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Section 1: 10-Q (10-Q)

Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
FORM 10-Q
(Mark One)
x    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 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 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 July 29, 2016, there were 11,064,440 shares of the registrant’s common stock outstanding.



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

Condensed Notes to Consolidated Financial Statements

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

2

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

Condensed Notes to Consolidated Financial Statements

PART I
FINANCIAL INFORMATION

ITEM 1
Financial Statements

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
(unaudited)
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
% Change
 
2016
 
2015
 
% Change
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Earned premium
$
340,715

 
$
340,504

 
0.1
 %
 
$
676,899

 
$
672,610

 
0.6
 %
Installment and other fee income
25,385

 
24,556

 
3.4
 %
 
50,903

 
49,117

 
3.6
 %
Net investment income
8,927

 
9,202

 
(3.0
)%
 
16,990

 
17,938

 
(5.3
)%
Net realized (losses) gains on investments (1)
(164
)
 
214

 
(176.4
)%
 
(25
)
 
1,384

 
(101.8
)%
Other income
220

 
281

 
(21.6
)%
 
478

 
681

 
(29.8
)%
Total revenues
375,084

 
374,757

 
0.1
 %
 
745,246

 
741,730

 
0.5
 %
Costs and Expenses:
 
 
 
 
 
 
 
 
 
 
 
Losses and loss adjustment expenses
263,514

 
262,784

 
0.3
 %
 
528,798

 
518,427

 
2.0
 %
Commissions and other underwriting expenses
89,164

 
86,272

 
3.4
 %
 
177,771

 
175,101

 
1.5
 %
Interest expense
3,508

 
3,508

 
0.0
 %
 
7,017

 
7,015

 
0.0
 %
Corporate general and administrative expenses
2,060

 
2,074

 
(0.7
)%
 
3,764

 
3,929

 
(4.2
)%
Other expenses
797

 
452

 
76.2
 %
 
1,080

 
1,355

 
(20.3
)%
Total costs and expenses
359,043

 
355,090

 
1.1
 %
 
718,429

 
705,827

 
1.8
 %
Earnings before income taxes
16,040

 
19,667

 
(18.4
)%
 
26,816

 
35,903

 
(25.3
)%
Provision for income taxes
5,026

 
6,174

 
(18.6
)%
 
8,094

 
11,257

 
(28.1
)%
Net Earnings
$
11,015

 
$
13,493

 
(18.4
)%
 
$
18,723

 
$
24,646

 
(24.0
)%
Net Earnings per Common Share:
 
 
 
 
 
 
 
 
 
 
 
Basic
$
1.00

 
$
1.18

 
(15.3
)%
 
$
1.70

 
$
2.16

 
(21.3
)%
Diluted
0.99

 
1.18

 
(16.1
)%
 
1.68

 
2.14

 
(21.5
)%
Average Number of Common Shares:
 
 
 
 
 
 
 
 
 
 
 
Basic
11,012

 
11,408

 
(3.5
)%
 
11,024

 
11,417

 
(3.4
)%
Diluted
11,096

 
11,483

 
(3.4
)%
 
11,115

 
11,517

 
(3.5
)%
Cash Dividends per Common Share
$
0.52

 
$
0.43

 
20.9
 %
 
$
1.04

 
$
0.86

 
20.9
 %
(1) Net realized gains on sales
$
34

 
$
423

 
(91.9
)%
 
$
291

 
$
1,973

 
(85.2
)%
Total other-than-temporary impairment (OTTI) losses
(198
)
 
(208
)
 
(4.8
)%
 
(316
)
 
(590
)
 
(46.5
)%
Total net realized (losses) gains on investments
$
(164
)
 
$
214

 
(176.4
)%
 
$
(25
)
 
$
1,384

 
(101.8
)%
See Condensed Notes to Consolidated Financial Statements.

