Management's Discussion and Analysis ("MD&A") of Financial Condition and Results of Operations

INDEX TO MD&A

Page Overview 17 Critical Accounting Policies 18 Insurance Reserves 18 Other-than-Temporary Losses on Investments 24 Accruals for Litigation 24 Liquidity and Capital Resources 25 Ratios 25 Sources of Funds 25 Contractual Obligations 26 Investments 26 General 26 Fixed Maturity Investments 31 Exposure to Market Risk 31 Interest Rate Risk 31 Credit Risk 32 Equity Price Risk 33 Goodwill 34 Results of Operations 35 Underwriting 35 Premium 35 Profitability 39 Investment Income 42 Realized Gains (Losses) on Investments 43 Other Income 44 Interest Expense 45 Corporate General and Administrative Expenses 45 Restructuring Charges 45 Other Expenses 46 Income Taxes 46

See "Cautionary Statement Regarding Forward-Looking Statements" on page 1.

Overview

In 2008, Infinity's revenues were adversely affected by the economic recession. The continued decline in the markets for debt and equity investments resulted in $61.8 million in charges to Infinity for other-than-temporary impairments. Increasing unemployment in Infinity's key Focus States dampened consumer demand for auto insurance leading to a decline in written premium of 11.8% in these states for the year. See Results of Operations - Underwriting - Premium for a more detailed discussion of Infinity's underwriting results.

Net earnings and diluted earnings per share for the twelve months ended December 31, 2008 were $19.3 million and $1.23, respectively, compared with $71.9 million and $3.87, respectively, for the twelve months ended December 31, 2007. The decline in diluted earnings per share is primarily due to $51.4 million of net realized losses during 2008 compared to $3.1 million of net realized losses during 2007. Included in the net realized loss for 2008 is $61.8 million of other-than-temporary impairments on securities compared with $4.0 million of impairments during 2007.

Operating earnings, which exclude realized gains and losses on investments, were $71.1 million for the twelve months ended December 31, 2008, down 6.0% from $75.6 million in 2007. This decrease is primarily attributable to a decline in investment income.

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

Infinity continued to generate strong underwriting results in 2008 with a GAAP combined ratio of 92.5% at December 31 compared to 93.5% for the same period of 2007. Underwriting results benefited from $29.4 million of favorable development on prior accident period loss and LAE reserves compared with $13.5 million for the twelve months ended December 31, 2007. See Results of Operations - Underwriting - Profitability for a more detailed discussion of Infinity's underwriting results.

The market for personal auto insurance remained competitive in 2008 but is beginning to show signs of firming. Declines in claim frequencies for the industry have slowed while average claim severities continue to increase. Even though Infinity expects this firming trend to continue, Infinity believes that the impact of the economic recession will continue to suppress demand for auto insurance in 2009.

Critical Accounting Policies

(See Note 1- Significant Reporting and Accounting Policies of the Notes to Consolidated Financial Statements)

The preparation of financial statements requires management to make estimates and assumptions that can have a significant effect on amounts reported in the financial statements. As more information becomes known, these estimates and assumptions could change and thus impact amounts reported in the future. Management believes that the establishment of insurance reserves, the determination of "other-than-temporary" impairment on investments and accruals for litigation are the areas where the degree of judgment required to determine amounts recorded in the financial statements make the accounting policies critical.

Insurance Reserves

Insurance reserves, or unpaid losses and LAE, are management's best estimate of
(i) the ultimate amounts that will be paid for all claims that have been reported up to the date of the current accounting period but that have not yet been paid, (ii) an estimate of claims that have occurred but have not yet been reported to the Company ("incurred but not reported" or "IBNR"), and
(iii) unpaid claim settlement expenses.

