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| IPCC > SEC Filings for IPCC > Form 10-Q on 7-Aug-2009 | All Recent SEC Filings |
7-Aug-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 June 30, 2009 were $16.9 million and $1.22, respectively, compared to $12.1 million and $0.74, respectively, for the three months ended June 30, 2008. Net earnings and diluted earnings per share for the six months ended June 30, 2009 were $27.7 million and $1.98, respectively, compared to $26.1 million and $1.60, respectively, for the six months ended June 30, 2008. The increase in diluted earnings per share for the six months ended June 30, 2009 is primarily due to an increase in underwriting income.
Net realized losses on investments were $6.0 million for the first six months of 2009 as compared to $3.2 million for the same period of 2008. Infinity had realized gains of $0.2 million for the second quarter of 2009 compared to a realized loss of $1.8 million in the second quarter of 2008. Included in the net realized loss for the first six months of 2009 is $8.3 million of other-than-temporary impairments on fixed income securities compared with $7.7 million of impairments during the first six months of 2008. Included in the net realized gain for the second quarter of 2009 is $0.8 million of other-than-temporary impairments on fixed income securities compared with $3.5 million of impairments during the second quarter of 2008.
Included in net earnings for the three and six months ended June 30, 2009 were $6.8 million ($10.4 million pre-tax) and $13.1 million ($20.2 million pre-tax), respectively, of favorable development on prior accident period loss and LAE reserves compared to $4.1 million ($6.3 million pre-tax) and $7.9 million ($12.2 million pre-tax), respectively, for the three and six months ended June 30, 2008. See Results of Operations - Underwriting - Profitability for a more detailed discussion of Infinity's underwriting results.
Total revenues declined 8.8% and 9.8% for the three and six months ended June 30, 2009 compared with the same periods in 2008. The decline for both periods is primarily attributable to a decline in earned premiums as a result of decreases in gross written premiums in states such as Arizona, Florida and Georgia. See Results of Operations - Underwriting - Premiums for a more detailed discussion of Infinity's gross written premium growth.
Infinity's book value per share increased 9.1% from $37.70 at June 30, 2008 to $41.11 at June 30, 2009. This increase was primarily due to earnings and change in unrealized net gains on investments, net of shareholder dividends, for the twelve months ended June 30, 2009. Also increasing book value per share over this period by approximately $0.83 per share was the $13.3 million reduction in the deferred tax valuation reserve associated with the $38.1 million reclassification of OTTI reserve to unrealized losses required under FSP 115-2 on April 1, 2009. Annualized return on equity for the three and six months ended June 30, 2009 was 12.4% and 10.2%, respectively, compared with 8.0% and 8.7% for the three and six months ended June 30, 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 and 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 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.
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 June 30, 2009 and 2008 ($ in thousands):
Three months ended June 30,
2009 2008 $ Change Change
Net earned premium
Gross written premium
Personal auto insurance:
Focus States:
Urban Zones $ 157,466 $ 171,102 $ (13,636 ) (8.0 )%
Non-Urban Zones 20,240 26,233 (5,993 ) (22.8 )%
Total Focus States 177,706 197,335 (19,629 ) (9.9 )%
Maintenance States 7,667 11,593 (3,926 ) (33.9 )%
Other States 506 1,015 (508 ) (50.1 )%
Subtotal 185,879 209,943 (24,064 ) (11.5 )%
Commercial Vehicle 14,361 10,787 3,574 33.1 %
Classic Collector 3,826 6,523 (2,697 ) (41.3 )%
Other 32 287 (255 ) (88.7 )%
Total gross written premium 204,099 227,540 (23,441 ) (10.3 )%
Ceded reinsurance (1,278 ) (947 ) (331 ) 35.0 %
Net written premium 202,821 226,593 (23,773 ) (10.5 )%
Change in unearned premium 10,909 6,769 4,139 61.1 %
