Edgar Filing: INFINITY PROPERTY & CASUALTY CORP

IPCC.10Q.3Q.2012

Table of Contents

INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

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 September 30, 2012

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

For the transition period from to

Commission File No. 0-50167

INFINITY PROPERTY AND CASUALTY CORPORATION

(Exact name of registrant as specified in its charter)



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

3700 Colonnade Parkway, Suite 600, Birmingham, Alabama 35243

(Address of principal executive offices and zip code)

(205) 870-4000

(Registrant’s telephone number, including area code)

Not Applicable

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

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

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

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



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

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

As of October 31, 2012 there were 11,673,041 shares of the registrant’s common stock outstanding.

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

INDEX




		Page
	PART I – FINANCIAL INFORMATION

Item 1	Financial Statements

	Consolidated Statements of Earnings	3

	Consolidated Statements of Comprehensive Income	4

	Consolidated Balance Sheets	5

	Consolidated Statements of Changes in Shareholders’ Equity	6

	Consolidated Statements of Cash Flows	7

	Condensed Notes to Consolidated Financial Statements	11

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3	Quantitative and Qualitative Disclosures About Market Risk	47

Item 4	Controls and Procedures	47

PART II – OTHER INFORMATION

Item 1	Legal Proceedings	48

Item 1A	Risk Factors	48

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	48

Item 6	Exhibits	49

	Signature	50

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

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

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

101.INS	XBRL Instance Document

101.SCH	XBRL Taxonomy Extension Schema

101.CAL	XBRL Taxonomy Extension Calculation Linkbase

101.DEF	XBRL Taxonomy Extension Definition Linkbase

101.LAB	XBRL Taxonomy Extension Label Linkbase

101.PRE	XBRL Taxonomy Extension Presentation Linkbase

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

PART I

FINANCIAL INFORMATION

ITEM 1

Financial Statements

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(in thousands, except per share data)

(unaudited)



	Three months ended September 30,								Nine months ended September 30,
	2012			2011			% Change		2012			2011			% Change
				(as adjusted see Note 1)								(as adjusted see Note 1)
Revenues:
Earned premium	$	301,463		$	255,138		18.2	%	$	872,730		$	745,703		17.0	%
Net investment income	9,018			10,166			(11.3	)%	28,364			31,117			(8.8	)%
Net realized gains on investments¹	268			722			(62.8	)%	2,673			5,604			(52.3	)%
Gain on sale of subsidiary	2,922			0			0.0	%	2,922			0			0.0	%
Other income	63			101			(37.8	)%	430			201			113.7	%
Total revenues	313,734			266,127			17.9	%	907,119			782,625			15.9	%
Costs and Expenses:
Losses and loss adjustment expenses	238,261			195,275			22.0	%	683,946			566,685			20.7	%
Commissions and other underwriting expenses	63,353			57,199			10.8	%	186,356			172,128			8.3	%
Interest expense	3,199			2,702			18.4	%	8,604			8,105			6.2	%
Corporate general and administrative expenses	1,750			1,729			1.2	%	5,850			5,654			3.5	%
Other expenses	585			1,026			(43.0	)%	931			1,425			(34.7	)%
Total costs and expenses	307,148			257,931			19.1	%	885,687			753,997			17.5	%
Earnings before income taxes	6,586			8,196			(19.6	)%	21,431			28,628			(25.1	)%
Provision for income taxes	1,432			1,462			(2.1	)%	5,029			4,839			3.9	%
Net Earnings	$	5,154		$	6,733		(23.4	)%	$	16,402		$	23,789		(31.1	)%
Net Earnings per Common Share:
Basic	$	0.44		$	0.56		(21.4	)%	$	1.40		$	1.95		(28.2	)%
Diluted	0.43			0.55			(21.8	)%	1.37			1.90			(27.9	)%
Average Number of Common Shares:
Basic	11,631			12,070			(3.6	)%	11,689			12,230			(4.4	)%
Diluted	11,893			12,344			(3.7	)%	11,959			12,524			(4.5	)%
Cash Dividends per Common Share	$	0.225		$	0.180		25.0	%	$	0.675		$	0.540		25.0	%
¹Net realized gains before impairment losses	$	479		$	1,146		(58.2	)%	$	3,949		$	6,873		(42.5	)%
Total other-than-temporary impairment (OTTI) losses	(211		)	(442		)	(52.2	)%	(1,245		)	(2,121		)	(41.3	)%
Non-credit portion in other comprehensive income	0			19			(100.0	)%	1			1,036			(99.9	)%
OTTI losses reclassified from other comprehensive income	0			(1		)	(100.0	)%	(32		)	(185		)	(82.5	)%
Net impairment losses recognized in earnings	(211		)	(424		)	(50.2	)%	(1,277		)	(1,270		)	0.5	%
Total net realized gains on investments	$	268		$	722		(62.8	)%	$	2,673		$	5,604		(52.3	)%

See Condensed Notes to Consolidated Financial Statements.

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)



	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
				(as adjusted see Note 1)						(as adjusted see Note 1)
Net earnings	$	5,154		$	6,733		$	16,402		$	23,789
Other comprehensive income before tax:
Net change in postretirement benefit liability	(6		)	(16		)	(17		)	(48		)
Unrealized gains on investments:
Unrealized holding gains arising during the period	10,662			2,723			20,780			16,483
Less: Reclassification adjustments for gains included in net income	(268		)	(722		)	(2,673		)	(5,604		)
Unrealized gains on investments, net	10,394			2,001			18,107			10,879
Other comprehensive income, before tax	10,388			1,985			18,090			10,831
Income tax expense related to components of other comprehensive income	(3,636		)	(695		)	(6,332		)	(3,791		)
Other comprehensive income, net of tax	6,752			1,290			11,759			7,040
Comprehensive income	$	11,907		$	8,023		$	28,161		$	30,829

See Condensed Notes to Consolidated Financial Statements.

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)



	September 30, 2012			December 31, 2011
	(unaudited)			(as adjusted see Note 1)
Assets
Investments:
Fixed maturities – at fair value (amortized cost $1,195,837 and $1,144,687)	$	1,251,930		$	1,187,987
Equity securities – at fair value (cost $26,569 and $26,413)	42,400			36,930
Total investments	$	1,294,330		$	1,224,917
Cash and cash equivalents	126,574			83,767
Restricted cash (See Note 10)	209,879			0
Accrued investment income	10,762			10,761
Agents’ balances and premium receivable, net of allowances for doubtful accounts of $15,010 and $13,497	445,334			382,621
Property and equipment, net of accumulated depreciation of $43,303 and $37,551	40,726			38,694
Prepaid reinsurance premium	2,676			2,131
Recoverables from reinsurers (includes $758 and $79 on paid losses and LAE)	15,318			14,719
Deferred policy acquisition costs	92,493			80,071
Current and deferred income taxes	8,811			10,728
Receivable for securities sold	0			1,152
Other assets	20,013			5,535
Goodwill	75,275			75,275
Total assets	$	2,342,192		$	1,930,371
Liabilities and Shareholders’ Equity
Liabilities:
Unpaid losses and loss adjustment expenses	$	544,318		$	495,403
Unearned premium	557,748			474,528
Payable to reinsurers	0			45
Long-term debt (See Note 6)	469,875			194,810
Commissions payable	32,644			30,605
Payable for securities purchased	4,558			10,818
Other liabilities	58,465			62,373
Total liabilities	$	1,667,608		$	1,268,582
Commitments and contingencies (See Note 10)
Shareholders’ equity:
Common stock, no par value (50,000,000 shares authorized; 21,420,996 and 21,331,006 shares issued)	$	21,456		$	21,358
Additional paid-in capital	359,858			355,911
Retained earnings	660,896			652,423
Accumulated other comprehensive income, net of tax	47,077			35,319
Treasury stock, at cost (9,732,697 and 9,524,369 shares)	(414,704		)	(403,221		)
Total shareholders’ equity	$	674,584		$	661,789
Total liabilities and shareholders’ equity	$	2,342,192		$	1,930,371

See Condensed Notes to Consolidated Financial Statements.

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(in thousands)

(unaudited)



	Common Stock		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss), Net of Tax			Treasury Stock			Total
Balance at December 31, 2010	$	21,228	$	349,742	$	625,492		$	24,488		$	(359,766	)	$	661,184
Cumulative effect of change in accounting principle	—		—		(6,157		)	—			—			(6,157		)
Net earnings	—		—		23,789			—			—			23,789
Net change in postretirement benefit liability	—		—		—			(31		)	—			(31		)
Change in unrealized gain on investments	—		—		—			6,102			—			6,102
Change in non-credit component of impairment losses on fixed maturities	—		—		—			969			—			969
Comprehensive income														$	30,829
Dividends paid to common shareholders	—		—		(6,618		)	—			—			(6,618		)
Shares issued and share-based compensation expense, including tax benefit	91		4,291		—			—			—			4,383
Acquisition of treasury stock	—		—		—			—			(39,387		)	(39,387		)
Balance at September 30, 2011, as adjusted	$	21,319	$	354,034	$	636,505		$	31,528		$	(399,153	)	$	644,233
Net earnings	$	—	$	—	$	18,044		$	—		$	—		$	18,044
Net change in postretirement benefit liability	—		—		—			(145		)	—			(145		)
Change in unrealized gain on investments	—		—		—			3,618			—			3,618
Change in non-credit component of impairment losses on fixed maturities	—		—		—			317			—			317
Comprehensive income														$	21,835
Dividends paid to common shareholders	—		—		(2,126		)	—			—			(2,126		)
Shares issued and share-based compensation expense, including tax benefit	38		1,877		—			—			—			1,916
Acquisition of treasury stock	—		—		—			—			(4,067		)	(4,067		)
Balance at December 31, 2011, as adjusted	$	21,358	$	355,911	$	652,423		$	35,319		$	(403,221	)	$	661,789
Net earnings	$	—	$	—	$	16,402		$	—		$	—		$	16,402
Net change in postretirement benefit liability								(11		)				(11		)
Change in unrealized gain on investments	—		—		—			10,784			—			10,784
Change in non-credit component of impairment losses on fixed maturities	—		—		—			986			—			986
Comprehensive income														$	28,161
Dividends paid to common shareholders	—		—		(7,929		)	—			—			(7,929		)
Shares issued and share-based compensation expense, including tax benefit	98		3,947		—			—			—			4,045
Acquisition of treasury stock	—		—		—			—			(11,483		)	(11,483		)
Balance at September 30, 2012	$	21,456	$	359,858	$	660,896		$	47,077		$	(414,704	)	$	674,584

See Condensed Notes to Consolidated Financial Statements.