IBNR reserves are established for the quarter and year-end based on a quarterly reserve analysis by the Company's actuarial staff. Various standard actuarial tests are applied to subsets of the business at a state, product and coverage basis. Included in the analyses are the following:

• Paid and incurred extrapolation methods utilizing paid and incurred loss development to predict ultimate losses;

• Paid and incurred frequency and severity methods utilizing paid and incurred claims count development and paid and incurred development to predict ultimate average frequency (i.e. claims count per auto insured) or ultimate average severity (cost of claim per claim); and

• Paid and incurred Bornhuetter-Ferguson methods adding expected development to actual paid or incurred experience to project ultimate losses.

For each subset of the business evaluated, each test generates a point estimate based on development factors applied to known paid and incurred claims and claim counts to estimate ultimate paid claims and claim counts. Selections of factors are based on historical loss development patterns with adjustment based on professional actuarial judgment where anticipated development patterns vary from those seen historically. This estimation of IBNR requires selection of hundreds of such factors. A single point estimate for the subset being evaluated is then selected from the results of various tests, based on a combination of simple averages of the point estimates of the various tests and selections based on professional actuarial judgment. During recent years, paid methods have been less reliable as a result of changes in settlement practices, so Infinity has more heavily relied on incurred methods.

While the ultimate liability may be greater or lower than recorded loss reserves, the development period for personal auto coverage is shorter than that associated with many other property and casualty coverages and can therefore be established with less uncertainty than coverages developing over longer periods, such as environmental coverage.

Estimating the liability for unpaid losses and LAE is inherently judgmental and is influenced by factors that are subject to significant variation. Infinity estimates liabilities for the costs of losses and LAE for both reported and unreported (IBNR) claims based on historical trends in the following areas adjusted for deviations in such trends:

• Claims settlement and payment practices;

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

• Business mix;

• Coverage limits and deductibles;

• Inflation trends in auto repair and medical costs; and

• Legal and regulatory trends affecting claims settlements.

Where deviations from historical trends in these key areas exist, when possible, quantitative and qualitative modifications to, or selections of, such factors are made to reflect such deviations. Management analyzes the adequacy of reserves using actuarial data and analytical reserve development techniques, including projections of ultimate paid losses, to determine the ultimate amount of reserves. The list of "key underlying assumptions" provided above are non-exhaustive examples of major factors taken into account in developing these estimates.

Infinity reviews loss reserve adequacy quarterly by accident year at a state and coverage level, while it reviews reserves quarterly for the Assumed Agency Business only at the coverage level. Reserves are adjusted as additional information becomes known. Such adjustments are reflected in current year operations. Loss and LAE reserves are also certified to state regulators annually.

During each quarterly review by the internal actuarial staff, using the additional information obtained with the passage of time, factor selections are updated, which in turn adjust the ultimate loss estimates and held IBNR reserves for the subset of the business and accident periods affected by such updates. The actuarial staff also performs various tests to estimate ultimate average severity and frequency of claims. Severity represents the average cost per claim and frequency represents the number of claims per policy. As an overall review, the staff then evaluates for reasonableness loss and LAE ratios by accident year by state and by coverage.

Factors that can significantly affect actual frequency include, among others, changes in weather, driving patterns or trends and class of driver. Estimates of average frequency can be affected by changes in claims settlement and reserving practices. Loss severity can be affected by auto repair and medical cost inflation, jury awards and changes in policy limit profiles. Estimation of LAE reserves is subject to variation from factors such as the use of outside adjusters, frequency of lawsuits, claims staffing and experience levels.

Management believes that Infinity's relatively low average policy limit and concentration on the nonstandard auto driver classification help stabilize fluctuations in frequency and severity. For example, approximately 93% of policies included within the nonstandard book of business include only the state-mandated minimum policy limits for bodily injury and property damage, which somewhat mitigates the challenge of estimating average severity. These low limits tend to reduce the exposure of the loss reserves on this coverage to medical cost inflation on severe injuries since the minimum policy limits will limit the total payout.

The Company's management believes that the historical magnitude of adjustments to ultimate losses on an accident year basis are indicative of the sensitivity of currently held loss reserves to changes in underlying assumptions. Over the past eight accident years (the years for which data are readily available), excluding the effect of corporate litigation costs, the combined effects of adjustments to the initial estimate for average ultimate claims frequency and severity have ranged from (5.5)% to 4.3% (averaging (0.4)%).

