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, 2016
OR
o     Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from              to             
Commission File No. 0-50167
INFINITY PROPERTY AND CASUALTY CORPORATION
(Exact name of registrant as specified in its charter)
Incorporated under
the Laws of Ohio
 
03-0483872
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
  
Accelerated filer
¨
Non-accelerated filer
o  (Do not check if smaller reporting company)
  
Smaller reporting company
¨

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
As of October 31, 2016, there were 11,055,245 shares of the registrant’s common stock outstanding.


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

Condensed Notes to Consolidated Financial Statements

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

2
Table of Contents
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

PART I
FINANCIAL INFORMATION

ITEM 1
Financial Statements

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
(unaudited)
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2016
 
2015
 
% Change
 
2016
 
2015
 
% Change
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Earned premium
$
342,171

 
$
338,586

 
1.1
 %
 
$
1,019,070

 
$
1,011,197

 
0.8
 %
Installment and other fee income
26,297

 
24,005

 
9.6
 %
 
77,200

 
73,122

 
5.6
 %
Net investment income
8,125

 
9,970

 
(18.5
)%
 
25,115

 
27,908

 
(10.0
)%
Net realized gains (losses) on investments (1)
1,282

 
(410
)
 
(412.8
)%
 
1,257

 
974

 
29.1
 %
Other income
249

 
232

 
7.6
 %
 
727

 
913

 
(20.3
)%
Total revenues
378,124

 
372,383

 
1.5
 %
 
1,123,370

 
1,114,113

 
0.8
 %
Costs and Expenses:
 
 
 
 
 
 
 
 
 
 
 
Losses and loss adjustment expenses
280,866

 
256,063

 
9.7
 %
 
809,664

 
774,489

 
4.5
 %
Commissions and other underwriting expenses
88,412

 
86,779

 
1.9
 %
 
266,183

 
261,880

 
1.6
 %
Interest expense
3,507

 
3,506

 
0.0
 %
 
10,524

 
10,522

 
0.0
 %
Corporate general and administrative expenses
1,768

 
1,677

 
5.5
 %
 
5,532

 
5,605

 
(1.3
)%
Other expenses
375

 
1,545

 
(75.7
)%
 
1,455

 
2,900

 
(49.8
)%
Total costs and expenses
374,929

 
349,569

 
7.3
 %
 
1,093,358

 
1,055,396

 
3.6
 %
Earnings before income taxes
3,196

 
22,814

 
(86.0
)%
 
30,012

 
58,717

 
(48.9
)%
Provision for income taxes
442

 
7,077

 
(93.7
)%
 
8,536

 
18,333

 
(53.4
)%
Net Earnings
$
2,753

 
$
15,737

 
(82.5
)%
 
$
21,476

 
$
40,384

 
(46.8
)%
Net Earnings per Common Share:
 
 
 
 
 
 
 
 
 
 
 
Basic
$
0.25

 
$
1.39

 
(82.0
)%
 
$
1.95

 
$
3.55

 
(45.1
)%
Diluted
0.25

 
1.38

 
(81.9
)%
 
1.93

 
3.52

 
(45.2
)%
Average Number of Common Shares:
 
 
 
 
 
 
 
 
 
 
 
Basic
11,018

 
11,321

 
(2.7
)%
 
11,022

 
11,385

 
(3.2
)%
Diluted
11,084

 
11,383

 
(2.6
)%
 
11,105

 
11,474

 
(3.2
)%
Cash Dividends per Common Share
$
0.52

 
$
0.43

 
20.9
 %
 
$
1.56

 
$
1.29

 
20.9
 %
(1) Net realized gains (losses) on sales
$
1,282

 
$
(287
)
 
(546.6
)%
 
$
1,573

 
$
1,686

 
(6.7
)%
Total other-than-temporary impairment (OTTI) losses
0

 
(123
)
 
(100.0
)%
 
(316
)
 
(713
)
 
(55.7
)%
Total net realized gains (losses) on investments
$
1,282

 
$
(410
)
 
(412.8
)%
 
$
1,257

 
$
974

 
29.1
 %
See Condensed Notes to Consolidated Financial Statements.

3
Table of Contents
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in thousands)
(unaudited)
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Net earnings
$
2,753

 
$
15,737

 
$
21,476

 
$
40,384

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

 
(32
)
 
49

Unrealized gains (losses) on investments:
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during the period
4,702

 
(11,301
)
 
30,989

 
(16,357
)
Less: Reclassification adjustments for (gains) losses included in net earnings
(1,282
)
 
410

 
(1,257
)
 
(974
)
Unrealized gains (losses) on investments, net
3,420

 
(10,891
)
 
29,731

 
(17,331
)
Other comprehensive income (loss), before tax
3,409

 
(10,875
)
 
29,699

 
(17,281
)
Income tax (expense) benefit related to components of other comprehensive income
(1,193
)
 
3,806

 
(10,395
)
 
6,049

Other comprehensive income (loss), net of tax
2,216

 
(7,069
)
 
19,304

 
(11,233
)
Comprehensive income
$
4,969

 
$
8,669

 
$
40,780

 
$
29,151

See Condensed Notes to Consolidated Financial Statements.


4
Table of Contents
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts in line descriptions)
 
September 30, 2016
 
December 31, 2015
 
(unaudited)
 
 
Assets
 
 
 
Investments:
 
 
 
Fixed maturities – at fair value (amortized cost $1,379,525 and $1,381,510)
$
1,404,633

 
$
1,381,467

Equity securities – at fair value (cost $77,125 and $78,815)
92,822

 
89,935

Short-term investments – at fair value (amortized cost $2,257 and $4,656)
2,255

 
4,651

Total investments
1,499,710

 
1,476,053

Cash and cash equivalents
73,616

 
62,483

Accrued investment income
11,253

 
12,245

Agents’ balances and premium receivable, net of allowances for doubtful accounts of $14,501 and $15,385
551,914

 
511,543

Property and equipment, net of accumulated depreciation of $67,849 and $72,892
94,358

 
89,707

Prepaid reinsurance premium
3,384

 
5,385

Recoverables from reinsurers (includes $1,078 and $362 on paid losses and LAE)
18,659

 
15,056

Deferred policy acquisition costs
97,448

 
93,157

Current and deferred income taxes
21,803

 
33,926

Receivable for securities sold
1,714

 
0

Other assets
11,082

 
10,306

Goodwill
75,275

 
75,275

Total assets
$
2,460,217

 
$
2,385,135

Liabilities and Shareholders’ Equity
 
 
 
Liabilities:
 
 
 
Unpaid losses and loss adjustment expenses
$
676,526

 
$
669,965

Unearned premium
660,306

 
616,649

Long-term debt (fair value $292,075 and $281,581)
273,538

 
273,383

Commissions payable
16,686

 
17,406

Payable for securities purchased
24,118

 
7,264

Other liabilities
106,242

 
112,873

Total liabilities
1,757,416

 
1,697,540

Commitments and contingencies (See Note 9)


 


Shareholders’ equity:
 
 
 
Common stock, no par value (50,000,000 shares authorized; 21,808,959 and 21,774,520 shares issued)
21,816

 
21,794

Additional paid-in capital
377,757

 
376,025

Retained earnings
761,831

 
757,604

Accumulated other comprehensive income, net of tax
27,115

 
7,811

Treasury stock, at cost (10,751,048 and 10,623,138 shares)
(485,717
)
 
(475,638
)
Total shareholders’ equity
702,801

 
687,595

Total liabilities and shareholders’ equity
$
2,460,217

 
$
2,385,135

See Condensed Notes to Consolidated Financial Statements.

5
Table of Contents
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
($ in thousands)
(unaudited)
 
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income,
Net of Tax
 
Treasury
Stock
 
Total
Balance at December 31, 2014
$
21,745

 
$
372,368

 
$
725,651

 
$
23,494

 
$
(445,599
)
 
$
697,659

Net earnings
—

 
—

 
40,384

 
—

 
—

 
40,384

Net change in post-retirement benefit liability
—

 
—

 
—

 
32

 
—

 
32

Change in unrealized gain on investments
—

 
—

 
—

 
(11,703
)
 
—

 
(11,703
)
Change in non-credit component of impairment losses on fixed maturities
—

 
—

 
—

 
438

 
—

 
438

Comprehensive income
 
 
 
 
 
 
 
 
 
 
29,151

Dividends paid to common shareholders
—

 
—

 
(14,711
)
 
—

 
—

 
(14,711
)
Shares issued and share-based compensation expense, including tax benefit
31

 
2,321

 
—

 
—

 
—

 
2,352

Acquisition of treasury stock
—

 
—

 
—

 
—

 
(17,353
)
 
(17,353
)
Balance at September 30, 2015
$
21,776

 
$
374,689

 
$
751,323

 
$
12,261

 
$
(462,951
)
 
$
697,098

Net earnings
—

 
—

 
11,097

 
—

 
—

 
11,097

Net change in post-retirement benefit liability
—

 
—

 
—

 
469

 
—

 
469

Change in unrealized gain on investments
—

 
—

 
—

 
(5,092
)
 
—

 
(5,092
)
Change in non-credit component of impairment losses on fixed maturities
—

 
—

 
—

 
172

 
—

 
172

Comprehensive income
 
 
 
 
 
 
 
 
 
 
6,646

Dividends paid to common shareholders
—

 
—

 
(4,816
)
 
—

 
—

 
(4,816
)
Shares issued and share-based compensation expense, including tax benefit
18

 
1,336

 
—

 
—

 
—

 
1,354

Acquisition of treasury stock
—

 
—

 
—

 
—

 
(12,687
)
 
(12,687
)
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

See Condensed Notes to Consolidated Financial Statements.