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



	Three months ended September 30,
	2012			2011
				(as adjusted See Note 1)
Operating Activities:
Net earnings	$	5,154		$	6,733
Adjustments:
Depreciation	2,356			1,850
Amortization	2,580			2,038
Net realized gains on investments	(268		)	(722		)
Loss on disposal of property and equipment	30			160
Gain on sale of subsidiary	(2,922		)	0
Share-based compensation expense	671			967
Excess tax benefits from share-based payment arrangements	0			(169		)
Activity related to rabbi trust	37			(65		)
Decrease (increase) in accrued investment income	101			(5		)
Increase in agents’ balances and premium receivable	(18,250		)	(14,928		)
(Increase) decrease in reinsurance receivables	(1,108		)	186
Increase in deferred policy acquisition costs	(2,463		)	(2,444		)
(Increase) decrease in other assets	(2,685		)	5,903
Increase in unpaid losses and loss adjustment expenses	13,446			10,422
Increase in unearned premium	21,645			14,409
Decrease in other liabilities	(1,099		)	(5,848		)
Net cash provided by operating activities	17,225			18,488
Investing Activities:
Purchases of fixed maturities	(89,084		)	(46,844		)
Purchases of equity securities	0			(2,000		)
Purchases of property and equipment	(944		)	(2,705		)
Maturities and redemptions of fixed maturities	62,178			22,416
Proceeds from sale of fixed maturities	9,968			49,360
Proceeds from sale of property and equipment	11			0
Net cash (used in) provided by investing activities	(17,872		)	20,228
Financing Activities:
Proceeds from stock options exercised and employee stock purchases, including tax benefit	396			271
Excess tax benefits from share-based payment arrangements	0			169
Proceeds from issuance of bonds	273,213			0
Increase in restricted cash related to planned redemption of debt	(209,879		)	0
Acquisition of treasury stock	(3,194		)	(21,284		)
Dividends paid to shareholders	(2,629		)	(2,170		)
Net cash provided by (used in) financing activities	57,906			(23,014		)
Net increase in cash and cash equivalents	57,260			15,702
Cash and cash equivalents at beginning of period	69,314			36,455
Cash and cash equivalents at end of period	$	126,574		$	52,157

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

See Condensed Notes to Consolidated Financial Statements.

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q



	Nine months ended September 30,
	2012			2011
				(as adjusted See Note 1)
Operating Activities:
Net earnings	$	16,402		$	23,789
Adjustments:
Depreciation	6,442			6,676
Amortization	7,137			5,869
Net realized gains on investments	(2,673		)	(5,604		)
Loss on disposal of property and equipment	44			362
Gain on sale of subsidiary	(2,922		)	0
Share-based compensation expense	2,817			2,383
Excess tax benefits from share-based payment arrangements	0			(169		)
Activity related to rabbi trust	72			(47		)
(Increase) decrease in accrued investment income	(1		)	809
Increase in agents’ balances and premium receivable	(62,713		)	(53,024		)
(Increase) decrease in reinsurance receivables	(1,145		)	1,596
Increase in deferred policy acquisition costs	(12,421		)	(11,196		)
Increase in other assets	(8,004		)	(4,087		)
Increase in unpaid losses and loss adjustment expenses	48,915			15,698
Increase in unearned premium	83,220			63,370
Decrease in payable to reinsurers	(45		)	(42		)
Decrease in other liabilities	(2,096		)	(20,328		)
Net cash provided by operating activities	73,029			26,057
Investing Activities:
Purchases of fixed maturities	(344,520		)	(242,707		)
Purchases of equity securities	0			(2,000		)
Purchases of property and equipment	(8,529		)	(20,881		)
Maturities and redemptions of fixed maturities	144,171			113,081
Proceeds from sale of fixed maturities	133,510			150,231
Proceeds from sale of equity securities	0			7,871
Proceeds from sale of property and equipment	11			0
Net cash (used in) provided by investing activities	(75,359		)	5,596
Financing Activities:
Proceeds from stock options exercised and employee stock purchases, including tax benefit	1,229			1,999
Excess tax benefits from share-based payment arrangements	0			169
Proceeds from issuance of bonds	273,213			0
Increase in restricted cash related to planned redemption of debt	(209,879		)	0
Acquisition of treasury stock	(11,497		)	(38,650		)
Dividends paid to shareholders	(7,929		)	(6,618		)
Net cash provided by (used in) financing activities	45,136			(43,100		)
Net increase (decrease) in cash and cash equivalents	42,807			(11,447		)
Cash and cash equivalents at beginning of period	83,767			63,605
Cash and cash equivalents at end of period	$	126,574		$	52,157

See Condensed Notes to Consolidated Financial Statements.

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

INDEX TO NOTES



1. Reporting and Accounting Policies		7. Income Taxes

2. Share-Based Compensation		8. Additional Information

3. Computation of Net Earnings Per Share		9. Insurance Reserves

4. Fair Value		10. Commitments and Contingencies

5. Investments		11. Subsequent Events

6. Long-Term Debt

Note 1 Reporting and Accounting Policies

Nature of Operations

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

Basis of Consolidation and Reporting

The accompanying consolidated financial statements are unaudited and should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2011. This Quarterly Report on Form 10-Q, including the Condensed Notes to Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations, focuses on our financial performance since the beginning of the year.

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

We have evaluated events that occurred after September 30, 2012 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

Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts

In October 2010, the Financial Accounting Standards Board ("FASB") issued an accounting standards update intended to reduce diversity in practice for the accounting of deferred policy acquisition costs. The guidance modifies the definition of acquisition costs to require that costs be directly related to the successful acquisition of a new or renewal insurance contract to be deferred. We adopted this standard as of January 1, 2012. Pursuant to the guidance, we elected to adopt this standard on a retrospective basis and recognized an adjustment to beginning retained earnings for the earliest period shown in the Consolidated Statements of Changes in Shareholders' Equity of $6.2 million, net of taxes.

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

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

Condensed Notes to Consolidated Financial Statements



	December 31, 2011
	As Reported		As Adjusted		Difference
Deferred policy acquisition costs	$	89.9	$	80.1	$	(9.8	)
Current and deferred income taxes	7.3		10.7		3.4
Total assets	1,936.8		1,930.4		(6.4		)
Shareholders' equity	668.2		661.8		(6.4		)

The following table illustrates the effect of adopting this standard on the Consolidated Statements of Earnings (in millions, except per share amounts):



	Three months ended September 30,							Nine months ended September 30,
	2011							2011
	As Reported		As Adjusted		Difference			As Reported		As Adjusted		Difference
Commissions and other underwriting expenses	$	58.1	$	57.2	$	(0.9	)	$	170.7	$	172.1	$	1.4
Provision for income taxes	1.1		1.5		0.3			5.3		4.8		(0.5		)
Net earnings	6.1		6.7		0.6			24.7		23.8		(0.9		)
Net earnings per common share:
Basic	$	0.51	$	0.56	$	0.05		$	2.02	$	1.95	$	(0.07	)
Diluted	0.50		0.55		0.05			1.97		1.90		(0.07		)

We also adjusted the Consolidated Statements of Cash Flows for these changes for the three and nine months ended September 30, 2011.

Presentation of Comprehensive Income

In June and December 2011, the FASB issued guidance amending the presentation of comprehensive income and its components. We adopted this standard as of January 1, 2012. Under the new guidance, a reporting entity has the option to present comprehensive income in a single continuous statement or in two separate but consecutive statements, as we elected. The impact of adoption was not material to our results of operations or financial position.

Amendments to Fair Value Measurement and Disclosure Requirements

In May 2011, the FASB issued guidance that clarifies the application of existing fair value measurement and disclosure requirements and amends certain fair value measurement principles, requirements and disclosures. We adopted this standard as of January 1, 2012. The impact of adoption was not material to our results of operations or financial position. Additional disclosures required by this standard are located in Note 4 to the Consolidated Financial Statements.

Intangibles – Goodwill and Other

In September 2011, the FASB issued guidance providing the option to first assess qualitative factors, such as macroeconomic conditions and industry and market considerations, to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment indicates impairment, an entity must perform the two-step goodwill impairment test. If an entity does not elect the option to perform the qualitative assessment, the guidance requiring the two-step goodwill impairment test is unchanged. We adopted this standard as of January 1, 2012. The impact of adoption had no impact on our results of operations or financial position.

Note 2 Share-Based Compensation

Restricted Stock Plan

We established the Restricted Stock Plan in 2002 and amended it on July 31, 2007. There are 500,000 shares of our common stock reserved for issuance under the Restricted Stock Plan, of which we have issued 278,843 shares as of September 30, 2012. We expense the fair value of shares issued under the Restricted Stock Plan over the vesting periods of the awards based on the market value of our stock on the date of grant.

On July 31, 2007, our Compensation Committee (“Committee”) approved the grant of 72,234 shares of restricted stock to certain officers under the Restricted Stock Plan. These shares of restricted stock vested in full on July 31, 2011. On August 2,

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

Condensed Notes to Consolidated Financial Statements

2011, the Committee approved the grant of an additional 72,234 shares of restricted stock to certain officers under the Restricted Stock Plan. These shares will vest in full on August 2, 2014. During the vesting period, the shares of restricted stock will not have voting rights and will accrue dividends, which we will not pay until the shares have vested. We treat the restricted shares as issued and outstanding for calculation of diluted earnings per share only. Until fully vested, we will not consider the shares issued and outstanding for purposes of the basic earnings per share calculation.

Non-employee Directors’ Stock Ownership Plan

In May 2005, our shareholders approved the Non-employee Directors’ Stock Ownership Plan (“Directors’ Plan”). The purpose of the Directors’ Plan is to include our common stock as part of the compensation provided to our non-employee directors and to provide for stock ownership requirements for our non-employee directors. There are 200,000 shares of our common stock reserved for issuance under the Directors’ Plan, of which we have issued 49,461 shares as of September 30, 2012. Under the terms of the Directors’ Plan, we grant shares on or about June 1 of each year and we restrict these shares from sale or transfer by any recipient for six months from the date of grant. In June 2011, we issued 6,657 shares of our common stock, valued pursuant to the Directors’ Plan at $350,000, to our non-employee directors. In June 2012, we issued 5,502 shares of our common stock, valued pursuant to the Directors’ Plan at $300,000, to our non-employee directors. We treat participants’ shares as issued and outstanding for basic and diluted earnings per share calculations.

Employee Stock Purchase Plan

We established our Employee Stock Purchase Plan (“ESPP”) in 2004 and amended and restated it on August 3, 2010. Under the ESPP, all eligible full-time employees may purchase shares of our common stock at a 15% discount to the current market price. Employees may allocate up to 25% of their base salary with a maximum annual participation amount of $25,000. If a participant sells any shares purchased under the ESPP within one year, we preclude that employee from participating in the ESPP for one year from the date of sale. The source of shares issued to participants is treasury shares or authorized but previously unissued shares. The maximum number of shares that we may issue under the ESPP may not exceed 1,000,000, of which we have issued 52,244 as of September 30, 2012. Our ESPP is qualified under Section 423 of the Internal Revenue Code of 1986, as amended. We treat participants’ shares as issued and outstanding for basic and diluted earnings per share calculations.

Performance Share Plan

Our shareholders approved the Performance Share Plan (“PSP”) on May 20, 2008 and an amended and restated PSP on May 26, 2010. The purpose of the PSP is to align further the interest of management with our long-term shareholders by including performance-based compensation, payable in shares of common stock, as a component of an executive’s annual compensation. The Committee administers the PSP and will (i) establish the performance goals, which may include but are not limited to, combined ratio, premium growth, growth within certain specific geographic areas and earnings per share or return on equity over the course of the upcoming three year period, (ii) determine the PSP participants, (iii) set the performance share units to be awarded to such participants, and (iv) set the rate at which performance share units will convert to shares of common stock based upon attainment of the performance goals. The number of shares of common stock that we may issue under the PSP is limited to 500,000 shares. In April 2012 and 2011, we issued 49,098 and 32,957 shares, respectively, under the PSP.

Stock Option Plan

We amended our Stock Option Plan (“SOP”) to prohibit any future grant of stock options from the plan after May 20, 2008. We amended the plan again on August 2, 2011. We have granted no options since 2004. We generally granted options with an exercise price equal to the closing price of our stock at the date of grant and these options have a 10-year contractual life. All of the options under the SOP have fully vested. Subject to specific limitations contained in the SOP, our Board of Directors has the ability to amend, suspend or terminate the plan at any time without shareholder approval. The SOP will continue in effect until the exercise or expiration of all options granted under the SOP.

