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| IPCC > SEC Filings for IPCC > Form 10-Q on 8-May-2009 | All Recent SEC Filings |
8-May-2009
Quarterly Report
ITEM 2
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain statements that may be deemed to be "forward-looking statements" that anticipate results based on our estimates, assumptions and plans that are subject to uncertainty. These statements are made 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 are based on estimates, assumptions, and projections. Statements which include the words "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.
Actual results could differ materially from those expected by Infinity depending on: changes in economic conditions and financial markets (including interest rates), the adequacy or accuracy of Infinity's pricing methodologies, actions of competitors, the approval of requested form and rate changes, judicial and regulatory developments affecting the automobile insurance industry, the outcome of pending litigation against Infinity, weather conditions (including the severity and frequency of storms, hurricanes, snowfalls, hail and winter conditions), changes in driving patterns and loss trends. Infinity undertakes 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 II, Item 1A of this report, as well as in Part I, Item 1A of Infinity's Annual Report on Form 10-K for the twelve months ended December 31, 2008.
OVERVIEW
Net earnings and diluted earnings per share for the three months ended March 31, 2009 were $10.8 million and $0.76, respectively, compared with $14.0 million and $0.86, respectively, for the three months ended March 31, 2008.
The decline in diluted earnings per share for the three months ended March 31, 2009 is primarily due to $6.1 million of net realized losses on investments during the first quarter of 2009 compared to $1.4 million of net realized losses during the first quarter of 2008. Included in the net realized loss for the first quarter of 2009 is $7.5 million of other-than-temporary impairments on fixed income securities compared with $4.2 million of impairments during the first quarter of 2008.
Included in net earnings for the three months ended March 31, 2009 were $6.4 million ($9.8 million pre-tax) of favorable development on prior accident period loss and LAE reserves compared with $3.9 million ($5.9 million pre-tax) for the three months ended March 31, 2008. See Results of Operations - Underwriting - Profitability for a more detailed discussion of Infinity's underwriting results.
Total revenues declined 10.8% for the three months ended March 31, 2009 compared with the same period in 2008. The decline is primarily attributable to both the increase in realized losses on investments discussed above, as well as a decline in earned premium as a result of decreases in gross written premium in states such as Arizona, Florida and Georgia. See Results of Operations - Underwriting - Premium for a more detailed discussion of Infinity's gross written premium growth.
Infinity's book value per share increased 1.1% from $37.80 at March 31, 2008 to $38.23 at March 31, 2009. Annualized return on equity for the three months ended March 31, 2009 was 8.2% compared with 9.2% for the three months ended March 31, 2008.
Management's Discussion and Analysis of Financial Condition and Results of Operations
RESULTS OF OPERATIONS
Underwriting
Premium
Infinity's 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, Infinity believes 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. Infinity also writes commercial vehicle insurance and insurance for classic collectible automobiles ("Classic Collector").
Infinity is licensed to write insurance in all 50 states and the District of Columbia, but focuses its operations in targeted urban areas ("Urban Zones") identified within selected focus states that management believes offer the greatest opportunity for premium growth and profitability.
Infinity classifies the states in which it operates into three categories:
• "Focus States" - Infinity has identified Urban Zones in these states which include: Arizona, California, Florida, Georgia, Illinois, Nevada, Pennsylvania and Texas.
• "Maintenance States" - Infinity is maintaining its writings in these states which include: Alabama, Colorado, Connecticut, Missouri, Ohio, South Carolina, and Tennessee. Infinity believes each state offers the Company an opportunity for underwriting profit.
• "Other States" - Includes all remaining states.
Infinity further classifies territories within the Focus States into two categories:
• "Urban Zones" - include the following urban areas:
• Arizona - Phoenix, Tucson
• California - Bay Area, Los Angeles, Sacramento, San Diego, and San Joaquin Valley
• Florida - Jacksonville, Miami, Orlando, Sarasota and Tampa
• Georgia - Atlanta
• Illinois - Chicago
• Nevada - Las Vegas
• Pennsylvania - Allentown, 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.
Infinity continually evaluates its 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. In the tables below, Infinity has restated 2008 premium, policies-in-force and combined ratios to be consistent with the 2009 definition of Urban Zones, Focus States, Maintenance States and Other States.
INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following table shows Infinity's net earned premium for the three months
ended March 31, 2009 and 2008 ($ in thousands):
Three months ended March 31,
2009 2008 $ Change Change
Net earned premium
Gross written premium
Personal auto insurance:
Focus States:
Urban Zones $ 181,108 $ 192,092 $ (10,984 ) (5.7 )%
Non-Urban Zones 24,866 31,188 (6,322 ) (20.3 )%
Total Focus States 205,974 223,280 (17,307 ) (7.8 )%
Maintenance States 9,589 13,752 (4,163 ) (30.3 )%
Other States 422 988 (565 ) (57.2 )%
Subtotal 215,985 238,020 (22,035 ) (9.3 )%
Commercial Vehicle 12,841 10,869 1,972 18.1 %
Classic Collector 4,349 4,366 (17 ) (0.4 )%
Other 80 221 (142 ) (64.0 )%
Total gross written premium 233,254 253,476 (20,222 ) (8.0 )%
Ceded reinsurance (1,300 ) (1,262 ) (37 ) 2.9 %
Net written premium 231,955 252,214 (20,259 ) (8.0 )%
Change in unearned premium (17,288 ) (17,150 ) (138 ) 0.8 %
Net earned premium $ 214,667 $ 235,064 $ (20,397 ) (8.7 )%
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The following table shows Infinity's policies-in-force as of March 31, 2009 and 2008:
As of March 31,
2009 2008 $ Change Change
Policies-in-force
Personal auto insurance:
Focus States:
Urban Zones 592,380 599,911 (7,531 ) (1.3 )%
Non-Urban Zones 73,843 90,389 (16,546 ) (18.3 )%
Total Focus States 666,223 690,300 (24,077 ) (3.5 )%
Maintenance States 30,270 41,665 (11,395 ) (27.3 )%
Other States 1,616 3,730 (2,114 ) (56.7 )%
Total personal auto insurance 698,109 735,695 (37,586 ) (5.1 )%
Commercial Vehicle 22,029 15,211 6,818 44.8 %
Classic Collector 61,218 60,524 694 1.1 %
Other 217 816 (599 ) (73.4 )%
Total policies-in-force 781,573 812,246 (30,673 ) (3.8 )%
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Management's Discussion and Analysis of Financial Condition and Results of Operations
Gross written premium decreased 8.0% during the first quarter of 2009 when compared with the first quarter of 2008. During the first three months of 2009, Infinity implemented 9 rate revisions in various states with an overall rate increase of less than 1%. Policies-in-force at March 31, 2009 decreased 3.8% compared with the same period in 2008. Gross written premium declined more than policies-in-force due to a shift in the business mix to more liability only policies, which have lower average premium.
During the first quarter of 2009, personal auto insurance gross written premium in Infinity's eight Focus States decreased 7.8% compared with the same period in 2008. The decline in gross written premium is primarily a result of declines in Arizona, Florida and Georgia. Gross written premium in Arizona declined 33.2% during the first quarter of 2009 as compared with the first quarter of 2008. This decline is due to a weakening economy and increased immigration enforcement. Gross written premium in Florida declined 26.2% during the first three months of 2009 as compared with the same period of 2008. The decline in gross written premium is due primarily to Infinity raising rates 15.1% during 2008 to improve profitability in Florida. A decline in Georgia's gross written premium of 24.3% during the first quarter of 2009 as compared with the same period of 2008 is primarily a result of rate increases totaling approximately 10.0% during late 2008 and early 2009. Premium in California, Infinity's largest state by premium volume, was down just 1.3% for the first quarter of 2009 as compared to the same period of 2008.
Partially offsetting the decline in premium in Arizona, Florida and Georgia during the first quarter of 2009 were increases in gross written premium in Illinois and Nevada. Illinois's gross written premium increased 451.9% during the first quarter of 2009 as compared to the first quarter of 2008. This growth is primarily attributable to the recent introduction of the Chicago Urban Zone. Nevada's gross written premium increased 25.8% during the first quarter of 2009 primarily as a result of continued marketing efforts and growth in the Las Vegas Urban Zone.
Gross written premium in the Maintenance States declined 30.3% during the first quarter of 2009. Infinity has increased rates in several of the Maintenance States over the last twelve months in an effort to improve profitability.
Infinity's Commercial Vehicle gross written premium increased 18.1% during the first quarter of 2009 as compared with the same periods of 2008. During 2007, Infinity revised its rating structure and reintroduced the program in states such as California, Connecticut, Georgia and Texas. In addition, increased marketing and advertising led to the growth in gross written premium.
Profitability
A key operating performance measure of insurance companies is underwriting profitability, as opposed to overall profitability or net earnings. Underwriting profitability is measured by the combined ratio. When the combined ratio is under 100%, underwriting results are generally considered profitable; when the ratio is over 100%, underwriting results are generally considered unprofitable. The combined ratio does not reflect investment income, other income, other expenses or federal income taxes.
