- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended Commission File
March 31, 2003 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
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark whether the Registrant is an accelerated filer.
Yes No X
As of May 1, 2003, there were 20,481,458 shares of the Registrant's
Common Stock outstanding.
Page 1 of 21
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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
PART I
FINANCIAL INFORMATION
ITEM I
FINANCIAL STATEMENTS
INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars In Thousands)
March 31, December 31,
2003 2002
---------- -----------
ASSETS:
Investments:
Fixed maturities - at market
(amortized cost - $1,031,008 and $917,104) $1,077,297 $ 955,576
Equity securities - at market
(cost - $18,425 and $19,136) 15,410 17,623
---------- ----------
Total investments 1,092,707 973,199
Cash and cash equivalents 112,221 88,053
Accrued investment income 15,645 13,644
Agents' balances and premiums receivable 244,012 188,109
Prepaid reinsurance premiums 108,354 91,924
Recoverables from reinsurers 44,519 34,826
Deferred policy acquisition costs 37,351 21,894
Receivable from affiliates 2,182 33,988
Prepaid expenses, deferred charges and
other assets 45,506 29,241
Goodwill 75,275 70,322
---------- ----------
$1,777,772 $1,545,200
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Unpaid losses and loss adjustment expenses $ 716,072 $ 604,026
Unearned premiums 379,859 302,627
Payable to reinsurers 85,721 72,701
Note payable to AFG 55,000 55,000
Payable to affiliates 4,022 4,755
Accounts payable, accrued expenses and
other liabilities 131,993 119,288
---------- ----------
Total liabilities 1,372,667 1,158,397
Shareholders' Equity:
Common Stock, no par value
- 50,000,000 and 1,000 shares authorized
- 20,481,458 and 1,000 shares outstanding 20,481 1
Additional paid-in capital 326,889 342,743
Retained earnings 31,547 20,000
Unearned compensation (restricted stock) (1,986) -
Unrealized gain on marketable securities, net 28,174 24,059
---------- ----------
Total shareholders' equity 405,105 386,803
---------- ----------
$1,777,772 $1,545,200
========== ==========
2
INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(In Thousands, Except Per Share Data)
Three months ended
March 31,
------------------------
2003 2002
---- ----
INCOME:
Earned premiums $165,528 $170,057
Net investment income 14,168 17,061
Realized gains (losses) on investments 327 (398)
Other income 1,000 1,126
-------- --------
181,023 187,846
COSTS AND EXPENSES:
Losses and loss adjustment expenses 134,532 135,543
Commissions and other underwriting expenses 21,379 31,813
Interest expense 1,166 -
Other operating and general expenses 6,288 4,248
-------- --------
163,365 171,604
-------- --------
Earnings before income taxes 17,658 16,242
Provision for income taxes 6,111 5,601
-------- --------
NET EARNINGS $ 11,547 $ 10,641
======== ========
EARNINGS PER COMMON SHARE:
Basic $.57 n/a
Diluted $.57 n/a
Average number of Common Shares:
Basic 20,347 n/a
Diluted 20,414 n/a
3
INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In Thousands)
Common Stock Unrealized
and Paid-in Retained Gain (Loss) Unearned
Capital Earnings on Securities Compensation Total
------------ -------- ------------- ------------ --------
BALANCE AT JANUARY 1, 2003 $342,744 $20,000 $24,059 $ - $386,803
Net earnings - 11,547 - - 11,547
Change in unrealized - - 4,115 - 4,115
--------
Comprehensive income 15,662
Issuance of restricted stock awards 2,150 - - (2,150) -
Amortization of unearned compensation - - - 164 164
Capital contribution 2,476 - - - 2,476
-------- ------- ------- ------ --------
BALANCE AT MARCH 31, 2003 $347,370 $31,547 $28,174 ($1,986) $405,105
======== ======= ======= ====== ========
BALANCE AT JANUARY 1, 2002 $585,699 ($25,870) $ 2,928 $ - $562,757
Net earnings - 10,641 - - 10,641
Change in unrealized - - (10,605) - (10,605)
--------
Comprehensive income 36
Other 120 - - - 120
-------- ------- ------- ------ --------
BALANCE AT MARCH 31, 2002 $585,819 ($15,229) ($ 7,677) $ - $562,913
======== ======= ======= ====== ========
4
INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
Three months ended
March 31,
---------------------
2003 2002
---- ----
OPERATING ACTIVITIES:
Net earnings $ 11,547 $ 10,641
Adjustments:
Depreciation and amortization 3,763 3,123
Realized (gains) losses on investments (327) 398
Increase in agents balances and premiums receivable (15,678) (12,882)
Decrease (increase) in reinsurance receivables 13,158 (20,090)
Decrease (increase) in deferred policy acquisition
costs (4,305) 926
Decrease (increase) in other assets (303) 3,720
Change in balances with affiliates 9,685 2,105
Increase (decrease) in insurance claims and reserves (23,604) 20,101
Increase in payable to reinsurers 13,020 9,053
Increase (decrease) in other liabilities (1,216) 592
Other, net 279 (189)
-------- --------
6,019 17,498
-------- --------
INVESTING ACTIVITIES:
Purchases of and additional investments in:
Fixed maturity investments (88,106) (84,893)
