Edgar Filing: INFINITY PROPERTY & CASUALTY CORP

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2016

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File No. 0-50167

INFINITY PROPERTY AND CASUALTY CORPORATION

(Exact name of registrant as specified in its charter)



Incorporated under the Laws of Ohio		03-0483872
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2201 4th Avenue North, Birmingham, Alabama 35203

(Address of principal executive offices and zip code)

(205) 870-4000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	o (Do not check if smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined by rule 12b-2 of the Exchange Act). Yes ¨ No x

As of July 29, 2016, there were 11,064,440 shares of the registrant’s common stock outstanding.

Table of Contents

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

TABLE OF CONTENTS




		Page
	PART I – FINANCIAL INFORMATION

Item 1	Financial Statements

	Consolidated Statements of Earnings	3

	Consolidated Statements of Comprehensive Income	4

	Consolidated Balance Sheets	5

	Consolidated Statements of Changes in Shareholders’ Equity	6

	Consolidated Statements of Cash Flows	7

	Condensed Notes to Consolidated Financial Statements	9

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3	Quantitative and Qualitative Disclosures About Market Risk	36

Item 4	Controls and Procedures	36

PART II – OTHER INFORMATION

Item 1	Legal Proceedings	37

Item 1A	Risk Factors	37

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	37

Item 6	Exhibits	37

	Signature	38

Table of Contents

INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

PART I

FINANCIAL INFORMATION

ITEM 1

Financial Statements

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(in thousands, except per share data)

(unaudited)



	Three months ended June 30,								Six months ended June 30,
	2016			2015			% Change		2016			2015			% Change
Revenues:
Earned premium	$	340,715		$	340,504		0.1	%	$	676,899		$	672,610		0.6	%
Installment and other fee income	25,385			24,556			3.4	%	50,903			49,117			3.6	%
Net investment income	8,927			9,202			(3.0	)%	16,990			17,938			(5.3	)%
Net realized (losses) gains on investments ⁽¹⁾	(164		)	214			(176.4	)%	(25		)	1,384			(101.8	)%
Other income	220			281			(21.6	)%	478			681			(29.8	)%
Total revenues	375,084			374,757			0.1	%	745,246			741,730			0.5	%
Costs and Expenses:
Losses and loss adjustment expenses	263,514			262,784			0.3	%	528,798			518,427			2.0	%
Commissions and other underwriting expenses	89,164			86,272			3.4	%	177,771			175,101			1.5	%
Interest expense	3,508			3,508			0.0	%	7,017			7,015			0.0	%
Corporate general and administrative expenses	2,060			2,074			(0.7	)%	3,764			3,929			(4.2	)%
Other expenses	797			452			76.2	%	1,080			1,355			(20.3	)%
Total costs and expenses	359,043			355,090			1.1	%	718,429			705,827			1.8	%
Earnings before income taxes	16,040			19,667			(18.4	)%	26,816			35,903			(25.3	)%
Provision for income taxes	5,026			6,174			(18.6	)%	8,094			11,257			(28.1	)%
Net Earnings	$	11,015		$	13,493		(18.4	)%	$	18,723		$	24,646		(24.0	)%
Net Earnings per Common Share:
Basic	$	1.00		$	1.18		(15.3	)%	$	1.70		$	2.16		(21.3	)%
Diluted	0.99			1.18			(16.1	)%	1.68			2.14			(21.5	)%
Average Number of Common Shares:
Basic	11,012			11,408			(3.5	)%	11,024			11,417			(3.4	)%
Diluted	11,096			11,483			(3.4	)%	11,115			11,517			(3.5	)%
Cash Dividends per Common Share	$	0.52		$	0.43		20.9	%	$	1.04		$	0.86		20.9	%
⁽¹⁾Net realized gains on sales	$	34		$	423		(91.9	)%	$	291		$	1,973		(85.2	)%
Total other-than-temporary impairment (OTTI) losses	(198		)	(208		)	(4.8	)%	(316		)	(590		)	(46.5	)%
Total net realized (losses) gains on investments	$	(164	)	$	214		(176.4	)%	$	(25	)	$	1,384		(101.8	)%

See Condensed Notes to Consolidated Financial Statements.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

($ in thousands)

(unaudited)



	Three months ended June 30,						Six months ended June 30,
	2016			2015			2016			2015
Net earnings	$	11,015		$	13,493		$	18,723		$	24,646
Other comprehensive income before tax:
Net change in post-retirement benefit liability	(11		)	16			(22		)	33
Unrealized gains (losses) on investments:
Unrealized holding gains (losses) arising during the period	10,828			(13,472		)	26,287			(5,056		)
Less: Reclassification adjustments for losses (gains) included in net earnings	164			(214		)	25			(1,384		)
Unrealized gains (losses) on investments, net	10,992			(13,687		)	26,311			(6,440		)
Other comprehensive income (loss), before tax	10,981			(13,670		)	26,290			(6,407		)
Income tax (expense) benefit related to components of other comprehensive income	(3,843		)	4,785			(9,201		)	2,242
Other comprehensive income (loss), net of tax	7,137			(8,886		)	17,088			(4,164		)
Comprehensive income	$	18,152		$	4,607		$	35,811		$	20,482

See Condensed Notes to Consolidated Financial Statements.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts in line descriptions)



	June 30, 2016			December 31, 2015
	(unaudited)
Assets
Investments:
Fixed maturities – at fair value (amortized cost $1,358,297 and $1,381,510)	$	1,383,806		$	1,381,467
Equity securities – at fair value (cost $78,869 and $78,815)	90,742			89,935
Short-term investments - at fair value (amortized cost $4,066 and $4,656)	4,066			4,651
Total investments	1,478,615			1,476,053
Cash and cash equivalents	76,016			62,483
Accrued investment income	11,735			12,245
Agents’ balances and premium receivable, net of allowances for doubtful accounts of $14,790 and $15,385	536,559			511,543
Property and equipment, net of accumulated depreciation of $75,484 and $72,892	98,177			89,707
Prepaid reinsurance premium	3,818			5,385
Recoverables from reinsurers (includes $202 and $362 on paid losses and LAE)	18,690			15,056
Deferred policy acquisition costs	95,821			93,157
Current and deferred income taxes	20,339			33,926
Other assets	11,380			10,306
Goodwill	75,275			75,275
Total assets	$	2,426,425		$	2,385,135
Liabilities and Shareholders’ Equity
Liabilities:
Unpaid losses and loss adjustment expenses	$	666,210		$	669,965
Unearned premium	645,396			616,649
Long-term debt (fair value $291,572 and $281,581)	273,486			273,383
Commissions payable	15,238			17,406
Payable for securities purchased	11,873			7,264
Other liabilities	111,167			112,873
Total liabilities	1,723,369			1,697,540
Commitments and contingencies (See Note 9)
Shareholders’ equity:
Common stock, no par value (50,000,000 shares authorized; 21,808,105 and 21,774,520 shares issued)	21,801			21,794
Additional paid-in capital	376,652			376,025
Retained earnings	764,829			757,604
Accumulated other comprehensive income, net of tax	24,899			7,811
Treasury stock, at cost (10,743,948 and 10,623,138 shares)	(485,124		)	(475,638		)
Total shareholders’ equity	703,057			687,595
Total liabilities and shareholders’ equity	$	2,426,425		$	2,385,135

See Condensed Notes to Consolidated Financial Statements.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

($ in thousands)

(unaudited)



	Common Stock		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income, Net of Tax			Treasury Stock			Total
Balance at December 31, 2014	$	21,745	$	372,368	$	725,651		$	23,494		$	(445,599	)	$	697,659
Net earnings	—		—		24,646			—			—			24,646
Net change in post-retirement benefit liability	—		—		—			21			—			21
Change in unrealized gain on investments	—		—		—			(4,478		)	—			(4,478		)
Change in non-credit component of impairment losses on fixed maturities	—		—		—			292			—			292
Comprehensive income														20,482
Dividends paid to common shareholders	—		—		(9,853		)	—			—			(9,853		)
Shares issued and share-based compensation expense, including tax benefit	28		2,132		—			—			—			2,160
Acquisition of treasury stock	—		—		—			—			(7,892		)	(7,892		)
Balance at June 30, 2015	$	21,773	$	374,499	$	740,444		$	19,330		$	(453,491	)	$	702,555
Net earnings	—		—		26,834			—			—			26,834
Net change in post-retirement benefit liability	—		—		—			480			—			480
Change in unrealized gain on investments	—		—		—			(12,317		)	—			(12,317		)
Change in non-credit component of impairment losses on fixed maturities	—		—		—			318			—			318
Comprehensive income														15,315
Dividends paid to common shareholders	—		—		(9,674		)	—			—			(9,674		)
Shares issued and share-based compensation expense, including tax benefit	21		1,526		—			—			—			1,547
Acquisition of treasury stock	—		—		—			—			(22,147		)	(22,147		)
Balance at December 31, 2015	$	21,794	$	376,025	$	757,604		$	7,811		$	(475,638	)	$	687,595
Net earnings	—		—		18,723			—			—			18,723
Net change in post-retirement benefit liability	—		—		—			(14		)	—			(14		)
Change in unrealized gain on investments	—		—		—			16,960			—			16,960
Change in non-credit component of impairment losses on fixed maturities	—		—		—			142			—			142
Comprehensive income														35,811
Dividends paid to common shareholders	—		—		(11,497		)	—			—			(11,497		)
Shares issued and share-based compensation expense, including tax benefit	7		627		—			—			—			633
Acquisition of treasury stock	—		—		—			—			(9,486		)	(9,486		)
Balance at June 30, 2016	$	21,801	$	376,652	$	764,829		$	24,899		$	(485,124	)	$	703,057