While financial data is reported in accordance with GAAP for shareholder and other investment purposes it is reported on a statutory basis for insurance regulatory purposes. Infinity evaluates 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 are earned; on a statutory basis these items are expensed as incurred. Costs for computer software developed or obtained for internal use are capitalized under GAAP and amortized over their useful life, rather than expensed as incurred, as required for statutory purposes. Additionally, bad debt charge-offs on agent balances and premium receivables are included only in the GAAP combined ratios.
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 March 31,
2009 2008 % Point Change
Loss & Loss & Loss &
LAE Underwriting Combined LAE Underwriting Combined LAE Underwriting Combined
Ratio Ratio Ratio Ratio Ratio Ratio Ratio Ratio Ratio
Personal Auto Insurance:
Focus States:
Urban Zones 71.9 % 19.2 % 91.1 % 79.1 % 19.6 % 98.6 % (7.1 )% (0.4 )% (7.5 )%
Non-Urban Zones 69.5 % 21.8 % 91.3 % 67.3 % 21.2 % 88.5 % 2.2 % 0.6 % 2.8 %
Total Focus States 71.6 % 19.5 % 91.1 % 77.4 % 19.8 % 97.2 % (5.8 )% (0.3 )% (6.1 )%
Maintenance States 74.0 % 27.8 % 101.7 % 77.4 % 23.1 % 100.5 % (3.4 )% 4.6 % 1.2 %
Other States NM NM NM NM NM NM NM NM NM
Subtotal 71.9 % 20.0 % 91.8 % 77.6 % 20.0 % 97.6 % (5.7 )% 0.0 % (5.7 )%
Commercial Vehicle 67.0 % 22.1 % 89.1 % 36.6 % 22.7 % 59.2 % 30.5 % (0.6 )% 29.9 %
Classic Collector 28.7 % 41.9 % 70.6 % 27.2 % 45.9 % 73.1 % 1.6 % (4.1 )% (2.5 )%
Other NM NM NM NM NM NM NM NM NM
Total statutory ratios 70.5 % 20.6 % 91.0 % 72.2 % 20.7 % 93.0 % (1.8 )% (0.2 )% (2.0 )%
GAAP ratios 70.5 % 21.9 % 92.4 % 72.1 % 22.4 % 94.5 % (1.6 )% (0.5 )% (2.1 )%
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NM: not meaningful due to the low premium for these lines.
In evaluating the profit performance of Infinity's business, the Company's management reviews underwriting profitability using statutory combined ratios. Accordingly, the discussion of underwriting results that follows will focus on these ratios and the components thereof.
The statutory combined ratio for the first quarter of 2009 decreased 2.0 points compared with the same period of 2008. The first quarter of 2009 and 2008 benefited from $9.8 million and $5.9 million, respectively, of favorable development on loss and LAE reserves. Losses from catastrophes were less than $0.1 million and $0.2 million for the three months ended March 31, 2009 and March 31, 2008, respectively.
The combined ratio decrease of 6.1 points in the Focus States is primarily attributable to favorable development on loss and LAE reserves in California and Florida.
The loss and LAE ratio in the Maintenance States for the three months ended March 31, 2009 declined compared with the first quarter of 2008 as a result of unfavorable development on loss and LAE reserves in Tennessee recorded during the first quarter of 2008. The increase in the underwriting ratio in the Maintenance States is attributable to a decline in premium while fixed expenses in these states remained flat.
The loss and LAE ratio for the Commercial Vehicle business increased substantially during the first quarter of 2009 compared with the same period in 2008 primarily as a result of an increase in the loss ratio in California due to a shift toward new business, which typically has a higher loss ratio than renewal business. Additionally, there was an increase in the loss ratio in the Non-Focus states during the first quarter of 2009 when compared with the same period in 2008 as a result of favorable development on loss and LAE reserves in these states recorded during the first quarter of 2008.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Net Investment Income
Net investment income is comprised of gross investment revenue and investment
management fees and expenses, as shown in the following table (in thousands):
Three months ended March 31,
2009 2008
Investment income:
Interest income on fixed maturities, cash and cash
equivalents $ 13,870 $ 15,585
Dividends on equity securities 194 215
Gross investment income 14,064 15,800
Investment expenses (420 ) (476 )
Net investment income $ 13,644 $ 15,324
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Changes in investment income reflect fluctuations in market rates and changes in average invested assets. Net investment income for the three months ended March 31, 2009 declined compared to the same period in 2008 primarily due to a decrease in average investment balances of 11.7% in addition to a 34 basis point decline in book yields as a result of a general decline in market interest rates for high quality bonds.