Property and equipment (512) (1,009)
Maturities and redemptions of fixed maturity
investments 43,614 19,520
Sales of:
Fixed maturity investments 62,610 61,644
Equity securities 526 2,389
Property and equipment 17 296
-------- --------
18,149 (2,053)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 24,168 15,445
Cash and cash equivalents at beginning of period 88,053 60,701
-------- --------
Cash and cash equivalents at end of period $112,221 $ 76,146
======== ========
5
INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
NOTES TO FINANCIAL STATEMENTS
A. DESCRIPTION OF THE COMPANY
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 allows Infinity to continue to write standard and
preferred insurance on policies issued by the same GAI companies that had
previously issued such policies. The business assumed from GAI is not
included in the historical consolidated statements of Infinity prior to
2003.
In February of 2003, AFG sold 12.5 million shares of Infinity in an
initial public offering. At March 31, 2003, AFG beneficially owned 38% of
Infinity's Common Stock.
B. ACCOUNTING POLICIES
BASIS OF PRESENTATION The accompanying consolidated financial statements
for Infinity and subsidiaries are unaudited; however, management believes
that all adjustments (consisting only of normal recurring accruals unless
otherwise disclosed herein) necessary for fair presentation have been
made. The results of operations for interim periods are not necessarily
indicative of results to be expected for the year. The financial
statements have been prepared in accordance with the instructions to Form
10-Q and therefore do not include all information and footnotes necessary
to be in conformity with generally accepted accounting principles.
Infinity's financial statements for periods prior to December 31, 2002,
represent the combined statements of the NSA Group. Earnings per share
data for the three months ended March 31, 2002 is not applicable because
the Consolidated Statement of Earnings for this period represents the
combined statements of wholly-owned subsidiaries.
The accompanying income statement for three months ended March 31, 2002,
include expenses incurred directly by Infinity as well as charges for fees
allocated by other AFG subsidiaries to Infinity for various services.
Charges billed by AFG for corporate staff services, including human
resources, risk management, legal, and financial reporting were 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. Beginning in 2003, Infinity and AFG entered into
agreements under which AFG will continue to provide investment advisory
and certain other services to Infinity at established rates.
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.
6
INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
NOTES TO FINANCIAL STATEMENTS - CONTINUED
The acquisition of the NSA Group and assumption of the Assumed Agency
Business have 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 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.
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 shareholders' 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.
GOODWILL Goodwill represents the excess of Infinity's cost basis of its
subsidiaries over its equity in the subsidiaries' underlying net assets.
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.
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 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
7
INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
NOTES TO FINANCIAL STATEMENTS - CONTINUED
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 recoverables. Changes in estimates
of the liabilities for losses and loss adjustment expenses are reflected
in the Consolidated Statement of Earnings 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 a consolidated federal income tax
return which will include all 80%-owned subsidiaries for periods following
its February 2003 public offering. Prior to the offering, Infinity and its
80%-owned 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 did
not impact the recognition of income tax expense or 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. For periods prior
to the February 2003 public offering, current and deferred tax assets and
liabilities were aggregated with other amounts receivable from affiliates.
At March 31, 2003, Infinity's net deferred tax asset is included in other
assets.
STOCK-BASED COMPENSATION As permitted under SFAS No. 123, "Accounting for
Stock-Based Compensation," Infinity accounts for stock options and other
stock-based compensation plans using the intrinsic value based method
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees." The fair value of shares issued under
Infinity's Restricted Stock Plan is recorded as unearned compensation and
expensed over the vesting periods of the awards. Under Infinity's Stock
Option Plan, options are granted to officers, directors and key employees
at exercise prices equal to the fair value of the shares at the dates of
grant. No compensation expense is recognized for stock option grants.
