreased by 1.3 points during the third quarter and first nine months of 2017, respectively. The decrease in the combined ratio during the first nine months is primarily due to improving combined ratios in California and Florida.
Losses from catastrophes were $15.1 million for the three months ended September 30, 2017 compared with net loss recoveries from catastrophes for the three months ended September 30, 2016 of $0.3 million. Losses from catastrophes during the first nine months of 2017 were $18.3 million compared with $6.1 million for the same period of 2016.
The 5.1 points decrease in the Personal Auto combined ratio for the three months ended September 30, 2017 compared with the same period of 2016, was primarily favorable development in California and Florida from the first two accident quarters of 2017 partially offset by an increase in the combined ratio in Texas.
The 14.4 points and 2.0 points decrease in the Commercial Auto combined ratio for the three and nine months ended September 30, 2017, was primarily due to less unfavorable development during the third quarter of 2017 compared with the same period of 2016 and an improvement in the accident year loss ratio during the third quarter of 2017 compared to the third quarter of 2016.
Installment and Other Fee Income
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
($ in thousands)
2017
 
2016
 
2017
 
2016
Installment and other fee income
$
26,022

 
$
26,297

 
$
79,432

 
$
77,200

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

33

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
 
Nine months ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
Gross investment income:
 
 
 
 
 
 
 
Interest income on fixed maturities, cash and cash equivalents
$
9,821

 
$
8,191

 
$
27,599

 
$
25,237

     Dividends on equity securities
498

 
482

 
1,525

 
1,545

Gross investment income
10,319

 
8,672

 
29,124

 
26,782

Investment expenses
(548
)
 
(548
)
 
(1,656
)
 
(1,667
)
Net investment income
9,771

 
8,125

 
27,467

 
25,115

Average investment balance, at cost
$
1,575,453

 
$
1,499,267

 
$
1,558,849

 
$
1,502,808

Annualized returns excluding realized gains and losses
2.5%

 
2.2%

 
2.3%

 
2.2%

Annualized returns including realized gains and losses
2.4%

 
2.5%

 
2.5%

 
2.3%

The increase in pre-tax net investment income for the three and nine months ended September 30, 2017, was primarily due to lower premium amortization on mortgage-backed securities and an increase in both make whole interest and bond issuer tender offers during 2017.
The following table provides information about our fixed maturity investments at September 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
$
15,737

 
$
22,400

 
$
38,138

 
3.3%
2018
57,294

 
107,063

 
164,357

 
2.4%
2019
57,328

 
200,257

 
257,586

 
2.2%
2020
48,357

 
192,544

 
240,901

 
2.4%
2021
42,445

 
138,210

 
180,656

 
2.7%
Thereafter
210,634

 
276,766

 
487,401

 
2.6%
Total
$
431,795

 
$
937,243

 
$
1,369,038

 
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.

34

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 September 30, 2017
 
Three months ended September 30, 2016
 
Net Realized Losses on Sales
 
Net Impairment Losses Recognized in Earnings
 
Total Net Realized Losses on Investments
 
Net Realized Gains (Losses) on Sales
 
Net Impairment Losses Recognized in Earnings
 
Total Net Realized Gains (Losses) on Investments
Fixed maturities
$
(410
)
 
$
(22
)
 
$
(431
)
 
$
813

 
$
0

 
$
813

Equity securities
0

 
0

 
0

 
470

 
0

 
470

Short-term investments
0

 
0

 
0

 
(1
)
 
0

 
(1
)
Total
$
(410
)
 
$
(22
)
 
$
(431
)
 
$
1,282

 
$
0

 
$
1,282

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2017
 
Nine months ended September 30, 2016
 
Net Realized (Losses) Gains on Sales
 
Net Impairment Losses
Recognized
in Earnings
 
Total Net Realized (Losses) Gains
on Investments
 
Net Realized
Gains (Losses) on Sales
 
Net Impairment Losses
Recognized
in Earnings
 
Total Net Realized Gains (Losses) on Investments
Fixed maturities
$
(161
)
 
$
(31
)
 
$
(192
)
 
$
1,106

 
$
(316
)
 
$
790

Equity securities
2,155

 
0

 
2,155

 
470

 
0

 
470

Short-term investments
1

 
0

 
1

 
(3
)
 
0

 
(3
)
       Total
$
1,996

 
$
(31
)
 
$
1,964

 
$
1,573

 
$
(316
)
 
$
1,257

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
 
Nine months ended
 
September 30,
 
September 30,
($ in thousands)
2017
 
2016
 
2017
 
2016
5.0% Senior Notes
$
3,438

 
$
3,438

 
$
10,313

 
$
10,313

Amortization of debt issuance costs
55

 
52

 
162

 
154

Capital leases
18

 
18

 
58

 
57

Total
$
3,510

 
$
3,507

 
$
10,533

 
$
10,524

At September 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 30.9% and 29.2% for the three and nine months ended September 30, 2017, respectively, compared with 13.8% and 28.4%, respectively, for the same periods of 2016. The GAAP effective tax rate has increased in 2017 primarily as a result of an increase in operating income. Refer to Note 6 – Income Taxes to the Consolidated Financial Statements for additional information on income taxes.



