Back to GetFilings.com
- ------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE
DECEMBER 31, 2002 NO. 0-50167
INFINITY PROPERTY AND CASUALTY CORPORATION
INCORPORATED UNDER IRS EMPLOYER I.D.
THE LAWS OF OHIO NO. 03-0483872
2204 LAKESHORE DRIVE, BIRMINGHAM, ALABAMA 35209
(205) 870-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, no
par value
OTHER SECURITIES FOR WHICH REPORTS ARE SUBMITTED PURSUANT TO SECTION 15(d) OF
THE ACT: None
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 No X
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and need not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated
filer. Yes No X
----- -----
As of March 15, 2003, there were 20,481,458 shares of the
Registrant's Common Stock outstanding. Infinity Property and Casualty
Corporation is a new corporation that was formed in September 2002. Prior to
an initial public offering completed in February of 2003, all shares of the
Registrant's Common Stock were owned by American Financial Group, Inc.
-------------
DOCUMENTS INCORPORATED BY REFERENCE: None
- -------------------------------------------------------------------------------
INFINITY PROPERTY AND CASUALTY CORPORATION
INDEX TO ANNUAL REPORT
ON FORM 10-K
Page
PART I
Item 1 - Business:
Introduction 1
Operations 1
Investments 7
Regulatory Environment 9
Item 2 - Properties 10
Item 3 - Legal Proceedings 10
Item 4 - Submission of Matters to a Vote of Security Holders (a)
PART II
Item 5 - Market for Registrant's Common Equity and Related
Stockholder Matters 11
Item 6 - Selected Financial Data 12
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 7A - Quantitative and Qualitative Disclosures About
Market Risk 22
Item 8 - Financial Statements and Supplementary Data 22
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure (a)
PART III
Item 10 - Directors and Executive Officers of the Registrant 23
Item 11 - Executive Compensation 26
Item 12 - Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 31
Item 13 - Certain Relationships and Related Transactions 32
Item 14 - Controls and Procedures 36
PART IV
Item 15 - Exhibits, Financial Statement Schedules and
Reports on Form 8-K S-1
(a) The response to this Item is "none".
- -------------------------------------------------------------------------------
INFINITY PROPERTY AND CASUALTY CORPORATION
FORWARD-LOOKING STATEMENTS
This Form 10-K, chiefly in Items 1, 3, 5, 7 and 8, contains certain
forward-looking statements that are subject to numerous assumptions, risks or
uncertainties. The Private Securities Litigation Reform Act of 1995 provides a
safe harbor for forward-looking statements. Some of the forward-looking
statements can be identified by the use of forward-looking words such as
"anticipates", "believes", "estimates", "expects", "intends", "plans",
"seeks", "could", "may", "should", "will", or the negative version of those
words or other comparable terminology. Examples of such forward-looking
statements include statements relating to: expectations concerning market and
other conditions, long term financing, future premiums, revenues, earnings and
investment activities, expected losses, rate increases, improved loss
experience and expected expense savings resulting from consolidation of the
operations of the Company's subsidiaries.
Actual results could differ materially from those expected by the Company
depending on certain risks and uncertainties including but not limited to:
- changes in economic conditions and financial markets (including
interest rates);
- the adequacy or accuracy of its pricing methodologies;
- the presence of competitors with greater financial resources and the
impact of competitive pricing;
- the ability to obtain timely approval for requested rate changes;
- judicial and regulatory developments adverse to the automobile
insurance industry;
- the outcome of pending litigation against the Company;
- weather conditions (including the severity and frequency of storms,
hurricanes, snowfalls, hail and winter conditions);
- changes in driving patterns and loss trends;
- acts of war and terrorist activities; and
- the challenges posed by consolidating the operations of its insurance
subsidiaries.
The forward-looking statements herein are made only as of the date of this
report. The Company assumes no obligation to publicly update any
forward-looking statements.
PART I
ITEM 1
BUSINESS
INTRODUCTION
Infinity Property and Casualty Corporation ("Infinity") is a holding
company which, through subsidiaries, provides personal automobile insurance on
a national level with an emphasis on nonstandard auto insurance. Infinity
employs approximately 2,800 persons. Its address is 2204 Lakeshore Drive,
Birmingham, Alabama 35209; its phone number is (205) 870-4000. SEC filings,
news releases and other information may be accessed free of charge through
Infinity's Internet site at: www.ipacc.com.
Infinity was incorporated as an Ohio corporation in September 2002 as
an indirect wholly-owned subsidiary of American Financial Group, Inc. ("AFG")
to acquire and conduct, as a separate public company, AFG's personal lines
business written through independent agents. On December 31, 2002, AFG
transferred to Infinity all of the issued and outstanding capital stock of the
following personal auto insurance subsidiaries: Atlanta Casualty Company,
Infinity Insurance Company, Leader Insurance Company and Windsor Insurance
Company (collectively the "NSA Group"). In exchange, AFG received all of the
issued and outstanding shares of Infinity Common Stock and a $55 million
promissory note. In February of 2003, AFG sold 12.5 million shares (61%) of
Infinity in an initial public offering.
As of January 1, 2003, Infinity acquired the inforce personal
insurance business written through independent agents (the "Assumed Agency
Business") by AFG's principal property and casualty subsidiary, Great American
Insurance Company ("GAI"). Because this business is not a separate legal
entity, the acquisition was effected through a reinsurance agreement under
which an Infinity subsidiary assumed the inforce business, services the
policyholders and handles the claims. GAI, in turn, transferred to Infinity
assets (primarily investment securities) with a market value of $125.3 million
and permits Infinity to continue to write standard and preferred insurance on
policies issued by the same GAI companies that had previously issued such
policies. This arrangement will continue for a period of up to three years
during which time Infinity intends to make the proper rate and form filings to
allow its insurance subsidiaries to write these policies.
References to Infinity, unless the context requires otherwise
includes the Combined Operations of the NSA Group and the Assumed Agency
Business. Unless indicated otherwise, the financial information herein is
presented on a GAAP basis.
OPERATIONS
Infinity estimates that approximately 80% of its personal auto
business is nonstandard auto insurance. While there is no precise,
industry-recognized definition of nonstandard auto insurance, such insurance
is generally understood to mean coverage to drivers who, due to their driving
record, age or vehicle type, represent higher than normal risks and pay higher
rates for comparable coverage. Based on data published by A.M. Best, Infinity
believes that it is the second largest provider of nonstandard auto coverage
through independent agents in the United States. Infinity also writes standard
and preferred personal auto insurance, nonstandard commercial auto insurance
and complementary personal lines insurance products.
The business acquired by Infinity generated $989 million in gross
premiums written and $687 million in net premiums written in 2002. In that
year, approximately 95% of Infinity's business was personal auto and the
remaining 5% was homeowners, umbrella liability, boat owners and nonstandard
commercial auto coverages.
Infinity has a history of favorable underwriting results. The
following table compares Infinity's statutory combined ratio in past years
with those of the personal lines insurance industry as a whole. The statutory
combined ratio is the sum of the loss ratio (the ratio of losses and loss
adjustment expenses to net
1
earned premiums) and the expense ratio (when calculated on a statutory
accounting basis, the ratio of underwriting expenses to net written premiums).
When the combined ratio is under 100%, underwriting results are generally
considered profitable; when the ratio is over 100%, underwriting results are
generally considered unprofitable. The combined ratio does not reflect
investment income, other income or federal income taxes.
2002 2001 2000 1999 1998 1998-2002 1993-2002
---- ---- ---- ---- ---- --------- ---------
Infinity 92.7% 104.6% 108.7% 98.7% 97.0% 100.9% 101.4%
Industry (*) 105.6% 110.9% 109.9% 104.5% 102.7% 105.9% 105.2%
(*) Industry combined ratios were obtained from A.M. Best.
THE PERSONAL AUTOMOBILE MARKET
Personal auto insurance is the largest line of property and casualty
insurance accounting for approximately 40% of the $330 billion of annual
industry premiums. Personal auto insurance provides coverage to drivers for
liability to others for both bodily injury and property damage and for
physical damage to an insured's own vehicle from collision and other perils.
Personal auto insurance is comprised of preferred, standard and nonstandard
risks. Nonstandard insurance is intended for drivers who, due to their driving
record, age or vehicle type, represent a higher than normal risk. As a result,
customers that purchase nonstandard auto insurance generally pay higher
premiums for similar coverage than drivers qualifying for standard or
preferred policies. While there is no established industry-recognized
demarcation between nonstandard policies and all other personal auto policies,
Infinity believes that nonstandard auto risks generally constitute between 15%
and 20% of the personal automobile insurance market, with this range
fluctuating according to competitive conditions in the market. Approximately
one-third of all personal automobile insurance is sold by independent agents.
The personal auto insurance industry is cyclical, characterized by
periods of price competition and excess capacity followed by periods of high
premium rates and shortages of underwriting capacity. In the late 1990s, many
automobile insurers attempted to capture more business by reducing rates.
Infinity believes that these industry-wide rate reductions combined with
increased severity trends during the period contributed to the deterioration
of industry loss ratios in the years 1999 through 2001. Infinity began
implementing rate increases in early 2000. Since that time, most of the
industry, including some of the largest companies, have begun to raise rates
and tighten underwriting standards in order to address poor results. Other
insurance companies have recently withdrawn from the market because of their
inability to compete successfully, impaired capital positions, or because of a
decrease in the availability of reinsurance.
The personal auto insurance industry is highly competitive and,
except for regulatory considerations, there are relatively few barriers to
entry. Infinity competes with both large national writers and smaller regional
companies. In 2001, the five largest automobile insurance companies accounted
for approximately 47% of the industry's net written premiums and the largest
ten accounted for approximately 62% (2002 industry data not available). Over
380 insurance groups compete in the personal auto insurance industry,
according to A.M. Best. Some of these groups may specialize in nonstandard
auto insurance, while others provide a broad spectrum of personal auto
insurance.
Infinity generally competes with other insurers on the basis of
price, coverages offered, claims handling, customer service, agent commission,
geographic coverage and financial strength ratings.
PRICING AND PRODUCT MANAGEMENT
Infinity develops tailored rates for its personal automobile
customers based on a variety of factors, which may include the driving record
of the insureds, the number of and type of vehicles covered, credit history,
and other factors. Management believes this approach enables Infinity to
achieve adequate rates for each risk and to provide a means to serve a broad
spectrum of customers.
2
Infinity evaluates risks in great detail and uses sophisticated
proprietary databases and risk models to offer each driver the appropriate
rate and coverage terms. For example, while many insurers evaluate drivers'
ages based on broad groupings, Infinity looks at exact age to reflect
differences in risk more accurately. In addition to varying rates, Infinity
offers coverage terms tailored to unique market needs.
The pricing segmentation approach that Infinity utilizes requires the
extensive involvement of product managers who are responsible for the
underwriting profitability of a specific state or region with the direct
oversight of rate level structure by Infinity's most senior managers. Product
managers work closely with pricing and product development departments to
generate rate level indications and other relevant data. Product managers are
also responsible for obtaining approval of Infinity's rate filings from state
insurance departments. Infinity believes this approach has permitted it to
respond more quickly than competitors to adverse loss trends such as those
experienced in 1999 and 2000 and to obtain faster approval for its filings.
Unlike many of its competitors, Infinity reacted by increasing personal auto
rates across the NSA Group and Assumed Agency Business by 14% in 2000, again
in 2001 and 12% in 2002. Infinity expects to benefit from these prior rate
actions as well as the price firming currently taking place in the market.
DISTRIBUTION AND MARKETING
Infinity distributes its products primarily through a network of
approximately 14,000 independent agencies. Independent agencies were
responsible for approximately 97% of Infinity's gross written premiums in
2002. In 2002, no one independent agency accounted for more than 2% of
Infinity's gross written premiums, and only one agency accounted for more than
1% of its gross written premiums. Another mode of distribution includes
relationships with some non-affiliated property and casualty insurers that
have their own captive agency forces. These companies usually provide standard
and preferred auto coverage through one of their own companies while utilizing
Infinity's companies for their nonstandard risks. Infinity believes these are
mutually beneficial relationships since its partners gain access to Infinity's
nonstandard auto expertise and Infinity gains access to a new distribution
channel. This channel represented approximately 3% of gross written premiums
in 2002. Infinity also sells a small amount of business (representing less
than 1% of its gross written premiums) via the Internet.
Infinity holds licenses to write auto insurance in all 50 states, but
it focuses on the 25 states which it believes provide the greatest opportunity
for profitable growth considering the market size and the current legal and
regulatory environment. In furtherance of this strategy, effective September
2002, Infinity no longer accepts new private passenger automobile insurance in
New Jersey, and during the first quarter of 2003, Infinity had its obligation
to issue renewal policies assumed by an unaffiliated insurance company. The
following table sets forth the distribution of Infinity's gross premiums
written by state as a percent of total gross written premiums for the periods
indicated:
2002 2001 2000
---- ---- ----
California 36% 25% 23%
Florida 10 10 10
New York 8 9 12
Georgia 7 8 8
Pennsylvania 7 7 6
Connecticut 6 8 7
All other states 26 33 34
---- ---- ----
100% 100% 100%
Infinity's business development department is responsible for the
distribution and sale of its products through independent agencies and
strategic partners. This department is split into two key areas, field
operations and corporate business development. The responsibilities of
Infinity's field business development representatives include selecting
agencies and strategic partners for appointment, training them to sell its
products, and monitoring their operations to ensure compliance with its
production and profitability standards. While most of the field
3
activity occurs face-to-face in the producer's office, Infinity has had
success with other approaches such as group seminars that focus on promoting
its products and conducting training for its agents.
Infinity's corporate business development staff is responsible for
its branding initiatives, cooperative advertising with its independent agents,
sales promotions and agents' incentives. In addition, this team is actively
engaged in building agency relationships via telephone, e-mail, fax and direct
mail.
Infinity fosters its agent relationships by providing them Infinity's
software applications along with programs and services designed to strengthen
and expand their marketing, sales and service capabilities. Infinity's
internet-based software applications provide many of its agents with real-time
underwriting, claims and policy information. Infinity believes the array of
services that it offers to its agents adds significant value to their
businesses. For example, Infinity recently established the PASS Program
(Providing Agents Service and Support). PASS is an incentive-based program
through which Infinity's agents earn savings on service and support needs
including technology, training, financial services, office supplies,
advertising, promotion and travel.
Infinity develops innovative products and services niche markets
across the entire range of automobile insurance segments. Infinity focuses
particular attention on developing relationships with Latino agents,
especially in Southern California. Over the past decade, Latinos have been the
fastest growing segment of the United States population according to U.S.
Census Bureau data. For example, Latinos constitute an estimated 45% of the
population in Los Angeles County. Over the past decade, Infinity has actively
developed close relationships with Latino agents by supporting their
businesses and customers in their local communities. Infinity has developed
products and services that support their particular needs and interests such
as translating important documents to Spanish and providing bilingual customer
service and claims personnel. Infinity considers its position in this unique
niche of the market, including the Infinity brand, to be a significant
competitive advantage.
Infinity's distribution and marketing efforts are implemented with a
focus on maintaining a low cost structure. Controlling expenses allows
Infinity to price competitively and achieve better underwriting returns. Over
the five years ended 2001, Infinity's statutory ratio of underwriting expenses
to premiums written has averaged 22.9%, which is 4.8 points better than the
personal lines industry average of 27.7% for the same period (2002 industry
data not available). Ongoing consolidation of Infinity's historically separate
business units is expected to generate savings during 2003 and additional
expense reductions in future years as the consolidation efforts continue.
CLAIMS HANDLING
Infinity's claims organization employs approximately 1,400 people and
has 40 field branch offices and three regional offices. Infinity provides a
24-hour, seven days per week toll-free service for its customers to report
claims. Infinity uses predominantly its own local adjusters who typically
respond to claims within 24 hours of a report.
Infinity is committed to the field handling of claims and believes it
provides better service to its customers and better control of the claim
resolution process than alternative methods. Infinity opens claims branch
offices in areas where it believes the volume of business will support them.
Customer interactions can occur with generalists (multi-line claim
representatives) and specialists (staff appraisers, field casualty
representatives and special investigators) based on local market volume,
density and performance. Nationally, over 50% of Infinity's claims are handled
face-to-face. Infinity strives for accuracy, consistency and fairness in its
claim resolutions. Infinity has an auditing program which measures performance
in investigations, damage documentation and other relevant areas.
Infinity's claims organization is committed to defending against
non-meritorious claims. This is done through referrals to its special
investigations team. This team, made up of claims and former law enforcement
professionals, works in concert with field operations to resolve questionable
claims.
4
The recent consolidation of Infinity's separate claims departments
has allowed it to gain economies of scale and to eliminate redundancies.
Infinity believes that this will provide greater consistency in the claims
handling process. Infinity estimates that it will reduce claims handling costs
by approximately $6 million annually, about $2 million of which has been
realized during 2002.
REINSURANCE
Infinity reinsures a portion of its business with other insurance
companies. Ceding reinsurance permits diversification of risk and limits the
maximum loss arising from large or unusually hazardous risks or catastrophic
events. Infinity is subject to credit risk with respect to its reinsurers, as
the ceding of risk to reinsurers generally does not relieve Infinity of its
liability to insureds until claims are fully settled. To attempt to mitigate
this credit risk, Infinity cedes business only to reinsurers that meet its
credit ratings criteria.
In April 2001, Infinity entered into a 90% quota share agreement on
the personal auto physical damage business written by the NSA Group with
Inter-Ocean Reinsurance Company Ltd., an unaffiliated company which is rated
"A (Excellent)" by A.M. Best. Under this agreement, Infinity minimizes its
credit risk by withholding premiums, in exchange for a fee, until all claims
are resolved or the parties mutually agree to terminate the agreement. This
quota share agreement was amended effective January 1, 2002, to include
coverage of business written by GAI's personal lines that would otherwise be
part of the business assumed by Infinity. Infinity renewed this agreement for
2003 on terms substantially equivalent to those in effect in 2002. For 2003,
the agreement provides Infinity with the flexibility to adjust, on a quarterly
basis, the percentage of business to be ceded to the reinsurer. The percentage
ceded may be reduced from the current level of 90% to as low as 20%.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
Loss and loss adjustment expense (LAE) reserves represent Infinity's
estimate of its ultimate liability for unpaid claims and related adjustment
expenses. Estimation of ultimate payments for claims and LAE requires
significant judgment as payments can be influenced by factors that are subject
to variation in the future. Among these factors are medical and auto repair
cost inflation, jury awards and changes in the regulatory and legal
environment. As a result, the ultimate liability may be greater or less than
stated loss reserves.
Internal actuarial staff reviews the NSA Group's reserves quarterly
by accident year at a state and coverage level. Quarterly reviews allow for
timely adjustments to reserves based on additional information. As part of
these quarterly reviews, the actuarial staff performs various tests to
estimate ultimate average severity and frequency of claims. Severity
represents the average cost per claim and frequency represents the number of
claims per policy. As an overall review, the staff then evaluates loss and LAE
ratios by accident year by state and by coverage for reasonableness. Actual
frequency is fairly stable because policyholders generally report auto
accidents within days of occurrence. Factors that can significantly affect
actual frequency include, among others, changes in weather and class of
driver. Estimates of average frequency can be affected by changes in claims
settlement and reserving practices, but are generally reliable. Loss severity
is not as readily estimable, and can be affected by auto repair and medical
cost inflation, jury awards and changes in policy limit profiles. For
Infinity's NSA Group, the challenge of estimating average severity is somewhat
mitigated by minimum policy limits for bodily injury on over 90% of its
policies. These low limits tend to reduce the exposure of the loss reserves on
this coverage to medical cost inflation on severe injuries since the minimum
policy limits will cap the total payout. Estimation of LAE reserves is subject
to variation from factors such as use of outside adjusters, frequency of
lawsuits, claims staffing and experience levels.