See Condensed Notes to Consolidated Financial Statements.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in thousands)

(unaudited)



	Three months ended June 30,
	2016			2015
Operating Activities:
Net earnings	$	11,015		$	13,493
Adjustments:
Depreciation	3,438			2,941
Amortization	5,037			5,260
Net realized losses (gains) on investments	164			(214		)
Loss on disposal of property and equipment	399			123
Share-based compensation expense	28			1,069
Excess tax benefits from share-based payment arrangements	(157		)	(298		)
Activity related to rabbi trust	48			(16		)
Change in accrued investment income	(314		)	(1,489		)
Change in agents’ balances and premium receivable	6,044			(11,572		)
Change in reinsurance receivables	1,663			(759		)
Change in deferred policy acquisition costs	1,392			(1,180		)
Change in other assets	6,590			(5,122		)
Change in unpaid losses and loss adjustment expenses	(7,265		)	5,272
Change in unearned premium	(7,103		)	8,514
Change in other liabilities	295			7,889
Net cash provided by operating activities	21,274			23,911
Investing Activities:
Purchases of fixed maturities	(103,611		)	(137,518		)
Purchases of short-term investments	(5,140		)	(2,628		)
Purchases of property and equipment	(10,450		)	(26,065		)
Maturities and redemptions of fixed maturities	36,847			59,775
Maturities and redemptions of short-term investments	0			285
Proceeds from sale of fixed maturities	99,180			56,704
Proceeds from sale of short-term investments	1,064			0
Proceeds from sale of property and equipment	2			0
Net cash provided by (used in) investing activities	17,892			(49,448		)
Financing Activities:
Proceeds from stock options exercised and employee stock purchases	68			68
Excess tax benefits from share-based payment arrangements	157			298
Principal payments under capital lease obligations	(129		)	(128		)
Acquisition of treasury stock	(1,116		)	(5,733		)
Dividends paid to shareholders	(5,753		)	(4,922		)
Net cash used in financing activities	(6,773		)	(10,416		)
Net increase (decrease) in cash and cash equivalents	32,393			(35,953		)
Cash and cash equivalents at beginning of period	43,623			96,434
Cash and cash equivalents at end of period	$	76,016		$	60,481

See Condensed Notes to Consolidated Financial Statements.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in thousands)

(unaudited)



	Six months ended June 30,
	2016			2015
Operating Activities:
Net earnings	$	18,723		$	24,646
Adjustments:
Depreciation	6,521			5,923
Amortization	10,839			11,196
Net realized losses (gains) on investments	25			(1,384		)
Loss on disposal of property and equipment	401			238
Share-based compensation expense	351			1,728
Excess tax benefits from share-based payment arrangements	(157		)	(298		)
Activity related to rabbi trust	66			11
Change in accrued investment income	509			(543		)
Change in agents’ balances and premium receivable	(25,016		)	(57,903		)
Change in reinsurance receivables	(2,067		)	(1,521		)
Change in deferred policy acquisition costs	(2,664		)	(8,916		)
Change in other assets	3,460			(3,437		)
Change in unpaid losses and loss adjustment expenses	(3,755		)	12,850
Change in unearned premium	28,747			63,688
Change in other liabilities	(3,745		)	5,099
Net cash provided by operating activities	32,238			51,378
Investing Activities:
Purchases of fixed maturities	(261,498		)	(287,674		)
Purchases of equity securities	0			(2,000		)
Purchases of short-term investments	(5,140		)	(3,660		)
Purchases of property and equipment	(15,395		)	(28,204		)
Maturities and redemptions of fixed maturities	76,145			106,503
Maturities and redemptions of short-term investments	0			285
Proceeds from sale of fixed maturities	203,115			152,136
Proceeds from sale of equity securities	0			4,489
Proceeds from sale of short-term investments	5,666			0
Proceeds from sale of property and equipment	2			0
Net cash provided by (used in) investing activities	2,896			(58,125		)
Financing Activities:
Proceeds from stock options exercised and employee stock purchases	126			133
Excess tax benefits from share-based payment arrangements	157			298
Principal payments under capital lease obligations	(249		)	(246		)
Acquisition of treasury stock	(10,137		)	(7,645		)
Dividends paid to shareholders	(11,497		)	(9,853		)
Net cash used in financing activities	(21,602		)	(17,313		)
Net increase (decrease) in cash and cash equivalents	13,533			(24,060		)
Cash and cash equivalents at beginning of period	62,483			84,541
Cash and cash equivalents at end of period	$	76,016		$	60,481

See Condensed Notes to Consolidated Financial Statements.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

INDEX TO NOTES



1.	Significant Reporting and Accounting Policies	6.	Income Taxes

2.	Computation of Net Earnings Per Share	7.	Additional Information

3.	Fair Value	8.	Insurance Reserves

4.	Investments	9.	Commitments and Contingencies

5.	Long-Term Debt	10.	Accumulated Other Comprehensive Income

Note 1 Significant Reporting and Accounting Policies

Nature of Operations

We are a holding company that provides insurance through our subsidiaries for personal automobiles with a concentration on nonstandard risks, commercial vehicles and classic collectors. Although licensed to write insurance in all 50 states and the District of Columbia, we focus on select states that we believe offer the greatest opportunity for premium growth and profitability.

Basis of Consolidation and Reporting

The accompanying consolidated financial statements are unaudited and should be read in conjunction with our Annual Report on Form 10-K (Form 10-K) for the year ended December 31, 2015. This Quarterly Report on Form 10-Q, including the Condensed Notes to Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations, focuses on our financial performance since the beginning of the year.

These financial statements reflect certain adjustments necessary for a fair presentation of our results of operations and financial position. Such adjustments consist of normal, recurring accruals recorded to accurately match expenses with their related revenue streams and the elimination of all significant intercompany transactions and balances.

We have evaluated events that occurred after June 30, 2016, for recognition or disclosure in our financial statements and the notes to the financial statements.

Schedules may not foot due to rounding.

Estimates

We based certain accounts and balances within these financial statements upon our estimates and assumptions. The amount of reserves for claims not yet paid, for example, is an item that we can only record by estimation. Unrealized capital gains and losses on investments are subject to market fluctuations, and we use judgment in the determination of whether unrealized losses on certain securities are temporary or other-than-temporary. Should actual results differ significantly from these estimates, the effect on our results of operations could be material. The results of operations for the periods presented may not be indicative of our results for the entire year.

Recently Adopted Accounting Standards

In April 2015 the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) related to the presentation of debt issuance costs. The guidance requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability. We adopted this standard retrospectively as of January 1, 2016.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

The following table illustrates the effect of adopting this standard on the Consolidated Balance Sheets ($ in millions):



	December 31, 2015
	As Reported		As Adjusted		Difference
Other assets	$	11.9	$	10.3	$	(1.6	)
Total assets	2,386.8		2,385.1		(1.6		)
Long-term debt	275.0		273.4		(1.6		)
Total liabilities	1,699.2		1,697.5		(1.6		)
Total liabilities and shareholders' equity	2,386.8		2,385.1		(1.6		)

Recently Issued Accounting Standards

In June 2016 the FASB issued an ASU related to the accounting for credit losses. The guidance generally requires credit losses on available-for-sale debt securities to be recognized as an allowance rather than as a reduction to the amortized cost of a security. The standard is effective for fiscal periods beginning after December 15, 2019, and interim periods within the year of adoption, with prospective application of the ASU required for debt securities for which an other-than-temporary impairment has been recognized before the implementation date. We do not expect the adoption of this standard to have a material impact on our financial condition or results of operations.

In March 2016 the FASB issued an ASU related to the accounting for employee share-based payments. The guidance addresses the recognition, presentation and classification of awards, forfeitures and shares withheld for tax purposes. The standard is effective for fiscal periods beginning after December 15, 2016, with each provision having a different application method. We do not expect the adoption of this standard to have a material impact on our financial condition or results of operations.

In February 2016 the FASB issued an ASU related to the accounting for leases. The guidance requires lessees to recognize lease assets and liabilities on the balance sheet. The standard is effective for fiscal years beginning after December 15, 2018, and is to be applied retrospectively, with an option to use a modified retrospective approach for leases which commenced prior to the effective date of this ASU. We are still evaluating the impact this ASU will have on the Company's consolidated financial statements.

In January 2016 the FASB issued an ASU amending the guidance on classifying and measuring financial instruments. The guidance requires equity securities to be measured at fair value and changes in that fair value to be recognized through net income. The standard is effective for fiscal years beginning after December 15, 2017, with a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. We currently record equity securities at fair value and as of June 30, 2016, we have $7.7 million net unrealized gains, net of tax, recognized as a component of other comprehensive income.

In May 2015 the FASB issued an ASU related to the disclosure for short-duration contracts. The guidance requires additional disclosures related to the liability for unpaid claims and claim adjustment expenses in an effort to increase transparency and comparability. The standard is effective for annual periods beginning after December 15, 2015, and interim periods within annual periods after December 15, 2016. The new guidance, which is to be applied retrospectively, will have no material impact on our results of operations or financial position.