8
INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
NOTES TO FINANCIAL STATEMENTS - CONTINUED
The following table illustrates the effect on net earnings and earnings
per share had compensation cost related to stock options been determined
and recognized based on "fair values" at grant dates consistent with the
method prescribed by SFAS No. 123. No information is applicable for the
three months ended March 31, 2002 as no options had been granted. For SFAS
No. 123 purposes, the fair value per option granted of $5.93 was
calculated using the Black-Scholes option pricing model and the following
assumptions: dividend yield of 1.4%; expected volatility of 33%; risk-free
interest rate of 4.0%; and expected option life of 7.5 years. See Note E
"Shareholders' Equity" for further information on stock options.
Three
months ended
March 31, 2003
--------------
Net earnings, as reported $11,547
Pro forma stock option expense, net of tax (59)
-------
Adjusted net earnings $11,488
=======
Earnings per share (as reported):
Basic $0.57
Diluted $0.57
Earnings per share (adjusted):
Basic $0.56
Diluted $0.56
BENEFIT PLANS Infinity provides retirement benefits to eligible employees
through its 401(k) Retirement Plan. Under this defined contribution plan,
Infinity has the discretion to match a percentage of employee
contributions to the Plan and to make profit-sharing contributions on
behalf of all eligible employees. Contributions to the Plan are charged
against earnings in the year for which they are declared.
Infinity provides 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 March 31,
2003. Changes in fair value of derivatives are included in current
earnings as realized gains (losses) on investments.
EARNINGS PER SHARE Basic earnings per share is calculated using the
weighted average number of shares of common stock outstanding during the
period, excluding issued but unvested restricted shares. The calculation
of diluted earnings per share includes restricted shares and 6,000 shares
representing the dilutive effect of common stock options.
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, borrowing money and repaying amounts borrowed. 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.
9
INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
NOTES TO FINANCIAL STATEMENTS - CONTINUED
C. GOODWILL The $5 million increase in goodwill during the first quarter of
2003 represents goodwill associated with the Assumed Agency Business.
D. NOTE PAYABLE TO AFG The note payable to AFG is a $55 million, ten-year
promissory note with an interest rate of 8.5%. Interest on the notes is
payable semi-annually and the principal is due at maturity in January
2013.
E. SHAREHOLDERS' EQUITY For periods prior to December 31, 2002, amounts shown
in the Statement of Changes in Shareholders' Equity represent the combined
balances of the NSA Group. Accordingly, shares outstanding and earnings
per share information for these periods are not applicable.
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 20,347,083 shares of
Common Stock outstanding. In February 2003, Infinity issued 134,375 shares
under its Restricted Stock Plan. No Preferred Stock has been issued.
Infinity declared a quarterly dividend of $.055 per common share on April
29, 2003.
STOCK OPTIONS AND RESTRICTED STOCK Infinity established its stock option
and restricted stock plans in 2002. Under the plan provisions, there were
2 million and 500,000 shares of Infinity Common Stock reserved for
issuance under Infinity's Stock Option Plan and Restricted Stock Plan,
respectively. No shares were issued under either plan in 2002. As of March
31, 2003, options for 420,180 shares were outstanding and 134,375 shares
of restricted stock have been awarded. Options generally become
exercisable at the rate of 20% per year commencing one year after grant;
those granted to non-employee directors of Infinity are fully exercisable
upon grant. Options generally expire ten years after the date of grant.
For restricted stock awards, one-third of the shares vest on each of the
first three anniversaries of the date of grant of the award.
UNREALIZED GAIN ON MARKETABLE SECURITIES The change in unrealized gain on
marketable securities for the three months ended March 31 included the
following (in millions):
Pretax
------------------------
Fixed Equity Tax
Maturities Securities Effects Net
---------- ---------- ------- ---
2003
-----------------------------------------------
Unrealized holding gains (losses) on securities
arising during the period $ 8.3 ($1.7) ($2.3) $ 4.3
Realized (gains) losses included in net income (.5) .2 .1 (.2)
----- ---- ---- -----
Change in unrealized gain on marketable
securities, net $ 7.8 ($1.5) ($2.2) $ 4.1
===== ==== ==== =====
2002
-----------------------------------------------
Unrealized holding losses on securities
arising during the period ($14.6) ($2.1) $5.8 ($10.9)
Realized (gains) losses included in net income 1.1 (.7) (.1) .3
----- ---- ---- -----
Change in unrealized gain on marketable
securities, net ($13.5) ($2.8) $5.7 ($10.6)
===== ==== ==== =====
10
INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Infinity is organized as a holding company with almost all of its operations
conducted by subsidiaries. However, Infinity has or will have continuing cash
needs for administrative expenses, the payment of principal and interest on
borrowings, shareholder dividends and taxes.