6
Table of Contents
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands, unaudited)
 
Three months ended September 30,
 
2016
 
2015
Operating Activities:
 
 
 
Net earnings
$
2,753

 
$
15,737

Adjustments:
 
 
 
Depreciation
3,930

 
3,193

Amortization
5,643

 
5,264

Net realized (gains) losses on investments
(1,282
)
 
410

Loss on disposal of property and equipment
143

 
916

Share-based compensation expense
1,060

 
135

Activity related to rabbi trust
46

 
(88
)
Change in accrued investment income
482

 
1,133

Change in agents’ balances and premium receivable
(15,356
)
 
3,795

Change in reinsurance receivables
465

 
(1,284
)
Change in deferred policy acquisition costs
(1,627
)
 
771

Change in other assets
(2,363
)
 
(2,948
)
Change in unpaid losses and loss adjustment expenses
10,316

 
(2,009
)
Change in unearned premium
14,911

 
(7,900
)
Change in other liabilities
(3,179
)
 
1,336

Net cash provided by operating activities
15,943

 
18,461

Investing Activities:
 
 
 
Purchases of fixed maturities
(117,638
)
 
(97,646
)
Purchases of equity securities
0

 
(5,000
)
Purchases of short-term investments
(3,110
)
 
(4,752
)
Purchases of property and equipment
(253
)
 
(5,748
)
Maturities and redemptions of fixed maturities
39,703

 
42,600

Maturities and redemptions of short-term investments
1,300

 
500

Proceeds from sale of fixed maturities
62,429

 
72,846

Proceeds from sale of equity securities
2,000

 
0

Proceeds from sale of short-term investments
3,592

 
3,086

Net cash (used in) provided by investing activities
(11,977
)
 
5,886

Financing Activities:
 
 
 
Proceeds from stock options exercised and employee stock purchases
60

 
58

Principal payments under capital lease obligations
(131
)
 
(125
)
Acquisition of treasury stock
(543
)
 
(9,297
)
Dividends paid to shareholders
(5,751
)
 
(4,858
)
Net cash used in financing activities
(6,366
)
 
(14,222
)
Net (decrease) increase in cash and cash equivalents
(2,400
)
 
10,124

Cash and cash equivalents at beginning of period
76,016

 
60,481

Cash and cash equivalents at end of period
$
73,616

 
$
70,605

See Condensed Notes to Consolidated Financial Statements.

7
Table of Contents
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands, unaudited)
 
Nine months ended September 30,
 
2016
 
2015
Operating Activities:
 
 
 
Net earnings
$
21,476

 
$
40,384

Adjustments:
 
 
 
Depreciation
10,451

 
9,116

Amortization
16,482

 
16,460

Net realized gains on investments
(1,257
)
 
(974
)
Loss on disposal of property and equipment
544

 
1,155

Share-based compensation expense
1,411

 
1,863

Excess tax benefits from share-based payment arrangements
(157
)
 
(298
)
Activity related to rabbi trust
112

 
(77
)
Change in accrued investment income
992

 
590

Change in agents’ balances and premium receivable
(40,372
)
 
(54,108
)
Change in reinsurance receivables
(1,602
)
 
(2,805
)
Change in deferred policy acquisition costs
(4,292
)
 
(8,145
)
Change in other assets
1,097

 
(6,385
)
Change in unpaid losses and loss adjustment expenses
6,562

 
10,841

Change in unearned premium
43,657

 
55,787

Change in other liabilities
(6,924
)
 
6,435

Net cash provided by operating activities
48,182

 
69,839

Investing Activities:
 
 
 
Purchases of fixed maturities
(379,135
)
 
(385,319
)
Purchases of equity securities
0

 
(7,000
)
Purchases of short-term investments
(8,250
)
 
(8,413
)
Purchases of property and equipment
(15,648
)
 
(33,953
)
Maturities and redemptions of fixed maturities
115,848

 
149,102

Maturities and redemptions of short-term investments
1,300

 
785

Proceeds from sale of fixed maturities
265,544

 
224,982

Proceeds from sale of equity securities
2,000

 
4,489

Proceeds from sale of short-term investments
9,258

 
3,086

Proceeds from sale of property and equipment
2

 
0

Net cash used in investing activities
(9,081
)
 
(52,240
)
Financing Activities:
 
 
 
Proceeds from stock options exercised and employee stock purchases
185

 
191

Excess tax benefits from share-based payment arrangements
157

 
298

Principal payments under capital lease obligations
(380
)
 
(371
)
Acquisition of treasury stock
(10,681
)
 
(16,942
)
Dividends paid to shareholders
(17,249
)
 
(14,711
)
Net cash used in financing activities
(27,967
)
 
(31,535
)
Net increase (decrease) in cash and cash equivalents
11,133

 
(13,936
)
Cash and cash equivalents at beginning of period
62,483

 
84,541

Cash and cash equivalents at end of period
$
73,616

 
$
70,605

See Condensed Notes to Consolidated Financial Statements.

8
Table of Contents
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
INDEX TO NOTES
 
1.
6.
 
 
 
2.
7.
 
 
 
3.
8.
 
 
 
4.
9.
 
 
 
5.
10.

Note 1 Significant Reporting and Accounting Policies
Nature of Operations
We are a holding company that provides insurance through our subsidiaries for personal automobiles with a concentration on nonstandard risks, commercial vehicles and classic collectors. Although licensed to write insurance in all 50 states and the District of Columbia, we focus on select states that we believe offer the greatest opportunity for premium growth and profitability.
Basis of Consolidation and Reporting
The accompanying consolidated financial statements are unaudited and should be read in conjunction with our Annual Report on Form 10-K (Form 10-K) for the year ended December 31, 2015. This Quarterly Report on Form 10-Q, including the Condensed Notes to Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations, focuses on our financial performance since the beginning of the year.
These financial statements reflect certain adjustments necessary for a fair presentation of our results of operations and financial position. Such adjustments consist of normal, recurring accruals recorded to accurately match expenses with their related revenue streams and the elimination of all significant intercompany transactions and balances.
We have evaluated events that occurred after September 30, 2016, for recognition or disclosure in our financial statements and the notes to the financial statements.
Schedules may not foot due to rounding.
Estimates
We based certain accounts and balances within these financial statements upon our estimates and assumptions. The amount of reserves for claims not yet paid, for example, is an item that we can only record by estimation. Unrealized capital gains and losses on investments are subject to market fluctuations, and we use judgment in the determination of whether unrealized losses on certain securities are temporary or other-than-temporary. Should actual results differ significantly from these estimates, the effect on our results of operations could be material. The results of operations for the periods presented may not be indicative of our results for the entire year.
Recently Adopted Accounting Standards
In April 2015 the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) related to the presentation of debt issuance costs. The guidance requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability. We adopted this standard retrospectively as of January 1, 2016.

9
Table of Contents
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

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

 
$
10.3

 
$
(1.6
)
Total assets
2,386.8

 
2,385.1

 
(1.6
)
Long-term debt
275.0

 
273.4

 
(1.6
)
Total liabilities
1,699.2

 
1,697.5

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

 
2,385.1

 
(1.6
)
Recently Issued Accounting Standards
In 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 March 2016 the FASB issued an ASU related to the accounting for employee share-based payments. The guidance addresses the recognition, presentation and classification of awards, forfeitures and shares withheld for tax purposes. The standard is effective for fiscal periods beginning after December 15, 2016, with each provision having a different application method. We do not expect the adoption of this standard to have a material impact on our financial condition or results of operations.
In February 2016 the FASB issued an ASU related to the accounting for leases. The guidance requires lessees to recognize lease assets and liabilities on the balance sheet. The standard is effective for fiscal years beginning after December 15, 2018, and is to be applied retrospectively, with an option to use a modified retrospective approach for leases which commenced prior to the effective date of this ASU. We are still evaluating the impact this ASU will have on the Company's consolidated financial statements.
In January 2016 the FASB issued an ASU amending the guidance on classifying and measuring financial instruments. The guidance requires equity securities to be measured at fair value and changes in that fair value to be recognized through net income. The standard is effective for fiscal years beginning after December 15, 2017, with a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. We currently record equity securities at fair value and as of September 30, 2016, we have $10.2 million net unrealized gains, net of tax, recognized as a component of other comprehensive income.
In May 2015 the FASB issued an ASU related to the disclosure for short-duration contracts. The guidance requires additional disclosures related to the liability for unpaid claims and claim adjustment expenses in an effort to increase transparency and comparability. The standard is effective for annual periods beginning after December 15, 2015, and interim periods within annual periods after December 15, 2016. The new guidance, which is to be applied retrospectively, will have no material impact on our results of operations or financial position.
In May 2014 the FASB issued an ASU related to the accounting for revenue from contracts with customers. Insurance contracts have been excluded from the scope of the guidance. In August 2015 the FASB issued an ASU to defer the effective date from fiscal years beginning after December 15, 2016, to fiscal years beginning after December 15, 2017. We do not expect the adoption of this standard to have a material impact on our financial condition or results of operations.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

Note 2 Computation of Net Earnings per Share
The following table illustrates our computations of basic and diluted net earnings per common share ($ in thousands, except per
share figures):
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Net earnings
$
2,753

 
$
15,737

 
$
21,476

 
$
40,384

Average basic shares outstanding
11,018

 
11,321

 
11,022

 
11,385

Basic net earnings per share
$
0.25

 
$
1.39

 
$
1.95

 
$
3.55

 
 
 
 
 
 
 
 
Average basic shares outstanding
11,018

 
11,321

 
11,022

 
11,385

Restricted stock not vested
27

 
18

 
24

 
16

Dilutive effect of Performance Share Plan
39

 
45

 
59

 
73

Average diluted shares outstanding
11,084

 
11,383

 
11,105

 
11,474

Diluted net earnings per share
$
0.25

 
$
1.38

 
$
1.93

 
$
3.52


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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, 2016
Level 1
 
Level 2
 
Level 3
 
Total
Cash and cash equivalents
$
73,616

 
$
0

 
$
0

 
$
73,616

Fixed maturity securities:
 
 
 
 
 
 
 
U.S. government
63,937

 
5

 
0

 
63,942

State and municipal
0

 
477,581

 
618

 
478,199

Mortgage-backed securities:

 
 
 
 
 
 
Residential
0

 
339,655

 
0

 
339,655

Commercial
0

 
76,190

 
0

 
76,190

Total mortgage-backed securities
0

 
415,845

 
0

 
415,845

Asset-backed securities
0

 
43,969

 
495

 
44,465

Corporates
0

 
401,177

 
1,005

 
402,182

Total fixed maturities
63,937

 
1,338,577

 
2,118

 
1,404,633

Equity securities
92,822

 
0

 
0

 
92,822

Short-term investments
768

 
1,487

 
0

 
2,255

Total cash and investments
$
231,144

 
$
1,340,065

 
$
2,118

 
$
1,573,327

Percentage of total cash and investments
14.7
%
 
85.2
%
 
0.1
%
 
100.0
%
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
Cash and cash equivalents
$
62,483

