Edgar Filing: INFINITY PROPERTY & CASUALTY CORP

IPCC.10Q.1Q.2014

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, 2014

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.)

3700 Colonnade Parkway, Suite 600, Birmingham, Alabama 35243

(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	¨	Accelerated filer	x
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 April 30, 2014 there were 11,511,817 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

INDEX




		Page
	PART I – FINANCIAL INFORMATION

Item 1	Financial Statements

	Consolidated Statements of Earnings	3

	Consolidated Statements of Comprehensive Income	4

	Consolidated Balance Sheets	5

	Consolidated Statements of Changes in Shareholders’ Equity	6

	Consolidated Statements of Cash Flows	7

	Condensed Notes to Consolidated Financial Statements	9

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3	Quantitative and Qualitative Disclosures About Market Risk	40

Item 4	Controls and Procedures	40

PART II – OTHER INFORMATION

Item 1	Legal Proceedings	41

Item 1A	Risk Factors	41

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	41

Item 6	Exhibits	42

	Signature	43

	EXHIBIT INDEX
Exhibit 10	Performance Share Award Agreement

Exhibit 31.1	Certification of the Chief Executive Officer under Exchange Act Rule 13a-14(a)

Exhibit 31.2	Certification of the Chief Financial Officer under Exchange Act Rule 13a-14(a)

Exhibit 32	Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350

101.INS	XBRL Instance Document

101.SCH	XBRL Taxonomy Extension Schema

101.CAL	XBRL Taxonomy Extension Calculation Linkbase

101.DEF	XBRL Taxonomy Extension Definition Linkbase

101.LAB	XBRL Taxonomy Extension Label Linkbase

101.PRE	XBRL Taxonomy Extension Presentation Linkbase

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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 March 31,
	2014			2013			% Change
Revenues:
Earned premium	$	327,679		$	318,589		2.9	%
Installment and other fee income	24,340			25,300			(3.8	)%
Net investment income	8,798			8,337			5.5	%
Net realized gains on investments¹	645			3,824			(83.1	)%
Other income	151			51			194.0	%
Total revenues	361,613			356,102			1.5	%
Costs and Expenses:
Losses and loss adjustment expenses	253,702			250,371			1.3	%
Commissions and other underwriting expenses	87,973			87,674			0.3	%
Interest expense	3,453			3,538			(2.4	)%
Corporate general and administrative expenses	1,526			1,737			(12.2	)%
Other expenses	312			677			(53.9	)%
Total costs and expenses	346,966			343,997			0.9	%
Earnings before income taxes	14,647			12,105			21.0	%
Provision for income taxes	4,320			3,443			25.5	%
Net Earnings	$	10,327		$	8,662		19.2	%
Net Earnings per Common Share:
Basic	$	0.90		$	0.75		20.0	%
Diluted	0.89			0.74			20.3	%
Average Number of Common Shares:
Basic	11,429			11,522			(0.8	)%
Diluted	11,580			11,753			(1.5	)%
Cash Dividends per Common Share	$	0.36		$	0.30		20.0	%

¹Net realized gains before impairment losses	$	672		$	3,896		(82.8	)%
Total other-than-temporary impairment (OTTI) losses	(893		)	(72		)	NM
Non-credit portion in other comprehensive income	885			0			NM
OTTI losses reclassified from other comprehensive income	(19		)	0			NM
Net impairment losses recognized in earnings	(27		)	(72		)	(62.6	)%
Total net realized gains on investments	$	645		$	3,824		(83.1	)%

NM = Not Meaningful

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

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)



	Three months ended March 31,
	2014			2013
Net earnings	$	10,327		$	8,662
Other comprehensive income (loss) before tax:
Net change in postretirement benefit liability	657			50
Unrealized gains (losses) on investments:
Unrealized holding gains arising during the period	7,852			2,688
Less: Reclassification adjustments for gains included in net earnings	(645		)	(3,824		)
Unrealized gains (losses) on investments, net	7,208			(1,136		)
Other comprehensive income (loss), before tax	7,865			(1,086		)
Income tax (expense) benefit related to components of other comprehensive income	(2,753		)	380
Other comprehensive income (loss), net of tax	5,112			(706		)
Comprehensive income	$	15,439		$	7,956

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

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts in line descriptions)



	March 31, 2014			December 31, 2013
	(unaudited)
Assets
Investments:
Fixed maturities – at fair value (amortized cost $ 1,394,055 and $1,345,077)	$	1,410,033		$	1,354,305
Equity securities – at fair value (cost $77,356 and $74,718)	94,224			91,127
Short-term investments - at fair value (amortized cost $1,400 and $2,595)	1,400			2,596
Total investments	$	1,505,657		$	1,448,027
Cash and cash equivalents	84,892			134,211
Accrued investment income	12,386			12,772
Agents’ balances and premium receivable, net of allowances for doubtful accounts of $14,552 and $15,884	492,997			451,339
Property and equipment, net of accumulated depreciation of $55,801 and $53,368	50,766			48,061
Prepaid reinsurance premium	4,167			3,133
Recoverables from reinsurers (includes $76 and $77 on paid losses and LAE)	14,620			14,508
Deferred policy acquisition costs	94,707			88,258
Current and deferred income taxes	21,632			28,648
Receivable for securities sold	209			2,791
Other assets	12,237			10,242
Goodwill	75,275			75,275
Total assets	$	2,369,544		$	2,317,265
Liabilities and Shareholders’ Equity
Liabilities:
Unpaid losses and loss adjustment expenses	$	662,890		$	646,577
Unearned premium	613,012			566,004
Payable to reinsurers	0			2
Long-term debt (fair value $282,266 and $272,632)	275,000			275,000
Commissions payable	18,272			19,100
Payable for securities purchased	13,641			39,887
Other liabilities	120,242			113,936
Total liabilities	$	1,703,057		$	1,660,507
Commitments and contingencies (See Note 9)
Shareholders’ equity:
Common stock, no par value (50,000,000 shares authorized; 21,614,200 and 21,599,047 shares issued)	$	21,696		$	21,684
Additional paid-in capital	369,319			368,902
Retained earnings	691,199			685,011
Accumulated other comprehensive income, net of tax	21,737			16,624
Treasury stock, at cost (10,122,977 and 10,095,416 shares)	(437,463		)	(435,463		)
Total shareholders’ equity	$	666,488		$	656,758
Total liabilities and shareholders’ equity	$	2,369,544		$	2,317,265

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

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 (Loss), Net of Tax			Treasury Stock			Total
Balance at December 31, 2012	$	21,529	$	361,845	$	666,199		$	29,851		$	(423,181	)	$	656,242
Net earnings	—		—		8,662			—			—			8,662
Net change in postretirement benefit liability	—		—		—			32			—			32
Change in unrealized gain on investments	—		—		—			(939		)	—			(939		)
Change in non-credit component of impairment losses on fixed maturities	—		—		—			200			—			200
Comprehensive income														7,956
Dividends paid to common shareholders	—		—		(3,474		)	—			—			(3,474		)
Shares issued and share-based compensation expense, including tax benefit	32		1,136		—			—			—			1,168
Acquisition of treasury stock	—		—		—			—			(3,871		)	(3,871		)
Balance at March 31, 2013	$	21,562	$	362,980	$	671,387		$	29,145		$	(427,053	)	$	658,021
Net earnings	—		—		23,971			—			—			23,971
Net change in postretirement benefit liability	—		—		—			556			—			556
Change in unrealized gain on investments	—		—		—			(11,786		)	—			(11,786		)
Change in non-credit component of impairment losses on fixed maturities	—		—		—			(1,291		)	—			(1,291		)
Comprehensive income														11,450
Dividends paid to common shareholders	—		—		(10,346		)	—			—			(10,346		)
Shares issued and share-based compensation expense, including tax benefit	122		5,922		—			—			—			6,044
Acquisition of treasury stock	—		—		—			—			(8,410		)	(8,410		)
Balance at December 31, 2013	$	21,684	$	368,902	$	685,011		$	16,624		$	(435,463	)	$	656,758
Net earnings	—		—		10,327			—			—			10,327
Net change in postretirement benefit liability	—		—		—			427			—			427
Change in unrealized gain on investments	—		—		—			5,055			—			5,055
Change in non-credit component of impairment losses on fixed maturities	—		—		—			(370		)	—			(370		)
Comprehensive income														15,439
Dividends paid to common shareholders	—		—		(4,139		)	—			—			(4,139		)
Shares issued and share-based compensation expense, including tax benefit	12		417		—			—			—			429
Acquisition of treasury stock	—		—		—			—			(2,000		)	(2,000		)
Balance at March 31, 2014	$	21,696	$	369,319	$	691,199		$	21,737		$	(437,463	)	$	666,488

