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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 March 31, 2018
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)
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
¨
Emerging growth company
o  
 
 
 

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

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
As of April 26, 2018, there were 10,941,936 shares of the registrant’s common stock outstanding.


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

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

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

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
 
March 31,
 
2018
 
2017
 
% Change
 
 
 
(as adjusted)
 
 
Revenues:
 
 
 
 
 
Earned premium
$
353,987

 
$
341,368

 
3.7
 %
Installment and other fee income
27,395

 
26,739

 
2.5
 %
Net investment income
9,786

 
8,695

 
12.5
 %
Net realized (losses) gains on investments (1)
(2,832
)
 
509

 
(656.2
)%
Other income
430

 
275

 
56.3
 %
Total revenues
388,766

 
377,587

 
3.0
 %
Costs and Expenses:
 
 
 
 
 
Losses and loss adjustment expenses
264,552

 
270,676

 
(2.3
)%
Commissions and other underwriting expenses
90,521

 
85,939

 
5.3
 %
Interest expense
3,509

 
3,512

 
(0.1
)%
Corporate general and administrative expenses
4,743

 
2,271

 
108.9
 %
Other expenses
505

 
322

 
56.9
 %
Total costs and expenses
363,829

 
362,719

 
0.3
 %
Earnings before income taxes
24,937

 
14,868

 
67.7
 %
Provision for income taxes
4,853

 
4,358

 
11.4
 %
Net Earnings
$
20,083

 
$
10,510

 
91.1
 %
Net Earnings per Common Share:
 
 
 
 
 
Basic
$
1.84

 
$
0.96

 
91.7
 %
Diluted
1.82

 
0.94

 
93.6
 %
Average Number of Common Shares:
 
 
 
 
 
Basic
10,915

 
10,998

 
(0.8
)%
Diluted
11,009

 
11,127

 
(1.1
)%
Cash Dividends per Common Share
$
0.58

 
$
0.58

 
0.0
 %
(1) Net realized gains on sales
$
1,363

 
$
519

 
162.6
 %
Net holding period losses on equity securities
(2,607
)
 
0

 
NM

Total other-than-temporary impairment (OTTI) losses
(1,468
)
 
(46
)
 
NM

Non-credit portion in other comprehensive income
158

 
36

 
341.9
 %
OTTI losses reclassified from other comprehensive income
(278
)
 
0

 
NM

Net impairment losses recognized in earnings
(1,588
)
 
(10
)
 
NM

Total net realized (losses) gains on investments
$
(2,832
)
 
$
509

 
(656.2
)%
NM = Not Meaningful
See Condensed Notes to Consolidated Financial Statements.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in thousands)
(unaudited)
 
Three months ended
 
March 31,
 
2018
 
2017
 
 
 
(as adjusted)
Net earnings
$
20,083

 
$
10,510

Other comprehensive income before tax:
 
 
 
Net change in post-retirement benefit liability
(2
)
 
(13
)
Unrealized gains on investments(1):
 
 
 
Unrealized holding (losses) gains arising during the period
(18,344
)
 
10,664

Less: Reclassification adjustments for losses (gains) included in net earnings
2,106

 
(509
)
Unrealized (losses) gains on investments, net
(16,238
)
 
10,155

Other comprehensive (loss) income, before tax
(16,240
)
 
10,143

Income tax benefit (expense) related to components of other comprehensive income
3,410

 
(3,550
)
Other comprehensive (loss) income, net of tax
(12,829
)
 
6,593

Comprehensive income
$
7,254

 
$
17,102

 
 
 
 
(1) The amounts for 2018 are for fixed maturities only.
 
 
 
See Condensed Notes to Consolidated Financial Statements.