Net earned premium $ 213,729 $ 233,363 $ (19,633 ) (8.4 )%
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The following table shows Infinity's net earned premium for the six months ended June 30, 2009 and 2008 ($ in thousands):
Six months ended June 30,
2009 2008 $ Change Change
Net earned premium
Gross written premium
Personal auto insurance:
Focus States:
Urban Zones $ 338,574 $ 363,194 $ (24,620 ) (6.8 )%
Non-Urban Zones 45,105 57,421 (12,316 ) (21.4 )%
Total Focus States 383,679 420,615 (36,936 ) (8.8 )%
Maintenance States 17,256 25,345 (8,089 ) (31.9 )%
Other States 929 2,002 (1,074 ) (53.6 )%
Subtotal 401,864 447,963 (46,099 ) (10.3 )%
Commercial Vehicle 27,202 21,656 5,546 25.6 %
Classic Collector 8,175 10,890 (2,715 ) (24.9 )%
Other 112 508 (396 ) (78.0 )%
Total gross written premium 437,353 481,015 (43,663 ) (9.1 )%
Ceded reinsurance (2,578 ) (2,209 ) (368 ) 16.7 %
Net written premium 434,775 478,807 (44,032 ) (9.2 )%
Change in unearned premium (6,379 ) (10,380 ) 4,001 (38.5 )%
Net earned premium $ 428,396 $ 468,427 $ (40,030 ) (8.5 )%
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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 shows Infinity's policies-in-force as of June 30, 2009 and
2008:
As of June 30,
2009 2008 $ Change Change
Policies-in-force
Personal auto insurance:
Focus States:
Urban Zones 588,366 600,036 (11,670 ) (1.9 )%
Non-Urban Zones 69,032 85,905 (16,873 ) (19.6 )%
Total Focus States 657,398 685,941 (28,543 ) (4.2 )%
Maintenance States 27,140 38,716 (11,576 ) (29.9 )%
Other States 1,233 2,842 (1,609 ) (56.6 )%
Total personal auto insurance 685,771 727,499 (41,728 ) (5.7 )%
Commercial Vehicle 24,780 16,809 7,971 47.4 %
Classic Collector 54,265 60,906 (6,641 ) (10.9 )%
Other 95 704 (609 ) (86.5 )%
Total policies-in-force 764,911 805,918 (41,007 ) (5.1 )%
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Gross written premium decreased 10.3% and 9.1% during the second quarter and first six months of 2009, respectively, compared with the same periods of 2008. During the first six months of 2009, Infinity implemented 21 rate revisions in various states with an overall rate decrease of less than 1%. Policies-in-force at June 30, 2009 decreased 5.1% 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.
Personal auto gross written premiums were down for the three and six months ended June 30, 2009 in all but two Focus States, Illinois and Nevada in which Infinity writes relatively low volume of premium. Economic conditions for Infinity's agents and policyholders worsened in the second quarter as unemployment rates in five of eight Focus States rose to above 10% and consumer confidence remained weak. Agents report that many policyholders are reducing purchases of some auto coverages, raising deductibles or dropping coverage altogether, all of which have decreased Infinity's premium volume. In states such as Florida and Georgia, Infinity has taken aggressive actions over the past year to improve profit margins, including raising rates, which has further reduced written premium.
During the second quarter and first six months of 2009, personal auto insurance gross written premium in Infinity's eight Focus States decreased 9.9% and 8.8% compared with the same periods in 2008. The decline in gross written premium is primarily a result of declines in Florida and Georgia. Gross written premium in Florida declined 26.9% and 26.5% during the second quarter and first six months of 2009, respectively, as compared with the same periods of 2008. The decline is due primarily to Infinity raising rates 15.1% during 2008 and tightening underwriting standards to improve profitability in Florida. Georgia's gross written premium declined 30.1% and 27.0% during the second quarter and first six months of 2009 as compared with the same periods of 2008. This decline is primarily a result of Infinity's rate increases intended to improve profitability in the state. Premium in California, Infinity's largest state by premium volume, was down 2.0% and 1.6% for the second quarter and first six months of 2009, respectively, as compared to the same periods of 2008.