Infinity's independent auditors review the adequacy of its loss
reserves as part of their audit procedures.
5
The following tables present the development of the NSA Group's and
the Assumed Agency Business' loss reserves, net of reinsurance, on a GAAP
basis for the calendar years 1992 through 2002. The top line of each table
shows the estimated liability (in millions) for unpaid losses and loss
adjustment expense recorded at the balance sheet date for the indicated years.
The next line shows the re-estimated liability as of December 31, 2002. The
remainder of the table presents intervening development as percentages of the
initially estimated liability. The development results from additional
information and experience in subsequent years. The middle line shows a
cumulative deficiency (redundancy) which represents the aggregate percentage
increase (decrease) in the liability initially estimated. The lower portion of
the table indicates the cumulative amounts paid as of successive periods as a
percentage of the original loss reserve liability.
These tables do not present accident or policy year development data.
Furthermore, in evaluating the re-estimated liability and cumulative
deficiency (redundancy), it should be noted that each percentage includes the
effects of changes in amounts for prior periods. Conditions and trends that
have affected development of the liability in the past may not necessarily
exist in the future. Accordingly, it may not be appropriate to extrapolate
future redundancies or deficiencies based on these tables.
NSA GROUP
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Liability for unpaid losses
and loss adjustment expenses:
As originally estimated $262 $385 $489 $569 $511 $525 $589 $543 $627 $608 $571
As re-estimated at
December 31, 2002 230 347 494 567 532 534 544 508 634 609 N/A
Liability re-estimated:
One year later 89.0% 89.6% 96.8% 97.8% 99.5% 100.8% 95.0% 95.3% 98.5% 100.2%
Two years later 87.0% 89.3% 100.4% 98.6% 101.9% 103.3% 93.6% 92.9% 101.1%
Three years later 87.5% 89.7% 101.1% 99.2% 104.7% 102.5% 91.0% 93.6%
Four years later 87.3% 90.2% 100.9% 100.3% 104.3% 100.9% 92.5%
Five years later 87.8% 90.1% 101.5% 100.0% 103.5% 101.7%
Six years later 88.0% 90.4% 101.3% 99.5% 103.9%
Seven years later 88.3% 90.6% 100.9% 99.7%
Eight years later 88.4% 90.1% 101.0%
Nine years later 87.9% 90.1%
Ten years later 87.9%
Cumulative deficiency
(redundancy): (12.1%) ( 9.9%) 1.0% ( .3%) 3.9% 1.7% ( 7.5%) ( 6.4%) 1.1% 0.2% N/A
======= ====== ==== ======= ==== ==== ======= ======= ==== ==== ====
Cumulative paid as of:
One year later 59.9% 58.8% 64.1% 63.8% 62.9% 59.3% 54.5% 53.0% 53.5% 51.5%
Two years later 76.1% 76.9% 87.2% 85.0% 83.9% 81.3% 73.2% 69.6% 76.6%
Three years later 82.1% 84.6% 95.2% 93.2% 94.3% 90.8% 80.6% 81.4%
Four years later 84.9% 87.5% 98.2% 96.6% 98.7% 94.8% 86.5%
Five years later 86.2% 88.7% 99.6% 98.3% 100.4% 98.0%
Six years later 86.9% 89.4% 100.5% 98.4% 101.9%
Seven years later 87.3% 89.9% 100.3% 98.8%
Eight years later 87.7% 89.6% 100.6%
Nine years later 87.3% 89.8%
Ten years later 87.5%
The following is a reconciliation of the NSA Group's net liability to the
gross liability for unpaid losses and loss adjustment expense.
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
As originally estimated:
Net liability shown above $262 $385 $489 $569 $511 $525 $589 $543 $627 $608 $571
Add reinsurance
recoverables 7 11 7 5 12 6 10 10 13 37 33
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Gross liability $269 $396 $496 $574 $523 $531 $599 $553 $640 $645 $604
==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ====
As re-estimated at December 31, 2002:
Net liability shown above $230 $347 $494 $567 $532 $534 $544 $508 $634 $609
Add reinsurance
recoverables 12 16 8 6 17 13 16 18 16 40
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Gross liability $242 $363 $502 $573 $549 $547 $560 $526 $650 $649 N/A
==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ===
Gross cumulative deficiency
(redundancy) (9.9%) (8.3%) 1.2% (0.3%) 4.9% 2.9% (6.7%) (4.9%) 1.5% 0.7% N/A
==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ===
During 2002, the NSA Group settled for $5.1 million a state class
action lawsuit involving the issue of whether there is an inherent diminished
value in a damaged automobile that should be accounted for when calculating
claim payments. The settlement increased the reserve deficiency for the 2001
calendar year-end reserves by $5.1 million. Excluding this, Infinity's NSA
Group experienced an overall redundancy for the calendar year-end 2001
reserves of about $4 million.
6
The following table presents the development of loss reserves for the
Assumed Agency Business (in millions). Under the reinsurance agreement entered
into with GAI, Infinity's insurance subsidiaries assumed the net reserves from
GAI. Accordingly, gross reserves and net reserves are the same.
ASSUMED AGENCY BUSINESS
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Liability for unpaid losses
and loss adjustment expenses:
As originally estimated $170 $171 $181 $189 $213 $190 $150 $118 $106 $116 $126
As re-estimated at
December 31, 2002 157 184 203 205 196 145 123 119 113 123 N/A
Liability re-estimated:
One year later 94.6% 104.2% 104.0% 114.4% 106.2% 88.9% 84.1% 102.9% 104.9% 106.3%
Two years later 94.6% 104.3% 114.1% 118.0% 99.3% 78.0% 86.2% 100.6% 106.9%
Three years later 92.0% 108.9% 115.7% 113.6% 93.9% 79.5% 82.3% 101.2%
Four years later 93.7% 109.4% 113.7% 110.2% 93.3% 76.6% 81.8%
Five years later 94.2% 108.2% 112.3% 109.3% 91.7% 76.6%
Six years later 93.4% 107.7% 111.1% 108.0% 92.2%
Seven years later 93.1% 106.7% 110.6% 108.7%
Eight years later 92.0% 106.1% 111.6%
Nine years later 91.5% 107.2%
Ten years later 92.6%
Cumulative deficiency
(redundancy): (7.8%) 7.3% 11.6% 8.7% (7.8%) (23.4%) (18.2%) 1.2% 6.9% 6.3% N/A
====== ====== ====== ====== ====== ======= ======= ===== ===== ===== ===
Cumulative paid as of:
One year later 50.0% 56.7% 60.5% 57.6% 51.4% 37.8% 38.6% 47.5% 47.0% 43.6%
Two years later 71.1% 81.3% 85.7% 86.0% 71.1% 55.2% 57.9% 69.5% 70.8%
Three years later 81.8% 94.9% 100.7% 97.7% 80.6% 65.2% 69.4% 83.3%
Four years later 88.3% 103.0% 106.4% 102.6% 85.6% 70.2% 75.3%
Five years later 91.8% 105.3% 108.9% 104.5% 88.1% 73.3%
Six years later 92.4% 106.5% 108.8% 105.8% 90.2%
Seven years later 92.8% 105.2% 109.5% 107.4%
Eight years later 91.1% 105.8% 111.0%
Nine years later 91.5% 107.2%
Ten years later 92.6%
For the Assumed Agency Business, the internal actuarial staff
evaluates reserves quarterly by accident year and in most instances on a
countrywide basis. In 2002, the year-end 2001 reserves for the Assumed Agency
Business developed adversely by about $7 million, mostly from accident year
2001. The adverse development related primarily to higher average claims
frequency on business written in New Jersey and Pennsylvania.
INVESTMENTS
GENERAL
Infinity employs a conservative approach to investment and capital
management intended to ensure that there is sufficient capital to support all
the insurance premium that it can profitably write. The investment portfolio
is managed by American Money Management Corporation, a wholly-owned subsidiary
of AFG. Infinity's board of directors sets investment guidelines and
periodically reviews the portfolio performance for compliance with such
guidelines.
7
The following table presents the percentage distribution of the NSA Group's
year end investment portfolio (excluding investment in equity securities of
affiliate corporations). The December 31, 2002 percentage distribution of the
NSA Group's investment portfolio was adjusted to include the investments
transferred to Infinity (approximately $125 million) in connection with the
January 1, 2003 acquisition of GAI's Assumed Agency Business.
2002 2001 2000
---- ---- ----
Cash and Cash Equivalents 8.3% 5.1% 13.4%
Fixed Maturities:
U.S. Government and Agencies 7.9 8.9 4.7
State and Municipal 5.6 4.2 4.1
Public Utilities 10.7 10.7 9.1
Mortgage-Backed Securities 12.3 11.7 8.0
Corporate and Other 49.7 54.8 56.5
Redeemable Preferred Stocks .8 .6 .4
----- ----- -----
87.0 90.9 82.8
Net Unrealized Gains (Losses) 3.2 .2 (1.2)
----- ----- -----
90.2 91.1 81.6
Equity Securities 1.5 3.8 5.0
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
The following table presents the yields of the NSA Group's investment portfolios
as reflected in the financial statements.
2002 2001 2000
---- ---- ----
Yield on Fixed Income Securities:
Excluding realized gains and losses 6.4% 6.7% 6.7%
Including realized gains and losses 6.3% 6.8% 6.3%
Yield on Equity Securities:
Excluding realized gains and losses 3.4% 2.8% 2.7%
Including realized gains and losses (12.6%) (10.7%) 0.8%
Yield on All Investments:
Excluding realized gains and losses 6.3% 6.6% 6.5%
Including realized gains and losses 5.7% 6.1% 6.0%
FIXED MATURITY INVESTMENTS
Infinity's fixed maturity portfolio is invested primarily in taxable
bonds. The NAIC assigns quality ratings which range from Class 1 (highest
quality) to Class 6 (lowest quality). The following table shows Infinity's
bonds and redeemable preferred stocks, by NAIC designation and comparable
Standard & Poor's Corporation rating as of December 31, 2002. The table also
includes $114.6 million in fixed maturity investments that were transferred to
Infinity in connection with the January 1, 2003 acquisition of GAI's Assumed
Agency Business.
Market Value
NAIC Amortized -----------------
Rating Comparable S&P Rating Cost Amount %
------ --------------------- --------- -------- ---
1 AAA, AA, A $ 646.6 $ 681.4 64%
2 BBB 286.3 298.8 28
--------- -------- ---
Total investment grade 932.9 980.2 92%
--------- -------- ---
3 BB 63.2 55.3 5
4 B 30.2 29.6 3
5 CCC, CC, C 3.6 3.3 *
6 D 1.8 1.7 *
--------- -------- ---
Total noninvestment grade 98.8 89.9 8%
--------- -------- ---
Total $ 1,031.7 $1,070.1 100%
========= ======== ===
-------------------
(*) Less than 1%
Fixed income investment funds are generally invested in securities
with short-term and intermediate-term maturities with an objective of
optimizing total return while allowing flexibility to react to changes in
market conditions and maintaining sufficient liquidity to meet policyholder
obligations. At December 31, 2002, the average life of Infinity's fixed
maturities was about 5 years. See Note C to the
8
financial statements for the composition of Infinity's fixed income portfolio
by scheduled maturity.
For additional information regarding Infinity's investment portfolio
and results, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources - Investments."
RATINGS
A.M. Best has currently assigned Infinity's insurance company
subsidiaries a group rating of "A (Excellent)". According to A.M. Best, "A"
ratings are assigned to insurers which have, on balance, "excellent balance
sheet strength, operating performance and business profile" when compared to
the standards established by A.M. Best and, in A.M. Best's opinion, "have an
excellent ability to meet their ongoing obligations to policyholders."
REGULATORY ENVIRONMENT
Infinity's insurance company subsidiaries are generally subject to
regulation and supervision by insurance departments of the jurisdictions in
which they are domiciled or licensed to transact business. State insurance
departments have broad administrative power relating to licensing insurers and
agents, regulating premium rates and policy forms, establishing reserve
requirements, prescribing statutory accounting methods and the form and
content of statutory financial reports, regulating certain transactions
involving the insurers and prescribing the type and amount of investments.
Under state insolvency and guaranty laws, regulated insurers can be assessed
or required to contribute to state guaranty funds to cover policyholder losses
resulting from insurer insolvencies. Insurers are also required by many
states, as a condition of doing business in the state, to participate in
various assigned risk pools, reinsurance facilities or underwriting
associations which provide various insurance coverages to individuals that
otherwise are unable to purchase that coverage in the voluntary market.
Participation in these involuntary plans is generally in proportion to
voluntary writings of related lines of business in that state. The
underwriting results of these plans traditionally have been unprofitable. The
amount of premiums Infinity might be required to assume in a given state in
connection with an involuntary plan may be reduced because of credits Infinity
may receive for nonstandard policies that it writes voluntarily. Many states
have laws and regulations that limit an insurer's ability to exit a market.
For example, certain states limit an automobile insurer's ability to cancel
and non-renew policies.
The insurance laws of the states of domicile of Infinity's insurance
subsidiaries contain provisions to the effect that the acquisition or change
of "control" of a domestic insurer or of any person that controls a domestic
insurer cannot be consummated without the prior approval of the relevant
insurance regulator. In general, a presumption of "control" arises from the
ownership, control, possession with the power to vote or possession of proxies
with respect to a specified percentage (generally 10%) or more of the voting
securities of a domestic insurer or of a person that controls a domestic
insurer. In addition, certain state insurance laws contain provisions that
require pre-acquisition notification to state agencies of a change in control
with respect to a non-domestic insurance company licensed to do business in
that state. While such pre-acquisition notification statutes do not authorize
the state agency to disapprove the change of control, such statutes do
authorize certain remedies, including the issuance of a cease and desist order
with respect to the non-domestic insurer if certain conditions exist, such as
undue market concentration. Such approval requirements may deter, delay or
prevent certain transactions affecting the ownership of Infinity's Common
Stock.
Infinity is a holding company with no business operations of its own.
Consequently, Infinity's ability to pay dividends to shareholders and meet its
debt payment obligations is largely dependent on dividends or other
distributions from its insurance company subsidiaries. State insurance laws
restrict the ability of Infinity's insurance company subsidiaries to declare
shareholder dividends. These subsidiaries may not make an "extraordinary
dividend" until thirty days after the applicable commissioner of insurance has
received notice of the intended dividend and has not objected in such time or
the commissioner has approved the payment of
9
the extraordinary dividend within the 30 day period. An extraordinary dividend
is defined as any dividend or distribution that, together with other
distributions made within the preceding twelve months, exceeds the greater of
10% of the insurer's surplus as of the preceding December 31, or the insurer's
net income for the twelve-month period ending the preceding December 31, in
each case determined in accordance with statutory accounting practices. In
addition, an insurer's remaining surplus after payment of a cash dividend to
shareholder affiliates must be both reasonable in relation to its outstanding
liabilities and adequate to its financial needs.
Generally, the net admitted assets of insurance companies that,
subject to other applicable insurance laws and regulations, are available for
transfer to the parent company cannot include the net admitted assets required
to meet the minimum statutory surplus requirements of the states where the
companies are licensed. The maximum dividends payable during 2003 to Infinity
by its insurance companies without seeking regulatory approval is
approximately $51 million.
State insurance law requires Infinity's insurance companies to
maintain specified levels of statutory capital and surplus. In addition, for
competitive reasons, Infinity's insurance company subsidiaries need to
maintain adequate financial strength ratings from independent rating agencies.
Both of these factors may limit the ability of Infinity's insurance
subsidiaries to declare and pay dividends.
ITEM 2
PROPERTIES
Infinity's insurance subsidiaries lease approximately 680,000 square
feet of office space in numerous cities throughout the United States. Most of
these leases expire within 8 years. The most significant leased office spaces
are located in suburban Atlanta, Birmingham (Infinity's principal office),
Cincinnati, Windsor (Connecticut) and Los Angeles. An Infinity subsidiary also
owns a 46,000 square foot office building in Dallas.
ITEM 3
LEGAL PROCEEDINGS
Infinity's subsidiaries are, from time to time, named as defendants
in various lawsuits incidental to its insurance business. There are currently
class action lawsuits pending against the Company in various state courts that
involve disputes over methods used to calculate claim payments on vehicles
determined to be a total loss, the assessment of nonpayment cancellation fees,
and interpretations of state mandated fee schedules under no fault insurance
laws. Also pending are lawsuits that seek extra contractual damages in
addition to damages claimed under insurance policies. Based on information
currently known by the Company and the status of these lawsuits, management
believes that the subsidiaries' ultimate liability in these actions, if any,
will not have a material adverse effect on the Company's results of
operations, liquidity or financial position.
10
PART II
ITEM 5
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Infinity issued 100 shares of Common Stock to American Premier
Underwriters, Inc. ("APU"), a 100%-owned subsidiary of AFG, in connection with
the formation of Infinity in September 2002. On December 31, 2002, Infinity
issued an additional 900 shares of Common Stock to APU in exchange for the
capital stock of the NSA Group companies. In January 2003, Infinity increased
its authorized capital stock to 50,000,000 shares of Common Stock and
10,000,000 shares of Preferred Stock and implemented a common stock split.
After the stock split, Infinity had 20,347,083 shares of Common Stock
outstanding. No Preferred Stock has been issued.
AFG completed an initial public offering of Infinity's Common Stock
in February of 2003. Because virtually all shares are being held in nominee
names for beneficial owners following the public offering, there were only
seven registered holders of record at March 15, 2003. Infinity's Common Stock
is listed and traded on the NASDAQ under the symbol IPCC. Infinity intends to
pay a quarterly dividend of $.055 per share beginning in the second quarter of
2003.
EQUITY COMPENSATION PLAN INFORMATION
Number of securities Number of securities
issued as available for future
restricted shares or issuance under equity
to be issued upon Weighted-average compensation plans
exercise of exercise price of (excluding securities
Equity Compensation Plans outstanding options outstanding options reflected in column (a))
- ------------------------- -------------------- ------------------- ------------------------
(a) (b) (c)
Approved by shareholders none n/a 2,500,000 (1)
Not approved by
shareholders none n/a none
(1) In 2002, Infinity established and its sole shareholder approved a stock
option plan and a restricted stock plan to enable it to attract and
motivate employees and to align their interests with those of Infinity's
shareholders.
11
ITEM 6
SELECTED FINANCIAL DATA
At December 31, 2002, AFG transferred the NSA Group to Infinity.
Financial information for periods prior to the date of transfer represents the
combined information of the NSA Group. Infinity also acquired the Assumed
Agency Business from GAI through a reinsurance transaction effective January
1, 2003. The historical financial information shown below (in millions) as of
and for each of the four years ended December 31, 2002 was derived from
audited financial statements. Data as of and for the year ended December 31,
1998 was derived from unaudited financial statements which include all
adjustments, consisting of normal recurring accruals, that management
considers necessary for a fair presentation of the financial position and
results of operations for those periods.