3

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

Condensed Notes to Consolidated Financial Statements

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in thousands)
(unaudited)
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
Net earnings
$
11,015

 
$
13,493

 
$
18,723

 
$
24,646

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

 
(22
)
 
33

Unrealized gains (losses) on investments:
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during the period
10,828

 
(13,472
)
 
26,287

 
(5,056
)
Less: Reclassification adjustments for losses (gains) included in net earnings
164

 
(214
)
 
25

 
(1,384
)
Unrealized gains (losses) on investments, net
10,992

 
(13,687
)
 
26,311

 
(6,440
)
Other comprehensive income (loss), before tax
10,981

 
(13,670
)
 
26,290

 
(6,407
)
Income tax (expense) benefit related to components of other comprehensive income
(3,843
)
 
4,785

 
(9,201
)
 
2,242

Other comprehensive income (loss), net of tax
7,137

 
(8,886
)
 
17,088

 
(4,164
)
Comprehensive income
$
18,152

 
$
4,607

 
$
35,811

 
$
20,482

See Condensed Notes to Consolidated Financial Statements.


4

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

Condensed Notes to Consolidated Financial Statements

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts in line descriptions)
 
June 30, 2016
 
December 31, 2015
 
(unaudited)
 
 
Assets
 
 
 
Investments:
 
 
 
Fixed maturities – at fair value (amortized cost $1,358,297 and $1,381,510)
$
1,383,806

 
$
1,381,467

Equity securities – at fair value (cost $78,869 and $78,815)
90,742

 
89,935

Short-term investments - at fair value (amortized cost $4,066 and $4,656)
4,066

 
4,651

Total investments
1,478,615

 
1,476,053

Cash and cash equivalents
76,016

 
62,483

Accrued investment income
11,735

 
12,245

Agents’ balances and premium receivable, net of allowances for doubtful accounts of $14,790 and $15,385
536,559

 
511,543

Property and equipment, net of accumulated depreciation of $75,484 and $72,892
98,177

 
89,707

Prepaid reinsurance premium
3,818

 
5,385

Recoverables from reinsurers (includes $202 and $362 on paid losses and LAE)
18,690

 
15,056

Deferred policy acquisition costs
95,821

 
93,157

Current and deferred income taxes
20,339

 
33,926

Other assets
11,380

 
10,306

Goodwill
75,275

 
75,275

Total assets
$
2,426,425

 
$
2,385,135

Liabilities and Shareholders’ Equity
 
 
 
Liabilities:
 
 
 
Unpaid losses and loss adjustment expenses
$
666,210

 
$
669,965

Unearned premium
645,396

 
616,649

Long-term debt (fair value $291,572 and $281,581)
273,486

 
273,383

Commissions payable
15,238

 
17,406

Payable for securities purchased
11,873

 
7,264

Other liabilities
111,167

 
112,873

Total liabilities
1,723,369

 
1,697,540

Commitments and contingencies (See Note 9)


 


Shareholders’ equity:
 
 
 
Common stock, no par value (50,000,000 shares authorized; 21,808,105 and 21,774,520 shares issued)
21,801

 
21,794

Additional paid-in capital
376,652

 
376,025

Retained earnings
764,829

 
757,604

Accumulated other comprehensive income, net of tax
24,899

 
7,811

Treasury stock, at cost (10,743,948 and 10,623,138 shares)
(485,124
)
 
(475,638
)
Total shareholders’ equity
703,057

 
687,595

Total liabilities and shareholders’ equity
$
2,426,425

 
$
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

 

 
24,646

 

 

 
24,646

Net change in post-retirement benefit liability

 

 

 
21

 

 
21

Change in unrealized gain on investments

 

 

 
(4,478
)
 

 
(4,478
)
Change in non-credit component of impairment losses on fixed maturities

 

 

 
292

 

 
292

Comprehensive income
 
 
 
 
 
 
 
 
 
 
20,482

Dividends paid to common shareholders

 

 
(9,853
)
 

 

 
(9,853
)
Shares issued and share-based compensation expense, including tax benefit
28

 
2,132

 

 

 

 
2,160

Acquisition of treasury stock

 

 

 

 
(7,892
)
 
(7,892
)
Balance at June 30, 2015
$
21,773

 
$
374,499

 
$
740,444

 
$
19,330

 
$
(453,491
)
 
$
702,555

Net earnings

 

 
26,834

 

 

 
26,834

Net change in post-retirement benefit liability

 

 

 
480

 

 
480

Change in unrealized gain on investments

 

 

 
(12,317
)
 

 
(12,317
)
Change in non-credit component of impairment losses on fixed maturities

 

 

 
318

 

 
318

Comprehensive income
 
 
 