As permitted by the Stock Compensation topic of the FASB Accounting Standards Codification, we used the modified Black-Scholes model with the assumptions noted below to estimate the value of employee stock options on the date of grant. Expected volatilities are based on historical volatilities of our stock. We selected the expected option life to be 7.5 years, which represents the midpoint between the last vesting date and the end of the contractual term. The risk-free interest rate for periods within the contractual life of the options is based on the yield on 10-year Treasury notes in effect at the time of grant. The dividend yield was based on expected dividends at the time of grant.

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

Condensed Notes to Consolidated Financial Statements

We estimated the weighted-average grant date fair values of options granted during 2004 and 2003 using the modified Black-Scholes valuation model and the following weighted-average assumptions:



	2004 Grants				2003 Grants
Weighted-average grant date fair value	$	13.87			$	5.97
Dividend yield	0.7		%		1.4		%
Expected volatility	33.0		%		33.0		%
Risk-free interest rate	4.3		%		4.0		%
Expected life	7.5			years	7.5			years
Weighted-average grant exercise price	$	33.56			$	16.11
Outstanding at September 30, 2012	78,300				83,599

The following table describes activity for our Stock Option Plan:



	Number of Options		Weighted-Average Exercise Price		Weighted- Average Remaining Term (in years)	Aggregate Intrinsic Value (a) (in millions)
Outstanding at December 31, 2011	192,455		$	23.40
Granted	0		0
Exercised	(30,556	)	$	16.77
Forfeited	0		0
Outstanding at September 30, 2012	161,899		$	24.65	0.87	$	5.8
Vested at September 30, 2012	161,899		$	24.65	0.87	$	5.8
Exercisable at September 30, 2012	161,899		$	24.65	0.87	$	5.8


(a)	We calculated the intrinsic value for the stock options based on the difference between the exercise price of the underlying awards and our closing stock price as of the reporting date.

Cash received from options exercised for the nine months ended September 30, 2012 and 2011 was approximately $0.5 million and $0.9 million, respectively. The actual tax benefit realized for the tax deductions from options exercised totaled $0.2 million and $0.5 million for the nine months ended September 30, 2012 and September 30, 2011, respectively. The total intrinsic value of options exercised during the nine months ended September 30, 2012 and 2011 was approximately $1.2 million and $1.8 million, respectively.

We have a policy of issuing new stock for the exercise of stock options.

The amount of total compensation cost, by plan, for share-based compensation arrangements was as follows (in thousands):



	Three months ended September 30,								Nine months ended September 30,
	2012				2011				2012				2011
	Expense Recognized in Income		Tax Benefit		Expense Recognized in Income		Tax Benefit		Expense Recognized in Income		Tax Benefit		Expense Recognized in Income		Tax Benefit
Restricted Stock Plan	$	298	$	104	$	265	$	93	$	893	$	312	$	662	$	232
Directors’ Plan	0		0		0		0		300		105		350		123
ESPP	13		0		11		0		40		0		30		0
PSP	373		131		702		246		1,624		568		1,371		480
Total	$	684	$	235	$	978	$	338	$	2,856	$	986	$	2,414	$	834

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

Condensed Notes to Consolidated Financial Statements

Note 3 Computation of Net Earnings per Share

The following table illustrates the computation of our basic and diluted net earnings per common share (in thousands, except per share figures):



	Three months ended September 30,				Nine months ended September 30,
	2012		2011		2012		2011
Net earnings for basic and diluted net earnings per share	$	5,154	$	6,733	$	16,402	$	23,789
Average basic shares outstanding	11,631		12,070		11,689		12,230
Basic net earnings per share	$	0.44	$	0.56	$	1.40	$	1.95

Average basic shares outstanding	11,631		12,070		11,689		12,230
Restricted stock not yet vested	32		71		25		72
Dilutive effect of assumed option exercises	101		104		103		119
Dilutive effect of Performance Share Plan	129		100		141		102
Average diluted shares outstanding	11,893		12,344		11,959		12,524
Diluted net earnings per share	$	0.43	$	0.55	$	1.37	$	1.90

Note 4 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 table presents for each of the fair value hierarchy levels our assets and liabilities for which we report fair value on a recurring basis at September 30, 2012 (in thousands):



	Fair Value
	Level 1			Level 2			Level 3			Total
Cash and cash equivalents	$	126,574		$	0		$	0		$	126,574
Fixed maturity securities:
U.S. government	106,669			318			3,735			110,722
Government-sponsored enterprises	0			70,678			0			70,678
State and municipal	0			432,116			4,031			436,147
Mortgage-backed securities:
Residential	0			238,149			0			238,149
Commercial	0			13,487			0			13,487
Total mortgage-backed securities	$	0		$	251,636		$	0		$	251,636
Collateralized mortgage obligations	0			21,920			0			21,920
Asset-backed securities	0			81,295			2,645			83,940
Corporates	0			265,969			10,918			276,886
Total fixed maturities	$	106,669		$	1,123,932		$	21,329		$	1,251,930
Equity securities	42,400			0			0			42,400
Total cash and investments	$	275,643		$	1,123,932		$	21,329		$	1,420,904
Percentage of total cash and investments	19.4		%	79.1		%	1.5		%	100.0		%

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

Condensed Notes to Consolidated Financial Statements

We do not measure our long-term debt at fair value in the Consolidated Balance Sheets. The $491.4 million fair value of our long-term debt would be included in Level 2 of the fair value hierarchy if it were reported at fair value.

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

A third party nationally recognized pricing service provides the fair value of securities in Level 2. We periodically review the third party pricing methodologies and test for significant differences between the market price used to value the security and recent sales activity.

The following table presents the changes in the Level 3 fair value category (in thousands):



	Three months ended September 30, 2012
	U.S. Government			State and Municipal			Mortgage- Backed Securities			Collateralized Mortgage Obligations			Corporates			ABS			Total
Balance at beginning of period	$	3,899		$	2,750		$	7,188		$	486		$	9,966		$	1,361		$	25,651
Total gains or (losses), unrealized or realized
Included in net earnings	0			0			0			(71		)	(203		)	0			(274		)
Included in other comprehensive income	(23		)	29			0			86			224			0			316
Purchases	0			4,002			0			0			0			2,645			6,647
Sales	0			0			0			(483		)	(1		)	0			(485		)
Settlements	(141		)	(2,750		)	0			(18		)	(122		)	0			(3,031		)
Transfers in	0			0			0			0			1,053			0			1,053
Transfers out	0			0			(7,188		)	0			0			(1,361		)	(8,549		)
Balance at end of period	$	3,735		$	4,031		$	0		$	0		$	10,918		$	2,645		$	21,329
	Nine months ended September 30, 2012
	U.S. Government			State and Municipal			Mortgage- Backed Securities			Collateralized Mortgage Obligations			Corporates			ABS			Total
Balance at beginning of period	$	4,438		$	0		$	0		$	509		$	10,426		$	0		$	15,374
Total gains or (losses), unrealized or realized
Included in net earnings	0			0			0			(71		)	(1,188		)	0			(1,259		)
Included in other comprehensive income	(106		)	2,779			7,188			90			1,501			1			11,452
Purchases	0			4,002			0			0			0			4,005			8,007
Sales	0			0			0			(483		)	(254		)	0			(737		)
Settlements	(597		)	(2,750		)	0			(44		)	(1,387		)	0			(4,778		)
Transfers in	0			0			0			0			2,889			0			2,889
Transfers out	0			0			(7,188		)	0			(1,070		)	(1,361		)	(9,619		)
Balance at end of period	$	3,735		$	4,031		$	0		$	0		$	10,918		$	2,645		$	21,329

Of the $21.3 million fair value of securities in Level 3, which consists of 17 securities, we priced 15 based on non-binding broker quotes. We manually calculated the price of 2 securities, which have a combined fair value of $0.8 million. Quantitative

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

Condensed Notes to Consolidated Financial Statements

information about the significant unobservable inputs used in the fair value measurement of these manually priced securities at September 30, 2012 is as follows (in millions):



	Fair Value		Valuation Technique	Unobservable Input	Value Used
Corporate bond	$	0.1	Recovery rate¹	Probability of default	100%
Corporate bond	0.8		Discounted cash flow	Comparable credit rating	B+
Total	$	0.8

¹ Recovery rate for senior unsecured bonds as indicated in Moody's Investor's Service Annual Default Study: Corporate Default and Recovery Rates, 1920-2011.

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

We transferred approximately $9.6 million of securities in Level 3 at December 31, 2011 to Level 2 during the nine months ended September 30, 2012 because we obtained a price for those securities from a nationally recognized pricing service. We transferred approximately $2.9 million of securities into Level 3 from Level 2 during the nine months ended September 30, 2012 because we could not obtain a price from a third party nationally recognized pricing service or because a rating by a NRSRO was not available. There were no transfers between Levels 1 and 2 during the nine months ended September 30, 2012.

The gains or losses included in net earnings are included in the line item net realized gains on investments in the Consolidated Statements of Earnings. We recognize the net gains or losses included in other comprehensive income in the line item unrealized 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):



	September 30, 2012				December 31, 2011
	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:
Cash and cash equivalents	$	126,574	$	126,574	$	83,767	$	83,767
Available-for-sale securities
Fixed maturities	1,251,930		1,251,930		1,187,987		1,187,987
Equity securities	42,400		42,400		36,930		36,930
Total cash and investments	$	1,420,904	$	1,420,904	$	1,308,684	$	1,308,684
Liabilities:
Long-term debt	$	469,875	$	491,414	$	194,810	$	207,246

See Note 5 to the Consolidated Financial Statements for additional information on investments and Note 6 for additional information on long-term debt.

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

Condensed Notes to Consolidated Financial Statements

Note 5 Investments

We consider all fixed maturity and equity securities available-for-sale and report them at fair value with the net unrealized gains or losses reported after-tax (net of any valuation allowance) as a component of other comprehensive income. The proceeds from sales of securities for the three months ended September 30, 2012 and 2011 were $10.0 million and $49.4 million, respectively. The proceeds from sales of securities for the nine months ended September 30, 2012 and 2011 were $133.5 million and $158.1 million, respectively. The proceeds for the three and nine months ended September 30, 2011 were net of $5.5 million of receivable for securities sold during the third quarter of 2011 that had not settled at September 30, 2011.

Gains or losses on securities are determined on a specific identification basis.