In May 2014 the FASB issued an ASU related to the accounting for revenue from contracts with customers. Insurance contracts have been excluded from the scope of the guidance. In August 2015 the FASB issued an ASU to defer the effective date from fiscal years beginning after December 15, 2016, to fiscal years beginning after December 15, 2017. We do not expect the adoption of this standard to have a material impact on our financial condition or results of operations.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

Note 2 Computation of Net Earnings per Share

The following table illustrates our computations of basic and diluted net earnings per common share ($ in thousands, except per

share figures):



	Three months ended June 30,				Six months ended June 30,
	2016		2015		2016		2015
Net earnings	$	11,015	$	13,493	$	18,723	$	24,646
Average basic shares outstanding	11,012		11,408		11,024		11,417
Basic net earnings per share	$	1.00	$	1.18	$	1.70	$	2.16

Average basic shares outstanding	11,012		11,408		11,024		11,417
Restricted stock not vested	24		14		22		13
Dilutive effect of Performance Share Plan	60		61		69		87
Average diluted shares outstanding	11,096		11,483		11,115		11,517
Diluted net earnings per share	$	0.99	$	1.18	$	1.68	$	2.14

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

Note 3 Fair Value

Fair values of instruments are based on:


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


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


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

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



	Fair Value
June 30, 2016	Level 1			Level 2			Level 3			Total
Cash and cash equivalents	$	76,016		$	0		$	0		$	76,016
Fixed maturity securities:
U.S. government	64,222			13			0			64,236
State and municipal	0			463,480			626			464,106
Mortgage-backed securities:
Residential	0			333,717			0			333,717
Commercial	0			67,372			0			67,372
Total mortgage-backed securities	0			401,089			0			401,089
Asset-backed securities	0			47,374			1,959			49,333
Corporates	0			403,935			1,107			405,043
Total fixed maturities	64,222			1,315,892			3,692			1,383,806
Equity securities	90,742			0			0			90,742
Short-term investments	767			3,299			0			4,066
Total cash and investments	$	231,748		$	1,319,191		$	3,692		$	1,554,631
Percentage of total cash and investments	14.9		%	84.9		%	0.2		%	100.0		%

	Fair Value
December 31, 2015	Level 1			Level 2			Level 3			Total
Cash and cash equivalents	$	62,483		$	0		$	0		$	62,483
Fixed maturity securities:
U.S. government	64,638			32			0			64,669
State and municipal	0			479,656			10			479,666
Mortgage-backed securities:
Residential	0			334,784			0			334,784
Commercial	0			70,224			0			70,224
Total mortgage-backed securities	0			405,008			0			405,008
Asset-backed securities	0			54,018			0			54,018
Corporates	0			376,582			1,524			378,105
Total fixed maturities	64,638			1,315,295			1,534			1,381,467
Equity securities	89,935			0			0			89,935
Short-term investments	0			4,651			0			4,651
Total cash and investments	$	217,056		$	1,319,946		$	1,534		$	1,538,536
Percentage of total cash and investments	14.1		%	85.8		%	0.1		%	100.0		%

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

We do not report our long-term debt at fair value in the Consolidated Balance Sheets. The $291.6 million and $281.6 million fair value of our long-term debt at June 30, 2016, and December 31, 2015, respectively, would be included in Level 2 of the fair value hierarchy if it were reported at fair value.

Level 1 includes cash and cash equivalents, U.S. Treasury securities, an exchange-traded fund and equities held in a rabbi trust which funds our Supplemental Employee Retirement Plan (SERP). Level 2 includes securities whose fair value was determined using observable market inputs. Level 3 securities are comprised of (i) securities for which there is no active or inactive market for similar instruments; (ii) securities whose fair value is determined based on unobservable inputs; and (iii) securities, other than those backed by the U.S. Government, that are not rated by a nationally recognized statistical rating organization (NRSRO). We recognize transfers between levels at the beginning of the reporting period.

A third party nationally recognized pricing service provides the fair value of securities in Level 2. A summary of the significant valuation techniques and market inputs for each class of security follows:

U.S. Government: In determining the fair value for U.S. Government securities we use the market approach. The primary inputs to the valuation include reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads, reference data and industry and economic events.

State and municipal: In determining the fair value for state and municipal securities we use the market approach. The primary inputs to the valuation include reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads, reference data and industry and economic events.

Mortgage-backed securities: In determining the fair value for mortgage-backed securities we use the market approach and to a lesser extent the income approach. The primary inputs to the valuation include reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads, reference data, industry and economic events and monthly payment information.

Asset-backed securities: In determining the fair value for asset-backed securities we use the market approach and to a lesser extent the income approach. The primary inputs to the valuation include reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads, reference data, industry and economic events, monthly payment information and collateral performance.

Corporate: In determining the fair value for corporate securities we use the market approach. The primary inputs to the valuation include reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads (for investment grade securities), observations of equity and credit default swap curves (for high-yield corporates), reference data and industry and economic events.

We review the third party pricing methodologies quarterly and test for significant differences between the market price used to value the security and recent sales activity.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

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



	Three months ended June 30, 2016
	State and Municipal			Corporates			Asset-Backed Securities			Total
Balance at beginning of period	$	0		$	1,442		$	1,338		$	2,781
Total (losses) gains, unrealized or realized
Included in net earnings	(4		)	4			0			(0		)
Included in other comprehensive income	1			(26		)	1			(24		)
Purchases	0			0			620			620
Settlements	0			(312		)	0			(312		)
Transfers in	628			0			0			628
Balance at end of period	$	626		$	1,107		$	1,959		$	3,692

	Three months ended June 30, 2015
	State and Municipal			Corporates			Asset-Backed Securities			Total
Balance at beginning of period	$	10		$	2,946		$	46		$	3,002
Total (losses) gains, unrealized or realized
Included in net earnings	(0		)	12			0			12
Included in other comprehensive income	(0		)	(28		)	0			(28		)
Purchases	0			0			0			0
Settlements	0			(506		)	(46		)	(552		)
Transfers in	0			0			0			0
Balance at end of period	$	10		$	2,423		$	0		$	2,434



	Six months ended June 30, 2016
	State and Municipal			Corporates			Asset-Backed Securities			Total
Balance at beginning of period	$	10		$	1,524		$	0		$	1,534
Total (losses) gains, unrealized or realized
Included in net earnings	(4		)	7			0			3
Included in other comprehensive income	1			(25		)	1			(23		)
Purchases	0			0			620			620
Settlements	(10		)	(398		)	0			(408		)
Transfers in	628			0			1,338			1,966
Balance at end of period	$	626		$	1,107		$	1,959		$	3,692

	Six months ended June 30, 2015
	State and Municipal			Corporates			Asset-Backed Securities			Total
Balance at beginning of period	$	0		$	3,134		$	150		$	3,285
Total losses, unrealized or realized
Included in net earnings	(0		)	(83		)	0			(83		)
Included in other comprehensive income	0			(43		)	0			(42		)
Purchases	0			0			0			0
Settlements	0			(586		)	(150		)	(736		)
Transfers in	10			0			0			10
Balance at end of period	$	10		$	2,423		$	0		$	2,434

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

Of the $3.7 million fair value of securities in Level 3 at June 30, 2016, which consisted of six securities, we priced four based on non-binding broker quotes, one price was provided by our unaffiliated money manager, and one security, which was included in Level 3 because it was not rated by a NRSRO, was priced by a nationally recognized pricing service.

During the six months ended June 30, 2016, one security was transferred from Level 2 into Level 3 because a price could not

be determined using observable market inputs, and one security was transferred from Level 2 into Level 3 following an exchange after which it was no longer rated by a NRSRO. There were no transfers of securities between Levels 1 and 2.

The gains or losses included in net earnings are included in the line item "Net realized (losses) gains on investments" in the Consolidated Statements of Earnings. We recognize the net gains or losses included in other comprehensive income in the line item "Unrealized gains (losses) on investments, net" in the Consolidated Statements of Comprehensive Income and the line item "Change in unrealized gain on investments" or the line item "Change in non-credit component of impairment losses on fixed maturities" in the Consolidated Statements of Changes in Shareholders’ Equity.

The following table presents the carrying value and estimated fair value of our financial instruments ($ in thousands):



	June 30, 2016				December 31, 2015
	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:
Cash and cash equivalents	$	76,016	$	76,016	$	62,483	$	62,483
Available-for-sale securities:
Fixed maturities	1,383,806		1,383,806		1,381,467		1,381,467
Equity securities	90,742		90,742		89,935		89,935
Short-term investments	4,066		4,066		4,651		4,651
Total cash and investments	$	1,554,631	$	1,554,631	$	1,538,536	$	1,538,536
Liabilities:
Long-term debt	$	273,486	$	291,572	$	273,383	$	281,581

Refer to Note 4 – Investments to the Consolidated Financial Statements for additional information on investments and Note 5 – Long-Term Debt to the Consolidated Financial Statements for additional information on long-term debt.

Note 4 Investments

We consider all fixed maturity and equity securities to be available-for-sale and report them at fair value with the net unrealized gains or losses reported after-tax (net of any valuation allowance) as a component of other comprehensive income. The proceeds from sales of securities for the three and six months ended June 30, 2016, were $100.2 million and $208.8 million, respectively, while the proceeds from sales of securities for the three and six months ended June 30, 2015, were $56.7 million and $156.6 million, respectively. There was no receivable for unsettled sales as of June 30, 2016, or 2015.