 
 
 
 
 
 
 
15,315

Dividends paid to common shareholders

 

 
(9,674
)
 

 

 
(9,674
)
Shares issued and share-based compensation expense, including tax benefit
21

 
1,526

 

 

 

 
1,547

Acquisition of treasury stock

 

 

 

 
(22,147
)
 
(22,147
)
Balance at December 31, 2015
$
21,794

 
$
376,025

 
$
757,604

 
$
7,811

 
$
(475,638
)
 
$
687,595

Net earnings

 

 
18,723

 

 

 
18,723

Net change in post-retirement benefit liability

 

 

 
(14
)
 

 
(14
)
Change in unrealized gain on investments

 

 

 
16,960

 

 
16,960

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

 

 

 
142

 

 
142

Comprehensive income
 
 
 
 
 
 
 
 
 
 
35,811

Dividends paid to common shareholders

 

 
(11,497
)
 

 

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

 
627

 

 

 

 
633

Acquisition of treasury stock

 

 

 

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

 
$
376,652

 
$
764,829

 
$
24,899

 
$
(485,124
)
 
$
703,057

See Condensed Notes to Consolidated Financial Statements.

6

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

Condensed Notes to Consolidated Financial Statements

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(unaudited)
 
Three months ended June 30,
 
2016
 
2015
Operating Activities:
 
 
 
Net earnings
$
11,015

 
$
13,493

Adjustments:
 
 
 
Depreciation
3,438

 
2,941

Amortization
5,037

 
5,260

Net realized losses (gains) on investments
164

 
(214
)
Loss on disposal of property and equipment
399

 
123

Share-based compensation expense
28

 
1,069

Excess tax benefits from share-based payment arrangements
(157
)
 
(298
)
Activity related to rabbi trust
48

 
(16
)
Change in accrued investment income
(314
)
 
(1,489
)
Change in agents’ balances and premium receivable
6,044

 
(11,572
)
Change in reinsurance receivables
1,663

 
(759
)
Change in deferred policy acquisition costs
1,392

 
(1,180
)
Change in other assets
6,590

 
(5,122
)
Change in unpaid losses and loss adjustment expenses
(7,265
)
 
5,272

Change in unearned premium
(7,103
)
 
8,514

Change in other liabilities
295

 
7,889

Net cash provided by operating activities
21,274

 
23,911

Investing Activities:
 
 
 
Purchases of fixed maturities
(103,611
)
 
(137,518
)
Purchases of short-term investments
(5,140
)
 
(2,628
)
Purchases of property and equipment
(10,450
)
 
(26,065
)
Maturities and redemptions of fixed maturities
36,847

 
59,775

Maturities and redemptions of short-term investments
0

 
285

Proceeds from sale of fixed maturities
99,180

 
56,704

Proceeds from sale of short-term investments
1,064

 
0

Proceeds from sale of property and equipment
2

 
0

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

 
(49,448
)
Financing Activities:
 
 
 
Proceeds from stock options exercised and employee stock purchases
68

 
68

Excess tax benefits from share-based payment arrangements
157

 
298

Principal payments under capital lease obligations
(129
)
 
(128
)
Acquisition of treasury stock
(1,116
)
 
(5,733
)
Dividends paid to shareholders
(5,753
)
 
(4,922
)
Net cash used in financing activities
(6,773
)
 
(10,416
)
Net increase (decrease) in cash and cash equivalents
32,393

 
(35,953
)
Cash and cash equivalents at beginning of period
43,623

 
96,434

Cash and cash equivalents at end of period
$
76,016

 
$
60,481

See Condensed Notes to Consolidated Financial Statements.