 
$
0

 
$
0

 
$
62,483

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

 
32

 
0

 
64,669

State and municipal
0

 
479,656

 
10

 
479,666

Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
0

 
334,784

 
0

 
334,784

Commercial
0

 
70,224

 
0

 
70,224

Total mortgage-backed securities
0

 
405,008

 
0

 
405,008

Asset-backed securities
0

 
54,018

 
0

 
54,018

Corporates
0

 
376,582

 
1,524

 
378,105

Total fixed maturities
64,638

 
1,315,295

 
1,534

 
1,381,467

Equity securities
89,935

 
0

 
0

 
89,935

Short-term investments
0

 
4,651

 
0

 
4,651

Total cash and investments
$
217,056

 
$
1,319,946

 
$
1,534

 
$
1,538,536

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

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

We do not report our long-term debt at fair value in the Consolidated Balance Sheets. The $292.1 million and $281.6 million fair value of our long-term debt at September 30, 2016, and December 31, 2015, respectively, would be included in Level 2 of the fair value hierarchy if it were reported at fair value.
Level 1 includes cash and cash equivalents, U.S. Treasury securities, an exchange-traded fund and equities held in a rabbi trust which funds our Supplemental Employee Retirement Plan (SERP). Level 2 includes securities whose fair value was determined using observable market inputs. Level 3 securities are comprised of (i) securities for which there is no active or inactive market for similar instruments; (ii) securities whose fair value is determined based on unobservable inputs; and (iii) securities, other than those backed by the U.S. Government, that are not rated by a nationally recognized statistical rating organization (NRSRO). We recognize transfers between levels at the beginning of the reporting period.
A third party nationally recognized pricing service provides the fair value of securities in Level 2. A summary of the significant valuation techniques and market inputs for each class of security follows:
U.S. Government: In determining the fair value for U.S. Government securities we use the market approach. The primary inputs to the valuation include reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads, reference data and industry and economic events.
State and municipal: In determining the fair value for state and municipal securities we use the market approach. The primary inputs to the valuation include reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads, reference data and industry and economic events.
Mortgage-backed securities: In determining the fair value for mortgage-backed securities we use the market approach and to a lesser extent the income approach. The primary inputs to the valuation include reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads, reference data, industry and economic events and monthly payment information.
Asset-backed securities: In determining the fair value for asset-backed securities we use the market approach and to a lesser extent the income approach. The primary inputs to the valuation include reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads, reference data, industry and economic events, monthly payment information and collateral performance.
Corporate: In determining the fair value for corporate securities we use the market approach. The primary inputs to the valuation include reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads (for investment grade securities), observations of equity and credit default swap curves (for high-yield corporates), reference data and industry and economic events.
We review the third party pricing methodologies quarterly and test for significant differences between the market price used to value the security and recent sales activity.












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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, 2016
State and
Municipal
 
Asset-Backed Securities
 
Corporates
 
Total
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

 
 
 
 
 
 
 
 
Three months ended September 30, 2015
 
 
 
 
 
 
 
Balance at beginning of period
$
10

 
$
0

 
$
2,423

 
$
2,434

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

 
6

 
6

Included in other comprehensive income
(0
)
 
0

 
(10
)
 
(10
)
Purchases
0

 
0

 
0

 
0

Settlements
0

 
0

 
(83
)
 
(83
)
Transfers in
0

 
0

 
0

 
0

Transfers out
0

 
0

 
(347
)
 
(347
)
Balance at end of period
$
10

 
$
0

 
$
1,989

 
$
1,999

Nine months ended September 30, 2016
State and
Municipal
 
Asset-Backed Securities
 
Corporates
 
Total
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

 
 
 
 
 
 
 
 
Nine months ended September 30, 2015
 
 
 
 
 
 
 
Balance at beginning of period
$
0

 
$
150

 
$
3,134

 
$
3,285

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

 
(77
)
 
(77
)
Included in other comprehensive income
0

 
0

 
(53
)
 
(53
)
Purchases
0

 
0

 
0

 
0

Settlements
0

 
(150
)
 
(669
)
 
(819
)
Transfers in
10

 
0

 
0

 
10

Transfers out
0

 
0

 
(347
)
 
(347
)
Balance at end of period
$
10

 
$
0

 
$
1,989

 
$
1,999


14
Table of Contents
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

Of the $2.1 million fair value of securities in Level 3 at September 30, 2016, which consisted of five securities, we priced three based on non-binding broker quotes, one price was provided by our unaffiliated money manager, and one security, which was included in Level 3 because it was not rated by a NRSRO, was priced by a nationally recognized pricing service.
One security was transferred from Level 2 into Level 3 during the first quarter of 2016 because a price could not be determined using observable market inputs. However, during the third quarter of 2016, a price was obtained using observable market inputs and the security was transferred back into Level 2. One security was transferred from Level 2 into Level 3 during the second quarter of 2016 following an exchange after which it was no longer rated by a NRSRO. There were no transfers of securities between Levels 1 and 2 in the first nine months of 2016.
The gains or losses included in net earnings are included in the line item "Net realized gains (losses) on investments" in the Consolidated Statements of Earnings. We recognize the net gains or losses included in other comprehensive income in the line item "Unrealized gains (losses) on investments, net" in the Consolidated Statements of Comprehensive Income and the line item "Change in unrealized gain on investments" or the line item "Change in non-credit component of impairment losses on fixed maturities" in the Consolidated Statements of Changes in Shareholders’ Equity.
The following table presents the carrying value and estimated fair value of our financial instruments ($ in thousands):
 
September 30, 2016
 
December 31, 2015
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
73,616

 
$
73,616

 
$
62,483

 
$
62,483

Available-for-sale securities:
 
 
 
 
 
 
 
Fixed maturities
1,404,633

 
1,404,633

 
1,381,467

 
1,381,467

Equity securities
92,822

 
92,822

 
89,935

 
89,935

Short-term investments
2,255

 
2,255

 
4,651

 
4,651

Total cash and investments
$
1,573,327

 
$
1,573,327

 
$
1,538,536

 
$
1,538,536

Liabilities:
 
 
 
 
 
 
 
Long-term debt
$
273,538

 
$
292,075

 
$
273,383

 
$
281,581

Refer to Note 4 – Investments to the Consolidated Financial Statements for additional information on investments and Note 5 – Long-Term Debt to the Consolidated Financial Statements for additional information on long-term debt.
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, 2016, were $68.0 million and $276.8 million, respectively, while the proceeds from sales of securities for the three and nine months ended September 30, 2015, were $75.9 million and $232.6 million, respectively. The proceeds for the nine months ended September 30, 2016, were net of $1.7 million of receivable for unsettled sales as of September 30, 2016. The proceeds for the nine months ended September 30, 2015, were net of $2.7 million of receivable for securities sold during the third quarter of 2015 that had not settled as of September 30, 2015.
Gross gains of $1.3 million and gross losses of $42.0 thousand were realized on sales of available-for-sale securities during the three months ended September 30, 2016, compared with gross gains of $1.6 million and gross losses of $1.9 million realized on sales during the three months ended September 30, 2015. Gross gains of $3.5 million and gross losses of $1.9 million were realized on sales of available-for-sale securities during the nine months ended September 30, 2016, compared with gross gains of $4.3 million and gross losses of $2.6 million realized on sales during the nine months ended September 30, 2015. Gains or losses on securities are determined on a specific identification basis.

15
Table of Contents
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

Summarized information for the major categories of our investment portfolio follows ($ in thousands):
September 30, 2016
Amortized
Cost or Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
OTTI
Recognized in
Accumulated
OCI(1)
Fixed maturities:
 
 
 
 
 
 
 
 
 
U.S. government
$
63,222

 
$
726

 
$
(6
)
 
$
63,942

 
$
0

State and municipal
470,074

 
8,352

 
(227
)
 
478,199

 
(51
)
Mortgage-backed securities:

 

 

 
 
 
 
Residential
331,827

 
7,971

 
(144
)
 
339,655

 
(2,061
)
Commercial
76,212

 
275

 
(296
)
 
76,190

 
0

Total mortgage-backed securities
408,040

 
$
8,246

 
(441
)
 
$
415,845

 
(2,061
)
Asset-backed securities
44,231

 
241

 
(7
)
 
44,465

 
(8
)
Corporates
393,959

 
8,506

 
(283
)
 
402,182

 
(41
)
Total fixed maturities
1,379,525

 
26,071

 
(963
)
 
1,404,633

 
(2,162
)
Equity securities
77,125

 
15,697

 
0

 
92,822

 
0

Short-term investments
2,257

 
0

 
(2
)
 
2,255

 
0

Total
$
1,458,907

 
$
41,768

 
$
(965
)
 
$
1,499,710

 
$
(2,162
)
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
U.S. government
$
64,849

 
$
103

 
$
(282
)
 
$
64,669

 
$
0

State and municipal
472,402

 
7,393

 
(129
)
 
479,666

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

 
3,678

 
(2,448
)
 
334,784

 
(2,374
)
Commercial
71,137

 
16

 
(929
)
 
70,224

 
0

Total mortgage-backed securities
404,691

 
3,694

 
(3,377
)
 
405,008

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

 
50

 
(138
)
 
54,018

 
(8
)
Corporates
385,462

 
1,281

 
(8,638
)
 
378,105

 
(61
)
Total fixed maturities
1,381,510

 
12,521

 
(12,564
)
 
1,381,467

 
(2,495
)
Equity securities
78,815

 
11,120

 
0

 
89,935

 
0

Short-term investments
4,656

 
0

 
(4
)
 
4,651

 
0

Total
$
1,464,981

 
$
23,640

 
$
(12,568
)
 
$
1,476,053

 
$
(2,495
)
 
 
 
 
 
 
 
 
 
 
(1) The total non-credit portion of OTTI recognized in Accumulated OCI reflecting the original non-credit loss at the time the credit impairment was determined.