Ultimate loss estimates, excluding corporate litigation losses, usually experience the greatest adjustment within the first twelve months after the accident year. Accordingly, the highest degree of uncertainty is associated with reserves for the current accident year because the current accident year contains the greatest proportion of losses that have not been reported or settled, and these elements must be estimated as of the current reporting date. The proportion of losses with these characteristics diminishes in subsequent years.

Applying the eight-year historical variances calculated above to the current 2008 accident year's estimate of ultimate losses, excluding corporate litigation losses, would yield an indication of sensitivity to held reserves from $(30.0) million to $23.5 million, or about (5.5)% to 4.3% of held reserves, generating an impact to after-tax income of $19.5 million to $(15.3) million, respectively. The final outcome may fall below or above these amounts.

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

Corporate litigation losses represent estimates of losses incurred from actual or threatened litigation by claimants alleging improper handling of claims by the Company, which are commonly known as "bad faith" claims. Oftentimes, the onset of such litigation, subsequent discovery, settlement discussions, trial and appeal may occur several years after the date of the original claim. Because of the infrequent nature of such claims, each case is accrued based on its own merit based on Statement of Financial Accounting Standard ("SFAS") No. 5 requirements that such accrual be probable and estimable. As such, no estimate is permissible under SFAS 5 for IBNR for threatened litigation yet to occur on accidents with dates prior to the balance sheet date. Consequently, the effect of setting accruals for such items likely will result in unfavorable reserve development in the reserve table below.

Calendar year losses incurred for corporate litigation losses, net of reinsurance, over the past seven calendar years have ranged from $8.2 million to $18.6 million, averaging $12.3 million per year. Gross of reinsurance, corporate litigation losses have ranged from $8.2 million to $21.1 million, averaging $14.9 million over the past seven calendar years.

The following tables present the development of Infinity's loss reserves, net of reinsurance, on a GAAP basis for the calendar years 1998 through 2008. The Infinity table includes the loss reserves of the NSA Group through December 31, 2002, the addition of the Assumed Agency Business on January 1, 2003, and those of Infinity combined for 2003 and all subsequent years. The top line of each table shows the estimated liability for unpaid losses and LAE recorded at the balance sheet date for the indicated years. The next line, captioned Liability for Unpaid Losses and LAE-as re-estimated at December 31, 2008, shows the re-estimated liability as of December 31, 2008. The remainder of the table presents intervening development as percentages of the initially estimated liability. The development results from additional information and experience in subsequent years. The middle line shows a cumulative deficiency (redundancy) which represents the aggregate percentage increase (decrease) in the liability initially estimated. The lower portion of the table indicates the cumulative amounts paid as of successive periods as a percentage of the original loss reserve liability.

These tables do not present accident or policy year development data. Furthermore, in evaluating the re-estimated liability and cumulative deficiency (redundancy), it should be noted that each percentage includes the effects of changes in amounts for prior periods. Conditions and trends that have affected development of the liability in the past may not necessarily exist in the future. Accordingly, it is not appropriate to extrapolate future redundancies or deficiencies based on these tables.

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

INFINITY



(in millions)                       1998        1999         2000        2001        2002        2003         2004         2005         2006         2007       2008
Liability for unpaid loss & LAE:
As originally estimated*           $  589      $   543      $   630     $   611     $   719     $   707      $   669      $   610      $   568      $  590      $ 524
As re-estimated at December 31,
2008                                  571          544          716         718         803         718          627          543          519         561        N/A