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

Condensed Notes to Consolidated Financial Statements

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



	September 30, 2012
	Amortized Cost or Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		OTTI Recognized in Accumulated OCI⁽¹⁾
Fixed maturities:
U.S. government	$	107,935	$	2,791	$	(3	)	$	110,722	$	0
Government-sponsored enterprises	69,021		1,658		0			70,678		0
State and municipal	414,600		21,592		(45		)	436,147		(53		)
Mortgage-backed securities:
Residential	224,736		13,412		0			238,149		(738		)
Commercial	12,670		824		(7		)	13,487		0
Total mortgage-backed securities	$	237,406	$	14,236	$	(7	)	$	251,636	$	(738	)
Collateralized mortgage obligations	21,395		533		(8		)	21,920		(263		)
Asset-backed securities	83,620		542		(222		)	83,940		(8		)
Corporates	261,860		15,108		(81		)	276,886		(1,131		)
Total fixed maturities	$	1,195,837	$	56,461	$	(367	)	$	1,251,930	$	(2,194	)
Equity securities	26,569		15,831		0			42,400		0
Total	$	1,222,405	$	72,292	$	(367	)	$	1,294,330	$	(2,194	)

	December 31, 2011
	Amortized Cost or Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		OTTI Recognized in Accumulated OCI⁽¹⁾
Fixed maturities:
U.S. government	$	124,378	$	3,428	$	(8	)	$	127,798	$	0
Government-sponsored enterprises	55,220		958		(9		)	56,170		0
State and municipal	391,436		18,016		(63		)	409,388		(70		)
Mortgage-backed securities:
Residential	225,506		10,878		(14		)	236,370		(1,157		)
Commercial	19,751		760		(142		)	20,369		(11		)
Total mortgage-backed securities	$	245,257	$	11,638	$	(156	)	$	256,739	$	(1,168	)
Collateralized mortgage obligations	27,447		757		(102		)	28,103		(515		)
Asset-backed securities	48,403		368		(143		)	48,628		(8		)
Corporates	252,546		9,688		(1,072		)	261,162		(1,949		)
Total fixed maturities	$	1,144,687	$	44,853	$	(1,553	)	$	1,187,987	$	(3,711	)
Equity securities	26,413		10,554		(38		)	36,930		0
Total	$	1,171,100	$	55,408	$	(1,590	)	$	1,224,917	$	(3,711	)

(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 10-Q

Condensed Notes to Consolidated Financial Statements

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



	Less than 12 Months								12 Months or More
	Number of Securities with Unrealized Losses	Fair Value		Gross Unrealized Losses			Unrealized Losses as % of Cost		Number of Securities with Unrealized Losses	Fair Value		Gross Unrealized Losses			Unrealized Losses as % of Cost
September 30, 2012
Fixed maturities:
U.S. government	2	$	7,236	$	(3	)	0.0	%	0	$	0	$	0		0.0	%
State and municipal	7	6,843		(38		)	0.6	%	1	518		(7		)	1.3	%
Mortgage-backed securities:
Commercial	2	377		(2		)	0.4	%	2	349		(6		)	1.6	%
Total mortgage-backed securities	2	$	377	$	(2	)	0.4	%	2	$	349	$	(6	)	1.6	%
Collateralized mortgage obligations	1	882		(8		)	0.9	%	1	1		0			1.4	%
Asset-backed securities	4	14,035		(107		)	0.8	%	3	4,151		(115		)	2.7	%
Corporates	11	5,246		(47		)	0.9	%	2	166		(34		)	17.0	%
Total fixed maturities	27	$	34,619	$	(206	)	0.6	%	9	$	5,185	$	(162	)	3.0	%
Equity securities	0	0		0			0.0	%	0	0		0			0.0	%
Total	27	$	34,619	$	(206	)	0.6	%	9	$	5,185	$	(162	)	3.0	%



	Less than 12 Months								12 Months or More
	Number of Securities with Unrealized Losses	Fair Value		Gross Unrealized Losses			Unrealized Losses as % of Cost		Number of Securities with Unrealized Losses	Fair Value		Gross Unrealized Losses			Unrealized Losses as % of Cost
December 31, 2011
Fixed maturities:
U.S. government	1	$	557	$	(8	)	1.4	%	0	$	0	$	0		0.0	%
Government-sponsored enterprises	1	5,032		(9		)	0.2	%	0	0		0			0.0	%
State and municipal	5	7,841		(36		)	0.5	%	2	2,885		(28		)	0.9	%
Mortgage-backed securities:
Residential	1	10,481		(14		)	0.1	%	0	0		0			0.0	%
Commercial	2	1,926		(7		)	0.4	%	5	4,505		(135		)	2.9	%
Total mortgage-backed securities	3	$	12,407	$	(21	)	0.2	%	5	$	4,505	$	(135	)	2.9	%
Collateralized mortgage obligations	4	2,714		(9		)	0.3	%	1	509		(93		)	15.5	%
Asset-backed securities	6	13,653		(143		)	1.0	%	1	433		0			0.1	%
Corporates	43	44,695		(1,057		)	2.3	%	1	721		(15		)	2.0	%
Total fixed maturities	63	$	86,899	$	(1,282	)	1.5	%	10	$	9,053	$	(271	)	2.9	%
Equity securities	0	0		0			0.0	%	0	0		0			0.0	%
Total	63	$	86,899	$	(1,282	)	1.5	%	10	$	9,053	$	(271	)	2.9	%

The table above excludes an unrealized gain on equities invested in a rabbi trust of $34.3 thousand at September 30, 2012 and an unrealized loss of $37.7 thousand at December 31, 2011.

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

Condensed Notes to Consolidated Financial Statements

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


•	the intent to sell the security;


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


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


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


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


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


•	issuer news releases;


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


•	industry research and communications with industry specialists and


•	third-party research and credit rating reports.

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

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

Condensed Notes to Consolidated Financial Statements

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



	September 30, 2012		December 31, 2011
Number of positions held with unrealized:
Gains	714		583
Losses	36		73
Number of positions held that individually exceed unrealized:
Gains of $500,000	7		5
Losses of $500,000	0		0
Percentage of positions held with unrealized:
Gains that were investment grade	84	%	83	%
Losses that were investment grade	72	%	73	%
Percentage of fair value held with unrealized:
Gains that were investment grade	95	%	95	%
Losses that were investment grade	90	%	91	%

The following table sets forth the amount of unrealized loss, excluding the rabbi trust, by age and severity at September 30, 2012 (in thousands):



Age of Unrealized Losses:	Fair Value of Securities with Unrealized Losses		Total Gross Unrealized Losses			Less Than 5%*			5% - 10%*		Greater Than 10%*
Less than or equal to:
Three months	$	21,709	$	(45	)	$	(45	)	$	0	$	0
Six months	6,213		(38		)	(38		)	0		0
Nine months	1,568		(19		)	(19		)	0		0
Twelve months	5,129		(104		)	(104		)	0		0
Greater than twelve months	5,185		(162		)	(128		)	0		(34		)
Total	$	39,804	$	(367	)	$	(333	)	$	0	$	(34	)

* As a percentage of amortized cost or cost.

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INFINITY PROPERTY AND CASUALTY CORPORATION 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			Tax Effects			Net
Nine months ended September 30, 2012
Unrealized holding gains (losses) on securities arising during the period	$	15,466		$	5,314		$	(7,273	)	$	13,507
Realized (gains) losses on securities sold	(3,949		)	0			1,382			(2,567		)
Impairment loss recognized in earnings⁽¹⁾	1,277			0			(447		)	830
Change in unrealized gains (losses) on marketable securities, net	$	12,793		$	5,314		$	(6,338	)	$	11,770
Nine months ended September 30, 2011
Unrealized holding gains (losses) on securities arising during the period	$	19,943		$	(3,460	)	$	(5,769	)	$	10,714
Realized (gains) losses on securities sold	(4,126		)	(2,748		)	2,406			(4,468		)
Impairment loss recognized in earnings⁽¹⁾	1,270			0			(444		)	825
Change in unrealized gains (losses) on marketable securities, net	$	17,087		$	(6,207	)	$	(3,808	)	$	7,072
(1) Tax excludes valuation reserve

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

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



	Nine months ended September 30,
	2012			2011
Beginning balance	$	1,728		$	1,828
Additions for:
Previously impaired securities	0			37
Newly impaired securities	9			694
Reductions for:
Securities sold and paid down	(362		)	(519		)
Securities that no longer have a non-credit component	(735		)	0
Ending balance	$	640		$	2,040

The table below sets forth the scheduled maturities of fixed maturity securities at September 30, 2012, 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.

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

Condensed Notes to Consolidated Financial Statements



	Fair Value								Amortized Cost
Maturity	Securities with Unrealized Gains		Securities with Unrealized Losses		Securities with No Unrealized Gains or Losses		All Fixed Maturity Securities		All Fixed Maturity Securities
One year or less	$	52,635	$	0	$	327	$	52,962	$	51,902
After one year through five years	553,858		10,833		1,347		566,038		543,658
After five years through ten years	208,191		5,618		280		214,089		200,021
After ten years	57,787		3,558		0		61,345		57,835
Mortgage-backed, asset-backed and collateralized mortgage obligations	337,701		19,795		0		357,496		342,421
	$	1,210,172	$	39,804	$	1,954	$	1,251,930	$	1,195,837

Note 6 Long-Term Debt

Our outstanding debt consisted of the following (in millions):



	September 30, 2012				December 31, 2011
	Carrying Value		Fair Value		Carrying Value		Fair Value
5.5% Senior Notes due 2014	$	194.9	$	205.3	$	194.8	$	207.2
5.0% Senior Notes due 2022	275.0		286.1		0.0		0.0
Total	$	469.9	$	491.4	$	194.8	$	207.2

In February 2004, we issued $200 million principal of senior notes due February 2014 (the “5.5% Senior Notes”). The 5.5% Senior Notes accrue interest at an effective yield of 5.55% and bear a coupon of 5.5%, payable semiannually. At the time we issued the Senior Notes, we capitalized $2.1 million of debt issuance costs, which we are amortizing over the term of the 5.5% Senior Notes. During 2009, we repurchased $5.0 million of our debt, bringing the outstanding principal to $195.0 million. We calculated the September 30, 2012 fair value of $205.3 million using a 139 basis point spread to the two-year U.S. Treasury Note of 0.232%. The 5.5% Senior Notes were fully redeemed on October 17, 2012 at a price of 106.729%, or $208.1 million, plus accrued interest of $1.8 million.

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 September 30, 2012 fair value of $286.1 million using a 286 basis point spread to the ten-year U.S. Treasury Note of 1.634%.

In August 2011, we renewed our agreement for a $50 million three-year revolving credit facility (the “Credit Agreement”) that requires us to meet certain financial and other covenants. At September 30, 2012 we were in technical violation of one of these covenants due to the issuance of the 5.0% Senior Notes. The 5.5% Senior Notes required 30 days' notice for redemption, therefore, at September 30, 2012 both bond issuances were outstanding causing our leverage ratio to exceed the maximum ratio set forth in the covenants. We were granted a temporary waiver and the 5.5% Senior Notes were redeemed on October 17, 2012. Upon redemption of the 5.5% Senior Notes, the covenant violation was cured.

At September 30, 2012, there were no borrowings outstanding under the Credit Agreement.

Note 7 Income Taxes

The following table reconciles our income taxes at statutory rates to our effective provision for income taxes (in thousands):

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q



	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
Earnings before income taxes	$	6,586		$	8,196		$	21,431		$	28,628
Income taxes at statutory rates	$	2,305		$	2,868		$	7,501		$	10,020
Effect of:
Dividends-received deduction	(44		)	(35		)	(123		)	(101		)
Tax-exempt interest	(824		)	(887		)	(2,468		)	(2,647		)
Adjustment to valuation allowance	36			(510		)	117			(2,454		)
Other	(42		)	25			3			21
Provision for income taxes	$	1,432		$	1,462		$	5,029		$	4,839
GAAP effective tax rate	21.7		%	17.8		%	23.5		%	16.9		%

During the nine months ended September 30, 2011, we decreased our tax valuation allowance by $2.5 million due to both a decrease in the reserve for other-than-temporary impaired securities and utilization of our capital loss carryforward.

Note 8 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 September 30,				Nine months ended September 30,
	2012		2011		2012		2011
Income tax payments	$	4,000	$	0	$	9,000	$	9,203
Interest payments on debt	5,363		5,363		10,725		10,725

Negative Cash Book Balances

Negative cash book balances, included in the line item “Other liabilities” in the Consolidated Balance Sheets, were $5.9 million at December 31, 2011. There were no negative cash book balances at September 30, 2012.