Gross gains of $0.9 million and gross losses of $0.9 million were realized on sales of available-for-sale securities during the three months ended June 30, 2016, compared with gross gains of $0.5 million and gross losses of $0.1 million realized on sales during the three months ended June 30, 2015. Gross gains of $2.2 million and gross losses of $1.9 million were realized on sales of available-for-sale securities during the six months ended June 30, 2016, compared with gross gains of $2.7 million and gross losses of $0.7 million realized on sales during the six months ended June 30, 2015. Gains or losses on securities are determined on a specific identification basis.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

Summarized information for the major categories of our investment portfolio follows ($ in thousands):



	June 30, 2016
	Amortized Cost or Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		OTTI Recognized in Accumulated OCI⁽¹⁾
Fixed maturities:
U.S. government	$	63,229	$	1,007	$	0		$	64,236	$	0
State and municipal	453,409		10,752		(55		)	464,106		(51		)
Mortgage-backed securities:
Residential	326,176		7,798		(256		)	333,717		(2,165		)
Commercial	67,272		309		(209		)	67,372		0
Total mortgage-backed securities	393,448		$	8,106	(465		)	$	401,089	(2,165		)
Asset-backed securities	49,116		227		(10		)	49,333		(8		)
Corporates	399,095		6,973		(1,026		)	405,043		(51		)
Total fixed maturities	1,358,297		27,066		(1,556		)	1,383,806		(2,276		)
Equity securities	78,869		11,873		0			90,742		0
Short-term investments	4,066		1		(0		)	4,066		0
Total	$	1,441,231	$	38,940	$	(1,557	)	$	1,478,615	$	(2,276	)

	December 31, 2015
	Amortized Cost or Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		OTTI Recognized in Accumulated OCI⁽¹⁾
Fixed maturities:
U.S. government	$	64,849	$	103	$	(282	)	$	64,669	$	0
State and municipal	472,402		7,393		(129		)	479,666		(51		)
Mortgage-backed securities:
Residential	333,554		3,678		(2,448		)	334,784		(2,374		)
Commercial	71,137		16		(929		)	70,224		0
Total mortgage-backed securities	404,691		3,694		(3,377		)	405,008		(2,374		)
Asset-backed securities	54,106		50		(138		)	54,018		(8		)
Corporates	385,462		1,281		(8,638		)	378,105		(61		)
Total fixed maturities	1,381,510		12,521		(12,564		)	1,381,467		(2,495		)
Equity securities	78,815		11,120		0			89,935		0
Short-term investments	4,656		0		(4		)	4,651		0
Total	$	1,464,981	$	23,640	$	(12,568	)	$	1,476,053	$	(2,495	)

(1) The total non-credit portion of OTTI recognized in Accumulated OCI reflecting the original non-credit loss at the time the credit impairment was determined.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

The following tables set forth the amount of unrealized loss by investment category and length of time that individual securities have been in a continuous unrealized loss position ($ in thousands):



	Less than 12 Months								12 Months or More
June 30, 2016	Number of Securities with Unrealized Losses	Fair Value		Gross Unrealized Losses			Unrealized Losses as % of Cost		Number of Securities with Unrealized Losses	Fair Value		Gross Unrealized Losses			Unrealized Losses as % of Cost
Fixed maturities:
U.S. government	0	$	0	$	0		0.0	%	0	$	0	$	0		0.0	%
State and municipal	7	14,350		(22		)	0.2	%	1	2,967		(33		)	1.1	%
Mortgage-backed securities:
Residential	19	7,071		(16		)	0.2	%	56	23,240		(240		)	1.0	%
Commercial	2	6,715		(22		)	0.3	%	10	31,994		(187		)	0.6	%
Total mortgage-backed securities	21	13,786		(38		)	0.3	%	66	55,234		(427		)	0.8	%
Asset-backed securities	10	6,902		(9		)	0.1	%	1	824		(1		)	0.2	%
Corporates	40	53,889		(440		)	0.8	%	26	32,518		(585		)	1.8	%
Total fixed maturities	78	88,927		(509		)	0.6	%	94	91,542		(1,047		)	1.1	%
Equity securities	0	0		0			0.0	%	0	0		0			0.0	%
Short-term investments	3	3,299		(0		)	0.0	%	0	0		0			0.0	%
Total	81	$	92,226	$	(510	)	0.5	%	94	$	91,542	$	(1,047	)	1.1	%



	Less than 12 Months								12 Months or More
December 31, 2015	Number of Securities with Unrealized Losses	Fair Value		Gross Unrealized Losses			Unrealized Losses as % of Cost		Number of Securities with Unrealized Losses	Fair Value		Gross Unrealized Losses			Unrealized Losses as % of Cost
Fixed maturities:
U.S. government	18	$	36,024	$	(241	)	0.7	%	4	$	4,687	$	(41	)	0.9	%
State and municipal	27	54,680		(129		)	0.2	%	0	0		0			0.0	%
Mortgage-backed securities:
Residential	205	133,814		(1,436		)	1.1	%	64	39,001		(1,012		)	2.5	%
Commercial	9	28,733		(349		)	1.2	%	10	34,169		(580		)	1.7	%
Total mortgage-backed securities	214	162,547		(1,785		)	1.1	%	74	73,170		(1,592		)	2.1	%
Asset-backed securities	36	35,313		(132		)	0.4	%	2	1,153		(7		)	0.6	%
Corporates	172	239,440		(7,149		)	2.9	%	12	14,373		(1,488		)	9.4	%
Total fixed maturities	467	528,003		(9,436		)	1.8	%	92	93,384		(3,128		)	3.2	%
Equity securities	0	0		0			0.0	%	0	0		0			0.0	%
Short-term investments	2	4,651		(4		)	0.1	%	0	0		0			0.0	%
Total	469	$	532,654	$	(9,440	)	1.7	%	92	$	93,384	$	(3,128	)	3.2	%

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

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


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


•	the length of time the security’s market value has been below its cost;


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


•	the intent to sell the security;


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


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


•	issuer news releases;


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


•	industry research and communications with industry specialists; and


•	third-party research and credit rating reports.

We regularly evaluate for potential impairment each security position that has either of the following: a fair value of less than 95% of its book value or an unrealized loss that equals or exceeds $100,000.

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



	June 30, 2016		December 31, 2015
Number of positions held with unrealized:
Gains	1,023		602
Losses	175		561
Number of positions held that individually exceed unrealized:
Gains of $500,000	2		2
Losses of $500,000	0		0
Percentage of positions held with unrealized:
Gains that were investment grade	95	%	94	%
Losses that were investment grade	73	%	89	%
Percentage of fair value held with unrealized:
Gains that were investment grade	95	%	95	%
Losses that were investment grade	69	%	88	%

The following table sets forth the amount of unrealized losses, excluding the rabbi trust, by age and severity at June 30, 2016, ($ in thousands):



	Fair Value of Securities with Unrealized Losses		Total Gross Unrealized Losses			Less Than 5%*			5% - 10%*			Total Gross Greater Than 10%*
Age of Unrealized Losses
Three months or less	$	56,881	$	(287	)	$	(287	)	$	0		$	0
Four months through six months	17,338		(52		)	(52		)	0			0
Seven months through nine months	8,170		(70		)	(70		)	0			0
Ten months through twelve months	13,103		(145		)	(45		)	(100		)	0
Greater than twelve months	88,276		(1,003		)	(819		)	(179		)	(5		)
Total	$	183,768	$	(1,557	)	$	(1,272	)	$	(279	)	$	(5	)

* As a percentage of amortized cost or cost.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

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



	Pre-tax
	Fixed Maturities			Equity Securities			Short-Term Investments			Tax Effects			Net
Six months ended June 30, 2016
Unrealized holding gains on securities arising during the period	$	25,531		$	753		$	3		$	(9,200	)	$	17,086
Realized (gains) losses on securities sold	(293		)	(0		)	2			102			(189		)
Impairment loss recognized in earnings	316			0			0			(111		)	205
Change in unrealized, net	$	25,553		$	753		$	5		$	(9,209	)	$	17,102
Six months ended June 30, 2015
Unrealized holding (losses) gains on securities arising during the period	$	(7,313	)	$	2,259		$	(2	)	$	1,770		$	(3,287	)
Realized gains on securities sold	(875		)	(1,098		)	0			691			(1,283		)
Impairment loss recognized in earnings	590			0			0			(206		)	383
Change in unrealized, net	$	(7,599	)	$	1,160		$	(2	)	$	2,254		$	(4,186	)

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

For our securities held with unrealized losses, we believe, based on our analysis, we will recover our cost basis in these securities and we do not intend to sell the securities nor is it more likely than not there will be a requirement to sell the securities before they recover in value.

The following table is a progression of credit losses on fixed maturity securities that were bifurcated between a credit and non-credit component ($ in thousands):



	Six months ended June 30,
	2016			2015
Beginning balance	$	683		$	852
Securities sold and paid down	(65		)	(85		)
Ending balance	$	618		$	766

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

The table below sets forth the scheduled maturities of fixed maturity securities at June 30, 2016, based on their fair values ($ in thousands). We report securities that do not have a single maturity date at average maturity. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid by the issuers.



	Fair Value								Amortized Cost
	Securities with Unrealized Gains		Securities with Unrealized Losses		Securities with No Unrealized Gains or Losses		All Fixed Maturity Securities		All Fixed Maturity Securities
Maturity
One year or less	$	62,071	$	4,759	$	0	$	66,830	$	66,112
After one year through five years	543,587		50,250		0		593,837		583,974
After five years through ten years	218,261		48,715		1,195		268,171		261,272
After ten years	4,547		0		0		4,547		4,375
Mortgage- and asset-backed securities	373,676		76,746		0		450,422		442,564
Total	$	1,202,142	$	180,469	$	1,195	$	1,383,806	$	1,358,297

Note 5 Long-Term Debt



($ in thousands)	June 30, 2016		December 31, 2015
Principal	$	275,000	$	275,000
Unamortized debt issuance costs	1,514		1,617
Long-term debt less unamortized debt issuance costs	$	273,486	$	273,383

In September 2012 we issued $275 million principal of senior notes due September 2022 (the “5.0% Senior Notes”). The 5.0% Senior Notes accrue interest at 5.0%, payable semiannually. At the time we issued the 5.0% Senior Notes, we capitalized $2.2 million of debt issuance costs, which we are amortizing over the term of the 5.0% Senior Notes. We calculated the June 30, 2016, fair value of $291.6 million using a 243 basis point spread to the 10-year U.S. Treasury Note of 1.471%.