16
Table of Contents
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

The following tables set forth the amount of unrealized loss by investment category and length of time that individual securities have been in a continuous unrealized loss position ($ in thousands):
 
Less than 12 Months
 
12 Months or More
September 30, 2016
Number of
Securities
with
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Unrealized
Losses as
% of Cost
 
Number of
Securities
with
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Unrealized
Losses as
% of Cost
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government
7
 
$
5,953

 
$
(6
)
 
0.1
%
 
0

 
$
0

 
$
0

 
0.0
%
State and municipal
37
 
71,508

 
(227
)
 
0.3
%
 
0

 
0

 
0

 
0.0
%
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
27
 
17,124

 
(18
)
 
0.1
%
 
42

 
13,692

 
(126
)
 
0.9
%
Commercial
10
 
28,433

 
(124
)
 
0.4
%
 
8

 
30,812

 
(173
)
 
0.6
%
Total mortgage-backed securities
37
 
45,557

 
(142
)
 
0.3
%
 
50

 
44,503

 
(299
)
 
0.7
%
Asset-backed securities
4
 
3,676

 
(6
)
 
0.2
%
 
1

 
519

 
(1
)
 
0.1
%
Corporates
25
 
27,842

 
(100
)
 
0.4
%
 
9

 
9,529

 
(183
)
 
1.9
%
Total fixed maturities
110
 
154,537

 
(481
)
 
0.3
%
 
60

 
54,551

 
(483
)
 
0.9
%
Equity securities
0
 
0

 
0

 
0.0
%
 
0

 
0

 
0

 
0.0
%
Short-term investments
2
 
1,487

 
(2
)
 
0.1
%
 
0

 
0

 
0

 
0.0
%
Total
112
 
$
156,024

 
$
(482
)
 
0.3
%
 
60

 
$
54,551

 
$
(483
)
 
0.9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government
18
 
$
36,024

 
$
(241
)
 
0.7
%
 
4

 
$
4,687

 
$
(41
)
 
0.9
%
State and municipal
27
 
54,680

 
(129
)
 
0.2
%
 
0

 
0

 
0

 
0.0
%
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
205
 
133,814

 
(1,436
)
 
1.1
%
 
64

 
39,001

 
(1,012
)
 
2.5
%
Commercial
9
 
28,733

 
(349
)
 
1.2
%
 
10

 
34,169

 
(580
)
 
1.7
%
Total mortgage-backed securities
214
 
162,547

 
(1,785
)
 
1.1
%
 
74

 
73,170

 
(1,592
)
 
2.1
%
Asset-backed securities
36
 
35,313

 
(132
)
 
0.4
%
 
2

 
1,153

 
(7
)
 
0.6
%
Corporates
172
 
239,440

 
(7,149
)
 
2.9
%
 
12

 
14,373

 
(1,488
)
 
9.4
%
Total fixed maturities
467
 
528,003

 
(9,436
)
 
1.8
%
 
92

 
93,384

 
(3,128
)
 
3.2
%
Equity securities
0
 
0

 
0

 
0.0
%
 
0

 
0

 
0

 
0.0
%
Short-term investments
2
 
4,651

 
(4
)
 
0.1
%
 
0

 
0

 
0

 
0.0
%
Total
469
 
$
532,654

 
$
(9,440
)
 
1.7
%
 
92

 
$
93,384

 
$
(3,128
)
 
3.2
%


17
Table of Contents
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

The determination of whether unrealized losses are “other-than-temporary” requires judgment based on subjective as well as objective factors. Factors we considered and resources we used in our determination include:
•
whether the unrealized loss is credit-driven or a result of changes in market interest rates;
•
the length of time the security’s market value has been below its cost;
•
the extent to which fair value is less than cost basis;
•
the intent to sell the security;
•
whether it is more likely than not that there will be a requirement to sell the security before its anticipated recovery;
•
historical operating, balance sheet and cash flow data contained in issuer SEC filings;
•
issuer news releases;
•
near-term prospects for improvement in the issuer and/or its industry;
•
industry research and communications with industry specialists; and
•
third-party research and credit rating reports.
We regularly evaluate for potential impairment each security position that has either of the following: a fair value of less than 95% of its book value or an unrealized loss that equals or exceeds $100,000.
The following table summarizes those securities, excluding the rabbi trust, with unrealized gains or losses:
 
September 30, 2016
 
December 31, 2015
Number of positions held with unrealized:
 
 
 
Gains
1,057

 
602

Losses
172

 
561

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

 
2

Losses of $500,000
0

 
0

Percentage of positions held with unrealized:
 
 
 
Gains that were investment grade
92
%
 
94
%
Losses that were investment grade
88
%
 
89
%
Percentage of fair value held with unrealized:
 
 
 
Gains that were investment grade
92
%
 
95
%
Losses that were investment grade
91
%
 
88
%
The following table sets forth the amount of unrealized losses, excluding the rabbi trust, by age and severity at September 30, 2016, ($ 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
$
143,900

 
$
(428
)
 
$
(428
)
 
$
0

 
$
0

Four months through six months
6,762

 
(38
)
 
(38
)
 
0

 
0

Seven months through nine months
3,995

 
(17
)
 
(17
)
 
0

 
0

Ten months through twelve months
1,886

 
(1
)
 
(1
)
 
0

 
0

Greater than twelve months
54,032

 
(482
)
 
(426
)
 
(56
)
 
0

Total
$
210,575

 
$
(965
)
 
$
(909
)
 
$
(56
)
 
$
0

* As a percentage of amortized cost or cost.

18
Table of Contents
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

The change in unrealized gains (losses) on marketable securities included the following ($ in thousands):
 
Pre-tax
 
 
 
 
Nine months ended September 30, 2016
Fixed
Maturities
 
Equity
Securities
 
Short-Term Investments
 
Tax
Effects
 
Net
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

 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2015
 
 
 
 
 
 
 
 
 
Unrealized holding (losses) gains on securities arising during the period
$
(9,119
)
 
$
(7,238
)
 
$
0

 
$
5,725

 
$
(10,632
)
Realized gains on securities sold
(588
)
 
(1,099
)
 
(0
)
 
590

 
(1,096
)
Impairment loss recognized in earnings
713

 
0

 
0

 
(249
)
 
463

Change in unrealized, net
$
(8,994
)
 
$
(8,337
)
 
$
0

 
$
6,066

 
$
(11,265
)
For fixed maturity securities that are other-than-temporarily impaired, we assess our intent to sell and the likelihood that we will be required to sell the security before recovery of our amortized cost. If a fixed maturity security is considered other-than-temporarily impaired but we do not intend to and are not more than likely to be required to sell the security before our recovery of amortized cost, we separate the amount of the impairment into a credit loss component and the amount due to all other factors ("non-credit component"). The excess of the amortized cost over the present value of the expected cash flows determines the credit loss component of an impairment charge on a fixed maturity security. The present value is determined using the best estimate of cash flows discounted at (i) the effective interest rate implicit at the date of acquisition for non-structured securities; or (ii) the book yield for structured securities. The techniques and assumptions for determining the best estimate of cash flows vary depending on the type of security. We recognize the credit loss component of an impairment charge in net earnings and the non-credit component in accumulated other comprehensive income. If we intend to sell or will, more likely than not, be required to sell a security, we treat the entire amount of the impairment as a credit loss.
For our securities held with unrealized losses, we believe, based on our analysis, 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 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,
 
2016
 
2015
Beginning balance
$
683

 
$
852

Securities sold and paid down
(105
)
 
(139
)
Ending balance
$
579

 
$
712


19
Table of Contents
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

The table below sets forth the scheduled maturities of fixed maturity securities at September 30, 2016, based on their fair values ($ in thousands). We report securities that do not have a single maturity date at average maturity. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid by the issuers.
 
Fair Value
 
Amortized
Cost
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
$
103,635

 
$
2,594

 
$
900

 
$
107,128

 
$
106,393

After one year through five years
497,251

 
74,810

 
2,095

 
574,155

 
565,291

After five years through ten years
223,821

 
37,429

 
0

 
261,250

 
253,888

After ten years
1,790

 
0

 
0

 
1,790

 
1,683

Mortgage- and asset-backed securities
366,054

 
94,256

 
0

 
460,310

 
452,270

Total
$
1,192,550

 
$
209,088

 
$
2,995

 
$
1,404,633

 
$
1,379,525

Note 5 Long-Term Debt
($ in thousands)
September 30, 2016
 
December 31, 2015
Principal
$
275,000

 
$
275,000

Unamortized debt issuance costs
1,462

 
1,617

Long-term debt less unamortized debt issuance costs
$
273,538

 
$
273,383

In September 2012 we issued $275 million principal of senior notes due September 2022 (the “5.0% Senior Notes”). The 5.0% Senior Notes accrue interest at 5.0%, payable semiannually. At the time we issued the 5.0% Senior Notes, we capitalized $2.2 million of debt issuance costs, which we are amortizing over the term of the 5.0% Senior Notes. We calculated the September 30, 2016, fair value of $292.1 million using a 223 basis point spread to the 10-year U.S. Treasury Note of 1.596%.
In August 2014 we renewed our agreement for a $50 million three-year revolving credit facility (the “Credit Agreement”) that requires us to meet certain financial and other covenants. We are currently in compliance with all covenants under the Credit Agreement, and as of September 30, 2016, there were no borrowings outstanding against it.
Note 6 Income Taxes
The following is a reconciliation of income taxes at the statutory rate of 35.0% to the effective provision for income taxes as shown in the Consolidated Statements of Earnings ($ in thousands):
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Earnings before income taxes
$
3,196

 
$
22,814

 
$
30,012

 
$
58,717

Income taxes at statutory rate
1,119

 
7,985

 
10,504

 
20,551

Effect of:
 
 
 
 
 
 
 
Dividends-received deduction
(101
)
 
(89
)
 
(322
)
 
(337
)
Tax-exempt interest
(600
)
 
(725
)
 
(1,858
)
 
(2,033
)
Other
24

 
(94
)
 
212

 
152

Provision for income taxes as shown on the Consolidated Statements of Earnings
$
442

 
$
7,077

 
$
8,536

 
$
18,333

GAAP effective tax rate
13.8
%
 
31.0
%
 
28.4
%
 
31.2
%

20
Table of Contents
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

Note 7 Additional Information
Supplemental Cash Flow Information
We made the following payments that we do not separately disclose in the Consolidated Statements of Cash Flows ($ in thousands):
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Income tax payments
$
3,100

 
$
6,511

 
$
6,651

 
$
19,261

Interest payments on debt
6,875

 
6,875

 
13,750

 
13,750

Interest payments on capital leases
18

 
19

 
57

 
62

Negative Cash Book Balances
Negative cash book balances, included in the line item “Other liabilities” in the Consolidated Balance Sheets, were $40.8 million and $41.4 million at September 30, 2016, and December 31, 2015, respectively.
Note 8 Insurance Reserves
Insurance reserves include liabilities for unpaid losses, both known and estimated for incurred but not reported (IBNR), and unpaid loss adjustment expenses (LAE). The following table provides an analysis of changes in the liability for unpaid losses and LAE on a GAAP basis ($ in thousands): 
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Balance at Beginning of Period
 