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

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

Table of Contents

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements



	Three months ended March 31,
	2014			2013
Operating Activities:
Net earnings	$	10,327		$	8,662
Adjustments:
Depreciation	2,540			2,022
Amortization	5,767			4,623
Net realized gains on investments	(645		)	(3,824		)
(Gain) loss on disposal of property and equipment	(27		)	1
Share-based compensation expense	(168		)	641
Excess tax benefits from share-based payment arrangements	(56		)	(50		)
Activity related to rabbi trust	18			37
Decrease (increase) in accrued investment income	386			100
Decrease (increase) in agents’ balances and premium receivable	(41,657		)	(38,967		)
Decrease (increase) in reinsurance receivables	(1,146		)	(1,329		)
Decrease (increase) in deferred policy acquisition costs	(6,449		)	(7,841		)
Decrease (increase) in other assets	2,555			1,847
Increase (decrease) in unpaid losses and loss adjustment expenses	16,313			23,906
Increase (decrease) in unearned premium	47,008			54,514
Increase (decrease) in payable to reinsurers	(2		)	(137		)
Increase (decrease) in other liabilities	5,555			(2,708		)
Net cash provided by operating activities	40,318			41,497
Investing Activities:
Purchases of fixed maturities	(183,528		)	(306,431		)
Purchases of equity securities	(2,600		)	0
Purchases of short-term investments	(200		)	0
Purchases of property and equipment	(5,249		)	(1,768		)
Maturities and redemptions of fixed maturities	41,201			46,154
Maturities and redemptions of short-term investments	1,400			0
Proceeds from sale of fixed maturities	64,959			192,730
Proceeds from sale of equity securities	0			3,519
Proceeds from sale of property and equipment	30			0
Net cash used in investing activities	(83,986		)	(65,796		)
Financing Activities:
Proceeds from stock options exercised and employee stock purchases	541			477
Excess tax benefits from share-based payment arrangements	56			50
Principal payments under capital lease obligation	(134		)	(305		)
Acquisition of treasury stock	(1,975		)	(3,990		)
Dividends paid to shareholders	(4,139		)	(3,474		)
Net cash used in financing activities	(5,650		)	(7,242		)
Net decrease in cash and cash equivalents	(49,319		)	(31,541		)
Cash and cash equivalents at beginning of period	134,211			165,182
Cash and cash equivalents at end of period	$	84,892		$	133,641

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, 2014

INDEX TO NOTES



1.	Reporting and Accounting Policies	7.	Additional Information

2.	Computation of Net Earnings Per Share	8.	Insurance Reserves

3.	Fair Value	9.	Commitments and Contingencies

4.	Investments	10.	Accumulated Other Comprehensive Income

5.	Long-Term Debt	11.	Subsequent Events

6.	Income Taxes

Note 1 Reporting and Accounting Policies

Nature of Operations

We are a holding company that, through subsidiaries, provides personal automobile insurance with a concentration on nonstandard auto insurance. 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 for the year ended December 31, 2013. 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 match expenses with their related revenue streams and the elimination of all significant inter-company transactions and balances.

We revised the presentation of our Consolidated Statements of Earnings for the three months ended March 31, 2013 to correctly classify $25.3 million of installment and other fee income as a component of total revenues and to conform to our current-year presentation. Previously, installment and other fee income was presented net within our commissions and other underwriting expenses, which was not in compliance with GAAP, thereby understating both total revenues and total expenses by an equivalent amount. This revision is not considered to be material to previously issued financial statements since it has no effect on the results of operations, financial condition or cash flows in any period presented or in any previously issued financial statements.

We have evaluated events that occurred after March 31, 2014 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.

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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 March 31,
	2014		2013
Net earnings	$	10,327	$	8,662
Average basic shares outstanding	11,429		11,522
Basic net earnings per share	$	0.90	$	0.75

Average basic shares outstanding	11,429		11,522
Restricted stock not yet vested	57		42
Dilutive effect of assumed option exercises	2		36
Dilutive effect of Performance Share Plan	92		152
Average diluted shares outstanding	11,580		11,753
Diluted net earnings per share	$	0.89	$	0.74

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

Note 3 Fair Value

Fair values of instruments are based on:


(i)	quoted prices in active markets for identical assets (Level 1),


(ii)	quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all significant inputs are observable in active markets (Level 2) or


(iii)	valuations derived from valuation techniques in which one or more significant inputs are unobservable in the marketplace (Level 3).

The following tables present, for each of the fair value hierarchy levels, our assets and liabilities for which we report fair value on a recurring basis (in thousands):



	Fair Value
March 31, 2014	Level 1			Level 2			Level 3			Total
Cash and cash equivalents	$	84,892		$	0		$	0		$	84,892
Fixed maturity securities:
U.S. government	65,081			129			0			65,210
State and municipal	0			499,088			0			499,088
Mortgage-backed securities:
Residential	0			347,260			0			347,260
Commercial	0			34,487			0			34,487
Total mortgage-backed securities	$	0		$	381,747		$	0		$	381,747
Asset-backed securities	0			67,352			530			67,882
Corporates	0			391,053			5,054			396,107
Total fixed maturities	$	65,081		$	1,339,369		$	5,583		$	1,410,033
Equity securities	94,224			0			0			94,224
Short-term investments	1,400			0			0			1,400
Total cash and investments	$	245,597		$	1,339,369		$	5,583		$	1,590,549
Percentage of total cash and investments	15.4		%	84.2		%	0.4		%	100.0		%

	Fair Value
December 31, 2013	Level 1			Level 2			Level 3			Total
Cash and cash equivalents	$	134,211		$	0		$	0		$	134,211
Fixed maturity securities:
U.S. government	64,496			171			0			64,666
State and municipal	0			487,111			0			487,111
Mortgage-backed securities:
Residential	0			323,346			0			323,346
Commercial	0			35,816			0			35,816
Total mortgage-backed securities	$	0		$	359,162		$	0		$	359,162
Collateralized mortgage obligations	0			1,291			0			1,291
Asset-backed securities	0			70,573			686			71,259
Corporates	0			365,642			5,175			370,816
Total fixed maturities	$	64,496		$	1,283,949		$	5,860		$	1,354,305
Equity securities	91,127			0			0			91,127
Short-term investments	1,200			1,396			0			2,596
Total cash and investments	$	291,033		$	1,285,345		$	5,860		$	1,582,238
Percentage of total cash and investments	18.4		%	81.2		%	0.4		%	100.0		%

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

We do not report our long-term debt at fair value in the Consolidated Balance Sheets. The $282.3 million and $272.6 million fair value of our long-term debt at March 31, 2014 and December 31, 2013, 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 invested 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. 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.

The following tables present the progression in the Level 3 fair value category (in thousands):



	Three months ended March 31, 2014
	U.S. Government			Corporates			Asset-Backed Securities			Total
Balance at beginning of period	$	0		$	5,175		$	686		$	5,860
Total gains or (losses), unrealized or realized
Included in net earnings	0			9			0			9
Included in other comprehensive income	0			(56		)	0			(56		)
Settlements	0			(74		)	(156		)	(230		)
Balance at end of period	$	0		$	5,054		$	530		$	5,583

	Three months ended March 31, 2013
	U.S. Government			Corporates			Asset-Backed Securities			Total
Balance at beginning of period	$	3,712		$	9,101		$	0		$	12,813
Total gains or (losses), unrealized or realized
Included in net earnings	(23		)	122			0			99
Included in other comprehensive income	(89		)	(113		)	0			(202		)
Settlements	(485		)	(211		)	0			(697		)
Balance at end of period	$	3,115		$	8,899		$	0		$	12,014

Of the $5.6 million fair value of securities in Level 3 at March 31, 2014, which consists of nine securities, we priced six 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 nationally recognized statistical rating organization, was priced by a nationally recognized pricing service. We manually calculated the remaining one security, which had a fair value of $0.1 million.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

Quantitative information about the significant unobservable inputs used in the fair value measurement of the manually priced security at March 31, 2014 is as follows (in millions):



	Fair Value		Valuation Technique	Unobservable Input	Value Used
Corporate bond	$	0.1	Recovery rate¹	Probability of default	100%

¹ Recovery rate for senior unsecured bonds as indicated in Moody's Investor's Service Annual Default Study: Corporate Default and Recovery Rates, 1920-2013.

The significant unobservable inputs used in the fair value measurement of our manually-priced corporate bond are a probability of default assumption and an assigned credit rating. Significant changes in either of these inputs in isolation could result in a significant change in fair value measurement for this corporate bond. Generally, a reduction in probability of default would increase security valuation. A change in the credit rating assumption would change the yield spread associated with that bond, and thus the yield used in discounting the cash flows to arrive at the security’s valuation.

There were no transfers between Levels 1, 2 or 3 during either the three months ended March 31, 2014 or the three months ended March 31, 2013.

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):



	March 31, 2014				December 31, 2013
	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:
Cash and cash equivalents	$	84,892	$	84,892	$	134,211	$	134,211
Investments
Fixed maturities	1,410,033		1,410,033		1,354,305		1,354,305
Equity securities	94,224		94,224		91,127		91,127
Short-term	1,400		1,400		2,596		2,596
Total cash and investments	$	1,590,549	$	1,590,549	$	1,582,238	$	1,582,238
Liabilities:
Long-term debt	$	275,000	$	282,266	$	275,000	$	272,632

See Note 4 to the Consolidated Financial Statements for additional information on investments and Note 5 to the Consolidated Financial Statements for additional information on long-term debt.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

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 months ended March 31, 2014 and the three months ended March 31, 2013 were $65.0 million and $196.2 million, respectively. The proceeds for the three months ended March 31, 2014 were net of $0.2 million of receivable for securities sold during the first quarter of 2014 that had not settled at March 31, 2014. The proceeds for the three months ended March 31, 2013 were net of $2.8 million of receivable for securities sold during the first quarter of 2013 that had not settled at March 31, 2013.