In August 2014 we renewed our agreement for a $50 million three-year revolving credit facility (the “Credit Agreement”) that requires us to meet certain financial and other covenants. We are currently in compliance with all covenants under the Credit Agreement, and as of June 30, 2016, there were no borrowings outstanding against it.

Note 6 Income Taxes

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



	Three months ended June 30,						Six months ended June 30,
	2016			2015			2016			2015
Earnings before income taxes	$	16,040		$	19,667		$	26,816		$	35,903
Income taxes at statutory rate	5,614			6,883			9,386			12,566
Effect of:
Dividends-received deduction	(150		)	(144		)	(222		)	(248		)
Tax-exempt interest	(619		)	(584		)	(1,258		)	(1,308		)
Other	180			19			188			247
Provision for income taxes as shown on the Consolidated Statements of Earnings	$	5,026		$	6,174		$	8,094		$	11,257
GAAP effective tax rate	31.3		%	31.4		%	30.2		%	31.4		%

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

Note 7 Additional Information

Supplemental Cash Flow Information

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



	Three months ended June 30,				Six months ended June 30,
	2016		2015		2016		2015
Income tax payments	$	3,551	$	12,000	$	3,551	$	12,750
Interest payments on debt	0		0		6,875		6,875
Interest payments on capital leases	19		21		40		43

Negative Cash Book Balances

Negative cash book balances, included in the line item “Other liabilities” in the Consolidated Balance Sheets, were $42.3 million and $41.4 million at June 30, 2016, and December 31, 2015, respectively.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

Note 8 Insurance Reserves

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



	Three months ended June 30,						Six months ended June 30,
	2016			2015			2016			2015
Balance at Beginning of Period
Unpaid losses on known claims	$	236,701		$	241,483		$	237,660		$	235,037
IBNR losses	295,281			278,863			290,097			277,482
LAE	141,493			155,409			142,207			155,658
Total unpaid losses and LAE	673,475			675,755			669,965			668,177
Reinsurance recoverables	(17,724		)	(13,982		)	(14,694		)	(14,370		)
Unpaid losses and LAE, net of reinsurance recoverables	655,751			661,773			655,271			653,808
Current Activity
Loss and LAE incurred:
Current accident year	275,687			273,246			546,854			531,030
Prior accident years	(12,173		)	(10,462		)	(18,056		)	(12,604		)
Total loss and LAE incurred	263,514			262,784			528,798			518,427
Loss and LAE payments:
Current accident year	(174,138		)	(164,762		)	(263,582		)	(246,670		)
Prior accident years	(97,405		)	(92,922		)	(272,764		)	(258,692		)
Total loss and LAE payments	(271,543		)	(257,684		)	(536,347		)	(505,362		)
Balance at End of Period
Unpaid losses and LAE, net of reinsurance recoverables	647,723			666,873			647,723			666,873
Add back reinsurance recoverables	18,487			14,155			18,487			14,155
Total unpaid losses and LAE	666,210			681,028			666,210			681,028
Unpaid losses on known claims	236,947			245,863			236,947			245,863
IBNR losses	290,767			281,147			290,767			281,147
LAE	138,496			154,017			138,496			154,017
Total unpaid losses and LAE	$	666,210		$	681,028		$	666,210		$	681,028

The $12.2 million and $18.1 million of favorable reserve development during the three and six months ended June 30, 2016, respectively, was primarily due to decreases in severity estimates related to Florida personal injury protection and bodily injury coverages and a decrease in California bodily injury loss adjustment expenses, and primarily related to accident years 2014 and prior. The favorable development for the six months ended June 30, 2016, was partially offset by unfavorable development from accident year 2015 in California material damage coverages, driven by an increase in severity.

The $10.5 million and $12.6 million of favorable reserve development during the three and six months ended June 30, 2015, respectively, was primarily due to decreases in loss adjustment expenses related to Florida bodily injury coverages in accident years 2013 and 2014.

Note 9 Commitments and Contingencies

Commitments

We extended our building lease in Alpharetta, Georgia through November 30, 2021, at a total base rent amount over the lease period of $2.7 million. In addition, a significant portion of our fleet vehicles, which have minimum lease terms of 367 days, were traded in during the first six months of 2016. The minimum remaining lease payment on our fleet as of June 30, 2016, has increased to $1.2 million. Other than these items, there have been no material changes from the commitments discussed on Form 10-K for

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

the year ended December 31, 2015. For a description of our previously reported commitments, refer to Note 14 Commitments and Contingencies of our Form 10-K for the year ended December 31, 2015.

Contingencies

From time to time we and our subsidiaries are named as defendants in various lawsuits incidental to our insurance operations. We consider legal actions relating to claims made in the ordinary course of seeking indemnification for a loss covered by the insurance policy in establishing loss and LAE reserves.

We also face, in the ordinary course of business, lawsuits that seek damages beyond policy limits, commonly known as extra-contractual claims, as well as class action and individual lawsuits that involve issues not unlike those facing other insurance companies and employers. We continually evaluate potential liabilities and reserves for litigation of these types using the criteria established by the Contingencies topic of the FASC. Under this guidance we may only record reserves for a loss if the likelihood of occurrence is probable and we can reasonably estimate the amount. If a material loss is judged to be reasonably possible, we will disclose an estimated range of loss or state that an estimate cannot be made. We consider each legal action using this guidance and record reserves for losses as warranted by establishing a reserve captured within our Consolidated Balance Sheets line-items “Unpaid losses and loss adjustment expenses” for extra-contractual claims and “Other liabilities” for class action and other non-claims related lawsuits. We record amounts incurred on the Consolidated Statements of Earnings within “Losses and loss adjustment expenses” for extra-contractual claims and “Other expenses” for class action and other non-claims related lawsuits.

Certain claims and legal actions have been brought against us for which we have accrued no loss, and for which an estimate of a possible range of loss cannot be made under the above rules. While it is not possible to predict the ultimate outcome of these claims or lawsuits, we do not believe they are likely to have a material effect on our financial condition or liquidity. However, losses incurred because of these cases could have a material adverse impact on net earnings in a given period.

For a description of previously reported contingencies, refer to Note 14 Commitments and Contingencies of our Form 10-K for the year ended December 31, 2015.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements

Note 10 Accumulated Other Comprehensive Income

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



	Three months ended June 30,
	2016									2015
	Before Tax			Income Tax			Net			Before Tax			Income Tax			Net
Accumulated change in post-retirement benefit liability, beginning of period	$	934		$	(327	)	$	607		$	190		$	(66	)	$	123
Effect on other comprehensive income	(11		)	4			(7		)	16			(6		)	11
Accumulated change in post-retirement benefit liability, end of period	923			(323		)	600			206			(72		)	134
Accumulated unrealized gains on investments, net, beginning of period	26,392			(9,237		)	17,155			43,218			(15,126		)	28,092
Other comprehensive income (loss) before reclassification	10,828			(3,790		)	7,038			(13,472		)	4,715			(8,757		)
Reclassification adjustment for other-than-temporary impairments included in net income	198			(69		)	129			208			(73		)	135
Reclassification adjustment for realized gains included in net income	(34		)	12			(22		)	(423		)	148			(275		)
Effect on other comprehensive income	10,992			(3,847		)	7,144			(13,687		)	4,790			(8,896		)
Accumulated unrealized gains on investments, net, end of period	37,383			(13,084		)	24,299			29,532			(10,336		)	19,196
Accumulated other comprehensive income, beginning of period	27,326			(9,564		)	17,762			43,408			(15,193		)	28,216
Change in post-retirement benefit liability	(11		)	4			(7		)	16			(6		)	11
Change in unrealized gains on investments, net	10,992			(3,847		)	7,144			(13,687		)	4,790			(8,896		)
Effect on other comprehensive income	10,981			(3,843		)	7,137			(13,670		)	4,785			(8,886		)
Accumulated other comprehensive income, end of period	$	38,306		$	(13,407	)	$	24,899		$	29,738		$	(10,408	)	$	19,330

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

Condensed Notes to Consolidated Financial Statements



	Six months ended June 30,
	2016									2015
	Before Tax			Income Tax			Net			Before Tax			Income Tax			Net
Accumulated change in post-retirement benefit liability, beginning of period	$	944		$	(331	)	$	614		$	174		$	(61	)	$	113
Effect on other comprehensive income	(22		)	8			(14		)	33			(12		)	21
Accumulated change in post-retirement benefit liability, end of period	923			(323		)	600			206			(72		)	134
Accumulated unrealized gains on investments, net, beginning of period	11,072			(3,875		)	7,197			35,972			(12,590		)	23,382
Other comprehensive income (loss) before reclassification	26,287			(9,200		)	17,086			(5,056		)	1,770			(3,287		)
Reclassification adjustment for other-than-temporary impairments included in net income	316			(111		)	205			590			(206		)	383
Reclassification adjustment for realized gains included in net income	(291		)	102			(189		)	(1,973		)	691			(1,283		)
Effect on other comprehensive income	26,311			(9,209		)	17,102			(6,440		)	2,254			(4,186		)
Accumulated unrealized gains on investments, net, end of period	37,383			(13,084		)	24,299			29,532			(10,336		)	19,196
Accumulated other comprehensive income, beginning of period	12,016			(4,206		)	7,811			36,145			(12,651		)	23,494
Change in post-retirement benefit liability	(22		)	8			(14		)	33			(12		)	21
Change in unrealized gains on investments, net	26,311			(9,209		)	17,102			(6,440		)	2,254			(4,186		)
Effect on other comprehensive income	26,290			(9,201		)	17,088			(6,407		)	2,242			(4,164		)
Accumulated other comprehensive income, end of period	$	38,306		$	(13,407	)	$	24,899		$	29,738		$	(10,408	)	$	19,330

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

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

ITEM 2

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

The primary events or circumstances that could cause actual results to differ materially from what we expect include determinations with respect to reserve adequacy, realized gains or losses on the investment portfolio (including other-than-temporary impairments for credit losses), loss cost trends, and competitive conditions in our key Focus States (defined in Results of Operations – Underwriting – Premium). We undertake no obligation to publicly update or revise any of the forward-looking statements. For a more detailed discussion of some of the foregoing risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements refer to Part I, Item 1A, Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2015.