 
 
 
 
 
 
Unpaid losses on known claims
$
236,947

 
$
245,863

 
$
237,660

 
$
235,037

IBNR losses
290,767

 
281,147

 
290,097

 
277,482

LAE
138,496

 
154,017

 
142,207

 
155,658

Total unpaid losses and LAE
666,210

 
681,028

 
669,965

 
668,177

Reinsurance recoverables
(18,487
)
 
(14,155
)
 
(14,694
)
 
(14,370
)
Unpaid losses and LAE, net of reinsurance recoverables
647,723

 
666,873

 
655,271

 
653,808

Current Activity
 
 
 
 
 
 
 
Loss and LAE incurred:
 
 
 
 
 
 
 
Current accident year
281,456

 
267,412

 
828,310

 
798,442

Prior accident years
(590
)
 
(11,349
)
 
(18,646
)
 
(23,953
)
Total loss and LAE incurred
280,866

 
256,063

 
809,664

 
774,489

Loss and LAE payments:
 
 
 
 
 
 
 
Current accident year
(197,437
)
 
(192,850
)
 
(461,020
)
 
(439,519
)
Prior accident years
(72,205
)
 
(66,257
)
 
(344,969
)
 
(324,949
)
Total loss and LAE payments
(269,642
)
 
(259,107
)
 
(805,989
)
 
(764,469
)
Balance at End of Period
 
 
 
 
 
 
 
Unpaid losses and LAE, net of reinsurance recoverables
658,946

 
663,829

 
658,946

 
663,829

Add back reinsurance recoverables
17,580

 
15,190

 
17,580

 
15,190

Total unpaid losses and LAE
676,526

 
679,018

 
676,526

 
679,018

Unpaid losses on known claims
240,935

 
246,015

 
240,935

 
246,015

IBNR losses
299,143

 
282,658

 
299,143

 
282,658

LAE
136,449

 
150,345

 
136,449

 
150,345

Total unpaid losses and LAE
$
676,526

 
$
679,018

 
$
676,526

 
$
679,018


21
Table of Contents
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

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 vehicle product, driven by an increase in severity.
The $24.0 million of favorable reserve development during the nine months ended September 30, 2015, was primarily due to decreases in severity as well as decreases in loss adjustment expenses related to Florida bodily injury coverages in accident years 2013 and 2014. A decrease in loss adjustment expenses related to California bodily injury coverages in accident years 2013 and 2014 also contributed to the $11.3 million of favorable reserve development during the three months ended September 30, 2015.
Note 9 Commitments and Contingencies
Commitments
We extended our building lease in Alpharetta, Georgia through November 30, 2021, at a total base rent amount over the lease period of $2.7 million. In addition, a significant portion of our fleet vehicles, which have minimum lease terms of 367 days, were traded in during the first six months of 2016. The minimum remaining lease payment on our fleet as of September 30, 2016, is $0.9 million. Other than these items, there have been no material changes from the commitments discussed on Form 10-K for the year ended December 31, 2015. For a description of our previously reported commitments, refer to Note 14 Commitments and Contingencies of our Form 10-K for the year ended December 31, 2015.
Contingencies
From time to time we and our subsidiaries are named as defendants in various lawsuits incidental to our insurance operations. We consider legal actions relating to claims made in the ordinary course of seeking indemnification for a loss covered by the insurance policy in establishing loss and LAE reserves.
We also face, in the ordinary course of business, lawsuits that seek damages beyond policy limits, commonly known as extra-contractual claims, as well as class action and individual lawsuits that involve issues not unlike those facing other insurance companies and employers. We continually evaluate potential liabilities and reserves for litigation of these types using the criteria established by the Contingencies topic of the FASC. Under this guidance we may only record reserves for a loss if the likelihood of occurrence is probable and we can reasonably estimate the amount. If a material loss is judged to be reasonably possible, we will disclose an estimated range of loss or state that an estimate cannot be made. We consider each legal action using this guidance and record reserves for losses as warranted by establishing a reserve captured within our Consolidated Balance Sheets line-items “Unpaid losses and loss adjustment expenses” for extra-contractual claims and “Other liabilities” for class action and other non-claims related lawsuits. We record amounts incurred on the Consolidated Statements of Earnings within “Losses and loss adjustment expenses” for extra-contractual claims and “Other expenses” for class action and other non-claims related lawsuits.
Certain claims and legal actions have been brought against us for which we have accrued no loss, and for which an estimate of a possible range of loss cannot be made under the above rules. While it is not possible to predict the ultimate outcome of these claims or lawsuits, we do not believe they are likely to have a material effect on our financial condition or liquidity. However, losses incurred because of these cases could have a material adverse impact on net earnings in a given period.
For a description of previously reported contingencies, refer to Note 14 Commitments and Contingencies of our Form 10-K for the year ended December 31, 2015.

22
Table of Contents
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

Note 10 Accumulated Other Comprehensive Income
The components of other comprehensive income before and after tax are as follows ($ in thousands):
 
Three months ended September 30,
 
2016
 
2015
 
Before Tax
 
Income Tax
 
Net
 
Before Tax
 
Income Tax
 
Net
Accumulated change in post-retirement benefit liability, beginning of period
$
923

 
$
(323
)
 
$
600

 
$
206

 
$
(72
)
 
$
134

Effect on other comprehensive income
(11
)
 
4

 
(7
)
 
16

 
(6
)
 
11

Accumulated change in post-retirement benefit liability, end of period
912

 
(319
)
 
593

 
223

 
(78
)
 
145

Accumulated unrealized gains on investments, net, beginning of period
37,383

 
(13,084
)
 
24,299

 
29,532

 
(10,336
)
 
19,196

Other comprehensive income (loss) before reclassification
4,702

 
(1,646
)
 
3,056

 
(11,301
)
 
3,955

 
(7,346
)
Reclassification adjustment for other-than-temporary impairments included in net income
0

 
0

 
0

 
123

 
(43
)
 
80

Reclassification adjustment for realized (gains) losses included in net income
(1,282
)
 
449

 
(833
)
 
287

 
(100
)
 
187

Effect on other comprehensive income
3,420

 
(1,197
)
 
2,223

 
(10,891
)
 
3,812

 
(7,079
)
Accumulated unrealized gains on investments, net, end of period
40,803

 
(14,281
)
 
26,522

 
18,641

 
(6,524
)
 
12,116

Accumulated other comprehensive income, beginning of period
38,306

 
(13,407
)
 
24,899

 
29,738

 
(10,408
)
 
19,330

Change in post-retirement benefit liability
(11
)
 
4

 
(7
)
 
16

 
(6
)
 
11

Change in unrealized gains on investments, net
3,420

 
(1,197
)
 
2,223

 
(10,891
)
 
3,812

 
(7,079
)
Effect on other comprehensive income
3,409

 
(1,193
)
 
2,216

 
(10,875
)
 
3,806

 
(7,069
)
Accumulated other comprehensive income, end of period
$
41,715

 
$
(14,600
)
 
$
27,115

 
$
18,864

 
$
(6,602
)
 
$
12,261


23
Table of Contents
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

 
Nine months ended September 30,
 
2016
 
2015
 
Before Tax
 
Income Tax
 
Net
 
Before Tax
 
Income Tax
 
Net
Accumulated change in post-retirement benefit liability, beginning of period
$
944

 
$
(331
)
 
$
614

 
$
174

 
$
(61
)
 
$
113

Effect on other comprehensive income
(32
)
 
11

 
(21
)
 
49

 
(17
)
 
32

Accumulated change in post-retirement benefit liability, end of period
912

 
(319
)
 
593

 
223

 
(78
)
 
145

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

 
(3,875
)
 
7,197

 
35,972

 
(12,590
)
 
23,382

Other comprehensive income (loss) before reclassification
30,989

 
(10,846
)
 
20,143

 
(16,357
)
 
5,725

 
(10,632
)
Reclassification adjustment for other-than-temporary impairments included in net income
316

 
(111
)
 
205

 
713

 
(249
)
 
463

Reclassification adjustment for realized gains included in net income
(1,573
)
 
551

 
(1,023
)
 
(1,686
)
 
590

 
(1,096
)
Effect on other comprehensive income
29,731

 
(10,406
)
 
19,325

 
(17,331
)
 
6,066

 
(11,265
)
Accumulated unrealized gains on investments, net, end of period
40,803

 
(14,281
)
 
26,522

 
18,641

 
(6,524
)
 
12,116

Accumulated other comprehensive income, beginning of period
12,016

 
(4,206
)
 
7,811

 
36,145

 
(12,651
)
 
23,494

Change in post-retirement benefit liability
(32
)
 
11

 
(21
)
 
49

 
(17
)
 
32

Change in unrealized gains on investments, net
29,731

 
(10,406
)
 
19,325

 
(17,331
)
 
6,066

 
(11,265
)
Effect on other comprehensive income
29,699

 
(10,395
)
 
19,304

 
(17,281
)
 
6,049

 
(11,233
)
Accumulated other comprehensive income, end of period
$
41,715

 
$
(14,600
)
 
$
27,115

 
$
18,864

 
$
(6,602
)
 
$
12,261


24
Table of Contents
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q
Management’s Discussion and Analysis of Financial Condition and Results of Operations


ITEM 2
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain “forward-looking statements” which anticipate results based on our estimates, assumptions and plans that are subject to uncertainty. We make these statements subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements in this report not dealing with historical results or current facts are forward-looking and we base them on estimates, assumptions and projections. Statements which include the words “assumes,” “believes,” “seeks,” “expects,” “may,” “should,” “intends,” “likely,” “targets,” “plans,” “anticipates,” “estimates” or the negative version of those words and similar statements of a future or forward-looking nature identify forward-looking statements. Examples of such forward-looking statements include statements relating to expectations concerning market conditions, premium growth, earnings, investment performance, expected losses, rate changes and loss experience.
The primary events or circumstances that could cause actual results to differ materially from what we expect include determinations with respect to reserve adequacy, realized gains or losses on the investment portfolio (including other-than-temporary impairments for credit losses), loss cost trends, and competitive conditions in our key Focus States (defined in Results of Operations – Underwriting – Premium). We undertake no obligation to publicly update or revise any of the forward-looking statements. For a more detailed discussion of some of the foregoing risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements refer to Part I, Item 1A, Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2015.
OVERVIEW
Higher average premiums in California, growth in Texas and renewal business growth in our commercial vehicle product resulted in gross written premium growth of 7.5% during the third quarter of 2016. However, our gross written premium has declined 0.5% during the first nine months of 2016 as lower premium during the first half of the year more than offset the growth during the third quarter. Refer to Results of Operations – Underwriting – Premium for a more detailed discussion of our gross written premium.
Net earnings and diluted earnings per share for the three months ended September 30, 2016, were $2.8 million and $0.25, respectively, compared with $15.7 million and $1.38, respectively, for the same periods of 2015. Net earnings and diluted earnings per share for the nine months ended September 30, 2016, were $21.5 million and $1.93, respectively, compared with $40.4 million and $3.52, respectively, for the same periods of 2015. The decrease in net earnings and diluted earnings per share for the nine months ended September 30, 2016, was primarily due to an increase in the accident year combined ratio from 97.6% at September 30, 2015, to 99.8% at September 30, 2016, and a decrease in favorable development on prior accident year loss and LAE reserves.
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 vehicle product, driven by an increase in severity. Included in net earnings for the three and nine months ended September 30, 2015, was $7.4 million ($11.3 million pre-tax) and $15.6 million ($24.0 million pre-tax), respectively, of favorable development on prior accident year loss and LAE reserves. This development was primarily due to decreases in severity as well as decreases in loss adjustment expenses related to Florida bodily injury coverages in accident years 2013 and 2014. A decrease in loss adjustment expenses related to California bodily injury coverages in accident years 2013 and 2014 also contributed to the development during the third quarter of 2015.