Gross gains of $0.8 million and gross losses of $0.1 million were realized on sales of available for sale securities during the three months ended March 31, 2014 compared with gross gains of $4.3 million and gross losses of $0.4 million realized on sales during the three months ended March 31, 2013. Gains or losses on securities are determined on a specific identification basis.

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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):



	March 31, 2014
	Amortized Cost or Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		OTTI Recognized in Accumulated OCI⁽¹⁾
Fixed maturities:
U.S. government	$	64,771	$	820	$	(381	)	$	65,210	$	0
State and municipal	488,609		11,220		(741		)	499,088		(87		)
Mortgage-backed securities:
Residential	350,772		2,693		(6,205		)	347,260		(3,232		)
Commercial	34,421		297		(230		)	34,487		0
Total mortgage-backed securities	$	385,193	$	2,990	$	(6,435	)	$	381,747	$	(3,232	)
Asset-backed securities	67,737		221		(76		)	67,882		(8		)
Corporates	387,745		9,713		(1,352		)	396,107		(531		)
Total fixed maturities	$	1,394,055	$	24,963	$	(8,986	)	$	1,410,033	$	(3,858	)
Equity securities	77,356		16,868		0			94,224		0
Short-term investments	1,400		0		0			1,400		0
Total	$	1,472,812	$	41,831	$	(8,986	)	$	1,505,657	$	(3,858	)

	December 31, 2013
	Amortized Cost or Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		OTTI Recognized in Accumulated OCI⁽¹⁾
Fixed maturities:
U.S. government	$	64,194	$	900	$	(427	)	$	64,666	$	0
State and municipal	478,092		10,789		(1,771		)	487,111		(73		)
Mortgage-backed securities:
Residential	330,169		1,985		(8,809		)	323,346		(2,435		)
Commercial	35,781		339		(304		)	35,816		0
Total mortgage-backed securities	$	365,950	$	2,324	$	(9,113	)	$	359,162	$	(2,435	)
Collateralized mortgage obligations	1,228		63		0			1,291		(161		)
Asset-backed securities	71,183		178		(103		)	71,259		(8		)
Corporates	364,430		9,086		(2,700		)	370,816		(612		)
Total fixed maturities	$	1,345,077	$	23,340	$	(14,112	)	$	1,354,305	$	(3,290	)
Equity securities	74,718		16,409		0			91,127		0
Short-term investments	2,595		1		0			2,596		0
Total	$	1,422,390	$	39,750	$	(14,112	)	$	1,448,027	$	(3,290	)

(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

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
	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
March 31, 2014
Fixed maturities:
U.S. government	12	$	27,125	$	(381	)	1.4	%	0	$	0	$	0		0.0	%
State and municipal	34	71,836		(484		)	0.7	%	5	10,469		(257		)	2.4	%
Mortgage-backed securities:
Residential	187	173,264		(4,711		)	2.6	%	46	46,299		(1,493		)	3.1	%
Commercial	6	9,192		(152		)	1.6	%	5	9,773		(78		)	0.8	%
Total mortgage-backed securities	193	$	182,456	$	(4,864	)	2.6	%	51	$	56,071	$	(1,571	)	2.7	%
Asset-backed securities	18	13,567		(76		)	0.6	%	0	0		0			0.0	%
Corporates	69	96,334		(1,263		)	1.3	%	2	2,483		(89		)	3.5	%
Total fixed maturities	326	$	391,318	$	(7,068	)	1.8	%	58	$	69,024	$	(1,917	)	2.7	%
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	326	$	391,318	$	(7,068	)	1.8	%	58	$	69,024	$	(1,917	)	2.7	%




	Less than 12 Months								12 Months or More
	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
December 31, 2013
Fixed maturities:
U.S. government	11	$	26,396	$	(427	)	1.6	%	0	$	0	$	0		0.0	%
State and municipal	51	121,431		(1,425		)	1.2	%	4	8,062		(346		)	4.1	%
Mortgage-backed securities:
Residential	229	207,821		(7,064		)	3.3	%	34	39,659		(1,744		)	4.2	%
Commercial	11	22,311		(290		)	1.3	%	1	756		(14		)	1.8	%
Total mortgage-backed securities	240	$	230,133	$	(7,354	)	3.1	%	35	$	40,415	$	(1,758	)	4.2	%
Asset-backed securities	18	14,738		(103		)	0.7	%	0	0		0			0.0	%
Corporates	90	115,735		(2,621		)	2.2	%	1	1,212		(79		)	6.1	%
Total fixed maturities	410	$	508,432	$	(11,929	)	2.3	%	40	$	49,688	$	(2,183	)	4.2	%
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	410	$	508,432	$	(11,929	)	2.3	%	40	$	49,688	$	(2,183	)	4.2	%

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

The determination of whether unrealized losses are “other-than-temporary” requires judgment based on subjective as well as objective factors. Factors we considered and resources we used in our determination include:


•	the intent to sell the security;


•	whether it is more likely than not that there will be a requirement to sell the security before our anticipated recovery;


•	whether the unrealized loss is credit-driven or a result of changes in market interest rates;


•	the length of time the security’s fair value has been below our cost;


•	the extent to which fair value is less than cost basis;


•	historical operating, balance sheet and cash flow data contained in issuer SEC filings;


•	issuer news releases;


•	near-term prospects for improvement in the issuer and/or its industry;


•	industry research and communications with industry specialists and


•	third-party research and credit rating reports.

We regularly evaluate for potential impairment each security position that has any of the following: a fair value of less than 95% of its book value, an unrealized loss that equals or exceeds $100,000 or one or more impairment charges recorded in the past. In addition, we review positions held related to an issuer of a previously impaired security.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

The following table summarizes those securities, excluding the rabbi trust, with unrealized gains or losses:



	March 31, 2014		December 31, 2013
Number of positions held with unrealized:
Gains	710		590
Losses	384		450
Number of positions held that individually exceed unrealized:
Gains of $500,000	2		1
Losses of $500,000	0		0
Percentage of positions held with unrealized:
Gains that were investment grade	85	%	81	%
Losses that were investment grade	94	%	93	%
Percentage of fair value held with unrealized:
Gains that were investment grade	89	%	88	%
Losses that were investment grade	94	%	95	%

The following table sets forth the amount of unrealized loss, excluding the rabbi trust, by age and severity at March 31, 2014 (in thousands):



Age of Unrealized Losses:	Fair Value of Securities with Unrealized Losses		Total Gross Unrealized Losses			Less Than 5%*			5% - 10%*			Greater Than 10%*
Three months or less	$	141,568	$	(468	)	$	(468	)	$	0		$	0
Four months through six months	34,866		(423		)	(423		)	0			0
Seven months through nine months	1,307		(23		)	(23		)	0			0
Ten months through twelve months	222,096		(6,324		)	(3,863		)	(2,462		)	0
Greater than twelve months	60,505		(1,747		)	(1,229		)	(518		)	0
Total	$	460,341	$	(8,986	)	$	(6,006	)	$	(2,980	)	$	0

* As a percentage of amortized cost or cost.

The change in unrealized gains (losses) on marketable securities included the following (in thousands):



	Pre-tax
	Fixed Maturities			Equity Securities			Short-Term Investments			Tax Effects			Net
Three months ended March 31, 2014
Unrealized holding gains (losses) on securities arising during the period	$	7,389		$	458		$	5		$	(2,748	)	$	5,104
Realized (gains) losses on securities sold	(666		)	0			(5		)	235			(437		)
Impairment loss recognized in earnings	27			0			0			(9		)	17
Change in unrealized gains (losses) on marketable securities, net	$	6,750		$	458		$	(1	)	$	(2,523	)	$	4,685
Three months ended March 31, 2013
Unrealized holding gains (losses) on securities arising during the period	$	(1,485	)	$	4,173		$	0		$	(941	)	$	1,747
Realized (gains) losses on securities sold	(3,522		)	(373		)	0			1,363			(2,532		)
Impairment loss recognized in earnings	72			0			0			(25		)	47
Change in unrealized gains (losses) on marketable securities, net	$	(4,936	)	$	3,800		$	0		$	398		$	(738	)

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

For fixed maturity securities that are other-than-temporarily impaired, we assess our intent to sell and the likelihood that we will be required to sell the security before recovery of our amortized cost. If a fixed maturity security is considered other-than-temporarily impaired but we do not intend to and are not more than likely to be required to sell the security before our recovery of amortized cost, we separate the amount of the impairment into a credit loss component and the amount due to all other factors ("non-credit component"). The excess of the amortized cost over the present value of the expected cash flows determines the credit loss component of an impairment charge on a fixed maturity security. The present value is determined using the best estimate of cash flows discounted at (1) the effective interest rate implicit at the date of acquisition for non-structured securities or (2) the book yield for structured securities. The techniques and assumptions for determining the best estimate of cash flows vary depending on the type of security. We recognize the credit loss component of an impairment charge in net earnings and the non-credit component in accumulated other comprehensive income. If we intend to sell or will, more likely than not, be required to sell a security, we treat the entire amount of the impairment as a credit loss.