7

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

Condensed Notes to Consolidated Financial Statements

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(unaudited)
 
Six months ended June 30,
 
2016
 
2015
Operating Activities:
 
 
 
Net earnings
$
18,723

 
$
24,646

Adjustments:
 
 
 
Depreciation
6,521

 
5,923

Amortization
10,839

 
11,196

Net realized losses (gains) on investments
25

 
(1,384
)
Loss on disposal of property and equipment
401

 
238

Share-based compensation expense
351

 
1,728

Excess tax benefits from share-based payment arrangements
(157
)
 
(298
)
Activity related to rabbi trust
66

 
11

Change in accrued investment income
509

 
(543
)
Change in agents’ balances and premium receivable
(25,016
)
 
(57,903
)
Change in reinsurance receivables
(2,067
)
 
(1,521
)
Change in deferred policy acquisition costs
(2,664
)
 
(8,916
)
Change in other assets
3,460

 
(3,437
)
Change in unpaid losses and loss adjustment expenses
(3,755
)
 
12,850

Change in unearned premium
28,747

 
63,688

Change in other liabilities
(3,745
)
 
5,099

Net cash provided by operating activities
32,238

 
51,378

Investing Activities:
 
 
 
Purchases of fixed maturities
(261,498
)
 
(287,674
)
Purchases of equity securities
0

 
(2,000
)
Purchases of short-term investments
(5,140
)
 
(3,660
)
Purchases of property and equipment
(15,395
)
 
(28,204
)
Maturities and redemptions of fixed maturities
76,145

 
106,503

Maturities and redemptions of short-term investments
0

 
285

Proceeds from sale of fixed maturities
203,115

 
152,136

Proceeds from sale of equity securities
0

 
4,489

Proceeds from sale of short-term investments
5,666

 
0

Proceeds from sale of property and equipment
2

 
0

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

 
(58,125
)
Financing Activities:
 
 
 
Proceeds from stock options exercised and employee stock purchases
126

 
133

Excess tax benefits from share-based payment arrangements
157

 
298

Principal payments under capital lease obligations
(249
)
 
(246
)
Acquisition of treasury stock
(10,137
)
 
(7,645
)
Dividends paid to shareholders
(11,497
)
 
(9,853
)
Net cash used in financing activities
(21,602
)
 
(17,313
)
Net increase (decrease) in cash and cash equivalents
13,533

 
(24,060
)
Cash and cash equivalents at beginning of period
62,483

 
84,541

Cash and cash equivalents at end of period
$
76,016

 
$
60,481

See Condensed Notes to Consolidated Financial Statements.

8

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

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 June 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.

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

Condensed Notes to Consolidated Financial Statements

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

 
$
10.3

 
$
(1.6
)
Total assets
2,386.8

 
2,385.1

 
(1.6
)
Long-term debt
275.0

 
273.4

 
(1.6
)
Total liabilities
1,699.2

 
1,697.5

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

 
2,385.1

 
(1.6
)
Recently Issued Accounting Standards
In 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 June 30, 2016, we have $7.7 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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Table of Contents
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

Note 2 Computation of Net Earnings per Share
The following table illustrates our computations of basic and diluted net earnings per common share ($ in thousands, except per
share figures):
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
Net earnings
$
11,015

 
$
13,493

 
$
18,723

 
$
24,646

Average basic shares outstanding
11,012

 
11,408

 
11,024

 
11,417

Basic net earnings per share
$
1.00

 
$
1.18

 
$
1.70

 
$
2.16

 
 
 
 
 
 
 
 
Average basic shares outstanding
11,012

 
11,408

 
11,024

 
11,417

Restricted stock not vested
24

 
14

 
22

 
13

Dilutive effect of Performance Share Plan
60

 
61

 
69

 
87

Average diluted shares outstanding
11,096

 
11,483

 
11,115

 
11,517

Diluted net earnings per share
$
0.99

 
$
1.18

 
$
1.68

 
$
2.14


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

Condensed Notes to Consolidated Financial Statements

Note 3 Fair Value
Fair values of instruments are based on:
(i)
quoted prices in active markets for identical assets (Level 1);
(ii)
quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all significant inputs are observable in active markets (Level 2); or
(iii)
valuations derived from valuation techniques in which one or more significant inputs are unobservable in the marketplace (Level 3).
The following tables present, for each of the fair value hierarchy levels, our assets and liabilities for which we report fair value on a recurring basis ($ in thousands):
 
Fair Value
June 30, 2016
Level 1
 
Level 2
 
Level 3
 
Total
Cash and cash equivalents
$
76,016

 
$
0

 
$
0

 
$
76,016

Fixed maturity securities:
 
 
 
 
 
 
 
U.S. government
64,222

 
13

 
0

 
64,236

State and municipal
0

 
463,480

 
626

 
464,106

Mortgage-backed securities:

 
 
 
 
 
 