25
Table of Contents
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, 2016:
 
Accident Year Combined Ratio
Developed Through
 
Prior Accident Year
(Favorable) / Unfavorable Development
($ in millions)
 
Dec 2014
 
Sept 2015
 
Dec 2015
 
Mar 2016
 
June 2016
 
Sept 2016
 
Q3 2016
 
YTD 2016
Accident Year
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prior
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
0.1

 
 
 
$
0.6

2008
91.2
%
 
91.1
%
 
91.1
%
 
91.1
%
 
91.1
%
 
91.1
%
 
0.0
 %
 
0.0

 
(0.0
)%
 
(0.2
)
2009
92.4
%
 
92.3
%
 
92.4
%
 
92.4
%
 
92.4
%
 
92.4
%
 
0.0
 %
 
0.3

 
0.0
 %
 
0.3

2010
99.2
%
 
99.3
%
 
99.4
%
 
99.3
%
 
99.3
%
 
99.3
%
 
0.0
 %
 
0.3

 
(0.1
)%
 
(1.1
)
2011
100.1
%
 
100.0
%
 
100.2
%
 
100.0
%
 
100.0
%
 
100.0
%
 
(0.0
)%
 
(0.3
)
 
(0.2
)%
 
(1.6
)
2012
100.1
%
 
99.9
%
 
100.1
%
 
99.9
%
 
99.8
%
 
99.8
%
 
0.0
 %
 
0.1

 
(0.3
)%
 
(3.3
)
2013
96.8
%
 
95.7
%
 
95.5
%
 
95.3
%
 
95.1
%
 
94.9
%
 
(0.2
)%
 
(3.1
)
 
(0.6
)%
 
(8.5
)
2014
96.4
%
 
95.9
%
 
95.4
%
 
95.0
%
 
94.6
%
 
94.3
%
 
(0.3
)%
 
(3.7
)
 
(1.0
)%
 
(13.3
)
2015
 
 
97.6
%
 
97.8
%
 
98.3
%
 
98.0
%
 
98.4
%
 
0.4
 %
 
5.6

 
0.6
 %
 
8.5

2016 YTD
 
 
 
 
 
 
99.4
%
 
99.5
%
 
99.8
%
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
(0.6
)
 
 
 
$
(18.6
)
Refer to Results of Operations – Underwriting – Profitability for a more detailed discussion of our underwriting results.
Pre-tax net investment income declined from $10.0 million and $27.9 million during the three and nine months ended September 30, 2015, respectively, to $8.1 million and $25.1 million during the three and nine months ended September 30, 2016, respectively, primarily due to a decrease in the average par value of our portfolio. In addition, pre-tax net investment income for the three months ended September 30, 2015, included the reclassification of $1.1 million of make whole proceeds which were previously included in realized gains and losses.
Our book value per share increased 3.1% from $61.66 at December 31, 2015, to $63.56 at September 30, 2016. 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 vehicle insurance and insurance for classic collectible automobiles (Classic Collector).
We are licensed to write insurance in all 50 states and the District of Columbia, but we focus our operations in targeted urban areas identified in selected Focus States (defined below) that we believe offer the greatest opportunity for premium growth and profitability.
We classify the states in which we operate into two categories:
•
“Focus States” – Arizona, California, Florida and Texas.
•
“Other States” – States where we are running off our business.
We continually evaluate our market opportunities; thus, the Focus States and Other States may change over time as new market opportunities arise, as the allocation of resources changes or as regulatory environments change.

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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,
 
2016
 
2015
 
Change
 
% Change
Gross written premium:
 
 
 
 
 
 
 
Personal Auto:
 
 
 
 
 
 
 
Focus States
$
312,538

 
$
287,388

 
$
25,150

 
8.8
 %
Other States
7,233

 
11,550

 
(4,316
)
 
(37.4
)%
Total Personal Auto
319,771

 
298,938

 
20,833

 
7.0
 %
Commercial Vehicle
35,326

 
31,130

 
4,196

 
13.5
 %
Classic Collector
4,280

 
4,140

 
139

 
3.4
 %
Total gross written premium
359,377

 
334,209

 
25,168

 
7.5
 %
Ceded reinsurance
(2,312
)
 
(3,568
)
 
1,256

 
(35.2
)%
Net written premium
357,065

 
330,641

 
26,424

 
8.0
 %
Change in unearned premium
(14,895
)
 
7,946

 
(22,840
)
 
(287.5
)%
Net earned premium
$
342,171

 
$
338,586

 
$
3,584

 
1.1
 %
 
 
 
 
 
 
 
 
 
Nine months ended September 30,
 
2016
 
2015
 
Change
 
% Change
Gross written premium:
 
 
 
 
 
 
 
Personal Auto:
 
 
 
 
 
 
 
Focus States
$
926,127

 
$
931,606

 
$
(5,478
)
 
(0.6
)%
Other States
25,797

 
39,145

 
(13,348
)
 
(34.1
)%
Total Personal Auto
951,925

 
970,751

 
(18,826
)
 
(1.9
)%
Commercial Vehicle
107,975

 
94,620

 
13,356

 
14.1
 %
Classic Collector
12,406

 
11,983

 
423

 
3.5
 %
Total gross written premium
1,072,306

 
1,077,354

 
(5,048
)
 
(0.5
)%
Ceded reinsurance
(6,511
)
 
(11,028
)
 
4,517

 
(41.0
)%
Net written premium
1,065,795

 
1,066,326

 
(531
)
 
0.0
 %
Change in unearned premium
(46,725
)
 
(55,130
)
 
8,404

 
(15.2
)%
Net earned premium
$
1,019,070

 
$
1,011,197

 
$
7,874

 
0.8
 %
The following table summarizes our policies in force:
 
At September 30,
 
2016
 
2015
 
Change
 
% Change
Personal Auto:
 
 
 
 
 
 
 
Focus States
711,049

 
756,690

 
(45,641
)
 
(6.0
)%
Other States
18,637

 
30,548

 
(11,911
)
 
(39.0
)%
Total Personal Auto
729,686

 
787,238

 
(57,552
)
 
(7.3
)%
Commercial Vehicle
51,849

 
48,151

 
3,698

 
7.7
 %
Classic Collector
41,511

 
41,065

 
446

 
1.1
 %
Total policies in force
823,046

 
876,454

 
(53,408
)
 
(6.1
)%
During the first nine months of 2016, we implemented rate revisions in various states with an overall rate increase of 7.7%. Policies in force at September 30, 2016, decreased 6.1% compared with the same period in 2015.
The increase in gross written premium in our Focus States during the third quarter of 2016 was primarily due to higher average premiums on renewal business in California and growth in Texas. The decline in gross written premium in our Focus States for

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


the nine months ended September 30, 2016, was primarily due to a reduction in new business in California during the first half of 2016 in response to rate increases totaling 5.3% implemented during the year, and renewal business in Florida primarily as a result of rate increases totaling 12.8% during the year, partially offset by growth in Texas.
The gross written premium growth in our Commercial Vehicle product during the third quarter and first nine months of 2016 was primarily due to renewal policy growth and higher average premium in California and Texas.
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.

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


The following table presents statutory and GAAP combined ratios: 
 
Three months ended September 30,
 
 
 
 
 
2016
 
2015
 
% Point Change
 
Loss &
LAE
Ratio
Underwriting
Ratio
Combined
Ratio
 
Loss &
LAE
Ratio
Underwriting
Ratio
Combined
Ratio
 
Loss &
LAE
Ratio
Underwriting
Ratio
Combined
Ratio
Personal Auto:
 
 
 
 
 
 
 
 
 
 
 
Focus States
81.4
%
16.3
%
97.7
%
 
73.9
%
17.0
%
90.9
%
 
7.4
 %
(0.7
)%
6.8
 %
Other States
56.9
%
11.6
%
68.5
%
 
71.4
%
14.0
%
85.4
%
 
(14.5
)%
(2.4
)%
(16.9
)%
Total Personal Auto
80.7
%
16.2
%
96.8
%
 
73.8
%
16.8
%
90.7
%
 
6.8
 %
(0.7
)%
6.2
 %
Commercial Vehicle
98.3
%
16.7
%
115.0
%
 
100.7
%
16.1
%
116.8
%
 
(2.4
)%
0.6
 %
(1.8
)%
Classic Collector
67.1
%
33.8
%
100.9
%
 
49.3
%
28.4
%
77.7
%
 
17.9
 %
5.4
 %
23.3
 %
Total statutory ratios
82.3
%
16.4
%
98.7
%
 
75.7
%
16.9
%
92.6
%
 
6.5
 %
(0.5
)%
6.1
 %
Total statutory ratios excluding development
80.7
%
16.4
%
97.1
%
 