FORWARD-LOOKING STATEMENTS 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 from the 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:
o changes in economic conditions and financial markets (including interest
rates);
o the adequacy or accuracy of its pricing methodologies;
o the presence of competitors with greater financial resources and the
impact of competitive pricing;
o the ability to obtain timely approval for requested rate changes;
o judicial and regulatory developments adverse to the automobile insurance
industry;
o the outcome of pending litigation against the Company;
o weather conditions (including the severity and frequency of storms,
hurricanes, snowfalls, hail and winter conditions);
o changes in driving patterns and loss trends;
o acts of war and terrorist activities; and
o 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. Infinity assumes no obligation to publicly update any forward-looking
statements.
CRITICAL ACCOUNTING POLICIES
Significant accounting policies are summarized in Note B to the financial
statements. The preparation of financial statements 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 further under the headings "Liquidity and Capital Resources -
Investments" and "Liquidity and Capital Resources - Uncertainties - Insurance
Reserves."
11
INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
SOURCES OF FUNDS Management believes Infinity has sufficient resources to meet
liquidity requirements primarily through funds generated by its insurance
subsidiaries. Infinity continues to explore long term debt financing
alternatives that will provide additional resources. 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.
QUOTA SHARE AGREEMENT Throughout 2002, Infinity's insurance subsidiaries ceded
90% of their personal auto physical damage business on a funds withheld basis to
Inter-Ocean Reinsurance Limited. Infinity renewed this agreement for 2003 on
terms substantially equivalent to those in effect in 2002. Infinity has the
flexibility 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 for the quarters ended March 31,
2003 and 2002, were $76.4 million and $88.7 million, respectively.
In September 2002, this agreement was amended to include coverage of Great
American's personal lines that Infinity would otherwise assume as part of the
Assumed Agency Business. Accordingly, Great American's participation in the
Inter-Ocean reinsurance agreement reduces the size of the Assumed Agency
Business. Premiums ceded by Great American under this agreement were $10.2
million in the first quarter of 2003.
INVESTMENTS Infinity's investment portfolio at March 31, 2003, contained
$1.1 billion in fixed maturity securities and $15.4 million in equity
securities, all carried at market value with unrealized gains and losses
reported as a separate component of shareholders' equity on an after-tax basis.
At March 31, 2003, Infinity had a pretax net unrealized gain of $46.3 million on
fixed maturities and a pretax unrealized loss of $3.0 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 March 31, 2003. Investment grade securities generally bear lower
yields and lower degrees of risk than those that are unrated or noninvestment
grade. Management believes that a high quality investment portfolio is more
likely to generate a stable and predictable investment return.
Individual portfolio securities are sold creating gains or losses as market
opportunities exist. Since all of these securities are carried at market value
in the balance sheet, there is virtually no effect on liquidity or financial
condition upon the sale and ultimate realization of unrealized gains and losses.
12
INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Summarized information for securities with unrealized gains and losses in
Infinity's balance sheet at March 31, 2003 is shown in the following table
(dollars in millions). Approximately $13.9 million of "Fixed Maturities" and
$787,000 of "Equity Securities" had no unrealized gains or losses at March 31,
2003.