Residential
0

 
333,717

 
0

 
333,717

Commercial
0

 
67,372

 
0

 
67,372

Total mortgage-backed securities
0

 
401,089

 
0

 
401,089

Asset-backed securities
0

 
47,374

 
1,959

 
49,333

Corporates
0

 
403,935

 
1,107

 
405,043

Total fixed maturities
64,222

 
1,315,892

 
3,692

 
1,383,806

Equity securities
90,742

 
0

 
0

 
90,742

Short-term investments
767

 
3,299

 
0

 
4,066

Total cash and investments
$
231,748

 
$
1,319,191

 
$
3,692

 
$
1,554,631

Percentage of total cash and investments
14.9
%
 
84.9
%
 
0.2
%
 
100.0
%
 
 
 
 
 
 
 
 
 
Fair Value
December 31, 2015
Level 1
 
Level 2
 
Level 3
 
Total
Cash and cash equivalents
$
62,483

 
$
0

 
$
0

 
$
62,483

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

 
32

 
0

 
64,669

State and municipal
0

 
479,656

 
10

 
479,666

Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
0

 
334,784

 
0

 
334,784

Commercial
0

 
70,224

 
0

 
70,224

Total mortgage-backed securities
0

 
405,008

 
0

 
405,008

Asset-backed securities
0

 
54,018

 
0

 
54,018

Corporates
0

 
376,582

 
1,524

 
378,105

Total fixed maturities
64,638

 
1,315,295

 
1,534

 
1,381,467

Equity securities
89,935

 
0

 
0

 
89,935

Short-term investments
0

 
4,651

 
0

 
4,651

Total cash and investments
$
217,056

 
$
1,319,946

 
$
1,534

 
$
1,538,536

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

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

Condensed Notes to Consolidated Financial Statements

We do not report our long-term debt at fair value in the Consolidated Balance Sheets. The $291.6 million and $281.6 million fair value of our long-term debt at June 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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Table of Contents
INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

The following tables present the progression in the Level 3 fair value category ($ in thousands): 
 
Three months ended June 30, 2016
 
State and
Municipal
 
Corporates
 
Asset-Backed Securities
 
Total
Balance at beginning of period
$
0

 
$
1,442

 
$
1,338

 
$
2,781

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

 
0

 
(0
)
Included in other comprehensive income
1

 
(26
)
 
1

 
(24
)
Purchases
0

 
0

 
620

 
620

Settlements
0

 
(312
)
 
0

 
(312
)
Transfers in
628

 
0

 
0

 
628

Balance at end of period
$
626

 
$
1,107

 
$
1,959

 
$
3,692

 
 
 
 
 
 
 
 
 
Three months ended June 30, 2015
 
State and
Municipal
 
Corporates
 
Asset-Backed Securities
 
Total
Balance at beginning of period
$
10

 
$
2,946

 
$
46

 
$
3,002

Total (losses) gains, unrealized or realized
 
 
 
 
 
 
 
Included in net earnings
(0
)
 
12

 
0

 
12

Included in other comprehensive income
(0
)
 
(28
)
 
0

 
(28
)
Purchases
0

 
0

 
0

 
0

Settlements
0

 
(506
)
 
(46
)
 
(552
)
Transfers in
0

 
0

 
0

 
0

Balance at end of period
$
10

 
$
2,423

 
$
0

 
$
2,434

 
Six months ended June 30, 2016
 
State and
Municipal
 
Corporates
 
Asset-Backed Securities
 
Total
Balance at beginning of period
$
10

 
$
1,524

 
$
0

 
$
1,534

Total (losses) gains, unrealized or realized
 
 
 
 
 
 
 
Included in net earnings
(4
)
 
7

 
0

 
3

Included in other comprehensive income
1

 
(25
)
 
1

 
(23
)
Purchases
0

 
0

 
620

 
620

Settlements
(10
)
 
(398
)
 
0

 
(408
)
Transfers in
628

 
0

 
1,338

 
1,966

Balance at end of period
$
626

 
$
1,107

 
$
1,959

 
$
3,692

 
 
 
 
 
 
 
 
 
Six months ended June 30, 2015
 
State and
Municipal
 
Corporates
 
Asset-Backed Securities
 
Total
Balance at beginning of period
$
0

 
$
3,134

 
$
150

 
$
3,285

Total losses, unrealized or realized
 
 
 