OVERVIEW

During the second quarter and first six months of 2016 total gross written premium decreased 4.4% and 4.1%, respectively, compared with the same periods of 2015. Premium growth in Texas and our Commercial Vehicle product was more than offset by declines in the other states. Refer to Results of Operations – Underwriting – Premium for a more detailed discussion of our gross written premium.

Net earnings and diluted earnings per share for the three months ended June 30, 2016, were $11.0 million and $0.99, respectively, compared with $13.5 million and $1.18, respectively, for the same periods of 2015. Net earnings and diluted earnings per share for the six months ended June 30, 2016, were $18.7 million and $1.68, respectively, compared with $24.6 million and $2.14, respectively, for the same periods of 2015. The decrease in diluted earnings per share for the six months ended June 30, 2016, was primarily due to an increase in the accident year combined ratio from 97.7% at June 30, 2015, to 99.5% at June 30, 2016, partially offset by an increase in favorable development on prior accident year loss and LAE reserves.

Included in net earnings for the three and six months ended June 30, 2016, was $7.9 million ($12.2 million pre-tax) and $11.7 million ($18.1 million pre-tax), respectively, of favorable development on prior accident year loss and LAE reserves. The development during the six months ended June 30, 2016, was primarily due to decreases in severity estimates related to Florida personal injury protection and bodily injury coverages and a decrease in California bodily injury loss adjustment expenses, and primarily related to accident years 2014 and prior. The favorable development for the six months ended June 30, 2016, was partially offset by unfavorable development from accident year 2015 in California material damage coverages, driven by an increase in severity. Included in net earnings for the three and six months ended June 30, 2015, was $6.8 million ($10.5 million pre-tax) and $8.2 million ($12.6 million pre-tax), respectively, of favorable development on prior accident year loss and LAE reserves. The development was primarily due to decreases in loss adjustment expenses related to Florida bodily injury coverages in accident years 2013 and 2014.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

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

The following table displays combined ratio results by accident year developed through June 30, 2016:



	Accident Year Combined Ratio Developed Through										Prior Accident Year (Favorable) / Unfavorable Development ($ in millions)
	Dec 2014		June 2015		Dec 2015		Mar 2016		June 2016		Q2 2016					YTD 2016
Accident Year
Prior													$	0.1				$	0.5
2008	91.2	%	91.1	%	91.1	%	91.1	%	91.1	%	(0.0	)%	(0.0		)	(0.0	)%	(0.2		)
2009	92.4	%	92.4	%	92.4	%	92.4	%	92.4	%	0.0	%	0.3			0.0	%	0.0
2010	99.2	%	99.3	%	99.4	%	99.3	%	99.3	%	(0.0	)%	(0.2		)	(0.1	)%	(1.3		)
2011	100.1	%	100.0	%	100.2	%	100.0	%	100.0	%	(0.0	)%	(0.1		)	(0.1	)%	(1.4		)
2012	100.1	%	99.9	%	100.1	%	99.9	%	99.8	%	(0.1	)%	(1.2		)	(0.3	)%	(3.4		)
2013	96.8	%	96.3	%	95.5	%	95.3	%	95.1	%	(0.2	)%	(2.4		)	(0.4	)%	(5.4		)
2014	96.4	%	96.2	%	95.4	%	95.0	%	94.6	%	(0.3	)%	(4.4		)	(0.7	)%	(9.6		)
2015			97.7	%	97.8	%	98.3	%	98.0	%	(0.3	)%	(4.3		)	0.2	%	2.8
2016 YTD							99.4	%	99.5	%
													$	(12.2	)			$	(18.1	)

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

Pre-tax net investment income for the three and six months ended June 30, 2016, was $8.9 million and $17.0 million, respectively, compared with $9.2 million and $17.9 million, respectively, for the same periods of 2015.

Our book value per share increased 3.0% from $61.66 at December 31, 2015, to $63.54 at June 30, 2016. This increase was primarily due to earnings and an increase in unrealized gains, partially offset by shareholder dividends and share repurchases during the year.

RESULTS OF OPERATIONS

Underwriting

Premium

Our insurance subsidiaries provide personal automobile insurance products with a concentration on nonstandard auto insurance. While there is no industry-recognized definition of nonstandard auto insurance, we believe that it is generally understood to mean coverage for drivers who, due to factors such as their driving record, driving experience, lapse in, or the absence of, prior insurance, or credit history, represent a higher than normal risk. Customers in the market for nonstandard auto insurance generally seek minimum required liability limits and are willing to accept restrictive coverages in exchange for more affordable insurance, given their risk profile. We also write commercial vehicle insurance and insurance for classic collectible automobiles (Classic Collector).

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

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


•	“Focus States” – Arizona, California, Florida and Texas.


•	“Other States” – States where we are running off our business.

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

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

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

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



	Three months ended June 30,
	2016			2015			Change			% Change
Net earned premium
Gross written premium
Personal Auto:
Focus States	$	285,923		$	302,916		$	(16,993	)	(5.6	)%
Other States	8,731			12,669			(3,938		)	(31.1	)%
Total Personal Auto	294,654			315,584			(20,930		)	(6.6	)%
Commercial Vehicle	37,409			32,214			5,196			16.1	%
Classic Collector	4,898			4,702			195			4.2	%
Total gross written premium	336,961			352,500			(15,539		)	(4.4	)%
Ceded reinsurance	57			(3,887		)	3,944			(101.5	)%
Net written premium	337,018			348,613			(11,595		)	(3.3	)%
Change in unearned premium	3,697			(8,109		)	11,806			(145.6	)%
Net earned premium	$	340,715		$	340,504		$	211		0.1	%

	Six months ended June 30,
	2016			2015			Change			% Change
Net earned premium
Gross written premium
Personal Auto:
Focus States	$	613,589		$	644,217		$	(30,628	)	(4.8	)%
Other States	18,564			27,596			(9,031		)	(32.7	)%
Total Personal Auto	632,154			671,813			(39,659		)	(5.9	)%
Commercial Vehicle	72,649			63,489			9,160			14.4	%
Classic Collector	8,126			7,843			283			3.6	%
Total gross written premium	712,929			743,145			(30,216		)	(4.1	)%
Ceded reinsurance	(4,199		)	(7,460		)	3,261			(43.7	)%
Net written premium	708,730			735,685			(26,955		)	(3.7	)%
Change in unearned premium	(31,830		)	(63,075		)	31,245			(49.5	)%
Net earned premium	$	676,899		$	672,610		$	4,289		0.6	%

The following table summarizes our policies in force:



	At June 30,
	2016	2015	Change		% Change
Policies in Force
Personal Auto:
Focus States	716,483	777,284	(60,801	)	(7.8	)%
Other States	21,500	35,528	(14,028	)	(39.5	)%
Total Personal Auto	737,983	812,812	(74,829	)	(9.2	)%
Commercial Vehicle	51,862	47,666	4,196		8.8	%
Classic Collector	41,354	41,084	270		0.7	%
Total policies in force	831,199	901,562	(70,363	)	(7.8	)%

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

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

During the first six months of 2016, we implemented rate revisions in various states with an overall rate increase of 6.0%. Policies in force at June 30, 2016, decreased 7.8% compared with the same period in 2015.

The decrease in gross written premium in our Focus States was primarily due to premium declines in Florida and California, partially offset by new business growth in Texas. New business in California declined during the first half of 2016 in response to rate increases totaling 5.3% implemented during the year, and renewal business in Florida declined primarily as a result of rate increases implemented during the preceding 12 months totaling 14.7%.

The gross written premium growth in our Commercial Vehicle product was primarily due to renewal policy growth and higher average premium in California and Florida.

Profitability

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

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

The discussion of underwriting results that follows focuses on statutory ratios and the components thereof, unless otherwise indicated.