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,
	2014			2013
Beginning balance	$	956		$	487
Additions for:
Previously impaired securities	19			0
Newly impaired securities	8			0
Reductions for:
Securities sold and paid down	(40		)	(40		)
Ending balance	$	943		$	447

The table below sets forth the scheduled maturities of fixed maturity securities at March 31, 2014, 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	$	62,289	$	3,312	$	2,325	$	67,925	$	67,275
After one year through five years	486,673		122,265		1,670		610,608		597,570
After five years through ten years	184,061		80,145		60		264,265		259,349
After ten years	15,080		2,526		0		17,606		16,931
Mortgage-backed and asset-backed securities	197,535		252,094		0		449,629		452,930
Total	$	945,637	$	460,341	$	4,055	$	1,410,033	$	1,394,055

Note 5 Long-Term Debt

In September 2012, we issued $275 million principal of senior notes due September 2022 (the “5.0% Senior Notes”). The 5.0% Senior Notes accrue interest at 5.0%, payable semiannually. At the time we issued the 5.0% Senior Notes, we capitalized $2.2 million of debt issuance costs, which we are amortizing over the term of the 5.0% Senior Notes. We calculated the March 31, 2014 fair value of $282.3 million using a 190 basis point spread to the ten-year U.S. Treasury Note of 2.72%.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

Agreement. At March 31, 2014, there were no borrowings outstanding under the Credit Agreement.

Note 6 Income Taxes

The following is a reconciliation of income taxes at the statutory rate of 35.0% to the effective provision for income taxes as shown in the Consolidated Statements of Earnings (in thousands):



	Three months ended March 31,
	2014			2013
Earnings before income taxes	$	14,647		$	12,105
Income taxes at statutory rate	5,126			4,237
Effect of:
Dividends-received deduction	(107		)	(49		)
Tax-exempt interest	(702		)	(750		)
Other	3			5
Provision for income taxes as shown on the Consolidated Statements of Earnings	$	4,320		$	3,443
GAAP effective tax rate	29.5		%	28.4		%

Note 7 Additional Information

Supplemental Cash Flow Information

We made the following payments that we do not separately disclose in the Consolidated Statements of Cash Flows (in thousands):



	Three months ended March 31,
	2014		2013
Income tax payments	$	0	$	0
Interest payments on debt	6,875		6,951

Negative Cash Book Balances

Negative cash book balances, included in the line item “Other liabilities” in the Consolidated Balance Sheets, were $58.7 million and $50.5 million, respectively, at March 31, 2014 and December 31, 2013.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

Note 8 Insurance Reserves

Insurance reserves include liabilities for unpaid losses, both known and estimated for incurred but not reported (“IBNR”), and unpaid loss adjustment expenses (“LAE”). The following table provides an analysis of changes in the liability for unpaid losses and LAE on a GAAP basis (in thousands):



	Three months ended March 31,
	2014			2013
Balance at Beginning of Period
Unpaid losses on known claims	$	221,447		$	205,589
IBNR losses	262,660			218,552
LAE	162,469			148,753
Total unpaid losses and LAE	646,577			572,894
Reinsurance recoverables	(14,431		)	(13,678		)
Unpaid losses and LAE, net of reinsurance recoverables	632,146			559,215
Current Activity
Loss and LAE incurred:
Current accident year	256,776			250,499
Prior accident years	(3,074		)	(128		)
Total loss and LAE incurred	253,702			250,371
Loss and LAE payments:
Current accident year	(80,818		)	(77,856		)
Prior accident years	(156,683		)	(148,723		)
Total loss and LAE payments	(237,502		)	(226,578		)
Balance at End of Period
Unpaid losses and LAE, net of reinsurance recoverables	648,346			583,008
Add back reinsurance recoverables	14,544			13,793
Total unpaid losses and LAE	$	662,890		$	596,800
Unpaid losses on known claims	$	226,659		$	218,835
IBNR losses	272,159			223,898
LAE	164,072			154,068
Total unpaid losses and LAE	$	662,890		$	596,800

The $3.1 million of favorable reserve development during the three months ended March 31, 2014 was primarily due to a decrease in frequency in accident year 2013 in Florida personal injury protection and material damage coverages in the states of California, Georgia and Pennsylvania.

Note 9 Commitments and Contingencies

Commitments

There have been no material changes from the commitments discussed in the Form 10-K for the year ended December 31, 2013. For a description of our previously reported commitments, refer to Note 14 Commitments and Contingencies in the Form 10-K for the year ended December 31, 2013.

Contingencies

From time to time, we and our subsidiaries are named as defendants in various lawsuits incidental to our insurance operations. We consider legal actions relating to claims made in the ordinary course of seeking indemnification for a loss covered by the insurance policy in establishing loss and LAE reserves. We also face in the ordinary course of business lawsuits that seek damages beyond policy limits, commonly known as extra-contractual or “bad faith” claims, as well as class action and

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

individual lawsuits that involve issues not unlike those facing other insurance companies and employers. We continually evaluate potential liabilities and reserves for litigation of these types using the criteria established by the Contingencies topic of the FASC. Under this guidance, we may only record reserves for a loss if the likelihood of occurrence is probable and we can reasonably estimate the amount. If a material loss, while not probable, is judged to be reasonably possible we will disclose the nature of the contingency and a possible range of loss if estimable.

In Estate of Jorge Luis Arroyo, Jr., et al. v. Gustavo M. Rodriguez, et al (Circuit Court of Miami-Dade County, Florida), a third party claimant is attempting to recover from Infinity a $30 million consent judgment obtained against an Infinity policyholder for personal injuries suffered by plaintiff. Infinity believes any claims of bad faith are unfounded and has denied any and all liability to plaintiff. While the outcome of this case, as with litigation generally, cannot be predicted with certainty, at this stage of the litigation we do not believe that the likelihood of a material loss is probable.

For a description of previously reported contingencies, refer to Note 14 Commitments and Contingencies in the Form 10-K for the year ended December 31, 2013.

Note 10 Accumulated Other Comprehensive Income

The components of other comprehensive income before and after tax are as follows (in thousands):



	Three months ended March 31,
	2014									2013
	Before Tax			Income Tax			Net			Before Tax			Income Tax			Net
Accumulated change in postretirement benefit liability, beginning of period	$	(62	)	$	22		$	(40	)	$	(967	)	$	339		$	(629	)
Effect on other comprehensive income	657			(230		)	427			50			(17		)	32
Accumulated change in postretirement benefit liability, end of period	$	595		$	(208	)	$	387		$	(918	)	$	321		$	(596	)

Accumulated unrealized gains on investments, net, beginning of period	$	25,638		$	(8,973	)	$	16,665		$	46,892		$	(16,412	)	$	30,480
Other comprehensive income before reclassification	7,852			(2,748		)	5,104			2,688			(941		)	1,747
Reclassification adjustment for other-than-temporary impairments included in net income	27			(9		)	17			72			(25		)	47
Reclassification adjustment for realized gains included in net income	(672		)	235			(437		)	(3,896		)	1,363			(2,532		)
Effect on other comprehensive income	7,208			(2,523		)	4,685			(1,136		)	398			(738		)
Accumulated unrealized gains on investments, net, end of period	$	32,846		$	(11,496	)	$	21,350		$	45,756		$	(16,015	)	$	29,741

Accumulated other comprehensive income, beginning of period	$	25,576		$	(8,952	)	$	16,624		$	45,924		$	(16,073	)	$	29,851
Change in postretirement benefit liability	657			(230		)	427			50			(17		)	32
Change in unrealized gains on investments, net	7,208			(2,523		)	4,685			(1,136		)	398			(738		)
Effect on other comprehensive income	7,865			(2,753		)	5,112			(1,086		)	380			(706		)
Accumulated other comprehensive income, end of period	$	33,441		$	(11,704	)	$	21,737		$	44,838		$	(15,693	)	$	29,145

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

Note 11 Subsequent Events

In April 2014, we purchased a 62,808 square foot warehouse and training facility building in Birmingham, Alabama for $3.5 million to replace certain leased facilities.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

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

ITEM 2

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains certain “forward-looking statements” which anticipate results based on our estimates, assumptions and plans that are subject to uncertainty. We make these statements subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements in this report not dealing with historical results or current facts are forward-looking and we base them on estimates, assumptions and projections. Statements which include the words “assumes,” “believes,” “seeks,” “expects,” “may,” “should,” “intends,” “likely,” “targets,” “plans,” “anticipates,” “estimates” or the negative version of those words and similar statements of a future or forward-looking nature identify forward-looking statements. Examples of such forward-looking statements include statements relating to expectations concerning market conditions, premium growth, earnings, investment performance, expected losses, rate changes and loss experience.

The primary events or circumstances that could cause actual results to differ materially from what we expect include determinations with respect to reserve adequacy, realized gains or losses on the investment portfolio (including other-than temporary impairments for credit losses), loss cost trends, undesired business mix or risk profile for new business and competitive conditions in our key Focus States. We undertake no obligation to publicly update or revise any of the forward-looking statements. For a more detailed discussion of some of the foregoing risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements see “Risk Factors” contained in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013.

