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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 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.

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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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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
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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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 $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


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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.

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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):
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.


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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