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

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

The following table presents statutory and GAAP combined ratios:



	Three months ended June 30,
	2016						2015						% Point Change
	Loss & LAE Ratio		Underwriting Ratio		Combined Ratio		Loss & LAE Ratio		Underwriting Ratio		Combined Ratio		Loss & LAE Ratio		Underwriting Ratio		Combined Ratio
Personal Auto:
Focus States	79.2	%	16.5	%	95.6	%	74.9	%	16.7	%	91.5	%	4.3	%	(0.2	)%	4.1	%
Other States	42.9	%	13.1	%	56.0	%	116.8	%	13.0	%	129.8	%	(73.8	)%	0.0	%	(73.8	)%
Total Personal Auto	78.0	%	16.4	%	94.4	%	77.0	%	16.5	%	93.5	%	1.0	%	(0.2	)%	0.8	%
Commercial Vehicle	74.2	%	18.9	%	93.0	%	85.2	%	15.3	%	100.4	%	(11.0	)%	3.6	%	(7.4	)%
Classic Collector	67.6	%	30.9	%	98.5	%	74.1	%	27.1	%	101.2	%	(6.4	)%	3.8	%	(2.6	)%
Total statutory ratios	77.6	%	16.8	%	94.4	%	77.4	%	16.6	%	93.9	%	0.2	%	0.3	%	0.5	%
Total statutory ratios excluding development	79.1	%	16.8	%	95.9	%	79.4	%	16.6	%	95.9	%	(0.3	)%	0.3	%	0.0	%
GAAP ratios	77.3	%	18.7	%	96.1	%	77.2	%	18.1	%	95.3	%	0.2	%	0.6	%	0.8	%
GAAP ratios excluding development	78.8	%	18.7	%	97.6	%	79.2	%	18.1	%	97.3	%	(0.3	)%	0.6	%	0.3	%

	Six months ended June 30,
	2016						2015						% Point Change
	Loss & LAE Ratio		Underwriting Ratio		Combined Ratio		Loss & LAE Ratio		Underwriting Ratio		Combined Ratio		Loss & LAE Ratio		Underwriting Ratio		Combined Ratio
Personal Auto:
Focus States	79.8	%	16.6	%	96.4	%	75.7	%	16.9	%	92.7	%	4.0	%	(0.3	)%	3.7	%
Other States	50.7	%	17.0	%	67.7	%	102.5	%	14.7	%	117.2	%	(51.8	)%	2.3	%	(49.5	)%
Total Personal Auto	78.8	%	16.6	%	95.4	%	77.2	%	16.9	%	94.1	%	1.5	%	(0.2	)%	1.3	%
Commercial Vehicle	75.7	%	17.4	%	93.0	%	81.4	%	16.1	%	97.5	%	(5.8	)%	1.3	%	(4.5	)%
Classic Collector	54.7	%	31.3	%	86.0	%	57.0	%	28.4	%	85.3	%	(2.3	)%	3.0	%	0.7	%
Total statutory ratios	78.3	%	16.9	%	95.2	%	77.3	%	17.0	%	94.2	%	1.0	%	(0.1	)%	1.0	%
Total statutory ratios excluding development	81.0	%	16.9	%	97.9	%	79.1	%	17.0	%	96.1	%	1.8	%	(0.1	)%	1.8	%
GAAP ratios	78.1	%	18.7	%	96.9	%	77.1	%	18.7	%	95.8	%	1.0	%	0.0	%	1.1	%
GAAP ratios excluding development	80.8	%	18.7	%	99.5	%	79.0	%	18.7	%	97.7	%	1.8	%	0.0	%	1.8	%

The statutory combined ratio for the three and six months ended June 30, 2016, increased by 0.5 point and 1.0 point, respectively, from the same periods of 2015. The second quarter of 2016 included $7.0 million of unfavorable development from the first accident quarter of 2016 compared with $3.7 million of unfavorable development during the second quarter of 2015 from the first accident quarter of 2015. The second quarter and first six months of 2016 included $12.2 million and $18.1 million, respectively, of favorable reserve development on prior accident year loss and LAE reserves primarily due to decreases in severity estimates related to Florida personal injury protection and bodily injury coverages and a decrease in California bodily injury loss adjustment expenses, and primarily related to accident years 2014 and prior. The favorable development for the six months ended June 30, 2016, was partially offset by unfavorable development from accident year 2015 in California material damage coverages, driven by an increase in severity. The second quarter and first six months of 2015 included $10.5 million and $12.6 million, respectively, of favorable development on prior accident year loss and LAE reserves. Excluding the effect of development, the statutory combined ratio was flat during the second quarter and increased 1.8 points during the first six months of 2016, compared with the same periods of 2015.

The GAAP combined ratio for the three and six months ended June 30, 2016, increased by 0.8 point and 1.1 points, respectively, from the same periods of 2015. Excluding the effect of development, the GAAP combined ratio increased by 0.3 point and 1.8

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INFINITY PROPERTY AND CASUALTY CORPORATION FORM 10-Q

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

points during the second quarter and first six months of 2016, respectively, primarily due to a higher accident year loss ratio as a result of increasing loss costs in material damage and personal injury protection coverages.

Losses from catastrophes were $5.2 million and $6.3 million for the three and six months ended June 30, 2016, respectively, compared with $1.0 million and $1.1 million for the same periods of 2015.

The 4.1 points and 3.7 points increase in the Focus States combined ratio for the three and six months ended June 30, 2016, compared with the same periods of 2015, was primarily due to an increase in the 2016 accident year loss ratio in California as a result of higher loss costs from collision and bodily injury coverages. The favorable development recognized during the first six months of 2016 in Florida more than offset the increase in the personal injury protection loss cost trends, resulting in an improvement in the calendar year combined ratio in this state.

The 7.4 points and 4.5 points decrease in the Commercial Vehicle combined ratio for the three and six months ended June 30, 2016, was primarily due to favorable development in 2016, compared with unfavorable development in 2015, partially offset by a higher expense ratio as a result of returned ceding commission on a terminated excess of loss reinsurance contract. Refer to Liquidity and Capital Resources – Reinsurance for more information on the modification to our excess of loss reinsurance program.

Installment and Other Fee Income



	Three months ended June 30,				Six months ended June 30,
($ in thousands)	2016		2015		2016		2015
Installment and other fee income	$	25,385	$	24,556	$	50,903	$	49,117

The increase in installment and other fee income charged to policyholders during the first six months of 2016 was primarily related to an increase in processing fees.

Net Investment Income

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



	Three months ended June 30,						Six months ended June 30,
	2016			2015			2016			2015
Investment income:
Interest income on fixed maturities, cash and cash equivalents	$	8,766		$	9,081		$	17,047		$	17,896
Dividends on equity securities	718			688			1,063			1,188
Gross investment income	9,484			9,769			18,110			19,083
Investment expenses	(557		)	(567		)	(1,120		)	(1,145		)
Net investment income	8,927			9,202			16,990			17,938
Average investment balance, at cost	$	1,498,837		$	1,571,086		$	1,502,468		$	1,572,481
Annualized returns excluding realized gains and losses	2.4		%	2.3		%	2.3		%	2.3		%
Annualized returns including realized gains and losses	2.3		%	2.4		%	2.3		%	2.5		%

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

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

The following table provides information about our fixed maturity investments at June 30, 2016, which are sensitive to interest rate risk. The table shows expected principal cash flows by expected maturity date for each of the five subsequent years and collectively for all years thereafter. Callable bonds and notes are included based on call date or maturity date depending upon which date produces the most conservative yield. Mortgage Backed Securities (MBS) and sinking fund issues are included based on maturity year adjusted for expected payment patterns.



	Expected Principal Cash Flows
($ in thousands)	MBS and ABS only		Excluding MBS and ABS		Total		Maturing Book Yield
For the period ending December 31,
2016	$	43,864	$	35,130	$	78,995	2.4%
2017	99,940		128,890		228,830		2.2%
2018	61,816		132,548		194,364		2.1%
2019	47,772		168,271		216,043		2.2%
2020	34,200		150,216		184,416		2.6%
Thereafter	138,826		250,243		389,069		2.9%
Total	$	426,419	$	865,297	$	1,291,716	2.5%

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

Net Realized (Losses) Gains on Investments

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



	Three months ended June 30, 2016									Three months ended June 30, 2015
	Net Realized Gains (Losses) on Sales			Net Impairment Losses Recognized in Earnings			Total Net Realized Losses on Investments			Net Realized Gains on Sales		Net Impairment Losses Recognized in Earnings			Total Net Realized Gains on Investments
Fixed maturities	$	34		$	(198	)	$	(164	)	$	423	$	(208	)	$	214
Equity securities	0			0			0			0		0			0
Short-term investments	(0		)	0			(0		)	0		0			0
Total	$	34		$	(198	)	$	(164	)	$	423	$	(208	)	$	214

	Six months ended June 30, 2016									Six months ended June 30, 2015
	Net Realized Gains (Losses) on Sales			Net Impairment Losses Recognized in Earnings			Total Net Realized Losses on Investments			Net Realized Gains on Sales		Net Impairment Losses Recognized in Earnings			Total Net Realized Gains on Investments
Fixed maturities	$	293		$	(316	)	$	(23	)	$	875	$	(590	)	$	285
Equity securities	0			0			0			1,098		0			1,098
Short-term investments	(2		)	0			(2		)	0		0			0
Total	$	291		$	(316	)	$	(25	)	$	1,973	$	(590	)	$	1,384

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

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

Interest Expense



	Three months ended June 30,				Six months ended June 30,
($ in thousands)	2016		2015		2016		2015
5.0% Senior Notes	$	3,438	$	3,438	$	6,875	$	6,875
Amortization of debt issuance costs	52		49		102		97
Capital leases	19		21		40		43
Total	$	3,508	$	3,508	$	7,017	$	7,015

At June 30, 2016, we had $275 million principal outstanding of senior notes. These notes carry a coupon rate of 5.0% and require no principal payment until maturity in September 2022. Refer to Note 5 – Long-Term Debt to the Consolidated Financial Statements for additional information on the 5.0% Senior Notes.

Income Taxes

Our GAAP effective tax rate was 31.3% and 30.2% for the three and six months ended June 30, 2016, respectively, compared with 31.4% for both periods of 2015. The GAAP effective tax rate has decreased in 2016 primarily as a result of a decrease in pre-tax income. Refer to Note 6 – Income Taxes to the Consolidated Financial Statements for additional information on income taxes.

LIQUIDITY AND CAPITAL RESOURCES

Sources of Funds

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

Funds to meet expenditures at the holding company level come primarily from dividends and tax payments from the insurance subsidiaries, as well as cash and investments held by the holding company. As of June 30, 2016, the holding company had $146.1 million of cash and investments. In 2016 our insurance subsidiaries may pay us up to $65.4 million in ordinary dividends without prior regulatory approval. For the six months ended June 30, 2016, our insurance subsidiaries have paid us ordinary dividends of $28.0 million.