OVERVIEW

In the first quarter of 2014, our gross written premium grew 0.5%. Our strategy for 2014 is to grow our profitable business including California, Florida and Texas personal auto and countrywide Commercial Vehicle while addressing higher combined ratios in Arizona, Georgia, Nevada and Pennsylvania. We expect this strategy to reduce gross written premium in our remaining Focus States as well as runoff business in the remaining states. In the first quarter of 2014, gross written premium in California, Florida, Texas and Commercial Vehicle grew 6.3% compared with the first quarter of 2013 while the remaining Focus States declined 28.9%. See Results of Operations – Underwriting – Premium for a more detailed discussion of our gross written premium growth.

Net earnings and diluted earnings per share for the three months ended March 31, 2014 were $10.3 million and $0.89, respectively, compared with $8.7 million and $0.74, respectively, for the three months ended March 31, 2013. The increase in diluted earnings per share for the three months ended March 31, 2014 was primarily due to an improvement in underwriting profitability.

Included in net earnings for the three months ended March 31, 2014 was $2.0 million ($3.1 million pre-tax) of favorable development on prior accident year loss and LAE reserves. The development was primarily due to a decrease in frequency in accident year 2013 in Florida personal injury protection and material damage coverages in California, Georgia and Pennsylvania. Included in net earnings for the three months ended March 31, 2013 was $0.1 million ($0.1 million pre-tax) of favorable development on prior accident year loss and LAE reserves.

The following table displays combined ratio results by accident year developed through March 31, 2014.

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

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



	Accident Year Combined Ratio Developed Through						Prior Accident Year Favorable / (Unfavorable) Development		($ in millions) Prior Accident Year Favorable / (Unfavorable) Development
Accident Year	Dec 2012		Dec 2013		Mar 2014		Q1 2014		Q1 2014
Prior									$	0.8
2006	90.4	%	90.3	%	90.3	%	0.0	%	(0.1		)
2007	92.3	%	92.2	%	92.2	%	0.0	%	(0.1		)
2008	91.6	%	91.3	%	91.3	%	0.0	%	0.0
2009	92.6	%	92.3	%	92.3	%	0.0	%	(0.1		)
2010	99.5	%	99.6	%	99.5	%	0.1	%	0.7
2011	100.0	%	100.3	%	100.2	%	0.1	%	0.6
2012	99.3	%	99.8	%	100.1	%	(0.3	)%	(3.5		)
2013			97.7	%	97.4	%	0.4	%	4.8
2014 YTD					97.8	%
									$	3.1

See Results of Operations – Underwriting – Profitability for a more detailed discussion of our underwriting results.

Pre-tax net investment income for the three months ended March 31, 2014 was $8.8 million compared with $8.3 million for the three months ended March 31, 2013. The increase in pre-tax net investment income is a result of a 4.2% increase in average invested assets (at cost). Average investments have increased as a result of positive cashflow from operations due to growth in premiums and improved margins.

Our book value per share increased 1.6% from $57.09 at December 31, 2013 to $58.00 at March 31, 2014. This increase was primarily due to an increase in unrealized gains and earnings partially offset by dividends for the three months ended March 31, 2014.

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

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

RESULTS OF OPERATIONS

Underwriting

Premium

Our insurance subsidiaries provide personal automobile insurance products with a concentration on nonstandard auto insurance. While there is no industry-recognized definition of nonstandard auto insurance, we believe that it is generally understood to mean coverage for drivers who, because of their driving record, age or vehicle type, represent higher than normal risks and pay higher rates for comparable coverage. We also write commercial vehicle insurance and insurance for classic collectible automobiles (“Classic Collector”).

We offer three primary products to individual drivers: the Low Cost product, which offers the most restrictive coverage, the Value Added product, which offers broader coverage and higher limits, and the Premier product, which we designed to offer the broadest coverage for standard and preferred risk drivers.

We are licensed to write insurance in all 50 states and the District of Columbia, but we focus our operations in targeted urban areas identified in selected Focus States that we believe offer the greatest opportunity for premium growth and profitability.

We classify the states in which we operate into two categories:


•	“Focus States” – These states include Arizona, California, Florida, Georgia, Nevada, Pennsylvania and Texas.


•	“Other States” – Includes nine states where we are currently running off our writings.

We continually evaluate our market opportunities; thus, the Focus States and Other States may change over time as new market opportunities arise, as the allocation of resources changes or as regulatory environments change.

Our net earned premium was as follows ($ in thousands):



	Three months ended March 31,
	2014			2013			Change			% Change
Net earned premium
Gross written premium
Personal Auto
Focus States	$	346,978		$	343,121		$	3,857		1.1	%
Other States	1,832			8,242			(6,410		)	(77.8	)%
Total Personal Auto	348,811			351,364			(2,553		)	(0.7	)%
Commercial Vehicle	25,464			21,258			4,206			19.8	%
Classic Collector	2,906			2,721			185			6.8	%
Total gross written premium	377,181			375,343			1,838			0.5	%
Ceded reinsurance	(2,931		)	(2,375		)	(556		)	23.4	%
Net written premium	374,249			372,968			1,281			0.3	%
Change in unearned premium	(46,570		)	(54,379		)	7,809			(14.4	)%
Net earned premium	$	327,679		$	318,589		$	9,090		2.9	%

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

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

The following table summarizes our policies in force:



	At March 31,
	2014	2013	Change		% Change
Policies in Force
Personal Auto
Focus States	839,622	882,680	(43,058	)	(4.9	)%
Other States	9,537	27,100	(17,563	)	(64.8	)%
Total Personal Auto	849,159	909,780	(60,621	)	(6.7	)%
Commercial Vehicle	40,750	40,475	275		0.7	%
Classic Collector	39,705	38,430	1,275		3.3	%
Total policies in force	929,614	988,685	(59,071	)	(6.0	)%

Gross written premium grew 0.5% during the first quarter of 2014 compared with the same period of 2013. Our growth business, which includes California, Florida and Texas personal auto and countrywide Commercial Vehicle, grew 6.3% during the first quarter of 2014 while the rest of our Focus States (Arizona, Georgia, Nevada and Pennsylvania) declined 28.9%. During the first three months of 2014, Infinity implemented rate revisions in various states with an overall rate increase of 0.8%. Excluding the effect of rate changes in California and Florida, our largest states, the overall rate increase was 0.5%. Policies in force at March 31, 2014 decreased 6.0% compared with the same period in 2013. Gross written premium grew despite the decline in policies in force due primarily to growth in Florida business, which has a higher average premium per policy than our other states.

During the first quarter of 2014, personal auto insurance gross written premium in our Focus States grew 1.1% when compared with the same period of 2013. The increase in gross written premium is primarily due to growth in Florida and Texas, which grew a combined 15.9% during the first quarter of 2014. The increase in Florida was primarily due to higher average premium and renewal business growth. Average written premiums in Texas also increased along with an increase in new business growth. The growth in Florida and Texas during the first quarter of 2014 was partially offset by declines in the remaining Focus States. An increase in California average written premium was offset by a decline in new business production leading to an overall decline in gross written premium during the first quarter of 2014 compared with the first quarter of 2013. In the remaining Focus States we continue to see a decline in new and renewal premium as we continue to work to improve the profitability in these states.

Our Commercial Vehicle gross written premium grew 19.8% during the first quarter of 2014 when compared with the same period of 2013. This growth is primarily due to higher average premium and growth in renewal business.

Gross written premium in our Classic Collector product grew 6.8% during the first quarter of 2014 when compared with the same period of 2013. This growth is primarily due to growth in renewal business.

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

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

Profitability

A key operating performance measure of insurance companies is underwriting profitability, as opposed to overall profitability or net earnings. We measure underwriting profitability by the combined ratio. When the combined ratio is under 100%, we consider underwriting results profitable; when the ratio is over 100%, we consider underwriting results unprofitable. The combined ratio does not reflect investment income, other income, interest expense, corporate general and administrative expenses, other expenses or federal income taxes.

While we report financial results in accordance with GAAP for shareholder and other users’ purposes, we report it on a statutory basis for insurance regulatory purposes. We evaluate underwriting profitability based on a combined ratio calculated using statutory accounting principles. The statutory and combined ratios represent the sum of the following ratios: (i) losses and LAE incurred as a percentage of net earned premium and (ii) underwriting expenses incurred, net of installment and other fees, as a percentage of net written premium. Certain expenses are treated differently under statutory and GAAP accounting principles. Under GAAP, commissions, premium taxes and other variable costs incurred in connection with writing new and renewal business are capitalized as deferred policy acquisition costs and amortized on a pro rata basis over the period in which the related premium is earned; on a statutory basis these items are expensed as incurred. Additionally, bad debt charge-offs on agent balances and premium receivables are included only in the GAAP combined ratios.