 
 
 
 
Included in net earnings
(0
)
 
(83
)
 
0

 
(83
)
Included in other comprehensive income
0

 
(43
)
 
0

 
(42
)
Purchases
0

 
0

 
0

 
0

Settlements
0

 
(586
)
 
(150
)
 
(736
)
Transfers in
10

 
0

 
0

 
10

Balance at end of period
$
10

 
$
2,423

 
$
0

 
$
2,434


14

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

Of the $3.7 million fair value of securities in Level 3 at June 30, 2016, which consisted of six securities, we priced four based on non-binding broker quotes, one price was provided by our unaffiliated money manager, and one security, which was included in Level 3 because it was not rated by a NRSRO, was priced by a nationally recognized pricing service.
During the six months ended June 30, 2016, one security was transferred from Level 2 into Level 3 because a price could not
be determined using observable market inputs, and one security was transferred from Level 2 into Level 3 following an exchange after which it was no longer rated by a NRSRO. There were no transfers of securities between Levels 1 and 2.
The gains or losses included in net earnings are included in the line item "Net realized (losses) gains on investments" in the Consolidated Statements of Earnings. We recognize the net gains or losses included in other comprehensive income in the line item "Unrealized gains (losses) on investments, net" in the Consolidated Statements of Comprehensive Income and the line item "Change in unrealized gain on investments" or the line item "Change in non-credit component of impairment losses on fixed maturities" in the Consolidated Statements of Changes in Shareholders’ Equity.
The following table presents the carrying value and estimated fair value of our financial instruments ($ in thousands):
 
June 30, 2016
 
December 31, 2015
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
76,016

 
$
76,016

 
$
62,483

 
$
62,483

Available-for-sale securities:
 
 
 
 
 
 
 
Fixed maturities
1,383,806

 
1,383,806

 
1,381,467

 
1,381,467

Equity securities
90,742

 
90,742

 
89,935

 
89,935

Short-term investments
4,066

 
4,066

 
4,651

 
4,651

Total cash and investments
$
1,554,631

 
$
1,554,631

 
$
1,538,536

 
$
1,538,536

Liabilities:
 
 
 
 
 
 
 
Long-term debt
$
273,486

 
$
291,572

 
$
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 six months ended June 30, 2016, were $100.2 million and $208.8 million, respectively, while the proceeds from sales of securities for the three and six months ended June 30, 2015, were $56.7 million and $156.6 million, respectively. There was no receivable for unsettled sales as of June 30, 2016, or 2015.
Gross gains of $0.9 million and gross losses of $0.9 million were realized on sales of available-for-sale securities during the three months ended June 30, 2016, compared with gross gains of $0.5 million and gross losses of $0.1 million realized on sales during the three months ended June 30, 2015. Gross gains of $2.2 million and gross losses of $1.9 million were realized on sales of available-for-sale securities during the six months ended June 30, 2016, compared with gross gains of $2.7 million and gross losses of $0.7 million realized on sales during the six months ended June 30, 2015. Gains or losses on securities are determined on a specific identification basis.

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

Condensed Notes to Consolidated Financial Statements

Summarized information for the major categories of our investment portfolio follows ($ in thousands):
 
June 30, 2016
 
Amortized
Cost or Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
OTTI
Recognized in
Accumulated
OCI(1)
Fixed maturities:
 
 
 
 
 
 
 
 
 
U.S. government
$
63,229

 
$
1,007

 
$
0

 
$
64,236

 
$
0

State and municipal
453,409

 
10,752

 
(55
)
 
464,106

 
(51
)
Mortgage-backed securities:

 

 

 
 
 
 
Residential
326,176

 
7,798

 
(256
)
 
333,717

 
(2,165
)
Commercial
67,272

 
309

 
(209
)
 
67,372

 
0

Total mortgage-backed securities
393,448

 
$
8,106

 
(465
)
 
$
401,089

 
(2,165
)
Asset-backed securities
49,116

 
227

 
(10
)
 
49,333

 
(8
)
Corporates
399,095

 
6,973

 
(1,026
)
 
405,043

 
(51
)
Total fixed maturities
1,358,297

 
27,066

 
(1,556
)
 