(unaudited)
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
INFINITY
Earnings Statement Data:
Earned Premiums $ 645.9(a) $ 916.4(a) $1,043.3 $944.5 $1,156.7
Total Revenues 704.5 990.0 1,110.8 1,044.9 1,244.8
Operating Earnings (Loss) before
Income Taxes 70.9 15.8 (58.9) 81.6 94.2
Net Earnings (Loss) 45.9 9.7 (50.1) 50.9 64.0
Balance Sheet Data:
Cash and Investments $1,061.3 $1,188.1 $1,216.2 $1,095.6 $1,276.7
Total Assets 1,545.2 1,760.4 1,787.9 1,594.9 1,778.4
Unpaid Losses and Loss Adjustment
Expenses 604.0 645.2 640.3 553.3 599.5
Total Liabilities 1,158.4 1,197.6 1,173.7 1,060.9 1,136.7
Shareholder's Equity 386.8 562.8 614.2 534.0 641.7
ASSUMED AGENCY BUSINESS
Earnings Statement Data:
Earned Premiums $ 107.2(b) $ 149.9 $128.9 $138.5 $148.2
Underwriting Gain (Loss) (10.0) (14.7) (3.6) 18.6 19.4
Balance Sheet Data:
Assets (excluding Investments)
to be Transferred $ 53.5 $ 78.8 $ 65.2 $ 55.4 $ 62.1
Investments to be Transferred 125.3 - - - -
Unpaid Losses and Loss Adjustment
Expenses 125.6 115.9 105.9 118.3 150.5
Liabilities to be Transferred 178.8 200.5 173.3 183.1 222.2
(a) The decline in earned premiums during 2001 and 2002 is due primarily to a
reinsurance agreement pursuant to which Infinity ceded 90% of the
automobile physical damage business written by it as more fully discussed
in "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(b) The decline in earned premiums during 2002 reflects the inclusion of the
Assumed Agency Business in the reinsurance agreement discussed above
effective January 1, 2002.
12
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Following is a discussion and analysis of the financial statements of
Infinity and the financial statements of the agency business that Infinity
assumed from GAI on January 1, 2003. Together, these businesses comprise
Infinity's operations going forward. References in this discussion to Infinity
include the NSA Group and the Assumed Agency Business unless the context
indicates otherwise. This discussion should be read in conjunction with the
audited financial statements beginning on page F-1.
Infinity was incorporated in the state of Ohio in September 2002 as
an indirect wholly-owned subsidiary of AFG. On December 31, 2002, AFG
transferred to Infinity all of the outstanding common stock of the following
personal auto insurance subsidiaries: Atlanta Casualty Company, Infinity
Insurance Company, Leader Insurance Company and Windsor Insurance Company
(collectively the "NSA Group").
Through a reinsurance transaction effective January 1, 2003, Infinity
acquired the Assumed Agency Business consisting of the personal lines business
written through independent agents by AFG's principal property and casualty
subsidiary, GAI. The Assumed Agency Business had net earned premiums of $107
million in 2002 consisting primarily of standard and preferred private
passenger automobile insurance. The Assumed Agency Business is not included in
Infinity's historical financial statements.
The acquisition of the NSA Group has been accounted for, and the
assumption of the Assumed Agency Business will be accounted for, at AFG's
historical carrying amounts as transfers of net assets between entities under
common control in accordance with Statement of Financial Accounting Standards
No. 141.
CRITICAL ACCOUNTING POLICIES
Significant accounting policies are summarized in Note B to the
financial statements. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that can have a significant effect on amounts
reported in the financial statements. As more information becomes known, these
estimates and assumptions could change and thus impact amounts reported in the
future. Management believes that the establishment of insurance reserves and
the determination of "other than temporary" impairment on investments are the
two areas where the degree of judgment required to determine amounts recorded
in the financial statements make the accounting policies critical. These two
policies are discussed below under the headings "Liquidity and Capital
Resources - Investments" and "Liquidity and Capital Resources -Uncertainties."
LIQUIDITY AND CAPITAL RESOURCES
RATIOS The National Association of Insurance Commissioners' model law
for risk based capital ("RBC") provides formulas to determine the amount of
capital that an insurance company needs to ensure that it has an acceptable
expectation of not becoming financially impaired. At December 31, 2002, the
capital ratios of all Infinity insurance companies substantially exceeded the
RBC requirements.
SOURCES OF FUNDS Infinity is organized as a holding company with all
of its operations being conducted by its insurance subsidiaries. Accordingly,
Infinity will have continuing cash needs for administrative expenses, the
payment of principal and interest on borrowings, shareholder dividends, and
taxes. Funds to meet these obligations will come primarily from dividend and
tax payments from Infinity's insurance subsidiaries.
13
Under the state insurance laws, dividends and capital distributions
from insurance companies are subject to restrictions relating to statutory
surplus and earnings. The maximum amount of dividends payable during 2003
without regulatory approval by Infinity's insurance subsidiaries is $51
million.
Following the completion of the public offering in February of 2003,
Infinity plans to file consolidated federal income tax returns including all
80%-owned U.S. subsidiaries. Under tax allocation agreements with Infinity,
its eligible subsidiaries will compute tax provisions as if filing separate
returns based on book taxable income computed in accordance with generally
accepted accounting principles. The resulting provision (or credit) will be
currently payable to (or receivable from) Infinity.
Infinity intends to establish a bank credit line in 2003 that will
provide resources to meet liquidity requirements. However, if these funds and
funds generated from operations, including dividends and tax payments from its
insurance subsidiaries, are insufficient to meet fixed charges in any period,
Infinity would have to generate cash through alternative methods of financing,
sales of assets, or similar transactions.
Infinity's insurance subsidiaries generate liquidity primarily by
collecting and investing premiums in advance of paying claims. Infinity had
positive cash flow from operations of approximately $45 million in 2002, $33
million in 2001 and $25 million in 2000.
QUOTA SHARE AGREEMENT Effective April 2001, Infinity's insurance
subsidiaries entered into a reinsurance agreement with Inter-Ocean Reinsurance
Limited, under which Infinity's subsidiaries agreed to cede 90% of its
personal auto physical damage business on a funds withheld basis for policies
written from April 1, 2001 to December 31, 2002. Infinity has renewed this
agreement for 2003 on terms substantially equivalent to those in effect in
2002. Infinity has the flexibility in 2003 to adjust, on a quarterly basis,
the percentage of business to be ceded under the reinsurance agreement. The
percentage ceded may be reduced from the current level of 90% to as low as
20%. No adjustments with respect to future quarters can be predicted at this
time but will be determined based on business conditions. Premiums ceded under
this agreement from inception through December 31, 2001, and for the year
ended December 31, 2002, were $219.5 million and $296.1 million, respectively.
The Inter-Ocean reinsurance agreement also includes coverage of GAI's
personal lines business written through independent agents for policies in
effect since January 1, 2002, and unearned premium at December 31, 2001 that
Infinity would otherwise assume as part of the Assumed Agency Business.
Accordingly, GAI's participation in the Inter-Ocean reinsurance agreement
reduces the size of the Assumed Agency Business. Premiums ceded by GAI under
this agreement were $78.5 million in 2002.
INVESTMENTS Infinity's investment portfolio at December 31, 2002,
contained $956 million in fixed maturity securities and $18 million in equity
securities, all carried at market value with unrealized gains and losses
reported as a separate component of shareholder's equity on an after-tax
basis. At December 31, 2002, Infinity had a pretax net unrealized gain of
$38.5 million on fixed maturities and a pretax unrealized loss of $1.5 million
on equity securities.
Approximately 91% of the fixed maturities that Infinity holds were
rated "investment grade" (credit rating of AAA to BBB) by nationally
recognized rating agencies at December 31, 2002. Investment grade securities
generally bear lower yields and lower degrees of risk than those that are
unrated or noninvestment grade.
Investments in mortgage-backed securities ("MBSs") represented
approximately one-seventh of Infinity's fixed maturities at December 31, 2002.
MBSs are subject to significant prepayment risk due to the fact that, in
periods of declining interest rates, mortgages may be repaid more rapidly than
scheduled as borrowers refinance higher rate mortgages to take advantage of
lower rates. Due to the significant decline in the general level of interest
rates in 2002, Infinity has experienced an increase in the level of
prepayments on its MBSs; these prepayments have not been reinvested at
interest rates comparable to the rates earned on the prepaid MBSs.
Approximately 95% of Infinity's MBSs are rated "AAA" and all are investment
grade.
14
Summarized information for securities with unrealized gains and losses
in Infinity's balance sheet at December 31, 2002 is shown in the following
table (dollars in millions). Approximately $1.6 million of "Fixed Maturities"
and $883,000 of "Equity Securities" had no unrealized gains or losses at
December 31, 2002.
Securities Securities
With With
Unrealized Unrealized
Gains Losses
---------- ----------
Fixed Maturities
Market value of securities $844.8 $109.2
Amortized cost of securities $793.9 $121.6
Gross unrealized gain (loss) $ 50.9 ($ 12.4)
Market value as a % of amortized cost 106.4% 89.8%
Number of security positions held 345 61
Number individually exceeding $500,000 gain or loss 14 6
Concentration of gains (losses) by type or industry
(exceeding 5% of unrealized):
Mortgage-backed securities $ 6.1 ($ .4)
Banks 4.7 (.2)
U.S. Government and government agencies 4.1 -
State, municipalities and political subdivisions 3.8 (.1)
Electric services 2.3 (1.8)
Natural gas transmission and distribution 1.2 (.9)
Air transportation .4 (4.7)
Percentage rated investment grade 98% 44%
Equity Securities
Market value of securities $ 1.0 $ 15.7
Cost of securities $ .6 $ 17.6
Gross unrealized gain (loss) $ .4 ($ 1.9)
Market value as % of cost 166.7% 89.2%
Number individually exceeding $500,000 gain or loss - 1
The table below sets forth the scheduled maturities of fixed maturity
securities at December 31, 2002 based on their market values. Securities that
do not have a single maturity date are reported at average maturity. Actual
maturities may differ from contractual maturities because certain securities
may be called or prepaid by the issuers.
Securities Securities
With With
Unrealized Unrealized
Maturity Gains Losses
-------- ---------- ----------
One year or less 8% 8%
After one year through five years 32 41
After five years through ten years 37 38
After ten years 7 8
--- ---
84 95
Mortgage-backed securities 16 5
--- ---
100% 100%
=== ===
Infinity realized aggregate losses of $5.9 million during 2002 on $34
million in sales of fixed maturity securities (12 issues; 9 issuers) that had
individual unrealized losses greater than $100,000 at December 31, 2001. The
market value of four of the securities did not change from December 31, 2001
to the sale date. Market values of three of the securities increased an
aggregate of $1.4 million from December 31, 2001 to date of sale. One of the
securities was a Qwest Communications bond that decreased in value by $2.2
million from December 31, 2001 to the date of sale due to the decline in
Qwest's financial condition. Market values of the remaining four securities
decreased an aggregate of $694,000 from December 31, 2001 to the sale date.
Although Infinity had the ability to continue holding these
investments, its intent to hold them changed due primarily to deterioration in
the issuers' credit-worthiness, decisions to lessen exposure to a particular
credit or industry, or decisions to modify asset allocation within the
portfolio.
15
The table below (dollars in millions) summarizes the length of time
securities have been in an unrealized gain or loss position at December 31,
2002.
Market
Aggregate Aggregate Value as
Market Unrealized % of Cost
Value Gain (Loss) Basis
Fixed Maturities
SECURITIES WITH UNREALIZED GAINS:
Exceeding $100,000 at 12/31/02 and for:
Less than one year (160 issues) $556.7 $ 38.5 107.4%
More than one year (19 issues) 64.2 6.2 110.7
Less than $100,000 at 12/31/02 (166 issues) 223.9 6.2 102.8
------ --------
$844.8 $ 50.9 106.4%
====== ========
SECURITIES WITH UNREALIZED LOSSES:
Exceeding $100,000 at 12/31/02 and for:
Less than one year (22 issues) $ 40.5 $ ( 7.4) 84.6%
More than one year (12 issues) 24.1 (4.1) 85.5
Less than $100,000 at 12/31/02 (27 issues) 44.6 (.9) 98.0
------ --------
$109.2 $ ( 12.4) 89.8%
====== ========
Equity Securities
SECURITIES WITH UNREALIZED GAINS:
Exceeding $100,000 at 12/31/02 and for:
Less than one year (none) $ - $ - - %
More than one year (2 issues) .7 .4 233.3
Less than $100,000 at 12/31/02 (4 issues) .3 - 100.0
------ --------
$ 1.0 $ .4 166.7%
====== ========
SECURITIES WITH UNREALIZED LOSSES:
Exceeding $100,000 at 12/31/02 and for:
Less than one year (3 issues) $ 14.0 $ ( 1.0) 93.3%
More than one year (1 issue) .5 (.6) 45.5
Less than $100,000 at 12/31/02 (6 issues) 1.2 (.3) 80.0
------ --------
$ 15.7 $ ( 1.9) 89.2%
====== ========
When a decline in the value of a specific investment is considered to
be "other than temporary", a provision for impairment is charged to earnings
(accounted for as a realized loss) and the cost basis of that investment is
reduced. The determination of whether unrealized losses are "other than
temporary" requires judgment based on subjective as well as objective factors.
Factors considered and resources used by management include:
- whether the unrealized loss is credit-driven or a result of
changes in market interest rates,
- the extent to which market 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,
- third party research and credit rating reports,
- internally generated financial models and forecasts,
- discussions with issuer management, and
- ability and intent to hold the investment for a period of
time sufficient to allow for any anticipated recovery in
market value.
Based on its analysis of the factors enumerated above, management
believes (i) Infinity will recover its cost basis in the securities with
unrealized losses and (ii) that Infinity has the ability and intent to hold
the securities until they mature or 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 accurately predict if or
when a specific security will become impaired, charges for other than
temporary impairment could be material to results of operations in a future
period. Management believes it is not likely that future impairment charges
will have a significant effect on Infinity's liquidity.
16
Net realized gains (losses) on securities sold and charges for "other
than temporary" impairment on securities held were as follows (in millions):
Net Realized
Gains (Losses) Charges for
on Sales Impairment Other Total
-------------- ----------- -------- ------
2002 $ 3.0 ($ 9.4) ($.3)(a) ($6.7)
2001 10.3 (16.2) - (5.9)
2000 (2.4) (3.0) - (5.4)
(a) Adjustments to reflect warrants at fair value.
Increased impairment charges in recent years reflect, among other
things, a rise in corporate defaults in the marketplace.
UNCERTAINTIES
INSURANCE RESERVES Liabilities for the costs of losses and loss
adjustment expenses for both reported and unreported claims are estimated
based on historical trends adjusted for changes in loss cost trends,
underwriting standards, policy provisions, product mix and other factors.
Estimating the liability for unpaid losses and loss adjustment expense is
inherently judgmental and is influenced by factors which are subject to
significant variation. Through the use of analytical reserve development
techniques, management monitors items such as the effect of inflation on
medical, hospitalization, material repair and replacement costs, general
economic trends and the legal environment. Adjustments to reserves are
reflected in the results of operations in the periods in which estimates
change.
EXPOSURE TO MARKET RISK Market risk represents the potential economic
loss arising from adverse changes in the fair value of financial instruments.
Infinity's exposures to market risk relate primarily to its investment
portfolio which is exposed to interest rate risk and, to a lesser extent,
equity price risk.
FIXED MATURITY PORTFOLIO The fair value of Infinity's fixed maturity
portfolio is directly impacted by changes in market interest rates. Infinity's
fixed maturity portfolio is comprised of substantially all fixed rate
investments with primarily short-term and intermediate-term maturities. This
practice allows flexibility in reacting to fluctuations of interest rates. The
portfolios of Infinity's insurance companies are managed with an attempt to
achieve an adequate risk-adjusted return while maintaining sufficient
liquidity to meet policyholder obligations.
The following table provides information about Infinity's fixed
maturity investments at December 31, 2002 and 2001, that are sensitive to
interest rate risk. The table shows expected principal cash flows (in
millions) and related weighted average interest rates by expected maturity
date for each of the five subsequent years and collectively for all years
thereafter. Callable bonds and notes are included based on call date or
maturity date depending upon which date produces the most conservative yield.
Mortgage-backed securities ("MBSs") and sinking fund issues are included based
on maturity year adjusted for expected payment patterns. Actual cash flows may
differ from those expected.
December 31, 2002 December 31, 2001
---------------------- ---------------------
Principal Principal
Cash Flows Rate Cash Flows Rate
---------- ---- ---------- ----
2003 $105.0 6.7% 2002 $ 63.7 7.5%
2004 76.6 7.1 2003 143.9 7.1
2005 122.9 6.4 2004 89.1 7.0
2006 100.3 6.5 2005 119.4 6.6
2007 97.9 6.6 2006 137.1 6.3
Thereafter 404.1 6.2 Thereafter 523.1 6.8
------ --------
Total $906.8 6.4% Total $1,076.3 6.8%
====== ========
Fair Value $955.6 Fair Value $1,082.8
====== ========
17
EQUITY PRICE RISK Equity price risk is the potential economic loss
from adverse changes in equity security prices. Although Infinity's investment
in equity securities is only 2% of total investments, it is concentrated in a
relatively limited number of positions; approximately four-fifths of the total
is in three investments. While this approach allows management to more closely
monitor the companies and industries in which they operate, it does increase
risk exposure to adverse price declines in a major position.
RESULTS OF OPERATIONS
UNDERWRITING Infinity's insurance subsidiaries sell nonstandard, standard and
preferred personal auto insurance and, to a lesser extent, nonstandard
commercial auto coverage and a complement of other personal lines insurance
products. Nonstandard coverage is a product designed for drivers who, due to
their driving record, age or vehicle type, represent higher than normal risks
and pay higher rates for comparable coverage.
Underwriting profitability is measured by the combined ratio which is
a sum of the ratios of losses, loss adjustment expenses ("LAE") and
underwriting expenses to earned premiums. When the combined ratio is under
100%, underwriting results are generally considered profitable; when the ratio
is over 100%, underwriting results are generally considered unprofitable. The
combined ratio does not reflect investment income, other income or federal
income taxes.
While losses on claims reported are generally determinable, the
process of determining overall loss and LAE reserves is also highly dependent
upon the use of estimates in the case of losses incurred or expected but not
yet reported or developed. Actuarial procedures and projections are used to
obtain "best estimates" which are then included in the overall results. These
estimates are subject to changes in claim amounts and frequency and are
periodically reviewed and adjusted as additional information becomes known. In
accordance with industry practices, such adjustments are reflected in current
year underwriting results. As a result, the ratio of loss and LAE expenses
component of the combined ratio includes development of prior year reserves in
addition to provision for losses and LAE occurring in the current year.
Underwriting expenses include expenses that vary directly with
premium volume (commissions and premium taxes) as well as expenses that are
relatively fixed (administrative expenses). Accordingly, underwriting expenses
tend to move in the same direction as premiums but at a slower rate. As a
result, the underwriting expense ratio tends to decrease when premiums grow
and increase when premiums decline.
Since early 2000, Infinity's insurance subsidiaries have been
increasing their premium rates with a goal of achieving underwriting profits,
even if it entails foregoing volume. Management expects rate increases to
continue during 2003 but at a reduced pace and level. As with all property and
casualty companies, the beneficial impact of these price increases is
reflected in Infinity's financial results over time. Infinity implements price
increases on its in-force policies as they are renewed, which generally takes
between six and twelve months for the entire book of business. Infinity
recognizes increased premiums on particular policies as the premiums are
earned, generally over the course of the six to twelve months after the policy
is effective.
18
Net earned premiums and combined ratios for Infinity and the Assumed
Agency Business were as follows (dollars in millions):
2002 2001 2000
---- ---- ----
Net Earned Premiums (GAAP)
Infinity:
Gross written premiums $ 914.6 $ 962.3 $1,077.7
Ceded reinsurance (301.6) (224.7) (3.8)
------- ------- --------
Net written premiums 613.0 737.6 1,073.9
Change in unearned premiums 32.9 178.8 (30.6)
------- ------- --------
Net earned premiums $ 645.9 $ 916.4 $1,043.3
======= ======= ========
Assumed Agency Business:
Net written premiums (a) $ 74.3 $ 165.3 $ 133.1
Change in unearned premiums 32.9 (15.4) (4.2)
------- ------- --------
Net earned premiums $ 107.2 $ 149.9 $ 128.9
======= ======= ========
Combined Ratios (GAAP)
Infinity:
Loss and LAE ratio 81.8% 82.1% 87.8%
Underwriting expense ratio 12.2 22.1 22.0
Combined ratio 94.0% 104.2% 109.8%
Assumed Agency Business:
Loss and LAE ratio 84.9% 81.2% 72.4%
Underwriting expense ratio 24.4 28.6 30.4
Combined ratio 109.3% 109.8% 102.8%
Weighted Average of Infinity and Agency:
Loss and LAE ratio 82.2% 82.0% 86.1%
Underwriting expense ratio 13.9 22.9 22.9
Combined ratio 96.1% 104.9% 109.0%
(a) Under a reinsurance agreement entered into with GAI, Infinity's
insurance subsidiaries assumed net written premiums from GAI.