Liability re-estimated:
One year later                       95.0 %       95.3 %       98.5 %     101.5 %     103.2 %      99.2 %       97.5 %       94.9 %       97.6 %      95.0 %
Two years later                      93.6 %       92.9 %      102.1 %     108.7 %     107.1 %     100.3 %       94.2 %       91.5 %       91.3 %
Three years later                    91.0 %       94.4 %      106.4 %     112.1 %     108.5 %      99.5 %       93.7 %       89.1 %
Four years later                     93.1 %       96.0 %      108.5 %     112.8 %     108.4 %     100.2 %       93.6 %
Five years later                     93.8 %       97.3 %      108.6 %     112.9 %     109.6 %     101.5 %
Six years later                      94.4 %       97.2 %      109.1 %     114.8 %     111.6 %
Seven years later                    94.2 %       97.9 %      111.0 %     117.6 %
Eight years later                    94.9 %      100.0 %      113.7 %
Nine years later                     96.9 %      100.1 %
Ten years later                      97.0 %

Cumulative deficiency
(redundancy)                         (3.0 )%       0.1 %       13.7 %      17.6 %      11.6 %       1.5 %       (6.4 )%     (10.9 )%      (8.7 )%     (5.0 )%     N/A


Cumulative deficiency
(redundancy) excluding corporate
litigation losses                    (6.4 )%      (4.3 )%       6.2 %       8.7 %       3.6 %      (7.1 )%     (14.6 )%     (17.6 )%     (14.4 )%     (8.3 )%     N/A


Cumulative paid as of:
One year later                       54.5 %       53.0 %       53.3 %      51.3 %      50.3 %      48.4 %       52.6 %       50.3 %       48.4 %      54.6 %
Two years later                      73.2 %       69.6 %       76.2 %      80.3 %      77.1 %      75.8 %       72.6 %       66.5 %       69.1 %
Three years later                    80.6 %       81.4 %       92.0 %      96.3 %      94.3 %      87.7 %       80.1 %       77.4 %
Four years later                     86.5 %       89.4 %      100.0 %     105.7 %     101.5 %      91.6 %       87.3 %
Five years later                     90.6 %       93.1 %      104.9 %     109.2 %     103.7 %      97.4 %
Six years later                      92.1 %       95.7 %      106.5 %     110.4 %     108.8 %
Seven years later                    93.4 %       96.4 %      107.3 %     115.8 %
Eight years later                    93.8 %       96.8 %      112.2 %
Nine years later                     94.1 %       99.2 %
Ten years later                      96.3 %

* 2002 includes $126 resulting from the addition of the Assumed Agency Business.

                INFINITY PROPERTY AND CASUALTY CORPORATION 10-K

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



The following is a reconciliation of Infinity's net liability to the gross
liability for unpaid losses and LAE (in millions):



                                     1998        1999        2000       2001       2002       2003        2004         2005         2006         2007       2008
As originally estimated
Net liability shown above*          $  589      $  543      $  630     $  611     $  719     $  707      $   669      $   610      $   568      $  590      $ 524
Add reinsurance recoverables            11          10          13         37         33         32           27           16           28          28         21

Gross liability                     $  600      $  553      $  643     $  648     $  752     $  739      $   696      $   626      $   596      $  618      $ 545

As re-estimated at December 31,
2008:
Net liability shown above           $  571      $  544      $  716     $  718     $  803     $  718      $   627      $   543      $   519      $  561        N/A
Add reinsurance recoverables            33          44          52         80         75         56           47           36           30          27        N/A

Gross liability                     $  604      $  588      $  768     $  798     $  878     $  774      $   674      $   580      $   549      $  588        N/A

Gross cumulative deficiency
(redundancy)                           0.8 %       6.4 %      19.4 %     23.2 %     16.7 %      4.7 %       (3.3 )%      (7.3 )%      (7.8 )%     (4.9 )%     N/A

Gross cumulative deficiency
(redundancy) excluding corporate
litigation losses                     (3.9 )%     (0.1 )%      9.4 %     12.1 %      6.6 %     (6.0 )%     (13.4 )%     (14.9 )%     (14.0 )%     (8.5 )%     N/A

* 2002 includes $126 resulting from the addition of the Assumed Agency Business.

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

The following table presents (in millions) the development of loss reserves for the Assumed Agency Business through December 31, 2002. Development for 2003 for the Assumed Agency Business is included in the Infinity table above. Under the reinsurance agreement entered into with GAI, Infinity's insurance subsidiaries assumed the net reserves from GAI. Accordingly, gross reserves and net reserves are the same.