Gain on Sale of Subsidiary

On September 30, 2012, we completed the sale of an inactive, shell subsidiary company to an unaffiliated third party. The total gain recorded on a GAAP basis was $2.9 million. In the future we intend to sell or dissolve other inactive shell companies. The primary reason for the sale of the companies is to reduce the administrative costs associated with maintaining licenses that are no longer needed to support our insurance operations.

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

Condensed Notes to Consolidated Financial Statements

Note 9 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 September 30,						Nine months ended September 30,
	2012			2011			2012			2011
Balance at Beginning of Period
Unpaid losses on known claims	$	202,622		$	188,189		$	181,972		$	180,334
IBNR losses	182,630			160,992			177,645			164,140
LAE	145,620			133,928			135,787			133,359
Total unpaid losses and LAE	530,872			483,108			495,403			477,833
Reinsurance recoverables	(13,798		)	(14,880		)	(14,640		)	(16,521		)
Unpaid losses and LAE, net of reinsurance recoverables	517,074			468,228			480,764			461,312
Current Activity
Loss and LAE incurred:
Current accident year	232,940			190,459			676,822			561,846
Prior accident years	5,321			4,816			7,124			4,839
Total loss and LAE incurred	238,261			195,275			683,946			566,685
Loss and LAE payments:
Current accident year	(165,714		)	(131,711		)	(368,230		)	(301,638		)
Prior accident years	(59,864		)	(53,016		)	(266,722		)	(247,582		)
Total loss and LAE payments	(225,578		)	(184,727		)	(634,953		)	(549,220		)
Balance at End of Period
Unpaid losses and LAE, net of reinsurance recoverables	529,757			478,777			529,757			478,777
Add back reinsurance recoverables	14,561			14,754			14,561			14,754
Total unpaid losses and LAE	$	544,318		$	493,531		$	544,318		$	493,531
Unpaid losses on known claims	$	201,804		$	194,164		$	201,804		$	194,164
IBNR losses	193,959			162,809			193,959			162,809
LAE	148,556			136,557			148,556			136,557
Total unpaid losses and LAE	$	544,318		$	493,531		$	544,318		$	493,531

Increases in severities in both bodily injury coverage in California and personal injury protection coverage in Florida related to accident year 2011 was the primary sources of the $5.3 million and $7.1 million of unfavorable reserve development during the three and nine months ended September 30, 2012, respectively.

Increases in severities in both liability coverage in California as well as personal injury protection coverage in Florida relating

to accident year 2010 were the primary source of the unfavorable development during the third quarter of 2011. An increase in

severity in Florida personal injury protection coverage related to accident year 2010 was the primary source of the unfavorable

development during the nine months ended September 30, 2011.

Note 10 Commitments and Contingencies

Commitments

At September 30, 2012 we held $209.9 million of restricted cash in our Consolidated Balance Sheets. We classified this cash as restricted as it was our intention to use the funds to redeem the the 5.5% Senior Notes. We fully redeemed the 5.5% Senior Notes on October 17, 2012 at a price of 106.729% of par, or $208.1 million, plus accrued interest of $1.8 million.

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

Condensed Notes to Consolidated Financial Statements

There have been no other material changes from the commitments discussed in the Form 10-K for the year ended December 31, 2011. For a description of our previously reported commitments, refer to Note 14 Commitments and Contingencies in the Form 10-K for the year ended December 31, 2011.

Contingencies

There have been no material changes from the contingencies discussed in the Form 10-K for the year ended December 31, 2011. For a description of our previously reported contingencies, refer to Note 14 Commitments and Contingencies, in the Form 10-K for the year ended December 31, 2011.

Note 11 Subsequent Events

On October 17, 2012 we fully redeemed the $195.0 million principal outstanding of the 5.5% Senior Notes at a price of 106.729%, or $208.1 million, plus accrued interest of $1.8 million. In the fourth quarter of 2012, we will recognize a pre-tax loss on redemption as follows (in thousands):



Redemption price	$	208,122
Amortized cost at redemption	(194,878		)
Unamortized issuance costs	352
Loss on redemption of debt, pre-tax	$	13,595

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INFINITY PROPERTY AND CASUALTY CORPORATION 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), rising bodily injury loss cost trends, undesired business mix or risk profile for new business, elevated unemployment rates and the proliferation of illegal immigration legislation in key Focus States. We undertake no obligation to publicly update or revise any of the forward-looking statements. For a more detailed discussion of some of the foregoing risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements see “Risk Factors” contained in Part I, Item 1A of our Annual Report on Form 10-K for the twelve months ended December 31, 2011.

OVERVIEW

In the third quarter of 2012 our gross written premium grew 19.9%. This quarter marks the twelfth consecutive quarter that we have experienced growth in written premiums. Approximately 92% of this growth came from California (15%) and Florida (77%), our two most profitable states. Premiums fell in three of the seven Focus States during the third quarter of 2012 as a result of our efforts to improve profitability through rate increases and more restrictive underwriting. See Results of Operations – Underwriting – Premium for a more detailed discussion of our gross written premium growth.

Net earnings and diluted earnings per share for the three months ended September 30, 2012 were $5.2 million and $0.43, respectively, compared to $6.7 million and $0.55, respectively, for the three months ended September 30, 2011. Net earnings and diluted earnings per share for the nine months ended September 30, 2012 were $16.4 million and $1.37, respectively, compared to $23.8 million and $1.90, respectively, for the nine months ended September 30, 2011. The decrease in diluted earnings per share for the three and nine months ended September 30, 2012 was primarily due to an increase in unfavorable development recognized in 2012 coupled with a decline in investment income.

Included in net earnings for the three months ended September 30, 2012 and 2011 were $3.5 million ($5.3 million pre-tax) and $3.1 million ($4.8 million pre-tax), respectively, of unfavorable development on prior accident year loss and LAE reserves. Included in net earnings for the nine months ended September 30, 2012 and 2011 were $4.6 million ($7.1 million pre-tax) and $3.1 million ($4.8 million pre-tax), respectively, of unfavorable development on prior accident year loss and LAE reserves. The following table displays combined ratio results by accident year developed through September 30, 2012.

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

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



	Accident Year Combined Ratio Developed Through										Prior Accident Year Favorable / (Unfavorable) Development				($ in millions) Prior Accident Year Favorable / (Unfavorable) Development
Accident Year	Sept 2011		Dec 2011		Mar 2012		Jun 2012		Sept 2012		Q3 2012		YTD 2012		Q3 2012			YTD 2012
	(as adjusted see Note 1)
Prior															$	(0.7	)	$	(1.0	)
2004	84.9	%	84.9	%	84.9	%	85.0	%	85.0	%	0.0	%	0.0	%	(0.1		)	(0.1		)
2005	87.9	%	87.8	%	87.8	%	87.8	%	87.8	%	0.0	%	0.0	%	(0.1		)	0.1
2006	90.5	%	90.4	%	90.3	%	90.3	%	90.3	%	0.0	%	0.1	%	0.2			1.4
2007	92.7	%	92.7	%	92.5	%	92.5	%	92.5	%	0.0	%	0.2	%	0.1			2.3
2008	91.7	%	91.7	%	91.6	%	91.5	%	91.5	%	0.0	%	0.2	%	0.2			2.0
2009	92.9	%	92.9	%	92.7	%	92.6	%	92.6	%	0.0	%	0.3	%	0.3			2.5
2010	99.4	%	99.4	%	99.8	%	99.6	%	99.5	%	0.1	%	(0.1	)%	0.9			(0.5		)
2011	98.4	%	97.6	%	97.9	%	98.3	%	98.9	%	(0.6	)%	(1.4	)%	(6.2		)	(13.9		)
2012 YTD					99.9	%	99.2	%	98.9	%
															$	(5.3	)	$	(7.1	)

Recent accident years are less developed than prior years and must be interpreted with caution. However, the upward trend in the 2010 through 2012 accident period combined ratios compared to prior periods reflects an increase in new business during 2010 through 2012. Our new business combined ratios typically run 20 to 30 points higher than renewal business combined ratios due to higher commission and acquisition expenses as well as typically higher loss ratios. See Results of Operations – Underwriting – Profitability for a more detailed discussion of our underwriting results.

Pre-tax net investment income for the three months ended September 30, 2012 was $9.0 million compared to $10.2 million for the three months ended September 30, 2011. Pre-tax net investment income for the nine months ended September 30, 2012 was $28.4 million compared to $31.1 million for the nine months ended September 30, 2011. The decrease in pre-tax net investment income for the three and nine months ended September 30, 2012 is a result of low and declining new market investment yields at which cash from maturing and prepaid securities was invested.

Our book value per share increased 3.0% from $56.05 at December 31, 2011 to $57.71 at September 30, 2012. This increase was primarily due to earnings, net of shareholder dividends, and the increase in unrealized gains on investments for the nine months ended September 30, 2012.

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

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

RESULTS OF OPERATIONS

Underwriting

Premium

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

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

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

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


•	“Focus States” – We have identified Urban Zones in these states, which include Arizona, California, Florida, Georgia, Nevada, Pennsylvania and Texas.


•	“Maintenance States” – We are maintaining our writings in these states, which include Alabama, Colorado, Illinois, South Carolina and Tennessee. We believe each state offers us an opportunity for underwriting profit.


•	“Other States” – Includes eight states where we maintain a renewal book of personal auto business.

We further classify territories within the Focus States into two categories:


•	“Urban Zones” – include the following urban areas:


◦	Arizona – Phoenix and Tucson


◦	California – Bay Area, Los Angeles, Sacramento, San Diego and San Joaquin Valley


◦	Florida – Jacksonville, Miami, Orlando, Sarasota and Tampa


◦	Georgia – Atlanta


◦	Nevada – Las Vegas


◦	Pennsylvania – Allentown and Philadelphia


◦	Texas – Dallas, Fort Worth, Houston and San Antonio


•	“Non-urban Zones” – include all remaining areas in the Focus States located outside of a designated Urban Zone.

We continually evaluate our market opportunities; thus, the Focus States, Urban Zones, Maintenance States and Other States may change over time as new market opportunities arise, as the allocation of resources changes or as regulatory environments change. At the beginning of 2012, we reclassified Illinois from a Focus State to a Maintenance State due to its low premium volume and underwriting profits. In the tables below, we have restated 2011 premium, policies in force and combined ratios to be consistent with the 2012 definition of Urban Zones, Focus States, Maintenance States and Other States.