The following table presents the statutory and GAAP combined ratios:



	Three months ended March 31,
	2014						2013						% Point Change
	Loss & LAE Ratio		Underwriting Ratio		Combined Ratio		Loss & LAE Ratio		Underwriting Ratio		Combined Ratio		Loss & LAE Ratio		Underwriting Ratio		Combined Ratio
Personal Auto:
Focus States	78.6	%	17.5	%	96.0	%	79.6	%	17.3	%	96.9	%	(1.1	)%	0.2	%	(0.8	)%
Other States	65.6	%	31.9	%	97.5	%	82.2	%	22.1	%	104.3	%	(16.6	)%	9.8	%	(6.7	)%
Total Personal Auto	78.4	%	17.5	%	95.9	%	79.7	%	17.4	%	97.1	%	(1.3	)%	0.2	%	(1.1	)%
Commercial Vehicle	73.7	%	17.6	%	91.3	%	70.6	%	16.0	%	86.6	%	3.1	%	1.6	%	4.7	%
Classic Collector	45.8	%	34.1	%	79.9	%	41.6	%	37.5	%	79.2	%	4.1	%	(3.4	)%	0.7	%
Total statutory ratios	77.5	%	17.8	%	95.3	%	78.7	%	17.5	%	96.2	%	(1.2	)%	0.2	%	(1.0	)%
Total statutory ratios excluding development	78.5	%	17.8	%	96.2	%	78.8	%	17.5	%	96.3	%	(0.3	)%	0.2	%	(0.1	)%
GAAP ratios	77.4	%	19.4	%	96.8	%	78.6	%	19.6	%	98.2	%	(1.2	)%	(0.2	)%	(1.3	)%
GAAP ratios excluding development	78.4	%	19.4	%	97.8	%	78.6	%	19.6	%	98.2	%	(0.3	)%	(0.2	)%	(0.4	)%

In evaluating the profit performance of our business, we review underwriting profitability using statutory combined ratios. Accordingly, the discussion of underwriting results that follows will focus on these ratios and the components thereof, unless otherwise indicated.

The statutory combined ratio for the three months ended March 31, 2014 decreased by 1.0 point from the same period of 2013. The first quarter of 2014 and 2013 included $3.1 million and $0.1 million of favorable development on prior year loss and LAE reserves, respectively. Excluding the effect of development, the statutory combined ratio decreased 0.1 point for the three months ended March 31, 2014 compared with the same period of 2013.

The GAAP combined ratio for the three months ended March 31, 2014 decreased by 1.3 points from the same period of 2013. Excluding the effect of development, the GAAP combined ratio decreased by 0.4 point for the three months ended March 31, 2014 compared with the same period of 2013.

There were no catastrophe losses for the first three months ended March 31, 2014 compared with $0.5 million for the same period of 2013.

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

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

The combined ratio in the Focus States decreased by 0.8 point for the three months ended March 31, 2014. The decline was primarily due to a reduction in new business and rate increases taken in Arizona, Georgia and Nevada to improve profitability, which has resulted in the improvement in the loss and LAE ratio.

The combined ratio in Commercial Vehicle increased by 4.7 points during the three months ended March 31, 2014 compared with the same period of 2013 primarily due to favorable development on prior accident year loss and LAE recognized in the three months ended March 31, 2013.

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

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

Net Investment Income

Net investment income is comprised of gross investment income and investment management fees and expenses, as shown in the following table ($ in thousands):



	Three months ended March 31,
	2014			2013
Investment income:
Interest income on fixed maturities, cash and cash equivalents	$	8,833		$	8,594
Dividends on equity securities	514			233
Gross investment income	$	9,347		$	8,827
Investment expenses	(549		)	(490		)
Net investment income	$	8,798		$	8,337
Average investment balance, at cost	$	1,556,841		$	1,494,434
Annualized returns excluding realized gains and losses	2.3		%	2.2		%
Annualized returns including realized gains and losses	2.4		%	3.3		%

Changes in investment income reflect fluctuations in market rates and changes in average invested assets. Net investment income for the three months ended March 31, 2014 increased compared to the same period of 2013 primarily due to growth in average investment balances.

The book yield on our portfolio continues to exceed our new money rates. Therefore, we expect that investment returns will continue to decline gradually as proceeds from maturing or prepaid investments are expected to be reinvested at yields lower than the average book yield for the total portfolio.

The following table provides information about our fixed maturity investments at March 31, 2014, which are sensitive to interest rate risk. The table shows expected principal cash flows by expected maturity date for each of the five subsequent years and collectively for all years thereafter. Callable bonds and notes are included based on call date or maturity date depending upon which date produces the most conservative yield. MBS and sinking fund issues are included based on maturity year adjusted for expected payment patterns.



(in thousands)	Expected Principal Cash Flows
	MBS, CMO and ABS only	Excluding MBS, CMO and ABS	Total	Maturing Book Yield
For the period ending December 31,
2014	54,074	56,256	110,330	2.2	%
2015	66,787	170,587	237,375	2.5	%
2016	70,015	174,961	244,976	2.4	%
2017	55,070	198,672	253,742	2.3	%
2018	30,077	89,835	119,912	2.7	%
Thereafter	159,156	195,185	354,342	3.1	%
Total	435,179	885,497	1,320,677	2.6	%

The cash flows presented take into consideration historical relationships of market yields and prepayment rates. However, the actual prepayment rate may differ from historical trends, resulting in actual principal cash flows that differ from those presented above.

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

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

Realized Gains (Losses) on Investments

We recorded impairments for unrealized losses deemed other-than-temporary and realized gains and losses on sales and disposals, as follows (before tax, in thousands):



	Three months ended March 31, 2014							Three months ended March 31, 2013
	Impairments Recognized in Earnings			Net Realized Gains (Losses) on Sales		Total Realized Gains (Losses)		Impairments Recognized in Earnings			Net Realized Gains (Losses) on Sales		Total Realized Gains (Losses)
Fixed maturities	$	(27	)	$	666	$	639	$	(72	)	$	3,522	$	3,450
Equities	0			0		0		0			373		373
Short-term investments	0			5		5		0			0		0
Total	$	(27	)	$	672	$	645	$	(72	)	$	3,896	$	3,824

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

Interest Expense

At March 31, 2014, we had $275.0 million of Senior Notes outstanding that accrue interest at 5.0% (the "5.0% Senior Notes"). We recognized $3.5 million and $3.5 million of interest expense on the Senior Notes in the Consolidated Statements of Earnings for the three months ended March 31, 2014 and 2013, respectively.

Refer to Note 5 to the Consolidated Financial Statements for additional information on the Senior Notes.

Income Taxes

Our GAAP effective tax rate for the three months ended March 31, 2014 was 29.5% compared with 28.4% for the same period of 2013. See Note 6 to the Consolidated Financial Statements for additional information on income taxes.

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

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

LIQUIDITY AND CAPITAL RESOURCES

Sources of Funds

We are a holding company and our insurance subsidiaries conduct our operations. Accordingly, we will have continuing cash needs for administrative expenses, the payment of interest on borrowings, shareholder dividends, share repurchases and taxes.

Funds to meet expenditures at the holding company level come primarily from dividends and tax payments from the insurance subsidiaries, as well as cash and investments held by the holding company. As of March 31, 2014, the holding company had $107.6 million of cash and investments. In 2014, our insurance subsidiaries may pay us up to $66.8 million in ordinary dividends without prior regulatory approval.

Our insurance subsidiaries generate liquidity to satisfy their obligations primarily by collecting and investing premium in advance of paying claims and generating investment income on their $1.4 billion investment portfolio. Our insurance subsidiaries generated positive cash flows from operations of $54.5 million during the three months ended March 31, 2014 compared to positive operating cash flows of $52.3 million during the three months ended March 31, 2013.

At March 31, 2014, we had $275 million principal outstanding of Senior Notes. The Senior Notes accrue interest at 5.0%, payable semiannually each March and September. Refer to Note 5 to the Consolidated Financial Statements for more information on our long-term debt.

In August 2011, we renewed our agreement for a $50 million three-year revolving credit facility (the “Credit Agreement”) that requires us to meet certain financial and other covenants. We are currently in compliance with all covenants under the Credit Agreement. At March 31, 2014 there were no borrowings outstanding under the credit agreement. We intend to renew our line of credit in August 2014.

In June 2013, we filed a "shelf" registration statement with the Securities and Exchange Commission registering $300.0 million of our securities, which will allow us to sell any combination of senior or subordinated debt securities, common stock, preferred stock, warrants, depositary shares and units in one or more offerings should we choose to do so in the future.

Uses of Funds

In February 2014, we increased our quarterly dividend to $0.36 per share from $0.30 per share. At this current amount, our 2014 annualized dividend payments would be approximately $16.5 million.

On August 3, 2010 our Board of Directors adopted a share and debt repurchase program set to expire on December 31, 2011. On August 2, 2011 our Board of Directors increased the authority under this program by $50.0 million and extended the date to execute the program to December 31, 2012. On November 6, 2012, our Board of Directors again increased the authority under

this share and debt repurchase plan by $25.0 million and extended the date to execute the program to December 31, 2014. During the first quarter of 2014, we repurchased 24,200 shares at an average cost, excluding commissions, of $72.20. As of March 31, 2014, we had $42.1 million of authority remaining under this program.