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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts in line descriptions)
 
March 31, 2018
 
December 31, 2017
 
(unaudited)
 
(as adjusted)
Assets
 
 
 
Investments:
 
 
 
Fixed maturities – at fair value (amortized cost $1,512,939 and $1,439,878)
$
1,497,930

 
$
1,441,107

Equity securities – at fair value (cost $65,913 and $68,812)
90,498

 
96,004

Short-term investments – at fair value (amortized cost $0 and $2,541)
0

 
2,541

Total investments
1,588,428

 
1,539,653

Cash and cash equivalents
88,793

 
107,589

Accrued investment income
10,098

 
13,079

Agents’ balances and premium receivable, net of allowances for doubtful accounts of $13,238 and $15,262
557,206

 
507,963

Property and equipment, net of accumulated depreciation of $87,945 and $84,776
78,732

 
82,453

Prepaid reinsurance premium
482

 
1,032

Recoverables from reinsurers (includes $3,124 and $(1,269) on paid losses and LAE)
22,674

 
30,340

Deferred policy acquisition costs
98,672

 
88,300

Current and deferred income taxes
9,091

 
10,543

Receivable for securities sold
120

 
1,700

Other assets
21,896

 
16,557

Goodwill
75,275

 
75,275

Total assets
$
2,551,466

 
$
2,474,484

Liabilities and Shareholders’ Equity
 
 
 
Liabilities:
 
 
 
Unpaid losses and loss adjustment expenses
$
701,006

 
$
715,098

Unearned premium
691,464

 
627,575

Long-term debt (fair value $286,330 and $290,824)
273,865

 
273,809

Commissions payable
15,844

 
16,743

Payable for securities purchased
40,375

 
5,615

Other liabilities
110,996

 
119,831

Total liabilities
1,833,550

 
1,758,672

Commitments and contingencies (See Note 9)


 


Shareholders’ equity:
 
 
 
Common stock, no par value (50,000,000 shares authorized; 21,879,505 and 21,867,436 shares issued)
21,908

 
21,888

Additional paid-in capital
385,346

 
383,567

Retained earnings
824,932

 
793,077

Accumulated other comprehensive income, net of tax
(11,202
)
 
19,756

Treasury stock, at cost (10,937,569 and 10,932,539 shares)
(503,069
)
 
(502,475
)
Total shareholders’ equity
717,916

 
715,812

Total liabilities and shareholders’ equity
$
2,551,466

 
$
2,474,484

See Condensed Notes to Consolidated Financial Statements.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

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, 2016
$
21,829

 
$
378,745

 
$
777,695

 
$
7,907

 
$
(486,990
)
 
$
699,187

Cumulative effect of change in accounting principle

 

 
(3,808
)
 

 

 
(3,808
)
Net earnings

 

 
10,510

 

 

 
10,510

Net change in post-retirement benefit liability

 

 

 
(8
)
 

 
(8
)
Change in unrealized gain on investments

 

 

 
6,579

 

 
6,579

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

 

 

 
22

 

 
22

Comprehensive income
 
 
 
 
 
 
 
 
 
 
17,102

Dividends paid to common shareholders

 

 
(6,402
)
 

 

 
(6,402
)
Shares issued and share-based compensation expense
18

 
1,430

 

 

 

 
1,449

Acquisition of treasury stock

 

 

 

 
(2,303
)
 
(2,303
)
Balance at March 31, 2017, as adjusted
$
21,848

 
$
380,175

 
$
777,994

 
$
14,500

 
$
(489,293
)
 
$
705,225

Net earnings

 

 
34,214

 

 

 
34,214

Net change in post-retirement benefit liability

 

 

 
(124
)
 

 
(124
)
Change in unrealized gain on investments

 

 

 
5,074

 

 
5,074

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

 

 

 
306

 

 
306

Comprehensive income
 
 
 
 
 
 
 
 
 
 
39,469

Dividends paid to common shareholders

 

 
(19,131
)
 

 

 
(19,131
)
Shares issued and share-based compensation expense
40

 
3,391

 

 

 

 
3,432

Acquisition of treasury stock

 

 

 

 
(13,182
)
 
(13,182
)
Balance at December 31, 2017, as adjusted
$
21,888

 
$
383,567

 
$
793,077

 
$
19,756

 
$
(502,475
)
 
$
715,812

Cumulative effect of change in accounting principle
$

 
$

 
18,118

 
$
(18,128
)
 
$

 
(10
)
Net earnings

 

 
20,083

 

 

 
20,083

Net change in post-retirement benefit liability

 

 

 
(1
)
 

 
(1
)
Change in unrealized gain on fixed maturity investments

 

 

 
(12,980
)
 

 
(12,980
)
Change in non-credit component of impairment losses on fixed maturities

 

 

 
152

 

 
152

Comprehensive income
 
 
 