Accordingly, gross written premiums and net written premiums are
the same.
2002 COMPARED TO 2001 Infinity's net earned premiums decreased $271
million (30%) during 2002 due primarily to the Inter-Ocean reinsurance
agreement, effective April 1, 2001, under which Infinity ceded 90% of the
personal automobile physical damage business written by its insurance
subsidiaries during 2002. Excluding the effect of this agreement, net earned
premiums declined approximately 9%, reflecting lower business volume partially
offset by the impact of rate increases. Policies in force declined 16% from
approximately 734,000 on December 31, 2001 to 616,000 on December 31, 2002.
The decline in policy counts is due to rate increases and actions taken to
reduce business in certain non-focus or non-profitable states as well as
decisions by insureds not to renew. During 2002, Infinity increased personal
auto rates about 12% over rates in effect at year end 2001. Underwriting
expenses in 2002 include the effect of $130.4 million in ceding commissions
earned under the Inter-Ocean reinsurance agreement. Commissions earned under
this agreement generally vary directly with the loss and LAE ratio on the
business ceded. Accordingly, Infinity's expense ratio reflects the benefit of
strong underwriting results in the business ceded to Inter-Ocean. Overall,
Infinity's combined ratio improved 10.2 points over 2001 due primarily to
recent rate increases. Excluding the effect of the Inter-Ocean agreement,
Infinity's combined ratio for 2002 was 95.9% compared to 103.7% in 2001.
Net earned premiums of the Assumed Agency Business decreased $43
million (28%) in 2002 reflecting the impact of the Inter-Ocean reinsurance
agreement, effective January 1, 2002, under which 90% of GAI's personal
automobile physical damage business written through independent agents was
ceded. Excluding the effect of this agreement, net earned premiums increased
$12.1 million (8%) reflecting rate increases implemented in the later part of
2001, partially offset by a reduction in volume from certain unprofitable
business. The combined ratio was flat as an increase in prior year development
was offset by the shift away from underperforming business and the increase in
rates over the past year. Underwriting expenses fell $16.6 million in 2002
compared to 2001 reflecting GAI's $19.7 million ceding commission earned on
premiums ceded under the Inter-Ocean reinsurance agreement.
19
2001 COMPARED TO 2000 Infinity's net earned premiums decreased $127
million (12%) in 2001 due primarily to the automobile physical damage
reinsurance agreement discussed above. Excluding the effect of the agreement,
net earned premiums were flat in 2001. Policies in force declined 19% as some
customers decided not to renew policies at higher rates. Infinity's insurance
subsidiaries increased personal auto rates approximately 15% in 2001. The 2001
combined ratio improved 5.6 points compared to 2000 as the effect of rate
increases in 2001 and 2000 more than offset a $5.1 million charge to write-off
policy-processing software that was not in use. Infinity's underwriting
expenses decreased $27 million (12%) during 2001 as the $38 million ceding
commission earned on the reinsurance agreement more than offset increased
salaries and employee-related expenses.
The $21 million (16%) increase in net earned premiums for the Assumed
Agency Business was due primarily to volume growth across numerous states
stemming from a 10% increase in new agents. The increase in the combined ratio
resulted from insufficient pricing on new business. The Assumed Agency
Business' underwriting expenses increased $3.6 million (9%) in 2001 primarily
due to increased commissions on higher premiums.
The remaining discussion of results of operations relates to
Infinity's Consolidated Statement of Operations.
INVESTMENT INCOME Changes in investment income reflect fluctuations in market
rates and changes in average invested assets. Fluctuations in average invested
assets reflect primarily the timing of dividends and capital contributions as
capital requirements and the cash needs of Infinity change.
The Assumed Agency Business represents a portion of GAI's personal
lines business and is not a separate legal entity; accordingly, it does not
have a separate investment portfolio and related investment income.
2002 COMPARED TO 2001 Net investment income decreased $14.0 million
in 2002 compared to 2001 due primarily to (i) a $4.6 million increase in
interest expense (included in net investment income) on funds held from the
aforementioned automobile reinsurance agreement (ii) a decrease in interest
rates and (iii) an 8% decrease in average invested assets. Average invested
assets decreased due primarily to dividends paid in the fourth quarter of 2001
and the last three quarters of 2002.
2001 COMPARED TO 2000 Net investment income increased $5.9 million in
2001 due primarily to a 12% increase in average invested assets in fixed
maturity securities, partially offset by $3.1 million in interest expense on
funds held from the Inter-Ocean reinsurance agreement discussed above. Average
invested assets increased due primarily to a capital contribution received in
the fourth quarter of 2000.
REALIZED GAINS (LOSSES) ON INVESTMENTS
2002 COMPARED TO 2001 Realized gains (losses) on investments include
provisions for other than temporary impairment of securities still held of
$9.4 million in 2002 and $16.2 million in 2001. Increased impairment charges
in recent years reflect, among other things, a rise in corporate defaults in
the marketplace.
Infinity owns warrants to buy the common stock of a publicly traded
company. Under generally accepted accounting principles, these investments are
considered derivatives and marked to market resulting in realized gains and
losses. Realized gains (losses) on investments include a loss of $281,000 in
2002 to adjust the carrying value of these warrants to their market value of
$883,000 at December 31, 2002.
2001 COMPARED TO 2000 Realized gains (losses) on investments include
provisions for other than temporary impairment of securities still held of
$16.2 million in 2001 and $3.0 million in 2000.
20
OTHER OPERATING AND GENERAL EXPENSES
2002 COMPARED TO 2001 Other operating and general expenses for 2001
include goodwill amortization of $2.2 million. Under SFAS No. 142, which was
implemented January 1, 2002, goodwill is no longer amortized. Excluding 2001
goodwill amortization, other operating and general expenses increased $9.2
million due primarily to a $5.3 million litigation settlement.
2001 COMPARED TO 2000 Other operating and general expenses decreased
$4.6 million (19%) due primarily to a $3.7 million reduction in corporate
litigation expenses.
INCOME TAXES Infinity's effective tax rate was 35% in 2002, 38% in 2001 and
35% in 2000. See Note H to Infinity's financial statements for an analysis of
items affecting the effective tax rate.
EQUITY IN AFFILIATE LOSSES Equity in net losses of affiliates for 2000
represents Infinity's proportionate share of the results of Chiquita Brands
International, an affiliate of AFG during this period. Chiquita reported net
losses attributable to common shareholders of $112 million in 2000.
Equity in net losses of affiliates for 2000 also includes a $14.2
million pretax charge to writedown Infinity's investment in Chiquita to quoted
market value at December 31, 2000. In 2001, Infinity suspended accounting for
Chiquita under the equity method due to Chiquita's pending restructuring. In
March 2002, Chiquita completed its reorganization under Chapter 11 of the U.S.
Bankruptcy Code. All remaining shares held by Infinity after the restructuring
were sold in 2002.
RECENT ACCOUNTING STANDARDS In July 2001, the Financial Accounting Standards
Board issued SFAS No. 141, "Business Combinations", and No. 142, "Goodwill and
Other Intangible Assets". Under SFAS No. 141, business combinations initiated
after June 30, 2001 are required to be accounted for using the purchase method
of accounting. Under SFAS No. 142, goodwill is no longer amortized beginning
January 1, 2002, but is subject to an impairment test at least annually.
Infinity completed the transitional test for impairment in 2002 with no
writedown required. Other operating and general expenses for Infinity
includes goodwill amortization of $2.2 million in both 2001 and 2000. The
carrying value of goodwill at December 31, 2002, was $70.3 million for
Infinity and $5.0 million for the Assumed Agency Business.
21
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 7A is included in Management's
Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INFINITY PROPERTY AND CASUALTY CORPORATION:
Report of Independent Auditors F-1
Consolidated Balance Sheet:
December 31, 2002 and 2001 F-2
Consolidated Statement of Operations:
Years ended December 31, 2002, 2001, and 2000 F-3
Consolidated Statement of Changes in Shareholder's Equity:
Years ended December 31, 2002, 2001, and 2000 F-4
Consolidated Statement of Cash Flows:
Years ended December 31, 2002, 2001, and 2000 F-5
Notes to Financial Statements F-6
PERSONAL LINES AGENCY BUSINESS OF GREAT AMERICAN INSURANCE COMPANY:
Report of Independent Auditors F-16
Financial Statements F-17
Notes to Financial Statements F-18
"Selected Quarterly Financial Data" has been included in Note I to the
Consolidated Financial Statements of Infinity Property and Casualty
Corporation and Note D to the Financial Statements of the Personal Lines
Agency Business of Great American Insurance Company.
22
PART III
ITEM 10
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers, directors and other key employees are as follows:
Age(1) Position
------ -----------------------------------------------
James R. Gober 51 Chief Executive Officer, President and Director
John R. Miner 42 Executive Vice President
Samuel J. Simon 46 Senior Vice President, General Counsel and
Secretary
Roger Smith 42 Senior Vice President and Chief Financial
Officer
Joseph A. Pietrangelo 37 Senior Vice President
Carl H. Lindner III 49 Chairman of the Board
Thomas A. Hayes (2)(3) 60 Director
Ethan Jackson (3)(4) 66 Director
Keith A. Jensen 51 Director
Gregory G. Joseph (2)(4) 40 Director
Gregory C. Thomas (2)(3)(4) 55 Director
(1) As of March 1, 2003.
(2) Became a member of the Audit Committee upon completion of the public
offering in February of 2003. Mr. Thomas serves as Chairman of the Audit
Committee.
(3) Became a member of the Compensation Committee upon completion of the public
offering. Mr. Hayes serves as Chairman of the Compensation Committee.
(4) Became a member of the Nominating/Governance Committee upon completion of
the public offering. Mr. Joseph serves as Chairman of the
Nominating/Governance Committee.
James R. Gober was elected Chief Executive Officer and President and a
director in November 2002. Mr. Gober has served in various capacities with
Infinity's companies since 1978, including Director and President of Infinity
Insurance Company and subsidiaries, and most recently as Director, President and
Chief Executive Officer of each of the companies comprising the NSA Group. Since
1991, Mr. Gober has been the principal operating officer for some or all of the
companies within the NSA Group.
John R. Miner was elected Executive Vice President in September 2002. Mr.
Miner has served in various capacities with GAI since 1988, most recently as
President of GAI's personal lines division and Director and Senior Vice
President of GAI.
Samuel J. Simon was elected Secretary in September 2002 and Senior Vice
President and General Counsel in December 2002. Since October 1996, Mr. Simon
has served as Assistant General Counsel of AFG. From 1993 to October 1996, Mr.
Simon was Senior Vice President and General Counsel of Citicasters Inc., a
public company that was engaged primarily in the ownership and operation of
television and radio stations. Citicasters was formerly an affiliate of AFG.
Roger Smith was elected Senior Vice President and Chief Financial Officer
in September 2002. Mr. Smith has served in various capacities with GAI since
1989 including Controller and Vice President of GAI and most recently as Vice
President with responsibilities for Corporate Development.
Joseph A. Pietrangelo was elected Senior Vice President in September 2002.
Mr. Pietrangelo has served in various capacities with Infinity's companies since
1999, most recently as Senior Vice President -- Claims for the NSA Group and
GAI's personal lines. From 1997 to 1999, Mr. Pietrangelo was with Zurich/Farmers
Personal Insurance, and for ten years prior to such time, Mr. Pietrangelo served
in various capacities with The Progressive Corporation.
23
Carl H. Lindner III was elected Chairman of the Board in September 2002.
For more than five years, Mr. Lindner has served as Co-President and a director
of AFG. For over ten years, Mr. Lindner has been principally responsible for
AFG's property and casualty insurance operations. Mr. Lindner is also a director
of American Financial Corporation ("AFC"). Carl H. Lindner III is the son of
Carl H. Lindner, who serves as Chairman of the Board of AFG and Great American
Financial Resources, Inc. ("GAFRI", a public company controlled by AFG) as well
as Chief Executive Officer of AFG. Carl H. Lindner III is also the brother of
Keith E. Lindner and S. Craig Lindner, both of whom serve as directors and
executive officers of AFG. S. Craig Lindner is also an executive officer and
director of GAFRI.
Thomas A. Hayes joined the board of directors upon completion of the public
offering. Mr. Hayes joined KMK Consulting Company, a Cincinnati, Ohio-based
business consulting firm, as Vice President in January 2002. From December 1998
to November 1999, Mr. Hayes served as Executive Vice President and Chief
Operating Officer of the Ohio Casualty Group, a public corporation. Prior to
that time, Mr. Hayes was employed in various positions by GAI including, among
others, General Counsel and President of the Commercial Division. Mr. Hayes also
serves as a member of the board of directors of U.S.I. Holding Corporation, a
distributor of insurance and financial products and services to businesses
throughout the United States.
Ethan Jackson joined the board of directors upon completion of the public
offering. For more than five years Mr. Jackson has been a private investor
serving as Chairman and Chief Executive Officer of Basic American Financial,
Inc., a private company not affiliated with AFG, which primarily manages family
holdings. Mr. Jackson spent the majority of his business career in real estate
development and commercial construction, specializing in the medical field. Mr.
Jackson is on the Board of Advisors to Indiana Mills and Manufacturing, Inc., a
private company specializing in safety equipment for the transportation
industry, and serves as Chairman of the Board of the Oral and Maxillofacial
Surgery Foundation.
Keith A. Jensen was elected a director in September 2002. Mr. Jensen has
served as a Senior Vice President of AFG since February 1999. He served as a
Senior Vice President of GAFRI from February 1997 until he was named Executive
Vice President of that company in May 1999. From 1975 until January 1997, Mr.
Jensen was employed by Deloitte and Touche LLP, an independent accounting firm,
having served as partner for the last 11 of those years.
Gregory G. Joseph joined the board of directors upon completion of the
public offering. Mr. Joseph is, and has been for over 10 years, a principal
executive officer and attorney for a number of family-owned, Cincinnati-based
automotive dealerships. He also serves on the advisory board to Xavier
University, Cincinnati, Ohio, and has served as President of the Greater
Cincinnati Auto Dealers Association. Mr. Joseph is the son of Ronald G. Joseph,
who serves as a director of GAFRI.
Gregory C. Thomas joined the board of directors upon completion of the
public offering. Mr. Thomas is currently retired after serving, from May 1990
through September 1996, as Executive Vice President and Chief Financial Officer
of Citicasters Inc., and prior to that, served in several capacities with Taft
Broadcasting Company and as a certified public accountant with Peat Marwick (now
KMPG Peat Marwick). From November 2000 to March 2002, Mr. Thomas served as a
director, chairman of the audit committee and a member of the compensation
committee of Chiquita Brands International, Inc., a leading international
marketer, producer and distributor of quality fresh fruits and vegetables and
processed foods. Both Citicasters and Chiquita were formerly affiliates of AFG.
24
BOARD OF DIRECTORS
The board is divided into two classes of directors who serve for staggered
two-year terms. Infinity's initial Class I directors, whose terms expire in
2004, are James R. Gober, Ethan Jackson and Gregory G. Joseph. Infinity's
initial Class II directors, whose terms expire in 2005, are Thomas A. Hayes,
Keith A. Jensen, Carl H. Lindner III and Gregory C. Thomas. It is expected that
the composition (but not the number) of individuals serving as independent
directors will change prior to the expiration of the terms set forth above.
BOARD COMMITTEES
Following the completion of the public offering, Infinity's board of
directors appointed an audit committee, a compensation committee and a
nominating/governance committee. The audit committee is responsible for
selecting independent accountants, reviewing the results and scope of the
independent accountants' audit and the services provided by them, and reviewing
and evaluating Infinity's audit and control functions. The compensation
committee administers Infinity's stock plans, and makes recommendations
concerning salaries and incentive compensation for its employees and establishes
the compensation of its executive officers. The nominating/governance committee
selects the director nominees to stand for election at annual meetings of
shareholders and develops and recommends to the board a set of corporate
governance principles for the Company.
25
ITEM 11
EXECUTIVE COMPENSATION
None of Infinity's officers received compensation from Infinity in 2002.
After the public offering, the compensation committee of Infinity's board of
directors will establish compensation and benefits for Infinity's executive
officers.
The following table sets forth information with respect to compensation
earned by Infinity's Chief Executive Officer and by its four other executive
officers for the fiscal years ended December 31, 2002 and 2001. All of the
compensation discussed below was paid by AFG or subsidiaries of AFG.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-term Compensation
------------------------------------- ---------------------------
Other Annual LTIP All Other
Name and Position Year Salary Bonus Compensation(a) Payouts(b) Compensation(c)
----------------- ---- ------ ----- --------------- ---------- ---------------
James R. Gober 2002 $385,096 $250,000 $ 9,571 $352,850 $29,000
Chief Executive Officer 2001 362,020 162,500 10,182 208,725 28,400
and President
John R. Miner 2002 389,428 91,732 3,065 196,350 28,058
Executive Vice President 2001 383,334 171,407 8,683 - 28,400
Samuel J. Simon 2002 300,000 35,000 990 - 20,750
Senior Vice President and 2001 300,000 20,000 1,350 - 19,400
General Counsel
Roger Smith 2002 182,520 37,400 2,194 - 15,374
Senior Vice President and 2001 177,802 20,000 750 9,804 13,290
Chief Financial Officer
Joseph A. Pietrangelo 2002 205,961 50,000 400 - 14,996
Senior Vice President 2001 180,000 60,000 330 - 15,400
- ------------
(a) Consists of automobile allowance and insurance premiums.
(b) Executives and other key employees of AFG insurance subsidiaries
participate in long-term incentive plans which reward profitable results
for individual business units based on targeted objectives for the unit
tied to long-term profitability. The plans generally measure cumulative
underwriting profit for the business unit over five years. Payment of
earned amounts is generally made over a three year period following the
term of the plan.
(c) Consists of retirement plan contributions but excludes options granted
under AFG's stock option plan which will immediately vest and remain
exercisable by the executives for a period of three years following
completion of this offering. See "Formation and Separation" in Item 13.
OPTION GRANTS IN LAST FISCAL YEAR
The following table shows 2002 grants to the above named executive officers
of options to purchase AFG common stock under the AFG Stock Option Plan:
Number of Percent of Total
AFG Securities Options Granted Exercise
Underlying to AFG Employees Price Expiration
Options Granted(a) in Fiscal 2002 Per Share(b) Date
--------------- ---------------- --------- ----------
James R. Gober 17,500 1.7% $25.78 2/22/12
John R. Miner 17,500 1.7% 25.78 2/22/12
Samuel J. Simon 7,000 0.7% 25.78 2/22/12
Roger Smith 7,500 0.7% 25.78 2/22/12
Joseph A. Pietrangelo 5,000 0.5% 25.78 2/22/12
(a) Following the completion of the offering, all options held by Infinity's
employees immediately vested and remain exercisable for a period of three
years.
(b) On December 31, 2002, the price of AFG common stock on the New York Stock
Exchange was $23.07.
26
AGGREGATE OPTION EXERCISES TABLE
The following table shows the total number of shares underlying options for
AFG common stock exercised in 2002 and the value at December 31, 2002 of
outstanding options for AFG common stock held by Infinity's named executive
officers.