78.4
%
16.9
%
95.3
%
 
2.3
 %
(0.5
)%
1.8
 %
GAAP ratios
82.1
%
18.2
%
100.2
%
 
75.6
%
18.5
%
94.2
%
 
6.5
 %
(0.4
)%
6.1
 %
GAAP ratios excluding development
80.5
%
18.2
%
98.7
%
 
78.3
%
18.5
%
96.8
%
 
2.2
 %
(0.4
)%
1.8
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30,
 
 
 
 
 
2016
 
2015
 
% Point Change
 
Loss &
LAE
Ratio
Underwriting
Ratio
Combined
Ratio
 
Loss &
LAE
Ratio
Underwriting
Ratio
Combined
Ratio
 
Loss &
LAE
Ratio
Underwriting
Ratio
Combined
Ratio
Personal Auto:
 
 
 
 
 
 
 
 
 
 
 
Focus States
80.3
%
16.5
%
96.8
%
 
75.1
%
17.0
%
92.1
%
 
5.2
 %
(0.4
)%
4.7
 %
Other States
52.5
%
15.5
%
68.0
%
 
93.7
%
14.5
%
108.1
%
 
(41.2
)%
1.0
 %
(40.1
)%
Total Personal Auto
79.4
%
16.5
%
95.9
%
 
76.1
%
16.9
%
93.0
%
 
3.3
 %
(0.4
)%
2.9
 %
Commercial Vehicle
83.7
%
17.2
%
100.9
%
 
88.1
%
16.1
%
104.2
%
 
(4.4
)%
1.1
 %
(3.3
)%
Classic Collector
58.9
%
32.2
%
91.1
%
 
54.4
%
28.4
%
82.7
%
 
4.5
 %
3.8
 %
8.4
 %
Total statutory ratios
79.6
%
16.8
%
96.4
%
 
76.8
%
17.0
%
93.7
%
 
2.9
 %
(0.2
)%
2.7
 %
Total statutory ratios excluding development
81.5
%
16.8
%
98.2
%
 
79.1
%
17.0
%
96.1
%
 
2.3
 %
(0.2
)%
2.1
 %
GAAP ratios
79.5
%
18.5
%
98.0
%
 
76.6
%
18.7
%
95.3
%
 
2.9
 %
(0.1
)%
2.7
 %
GAAP ratios excluding development
81.3
%
18.5
%
99.8
%
 
79.0
%
18.7
%
97.6
%
 
2.3
 %
(0.1
)%
2.2
 %
The statutory combined ratio for the three and nine months ended September 30, 2016, increased by 6.1 points and 2.7 points, respectively, from the same periods of 2015. The third quarter of 2016 included $6.0 million of unfavorable development from the first two accident quarters of 2016 compared with $2.4 million of unfavorable development during the third quarter of 2015 from the first two accident quarters of 2015. The third quarter and first nine months of 2016 included $0.6 million and $18.6 million, respectively, of favorable reserve 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 vehicle product, driven by an increase in severity. The third quarter and first nine months of 2015 included $11.3 million and $24.0 million, respectively, of favorable development on prior accident year loss and LAE reserves. Excluding the effect of development, the statutory combined ratio increased 1.8 points and 2.1 points during the third quarter and first nine months of 2016, compared with the same periods of 2015.
The GAAP combined ratio for the three and nine months ended September 30, 2016, increased by 6.1 points and 2.7 points, respectively, from the same periods of 2015. Excluding the effect of development, the GAAP combined ratio increased by 1.8 points and 2.2 points during the third quarter and first nine months of 2016, respectively, primarily due to a higher accident year loss ratio as a result of increasing loss costs in material damage, bodily injury and personal injury protection coverages.

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


We had net loss recoveries from catastrophes for the three months ended September 30, 2016, of $0.3 million, compared with losses of $0.3 million for the same period of 2015. Losses from catastrophes for the nine months ended September 30, 2016, were $6.1 million, compared with $1.4 million for the same period of 2015.
The 6.8 points and 4.7 points increase in the Focus States combined ratio for the three and nine months ended September 30, 2016, compared with the same periods of 2015, was primarily due to an increase in the 2016 accident year loss ratio in California as a result of higher loss costs from material damage and bodily injury coverages.
The 3.3 points decrease in the Commercial Vehicle combined ratio for the nine months ended September 30, 2016, was primarily due to an improvement in the current accident year loss and LAE ratio, partially offset by a higher expense ratio as a result of returned ceding commission on a terminated excess of loss reinsurance contract. Refer to Liquidity and Capital Resources – Reinsurance for more information on the modification to our excess of loss reinsurance program.
Installment and Other Fee Income
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
($ in thousands)
2016
 
2015
 
2016
 
2015
Installment and other fee income
$
26,297

 
$
24,005

 
$
77,200

 
$
73,122

The increase in installment and other fee income charged to policyholders during the first nine months of 2016 was primarily related to an increase in processing fees.
Net Investment Income
Net investment income is comprised of gross investment income less investment management fees and expenses, as shown in the following table ($ in thousands):
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Gross investment income:
 
 
 
 
 
 
 
Interest income on fixed maturities, cash and cash equivalents
$
8,191

 
$
10,103

 
$
25,237

 
$
27,999

Dividends on equity securities
482

 
426

 
1,545

 
1,614

Gross investment income
8,672

 
10,529

 
26,782

 
29,613

Investment expenses
(548
)
 
(559
)
 
(1,667
)
 
(1,704
)
Net investment income
8,125

 
9,970

 
25,115

 
27,908

Average investment balance, at cost
$
1,499,267

 
$
1,555,905

 
$
1,502,808

 
$
1,567,328

Annualized returns excluding realized gains and losses
2.2%

 
2.6%

 
2.2%

 
2.4%

Annualized returns including realized gains and losses
2.5%

 
2.5%

 
2.3%

 
2.5%

Pre-tax net investment income declined from $10.0 million and $27.9 million during the three and nine months ended September 30, 2015, respectively, to $8.1 million and $25.1 million during the three and nine months ended September 30, 2016, respectively, primarily due to a decrease in the average par value of our portfolio. In addition, pre-tax net investment income for the three months ended September 30, 2015, included the reclassification of $1.1 million of make whole proceeds which were previously included in realized gains and losses.
The book yield on our portfolio continues to exceed our new money rates. Therefore, we expect investment returns will gradually decline as proceeds from maturing or prepaid investments are expected to be reinvested at yields lower than the average book yield for the total portfolio.

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


The following table provides information about our fixed maturity investments at September 30, 2016, which are sensitive to interest rate risk. The table shows expected principal cash flows by expected maturity date for each of the five subsequent years and collectively for all years thereafter. Callable bonds and notes are included based on call date or maturity date depending upon which date produces the most conservative yield. Mortgage Backed Securities (MBS) and sinking fund issues are included based on maturity year adjusted for expected payment patterns.
 
Expected Principal Cash Flows
 
 
($ in thousands)
MBS and
ABS only
 
Excluding
MBS and ABS
 
Total
 
Maturing Book Yield
For the period ending December 31,
 
 
 
 
 
 
 
2016
$
20,900

 
$
17,350

 
$
38,250

 
2.5%
2017
100,677

 
137,219

 
237,896

 
2.3%
2018
67,091

 
129,942

 
197,033

 
2.2%
2019
52,969

 
175,025

 
227,994

 
2.1%
2020
39,218

 
152,104

 
191,322

 
2.6%
Thereafter
154,870

 
263,645

 
418,516

 
2.6%
Total
$
435,725

 
$
875,285

 
$
1,311,010

 
2.4%
The cash flows presented take into consideration historical relationships of market yields and prepayment rates. However, the actual prepayment rate may differ from historical trends, resulting in actual principal cash flows that differ from those presented above.
Net Realized Gains (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, 2016
 
Three months ended September 30, 2015
 
Net Realized Gains (Losses) on Sales
 
Net Impairment Losses Recognized in Earnings
 
Total Net Realized Gains (Losses) on Investments
 
Net Realized (Losses) Gains on Sales
 
Net Impairment Losses Recognized in Earnings
 
Total Net Realized Losses on Investments
Fixed maturities
$
813

 
$
0

 
$
813

 
$
(287
)
 
$
(123
)
 
$
(410
)
Equity securities
470

 
0

 
470

 
0

 
0

 
0

Short-term investments
(1
)
 
0

 
(1
)
 
0

 
0

 
0

Total
$
1,282

 
$
0

 
$
1,282

 
$
(287
)
 
$
(123
)
 
$
(410
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2016
 
Nine months ended September 30, 2015
 
Net Realized Gains (Losses) on Sales
 
Net Impairment Losses
Recognized
in Earnings
 
Total Net Realized Gains
(Losses) on Investments
 
Net Realized
Gains on Sales
 
Net Impairment Losses
Recognized
in Earnings
 
Total Net Realized
(Losses) Gains on Investments
Fixed maturities
$
1,106

 
$
(316
)
 
$
790

 
$
588

 
$
(713
)
 
$
(125
)
Equity securities
470

 
0

 
470

 
1,099

 
0

 
1,099

Short-term investments
(3
)
 
0

 
(3
)
 
0

 
0

 
0

       Total
$
1,573

 
$
(316
)
 
$
1,257

 
$
1,686

 
$
(713
)
 
$
974

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

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Interest Expense
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
($ in thousands)
2016
 
2015
 
2016
 
2015
5.0% Senior Notes
$
3,438

 
$
3,438

 
$
10,313

 
$
10,313

Amortization of debt issuance costs
52

 
49

 
154

 
147

Capital leases
18

 
19

 
57

 
62

Total
$
3,507

 
$
3,506

 
$
10,524

 
$
10,522

At September 30, 2016, we had $275 million principal outstanding of senior notes. These notes carry a coupon rate of 5.0% and require no principal payment until maturity in September 2022. Refer to Note 5 – Long-Term Debt to the Consolidated Financial Statements for additional information on the 5.0% Senior Notes.
Income Taxes
Our GAAP effective tax rate was 13.8% and 28.4% for the three and nine months ended September 30, 2016, respectively, compared with 31.0% and 31.2% for the three and nine months ended September 30, 2015, respectively. The GAAP effective tax rate has decreased in 2016 primarily as a result of a more significant impact from tax-exempt interest and the dividends-received deduction due to lower pre-tax income. Refer to Note 6 – Income Taxes to the Consolidated Financial Statements for additional information on income taxes.
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, 2016, the holding company had $149.6 million of cash and investments. In 2016 our insurance subsidiaries may pay us up to $59.6 million in ordinary dividends without prior regulatory approval. For the nine months ended September 30, 2016, our insurance subsidiaries have paid us ordinary dividends of $44.0 million.
Our insurance subsidiaries generate liquidity to satisfy their obligations primarily by collecting and investing premiums in advance of paying claims and generating investment income on their $1.4 billion investment portfolio. Our insurance subsidiaries generated positive cash flows from operations of $21.2 million and $58.6 million during the three and nine months ended September 30, 2016, respectively, compared with positive operating cash flows of $23.8 million and $79.9 million during the same periods of 2015.
At September 30, 2016, we had $275 million principal outstanding of 5.0% Senior Notes. The 5.0% Senior Notes accrue interest at 5.0%, payable semiannually each March and September. Refer to Note 5 – Long-Term Debt to the Consolidated Financial Statements for more information on our long-term debt.
In August 2014 we renewed our agreement for a $50 million three-year revolving credit facility (the “Credit Agreement”) that requires us to meet certain financial and other covenants. We are currently in compliance with all covenants under the Credit Agreement, and as of September 30, 2016, there were no borrowings outstanding against it.
On February 29, 2016, we filed a "shelf" registration statement with the Securities and Exchange Commission registering securities, 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 2016 we increased our quarterly dividend to $0.52 per share from $0.43 per share. At this current amount, our 2016 annualized dividend payments would be approximately $23.0 million.