35

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 September 30, 2017, the holding company had $163.7 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 nine months ended September 30, 2017, our insurance subsidiaries have paid us ordinary dividends of $47.5 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 $53.1 million and $111.5 million during the three and nine months ended September 30, 2017, respectively, compared with positive operating cash flows of $21.2 million and $58.6 million during the same periods of 2016.
At September 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 2017 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 September 30, 2017, there were no borrowings outstanding against it.
On February 29, 2016, we filed a "shelf" registration statement with the Securities and Exchange Commission registering securities, 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, and on November 2, 2017, approved an extension to December 31, 2018. As of September 30, 2017, we had $27.1 million of authority remaining under this program. Share repurchases during the first nine 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

Third quarter
58,449

 
91.29

Total
84,606

 
$
91.58

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.

36

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


Reinsurance
Premium ceded under all reinsurance agreements for the three and nine months ended September 30, 2017, was $3.2 million and $5.8 million, respectively, compared with $2.3 million and $6.5 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 nine months ended September 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 September 30, 2017, contained approximately $1.4 billion in fixed maturity securities, $100.0 million in equity securities and $2.6 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 September 30, 2017, we had pre-tax net unrealized gains of $9.5 million on fixed maturities and pre-tax net unrealized gains of $25.7 million on equity securities. Combined, the pre-tax net unrealized gain increased by $24.1 million for the nine months ended September 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 September 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 90.3% of our fixed maturity investments at September 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.

37

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


Summarized information for our investment portfolio at September 30, 2017, was as follows ($ in thousands):
 
Amortized
Cost
 
Fair Value
 
% of Total 
Fair Value
Fixed Maturities:
 
 
 
 
 
U.S. government
$
62,099

 
$
61,894

 
4.0
%
State and municipal
497,868

 
502,386

 
32.4
%
Mortgage- and asset-backed:
 
 
 
 
 
Residential mortgage-backed securities
356,172

 
355,257

 
22.9
%
Commercial mortgage-backed securities
35,292

 
34,890

 
2.2
%
Asset-backed securities (ABS):
 
 
 
 
 
Auto loans
33,165

 
33,172

 
2.1
%
Equipment leases
4,731

 
4,744

 
0.3
%
Credit card
10,360

 
10,400

 
0.7
%
All other
7,775

 
7,789

 
0.5
%
Total ABS
56,031

 
56,106

 
3.6
%
Total mortgage- and asset-backed
447,494

 
446,253

 
28.8
%
Corporates
 
 
 
 
 
Investment grade
298,080

 
300,726

 
19.4
%
Non-investment grade
133,663

 
137,450

 
8.9
%
Total corporates
431,742

 
438,175

 
28.2
%
Total fixed maturities
1,439,204

 
1,448,709

 
93.4
%
Equity securities
74,347

 
100,042

 
6.4
%
Short-term investments
2,574

 
2,572

 
0.2
%
Total investments
$
1,516,125

 
$
1,551,323

 
100.0
%
We categorize securities by rating based upon available ratings issued by Moody's, Standard & Poor's or Fitch. If all three ratings are available but not equivalent, we exclude the lowest rating and the lower of the remaining ratings is used. If ratings are only available from two agencies, the lowest is used. This methodology is consistent with that used by the major bond indices.
The following table presents the credit rating and fair value of our fixed maturity portfolio by major security type at September 30, 2017 ($ in thousands): 
 
Rating
 
 
 
 
 
AAA
 
AA
 
A
 
BBB
 
Non-investment Grade
 
Total Fair
Value
 
% of Total Exposure
U.S. government
$
61,894

 
$
0

 
$
0

 
$
0

 
$
0

 
$
61,894

 
4.3
%
State and municipal
145,861

 
268,083

 
84,905

 
0

 
3,537

 
502,386

 
34.7
%
Mortgage- and asset-backed
424,431

 
13,558

 
3,735

 
4,530

 
0

 
446,253

 
30.8
%
Corporates
1,707

 
23,281

 
145,828

 
129,909

 
137,450

 
438,175

 
30.2
%
Total fair value
$
633,893

 
$
304,923

 
$
234,467

 
$
134,439

 
$
140,987

 
$
1,448,709

 
100.0
%
% of total fair value
43.8%

 
21.0%

 
16.2%

 
9.3%

 
9.7%

 
100.0%

 
 

38

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

ITEM 3
Quantitative and Qualitative Disclosures about Market Risk
As of September 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 September 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 September 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 third 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.

39

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 (a)
 
Average Price Paid per Share (b)
 
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 (c)
July 1, 2017 - July 31, 2017
 
6,200

 
$
93.81

 
6,200

 
$
31,861,730

August 1, 2017 - August 31, 2017
 
37,423

 
91.88

 
19,849

 
30,042,848

September 1, 2017 - September 30, 2017
 
32,400

 
90.12

 
32,400

 
27,121,521

Total
 
76,023

 
$
91.29

 
58,449

 
$
27,121,521

 
(a)
Includes 17,574 shares surrendered to cover the withholding taxes related to the issuance of shares under the 2013 Stock Incentive Plan.
(b)
Average price paid per share excludes commissions.
(c)
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, and on November 2, 2017, approved an extension to December 31, 2018.

ITEM 6
Certification of the Chief Executive Officer under Exchange Act Rule 13a-14(a)
Certification of the Chief Financial Officer under Exchange Act Rule 13a-14(a)
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.

40

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
November 6, 2017
 
Robert H. Bateman
 
 
Executive Vice President, Chief Financial Officer and Treasurer

41