Securities Securities
With With
Unrealized Unrealized
Gains Losses
---------- ----------
FIXED MATURITIES
----------------
Market value of securities $954.9 $108.5
Amortized cost of securities $901.2 $115.9
Gross unrealized gain (loss) $ 53.7 ($ 7.4)
Market value as a % of amortized cost 106.0% 93.6%
Number of security positions held 392 52
Number individually exceeding $500,000 gain or loss 13 3
Concentration of gains (losses) by type or industry
(exceeding 5% of unrealized):
Mortgage-backed securities $ 6.4 ($ 0.4)
Banks and savings institutions 4.6 (0.1)
State, municipalities and political subdivisions 4.0 (0.2)
U.S. Government and government agencies 2.8 -
Electric services 2.8 (0.3)
Natural gas transmission and distribution 1.4 (0.6)
Chemicals and allied products 1.3 (0.4)
Petroleum refining 1.0 (0.7)
Air transportation 0.2 (3.2)
Percentage rated investment grade 95.1% 58.7%
EQUITY SECURITIES
-----------------
Market value of securities $ 0.9 $ 13.7
Cost of securities $ 0.3 $ 17.3
Gross unrealized gain (loss) $ 0.6 ($ 3.6)
Market value as % of cost 300.0% 79.2%
Number individually exceeding $500,000 gain or loss - 2
The table below sets forth the scheduled maturities of fixed maturity securities
at March 31, 2003 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 All Fixed
Unrealized Unrealized Maturity
Gains Losses Securities
---------- ---------- ----------
MATURITY
--------
One year or less 7% 4% 7%
After one year through five years 32 28 31
After five years through ten years 38 33 38
After ten years 6 20 7
--- --- ---
83 85 83
Mortgage-backed securities 17 15 17
--- --- ---
100% 100% 100%
=== === ===
Infinity realized aggregate losses of $84,000 during the first quarter of 2003
on $10.9 million in sales of fixed maturity securities (3 issues/issuers) that
had individual unrealized losses greater than $100,000 at December 31, 2002.
Market values of all three of the securities increased an aggregate of $367,000
from December 31, 2002 to date of sale.
13
INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
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.
The table below (dollars in millions) summarizes the length of time securities
have been in an unrealized gain or loss position at March 31, 2003.
Market
Aggregate Aggregate Value as
Market Unrealized % of Cost
Value Gain (Loss) Basis
--------- ----------- ---------
Fixed Maturities
--------------------------------------------
SECURITIES WITH UNREALIZED GAINS:
Exceeding $100,000 at 3/31/03 and for:
Less than one year (167 issues) $588.6 $41.2 107.5%
More than one year (16 issues) 57.0 5.4 110.5
Less than $100,000 at 3/31/03 (209 issues) 309.3 7.1 102.3
------ -----
$954.9 $53.7 106.0%
====== =====
SECURITIES WITH UNREALIZED LOSSES:
Exceeding $100,000 at 3/31/03 and for:
Less than one year (8 issues) $ 17.7 ($ 2.3) 88.5%
More than one year (10 issues) 14.2 (3.9) 78.5
Less than $100,000 at 3/31/03 (34 issues) 76.6 (1.2) 98.5
------ -----
$108.5 ($ 7.4) 93.6%
====== =====
Equity Securities
--------------------------------------------
SECURITIES WITH UNREALIZED GAINS:
Exceeding $100,000 at 3/31/03 and for:
Less than one year (none) $ - $ - - %
More than one year (2 issues) 0.8 0.6 400.0
Less than $100,000 at 3/31/03 (5 issues) 0.1 - 100.0
------ -----
$ 0.9 $ 0.6 300.0%
====== =====
SECURITIES WITH UNREALIZED LOSSES:
Exceeding $100,000 at 3/31/03 and for:
Less than one year (6 issues) $ 12.6 ($ 3.3) 79.2%
More than one year (1 issue) .9 (.3) 75.0
Less than $100,000 at 3/31/03 (2 issues) .2 - 100.0
------ -----
$ 13.7 ($ 3.6) 79.2%
====== =====
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. A listing of factors
considered and resources used is contained in the discussion of "Investments"
under Management's Discussion and Analysis in Infinity's 2002 Form 10-K.
Based on its analysis, 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.
14
INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
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.
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 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.
In this discussion, prior period underwriting results represent the combined
results of the NSA Group and the Assumed Agency Business.
Net earned premiums and combined ratios for Infinity were as follows (dollars in
millions):
Three months ended
March 31,
--------------------
2003 2002(b)
---- ----
Net Earned Premiums (GAAP)
--------------------------
Gross written premiums $255.8(a) $309.4
Ceded reinsurance (77.5) (90.7)
------ ------
Net written premiums 178.3(a) 218.7
Change in unearned premiums (12.8) (9.1)
------ ------
Net earned premiums $165.5 $209.6
====== ======
Combined Ratios (GAAP)
----------------------
Loss and LAE ratio 81.2% 79.2%
Underwriting expense ratio 12.9 20.8
Combined ratio 94.1% 100.0%
(a) Excludes $48 million in unearned premiums transferred to Infinity
with the Assumed Agency Business on January 1, 2003.
(b) For comparative purposes, 2002 underwriting results have been
adjusted to include $36.9 million in net written premiums ($39.5
million in net earned premiums) of the Assumed Agency Business.
Excluding the Assumed Agency Business, Infinity's combined ratio
was 98.4% for the first quarter of 2002.