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INFINITY PROPERTY AND CASUALTY CORPORATION 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 September 30,
	2012			2011			Change			% Change
Net earned premium
Gross written premium
Personal Auto
Focus States
Urban Zones	$	250,863		$	215,105		$	35,758		16.6	%
Non-urban Zones	41,885			29,462			12,423			42.2	%
Total Focus States	292,748			244,567			48,181			19.7	%
Maintenance States	7,553			6,386			1,167			18.3	%
Other States	1,744			1,629			116			7.1	%
Total Personal Auto	302,045			252,581			49,464			19.6	%
Commercial Vehicle	19,471			15,538			3,933			25.3	%
Classic Collector	3,450			3,010			440			14.6	%
Other	(1		)	0			(1		)	0.0	%
Total gross written premium	324,966			271,129			53,836			19.9	%
Ceded reinsurance	(1,994		)	(1,575		)	(419		)	26.6	%
Net written premium	322,972			269,554			53,418			19.8	%
Change in unearned premium	(21,509		)	(14,417		)	(7,092		)	49.2	%
Net earned premium	$	301,463		$	255,138		$	46,326		18.2	%

	Nine months ended September 30,
	2012			2011			Change			% Change
Net earned premium
Gross written premium
Personal Auto
Focus States
Urban Zones	$	747,495		$	641,627		$	105,869		16.5	%
Non-urban Zones	117,985			88,099			29,886			33.9	%
Total Focus States	865,480			729,725			135,755			18.6	%
Maintenance States	22,904			22,031			874			4.0	%
Other States	5,389			5,534			(145		)	(2.6	)%
Total Personal Auto	893,774			757,290			136,483			18.0	%
Commercial Vehicle	57,736			47,878			9,857			20.6	%
Classic Collector	9,735			8,456			1,280			15.1	%
Other	(1		)	0			(1		)	0.0	%
Total gross written premium	961,244			813,625			147,619			18.1	%
Ceded reinsurance	(5,733		)	(4,810		)	(924		)	19.2	%
Net written premium	955,511			808,815			146,696			18.1	%
Change in unearned premium	(82,781		)	(63,112		)	(19,669		)	31.2	%
Net earned premium	$	872,730		$	745,703		$	127,027		17.0	%

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

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

The following table summarizes our policies in force:



	At September 30,
	2012	2011	Change		% Change
Policies in Force
Personal Auto
Focus States
Urban Zones	756,141	695,036	61,105		8.8	%
Non-urban Zones	109,936	85,657	24,279		28.3	%
Total Focus States	866,077	780,693	85,384		10.9	%
Maintenance States	26,853	26,513	340		1.3	%
Other States	3,761	4,123	(362	)	(8.8	)%
Total Personal Auto	896,691	811,329	85,362		10.5	%
Commercial Vehicle	38,868	35,042	3,826		10.9	%
Classic Collector	37,815	35,167	2,648		7.5	%
Total policies in force	973,374	881,538	91,836		10.4	%

Gross written premium grew 19.9% and 18.1% during the third quarter and first nine months of 2012, respectively, compared with the same periods of 2011. During the first nine months of 2012, Infinity implemented rate revisions in various states with an overall rate increase of 5.6%. Excluding the effect of rate changes in California, our largest state, the overall rate increase was 8.3%. Policies in force at September 30, 2012 increased 10.4% compared with the same period in 2011. Gross written premium grew more than policies in force due to a shift in overall business mix toward policies offering broader coverage and higher average premium as well as growth in Florida business, which has a higher average premium per policy than our other states.

During the third quarter and first nine months of 2012, personal auto insurance gross written premium in our Focus States grew 19.7% and 18.6%, respectively, when compared with the same periods of 2011. The increase in gross written premium in both periods is primarily due to growth in California and Florida.


•	California gross written premium grew 5.7% and 7.9%, respectively, during the third quarter and first nine months of 2012. Rate actions taken by competitors and a shift in business mix to policies offering broader coverage and higher average premium have stimulated premium growth in the state.


•	Florida gross written premium grew 85.4% and 76.1%, respectively, during the third quarter and first nine months of 2012. This growth is primarily a result of an increase in new business application count, higher business retention, an increase in average premium from rate increases, and competitor rate increases.

Declines of 14.2% and 13.0% in Texas, respectively, during the third quarter and first nine months of 2012 partially offset the growth in California and Florida. The decline in Texas gross written premium is primarily due to actions taken, such as rate increases and the elimination of annual policies, to improve profitability in the state.

Gross written premium in the Maintenance States grew 18.3% and 4.0%, respectively, during the third quarter and first nine months of 2012 primarily due to growth in Alabama premium as a result of increased marketing efforts in the state. This growth was partially offset by a decline in Illinois premium.

Our Commercial Vehicle gross written premium grew 25.3% and 20.6%, respectively, during the third quarter and first nine months of 2012. This growth is primarily due to higher average premium and better retention for this product.

Gross written premium in our Classic Collector product grew 14.6% and 15.1%, respectively, during the third quarter and first nine months of 2012. This growth is primarily due to growth in Florida and Texas resulting from an increase in the number of agencies actively producing business for this product.

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

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

Profitability

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

While we report financial results in accordance with GAAP for shareholder and other users’ purposes, we report it on a statutory basis for insurance regulatory purposes. We evaluate underwriting profitability based on a combined ratio calculated using statutory accounting principles. The statutory 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 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.

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

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

The following table presents the statutory and GAAP combined ratios:



	Three months ended September 30,
	2012						2011						% 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:
Urban Zones	79.5	%	17.8	%	97.3	%	76.7	%	19.9	%	96.6	%	2.7	%	(2.0	)%	0.7	%
Non-urban Zones	77.1	%	18.6	%	95.7	%	80.6	%	20.1	%	100.7	%	(3.5	)%	(1.5	)%	(5.0	)%
Total Focus States	79.1	%	17.9	%	97.1	%	77.2	%	19.9	%	97.1	%	1.9	%	(2.0	)%	0.0	%
Maintenance States	84.5	%	21.6	%	106.1	%	87.7	%	26.9	%	114.6	%	(3.2	)%	(5.4	)%	(8.5	)%
Other States	NM		NM		NM		NM		NM		NM		NM		NM		NM
Subtotal	79.4	%	18.0	%	97.4	%	77.5	%	20.0	%	97.6	%	1.9	%	(2.1	)%	(0.2	)%
Commercial Vehicle	76.4	%	17.8	%	94.1	%	62.8	%	17.8	%	80.6	%	13.6	%	0.0	%	13.6	%
Classic Collector	60.2	%	40.7	%	101.0	%	64.5	%	36.1	%	100.6	%	(4.2	)%	4.6	%	0.4	%
Total statutory ratios	79.1	%	18.3	%	97.4	%	76.6	%	19.9	%	96.5	%	2.5	%	(1.6	)%	0.9	%
Total statutory ratios excluding development	76.4	%	18.3	%	94.7	%	76.1	%	19.9	%	96.0	%	0.3	%	(1.6	)%	(1.3	)%
GAAP ratios	79.0	%	21.0	%	100.0	%	76.5	%	22.4	%	99.0	%	2.5	%	(1.4	)%	1.1	%
GAAP ratios excluding development	76.3	%	21.0	%	97.3	%	76.0	%	22.4	%	98.4	%	0.3	%	(1.4	)%	(1.1	)%

	Nine months ended September 30,
	2012						2011						% 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:
Urban Zones	78.9	%	18.5	%	97.4	%	75.9	%	20.9	%	96.8	%	3.0	%	(2.4	)%	0.5	%
Non-urban Zones	78.4	%	18.6	%	97.0	%	78.9	%	20.1	%	99.0	%	(0.5	)%	(1.5	)%	(2.0	)%
Total Focus States	78.9	%	18.5	%	97.3	%	76.3	%	20.8	%	97.1	%	2.5	%	(2.3	)%	0.2	%
Maintenance States	77.9	%	22.6	%	100.5	%	87.0	%	27.3	%	114.3	%	(9.1	)%	(4.7	)%	(13.9	)%
Other States	NM		NM		NM		NM		NM		NM		NM		NM		NM
Subtotal	79.0	%	18.6	%	97.5	%	76.7	%	21.0	%	97.6	%	2.3	%	(2.4	)%	(0.1	)%
Commercial Vehicle	70.0	%	18.0	%	88.0	%	68.6	%	18.1	%	86.7	%	1.4	%	(0.1	)%	1.3	%
Classic Collector	66.5	%	38.4	%	105.0	%	65.6	%	38.6	%	104.2	%	0.9	%	(0.2	)%	0.8	%
Total statutory ratios	78.5	%	18.8	%	97.3	%	76.1	%	20.8	%	96.8	%	2.4	%	(1.9	)%	0.5	%
Total statutory ratios excluding development	77.7	%	18.8	%	96.5	%	75.4	%	20.8	%	96.2	%	2.3	%	(1.9	)%	0.4	%
GAAP ratios	78.4	%	21.4	%	99.7	%	76.0	%	23.1	%	99.1	%	2.4	%	(1.7	)%	0.6	%
GAAP ratios excluding development	77.6	%	21.4	%	98.9	%	75.3	%	23.1	%	98.4	%	2.2	%	(1.7	)%	0.5	%

NM: not meaningful due to the low premium.

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

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

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

The statutory combined ratio for the three months ended September 30, 2012 increased by 0.9% points from the same period of 2011. The statutory combined ratio for the nine months ended September 30, 2012 increased by 0.5% points from the same period of 2011. The third quarter of 2012 included $5.3 million of unfavorable development on prior year loss and LAE reserves and $2.9 million in unfavorable development on loss and LAE reserves from the first six months of 2012. The first nine months of 2012 included $7.1 million of unfavorable development on prior year loss and LAE reserves. The third quarter of 2011 included $4.8 million of unfavorable development on prior year loss and LAE reserves and $3.5 million in favorable development on loss and LAE reserves from the first six months of 2011. The first nine months of 2011 included $4.8 million of unfavorable development on prior year loss and LAE reserves.

Excluding the effect of development from all periods, the statutory combined ratio decreased by 1.3 points for the three months ended September 30, 2012 and increased by 0.4 points for the nine months ended September 30, 2012 compared to the same periods of 2011. In both periods, an increase in the loss and LAE ratio was offset by a decline in the underwriting ratio.

The increase in the loss and LAE ratio is primarily attributable to an increase in new business in states such as Florida. The underwriting ratio has declined primarily as a result of spreading fixed underwriting costs over a larger written premium base as well as a decline in advertising spending.

The GAAP combined ratio for the three months ended September 30, 2012 increased by 1.1 points from the same period of 2011. The GAAP combined ratio for the nine months ended September 30, 2012 increased by 0.6 points from the same period of 2011. Excluding the effect of development from all periods, the GAAP combined ratio decreased by 1.1 points for the three months ended September 30, 2012 and increased by 0.5 points for the nine months ended September 30, 2012 compared to the same periods of 2011. We expect the GAAP combined ratio, excluding reserve development, to be between 98.0% and 99.0% for the full year 2012.

Losses from catastrophes were $0.8 million and $2.9 million for the three and nine months ended September 30, 2012, respectively, compared to $1.6 million and $3.8 million for the same periods of 2011. Losses from catastrophes during 2012 were primarily due to hail storms in Texas during the second quarter.

The combined ratio in the Focus States remained flat for the three months ended September 30, 2012 and increased by 0.2 points for the nine months ended September 30, 2012 In both periods, increases in the loss and LAE ratio were offset by declines in the underwriting ratio. The increase in the loss and LAE ratio in both the third quarter and first nine months of 2012 is primarily due to unfavorable development in California. The increase in the loss and LAE ratio in the Focus States was partially offset by a decline in the underwriting ratio of 2.0 points and 2.3 points for the three and nine months ended September 30, 2012, respectively. As we experience premium growth in these states, the ratio of fixed underwriting costs to premium has declined.

The combined ratio in the Maintenance States decreased by 8.5 and 13.9 points during the three and nine months ended September 30, 2012, respectively, when compared to the same periods of 2011, primarily due to a decline in the loss and LAE ratio in Illinois. We reclassified Illinois from a Focus State to a Maintenance State in 2012 and slowed new business production which drove the decline in the loss and LAE ratio.

The combined ratio for the Commercial Vehicle product increased by 13.6 points and 1.3 points, respectively, during the three and nine months ended September 30, 2012, due to an increase in the loss and LAE ratio in both periods. The increase is due to several large losses incurred during the third quarter of 2012.