 
 
 
 
 
 
 
7,254

Dividends paid to common shareholders

 

 
(6,346
)
 

 

 
(6,346
)
Shares issued and share-based compensation expense
21

 
1,779

 

 

 

 
1,800

Acquisition of treasury stock

 

 

 

 
(594
)
 
(594
)
Balance at March 31, 2018
$
21,908

 
$
385,346

 
$
824,932

 
$
(11,202
)
 
$
(503,069
)
 
$
717,916

See Condensed Notes to Consolidated Financial Statements.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands, unaudited)
 
Three months ended
 
March 31,
 
2018
 
2017
 
 
 
(as adjusted)
Operating Activities:
 
 
 
Net earnings
$
20,083

 
$
10,510

Adjustments:
 
 
 
Depreciation
3,696

 
4,177

Amortization
4,840

 
5,327

Net realized losses (gains) on investments
2,832

 
(509
)
Loss (gain) on disposal of property and equipment
10

 
(2
)
Share-based compensation expense
1,731

 
1,384

Activity related to rabbi trust
(13
)
 
69

Change in accrued investment income
2,980

 
246

Change in agents’ balances and premium receivable
(49,243
)
 
(17,118
)
Change in reinsurance receivables
8,216

 
917

Change in deferred policy acquisition costs
(10,372
)
 
(2,957
)
Change in other assets
(804
)
 
(4,505
)
Change in unpaid losses and loss adjustment expenses
(14,092
)
 
(6,508
)
Change in unearned premium
63,889

 
26,943

Change in other liabilities
(9,815
)
 
5,565

Net cash provided by operating activities
23,939

 
23,538

Investing Activities:
 
 
 
Purchases of fixed maturities
(403,516
)
 
(120,831
)
Purchases of equity securities
0

 
(1,900
)
Purchases of property and equipment
(313
)
 
(889
)
Maturities and redemptions of fixed maturities
32,497

 
43,319

Proceeds from sale of fixed maturities
328,064

 
37,671

Proceeds from sale of equity securities
5,013

 
2,002

Proceeds from sale of short-term investments
2,528

 
2,400

Proceeds from sale of property and equipment
0

 
19

Net cash used in investing activities
(35,727
)
 
(38,209
)
Financing Activities:
 
 
 
Proceeds from stock options exercised and employee stock purchases
70

 
65

Principal payments under capital lease obligations
(138
)
 
(135
)
Acquisition of treasury stock
(594
)
 
(2,296
)
Dividends paid to shareholders
(6,346
)
 
(6,402
)
Net cash used in financing activities
(7,009
)
 
(8,768
)
Net decrease in cash and cash equivalents
(18,796
)
 
(23,438
)
Cash and cash equivalents at beginning of period
107,589

 
92,800

Cash and cash equivalents at end of period
$
88,793

 
$
69,361

See Condensed Notes to Consolidated Financial Statements.


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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
INDEX TO NOTES
 
1.
7.
 
 
 
2.
8.
 
 
 
3.
9.
 
 
 
4.
10.
 
 
 
5.
11.
 
 
 
 
6.
 
 

Note 1 Significant Reporting and Accounting Policies
Nature of Operations
We are a holding company that provides insurance through our subsidiaries for personal auto with a concentration on nonstandard risks, commercial auto and classic collectors. Although licensed to write insurance in all 50 states and the District of Columbia, we focus on select states that we believe offer the greatest opportunity for premium growth and profitability.
Basis of Consolidation and Reporting
The accompanying consolidated financial statements are unaudited and should be read in conjunction with our Annual Report on Form 10-K (Form 10-K) for the year ended December 31, 2017. 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 March 31, 2018, 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 February 2018 the FASB issued an ASU allowing a reclassification from accumulated other comprehensive income to retained earnings and consequently eliminating the stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. We elected to early adopt the ASU and applied the amendment in the period of adoption, with a cumulative-effect adjustment of $0.4 million reclassified from accumulated other comprehensive income to retained earnings.
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