Our insurance subsidiaries generate liquidity to satisfy their obligations primarily by collecting and investing premiums in advance of paying claims and generating investment income on their $1.4 billion investment portfolio. Our insurance subsidiaries generated positive cash flows from operations of $14.3 million and $37.4 million during the three and six months ended June 30, 2016, respectively, compared with positive operating cash flows of $22.1 million and $56.1 million during the same periods of 2015.

At June 30, 2016, we had $275 million principal outstanding of 5.0% Senior Notes. The 5.0% Senior Notes accrue interest at 5.0%, payable semiannually each March and September. Refer to Note 5 – Long-Term Debt to the Consolidated Financial Statements for more information on our long-term debt.

On February 29, 2016, we filed a "shelf" registration statement with the Securities and Exchange Commission registering securities, which will allow us to sell any combination of senior or subordinated debt securities, common stock, preferred stock, warrants, depositary shares, purchase contracts and units in one or more offerings should we choose to do so in the future. This shelf registration statement expires March 1, 2019.

Uses of Funds

In February 2016 we increased our quarterly dividend to $0.52 per share from $0.43 per share. At this current amount, our 2016 annualized dividend payments would be approximately $23.0 million.

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

On November 4, 2014, our Board of Directors increased the authority of our share and debt repurchase program to a total of $75 million and extended the date to execute the program from December 31, 2014, to December 31, 2016. As of June 30, 2016, we had $36.7 million of authority remaining under this program. Share repurchases during the first six months of 2016 were as follows:



	Total Number of Shares Purchased	Average Price Paid per Share (Excluding Commissions)
First quarter	106,766	$	78.59
Second quarter	2,800	78.32
Total	109,566	$	78.58

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

Reinsurance

Premium ceded under all reinsurance agreements for the three and six months ended June 30, 2016, was $(0.1) million and $4.2 million, respectively, compared with $3.9 million and $7.5 million, respectively, for the same periods of 2015. Effective June 1, 2016, we modified our excess of loss reinsurance protection for commercial auto to cover losses up to $500,000 for claims in excess of $500,000 per occurrence. In addition, we added a 75% quota share for our general liability business. Premium ceded for the three and six months ended June 30, 2016, includes the return of $5.9 million of unearned premium due to the termination of the previous excess of loss contract. The $1.8 million of ceding commissions associated with this unearned premium was returned to the reinsurers. Refer to Note 11 - Reinsurance to the Consolidated Financial Statements of our Form 10-K for the year ended December 31, 2015, for more information on our reinsurance contracts.

Investments

Our consolidated investment portfolio at June 30, 2016, contained approximately $1.4 billion in fixed maturity securities, $90.7 million in equity securities and $4.1 million of short-term investments. All of these are carried at fair value with unrealized gains and losses reported in accumulated other comprehensive income, a separate component of shareholders’ equity, on an after-tax basis. At June 30, 2016, we had pre-tax net unrealized gains of $25.5 million on fixed maturities and pre-tax net unrealized gains of $11.9 million on equity securities. Combined, the pre-tax net unrealized gain increased by $26.3 million for the six months ended June 30, 2016. This increase occurred as a result of lower market interest rates affecting our fixed portfolio. The average option adjusted duration of our fixed maturity portfolio was 2.8 years at June 30, 2016, compared with 3.2 years at December 31, 2015.

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

Approximately 91.6% of our fixed maturity investments at June 30, 2016, were rated “investment grade,” and, as of the same date, the average credit rating of our fixed maturity portfolio was AA-. Investment grade securities generally bear lower yields and have lower degrees of risk than those that are unrated or non-investment grade. We believe that a high quality investment portfolio is more likely to generate a stable and predictable investment return.

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

Our Level 1 securities are U.S. Treasury securities, an exchange-traded fund and equity securities held in a rabbi trust. Our Level 2 securities are comprised of securities whose fair value was determined using observable market inputs. Our Level 3 securities are comprised of (i) securities for which there is no active or inactive market for similar instruments; (ii) securities whose fair value is determined based on unobservable inputs; and (iii) securities that nationally recognized statistical rating organizations do not rate.

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

Summarized information for our investment portfolio at June 30, 2016, was as follows ($ in thousands):



	Amortized Cost		Fair Value		% of Total Fair Value
Fixed Maturities:
U.S. government	$	63,229	$	64,236	4.3	%
State and municipal	453,409		464,106		31.4	%
Mortgage- and asset-backed:
Residential mortgage-backed securities	326,176		333,717		22.6	%
Commercial mortgage-backed securities	67,272		67,372		4.6	%
Asset-backed securities (ABS):
Auto loans	35,322		35,406		2.4	%
Equipment leases	7,589		7,646		0.5	%
All other	6,205		6,281		0.4	%
Total ABS	49,116		49,333		3.3	%
Total mortgage- and asset-backed	442,564		450,422		30.5	%
Corporates
Investment grade	284,919		289,929		19.6	%
Non-investment grade	114,176		115,114		7.8	%
Total corporates	399,095		405,043		27.4	%
Total fixed maturities	1,358,297		1,383,806		93.6	%
Equity securities	78,869		90,742		6.1	%
Short-term investments	4,066		4,066		0.3	%
Total investments	$	1,441,231	$	1,478,615	100.0	%

We categorize securities by rating based upon available ratings issued by Moody's, Standard & Poor's or Fitch. If all three ratings are available but not equivalent, we exclude the lowest rating and the lower of the remaining ratings is used. If ratings are only available from two agencies, the lowest is used. This methodology is consistent with that used by the major bond indices. State and municipal bond ratings presented are underlying ratings without regard to any insurance.

The following table presents the credit rating and fair value of our fixed maturity portfolio by major security type at June 30, 2016, ($ in thousands):



	Rating
	AAA			AA			A			BBB			Non-investment Grade			Total Fair Value			% of Total Exposure
U.S. government	$	64,236		$	0		$	0		$	0		$	0		$	64,236		4.6	%
State and municipal	124,929			256,493			82,059			0			626			464,106			33.5	%
Mortgage- and asset-backed	419,675			24,035			3,587			3,125			0			450,422			32.5	%
Corporates	0			26,157			131,803			131,969			115,114			405,043			29.3	%
Total fair value	$	608,839		$	306,685		$	217,449		$	135,094		$	115,740		$	1,383,806		100.0	%
% of total fair value	44.0		%	22.2		%	15.7		%	9.8		%	8.4		%	100.0		%

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Condensed Notes to Consolidated Financial Statements

ITEM 3

Quantitative and Qualitative Disclosures about Market Risk

As of June 30, 2016, there were no material changes to the information provided on Form 10-K for the year ended December 31, 2015, under the caption “Exposure to Market Risk” in Management’s Discussion and Analysis of Financial Condition and Results of Operations. Refer to Item 2 Management’s Discussion and Analysis under the caption “Investments” for updates to disclosures made under the subcaption “Credit Risk” of our Form 10-K for the year ended December 31, 2015.

ITEM 4

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of the Company’s management, including its Principal Executive Officer and Principal Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2016. Based on that evaluation, we concluded that the controls and procedures are effective in providing reasonable assurance that material information required to be disclosed in our reports filed with or submitted to the Securities and Exchange Commission (SEC) under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate.

Changes in Internal Control over Financial Reporting

During the fiscal quarter ended June 30, 2016, there have been no changes to our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Condensed Notes to Consolidated Financial Statements

PART II

OTHER INFORMATION

ITEM 1

Legal Proceedings

We have not become a party to any material legal proceedings and there have not been any material developments in our legal proceedings disclosed on Form 10-K for the year ended December 31, 2015. For a description of our previously reported legal proceedings, refer to Part I, Item 3, Legal Proceedings of our Form 10-K for the year ended December 31, 2015.

ITEM 1A

Risk Factors

There have been no material changes in our risk factors as disclosed on Form 10-K for the year ended December 31, 2015. For a description of our previously reported risk factors, refer to Part I, Item 1A, Risk Factors of our Form 10-K for the year ended December 31, 2015.

ITEM 2

Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities



	Total Number of Shares Purchased (a)	Average Price Paid per Share (b)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value that May Yet Be Purchased Under the Plans or Programs (c)
Period:
April 1, 2016 - April 30, 2016	13,344	$	77.68	2,100	$	36,801,587
May 1, 2016 - May 31, 2016	700	78.83		700	36,746,387
June 1, 2016 - June 30, 2016	—	—		—	36,746,387
Total	14,044	$	77.74	2,800	$	36,746,387


(a)	Includes 11,244 shares surrendered to cover the withholding taxes related to the issuance of shares under the performance share plan.

(b)Average price paid per share excludes commissions.


(c)	On November 4, 2014, our Board of Directors increased the authority under our current share and debt repurchase plan to a total of $75.0 million and extended the date to execute the program from December 31, 2014, to December 31, 2016.

ITEM 6



Exhibit 31.1	Certification of the Chief Executive Officer under Exchange Act Rule 13a-14(a)
Exhibit 31.2	Certification of the Chief Financial Officer under Exchange Act Rule 13a-14(a)
Exhibit 32	Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350
Exhibit 101.INS	XBRL Instance Document
Exhibit 101.SCH	XBRL Taxonomy Extension Schema Document ⁽¹⁾
Exhibit 101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document ⁽¹⁾
Exhibit 101.DEF	XBRL Taxonomy Extension Definition Linkbase Document ⁽¹⁾
Exhibit 101.LAB	XBRL Taxonomy Extension Label Linkbase Document ⁽¹⁾
Exhibit 101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document ⁽¹⁾

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

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Condensed Notes to Consolidated Financial Statements

Signature

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




	Infinity Property and Casualty Corporation

	BY:	/s/ ROBERT H. BATEMAN
August 4, 2016		Robert H. Bateman
		Executive Vice President, Chief Financial Officer and Treasurer