Number of AFG Securities Value of Unexercised
AFG Shares Underlying Unexercised In-the-Money AFG
Acquired AFG Options at Year End Options at Year End (a)
on Value --------------------------- ----------------------------
Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
-------- -------- ----------- ------------- ----------- -------------
James R. Gober 5,455 13,011 37,500 40,000 $39,300 $58,950
John R. Miner - - 48,500 39,500 39,300 58,950
Samuel J. Simon 1,000 9,725 13,200 16,500 9,870 19,650
Roger Smith - - 13,200 15,800 14,464 21,696
Joseph A. Pietrangelo - - 2,000 7,000 2,656 3,984
(a) The value of unexercised in-the-money options is calculated based on the
New York Stock Exchange closing market price of AFG's common stock at
year-end 2002. This price was $23.07 per share.
DIRECTOR COMPENSATION
Infinity's Regulations provide that, at the discretion of the board of
directors, the directors may be paid their expenses, if any, at each meeting of
the board of directors and may be paid a fixed sum for attendance at each
meeting of the board of directors and a fixed annual fee or a stated salary as a
director. At the discretion of the board, members of special or standing
committees may be allowed like compensation for attending committee meetings.
None of the directors received compensation for services as a board or committee
member in 2002.
With the completion of the initial public offering, directors who are not
an Infinity or AFG employee each receive an annual fee of $25,000 per year, are
paid an attendance fee of $1,500 for each board and committee meeting attended,
are granted options to purchase 2,500 shares of Infinity's Common Stock per year
and are reimbursed for reasonable travel expenses incurred in connection with
their services as directors. Each chairman of a board committee receives an
additional $5,000 annual fee.
EMPLOYMENT AGREEMENT WITH JAMES R. GOBER
Infinity has entered into an employment agreement with James R. Gober which
became effective upon the completion of the initial public offering. Under the
agreement, Infinity has agreed to employ Mr. Gober for a period of two years,
during which time he will be primarily responsible for overseeing Infinity's
business strategy and have other duties commensurate with his position as Chief
Executive Officer. The agreement provides that Infinity pays him a base salary
of at least $550,000 and that he will have an opportunity for an annual bonus of
at least $500,000 under a bonus plan to be established by the compensation
committee. The bonus plan will be based on considerations of Infinity's reported
earnings per share and the underwriting profitability of the insurance
subsidiaries.
In connection with the employment agreement, Mr. Gober has been issued
62,500 shares of Infinity Common Stock under Infinity's 2002 Restricted Stock
Plan and has been granted options to acquire 101,500 shares of Common Stock
under Infinity's 2002 Stock Option Plan.
27
The restrictions on the restricted shares lapse and the stock options vest:
- 30 days prior to the consummation of a change of control, which the
agreement defines as a person or group owning more than 40% of
Infinity's voting stock and a greater percentage than AFG;
- within two years after a merger, consolidation, liquidation or sale of
assets or similar transactions involving Infinity, if the individuals
who are Infinity's directors immediately prior to a merger,
consolidation, liquidation or sale of assets no longer constitute a
majority of the Board; or
- within two years after a tender offer or exchange offer for Infinity's
voting securities if the individuals who are directors of the Company
immediately prior to the commencement of the tender or exchange offer no
longer constitute a majority of the Board.
If Mr. Gober's employment is terminated other than for cause, the agreement
provides that Mr. Gober will receive payment of earned but unpaid salary and
bonus amounts accrued through the date of termination, continual payment of his
most recent salary for a period of 24 months from the date of termination,
payment of two times his annual base bonus amount to be paid over a 24-month
period if certain performance criteria are met, payment of accrued but unused
vacation time, reimbursement of business expenses, 100% vesting of any stock
options and restricted shares which have been granted to Mr. Gober within three
years of the termination date and payment of Mr. Gober's life insurance, medical
and dental benefits for a period of 24 months after termination. Mr. Gober has
agreed not to compete with Infinity or solicit its employees for a period of 24
months following certain events of termination.
STOCK OPTION PLAN
Infinity established the 2002 Stock Option Plan to enable it to attract and
motivate its employees and to encourage the identification of their interests
with those of Infinity's shareholders. The plan also provides for the grant of
options to purchase shares by Infinity's non-employee directors. The plan
provides for the grant of "incentive stock options" that are qualified under the
Internal Revenue Code of 1986, as amended (the "Code"), and for the grant of
nonqualified stock options.
The maximum number of shares of Infinity's Common Stock for which options
may be granted under the plan is 2,000,000 (subject to antidilution provisions).
Infinity's compensation committee administers the plan. Each member of the
committee is an "outside director," as such term is defined under Section 162(m)
of the Code, and a "Non-Employee Director" as defined in Rule 16b-3(b)
promulgated under the Securities Exchange Act of 1934.
Subject to specific limitations contained in the Plan, Infinity's board of
directors has the ability to amend, suspend or terminate the plan at any time
without shareholder approval. Unless earlier terminated, the plan may continue
in effect until December 16, 2012.
Options generally expire ten years after the date of grant, though the
committee can provide for a shorter term for a particular grant. Generally,
subject to the discretion of the compensation committee, 20% of the shares
underlying an option will become exercisable upon the first anniversary of the
date of grant, and 20% become exercisable on each subsequent anniversary.
Exercise prices for options granted under the plan may not be less than the fair
market value on the date of grant. The compensation committee has broad
discretion in determining the terms of the grant of awards under the plan,
subject to the restrictions outlined above. Upon a change of control, as defined
in the plan, all outstanding options will immediately vest in full and become
exercisable.
Payment for shares purchased upon exercise of an option must be made in
cash. The committee, however, may permit payment by delivery of shares of Common
Stock already owned by the optionee having a fair market value equal to the cash
option price of the shares, by assigning the proceeds of a sale or loan with
respect to
28
some or all of the shares being acquired (subject to applicable law), by a
combination of the foregoing or by any other method.
Persons who receive options incur no federal income tax liability at the
time of grant. Persons exercising nonqualified options recognize taxable income,
and Infinity has a tax deduction at the time of exercise to the extent of the
difference between market price on the day of exercise and the exercise price.
Persons exercising incentive stock options do not recognize taxable income until
they sell the underlying common stock. Sales within two years of the date of
grant or one year of the date of exercise result in taxable income to the holder
and a deduction for Infinity, both measured by the difference between the market
price at the time of sale and the exercise price. Sales after such period are
treated as capital transactions to the holder, and Infinity receives no
deduction. The foregoing is only a summary of the federal income tax rules
applicable to options granted under the plan and is not intended to be complete.
In addition, this summary does not discuss the effect of the income or other tax
laws of any state or foreign country in which a participant may reside.
Infinity's board of directors approved the grant of options to purchase
415,180 shares of its Common Stock with an exercise price equal to the initial
public offering price of $16.00 per share. Of the granted options, the executive
officers named below were granted options to acquire the following number of
shares.
Name Shares
---- ------
James R. Gober 101,500
John R. Miner 40,600
Samuel J. Simon 36,540
Roger Smith 20,300
Joseph A. Pietrangelo 16,240
These options have a term of ten years and will vest in five equal annual
installments beginning on the first anniversary of the date of grant.
RESTRICTED STOCK PLAN
Infinity established the 2002 Restricted Stock Plan to enable it to attract
and retain its employees and employees of its subsidiaries and to encourage the
identification of their interests with those of Infinity's shareholders.
The maximum number of shares of Infinity's Common Stock which may be
awarded under the plan is 500,000 (subject to antidilution provisions). If any
employee who has been awarded restricted stock under the plan forfeits his or
her interest in any shares, such shares shall again be available for
distribution in connection with future awards under the plan. Infinity's
compensation committee administers the plan. Each member of the committee is a
"Non-Employee Director" as defined in Rule 16b-3(b) promulgated under the
Securities Exchange Act of 1934.
Subject to specific limitations contained in the plan, Infinity's board of
directors has the ability to amend, suspend or discontinue the plan at any time
without shareholder approval. Unless earlier terminated, the plan may continue
in effect until December 16, 2012.
The plan provides for the awarding of shares of Infinity's Common Stock to
its employees and restricting that recipient's rights of transfer of the shares
until the award vests. Under the plan, one-third of the shares subject to a
restricted stock award vest on each of the first three anniversaries of the date
of the grant of the award. During that restricted period, those shares are
subject to substantial risk of forfeiture. To the extent the recipient forfeits
his or her interest in the stock, he or she will have no rights in the shares
forfeited. A holder of restricted stock under the plan will be entitled to vote
and to receive dividends or other distributions on the shares regardless of
whether the shares have vested.
Employees receiving restricted stock will receive a certificate for all
shares covered by the award at the time of grant. Shares issued will contain a
restrictive legend to prevent the transfer of unvested shares. When the
restrictions have lapsed, the holder of the restricted stock may exchange his or
her certificate for a
29
certificate that does not contain the restrictive legend. If the restrictions
are not complied with, the restricted stock will be forfeited. The restricted
stock may not be sold, assigned, pledged, hypothecated or otherwise disposed of.
As of the date immediately before a merger, consolidation, dissolution or
similar transaction, and 30 days before a change of control (as defined in a
manner identical to that in the description of James R. Gober's restricted stock
above), all restrictions on outstanding shares of restricted stock will lapse
and the shares will be fully vested.
The award of restricted stock under the plan will not result in any taxable
income to the recipient at the time of the award, unless the recipient so
elects. Unless the recipient elects to recognize the income at the time of the
award, the recipient will recognize income for tax purposes at the time the
restrictions on the restricted stock lapse. The amount of income to be
recognized by the employee is the fair market value of Infinity's Common Stock
at the time the restrictions lapse or at the time of the award, if the recipient
has elected to recognize the income at that time. Infinity is entitled to take
appropriate measures to withhold from the restricted stock which becomes free of
plan restrictions or to otherwise obtain from the recipient sufficient sums for
the amount Infinity deems necessary to satisfy any applicable tax withholding
obligations or to make other appropriate arrangements with recipients to satisfy
such obligations. Any dividends received by a recipient as a result of
restricted stock will be treated as ordinary earned income, until such time as
the restrictions lapse and as dividend income after the restrictions have
lapsed. The amount of income included in the recipient's taxable earned income,
resulting from the award of restricted stock and the lapsing of the
restrictions, will (subject to the $1 million annual limitation of Section
162(m) of the Code) measure the amount of the deduction to which Infinity is
entitled.
The tax basis of a recipient in the restricted stock awarded under the plan
will be the fair market value of the restricted stock at the time the
restrictions lapse or at the time of the award, if the employee elected to
recognize the income at such time.
The executive officers named below were awarded the following number of
restricted shares:
Restricted
Name Shares
---- ----------
James R. Gober 62,500
John R. Miner 25,000
Samuel J. Simon 21,875
Roger Smith 15,625
Joseph A. Pietrangelo 9,375
30
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information, as of March 15, 2003,
regarding the beneficial ownership of Infinity's Common Stock by each person
that owns beneficially more than 5% of the outstanding shares of Infinity's
Common Stock.
Name No. of Shares Percent
---- ------------- -------
American Financial Group, Inc. (a) 7,850,465 38%
One East Fourth Street
Cincinnati, Ohio 45202
(a) American Premier Underwriters, Inc., a wholly-owned subsidiary of AFG,
directly owned the above shares of Common Stock as well as those sold in
the public offering.
SECURITIES OWNERSHIP
The following table sets forth information, as of March 15, 2003,
concerning the beneficial ownership of equity securities of Infinity and its
subsidiaries by each director, nominee for director, the executive officers
named in the Summary Compensation Table and by all directors and executive
officers as a group. Unless otherwise indicated, the persons named have sole
voting and dispositive power over the shares reported.
Amount and Nature of
Beneficial Ownership
--------------------
Shares
of Common
Name of Beneficial Owner Stock Held Percent
------------------------ ---------- -------
James R. Gober 68,750 *
John R. Miner 26,875 *
Samuel J. Simon 25,000 *
Roger Smith 16,875 *
Joseph A. Pietrangelo 9,375 *
Carl H. Lindner III 7,850,465(a) 38%
Thomas A. Hayes - -
Ethan Jackson - -
Keith A. Jensen - -
Gregory G. Joseph 2,000 *
Gregory C. Thomas - -
All directors and executive
officers as a group
(11 persons) 7,999,340 39%
- -------------------
(*) Less than 1%
(a) Carl H. Lindner III, along with Carl H. Lindner, S. Craig Lindner and
Keith E. Lindner, has indirect beneficial ownership of shares held by
AFG; Each of them are officers, directors and significant shareholders
of AFG.
31
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At or prior to the completion of the offering in February of 2003, Infinity
entered into a number of agreements with AFG regarding its formation and
operations. The terms of these agreements, as described below, were negotiated
by Infinity and AFG. Prior to the offering, Infinity's board of directors
approved the terms of these agreements. Infinity believes that the terms of
these agreements are comparable to or more favorable than those that it could
have obtained from independent third parties.
FORMATION AND SEPARATION
As part of the initial public offering, Infinity entered into a formation
and separation agreement with AFG that set forth the terms of Infinity's
organization and certain of its ongoing relationships with AFG. Pursuant to the
agreement, AFG transferred to Infinity all of the issued and outstanding common
stock of the following personal auto insurance subsidiaries and their respective
subsidiaries (excluding Leader National Agency of Texas, Inc. and two foreign
subsidiaries): Atlanta Casualty Company, Infinity Insurance Company, Leader
Insurance Company and Windsor Insurance Company. In exchange, Infinity issued to
AFG all of its issued and outstanding common stock and a term note payable in
the amount of $55 million. In addition, pursuant to a reinsurance agreement
described below, effective January 1, 2003, AFG transferred to Infinity
substantially all of the personal lines insurance business written by Great
American Insurance ("GAI") and its subsidiaries through independent agents.
Under the agreement, Infinity received assets (primarily investment securities)
with a market value of $125.3 million.
The formation and separation agreement also required that Infinity and AFG
enter into certain agreements prior to completion of the offering, including the
reinsurance agreement referred to above, a registration rights agreement, an
investment advisory agreement, a services agreement, a non-competition
agreement, a tax allocation indemnification agreement, a license agreement and
other agreements, each as described below. Further, under the agreement, in the
event Infinity incurs certain losses which arise from the operation of the NSA
Group or the Assumed Agency Business prior to the completion of the offering,
AFG shall indemnify Infinity for 60% of the first $25 million of losses which
are in excess of a $13.2 million threshold. Losses covered by this
indemnification would include, among others, those arising from claims for
failure to settle within a policy limit or bad faith claims, and certain other
obligations for which reserves have not been established; provided, however,
that a loss shall neither be subject to indemnification nor included in the
calculation of the $13.2 million threshold unless such loss equals or exceeds
$200,000. Infinity has also agreed to establish reserves for these types of
claims in a manner consistent with past practice and to consult with AFG on its
intentions with respect to any indemnifiable claim.
Additionally, the agreement required that after completion of the offering,
Infinity establish welfare benefit plans for its employees with terms and
conditions generally comparable to those of AFG and use commercially reasonable
efforts to establish, as soon as practicable, retirement and savings plans for
its employees. All options to purchase AFG common stock held by Infinity's
employees immediately vested upon the completion of the offering and remain
exercisable for a period of three years thereafter.
Finally, the agreement provides that Infinity will negotiate in good faith
an insurance management services agreement with GAI if GAI retains its direct to
consumer personal auto book of business after completion of the offering. Under
such services agreement, Infinity will provide, at commercially reasonable
rates, management services necessary for GAI to continue its direct auto
insurance business.
32
REINSURANCE
Effective January 1, 2003, Infinity acquired by reinsurance, substantially
all of the independent agency produced personal lines insurance written by AFG's
principal property and casualty insurance subsidiary, GAI. In addition, Infinity
acquired all personal lines insurance assumed by GAI under a pooling agreement
among GAI and its affiliated insurance companies. GAI's personal lines insurance
consists primarily of personal auto insurance for standard and preferred drivers
but also includes other personal lines business such as homeowners, umbrella
liability and boat owners.
As the reinsurer, Infinity assumed all obligations, liabilities and rights
with respect to the acquired personal lines insurance, including
extracontractual and other non-claims obligations related to the acquired
personal lines business. GAI will, however, for a two-year period, retain all
assigned risk assessments regarding insurance written in New Jersey and all
assigned risk assessments regarding insurance written in New York before January
1, 2003. In consideration for Infinity's assumption of such obligations and
liabilities, on January 1, 2003, GAI transferred to Infinity assets (primarily
securities) in an amount equal to $125.3 million, which represents GAI's net
insurance liabilities on such personal lines agency business, as reflected in
the statement of the assets and liabilities of the acquired personal lines
insurance business as of December 31, 2002. The majority of the securities
transferred to Infinity were investment grade fixed income securities.
Under the agreement, Infinity has the right for three years to cause GAI to
continue writing personal lines insurance in compliance with its form and rate
filings then in effect. Infinity is obligated to fully reinsure any such
personal lines insurance policies issued or renewed by GAI during such time
period. In addition, Infinity is obligated to pay to GAI a ceding commission
equal to GAI's cost of renewing or issuing such business as well as a fronting
fee on such business, which is initially equal to four-tenths of one percent of
gross premiums received. The fronting fee shall be increased if Infinity is no
longer an affiliate, as defined by statutory accounting rules, of AFG in an
amount sufficient to fully compensate GAI for the amount of any increased
Standard & Poor's capital charge for unaffiliated companies reinsurance. In
consideration for providing such reinsurance, Infinity shall receive all net
premiums received by GAI or its affiliates on such renewals or new business.
During the next three years, Infinity intends to make the proper rate and
form filings allowing its insurance subsidiaries to write the policies Infinity
is acquiring under the agreement.
REGISTRATION RIGHTS
Effective as of the completion of the offering, Infinity entered into a
registration rights agreement with AFG. AFG has informed Infinity that it has no
current intention to dispose of, following the offering, any of the remaining
shares of Common Stock that it beneficially owns but wants registration rights
primarily for the purpose of valuing its Infinity Common Stock at market price.
Under this agreement, beginning six months after the completion of the
offering, AFG has the right to require Infinity, on one occasion, to register
under the Securities Act of 1933, shares of Infinity's Common Stock owned by AFG
and its affiliates for sale in a public offering. The shares that AFG and its
affiliates intend to sell must have an expected aggregate price to the public of
at least $5 million.
The registration rights agreement also requires Infinity to file with the
SEC no later than the first anniversary of the completion of the offering and
cause to become effective no later than 90 days thereafter a registration
statement relating to an offer to sell all shares of Common Stock then owned by
AFG. Infinity is not required to file this registration statement if, as of the
first anniversary of the completion of the offering, AFG is no longer the
beneficial owner of at least 9.9% of Infinity's outstanding Common Stock.
Infinity has agreed to keep this registration statement effective for up to 36
months, unless Infinity earlier delivers an opinion of its counsel to AFG that
AFG can sell the shares it continues
33
to own without registration and without any limitations as to volume under Rule
144 promulgated under the Securities Act of 1933.
If Infinity proposes to file a registration statement covering shares of
its Common Stock (other than a registration statement with respect to its
benefit plans or with respect to a business combination), AFG will have the
right to include shares of Common Stock held by it or its affiliates in the
registration, on a second-priority basis to the shares that Infinity is
including in the registration but in priority to any other shareholder who then
has registration rights. If another shareholder demands a registration, AFG will
have the right to include shares of Common Stock held by it or its affiliates in
the registration in priority to both the demanding shareholder and Infinity.
Infinity has agreed to pay all reasonable costs and expenses in connection
with each such registration except underwriting discounts and commissions
applicable to any shares of Common Stock sold by AFG. This agreement contains
customary terms and provisions with respect to, among other things, registration
procedures and rights to indemnification in connection with the registration of
the Common Stock on behalf of AFG.