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

outside party. We adopted the change on a modified retrospective basis, with a cumulative-effect adjustment of less than $(0.1) million recorded to retained earnings as of January 1, 2018.
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. We adopted the change on a modified retrospective basis as of January 1, 2018, with a cumulative-effect adjustment of $17.7 million reclassified from other comprehensive income to retained earnings.
In May 2014 the FASB issued an ASU related to the accounting for revenue from contracts with customers. Insurance contracts were excluded from the scope of the guidance. As an insurance-entity, we are largely exempt from the provisions of this standard, with only fee income subject to this new standard. Processing and policy fees were generally earned at the inception of the policy under previous guidance but are earned over the life of the policy under current guidance. The guidance was adopted as of January 1, 2018, using a full retrospective approach with a cumulative-effect adjustment to the balance sheet, which reduced shareholders' equity by $4.5 million.
The following table illustrates the effect of adopting this standard on the Consolidated Balance Sheets ($ in millions):
 
December 31, 2017
 
As Reported
 
As Adjusted
 
Difference
Agents' balances and premium receivable
$
508.1

 
$
508.0

 
$
(0.1
)
Current and deferred income taxes
9.4

 
10.5

 
1.2

Total assets
2,473.4

 
2,474.5

 
1.1

Other liabilities
114.3

 
119.8

 
5.5

Shareholders' equity
720.3

 
715.8

 
(4.5
)
Total liabilities and shareholders' equity
2,473.4

 
2,474.5

 
1.1


The following table illustrates the effect of adopting this standard on the Consolidated Statements of Earnings (in millions, except per share amounts):        
 
Three months ended March 31, 2017
 
As Reported
 
As Adjusted
 
Difference
Installment and other fee income
$
26.9

 
$
26.7

 
$
(0.2
)
Total revenues
377.8

 
377.6

 
(0.2
)
Earnings before income taxes
15.1

 
14.9

 
(0.2
)
Provision for income taxes
4.4

 
4.4

 
(0.1
)
Net earnings
10.6

 
10.5

 
(0.1
)
Net earnings per common share:
 
 
 
 
 
  Basic
$
0.97

 
$
0.96

 
$
(0.01
)
  Diluted
0.96

 
0.94

 
(0.02
)

We also adjusted the Consolidated Statements of Changes in Shareholders' Equity and the Consolidated Statements of Cash Flows for these changes for the three months ended March 31, 2017.
Recently Issued Accounting Standards
In March 2017 the FASB issued an ASU related to the amortization of premium on purchased callable debt securities. The guidance amends the amortization period for certain purchased callable debt securities held at a premium. Securities that contain explicit, noncontingent call features that are callable at fixed prices and on preset dates should shorten the amortization period for the premium to the earliest call date (and if the call option is not exercised, the effective yield is reset using the payment terms of the debt security). The standard is effective for fiscal years, and interim period within those years, beginning after December 15, 2018, and is to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings. We do not expect the adoption of this standard to have a material impact on our financial condition or results of operations.
In 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.

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The standard is effective for fiscal periods beginning after December 15, 2019, and interim periods within the year of adoption, with prospective application of the ASU required for debt securities for which an other-than-temporary impairment has been recognized before the implementation date. We do not expect the adoption of this standard to have a material impact on our financial condition or results of operations.
In February 2016 the FASB issued an ASU related to the accounting for leases. The guidance requires lessees to recognize lease assets and liabilities on the balance sheet. The standard is effective for fiscal years beginning after December 15, 2018, and is to be applied retrospectively, with an option to use a modified retrospective approach for leases which commenced prior to the effective date of this ASU. We do not expect the adoption of this standard to have a material impact on our financial condition or results of operations.

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
 
March 31,
 
2018
 
2017
Net earnings
$
20,083

 
$
10,510

Average basic shares outstanding
10,915

 
10,998

Basic net earnings per share
$
1.84

 
$
0.96

 
 
 
 
Average basic shares outstanding
10,915

 
10,998

Restricted stock not vested
8

 
33

Dilutive effect of Performance Share Plan
86

 
96

Average diluted shares outstanding
11,009

 
11,127

Diluted net earnings per share
$
1.82

 
$
0.94


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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
March 31, 2018
Level 1
 
Level 2
 
Level 3
 
Total
Cash and cash equivalents
$
88,793

 
$
0

 
$
0

 
$
88,793

Fixed maturity securities:
 
 
 
 
 
 
 
U.S. government
124,757

 
0

 
0

 
124,757

State and municipal
0

 
296,048

 
766

 
296,814

Mortgage-backed securities:

 
 
 
 
 
 
Residential
0

 
365,007

 
0

 
365,007

Commercial
0

 
59,204

 
2,857

 
62,061

Total mortgage-backed securities
0

 
424,211

 
2,857

 
427,068

Asset-backed securities
0

 
110,836

 
17,647

 
128,484

Corporates
0

 
520,698

 
109

 
520,807

Total fixed maturities
124,757

 
1,351,794

 
21,379

 
1,497,930

Equity securities
90,498

 
0

 
0

 
90,498

Short-term investments
0

 
0

 
0

 
0

Total cash and investments
$
304,048

 
$
1,351,794

 
$
21,379

 
$
1,677,221

Percentage of total cash and investments
18.1
%
 
80.6
%
 
1.3
%
 
100.0
%
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
Cash and cash equivalents
$
107,589

 
$
0

 
$
0

 
$
107,589

Fixed maturity securities:
 
 
 
 
 
 
 
U.S. government
60,528

 
0

 
0

 
60,528

State and municipal
0

 
490,724

 
3,488

 
494,211

Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
0

 
350,992

 
0

 
350,992

Commercial
0

 
30,569

 
0

 
30,569

Total mortgage-backed securities
0

 
381,561

 
0

 
381,561

Asset-backed securities
0

 
62,266

 
152

 
62,418

Corporates
0

 
442,281

 
108

 
442,390

Total fixed maturities
60,528

 
1,376,832

 
3,748

 
1,441,107

Equity securities
96,004

 
0

 
0

 
96,004

Short-term investments
0

 
2,541

 
0

 
2,541

Total cash and investments
$
264,121

 
$
1,379,373

 
$
3,748

 
$
1,647,242

Percentage of total cash and investments
16.0
%
 
83.7
%
 
0.2
%
 
100.0
%

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

We do not report our long-term debt at fair value in the Consolidated Balance Sheets. The $286.3 million and $290.8 million fair value of our long-term debt at March 31, 2018, and December 31, 2017, 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

The following tables present the progression in the Level 3 fair value category ($ in thousands): 
Three months ended March 31, 2018
State and
Municipal
 
Mortgage-
Backed
Securities
 
Asset-Backed Securities
 
Corporates
 
Total
Balance at beginning of period
$
3,488

 
$
0

 
$
152

 
$
108

 
$
3,748

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

 
(0
)
 
(0
)
 
(10
)
Included in other comprehensive income
3

 
10

 
27

 
1

 
41

Purchases
0

 
2,847

 
17,729

 
0

 
20,576

Sales
(3,360
)
 
0

 
0

 
0

 
(3,360
)
Settlements
0

 
0

 
(261
)
 
0

 
(261
)
Transfers in
645

 
0

 
0

 
0

 
645

Balance at end of period
$
766

 
$
2,857

 
$
17,647

 
$
109

 
$
21,379

 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2017
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
3,860

 
$
0

 
$
412

 
$
666

 
$
4,938

Total (losses) gains, unrealized or realized
 
 
 
 
 
 
 
 
 
Included in net earnings
(31
)
 
0

 
0

 
1

 
(30
)
Included in other comprehensive income
15

 
0

 
1

 
(22
)
 
(6
)
Purchases
0

 
0

 
4,259

 
2,000

 
6,259

Sales
(694
)
 
0

 
0

 
0

 
(694
)
Settlements
0

 
0

 
(88
)
 
(92
)
 
(180
)
Transfers in
329

 
0

 
0

 
0

 
329

Balance at end of period
$
3,479

 
$
0

 
$
4,584

 
$
2,553

 
$
10,616

 
 
 
 
 
 
 
 
Of the $21.4 million fair value of securities in Level 3 at March 31, 2018, which consisted of eleven securities, we priced six based on non-binding broker quotes, one was priced based on our unaffiliated money manager and four securities, which were included in Level 3 because they were not rated by a nationally recognized statistical rating organization, were priced by a nationally recognized pricing service.
During the three months ended March 31, 2018, eight securities were purchased and are new issues. One security, which was an exchange of a rated municipal bond for an unrated refunded bond, was transferred from Level 2 into Level 3. There were no transfers of securities between Levels 1 and 2. During the three months ended March 31, 2017, one security, which was an exchange of a rated municipal bond for an unrated refunded bond, was transferred from Level 2 into Level 3.
The gains or losses included in net earnings are included in the line item "Net realized 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 (losses) gains on investments, net" in the Consolidated Statements of Comprehensive Income and the line item "Change in unrealized gain on investments" or the line item "Change in non-credit component of impairment losses on fixed maturities" in the Consolidated Statements of Changes in Shareholders’ Equity.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