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


On November 4, 2014, our Board of Directors increased the authority of our share and debt repurchase program to a total of $75 million and extended the date to execute the program from December 31, 2014, to December 31, 2016. On November 1, 2016, our Board approved the extension of the date to execute the program from December 31, 2016, to December 31, 2017. As of September 30, 2016, we had $36.2 million of authority remaining under this program. Share repurchases during the first nine months of 2016 were as follows:
 
Total Number of Shares Purchased
 
Average Price Paid per Share
(Excluding Commissions)
First quarter
106,766

 
$
78.59

Second quarter
2,800

 
78.32

Third quarter
7,100

 
83.13

Total
116,666

 
$
78.86

We believe that cash balances, cash flows generated from operations or borrowings, and maturities and sales of investments are adequate to meet our future liquidity needs and those of our insurance subsidiaries.
Reinsurance
Premium ceded under all reinsurance agreements for the three and nine months ended September 30, 2016, was $2.3 million and $6.5 million, respectively, compared with $3.6 million and $11.0 million, respectively, for the same periods of 2015. Effective June 1, 2016, we modified our excess of loss reinsurance protection for commercial auto to cover losses up to $500,000 for claims in excess of $500,000 per occurrence. In addition, we added a 75% quota share for our general liability business. Premium ceded for the nine months ended September 30, 2016, includes the return of $5.9 million of unearned premium due to the termination of the previous excess of loss contract. The $1.8 million of ceding commissions associated with this unearned premium was returned to the reinsurers. Refer to Note 11 - Reinsurance to the Consolidated Financial Statements of our Form 10-K for the year ended December 31, 2015, for more information on our reinsurance contracts.
Investments
Our consolidated investment portfolio at September 30, 2016, contained approximately $1.4 billion in fixed maturity securities, $92.8 million in equity securities and $2.3 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, 2016, we had pre-tax net unrealized gains of $25.1 million on fixed maturities and pre-tax net unrealized gains of $15.7 million on equity securities. Combined, the pre-tax net unrealized gain increased by $29.7 million for the nine months ended September 30, 2016. This increase occurred as a result of lower market interest rates affecting our fixed portfolio. The average option adjusted duration of our fixed maturity portfolio was 2.6 years at September 30, 2016, compared with 3.2 years at December 31, 2015.
Since we carry all of these securities at fair value in our balance sheet, there is virtually no effect on liquidity or financial condition upon the sale and ultimate realization of unrealized gains and losses.
Approximately 91.6% of our fixed maturity investments at September 30, 2016, were rated “investment grade,” and, as of the same date, the average credit rating of our fixed maturity portfolio was AA-. Investment grade securities generally bear lower yields and have lower degrees of risk than those that are unrated or non-investment grade. We believe that a high quality investment portfolio is more likely to generate a stable and predictable investment return.
Fair values of instruments are based on (i) quoted prices in active markets for identical assets (Level 1); (ii) quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all significant inputs are observable in active markets (Level 2); or (iii) valuations derived from valuation techniques in which one or more significant inputs are unobservable in the marketplace (Level 3).
Our Level 1 securities are U.S. Treasury securities, an exchange-traded fund and equity securities held in a rabbi trust. Our Level 2 securities are comprised of securities whose fair value was determined using observable market inputs. Our Level 3 securities are comprised of (i) securities for which there is no active or inactive market for similar instruments; (ii) securities whose fair value is determined based on unobservable inputs; and (iii) securities that nationally recognized statistical rating organizations do not rate.

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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, 2016, was as follows ($ in thousands):
 
Amortized
Cost
 
Fair Value
 
% of Total 
Fair Value
Fixed Maturities:
 
 
 
 
 
U.S. government
$
63,222

 
$
63,942

 
4.3
%
State and municipal
470,074

 
478,199

 
31.9
%
Mortgage- and asset-backed:
 
 
 
 
 
Residential mortgage-backed securities
331,827

 
339,655

 
22.6
%
Commercial mortgage-backed securities
76,212

 
76,190

 
5.1
%
Asset-backed securities (ABS):
 
 
 
 
 
Auto loans
30,771

 
30,889

 
2.1
%
Equipment leases
7,589

 
7,648

 
0.5
%
All other
5,870

 
5,927

 
0.4
%
Total ABS
44,231

 
44,465

 
3.0
%
Total mortgage- and asset-backed
452,270

 
460,310

 
30.7
%
Corporates
 
 
 
 
 
Investment grade
279,209

 
284,191

 
18.9
%
Non-investment grade
114,750

 
117,991

 
7.9
%
Total corporates
393,959

 
402,182

 
26.8
%
Total fixed maturities
1,379,525

 
1,404,633

 
93.7
%
Equity securities
77,125

 
92,822

 
6.2
%
Short-term investments
2,257

 
2,255

 
0.2
%
Total investments
$
1,458,907

 
$
1,499,710

 
100.0
%
We categorize securities by rating based upon available ratings issued by Moody's, Standard & Poor's or Fitch. If all three ratings are available but not equivalent, we exclude the lowest rating and the lower of the remaining ratings is used. If ratings are only available from two agencies, the lowest is used. This methodology is consistent with that used by the major bond indices. State and municipal bond ratings presented are underlying ratings without regard to any insurance.
The following table presents the credit rating and fair value of our fixed maturity portfolio by major security type at September 30, 2016, ($ in thousands): 
 
Rating
 
 
 
 
 
AAA
 
AA
 
A
 
BBB
 
Non-investment Grade
 
Total Fair
Value
 
% of Total Exposure
U.S. government
$
63,942

 
$
0

 
$
0

 
$
0

 
$
0

 
$
63,942

 
4.6
%
State and municipal
134,134

 
263,333

 
80,115

 
0

 
618

 
478,199

 
34.0
%
Mortgage- and asset-backed
433,977

 
21,889

 
1,330

 
3,114

 
0

 
460,310

 
32.8
%
Corporates
0

 
32,690

 
133,988

 
117,514

 
117,991

 
402,182

 
28.6
%
Total fair value
$
632,052

 
$
317,911

 
$
215,433

 
$
120,627

 
$
118,609

 
$
1,404,633

 
100.0
%
% of total fair value
45.0%

 
22.6%

 
15.3%

 
8.6%

 
8.4%

 
100.0%

 
 

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

ITEM 3
Quantitative and Qualitative Disclosures about Market Risk
As of September 30, 2016, there were no material changes to the information provided on Form 10-K for the year ended December 31, 2015, under the caption “Exposure to Market Risk” in Management’s Discussion and Analysis of Financial Condition and Results of Operations. Refer to Item 2 Management’s Discussion and Analysis under the caption “Investments” for updates to disclosures made under the subcaption “Credit Risk” of our Form 10-K for the year ended December 31, 2015.
ITEM 4
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of the Company’s management, including its Principal Executive Officer and Principal Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2016. Based on that evaluation, we concluded that the controls and procedures are effective in providing reasonable assurance that material information required to be disclosed in our reports filed with or submitted to the Securities and Exchange Commission (SEC) under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate.
Changes in Internal Control over Financial Reporting
During the fiscal quarter ended September 30, 2016, there have been no changes to our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION

ITEM 1
Legal Proceedings
We have not become a party to any material legal proceedings and there have not been any material developments in our legal proceedings disclosed on Form 10-K for the year ended December 31, 2015. For a description of our previously reported legal proceedings, refer to Part I, Item 3, Legal Proceedings of our Form 10-K for the year ended December 31, 2015.

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

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

ITEM 2
Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Period
 
Total Number of Shares Purchased
 
Average Price Paid per Share (a)
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Approximate Dollar Value that May Yet Be Purchased Under the Plans or Programs (b)
July 1, 2016 - July 31, 2016
 
—

 
$
—

 
—

 
$
36,746,387

August 1, 2016 - August 31, 2016
 
2,900

 
82.31

 
2,900

 
36,506,410

September 1, 2016 - September 30, 2016
 
4,200

 
83.70

 
4,200

 
36,153,285

Total
 
7,100

 
$
83.13

 
7,100

 
$
36,153,285

 
(a)
Average price paid per share excludes commissions.
(b)
On November 4, 2014, our Board of Directors increased the authority under our current share and debt repurchase plan to a total of $75.0 million and extended the date to execute the program from December 31, 2014, to December 31, 2016. On November 1, 2016, our Board approved the extension of the date to execute the program from December 31, 2016, to December 31, 2017.

ITEM 6
Exhibit 31.1
Certification of the Chief Executive Officer under Exchange Act Rule 13a-14(a)
Exhibit 31.2
Certification of the Chief Financial Officer under Exchange Act Rule 13a-14(a)
Exhibit 32
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350
Exhibit 101.INS
XBRL Instance Document
Exhibit 101.SCH
XBRL Taxonomy Extension Schema Document (1)
Exhibit 101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document (1)
Exhibit 101.DEF
XBRL Taxonomy Extension Definition Linkbase Document (1)
Exhibit 101.LAB
XBRL Taxonomy Extension Label Linkbase Document (1)
Exhibit 101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document (1)
 
 
(1) Furnished with this report, in accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be "filed" for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.

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 3, 2016
 
Robert H. Bateman
 
 
Executive Vice President, Chief Financial Officer and Treasurer

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