On a comparative basis, Infinity's written premiums (gross and net) decreased
for the first quarter of 2003 compared to 2002 due primarily to lower business
volume, partially offset by the impact of rate increases implemented throughout
2002. In
15
INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
addition, Great American's participation in the Inter-Ocean reinsurance
agreement (effective in September 2002) resulted in $10.2 million in premiums
being ceded to Inter-Ocean during the first quarter of 2003 that would have
otherwise been ceded to Infinity. Including the policies written by the Assumed
Agency business, automobile policies in force declined from approximately
875,000 on December 31, 2001 to 735,000 on March 31, 2003. The decline in policy
counts is due to actions taken to reduce business in certain non-focus or
unprofitable 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 include the effect of 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 nearly 6 points over the 2002 quarter due to recent rate
increases, lower accident frequency, focus on profitable states, and continuing
consolidation efforts, partially offset by a moderate increase in claim
severity. Excluding the effect of the Inter-Ocean agreement, Infinity's combined
ratio for the first quarter of 2003 was 95.8% compared to 98.9% for the 2002
quarter.
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.
Net investment income decreased $2.9 million for the first quarter of 2003
compared to the first quarter of 2002 due primarily to lower interest rates.
REALIZED GAINS (LOSSES) ON INVESTMENTS Realized gains (losses) on investments
include provisions for other than temporary impairment of securities still held
of $2.7 million for the quarter ended March 31, 2003 and $632,000 for the
quarter ended March 31, 2002. The increase in impairments in the first quarter
of 2003 compared to the first quarter of 2002 reflects primarily the downturn in
the airline industry.
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 $96,000 for the quarter
ended March 31, 2003 and a gain of $204,000 for the 2002 quarter to adjust the
carrying value of these warrants to their market value ($787,000 at March 31,
2003).
INTEREST EXPENSE Interest expense reflects interest charges on the $55 million
note payable to AFG issued in connection with the acquisition of the NSA Group
on December 31, 2002.
OTHER OPERATING AND GENERAL EXPENSES Other operating and general expenses
increased $2.0 million for the quarter ended March 31, 2003 as compared to the
quarter ended March 31, 2002 due to holding company expenses related to the new
parent company of $1.0 million and a $1.1 million increase in corporate
litigation expenses reflecting unusually low litigation expenses in the first
quarter of 2002.
16
INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
As of March 31, 2003, there were no material changes to the information
provided in Infinity's Form 10-K for 2002 under the caption "Exposure to
Market Risk" in Management's Discussion and Analysis of Financial
Condition and Results of Operations.
----------------------------------------
ITEM 4
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.
17
INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
PART II
OTHER INFORMATION
ITEM 4
SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
An action in writing was taken by Infinity's sole shareholder, in lieu of an
annual meeting, on February 12, 2003, for the purpose of electing directors. The
following individuals were nominated and elected to serve on Infinity's board of
directors:
Term
Expiration
----------
James R. Gober 2004
Thomas A. Hayes 2005
Ethan Jackson 2004
Keith A. Jensen 2005
Gregory G. Joseph 2004
Carl H. Lindner III 2005
Gregory C. Thomas 2005
------------------------------------
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 99 - Certification pursuant to section 906 of the Sarbanes-Oxley Act
of 2002.
(b) Reports on Form 8-K:
Date of Report Item Reported
-------------- -------------
March 18, 2003 Press Release - Fourth quarter and full year
2002 results.
May 6, 2003 Press Release - First quarter 2003 results
and transcript of April 30, 2003 conference
call.
------------------------------------
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, Infinity
Property and Casualty Corporation has duly caused this Report to be signed on
its behalf by the undersigned duly authorized.
Infinity Property and Casualty Corporation
May 14, 2003 BY: s/ROGER SMITH
--------------------------------------
Roger Smith
Chief Financial Officer
18
INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
SARBANES-OXLEY SECTION 302(a) CERTIFICATIONS
I, James R. Gober, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Infinity Property and
Casualty Corporation;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
quarterly 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.
May 14, 2003 BY: s/JAMES R. GOBER
------------------------------------
James R. Gober
Chief Executive Officer
(principal executive officer)
19
INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
SARBANES-OXLEY SECTION 302(a) CERTIFICATIONS - CONTINUED
I, Roger Smith, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Infinity Property and
Casualty Corporation;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
quarterly 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.
May 14, 2003 BY: s/ROGER SMITH
-----------------------------------
Roger Smith
Chief Financial Officer
(principal financial officer)
20