The following table presents the carrying value and estimated fair value of our financial instruments ($ in thousands):
 
March 31, 2018
 
December 31, 2017
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
88,793

 
$
88,793

 
$
107,589

 
$
107,589

Available-for-sale securities:
 
 
 
 
 
 
 
Fixed maturities
1,497,930

 
1,497,930

 
1,441,107

 
1,441,107

Equity securities
90,498

 
90,498

 
96,004

 
96,004

Short-term investments
0

 
0

 
2,541

 
2,541

Total cash and investments
$
1,677,221

 
$
1,677,221

 
$
1,647,242

 
$
1,647,242

Liabilities:
 
 
 
 
 
 
 
Long-term debt
$
273,865

 
$
286,330

 
$
273,809

 
$
290,824

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. Net unrealized gains or losses on equity securities prior to January 1, 2018, and on fixed maturities are reported after-tax (net of any valuation allowance) as a component of other comprehensive income. As of January 1, 2018, changes in fair value of equity securities are recognized through net income. The proceeds from sales of securities for the three months ended March 31, 2018, and March 31, 2017, were $335.6 million and $42.1 million, respectively. Sales of securities were higher during the first quarter of 2018 as a result of our transition to a new investment policy statement and related portfolio repositioning. The proceeds for the three months ended March 31, 2018, were net of $0.1 million of receivable for securities sold as of March 31, 2018. The proceeds for the three months ended March 31, 2017, were net of $5.2 million of receivable for securities sold during the first quarter of 2017 that had not settled as of March 31, 2017.
Gross gains of $2.9 million and gross losses of $1.6 million were realized on sales of available-for-sale securities during the three months ended March 31, 2018, compared with gross gains of $0.7 million and gross losses of $0.2 million realized on sales during the three months ended March 31, 2017. Gains or losses on securities are determined on a specific identification basis.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Summarized information for the major categories of our investment portfolio follows ($ in thousands):
March 31, 2018
Amortized
Cost or Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
OTTI
Recognized in
Accumulated
OCI(1)
Fixed maturities:
 
 
 
 
 
 
 
 
 
U.S. government
$
125,887

 
$
58

 
$
(1,188
)
 
$
124,757

 
$
0

State and municipal
297,994

 
1,031

 
(2,211
)
 
296,814

 
0

Mortgage-backed securities:

 

 

 
 
 
 
Residential
372,319

 
669

 
(7,981
)
 
365,007

 
(72
)
Commercial
63,053

 
23

 
(1,016
)
 
62,061

 
0

Total mortgage-backed securities
435,372

 
693

 
(8,996
)
 
427,068

 
(72
)
Asset-backed securities
129,010

 
104

 
(630
)
 
128,484

 
0

Corporates
524,676

 
1,726

 
(5,595
)
 
520,807

 
0

Total fixed maturities
1,512,939

 
3,612

 
(18,621
)
 
1,497,930

 
(72
)
Short-term investments
0

 
0

 
0

 
0

 
0

Total
$
1,512,939

 
$
3,612

 
$
(18,621
)
 
$
1,497,930

 
$
(72
)
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
U.S. government
$
61,196

 
$
0

 
$
(668
)
 
$
60,528

 
$
0

State and municipal
492,442

 
2,768

 
(999
)
 
494,211

 
(46
)
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Residential
353,277

 
1,812

 
(4,097
)
 
350,992

 
(1,479
)
Commercial
31,204

 
18

 
(653
)
 
30,569

 
0

Total mortgage-backed securities
384,481

 
1,830

 
(4,750
)
 
381,561

 
(1,479
)
Asset-backed securities
62,552

 
62

 
(196
)
 
62,418

 
(8
)
Corporates
439,208

 
4,610

 
(1,429
)
 