We believe that cash balances, cash flows generated from operations or borrowings, and maturities and sales of investments are adequate to meet our future liquidity needs and those of our insurance subsidiaries.

Reinsurance

We use excess of loss, catastrophe and extra-contractual loss reinsurance to mitigate the financial impact of large or

catastrophic losses. During 2014, our catastrophe reinsurance protection covers 100% of $55 million in excess of $5 million. Our excess of loss reinsurance provides protection for commercial auto losses up to $700,000 for claims in excess of $300,000 per occurrence. Our extra-contractual loss reinsurance provides protection for losses up to $10 million in excess of $5 million for any single extra-contractual loss. We also use reinsurance to mitigate losses on our Classic Collector business.

Premium ceded under all reinsurance agreements for the three months ended March 31, 2014 was $2.9 million compared with $2.4 million for the same period of 2013.

Investments

Our consolidated investment portfolio at March 31, 2014 contained approximately $1.4 billion in fixed maturity securities, $94.2 million in equity securities and $1.4 million in short-term investments, all carried at fair value with unrealized gains and losses reported in accumulated other comprehensive income, a separate component of shareholders’ equity, on an after-tax basis. At March 31, 2014, we had pre-tax net unrealized gains of $16.0 million on fixed maturities and pre-tax net unrealized

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

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

gains of $16.9 million on equity securities. Combined, the pre-tax net unrealized gain increased by $7.2 million for the three months ended March 31, 2014. This increase occurred in the fixed portfolio due to lower market interest rates. The average option adjusted duration of our fixed maturity portfolio was 3.6 years at March 31, 2014, the same as that at December 31, 2013.

Since we carry all of these securities at fair value in our balance sheet, there is virtually no effect on liquidity or financial condition upon the sale and ultimate realization of unrealized gains and losses.

Approximately 90.5% of our fixed maturity investments at March 31, 2014 were rated “investment grade,” and as of the same date, the average credit rating of our fixed maturity portfolio was AA-. Investment grade securities generally bear lower yields and have lower degrees of risk than those that are unrated or non-investment grade. We believe that a high quality investment portfolio is more likely to generate a stable and predictable investment return.

Fair values of instruments are based on (i) quoted prices in active markets for identical assets (Level 1), (ii) quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all significant inputs are observable in active markets (Level 2) or (iii) valuations derived from valuation techniques in which one or more significant inputs are unobservable in the marketplace (Level 3).

Level 1 securities are U.S. Treasury securities, an exchange-traded fund and equity securities held in a rabbi trust. Level 2 securities are comprised of 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 that nationally recognized statistical rating organizations do not rate.

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

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

Summarized information for our investment portfolio at March 31, 2014 was as follows ($ in thousands):



	Amortized Cost		Fair Value		% of Total Fair Value
Fixed Maturities:
U.S. government	$	64,771	$	65,210	4.3	%
State and municipal	488,609		499,088		33.1	%
Mortgage-backed and asset-backed:
Residential mortgage-backed securities	350,772		347,260		23.1	%
Commercial mortgage-backed securities	34,421		34,487		2.3	%
Asset-backed securities ("ABS"):
Auto loans	51,784		51,901		3.4	%
Equipment leases	8,295		8,301		0.6	%
Home equity	505		509		0.0	%
Credit card receivables	6,515		6,524		0.4	%
Tax liens	528		530		0.0	%
Student loans	110		118		0.0	%
Total ABS	67,737		67,882		4.5	%
Total mortgage-backed and ABS	452,930		449,629		29.9	%
Corporates
Investment grade	257,197		262,156		17.4	%
Non-investment grade	130,548		133,951		8.9	%
Total corporates	387,745		396,107		26.3	%
Total fixed maturities	1,394,055		1,410,033		93.6	%
Equity securities	77,356		94,224		6.3	%
Short-term investments	1,400		1,400		0.1	%
Total investments	$	1,472,812	$	1,505,657	100.0	%

We categorize securities by rating based upon ratings issued by Moody's, Standard & Poor's or Fitch, where available. If all three ratings are available but not equivalent, we exclude the lowest rating and the lower of the remaining ratings is used. If ratings are only available from two agencies, the lowest is used. This methodology is consistent with that used by the major bond indices.

The following table presents the credit rating and fair value ($ in thousands) of our fixed maturity portfolio by major security type at March 31, 2014:



	Rating
	AAA			AA			A			BBB			Non- investment Grade			Total Fair Value			% of Total Exposure
U.S. government	$	65,210		$	0		$	0		$	0		$	0		$	65,210		4.6	%
State and municipal	107,249			281,102			110,737			0			0			499,088			35.4	%
Mortgage-backed and asset-backed	425,444			18,901			5,284			0			0			449,629			31.9	%
Corporates	0			17,495			117,820			126,841			133,951			396,107			28.1	%
Total fair value	$	597,902		$	317,499		$	233,841		$	126,841		$	133,951		$	1,410,033		100.0	%
% of total fair value	42.4		%	22.5		%	16.6		%	9.0		%	9.5		%	100.0		%

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

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

Our fixed income portfolio contains no securities issued by any single issuer that exceed 1% of the fair value of the fixed income portfolio.

The following table presents the credit rating and fair value of our state and municipal bond portfolio, by state, at March 31, 2014 ($ in thousands):



	Rating
State	AAA			AA			A			BBB			Non- investment Grade			Total Fair Value			% of Total Exposure
NY	$	12,163		$	38,504		$	15,851		$	0		$	0		$	66,518		13.3	%
CA	0			35,907			9,890			0			0			45,797			9.2	%
GA	11,675			2,425			14,284			0			0			28,384			5.7	%
MD	22,952			2,954			0			0			0			25,906			5.2	%
TX	10,582			9,691			5,018			0			0			25,292			5.1	%
PA	0			12,998			8,212			0			0			21,210			4.2	%
WA	878			18,371			1,723			0			0			20,972			4.2	%
NC	9,126			10,101			0			0			0			19,227			3.9	%
NJ	1,747			6,476			10,651			0			0			18,874			3.8	%
VA	4,374			13,212			0			0			0			17,586			3.5	%
All other states	33,753			130,462			45,107			0			0			209,322			41.9	%
Total fair value	$	107,249		$	281,102		$	110,737		$	0		$	0		$	499,088		100.0	%
% of total fair value	21.5		%	56.3		%	22.2		%	0.0		%	0.0		%	100.0		%

The following table presents the fair value of our state and municipal bond portfolio, by state and type of bond, at March 31, 2014 ($ in thousands):



	Type
	General Obligation
State	State			Local			Revenue			Certificate of Participation			Other			Total Fair Value			% of Total Exposure
NY	$	1,803		$	8,430		$	56,284		$	0		$	0		$	66,518		13.3	%
CA	5,512			15,261			25,024			0			0			45,797			9.2	%
GA	11,675			1,133			15,577			0			0			28,384			5.7	%
MD	11,852			11,100			2,954			0			0			25,906			5.2	%
TX	1,467			7,814			16,011			0			0			25,292			5.1	%
PA	8,117			792			12,302			0			0			21,210			4.2	%
WA	5,693			3,067			12,211			0			0			20,972			4.2	%
NC	5,894			3,232			10,101			0			0			19,227			3.9	%
NJ	4,036			0			14,838			0			0			18,874			3.8	%
VA	1,044			6,754			9,788			0			0			17,586			3.5	%
All other states	48,097			25,395			129,237			4,619			1,974			209,322			41.9	%
Total fair value	$	105,190		$	82,979		$	304,327		$	4,619		$	1,974		$	499,088		100.0	%
% of total fair value	21.1		%	16.6		%	61.0		%	0.9		%	0.4		%	100.0		%

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

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

The following table presents the fair value of the revenue category of our state and municipal bond portfolio, by state and further classification, at March 31, 2014 ($ in thousands):



	Revenue Bonds
State	Transportation			Utilities			Education			Other			Total Fair Value			% of Total Exposure
NY	$	25,507		$	3,373		$	7,151		$	20,253		$	56,284		18.5	%
CA	8,113			10,779			0			6,131			25,024			8.2	%
TX	2,185			2,977			3,926			6,923			16,011			5.3	%
GA	6,702			4,461			1,293			3,121			15,577			5.1	%
NJ	2,014			0			4,642			8,181			14,838			4.9	%
CO	0			0			7,075			5,355			12,430			4.1	%
PA	8,212			0			2,827			1,262			12,302			4.0	%
WA	0			8,541			0			3,670			12,211			4.0	%
IN	3,075			0			1,422			6,564			11,062			3.6	%
FL	4,873			0			0			5,750			10,623			3.5	%
All other states	11,780			17,828			13,625			74,732			117,966			38.8	%
Total fair value	$	72,461		$	47,959		$	41,962		$	141,944		$	304,327		100.0	%
% of total fair value	23.8		%	15.8		%	13.8		%	46.6		%	100.0		%

The following table presents the credit rating and fair value of our residential mortgage-backed securities at March 31, 2014 by deal origination year ($ in thousands):



	Rating
Deal Origination Year	AAA			AA			A			BBB			Non- investment Grade			Total Fair Value			% of Total Exposure
2002	$	164		$	0		$	0		$	0		$	0		$	164		0.0	%
2003	3,649			0			0			0			0			3,649			1.1	%
2004	2,806			0			0			0			0			2,806			0.8	%
2005	4,251			0			0			0			0			4,251			1.2	%
2006	4,689			0			0			0			0			4,689			1.4	%
2007	3,256			0			0			0			0			3,256			0.9	%
2008	11,325			0			0			0			0			11,325			3.3	%
2009	34,233			0			0			0			0			34,233			9.9	%
2010	50,084			0			0			0			0			50,084			14.4	%
2011	39,069			0			0			0			0			39,069			11.3	%
2012	95,067			0			0			0			0			95,067			27.4	%
2013	79,007			0			0			0			0			79,007			22.8	%
2014	19,659			0			0			0			0			19,659			5.7	%
Total fair value	$	347,260		$	0		$	0		$	0		$	0		$	347,260		100.0	%
% of total fair value	100.0		%	0.0		%	0.0		%	0.0		%	0.0		%	100.0		%

All of the $347.3 million of residential mortgage-backed securities were issued by government-sponsored enterprises (“GSE”).