Infinity 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 March 31, 2009 Three months ended March 31, 2008
Impairments Impairments
on securities Realized gains Total realized on securities Realized gains Total realized
held on sales losses held on sales losses
Fixed maturities $ (7,516 ) $ 1,389 $ (6,127 ) $ (4,197 ) $ 2,816 $ (1,381 )
Equities - - - - - -
Total $ (7,516 ) $ 1,389 $ (6,127 ) $ (4,197 ) $ 2,816 $ (1,381 )
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For Infinity's securities held with unrealized losses, management believes that, based on its analysis (i) Infinity will recover its cost basis in these securities in a relatively short period of time and/or (ii) that Infinity has the ability and intent to hold these securities until they mature or recover in value. Should either of these beliefs change with regard to a particular security, a charge for impairment would likely be required. While it is not possible to accurately predict if or when a specific security will become impaired, charges for other-than-temporary impairments could be material to results of operations in a future period.
Had Infinity recorded additional impairment charges on all its unrealized losses that were more than twelve months old at March 31, 2009, the pre-tax earnings impact would have been $1.8 million.
Interest Expense
The Senior Notes accrue interest at an effective yield of 5.55% (Refer to Note 4 of the Consolidated Financial Statements for additional information on the Senior Notes). Interest expense on the Senior Notes recognized in the Consolidated Statements of Earnings for each of the three months ended March 31, 2009 and 2008 was $2.8 million.
Other Income
Other income for the three months ended March 31, 2009 remained relatively flat at less than $0.1 million compared to $0.2 million for the corresponding period of 2008.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Other Expense
Other expense for the three months ended March 31, 2009 was $0.6 million compared to $1.4 million for the corresponding period of 2008. The decrease in other expenses is primarily due to a decrease in corporate litigation expenses.
Income Taxes
The Company's GAAP effective tax rate was 42.4% and 32.5% for the three months ended March 31, 2009 and 2008, respectively. For the three months ended March 31, 2009 and 2008, Infinity increased its tax valuation allowance by approximately $2.0 million and $0.2 million, respectively, primarily due to an increase in other-than-temporary impairments of securities.
(See Note 6 of the Consolidated Financial Statements for additional information)
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Funds
Infinity is organized as a holding company with all of its operations being conducted by its insurance subsidiaries. Accordingly, Infinity will have continuing cash needs for administrative expenses, the payment of interest on borrowings, shareholder dividends, share repurchases and taxes. Administrative expenses at the holding company currently average approximately $7.0 million annually.
At March 31, 2009, Infinity had outstanding $200 million principal of Senior Notes due 2014, bearing a fixed 5.5% interest rate. Interest payments on the Senior Notes of $5.5 million are due each February and August through maturity in February 2014. (Refer to Note 4 of the Consolidated Financial Statements for more information on the Senior Notes).
In February 2009, Infinity increased its quarterly dividend to $0.12 per share from $0.11 per share. At this current amount, Infinity's 2009 annualized dividend payments would be approximately $6.7 million.
In October 2006, the Company announced that the Board of Directors approved a share repurchase program expiring on the earlier of December 31, 2008 or the completion of all purchases contemplated by the program, whereby the Company may repurchase up to an aggregate amount of $100 million of its outstanding common shares. Effective July 24, 2008, Infinity's Board of Directors authorized an increase in the repurchase authority under the program by $74.3 million to $100.0 million as of that date (for an aggregate of $174.3 million since inception) and extended the date to execute this program to December 31, 2009. During the first quarter of 2009, Infinity repurchased 293,900 shares at an average cost, excluding commissions, of $35.37. As of March 31, 2009, Infinity had $31.0 million of authority remaining under this program.
Funds to meet expenditures at the holding company come primarily from dividends and tax payments from the insurance subsidiaries as well as cash and investments held by the holding company. As of March 31, 2009, Infinity had $127.5 million of cash and investments. In 2009, Infinity's insurance subsidiaries may pay to Infinity up to $43.0 million in ordinary dividends without prior regulatory approval. For the three months ended March 31, 2009, $10.0 million of dividends were paid to Infinity by its insurance subsidiaries.
In August 2008, Infinity entered into an agreement for a $50 million three-year revolving credit facility (the "Credit Agreement") that requires Infinity to meet certain financial and other covenants. Infinity is currently in compliance with all covenants under the Credit Agreement. At March 31, 2009, there were no borrowings outstanding under the Credit Agreement.
Infinity's insurance subsidiaries generate liquidity to satisfy their obligations primarily by collecting and investing premium in advance of paying claims and investment income on its $1.0 billion investment portfolio. . . .
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