442,390

 
(31
)
Total fixed maturities
1,439,878

 
9,271

 
(8,042
)
 
1,441,107

 
(1,564
)
Equity securities
68,812

 
27,192

 
0

 
96,004

 
0

Short-term investments
2,541

 
0

 
0

 
2,541

 
0

Total
$
1,511,232

 
$
36,463

 
$
(8,042
)
 
$
1,539,653

 
$
(1,564
)
 
 
 
 
 
 
 
 
 
 
(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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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

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
March 31, 2018
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
28
 
$
48,202

 
$
(881
)
 
1.8
%
 
16

 
$
12,743

 
$
(307
)
 
2.4
%
State and municipal
99
 
184,046

 
(2,147
)
 
1.2
%
 
4

 
4,573

 
(64
)
 
1.4
%
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
263
 
144,098

 
(2,250
)
 
1.5
%
 
272

 
119,273

 
(5,730
)
 
4.6
%
Commercial
15
 
30,658

 
(177
)
 
0.6
%
 
8

 
23,206

 
(839
)
 
3.5
%
Total mortgage-backed securities
278
 
174,756

 
(2,427
)
 
1.4
%
 
280

 
142,480

 
(6,569
)
 
4.4
%
Asset-backed securities
43
 
74,670

 
(628
)
 
0.8
%
 
1

 
1,458

 
(2
)
 
0.1
%
Corporates
232
 
367,660

 
(5,168
)
 
1.4
%
 
15

 
18,126

 
(427
)
 
2.3
%
Total fixed maturities
680
 
849,333

 
(11,252
)
 
1.3
%
 
316

 
179,380

 
(7,369
)
 
3.9
%
Short-term investments
0
 
0

 
0

 
0.0
%
 
0

 
0

 
0

 
0.0
%
Total
680
 
$
849,333

 
$
(11,252
)
 
1.3
%
 
316

 
$
179,380

 
$
(7,369
)
 
3.9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government
25
 
$
46,160

 
$
(422
)
 
0.9
%
 
16

 
$
14,368

 
$
(246
)
 
1.7
%
State and municipal
82
 
163,997

 
(939
)
 
0.6
%
 
5

 
10,529

 
(60
)
 
0.6
%
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
154
 
81,841

 
(453
)
 
0.6
%
 
279

 
127,317

 
(3,644
)
 
2.8
%
Commercial
2
 
3,578

 
(30
)
 
0.8
%
 
9

 
23,066

 
(623
)
 
2.6
%
Total mortgage-backed securities
156
 
85,419

 
(483
)
 
0.6
%
 
288

 
150,383

 
(4,267
)
 
2.8
%
Asset-backed securities
31
 
35,407

 
(193
)
 
0.5
%
 
2

 
1,561

 
(3
)
 
0.2
%
Corporates
104
 
158,788

 
(1,197
)
 
0.7
%
 
13

 
16,468

 
(232
)
 
1.4
%
Total fixed maturities
398
 
489,771

 
(3,233
)
 
0.7
%
 
324

 
193,309

 
(4,809
)
 
2.4
%
Equity securities
0
 
0

 
0

 
0.0
%
 
0

 
0

 
0

 
0.0
%
Short-term investments
0
 
0

 
0

 
0.0
%
 
0

 
0

 
0

 
0.0
%
Total
398
 
$
489,771

 
$
(3,233
)
 
0.7
%
 
324

 
$
193,309

 
$
(4,809
)
 
2.4
%
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.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

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 with unrealized gains or losses (2018 includes fixed maturity securities only):
 
March 31, 2018
 
December 31, 2017
Number of positions held with unrealized:
 
 
 
Gains
302

 
496

Losses
996

 
722

Number of positions held that individually exceed unrealized:
 
 
 
Gains of $500,000
0

 
2

Losses of $500,000
0

 
0

Percentage of positions held with unrealized:
 
 
 
Gains that were investment grade
84
%
 
81
%
Losses that were investment grade
94
%
 
97
%
Percentage of fair value held with unrealized:
 
 
 
Gains that were investment grade
88
%
 
81
%
Losses that were investment grade
93
%
 
95
%
The following table sets forth the amount of unrealized losses by age and severity at March 31, 2018, ($ 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
$
454,565

 
$
(3,506
)
 