INVESTMENT ADVISORY
As it has in the past, AFG, through its wholly-owned subsidiary, American
Money Management Corporation, provides investment advisory services to Infinity
and will continue to do so for five years from the consummation of the offering
at a fee of 17/100s of one percent of managed assets. The investment services it
furnishes are in accordance with general investment policies, objectives,
directions and guidelines established from time to time by Infinity's board of
directors or an appropriate committee of the board. For services rendered to
Infinity's subsidiaries, American Money Management charged fees of $1.8 million
in 2002 and $2.0 million in both 2001 and 2000.
TAX ALLOCATION
Infinity, and certain of AFG's subsidiaries, had been parties to a Tax
Allocation Agreement that provided for the filing of consolidated federal income
tax returns and the allocation of income tax liability among various AFG
subsidiaries as a Consolidated Tax Group. As a result of and upon completion of
the offering, Infinity is no longer a member of the Consolidated Tax Group for
federal income tax purposes. In the event any tax issues arise under the Tax
Allocation Agreement with respect to periods during which Infinity was a member
of the Consolidated Tax Group, Infinity has agreed with AFG to enter into a tax
allocation indemnification agreement pursuant to which Infinity will indemnify
the Consolidated Tax Group for liabilities that are allocated to the NSA Group
for periods prior to the offering, and that the Consolidated Tax Group will
indemnify Infinity for tax liabilities that are allocated to other members of
the Consolidated Tax Group for periods prior to the offering. The amount of tax
allocated for such periods is generally equal to the federal income tax that
would have been payable by Infinity during such periods if the NSA Group had
filed separate returns based upon income computed in accordance with generally
accepted accounting principles. Under the tax laws, each member of the
Consolidated Tax Group is severally liable for the federal income tax liability
of each other member of the Consolidated Tax Group. Accordingly, with respect to
periods in which Infinity has been included in the Consolidated Tax Group,
Infinity could be liable for any federal tax liability incurred, but not
discharged, by any other member of the Consolidated Tax Group. As discussed
above, the other members of the Consolidated Tax Group will indemnify Infinity
for that liability. Taxes recorded by the NSA Group for years 2002, 2001 and
2000 were $25.1 million, $6.1 million and ($26.4 million), respectively.
OTHER SERVICES
Effective upon the completion of the offering, Infinity entered into a
services agreement for the provision by AFG to Infinity of certain information
systems and corporate staff services, including human resources, risk
management, legal, financial reporting and other existing shared services. The
term for the provision of each service may vary depending on Infinity's needs.
Some services may be phased out over a brief period of time following the
completion of the offering while
34
others may continue for up to a three year term. Infinity intends to develop its
own internal capabilities in the future in order to reduce and eventually
eliminate its reliance on AFG for such services. Infinity will pay AFG for these
services fees as specified in the services agreement. Infinity does not expect
the fees for these services to exceed those allocated to it prior to its
formation. On each anniversary of the services agreement the fees for certain
services may be adjusted based on the consumer price index. For 2002, 2001 and
2000, Infinity estimates that fees allocated to its insurance operations were
$11 million each year.
NON-COMPETITION
Effective as of the completion of the public offering, Infinity entered
into a non-competition agreement with AFG pursuant to which for a period of five
years following completion of the offering, AFG shall not, and shall not permit
its subsidiaries to:
- offer, issue or sell, directly or indirectly within the United States,
personal automobile insurance written through independent agents; or
- employ, offer to employ or solicit with a view to employment any person
employed by Infinity whose annual base salary exceeds $50,000.
The non-competition agreement will not be binding upon a subsidiary or a
controlling shareholder of AFG after the time such subsidiary or controlling
shareholder ceases to be a subsidiary or controlling shareholder of AFG and will
not apply to any person which becomes an affiliate of AFG after the closing of
the offering (other than a subsidiary of AFG), including any person that
acquires all or substantially all of the capital stock or assets of AFG.
However, the agreement is binding upon any person who has a controlling interest
in AFG upon completion of the offering until the time such person ceases to have
a controlling interest in AFG.
Notwithstanding the foregoing, AFG is not prohibited from:
- engaging in any line of business in which it is engaged at the
completion of the offering; or
- acquiring an interest in any person engaged in any line of business
except for acquisitions of controlling interests, whether in a single
transaction or series of transactions, in any subsidiary or entities
with, in the aggregate, $100,000,000 or more in gross annual written
premiums or, with respect to one person, 50% or more of its gross
revenues, attributable to writing personal automobile insurance, which
Infinity refers to as a permitted acquiree. AFG may acquire a
controlling interest in a person which is not a permitted acquiree, if
AFG promptly divests the personal automobile insurance operations of
such subsidiary.
INTERCOMPANY SECURITIES TRANSACTIONS
The NSA Group has purchased and sold securities at fair value in
transactions with AFG subsidiaries; it has also transferred securities to its
parent in the form of capital distributions and received securities from its
parent as capital contributions. For a further description of these securities
transactions, see Note K to the financial statements.
TRADEMARK LICENSE
Pursuant to a trademark license agreement between GAI and Infinity,
Infinity has rights to use certain trademarks and service marks of GAI in
connection with its business. Under the license agreement, Infinity obtains a
non-exclusive, royalty-free right to use the "Great American" name during the
term of the Reinsurance Agreement principally in connection with the products
and services of the Assumed Agency Business. Infinity also obtains
non-exclusive, royalty-free rights in perpetuity to use certain other trademarks
and service marks of GAI that relate to its business. These licensed marks
remain the property of GAI and may continue to be used by GAI. Infinity's rights
to the marks are subject to certain notice, approval and quality control
requirements, as well as other standard commercial terms. Under the license
agreement, Infinity agreed to indemnify GAI for any claims
35
and losses that result from its use of the marks outside the scope of the
license granted to Infinity.
MISCELLANEOUS
After the offering, Infinity began to lease property located in Cincinnati,
Ohio from GAI and also began to sublease property currently leased by GAI in
Cincinnati, Ohio and Windsor, Connecticut. The leased and subleased premises
consist of the premises currently occupied by the Assumed Agency Business.
Following the offering, Infinity began to share space with GAI at certain of
these properties. The subleases remain effective during a transition period
following the offering through at least the current term of the existing lease.
The lease payments to be made to GAI under any sublease are determined on a
cost-sharing basis calculated by the percentage of space, if any, retained by
GAI and are secured by the assets of the subtenant. Lease payments allocated for
space occupied by the Assumed Agency Business were $1.1 million, $1.1 million
and $1.2 million, respectively, for 2002, 2001 and 2000.
Infinity is a party to two quota share reinsurance agreements with an AFG
subsidiary under which it reinsures the subsidiary's liabilities with respect to
certain policies of personal automobile insurance. The agreements allow Infinity
to write personal lines insurance in certain states on the subsidiary's form and
rate filings then in effect. These agreements may be terminated by either party
upon 90 days written notice.
ITEM 14
CONTROLS AND PROCEDURES
Infinity's chief executive officer and chief financial officer, with
assistance from management, have evaluated Infinity's disclosure controls and
procedures (as defined in Exchange Act Rule 13a-14(c)) as of a date within 90
days prior to filing this report. Based on that evaluation, they concluded that
the controls and procedures are effective. There have been no significant
changes in Infinity's internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
36
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS
INFINITY PROPERTY AND CASUALTY CORPORATION
We have audited the accompanying consolidated balance sheet of Infinity Property
and Casualty Corporation and subsidiaries (the "Company") as of December 31,
2002 and 2001, and the related consolidated statements of operations, changes in
shareholder's equity and cash flows for each of the three years in the period
ended December 31, 2002. Our audits also included the financial statement
schedules listed in the Index at Item 15(a). These financial statements and
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedules based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Infinity Property
and Casualty Corporation at December 31, 2002 and 2001, and the consolidated
results of their operations and cash flows for each of the three years in the
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
As discussed in Note B to the consolidated financial statements, in 2002, the
Company implemented Statement of Financial Accounting Standards No. 142 which
required a change in the method of accounting for goodwill.
ERNST & YOUNG LLP
Cincinnati, Ohio
March 18, 2003
F-1
INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
December 31,
-----------------------------
2002 2001
---- ----
ASSETS:
Investments:
Fixed maturities - at market
(amortized cost - $917,104 and $1,079,747) $ 955,576 $1,082,786
Equity securities - at market
(cost - $19,136 and $43,166) 17,623 44,655
---------- ----------
Total investments 973,199 1,127,441
Cash and cash equivalents 88,053 60,701
Accrued investment income 13,644 17,117
Agents' balances and premiums receivable 188,109 219,589
Prepaid reinsurance premiums 91,924 95,918
Recoverables from reinsurers 34,826 39,079
Deferred policy acquisition costs 21,894 39,948
Receivable from affiliates 33,988 47,529
Prepaid expenses, deferred charges and
other assets 29,241 42,769
Goodwill 70,322 70,322
---------- ----------
$1,545,200 $1,760,413
========== ==========
LIABILITIES AND CAPITAL:
Unpaid losses and loss adjustment expenses $ 604,026 $ 645,194
Unearned premiums 302,627 339,485
Payable to reinsurers 72,701 88,705
Payable to affiliates 59,755 14,176
Accounts payable, accrued expenses and
other liabilities 119,288 110,096
---------- ----------
Total liabilities 1,158,397 1,197,656
Shareholder's Equity:
Common Stock, no par value; 1,000 shares
authorized and 100 shares issued and
outstanding (50,000,000 shares authorized
and 20,347,083 shares issued and outstanding
adjusted for a split effected in January 2003) 1 10,500
Additional paid-in capital 342,743 575,199
Retained earnings 20,000 (25,870)
Unrealized gain on marketable securities, net 24,059 2,928
---------- ----------
Total shareholder's equity 386,803 562,757
---------- ----------
$1,545,200 $1,760,413
========== ==========
See notes to financial statements.
F-2
INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year ended December 31,
----------------------------------
2002 2001 2000
---- ---- ----
INCOME:
Earned premiums $645,857 $916,378 $1,043,316
Net investment income 61,260 75,215 69,326
Realized losses on investments (6,707) (5,901) (5,376)
Other income 4,043 4,312 3,564
-------- -------- ----------
704,453 990,004 1,110,830
COSTS AND EXPENSES:
Losses and loss adjustment expenses 527,786 752,336 915,808
Commissions and other underwriting expenses 78,970 202,111 229,516
Other operating and general expenses 26,764 19,763 24,371
-------- -------- ----------
633,520 974,210 1,169,695
-------- -------- ----------
Operating earnings (loss) before income taxes 70,933 15,794 (58,865)
Provision (credit) for income taxes 25,063 6,063 (20,231)
-------- -------- ----------
Net operating earnings (loss) 45,870 9,731 (38,634)
Equity in net losses of affiliates, net of tax - - (11,461)
-------- -------- ----------
NET EARNINGS (LOSS) $ 45,870 $ 9,731 ($ 50,095)
======== ======== ==========
See notes to financial statements.
F-3
INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
(IN THOUSANDS)
Common Stock Unrealized
and Paid-in Retained Gain (Loss)
Capital Earnings on Securities Total
------------ -------- ------------- -----
BALANCE AT DECEMBER 31, 1999 $551,567 $14,494 ($32,096) $533,965
Net loss - (50,095) - (50,095)
Change in unrealized - - 25,496 25,496
--------
Comprehensive loss (24,599)
Return of capital (41,500) - - (41,500)
Capital contributions 144,300 - - 144,300
Other 2,016 - - 2,016
-------- ------- ------- --------
BALANCE AT DECEMBER 31, 2000 $656,383 ($35,601) ($ 6,600) $614,182
======== ======= ======= ========
Net earnings $ - $ 9,731 $ - $ 9,731
Change in unrealized - - 9,528 9,528
--------
Comprehensive income 19,259
Return of capital (69,350) - - (69,350)
Other (1,334) - - (1,334)
-------- ------- ------- --------
BALANCE AT DECEMBER 31, 2001 $585,699 ($25,870) $ 2,928 $562,757
======== ======= ======= ========
Net earnings $ - $45,870 $ - $ 45,870
Change in unrealized - - 21,131 21,131
--------
Comprehensive income 67,001
Return of capital (189,476) - - (189,476)
Issuance of shares to AFG 1 - - 1
Issuance of Note Payable to AFG (55,000) - - (55,000)
Other 1,520 - - 1,520
-------- ------- ------- --------
BALANCE AT DECEMBER 31, 2002 $342,744 $20,000 $24,059 $386,803
======== ======= ======= ========
See notes to financial statements.
F-4
INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
Year ended December 31,
-----------------------------------
2002 2001 2000
---- ---- ----
OPERATING ACTIVITIES:
Net earnings (loss) $ 45,870 $ 9,731 ($ 50,095)
Adjustments:
Equity in net losses of affiliates - - 11,461
Depreciation and amortization 13,741 13,548 11,363
Realized losses on investments 6,707 5,901 5,376
Decrease (increase) in agents balances and
premiums receivable 31,480 72,814 (26,210)
Decrease (increase) in reinsurance
receivables 8,247 (119,849) (2,153)
Decrease (increase) in deferred policy
acquisition costs 18,054 43,807 (3,597)
Decrease (increase) in other assets 4,601 (1,468) 390
Change in balances with affiliates 1,645 (6,647) (23,656)
Increase (decrease) in insurance claims
and reserves (78,026) (78,833) 117,381
Increase (decrease) in payable to reinsurers (16,004) 88,705 -
Increase (decrease) in other liabilities 4,833 5,519 (13,599)
Other, net 4,336 (238) (1,410)
--------- --------- --------
45,484 32,990 25,251
--------- --------- --------
INVESTING ACTIVITIES:
Purchases of and additional investments in:
Fixed maturity investments (325,783) (531,892) (148,226)
Equity securities (109) - (9,780)
Property and equipment (4,015) (17,785) (30,774)
Maturities and redemptions of fixed maturity
investments 105,471 67,402 53,683
Sales of:
Fixed maturity investments 295,130 384,137 46,443
Equity securities 18,891 9,305 33,946
Property and equipment 324 16,301 298
--------- --------- --------
89,909 (72,532) (54,410)
--------- --------- --------
FINANCING ACTIVITIES:
Capital contributions - - 144,300
Dividends and return of capital distributions (108,041) (61,864) (10,698)
--------- --------- --------
(108,041) (61,864) 133,602
--------- --------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 27,352 (101,406) 104,443
Cash and cash equivalents at beginning of period 60,701 162,107 57,664
--------- --------- --------
Cash and cash equivalents at end of period $ 88,053 $ 60,701 $162,107
========= ========= ========
See notes to financial statements.
F-5
INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
INDEX TO NOTES
A. ORGANIZATION AND BASIS OF PRESENTATION G. EQUITY IN AFFILIATES
B. ACCOUNTING POLICIES H. INCOME TAXES
C. INVESTMENTS I. QUARTERLY OPERATING RESULTS
D. GOODWILL J. INSURANCE
E. PAYABLE TO AFFILIATES K. ADDITIONAL INFORMATION
F. SHAREHOLDER'S EQUITY
- -------------------------------------------------------------------------------
A. ORGANIZATION AND BASIS OF PRESENTATION
Infinity Property and Casualty Corporation ("Infinity") was formed in
September 2002 as an indirect wholly-owned subsidiary of American
Financial Group ("AFG") to acquire and conduct, as a separate public
company, AFG's personal insurance business written through
independent agents. At December 31, 2002, AFG transferred to Infinity
all of the issued and outstanding capital stock of the following
personal auto insurance subsidiaries: Atlanta Casualty Company,
Infinity Insurance Company, Leader Insurance Company and Windsor
Insurance Company (collectively the "NSA Group").
Through a reinsurance transaction effective January 1, 2003, Infinity
assumed the personal lines business written through agents (the
"Assumed Agency Business") by AFG's principal property and casualty
subsidiary, Great American Insurance Company ("GAI"). GAI, in turn,
transferred to Infinity assets (primarily investment securities) with
a market value of $125.3 million and permits Infinity to continue to
write standard and preferred insurance on policies issued by the same
GAI companies which had previously issued such policies. This
arrangement will continue for a period of up to three years during
which time Infinity intends to make the proper rate and form filings
to allow its insurance subsidiaries to write these policies.
The business assumed from GAI in 2003 is not included in the
historical consolidated statements of Infinity. The Assumed Agency
Business reported the following selected financial data as of
December 31, 2002 and 2001, and for the three years ended December
31, 2002:
2002 2001 2000
---- ---- ----
Earnings Statement Data:
Earned Premiums $107.2 $149.9 $128.9
Underwriting Loss (10.0) (14.7) (3.6)
Balance Sheet Data:
Assets (excluding Investments) to
be Transferred $ 53.5 $ 78.8
Investments to be Transferred 125.3 -
Unpaid Losses and Loss Adjustment
Expenses 125.6 115.9
Liabilities to be Transferred 178.8 200.5
At December 31, 2002, AFG beneficially owned all of Infinity's Common
Stock. In February of 2003, AFG sold 12.5 million shares (61%) of
Infinity in an initial public offering.
The accompanying consolidated financial statements include the
accounts of Infinity and its subsidiaries as of December 31, 2002.
Infinity's prior period financial statements represent the combined
statements of the NSA Group. Earnings per share data is not
applicable because the Consolidated Statement of Operations represent
the combined statements of wholly-owned subsidiaries.
The accompanying income statements include expenses incurred directly
by Infinity as well as charges for fees allocated by other AFG
subsidiaries to Infinity for various services. Prior to 2002, charges
billed by GAI for
F-6
INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
corporate staff services, including human resources, risk management,
legal, and financial reporting were based on estimated usage.
Beginning in 2002, these costs are based on the percentage of capital
that each of the AFG property and casualty insurance subsidiaries
needs to run its business, which approximates estimated usage.
Investment management fees have been based on the proportion each
subsidiary's portfolio (at market value) bears to the total
portfolios being managed. Management believes that these charges
billed by AFG are reasonable and the accompanying consolidated
financial statements are representative of the costs of Infinity
doing business on a stand-alone basis.
All significant intercompany balances and transactions have been
eliminated. The results of operations of companies since their
formation or acquisition are included in the consolidated financial
statements.
The acquisition of the NSA Group has been accounted for at AFG's
historical carrying amounts as transfers of net assets between
entities under common control in accordance with Statement of
Financial Accounting Standards No. 141.
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Changes in circumstances
could cause actual results to differ materially from those estimates.
B. ACCOUNTING POLICIES
INVESTMENTS All fixed maturity securities are considered "available
for sale" and reported at fair value with unrealized gains and losses
reported as a separate component of shareholder's equity. Premiums
and discounts on mortgage-backed securities are amortized over a
period based on estimated future principal payments, including
prepayments. Prepayment assumptions are reviewed periodically and
adjusted to reflect actual prepayments and changes in expectations.
The most significant determinants of prepayments are the difference
between interest rates on the underlying mortgages and current
mortgage loan rates and the structure of the security. Other factors
affecting prepayments include the size, type and age of underlying
mortgages, the geographic location of the mortgaged properties and
the credit worthiness of the borrowers. Variations from anticipated
prepayments will affect the life and yield of these securities.
Gains or losses on securities are determined on the specific
identification basis. When a decline in the value of a specific
investment is considered to be other than temporary, a provision for
impairment is charged to earnings and the cost basis of that
investment is reduced.
EQUITY IN NET LOSSES OF AFFILIATES Equity in net losses of affiliates
represents Infinity's proportionate share of the losses of Chiquita
Brands International which AFG accounted for under the equity method.
Due to Chiquita's announced intention to pursue a plan to restructure
its public debt, Infinity wrote down its investment in Chiquita
common stock to market value at December 31, 2000. In 2001, Infinity
suspended accounting for the investment under the equity method
because AFG no longer had the ability to influence the operating and
financial policies of Chiquita, and reclassified the investment to
"Equity securities". All remaining shares held by Infinity after the
restructuring were sold in 2002.