1,383,806

 
(2,276
)
Equity securities
78,869

 
11,873

 
0

 
90,742

 
0

Short-term investments
4,066

 
1

 
(0
)
 
4,066

 
0

Total
$
1,441,231

 
$
38,940

 
$
(1,557
)
 
$
1,478,615

 
$
(2,276
)
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
Amortized
Cost or Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
OTTI
Recognized in
Accumulated
OCI(1)
Fixed maturities:
 
 
 
 
 
 
 
 
 
U.S. government
$
64,849

 
$
103

 
$
(282
)
 
$
64,669

 
$
0

State and municipal
472,402

 
7,393

 
(129
)
 
479,666

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

 
3,678

 
(2,448
)
 
334,784

 
(2,374
)
Commercial
71,137

 
16

 
(929
)
 
70,224

 
0

Total mortgage-backed securities
404,691

 
3,694

 
(3,377
)
 
405,008

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

 
50

 
(138
)
 
54,018

 
(8
)
Corporates
385,462

 
1,281

 
(8,638
)
 
378,105

 
(61
)
Total fixed maturities
1,381,510

 
12,521

 
(12,564
)
 
1,381,467

 
(2,495
)
Equity securities
78,815

 
11,120

 
0

 
89,935

 
0

Short-term investments
4,656

 
0

 
(4
)
 
4,651

 
0

Total
$
1,464,981

 
$
23,640

 
$
(12,568
)
 
$
1,476,053

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


16

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

Condensed Notes to Consolidated Financial Statements

The following tables set forth the amount of unrealized loss by investment category and length of time that individual securities have been in a continuous unrealized loss position ($ in thousands):
 
Less than 12 Months
 
12 Months or More
June 30, 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
0
 
$
0

 
$
0

 
0.0
%
 
0

 
$
0

 
$
0

 
0.0
%
State and municipal
7
 
14,350

 
(22
)
 
0.2
%
 
1

 
2,967

 
(33
)
 
1.1
%
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
19
 
7,071

 
(16
)
 
0.2
%
 
56

 
23,240

 
(240
)
 
1.0
%
Commercial
2
 
6,715

 
(22
)
 
0.3
%
 
10

 
31,994

 
(187
)
 
0.6
%
Total mortgage-backed securities
21
 
13,786

 
(38
)
 
0.3
%
 
66

 
55,234

 
(427
)
 
0.8
%
Asset-backed securities
10
 
6,902

 
(9
)
 
0.1
%
 
1

 
824

 
(1
)
 
0.2
%
Corporates
40
 
53,889

 
(440
)
 
0.8
%
 
26

 
32,518

 
(585
)
 
1.8
%
Total fixed maturities
78
 
88,927

 
(509
)
 
0.6
%
 
94

 
91,542

 
(1,047
)
 
1.1
%
Equity securities
0
 
0

 
0

 
0.0
%
 
0

 
0

 
0

 
0.0
%
Short-term investments
3
 
3,299

 
(0
)
 
0.0
%
 
0

 
0

 
0

 
0.0
%
Total
81
 
$
92,226

 
$
(510
)
 
0.5
%
 
94

 
$
91,542

 
$
(1,047
)
 
1.1
%
 
Less than 12 Months
 
12 Months or More
December 31, 2015
Number of
Securities
with
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Unrealized
Losses as
% of Cost
 
Number of
Securities
with
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Unrealized
Losses as
% of Cost
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government
18

 
$
36,024

 
$
(241
)
 
0.7
%
 
4

 
$
4,687

 
$
(41
)
 
0.9
%
State and municipal
27

 
54,680

 
(129
)
 
0.2
%
 
0

 
0

 
0

 
0.0
%
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
205

 
133,814

 
(1,436
)
 
1.1
%
 
64

 
39,001

 
(1,012
)
 
2.5
%
Commercial
9

 
28,733

 
(349
)
 
1.2
%
 
10

 
34,169

 
(580
)
 
1.7
%
Total mortgage-backed securities
214

 
162,547

 
(1,785
)
 
1.1
%
 
74

 
73,170

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

 
35,313

 
(132
)
 
0.4
%
 
2

 
1,153

 
(7
)
 
0.6
%
Corporates
172

 
239,440

 
(7,149
)
 
2.9
%