$
(3,394
)
 
$
(112
)
 
$
0

Four months through six months
247,851

 
(4,193
)
 
(4,007
)
 
(185
)
 
0

Seven months through nine months
139,484

 
(3,392
)
 
(3,392
)
 
0

 
0

Ten months through twelve months
7,432

 
(161
)
 
(161
)
 
0

 
0

Greater than twelve months
179,380

 
(7,369
)
 
(4,846
)
 
(2,523
)
 
0

Total
$
1,028,713

 
$
(18,621
)
 
$
(15,801
)
 
$
(2,820
)
 
$
0

* As a percentage of amortized cost or cost.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

The change in unrealized gains (losses) on marketable securities recognized through accumulated other comprehensive income included the following ($ in thousands):
 
Pre-tax
 
 
 
 
Three months ended March 31, 2018
Fixed
Maturities
 
Short-Term Investments
 
Tax
Effects
 
Net
Unrealized holding (losses) gains on securities arising during the period
$
(18,346
)
 
$
1

 
3,852

 
(14,492
)
Realized losses (gains) on securities sold
519

 
(1
)
 
(109
)
 
409

Impairment loss recognized in earnings
1,588

 
0

 
(334
)
 
1,255

Change in unrealized, net
$
(16,238
)
 
$
0

 
$
3,410

 
$
(12,828
)
 
Pre-tax
 
 
 
 
Three months ended March 31, 2017
Fixed
Maturities
 
Equity
Securities
 
Short-Term Investments
 
Tax
Effects
 
Net
Unrealized holding gains on securities arising during the period
$
4,368

 
$
6,294

 
$
3

 
$
(3,733
)
 
$
6,932

Realized losses (gains) on securities sold
52

 
(569
)
 
(1
)
 
182

 
(337
)
Impairment loss recognized in earnings
10

 
0

 
0

 
(3
)
 
6

Change in unrealized, net
$
4,429

 
$
5,725

 
$
1

 
$
(3,554
)
 
$
6,601

For fixed maturity securities that are other-than-temporarily impaired, we assess our intent to sell and the likelihood that we will be required to sell the security before recovery of our amortized cost. If a fixed maturity security is considered other-than-temporarily impaired but we do not intend to and are not more than likely to be required to sell the security before our recovery to amortized cost, the amount of the impairment is separated into a credit loss component and the amount due to all other factors ("non-credit component"). The excess of the amortized cost over the present value of the expected cash flows determines the credit loss component of an impairment charge on a fixed maturity security. The present value is determined using the best estimate of cash flows discounted at (i) the effective interest rate implicit at the date of acquisition for non-structured securities; or (ii) the book yield for structured securities. The techniques and assumptions for determining the best estimate of cash flows vary depending on the type of security. We recognize the credit loss component of an impairment charge in net earnings and the non-credit component in accumulated other comprehensive income. If we intend to sell or will, more likely than not, be required to sell a security, the entire amount of the impairment is treated as a credit loss.
For our securities held with unrealized losses, we believe, based on our analysis, that we will recover our cost basis in these securities and we do not intend to sell the securities nor is it more likely than not that there will be a requirement to sell the securities before they recover in value.
The following table is a progression of credit losses on fixed maturity securities that were bifurcated between a credit and non-credit component ($ in thousands):
 
Three months ended March 31,
 
2018
 
2017
Beginning balance
$
753

 
$
557

Additions for:
 
 
 
Previously impaired securities
278

 
0

Newly impaired securities
7

 
10

Reductions for:
 
 
 
Securities sold and paid down
(41
)
 
(24
)
Ending balance
$
996

 
$
542


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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

The table below sets forth the scheduled maturities of fixed maturity securities at March 31, 2018, 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
$
9,473

 
$
24,024

 
$
1,353

 
$
34,850

 
$
34,848

After one year through five years
188,968

 
453,537

 
7,187

 
649,692

 
653,913

After five years through ten years
68,219

 
157,207

 
649

 
226,075

 
228,286

After ten years
31,179

 
582

 
0

 
31,761

 
31,510

Mortgage- and asset-backed securities
143,210

 
393,363

 
18,979

 
555,552

 
564,382

Total
$
441,049

 
$
1,028,713

 
$
28,168

 
$
1,497,930

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