GOODWILL Goodwill represents the excess of Infinity's cost basis of
its subsidiaries over its equity in their underlying net assets.
Through December 31, 2001, goodwill was being amortized over periods
of 20 to 40 years. Effective January 1, 2002, Infinity implemented
Statement of Financial Accounting Standards ("SFAS") No. 142 under
which goodwill is no longer amortized but is subject to an impairment
test at least annually. The transitional test under the new standard
indicated there was no impairment at that date.
F-7
INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
REINSURANCE Infinity's insurance subsidiaries cede reinsurance to
other companies. To the extent that any reinsuring companies are
unable to meet obligations under agreements covering reinsurance
ceded, Infinity's insurance subsidiaries would remain liable. Amounts
recoverable from reinsurers are estimated in a manner consistent with
the claim liability associated with the reinsured policies.
Infinity's insurance subsidiaries report as assets (a) the estimated
reinsurance recoverable on unpaid losses, including an estimate for
losses incurred but not reported, and (b) amounts paid to reinsurers
applicable to the unexpired terms of policies in force. Payable to
reinsurers represents ceded premiums retained by Infinity's insurance
subsidiaries to fund ceded losses as they become due. Infinity's
insurance subsidiaries also assume reinsurance, primarily from other
AFG subsidiaries. Income on reinsurance assumed is recognized based
on reports received from ceding companies.
DEFERRED POLICY ACQUISITION COSTS ("DPAC") Policy acquisition costs
(principally commissions, premium taxes and other marketing and
underwriting expenses) related to the production of new business are
deferred and charged against income ratably over the terms of the
related policies. The method followed in computing DPAC limits the
amount of such costs to their estimated realizable value without any
consideration for anticipated investment income.
UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES The net liabilities stated
for unpaid claims and for expenses of investigation and adjustment of
unpaid claims are based upon (a) the accumulation of case estimates
for losses reported prior to the close of the accounting period on
direct business written; (b) estimates received from ceding
reinsurers and insurance pools and associations; (c) estimates of
unreported losses based on past experience; (d) estimates based on
experience of expenses for investigating and adjusting claims and (e)
the current state of the law and coverage litigation. These
liabilities are subject to the impact of changes in claim amounts and
frequency and other factors. Unpaid losses and loss adjustment
expenses have not been reduced for reinsurance recoverable. Changes
in estimates of the liabilities for losses and loss adjustment
expenses are reflected in the Consolidated Statement of Operations in
the period in which determined. In spite of the variability inherent
in such estimates, management believes that the liabilities for
unpaid losses and loss adjustment expenses are adequate.
PREMIUM RECOGNITION Premiums are earned over the terms of the
policies on a pro rata basis. Unearned premiums represent that
portion of premiums written which is applicable to the unexpired
terms of policies in force. On reinsurance assumed from other
insurance companies or written through various underwriting
organizations, unearned premiums are based on reports received from
such companies and organizations.
INCOME TAXES Infinity plans to file consolidated federal income tax
returns including all 80%-owned U.S. subsidiaries for periods
following its initial public offering. Prior to the offering,
Infinity and its subsidiaries were part of the American Financial
Corporation ("AFC", an AFG subsidiary) tax group. Infinity's
companies had separate tax allocation agreements with AFC which
designated how tax payments were shared by members of the tax group.
In general, companies computed taxes on a separate return basis and
made payments to (or receive benefits from) AFC based on taxable
income. The tax allocation agreements with AFC have not impacted the
recognition of income tax expense and income tax payable in
Infinity's financial statements.
Deferred income taxes are calculated using the liability method.
Under this method, deferred income tax assets and liabilities are
determined based on differences between financial reporting and tax
bases and are measured using enacted tax rates. Deferred tax assets
are recognized if it is more likely than not that a benefit will be
realized. Current and deferred tax assets and liabilities are
aggregated with other amounts receivable from affiliates.
F-8
INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
BENEFIT PLANS Infinity has provided retirement benefits to qualified
employees of participating companies through the AFG Retirement and
Savings Plan, a defined contribution plan. The employer makes all
contributions to the retirement fund portion of the plan and matches
a percentage of employee contributions to the savings fund.
Contributions to benefit plans are charged against earnings in the
year for which they are declared. Following the initial public
offering, Infinity established its own separate retirement and
savings plan.
Infinity and many of its subsidiaries provide health care and life
insurance benefits to eligible retirees. Infinity also provides
postemployment benefits to former or inactive employees (primarily
those on disability) who were not deemed retired under other company
plans. The projected future cost of providing these benefits is
expensed over the period the employees earn such benefits.
DERIVATIVES Derivatives included in the Consolidated Balance Sheet
consist of investments in common stock warrants (included in Equity
securities). The carrying value of these warrants is less than $1
million at December 31, 2002. Changes in fair value of derivatives
are included in current earnings as realized gains (losses) on
investments.
STATEMENT OF CASH FLOWS For cash flow purposes, "investing
activities" are defined as making and collecting loans and acquiring
and disposing of debt or equity instruments and property and
equipment. "Financing activities" include obtaining resources from
owners and providing them with a return on their investments. All
other activities are considered "operating". Investments having
original maturities of three months or less when purchased are
considered to be cash equivalents for purposes of the financial
statements.
C. INVESTMENTS Fixed maturities and equity securities consisted of the
following (in millions):
December 31, 2002 December 31, 2001
---------------------------------------- -----------------------------------------
Amortized Market Gross Unrealized Amortized Market Gross Unrealized
Cost Value Gains Losses Cost Value Gains Losses
--------- ------ ----- ------ --------- -------- ----- ------
Fixed maturities:
United States Government
and government agencies
and authorities $ 84.1 $ 88.2 $ 4.1 $ - $ 106.3 $ 108.7 $ 2.5 ($ .1)
States, municipalities and
political subdivisions 56.0 59.7 3.8 (.1) 49.4 51.0 2.0 (.4)
Foreign government 2.3 2.5 .2 - 2.8 2.9 .1 -
Public utilities 111.8 112.8 3.7 (2.7) 126.9 127.5 1.9 (1.3)
Mortgage-backed securities 133.1 138.8 6.1 (.4) 139.0 138.7 2.0 (2.3)
All other corporate 520.3 543.0 31.6 (8.9) 647.8 647.5 13.6 (13.9)
Redeemable preferred stocks 9.5 10.6 1.4 (.3) 7.6 6.5 .1 (1.2)
------ ------ ----- ----- -------- -------- ----- -----
$917.1 $955.6 $50.9 ($12.4) $1,079.8 $1,082.8 $22.2 ($19.2)
====== ====== ===== ===== ======== ======== ===== =====
Equity securities $ 19.1 $ 17.6 $ .4 ($ 1.9) $ 43.2 $ 44.7 $ 4.5 ($ 3.0)
====== ====== ===== ===== ======== ======== ===== =====
The table below sets forth the scheduled maturities of fixed maturities
based on market value as of December 31, 2002. Securities that do not have
a single maturity date are reported at average maturity. Data based on
amortized cost is generally the same. Actual maturities may differ from
contractual maturities because certain securities may be called or prepaid
by the issuers. Mortgage-backed securities had an average life of
approximately four years at December 31, 2002.
Maturity
One year or less 8%
After one year through five years 33
After five years through ten years 37
After ten years 7
---
85
Mortgage-backed securities 15
---
100%
===
F-9
INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Certain risks are inherent in connection with fixed maturity securities,
including loss upon default, price volatility in reaction to changes in
interest rates, and general market factors and risks associated with
reinvestment of proceeds due to prepayments or redemptions in a period of
declining interest rates.
The change in unrealized gain (loss) on marketable securities included the
following (in millions):
Pretax
---------------------
Fixed Equity Tax
Maturities Securities Effects Net
---------- ---------- ------- ---
Year ended December 31, 2002
----------------------------
Unrealized holding gains (losses) on
securities arising during the period $33.9 ($8.2) ($ 9.0) $16.7
Realized losses included in net income 1.5 5.2 (2.3) 4.4
----- ---- ----- -----
Change in unrealized gain (loss) on
marketable securities, net $35.4 ($3.0) ($11.3) $21.1
===== ==== ===== =====
Year ended December 31, 2001
----------------------------
Unrealized holding gains (losses) on
securities arising during the period $17.6 ($8.8) ($ 3.1) $ 5.7
Realized losses (gains) included in
net income (.6) 6.5 (2.1) 3.8
----- ---- ----- -----
Change in unrealized gain (loss) on
marketable securities, net $17.0 ($2.3) ($ 5.2) $ 9.5
===== ==== ===== =====
Year ended December 31, 2000
----------------------------
Unrealized holding gains on
securities arising during the period $28.3 $5.4 ($11.7) $22.0
Realized losses included in net income 4.0 1.4 (1.9) 3.5
----- ---- ----- -----
Change in unrealized gain (loss) on
marketable securities, net $32.3 $6.8 ($13.6) $25.5
===== ==== ===== =====
Gross gains and losses on fixed maturity investment transactions included in
the Consolidated Statement of Cash Flows consisted of the following (in
millions):
2002 2001 2000
---- ---- ----
Gross Gains $14.3 $14.8 $ .6
Gross Losses (15.8) (14.2) (4.6)
D. GOODWILL Goodwill amortization expense was $2.2 million in both 2001 and
2000. If this amount had not been expensed, net earnings would have been
$12.0 million in 2001 and the net loss would have been $47.9 million in
2000. At December 31, 2001, accumulated amortization amounted to
approximately $37.8 million. Effective January 1, 2002, goodwill is no
longer amortized.
E. PAYABLE TO AFFILIATES Included in payable to affiliates is a $55 million,
ten-year promissory note payable to AFG with an interest rate of 8.5%.
Interest on the notes is payable semiannually and the principal is due at
maturity in January 2013.
F. SHAREHOLDER'S EQUITY Prior to December 31, 2002, amounts shown in
Shareholder's Equity represent the combined balances of the NSA Group.
Accordingly, shares outstanding and earnings per share information are not
applicable. At December 31, 2002, the components of Shareholder's Equity
are Infinity's.
Infinity issued 100 shares of Common Stock to American Premier Underwriters,
Inc. ("APU"), a 100%-owned subsidiary of AFG, in connection with the
formation of Infinity in September 2002. On December 31, 2002, Infinity
issued an additional 900 shares of Common Stock in exchange for the
capital stock of the NSA Group companies. In January 2003, Infinity
increased its authorized capital stock to 50,000,000 shares of Common
Stock and 10,000,000 shares of Preferred Stock and implemented a common
stock split. After the stock split, Infinity had
F-10
INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
20,347,083 shares of Common Stock outstanding. No Preferred Stock has been
issued. AFG beneficially owned all of the outstanding shares of Infinity
Common Stock at December 31, 2002, and 39% after 12.5 million shares were
sold in a public offering completed in February of 2003.
STOCK OPTIONS Infinity established its stock option plan in 2002. At
December 31, 2002, there were 2 million shares of Infinity Common Stock
reserved for issuance under Infinity's Stock Option Plan. No options were
granted in 2002.
G. EQUITY IN AFFILIATES At December 31, 2000, Infinity owned 2 million shares
(3%) of Chiquita common stock. AFG and its subsidiaries owned an additional
22 million shares (33%) of Chiquita common stock at that date. Chiquita is a
leading international marketer, producer and distributor of quality fresh
fruits and vegetables and processed foods. Chiquita reported net losses
attributable to common shares of $112 million in 2000.
In January 2001, Chiquita announced a restructuring initiative that included
discontinuing all interest and principal payments on its public debt. Due to
the expected restructuring, Infinity recorded a fourth quarter 2000 pretax
charge of $14.2 million to write down its investment in Chiquita to quoted
market value at December 31, 2000. In 2001, Infinity suspended accounting
for the investment under the equity method and reclassified the investment
to "Equity securities". In the third quarter of 2001, Infinity wrote down
its investment in Chiquita by an additional $669,000. In March 2002, the
court approved Chiquita's plan of reorganization under Chapter 11 of the
U.S. Bankruptcy Code. Under the plan, over $700 million in principal and
accrued interest related to Chiquita's public debt was converted into common
equity. As a result, Infinity received approximately 14,400 "new" shares in
the reorganized company plus warrants expiring in 2009 to purchase an
additional 240,000 shares at $19.23 per share. All of the common shares were
sold in 2002.
H. INCOME TAXES The following is a reconciliation of income taxes at the
statutory rate of 35% and income taxes as shown in the Consolidated
Statement of Operations (in thousands):
Year ended December 31,
------------------------------
2002 2001 2000
---- ---- ----
Earnings (loss) before income taxes:
Operating $70,933 $15,794 ($58,865)
Equity in net losses of affiliates - - (17,632)
------- ------- -------
Total $70,933 $15,794 ($76,497)
======= ======= =======
Income taxes at statutory rate $24,827 $ 5,528 ($26,774)
Effect of:
Amortization of goodwill - 782 782
Dividends received deduction (450) (385) (488)
Other 686 138 78
------- ------- -------
Total Provision (Credit) 25,063 6,063 (26,402)
Amounts applicable to:
Equity in net losses of affiliates - - 6,171
------- ------- -------
Provision (credit) for income taxes as
shown on the Consolidated Statement of
Operations $25,063 $ 6,063 ($20,231)
======= ======= =======
The total income tax provision (credit) consists of (in thousands):
2002 2001 2000
---- ---- ----
Current $34,070 $ 4,964 ($18,998)
Deferred (9,007) 1,099 (7,404)
------- ------- -------
$25,063 $ 6,063 ($26,402)
======= ======= =======
F-11
INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Deferred income tax assets and liabilities reflect temporary differences
between the carrying amounts of assets and liabilities recognized for
financial reporting purposes and the amounts recognized for tax
purposes. The significant components of deferred tax assets and
liabilities included in the Consolidated Balance Sheets were as follows
(in millions):
December 31,
-----------
2002 2001
---- ----
Deferred tax assets:
Discount on loss reserve $17.9 $20.4
Unearned premium reserve 14.0 16.3
Investment securities .2 11.9
Net operating loss carryforward 6.8 8.5
Other, net 9.3 9.5
------- -------
48.2 66.6
------- -------
Valuation allowance for deferred
tax assets (17.8) (17.8)
------- -------
30.4 48.8
Deferred tax liabilities:
Deferred policy acquisition costs (7.7) (14.0)
Depreciation and amortization (4.9) (6.8)
------- -------
(12.6) (20.8)
------- -------
Net deferred tax asset $17.8 $28.0
======= =======
The gross deferred tax asset has been reduced by a valuation allowance
based on an analysis of the likelihood of realization. Factors considered
in assessing the need for a valuation allowance include: (i) opportunities
to generate taxable income from sales of appreciated assets, and (ii) the
likelihood of generating larger amounts of taxable income in the future.
The likelihood of realizing this asset will be reviewed periodically; any
adjustments required to the valuation allowance will be made in the period
in which the developments on which they are based become known.
I. QUARTERLY OPERATING RESULTS (UNAUDITED) While insurance premiums are
recognized on a relatively level basis, claim losses related to adverse
weather (snow, hail, hurricanes, tornadoes, etc.) may be seasonal.
Quarterly results necessarily rely heavily on estimates and are not
necessarily indicative of results for longer periods of time.
The following are quarterly results of consolidated operations of Infinity
for the two years ended December 31, 2002 (in millions).
1st 2nd 3rd 4th Total
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ----
2002
------------------
Revenues $187.9 $170.8 $181.5 $164.3 $704.5
Net earnings 10.6 2.9 17.9 14.5 45.9
2001
------------------
Revenues $287.4 $272.2 $225.7 $204.7 $990.0
Net earnings (loss) (1.5) (12.4) 8.5 15.1 9.7
Realized gains (losses) on securities amounted to (in millions):
1st 2nd 3rd 4th Total
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ----
2002 ($.4) ($11.4) $5.4 ($ .3) ($6.7)
2001 (.2) (4.9) .7 (1.5) (5.9)
F-12
INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
J. INSURANCE Securities having a carrying value of about $40 million at
December 31, 2002, were on deposit as required by regulatory authorities.
INSURANCE RESERVES The following table provides an analysis of changes in
the liability for losses and loss adjustment expenses, net of reinsurance
(and grossed up), over the past three years on a GAAP basis (in millions):
Year ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Balance at beginning of period $608 $627 $543
Provision for losses and LAE
occurring in the current year 527 762 941
Net increase (decrease) in provision
for claims of prior years 1 (10) (25)
---- ---- ----
Total losses and LAE incurred 528 752 916
Payments for losses and LAE of:
Current year (252) (436) (544)
Prior years (313) (335) (288)
---- ---- ----
Total payments (565) (771) (832)
---- ---- ----
Balance at end of period $571 $608 $627
==== ==== ====
Add back reinsurance recoverables 33 37 13
---- ---- ----
Gross unpaid losses and LAE included $604 $645 $640
in the Balance Sheet ==== ==== ====
REINSURANCE Effective April 2001, Infinity's insurance subsidiaries entered
into a reinsurance agreement with Inter-Ocean Reinsurance (Ireland)
Limited, under which Infinity agreed to cede 90% of its automobile physical
damage business written through December 2002. This agreement has been
renewed for 2003 on terms substantially equivalent to those in effect in
2002. Under the agreement, Infinity retains all of the ceded premiums to
fund ceded losses as they become due from Inter-Ocean. Interest is credited
to Inter-Ocean for funds held on their behalf. Premiums ceded under this
agreement were $296 million and $220 million for the years 2002 and 2001,
respectively. Interest credited, which is reported as a reduction of net
investment income, was $7.7 million and $3.1 million for the years 2002 and
2001, respectively.
In addition, Infinity's insurance subsidiaries assume a limited amount of
other business, primarily from affiliates of AFG. The following table shows
(in millions) (i) written and earned premiums included in income for
reinsurance assumed, (ii) amounts deducted from written and earned premiums
in connection with reinsurance ceded and (iii) reinsurance recoveries
deducted from losses and loss adjustment expenses.
Year ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Direct premiums written $873 $908 $1,011
Reinsurance assumed 42 55 67
Reinsurance ceded (302) (225) (4)
---- ---- ------
Net written premiums $613 $738 $1,074
===== ===== ======
Direct premiums earned 906 $986 $975
Reinsurance assumed 46 60 72
Reinsurance ceded (306) (130) (4)
---- ---- ------
Net earned premiums $646 $916 $1,043
===== ===== ======
Reinsurance recoveries $174 $93 $10
===== ===== ======
F-13
INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NET INVESTMENT INCOME The following table shows (in millions) investment
income earned and investment expenses (including interest charges on
payables to reinsurers) incurred by Infinity's insurance companies.
Year ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Investment income:
Fixed maturities $ 70.3 $ 79.5 $ 69.8
Equity securities 1.1 1.3 2.0
Other .2 .2 .2
------ ----- -----
71.6 81.0 72.0
Investment expenses (a) (10.3) (5.8) (2.7)
------ ----- -----
$61.3 $75.2 $69.3
====== ===== =====
(a) Investment expenses include interest of $7.7 million in 2002 and $3.1
million in 2001 that was credited in connection with the Inter-Ocean
Reinsurance (Ireland) Limited reinsurance agreement.
STATUTORY INFORMATION Insurance companies are required to file financial
statements with state insurance regulatory authorities prepared on an
accounting basis prescribed or permitted by such authorities (statutory
basis). Net earnings (loss) and policyholders' surplus on a statutory basis
were as follows (in millions):
Policyholders'
Net Earnings (Loss) Surplus
--------------------------- -----------------
2002 2001 2000 2002 2001
---- ---- ---- ---- ----
$65.6 $56.9 ($52.2) $325.4 $442.8
K. ADDITIONAL INFORMATION Total rental expense for various leases of office
space and equipment was $15.2 million, $14.1 million and $12.9 million for
2002, 2001 and 2000, respectively.