ASSUMED AGENCY BUSINESS



                                          1998         1999         2000        2001       2002
  Liability for unpaid losses & LAE:
  As originally estimated                $   150      $   118      $   106     $   116     $ 126
  As re-estimated at December 31, 2008       121          116          108         117       N/A

  Liability re-estimated:
  One year later                            84.1 %      102.9 %      104.9 %     106.8 %
  Two years later                           86.2 %      100.6 %      106.8 %     101.6 %
  Three years later                         82.3 %      101.1 %      102.8 %     103.4 %
  Four years later                          81.7 %       98.9 %      104.5 %     103.7 %
  Five years later                          80.9 %      100.7 %      104.2 %     101.5 %
  Six years later                           81.7 %       99.8 %      102.7 %     101.3 %
  Seven years later                         81.2 %       98.8 %      102.8 %     100.6 %
  Eight years later                         81.0 %       98.9 %      102.1 %
  Nine years later                          80.8 %       98.4 %
  Ten years later                           80.7 %

  Cumulative deficiency (redundancy):      (19.3 )%      (1.6 )%       2.1 %       0.6 %


  Cumulative paid as of:
  One year later                            38.6 %       47.5 %       47.0 %      43.6 %
  Two years later                           57.9 %       69.5 %       70.8 %      60.2 %
  Three years later                         69.4 %       83.3 %       80.8 %      79.7 %
  Four years later                          75.3 %       88.1 %       91.6 %      90.4 %
  Five years later                          76.4 %       93.2 %       96.3 %      94.6 %
  Six years later                           78.3 %       95.4 %       98.6 %      97.1 %
  Seven years later                         79.6 %       96.5 %      100.0 %      98.4 %
  Eight years later                         80.0 %       97.4 %      100.9 %
  Nine years later                          80.4 %       97.8 %
  Ten years later                           80.5 %

During calendar year 2008, Infinity experienced $29.4 million of favorable reserve development, primarily from LAE reserves relating to liability coverages in the California, Florida and Pennsylvania nonstandard programs. In addition, there was favorable development on liability coverages of the Assumed Agency Business.

During calendar year 2007, Infinity experienced $13.5 million of favorable reserve development, primarily from favorable development on prior accident period loss reserves as well as a reduction in LAE estimates due to favorable expense payment patterns on bodily injury coverages in both California and Florida.

During calendar year 2006, Infinity experienced $31.2 million of favorable reserve development. This development came primarily from a reduction in ultimate estimates for average claim severities from accident years 2003-2005 in physical damage and bodily injury coverages. For those years, estimates for ultimate claim frequencies increased slightly.

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

Other-than-Temporary Losses on Investments

Changes in the fair values of held investment securities are usually recorded as changes in unrealized gains or losses on investments, a component of shareholders' equity. Net earnings are not affected until the disposition of a given security or, if an unrealized loss is deemed to be other-than-temporary, an impairment charge is recorded as a realized capital loss and the cost basis of the security is reduced.

The determination of whether unrealized losses are "other-than-temporary" requires judgment based on subjective as well as objective factors. Factors considered and resources used by management include:

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

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

• the ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value.

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

• 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

Management regularly evaluates for potential impairment each security position that either has a fair value of less than 95% of its book value, an unrealized loss that equals or exceeds $100,000 or had one or more impairment charges recorded in the past. In addition, management reviews positions held related to an issuer of a previously impaired security. The process of evaluation includes assessments of each item listed above. Since it is not possible to accurately predict if or when a specific security will become other than temporarily impaired, total impairment charges could be material to the results of operations in a future period.

Accruals for Litigation

Infinity continually evaluates potential liabilities and reserves for litigation using the criteria established by SFAS 5, "Accounting for Contingencies." Under this guidance, reserves for loss may only be recorded if the likelihood of occurrence is probable and the amount is reasonably estimable. Management . . .