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

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

The following table presents the credit rating and fair value of our commercial mortgage-backed securities at March 31, 2014 by deal origination year ($ in thousands):



	Rating
Deal Origination Year	AAA			AA			A			BBB			Non- investment Grade			Total Fair Value			% of Total Exposure
2004	$	44		$	0		$	0		$	0		$	0		$	44		0.1	%
2005	11,140			0			0			0			0			11,140			32.3	%
2006	13,338			0			0			0			0			13,338			38.7	%
2007	3,845			0			0			0			0			3,845			11.1	%
2008	0			754			0			0			0			754			2.2	%
2010	1,823			0			0			0			0			1,823			5.3	%
2012	1,007			0			0			0			0			1,007			2.9	%
2013	1,447			0			0			0			0			1,447			4.2	%
2014	1,091			0			0			0			0			1,091			3.2	%
Total fair value	$	33,733		$	754		$	0		$	0		$	0		$	34,487		100.0	%
% of total fair value	97.8		%	2.2		%	0.0		%	0.0		%	0.0		%	100.0		%

None of the $34.5 million of commercial mortgage-backed securities were issued by GSEs.

Table of Contents

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

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

The following table presents the credit rating and fair value of our ABS portfolio at March 31, 2014 by deal origination year ($ in thousands):



	Rating
Deal Origination Year	AAA			AA			A			BBB			Non- investment Grade			Total Fair Value			% of Total Exposure
2001	$	79		$	0		$	0		$	0		$	0		$	79		0.1	%
2003	430			0			0			0			0			430			0.6	%
2004	2,000			0			0			0			0			2,000			2.9	%
2010	61			0			0			0			0			61			0.1	%
2011	2,384			365			0			0			0			2,749			4.0	%
2012	12,206			5,127			1,872			0			0			19,204			28.3	%
2013	24,024			10,093			2,371			0			0			36,489			53.8	%
2014	3,266			2,562			1,041			0			0			6,869			10.1	%
Total fair value	$	44,450		$	18,147		$	5,284		$	0		$	0		$	67,882		100.0	%
% of total fair value	65.5		%	26.7		%	7.8		%	0.0		%	0.0		%	100.0		%

The following table presents the credit rating and fair value of our corporate bond portfolio, by industry sector and rating of bond, at March 31, 2014 ($ in thousands):



	Rating
Industry Sector	AAA			AA			A			BBB			Non- investment Grade			Total Fair Value			% of Total Exposure
Basic Materials	$	0		$	0		$	0		$	5,200		$	5,285		$	10,484		2.6	%
Communications	0			0			2,798			19,964			19,613			$	42,374		10.7	%
Consumer, Cyclical	0			0			2,905			8,995			21,421			$	33,321		8.4	%
Consumer, Non-cyclical	0			3,805			18,374			12,492			17,760			$	52,432		13.2	%
Energy	0			0			7,621			13,952			19,471			$	41,044		10.4	%
Financial	0			13,690			81,636			46,560			16,809			$	158,695		40.1	%
Industrial	0			0			0			7,134			17,154			$	24,288		6.1	%
Technology	0			0			1,724			6,010			8,696			$	16,429		4.1	%
Utilities	0			0			2,763			6,534			7,742			$	17,039		4.3	%
Total fair value	$	0		$	17,495		$	117,820		$	126,841		$	133,951		$	396,107		100.0	%
% of total fair value	0.0		%	4.4		%	29.7		%	32.0		%	33.8		%	100.0		%

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

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

Included in our investments in corporate fixed income securities at March 31, 2014 are $37.4 million of dollar-denominated investments with issuers or guarantors in foreign countries, as follows ($ in thousands):



	Rating
Issuer or Guarantor	AAA			AA			A			BBB			Non- investment Grade			Total Fair Value			% of Total Exposure
Sweden	$	0		$	1,670		$	0		$	0		$	0		$	1,670		4.5	%
Australia	0			1,700			2,732			0			0			$	4,432		11.8	%
Britain	0			6,392			11,056			0			0			$	17,449		46.6	%
Canada	0			3,547			1,710			0			394			$	5,651		15.1	%
Cayman Islands	0			0			0			0			533			$	533		1.4	%
France	0			2,079			1,001			0			0			$	3,080		8.2	%
Switzerland	0			0			4,603			0			0			$	4,603		12.3	%
Total fair value	$	0		$	15,389		$	21,102		$	0		$	928		$	37,419		100.0	%
% of total fair value	0.0		%	41.1		%	56.4		%	0.0		%	2.5		%	100.0		%

We own no investments that are denominated in a currency other than the U.S. dollar.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

ITEM 3

Quantitative and Qualitative Disclosures about Market Risk

As of March 31, 2014, there were no material changes to the information provided in our Form 10-K for the year ended December 31, 2013 under the caption “Exposure to Market Risk” in Management’s Discussion and Analysis of Financial Condition and Results of Operations. Refer to Item 2 Management’s Discussion and Analysis under the caption “Investments” for updates to disclosures made under the sub caption “Credit Risk” in our Form 10-K for the year ended December 31, 2013.

ITEM 4

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of Infinity’s disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) as of March 31, 2014. Based on that evaluation, we concluded that the controls and procedures are effective in providing reasonable assurance that material information required to be disclosed in our reports filed with or submitted to the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate.

Changes in Internal Control over Financial Reporting

During the fiscal quarter ended March 31, 2014, there have been no changes to our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

PART II

OTHER INFORMATION

ITEM 1

Legal Proceedings

We have not become a party to any material legal proceedings nor have there been any material developments in our legal proceedings disclosed in our Form 10-K for the year ended December 31, 2013. For a description of our previously reported legal proceedings, refer to Part I, Item 3, Legal Proceedings, in the Form 10-K for the year ended December 31, 2013.

ITEM 1A

Risk Factors

There have been no material changes in our risk factors as disclosed in our Form 10-K for the year ended December 31, 2013. For a description of our previously reported risk factors, refer to Part I, Item 1A, Risk Factors, in the Form 10-K for the year ended December 31, 2013.

ITEM 2

Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities



Period	Total Number of Shares Purchased(a)	Average Price Paid per Share (b)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (c)	Approximate Dollar Value that May Yet Be Purchased Under the Plans or Programs (c)
January 1, 2014 - January 31, 2014	11,561	$	72.77	8,200	$	43,222,101
February 1, 2014 - February 28, 2014	7,600	$	72.45	7,600	42,671,290
March 1, 2014 - March 31, 2014	8,400	$	72.30	8,400	42,063,727
Total	27,561	$	72.54	24,200	$	42,063,727


(a)	Includes 3,361 shares surrendered as partial consideration of the exercise price of employee stock options.


(b)	Average price paid per share excludes commissions.


(c)	On November 6, 2012, our Board of Directors increased the authority under our current share and debt repurchase plan by $25.0 million and extended the date to execute the program to December 31, 2014 from December 31, 2012.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

ITEM 6

Exhibits

Exhibit 10 - Performance Share Award Agreement (1)

Exhibit 31.1 - Certification of the Chief Executive Officer under Exchange Act Rule 13a-14(a)

Exhibit 31.2 - Certification of the Chief Financial Officer under Exchange Act Rule 13a-14(a)

Exhibit 32 - Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350

Exhibit 101.INS - XBRL Instance Document

Exhibit 101.SCH - XBRL Taxonomy Extension Schema Document (2)

Exhibit 101.CAL - XBRL Taxonomy Extension Calculation Linkbase Document (2)

Exhibit 101.DEF - XBRL Taxonomy Extension Definition Linkbase Document (2)

Exhibit 101.LAB - XBRL Taxonomy Extension Label Linkbase Document (2)

Exhibit 101.PRE - XBRL Taxonomy Extension Presentation Linkbase Document (2)

(1) Management Contract or Compensatory Plan or Arrangement

(2) Furnished with this report, in accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be "filed" for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, Infinity Property and Casualty Corporation has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.




	Infinity Property and Casualty Corporation

	BY:	/s/ ROGER SMITH
May 8, 2014		Roger Smith
		Executive Vice President, Chief Financial Officer and Treasurer (principal financial and accounting officer)