Future minimum rentals, related principally to office space, required under
operating leases having initial or remaining noncancelable lease terms in
excess of one year at December 31, 2002, were as follows: 2003 - $14.6
million; 2004 - $14.6 million; 2005 - $11.8 million; 2006 - $8.7 million;
2007 - $5.8 million and $16.6 million thereafter.
Agents' balances and premiums receivable included in the balance sheet are
shown net of allowances for uncollectible accounts. The provision for such
losses is included in other operating and general expenses. A progression
of the aggregate allowance follows (in millions):
2002 2001 2000
---- ---- ----
Beginning balance $10.1 $10.4 $ 8.9
Provision for losses 14.1 14.3 14.9
Uncollectible amounts written off (15.3) (14.6) (13.4)
----- ----- -----
Ending balance $ 8.9 $10.1 $10.4
===== ===== =====
RESTRICTIONS ON TRANSFER OF FUNDS AND ASSETS OF SUBSIDIARIES Payments of
dividends, loans and advances by Infinity companies are subject to various
state laws, federal regulations and debt covenants which limit the amount
of dividends, loans and advances that can be paid. Under applicable
restrictions, the maximum amount of dividends payable in 2003 from
Infinity's insurance companies without seeking regulatory clearance is
approximately $51 million. Additional amounts of dividends, loans and
advances require regulatory approval.
BENEFIT PLANS Infinity expensed approximately $5.1 million in 2002, $4.2
million in 2001 and $6.4 million in 2000 for their retirement and employee
savings plans.
F-14
INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
CONTINGENCIES Infinity is subject to various litigation resulting
principally from normal insurance activities. Based on advice of counsel,
management believes that the outcome of such matters will not have a
material effect upon Infinity's consolidated financial position.
RELATED PARTY TRANSACTIONS Various business has been transacted between
Infinity and AFG and its subsidiaries over the past several years,
including insurance, computer processing and programming, payroll
processing, office rental and sales of assets. Aggregate charges for these
items have been insignificant in relation to revenues.
Infinity's investment portfolio is managed by a subsidiary of AFG. Net
investment income includes investment management charges of $1.8 million in
2002 and $2.0 million in both 2001 and 2000.
Infinity has purchased and sold securities at fair value in transactions
with AFG subsidiaries; it has also transferred securities to its former
parent in the form of capital distributions and received securities from
its former parent as capital contributions. Such purchases, sales and
transfers and related realized gains (losses) were as follows (in
millions):
Acquisitions Dispositions Realized Losses
------------ ------------ ---------------
2002 $ - $102.7 ($7.9)
2001 31.6 7.5 ( .1)
2000 - 30.8 (.9)
Included in receivable from affiliates at December 31, 2002 and 2001 are
approximately $32.5 million and $37.5 million, respectively, of tax
benefits receivable from AFC.
F-15
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS
INFINITY PROPERTY AND CASUALTY CORPORATION
We have audited the accompanying statement of assets (excluding investments) and
liabilities to be transferred of the Personal Lines Agency Business of Great
American Insurance Company as of December 31, 2002 and 2001, and the related
statements of underwriting gains and losses and underwriting cash flows for each
of the three years in the period ended December 31, 2002. Our audits also
included the schedules listed in the Index at Item 15(a). These statements and
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the statements. We believe that
our audits provide a reasonable basis for our opinion.
The accompanying statements were prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission for inclusion in
the Form 10-K of Infinity Property and Casualty Corporation, and as described in
Note A, are not intended to be a complete presentation of the Company's assets,
liabilities, revenues, expenses and cash flows.
In our opinion, the accompanying statements of assets (excluding investments)
and liabilities to be transferred, underwriting gains and losses and
underwriting cash flows present fairly, in all material respects, the assets
(excluding investments) and liabilities to be transferred of the Personal Lines
Agency Business of Great American Insurance Company at December 31, 2002 and
2001, and its underwriting results and underwriting cash flows for each of the
three years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related schedules, when considered in relation to the statements as a whole,
present fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Cincinnati, Ohio
March 18, 2003
F-16
PERSONAL LINES AGENCY BUSINESS OF
GREAT AMERICAN INSURANCE COMPANY
FINANCIAL STATEMENTS
(IN THOUSANDS)
STATEMENT OF ASSETS (EXCLUDING INVESTMENTS) AND LIABILITIES TO BE TRANSFERRED
December 31,
------------
2002 2001
---- ----
ASSETS (EXCLUDING INVESTMENTS) TO BE TRANSFERRED:
Agents' balances $ 37,015 $ 44,632
Deferred policy acquisition costs 11,152 24,538
Goodwill 4,954 4,954
Other assets 414 4,684
-------- --------
$ 53,535 $ 78,808
======== ========
LIABILITIES TO BE TRANSFERRED:
Unpaid losses and loss adjustment expenses $125,623 $115,885
Unearned premiums 47,978 80,941
Other liabilities 5,199 3,680
-------- --------
$178,800 $200,506
======== ========
--------------------------------------------
STATEMENT OF UNDERWRITING GAINS AND LOSSES
Year ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Earned premiums $107,224 $149,925 $128,854
LOSSES AND EXPENSES:
Losses and loss adjustment expenses 91,064 121,811 93,294
Commissions and other underwriting expenses 26,189 42,819 39,202
-------- -------- --------
Underwriting loss ($ 10,029) ($ 14,705) ($3,642)
======== ======== ========
--------------------------------------------
STATEMENT OF UNDERWRITING CASH FLOWS
Year ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Premiums collected $81,878 $154,113 $127,790
Losses and loss adjustment expenses paid (81,326) (111,806) (105,701)
Commissions and other underwriting expenses paid (10,346) (46,092) (42,247)
------- -------- --------
Cash used by underwriting ($ 9,794) ($ 3,785) ($ 20,158)
======= ======== ========
F-17
PERSONAL LINES AGENCY BUSINESS OF
GREAT AMERICAN INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
A. BACKGROUND AND BASIS OF PRESENTATION
Great American Insurance Company ("GAI") is an indirect wholly-owned
subsidiary of American Financial Group, Inc. Through a reinsurance
agreement effective January 1, 2003, GAI transferred its personal lines
business written through independent agents (the "Assumed Agency Business")
to Infinity Property and Casualty Corporation ("Infinity"). Under the
reinsurance agreement, GAI also transferred to Infinity assets (primarily
investment securities) with a market value of approximately $125.3 million.
The accompanying statements have been prepared from the historical
accounting records of GAI and present the assets (excluding investments)
and liabilities to be transferred, the related underwriting gains and
losses and underwriting cash flows attributable to the Assumed Agency
Business. The Assumed Agency Business represents a portion of AFG's
Personal Lines segment of operations and is not a separate legal entity.
Accordingly, this business does not have a separate investment portfolio or
equity structure. For these reasons, the financial records necessary for
complete financial statements including investments, investment results,
and tax provisions do not exist.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Changes in circumstances could cause actual results
to differ materially from those estimates.
B. ACCOUNTING POLICIES
DEFERRED POLICY ACQUISITION COSTS ("DPAC") Policy acquisition costs
(principally commissions, premium taxes and other marketing and
underwriting expenses) related to the production of new business are
deferred and charged against income ratably over the terms of the related
policies. The method followed in computing DPAC limits the amount of such
costs to their estimated realizable value without any consideration for
anticipated investment income.
UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES The net liabilities stated for
unpaid claims and for expenses of investigation and adjustment of unpaid
claims are based upon (a) the accumulation of case estimates for losses
reported prior to the close of the accounting period on direct business
written; (b) estimates received from ceding reinsurers and insurance pools
and associations; (c) estimates of unreported losses based on past
experience; (d) estimates based on experience of expenses for investigating
and adjusting claims and (e) the current state of the law and coverage
litigation. These liabilities are subject to the impact of changes in claim
amounts and frequency and other factors. Changes in estimates of the
liabilities for losses and loss adjustment expenses are reflected in the
Statement of Underwriting Gains and Losses in the period in which
determined. In spite of the variability inherent in such estimates,
management believes that the liabilities for unpaid losses and loss
adjustment expenses are adequate.
PREMIUM RECOGNITION Premiums are earned over the terms of the policies on a
pro rata basis. Unearned premiums represent that portion of premiums
written which is applicable to the unexpired terms of policies in force.
C. REINSURANCE Effective January 1, 2002, GAI entered into a reinsurance
agreement with Inter-Ocean Reinsurance (Ireland) Limited, under which GAI
agreed to cede 90% of its automobile physical damage business written
through December 2002. This agreement has been renewed for 2003 on terms
substantially equivalent to those in effect in 2002. Premiums ceded under
this agreement were $78.5 million in 2002.
F-18
PERSONAL LINES AGENCY BUSINESS OF
GREAT AMERICAN INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
D. QUARTERLY OPERATING RESULTS (UNAUDITED) While insurance premiums are
recognized on a relatively level basis, claim losses related to adverse
weather (snow, hail, hurricanes, tornadoes, etc.) may be seasonal.
Quarterly results necessarily rely heavily on estimates and are not
necessarily indicative of results for longer periods of time.
The following are quarterly results of operations of the Assumed Agency
Business for the two years ended December 31, 2002 (in millions).
1st 2nd 3rd 4th Total
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ----
2002
-----------------
Earned premiums $39.5 $41.4 $ 3.8 $22.5 $107.2
Underwriting loss (2.7) (1.5) (4.2) (1.6) (10.0)
2001
-----------------
Earned premiums $35.2 $37.4 $39.0 $38.3 $149.9
Underwriting loss (1.2) (1.4) (4.7) (7.4) (14.7)
E. INSURANCE RESERVES The following table provides an analysis of changes in
the liability for losses and loss adjustment expenses over the past three
years on a GAAP basis (in millions):
Year ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Balance at beginning of period $116 $106 $118
Provision for losses and LAE
occurring in the current year 84 118 90
Net increase in provision for
claims of prior years 7 4 4
---- ---- ----
Total losses and LAE incurred 91 122 94
Payments for losses and LAE of:
Current year (31) (62) (48)
Prior years (50) (50) (58)
---- ---- ----
Total payments (81) (112) (106)
---- ---- ----
Balance at end of period $126 $116 $106
==== ==== ====
F-19
PART IV
ITEM 15
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
1. Financial Statements are included in Part II, Item 8.
2. Financial Statement Schedules:
A. Selected Quarterly Financial Data is included in Note I to the
Consolidated Financial Statements.
B. Schedules filed herewith for 2002, 2001 and 2000:
Page
----
I - Condensed Financial Information of Registrant S-2
VI - Supplemental Information Concerning
Property-Casualty Insurance Operations S-3
All other schedules for which provisions are made in the
applicable regulation of the Securities and Exchange
Commission have been omitted as they are not applicable, not
required, or the information required thereby is set forth in
the Financial Statements or the notes thereto.
3. Exhibits - see Exhibit Index on page E-1.
(b) Report on Form 8-K: none.
S-1
INFINITY PROPERTY AND CASUALTY CORPORATION - PARENT ONLY
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(IN THOUSANDS)
CONDENSED BALANCE SHEET
December 31,
2002
------------
ASSETS:
Investment in subsidiaries $441,802
Receivable from affiliates 1
--------
$441,803
========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Payables to affiliates $ 55,000
Shareholders' equity 386,803
--------
$441,803
========
Note: The companies comprising the NSA Group were transferred to Infinity
on December 31, 2002. No operations were conducted by the Registrant
during 2002.
S-2
INFINITY PROPERTY AND CASUALTY CORPORATION &
PERSONAL LINES AGENCY BUSINESS OF GREAT AMERICAN INSURANCE
SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY-CASUALTY INSURANCE OPERATIONS
THREE YEARS ENDED DECEMBER 31, 2002
(IN MILLIONS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G
- ------------- ------------ ------------- ---------- --------- ------------- ---------------
RESERVES FOR
UNPAID
DEFERRED CLAIMS DISCOUNT
AFFILIATION POLICY AND CLAIMS DEDUCTED NET
WITH ACQUISITION ADJUSTMENT IN UNEARNED EARNED INVESTMENT
REGISTRANT COSTS EXPENSES COLUMN C PREMIUMS PREMIUMS INCOME
- ------------- ------------ ------------- ---------- --------- ------------- ---------------
INFINITY PROPERTY AND CASUALTY CORPORATION
2002 $22 $604 (a) $ - $303 (b) $ 646 $61
=== ==== ==== ==== ====== ===
2001 $40 $645 (a) $ - $339 (b) $ 916 $75
=== ==== ==== ==== ====== ===
2000 $1,043 $69
====== ===
PERSONAL LINES AGENCY BUSINESS OF GREAT AMERICAN INSURANCE COMPANY
2002 $11 $126 $ - $ 48 $ 107 $ -
=== ==== ==== ==== ====== ===
2001 $25 $116 $ - $ 81 $ 150 $ -
=== ==== ==== ==== ====== ===
2000 $ 129 $ -
====== ===
COLUMN H COLUMN I COLUMN J COLUMN K
- ------------------- ------------ ------------ ---------
CLAIMS AND CLAIM
ADJUSTMENT
EXPENSES
INCURRED RELATED AMORTIZATION PAID
TO OF DEFERRED CLAIMS
- ------------------- POLICY AND CLAIM
CURRENT PRIOR ACQUISITION ADJUSTMENT PREMIUMS
YEARS YEARS COSTS EXPENSES WRITTEN
- --------- --------- ------------ ------------ ---------
$527 $ 1 $ 40 $565 $ 613
==== === ==== ==== ======
$762 ($10) $161 $771 $ 738
==== === ==== ==== ======
$941 ($25) $193 $832 $1,074
==== === ==== ==== ======
$ 84 $ 7 $ 15 $ 81 $ 74
==== === ==== ==== ======
$118 $ 4 $ 30 $112 $ 165
==== === ==== ==== ======
$ 90 $ 4 $ 26 $106 $ 133
==== === ==== ==== ======
(a) Grossed up for reinsurance recoverables of $33 million and $37 million
at December 31, 2002 and 2001, respectively.
(b) Grossed up for prepaid insurance premiums of $92 million and $96
million at December 31, 2002 and 2001, respectively.
S-3
SIGNATURES
Pursuant to the requirements of Section 13 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, duly authorized.
Infinity Property and Casualty Corporation
Signed: March 28, 2003 BY: s/JAMES R. GOBER
----------------
James R. Gober
Chief Executive Officer
--------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Capacity Date
--------- -------- ----
s/CARL H. LINDNER III Chairman of the Board March 28, 2003
- --------------------------- of Directors
Carl H. Lindner III
s/JAMES R. GOBER Chief Executive Officer, March 28, 2003
- ----------------------- President and Director
James R. Gober
s/ETHAN JACKSON Director March 28, 2003
- -----------------------
Ethan Jackson
s/THOMAS A. HAYES Director* March 28, 2003
- -----------------------
Thomas A. Hayes
s/KEITH A. JENSEN Director March 28, 2003
- ----------------------
Keith A. Jensen
s/GREGORY G. JOSEPH Director* March 28, 2003
- ----------------------
Gregory G. Joseph
s/GREGORY C. THOMAS Director* March 28, 2003
- ----------------------
Gregory C. Thomas
s/ROGER SMITH Senior Vice President and March 28, 2003
- ---------------------- Chief Financial Officer
Roger Smith
* Member of the Audit Committee
INFINITY PROPERTY AND CASUALTY CORPORATION
SARBANES-OXLEY SECTION 302(a) CERTIFICATIONS
I, James R. Gober, certify that:
1. I have reviewed this annual report on Form 10-K of Infinity Property and
Casualty Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
BY: s/JAMES R. GOBER
----------------
James R. Gober
Chief Executive Officer
March 28, 2003 (principal executive officer)
INFINITY PROPERTY AND CASUALTY CORPORATION
SARBANES-OXLEY SECTION 302(a) CERTIFICATIONS - CONTINUED
I, Roger Smith, certify that:
1. I have reviewed this annual report on Form 10-K of Infinity Property and
Casualty Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
BY: s/ROGER SMITH
----------------------------
Roger Smith
Chief Financial Officer
March 28, 2003 (principal financial officer)
INDEX TO EXHIBITS
INFINITY PROPERTY AND CASUALTY CORPORATION
Number Exhibit Description
- ------ -------------------
3.1 Amended and Restated Articles of Incorporation, filed as Exhibit 3.1 to
Infinity's Form S-1/A filed on January 29, 2003. (*)
3.2 Regulations, filed as Exhibit 3.2 to Infinity's Form S-1 filed on
October 9, 2002. (*)
4 Instruments defining the rights of security holders Registrant has no outstanding
debt issues exceeding 10% of
the assets of Registrant and
consolidated subsidiaries.
Material Contracts:
10.1 Formation and Separation Agreement between American Premier Underwriters, Inc. and
Infinity.
10.2 2002 Stock Option Plan.
10.3 Restricted Stock Plan, filed as Exhibit 10.3 to Infinity's Form
S-1/A filed on January 29, 2003. (*)
10.4 Reinsurance Agreement between Windsor Insurance Company, as
Reinsurer, and Great American Insurance Company and Affiliates, as
Reassured.
10.5 Agreement of Allocation of Payment of Federal Income Taxes dated May 13, 1974,
filed as Exhibit 10.5 to Infinity's Form S-1/A filed on November 22, 2002. (*)
10.6 Services Agreement between American Financial Group, Inc. and Infinity.
10.7 Registration Rights Agreement between American Financial Group, Inc. and
Infinity.
10.8 Investment Services Agreement between Infinity and American Money Management.
10.9 Employment Agreement for James R. Gober, filed as Exhibit 10.9 to Infinity's
Form S-1/A filed on January 15, 2003. (*)
10.10 Reinsurance Agreement with Inter-Ocean Reinsurance Limited, filed as Exhibit
10.10 to Infinity's Form S-1/A filed on November 22, 2002. (*)
10.11 Noncompetition Agreement between American Financial Group, Inc. and Infinity.
10.12 Tax Allocation Indemnification Agreement between American Financial Group,
Inc. and Infinity.
10.13 License Agreement between Great American Insurance Company and Infinity.
10.14 Reinsurance Agreements between Republic Indemnity Company of
America and Infinity, filed as Exhibit 10.14 to Infinity's Form
S-1/A filed on January 3, 2003. (*)
10.15 Reinsurance Cover Note with Inter-Ocean Reinsurance (Ireland)
Limited, filed 10.15 as Exhibit 10.15 to Infinity's Form S-1/A filed on
January 29, 2003. (*)
10.16 Lease between Great American Insurance Company and Infinity for
property located at 14 East Fourth Street, Cincinnati, Ohio.
10.17 Lease between Great American Insurance Company and Infinity for St. Louis,
Missouri property.
10.18 Sublease between Great American Insurance Company and Infinity for
Windsor, Connecticut property.
10.19 Sublease between Great American Insurance Company and Infinity for
Maitland, Florida property.
(*) Incorporated herein by reference.
E-1
INDEX TO EXHIBITS - CONTINUED
INFINITY PROPERTY AND CASUALTY CORPORATION
Number Exhibit Description
- ------ -------------------
Material Contracts:
10.20 Sublease between Great American Insurance Company and Infinity for
property located at 11353 Reed Hartman Highway, Cincinnati, Ohio.
10.21 Sublease between Great American Insurance Company and Infinity for
Parsippany, New Jersey property.
10.22 Sublease between Great American Insurance Company and Infinity for
Raleigh, North Carolina property.
10.23 Sublease between Great American Insurance Company and Infinity for
property located at 49 East Fourth Street, Cincinnati, Ohio.
10.24 Sublease between Great American Insurance Company and Infinity for Exton,
Pennsylvania property.
21 Subsidiaries of the Registrant. E-3
23 Consent of Independent Auditors. E-4
99 Certification of Chief Executive Officer and Chief Financial Officer E-5
(*) Incorporated herein by reference.
E-2