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

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

Net Investment Income

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



	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
Investment income:
Interest income on fixed maturities, cash and cash equivalents	$	9,351		$	10,514		$	29,294		$	32,162
Dividends on equity securities	209			165			587			484
Gross investment income	$	9,560		$	10,679		$	29,881		$	32,646
Investment expenses	(542		)	(513		)	(1,517		)	(1,529		)
Net investment income	$	9,018		$	10,166		$	28,364		$	31,117
Average investment balance, at cost	$	1,251,317		$	1,198,458		$	1,241,846		$	1,224,973
Annualized returns excluding realized gains and losses	2.9		%	3.4		%	3.0		%	3.4		%

Changes in investment income reflect fluctuations in market rates and changes in average invested assets. Net investment income for the three and nine months ended September 30, 2012 declined compared to the same periods of 2011 primarily due to a decline in book yields because of a general decline in market interest rates for high quality bonds.

In the current low interest rate environment, we expect that investment returns will continue to 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.

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



	Three months ended September 30, 2012							Three months ended September 30, 2011
	Impairments Recognized in Earnings			Realized Gains (Losses) on Sales		Total Realized Gains (Losses)		Impairments Recognized in Earnings			Realized Gains (Losses) on Sales		Total Realized Gains (Losses)
Fixed maturities	$	(211	)	$	479	$	268	$	(424	)	$	1,146	$	722
Equities	0			0		0		0			0		0
Total	$	(211	)	$	479	$	268	$	(424	)	$	1,146	$	722

	Nine months ended September 30, 2012							Nine months ended September 30, 2011
	Impairments Recognized in Earnings			Realized Gains (Losses) on Sales		Total Realized Gains (Losses)		Impairments Recognized in Earnings			Realized Gains (Losses) on Sales		Total Realized Gains (Losses)
Fixed maturities	$	(1,277	)	$	3,949	$	2,673	$	(1,270	)	$	4,126	$	2,856
Equities	0			0		0		0			2,748		2,748
Total	$	(1,277	)	$	3,949	$	2,673	$	(1,270	)	$	6,873	$	5,604

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.

Gain on Sale of Subsidiary

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

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

primary reason for the sale of the companies is to reduce the administrative costs associated with maintaining licenses that are no longer needed to support our insurance operations.

Interest Expense

At September 30, 2012 we had outstanding $195.0 million of senior notes that accrue interest at an effective yield of 5.55% and $275.0 million of senior notes that accrue interest at 5.0%. Interest expense recognized was as follows (in thousands):



	Three months ended September 30,				Nine months ended September 30,
	2012		2011		2012		2011
5.5% Senior Notes	$	2,703	$	2,702	$	8,108	$	8,105
5.0% Senior Notes	497		0		497		0
Total	$	3,199	$	2,702	$	8,604	$	8,105

Refer to Note 6 to the Consolidated Financial Statements for additional information on the Senior Notes.

Income Taxes

Our GAAP effective tax rate for the three and nine months ended September 30, 2012 was 21.7% and 23.5%, respectively, compared to 17.8% and 16.9% for the same periods of 2011. See Note 7 to the Consolidated Financial Statements for additional information on income taxes.

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

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

LIQUIDITY AND CAPITAL RESOURCES

Sources of Funds

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

Funds to meet expenditures at the holding company level come primarily from dividends and tax payments from the insurance subsidiaries as well as cash and investments held by the holding company. As of September 30, 2012, the holding company had $198.6 million of unrestricted cash and investments. In 2012, our insurance subsidiaries may pay us up to $53.1 million in ordinary dividends without prior regulatory approval.

Our insurance subsidiaries generate liquidity to satisfy their obligations primarily by collecting and investing premium in advance of paying claims and generating investment income on their $1.2 billion investment portfolio. Our insurance subsidiaries generated positive cash flows from operations of $21.5 million and $76.6 million, respectively, for the three and nine months ended September 30, 2012 compared to positive operating cash flows of $18.0 million during the third quarter of 2011 and positive operating cash flows of $36.7 million for the nine months ended September 30, 2011.

At September 30, 2012, we had outstanding $195.0 million principal of senior notes (the "5.5% Senior Notes") due 2014, bearing a fixed 5.5% interest rate. The 5.5% Senior Notes were fully redeemed on October 17, 2012 at a price of 106.729%, or $208.1 million plus accrued interest of $1.8 million.

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 each March and September. The majority of the proceeds from this issuance were used to redeem the 5.5% Senior Notes, as mentioned above. Refer to Note 6 to the Consolidated Financial Statements for more information on our long-term debt.

Uses of Funds

In February 2012, we increased our quarterly dividend to $0.225 per share from $0.180 per share. At this current amount, our 2012 annualized dividend payments would be approximately $10.6 million.

On August 3, 2010 our Board of Directors adopted a share and debt repurchase program set to expire on December 31, 2011. On August 2, 2011, our Board of Directors increased the authority under this program by $50.0 million and extended the date to execute the program to December 31, 2012. During the first quarter of 2012, we repurchased 22,800 shares at an average cost, excluding commissions, of $55.97. During the second quarter of 2012, we repurchased 114,507 shares at an average cost, excluding commissions, of $54.40. During the third quarter of 2012, we repurchased 47,044 shares at an average cost, excluding commissions, of $57.08. As of September 30, 2012, we had $36.8 million of authority remaining under this program. On November 6, 2012, our Board of Directors again increased the authority under our current share and debt repurchase plan by $25.0 million and extended the date to execute the program to December 31, 2014.

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

Reinsurance

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

catastrophic losses. During 2012, our catastrophe reinsurance protection covers 100% of $25 million in excess of $5 million. Our excess of loss reinsurance provides protection for commercial auto losses up to $700,000 for claims in excess of $300,000 per occurrence. Our extra-contractual loss reinsurance provides protection for losses up to $10 million in excess of $5 million for any single extra-contractual loss. We also use reinsurance to mitigate losses on our Classic Collector business.

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

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

Premium ceded under all reinsurance agreements for the three and nine months ended September 30, 2012 was $2.0 million and $5.7 million, respectively, compared to $1.6 million and $4.8 million, respectively, for the same periods of 2011.

Investments

Our consolidated investment portfolio at September 30, 2012 contained approximately $1.3 billion in fixed maturity securities and $42.4 million in equity securities, all carried at fair value with unrealized gains and losses reported in accumulated other comprehensive income, a separate component of shareholders’ equity, on an after-tax basis. At September 30, 2012, we had pre-tax net unrealized gains of $56.1 million on fixed maturities and pre-tax net unrealized gains of $15.8 million on equity securities. Combined, the pre-tax net unrealized gain increased by $18.1 million for the nine months ended September 30, 2012.

Approximately 93.8% of our fixed maturity investments at September 30, 2012 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.

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. The average option adjusted duration of our fixed maturity portfolio is 3.0 years at September 30, 2012.

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

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

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

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

Summarized information for our investment portfolio at September 30, 2012 was as follows (in thousands):



	Amortized Cost		Fair Value		% of Total Fair Value
U.S. government and agencies:
U.S. government	$	107,935	$	110,722	8.6	%
Government-sponsored enterprises	69,021		70,678		5.5	%
Total U.S. government and agencies	176,955		181,401		14.0	%
State and municipal	414,600		436,147		33.7	%
Mortgage-backed, CMOs and asset-backed:
Residential mortgage-backed securities	224,736		238,149		18.4	%
Commercial mortgage-backed securities	12,670		13,487		1.0	%
Collateralized mortgage obligations:
PAC	12,120		12,417		1.0	%
Sequentials	8,034		8,210		0.6	%
Whole loan	1,241		1,293		0.1	%
Total CMO	21,395		21,920		1.7	%
Asset-backed securities:
Auto loans	50,513		50,962		3.9	%
Equipment leases	6,884		6,904		0.5	%
Home equity	505		528		0.0	%
Credit card receivables	25,607		25,425		2.0	%
Miscellaneous	110		121		0.0	%
Total ABS	83,620		83,940		6.5	%
Total mortgage-backed, CMOs and asset-backed	342,421		357,496		27.6	%
Corporates
Investment grade	189,628		199,293		15.4	%
Non-investment grade	72,232		77,593		6.0	%
Total corporates	261,860		276,886		21.4	%
Total fixed maturities	1,195,837		1,251,930		96.7	%
Equity securities	26,569		42,400		3.3	%
Total investments	$	1,222,405	$	1,294,330	100.0	%

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

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

The following table presents the credit rating and fair value (in thousands) of our fixed maturity portfolio by major security type at September 30, 2012:



	Rating
	AAA			AA			A			BBB			Non- investment Grade			Total Fair Value			% of Total Exposure
U.S. government and agencies	$	0		$	181,401		$	0		$	0		$	0		$	181,401		14.5	%
State and municipal	28,794			257,299			141,998			8,056			0			436,147			34.8	%
Mortgage-backed, asset-backed and CMO	92,945			264,551			0			0			0			357,496			28.6	%
Corporates	0			14,820			110,033			74,441			77,593			276,886			22.1	%
Total fair value	$	121,739		$	718,071		$	252,031		$	82,497		$	77,593		$	1,251,930		100.0	%
% of total fair value	9.7		%	57.4		%	20.1		%	6.6		%	6.2		%	100.0		%

Other than securities backed by the U.S. government or issued by its agencies, our fixed income portfolio contains no securities issued by any single issuer that exceed 1% of the fair value of the fixed income portfolio.

Since 2007, the mortgage industry has experienced a rise in mortgage delinquencies and foreclosures, particularly among lower quality exposures (“sub-prime” and “Alt-A”). As a result, many securities with underlying sub-prime and Alt-A mortgages as collateral experienced significant drops in market value. We have only modest exposure to these types of investments. At September 30, 2012, our fixed maturity portfolio included two securities having a fair value of $0.5 million with exposure to sub-prime and Alt-A mortgages. Although these securities have sub-prime mortgages as underlying collateral, all are rated AA or better.

The following table presents the credit rating and fair value of our residential mortgage-backed securities at September 30, 2012 by deal origination year (in thousands):



	Rating
Deal Origination Year	AAA			AA			A			BBB			Non- investment Grade			Total Fair Value			% of Total Exposure
2006	$	0		$	916		$	0		$	0		$	0		$	916		0.4	%
2007	0			5,080			0			0			0			5,080			2.1	%
2008	0			23,164			0			0			0			23,164			9.7	%
2009	0			32,994			0			0			0			32,994			13.9	%
2010	0			67,574			0			0			0			67,574			28.4	%
2011	0			42,604			0			0			0			42,604			17.9	%
2012	0			65,817			0			0			0			65,817			27.6	%
Total fair value	$	0		$	238,149		$	0		$	0		$	0		$	238,149		100.0	%
% of total fair value	0.0		%	100.0		%	0.0		%	0.0		%	0.0		%	100.0		%

All of the $238.1 million of residential mortgage-backed securities were issued by government-sponsored enterprises (“GSE”).

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

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

The following table presents the credit rating and fair value of our commercial mortgage-backed securities at September 30, 2012 by deal origination year (in thousands):



	Rating
Deal Origination Year	AAA			AA			A			BBB			Non- investment Grade			Total Fair Value			% of Total Exposure
2003	$	44		$	0		$	0		$	0		$	0		$	44		0.3	%
2004	3,762			0			0			0			0			3,762			27.9	%
2005	3,333			0			0			0			0			3,333			24.7	%
2006	6,298			0			0			0			0			6,298			46.7	%
2007	50			0			0			0			0			50			0.4	%
Total fair value	$	13,487		$	0		$	0		$	0		$	0		$	13,487		100.0	%
% of total fair value	100.0		%	0.0		%	0.0		%	0.0		%	0.0		%	100.0		%

None of the $13.5 million of commercial mortgage-backed securities were issued by GSEs.

The following table presents the credit rating and fair value of our collateralized mortgage obligation portfolio at September 30, 2012 by deal origination year (in thousands):



	Rating
Deal Origination Year	AAA			AA			A			BBB			Non- investment Grade			Total Fair Value			% of Total Exposure
2002	$	1,293		$	985		$	0		$	0		$	0		$	2,279		10.4	%
2003	906			1,898			0			0			0			2,804			12.8	%
2004	1			1,745			0			0			0			1,746			8.0	%
2009	0			5,942			0			0			0			5,942			27.1	%
2010	0			4,301			0			0			0			4,301			19.6	%
2011	0			1,759			0			0			0			1,759			8.0	%
2012	0			3,090			0			0			0			3,090			14.1	%
Total fair value	$	2,200		$	19,720		$	0		$	0		$	0		$	21,920		100.0	%
% of total fair value	10.0		%	90.0		%	0.0		%	0.0		%	0.0		%	100.0		%

Of the $21.9 million of collateralized mortgage obligations, $19.7 million were issued by GSEs.

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

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

The following table presents the credit rating and fair value of our ABS portfolio at September 30, 2012 by deal origination year (in thousands):



	Rating
Deal Origination Year	AAA			AA			A			BBB			Non- investment Grade			Total Fair Value			% of Total Exposure
2001	$	0		$	75		$	0		$	0		$	0		$	75		0.1	%
2003	5,263			453			0			0			0			5,716			6.8	%
2004	5,010			0			0			0			0			5,010			6.0	%
2007	2,806			0			0			0			0			2,806			3.3	%
2008	5,129			0			0			0			0			5,129			6.1	%
2009	8,198			84			0			0			0			8,282			9.9	%
2010	2,579			2,103			0			0			0			4,683			5.6	%
2011	16,503			0			0			0			0			16,503			19.7	%
2012	31,769			3,967			0			0			0			35,736			42.6	%
Total fair value	$	77,257		$	6,683		$	0		$	0		$	0		$	83,940		100.0	%
% of total fair value	92.0		%	8.0		%	0.0		%	0.0		%	0.0		%	100.0		%

Our investment portfolio consists of $436.1 million of state and municipal bonds, of which $164.9 million are insured. Of the insured bonds, 46.7% are insured with MBIA, 28.7% with Assured Guaranty, 22.9% with AMBAC, 0.8% with Berkshire Hathaway and 1.0% are insured with XL Group. The following table presents the underlying ratings, represented by the lower of Standard and Poor’s, Moody’s or Fitch’s ratings, of the state and municipal bond portfolio (in thousands) at September 30, 2012:



	Insured				Uninsured				Total
Rating	Fair Value		% of Fair Value		Fair Value		% of Fair Value		Fair Value		% of Fair Value
AAA	$	3,481	2.1	%	$	25,313	9.3	%	$	28,794	6.6	%
AA+, AA, AA-	88,941		53.9	%	168,358		62.1	%	$	257,299	59.0	%
A+, A, A-	64,410		39.1	%	77,588		28.6	%	$	141,998	32.6	%
BBB+, BBB, BBB-	8,056		4.9	%	0		0.0	%	$	8,056	1.8	%
Total	$	164,889	100.0	%	$	271,259	100.0	%	$	436,147	100.0	%

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

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

The following table presents the credit rating and fair value of our state and municipal bond portfolio, by state, at September 30, 2012 (in thousands):



	Rating
State	AAA			AA			A			BBB			Non- investment Grade			Total Fair Value			% of Total Exposure
TX	$	15,286		$	15,871		$	8,589		$	0		$	0		$	39,746		9.1	%
NY	0			36,056			1,225			0			0			$	37,280		8.5	%
FL	0			16,503			15,077			0			0			$	31,581		7.2	%
GA	2,842			4,337			10,722			4,806			0			$	22,707		5.2	%
WA	1,389			17,297			3,121			0			0			$	21,807		5.0	%
VA	0			18,021			0			0			0			$	18,021		4.1	%
IL	0			4,947			12,830			0			0			$	17,777		4.1	%
IN	418			13,184			3,943			0			0			$	17,545		4.0	%
PA	0			5,708			10,603			0			0			$	16,311		3.7	%
CA	0			3,574			12,292			377			0			$	16,244		3.7	%
All other states	8,859			121,801			63,598			2,873			0			$	197,130		45.2	%
Total fair value	$	28,794		$	257,299		$	141,998		$	8,056		$	0		$	436,147		100.0	%
% of total fair value	6.6		%	59.0		%	32.6		%	1.8		%	0.0		%	100.0		%

The following table presents the fair value of our state and municipal bond portfolio, by state and type of bond, at September 30, 2012 (in thousands):



	Type
	General Obligation
State	State			Local			Revenue			Other			Total Fair Value			% of Total Exposure
TX	$	0		$	12,993		$	26,753		$	0		$	39,746		9.1	%
NY	0			6,444			30,836			0			$	37,280		8.5	%
FL	3,742			0			18,454			9,384			$	31,581		7.2	%
GA	3,380			2,401			16,925			0			$	22,707		5.2	%
WA	4,203			3,794			13,809			0			$	21,807		5.0	%
VA	0			3,614			14,407			0			$	18,021		4.1	%
IL	1,993			960			14,823			0			$	17,777		4.1	%
IN	0			0			17,545			0			$	17,545		4.0	%
PA	0			2,748			13,562			0			$	16,311		3.7	%
CA	6,324			0			9,919			0			$	16,244		3.7	%
All other states	21,600			33,693			139,753			2,084			$	197,130		45.2	%
Total fair value	$	41,244		$	66,647		$	316,788		$	11,468		$	436,147		100.0	%
% of total fair value	9.5		%	15.3		%	72.6		%	2.6		%	100.0		%

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

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

The following table presents the fair value of the revenue category of our state and municipal bond portfolio, by state and further classification, at September 30, 2012 (in thousands):



	Revenue Bonds
State	Transportation			Utilities			Education			Other			Total Fair Value			% of Total Exposure
NY	$	9,255		$	0		$	7,941		$	13,640		$	30,836		9.7	%
TX	15,854			6,452			3,025			1,422			$	26,753		8.4	%
FL	11,848			0			0			6,607			$	18,454		5.8	%
IN	3,252			1,245			9,106			3,943			$	17,545		5.5	%
GA	8,679			4,806			1,397			2,043			$	16,925		5.3	%
IL	8,164			0			2,269			4,391			$	14,823		4.7	%
VA	773			0			5,353			8,280			$	14,407		4.5	%
WA	1,324			9,300			0			3,185			$	13,809		4.4	%
PA	7,299			0			2,960			3,304			$	13,562		4.3	%
CO	5,927			0			7,476			0			$	13,403		4.2	%
All other states	31,820			30,835			20,069			53,545			$	136,270		43.0	%
Total fair value	$	104,194		$	52,638		$	59,596		$	100,360		$	316,788		100.0	%
% of total fair value	32.9		%	16.6		%	18.8		%	31.7		%	100.0		%

The following table presents the fair value of our corporate bond portfolio, by industry sector and rating of bond, at September 30, 2012 (in thousands):



	Rating
Industry Sector	AAA			AA			A			BBB			Non- investment Grade			Total Fair Value			% of Total Exposure
Basic Materials	$	0		$	0		$	0		$	2,660		$	2,753		$	5,414		2.0	%
Communications	0			0			0			12,969			12,245			$	25,213		9.1	%
Consumer, Cyclical	0			4,285			0			3,354			11,992			$	19,631		7.1	%
Consumer, Non-cyclical	0			0			26,252			10,094			6,997			$	43,344		15.7	%
Energy	0			1,069			21,630			6,660			11,740			$	41,098		14.8	%
Financial	0			9,467			50,672			28,170			13,277			$	101,585		36.7	%
Industrial	0			0			6,895			0			11,767			$	18,662		6.7	%
Technology	0			0			0			2,385			3,288			$	5,673		2.0	%
Utilities	0			0			4,585			8,148			3,534			$	16,266		5.9	%
Total fair value	$	0		$	14,820		$	110,033		$	74,441		$	77,593		$	276,886		100.0	%
% of total fair value	0.0		%	5.4		%	39.7		%	26.9		%	28.0		%	100.0		%

Included in our investments in corporate fixed income securities at September 30, 2012 are $42.6 million of dollar-denominated investments with issues or guarantors in foreign countries, as follows (in thousands):

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

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



	Rating
Issuer or Guarantor	AAA			AA			A			BBB			Non- investment Grade			Total Fair Value			% of Total Exposure
Aruba	$	0		$	0		$	785		$	0		$	0		$	785		1.8	%
Australia	0			0			3,732			0			0			$	3,732		8.8	%
Britain	0			4,774			7,564			0			0			$	12,339		28.9	%
Canada	0			0			8,619			1,125			2,336			$	12,081		28.3	%
Cayman Islands	0			0			0			0			1,204			$	1,204		2.8	%
France	0			1,069			2,117			0			0			$	3,185		7.5	%
Germany	0			0			4,091			0			0			$	4,091		9.6	%
South Korea	0			0			2,049			0			0			$	2,049		4.8	%
Switzerland	0			0			3,171			0			0			$	3,171		7.4	%
Total fair value	$	0		$	5,843		$	32,128		$	1,125		$	3,540		$	42,637		100.0	%
% of total fair value	0.0		%	13.7		%	75.4		%	2.6		%	8.3		%	100.0		%

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

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

ITEM 3

Quantitative and Qualitative Disclosures about Market Risk

As of September 30, 2012, there were no material changes to the information provided in our Form 10-K for the year ended December 31, 2011 under the caption “Exposure to Market Risk” in Management’s Discussion and Analysis of Financial Condition and Results of Operations. Refer to Item 2 Management’s Discussion and Analysis under the caption “Investments” for updates to disclosures made under the sub caption “Credit Risk” in our Form 10-K for the year ended December 31, 2011.

ITEM 4

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of Infinity’s disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2012. Based on that evaluation, we concluded that the controls and procedures are effective in providing reasonable assurance that material information required to be disclosed in our reports filed with or submitted to the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate.

Changes in Internal Control over Financial Reporting

During the fiscal quarter ended September 30, 2012, there have been no changes to our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

PART II

OTHER INFORMATION

ITEM 1

Legal Proceedings

We have not become a party to any material legal proceedings nor have there been any material developments in our legal proceedings disclosed in our Form 10-K for the year ended December 31, 2011. For a description of our previously reported legal proceedings, refer to Part I, Item 3, Legal Proceedings, in the Form 10-K for the year ended December 31, 2011.

ITEM 1A

Risk Factors

There have been no material changes in our risk factors as disclosed in our Form 10-K for the year ended December 31, 2011. For a description of our previously reported risk factors, refer to Part I, Item 1A, Risk Factors, in the Form 10-K for the year ended December 31, 2011.

ITEM 2

Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities



Period	Total Number of Shares Purchased	Average Price Paid per Share (a)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (b)	Maximum Number (or Approximate Dollar Value) that May Yet Be Purchased Under the Plans or Programs
July 1, 2012 - July 31, 2012	11,880	$	57.48	11,880	$	38,839,776
August 1, 2012 - August 31, 2012	26,858	$	56.37	26,858	37,324,892
September 1, 2012 - September 30, 2012	8,306	$	58.81	8,306	36,836,200
Total	47,044	$	57.08	47,044	$	36,836,200


(a)	Average price paid per share excludes commissions.


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

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

ITEM 6

Exhibits

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 4-6T of Regulation S-T, the information in these exhibits shall not be deemed to be "filed" for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q

Signature

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




	Infinity Property and Casualty Corporation

	BY:	/s/ ROGER SMITH
November 8, 2012		Roger Smith
		Executive Vice President, Chief Financial Officer and Treasurer (principal financial and accounting officer)