Gross written premium in the Maintenance States declined 33.9% and 31.9% during the second quarter and first six months of 2009, respectively, compared to the same periods of 2008. 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 33.1% and 25.6% the second quarter and first six months of 2009, respectively, compared to the same periods of 2008, primarily from growth in California, a new market for this product.
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. 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.
The following table presents the statutory and GAAP combined ratios:
Three months ended June 30,
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 % 20.4 % 92.3 % 68.3 % 21.9 % 90.2 % 3.6 % (1.5 )% 2.1 %
Non-Urban Zones 70.6 % 21.3 % 91.9 % 75.1 % 22.8 % 97.9 % (4.4 )% (1.5 )% (6.0 )%
Total Focus States 71.8 % 20.5 % 92.3 % 69.3 % 22.0 % 91.3 % 2.5 % (1.5 )% 1.0 %
Maintenance States 71.2 % 22.9 % 94.1 % 72.9 % 23.7 % 96.6 % (1.8 )% (0.8 )% (2.5 )%
Other States NM NM NM NM NM NM NM NM NM
Subtotal 71.6 % 20.6 % 92.3 % 68.5 % 22.2 % 90.7 % 3.2 % (1.6 )% 1.6 %
Commercial Vehicle 62.0 % 21.0 % 83.1 % 154.8 % 24.4 % 179.2 % (92.8 )% (3.4 )% (96.1 )%
Classic Collector 47.6 % 37.8 % 85.4 % 43.0 % 39.1 % 82.1 % 4.6 % (1.3 )% 3.2 %
Other NM NM NM NM NM NM NM NM NM
Total statutory ratios 70.6 % 20.6 % 91.2 % 70.8 % 23.2 % 94.0 % (0.2 )% (2.6 )% (2.8 )%
GAAP ratios 70.6 % 21.3 % 91.9 % 71.1 % 24.4 % 95.5 % (0.5 )% (3.1 )% (3.6 )%
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INFINITY PROPERTY AND CASUALTY CORPORATION 10-Q
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Six months ended June 30,
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 % 19.9 % 91.8 % 73.7 % 20.6 % 94.4 % (1.8 )% (0.7 )% (2.5 )%
Non-Urban Zones 70.2 % 20.7 % 90.9 % 71.2 % 21.9 % 93.1 % (1.0 )% (1.2 )% (2.2 )%
Total Focus States 71.7 % 20.0 % 91.7 % 73.4 % 20.8 % 94.2 % (1.7 )% (0.8 )% (2.5 )%
Maintenance States 73.5 % 24.1 % 97.5 % 75.2 % 23.4 % 98.6 % (1.8 )% 0.7 % (1.1 )%
Other States NM NM NM NM NM NM NM NM NM
Subtotal 71.8 % 20.3 % 92.0 % 73.1 % 21.0 % 94.1 % (1.3 )% (0.7 )% (2.0 )%
Commercial Vehicle 64.6 % 21.5 % 86.1 % 96.6 % 23.5 % 120.2 % (32.1 )% (2.0 )% (34.1 )%
Classic Collector 38.0 % 40.0 % 78.0 % 35.3 % 41.8 % 77.1 % 2.7 % (1.8 )% 0.9 %
Other NM NM NM NM NM NM NM NM NM
Total statutory ratios 70.5 % 20.6 % 91.1 % 71.5 % 21.9 % 93.4 % (1.0 )% (1.3 )% (2.3 )%
GAAP ratios 70.5 % 21.6 % 92.1 % 71.6 % 23.4 % 95.0 % (1.1 )% (1.8 )% (2.8 )%
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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 second quarter and first six months of 2009 decreased 2.8 and 2.3 points, respectively, compared with the same periods of 2008. The second quarter and first six months of 2009 benefited from $10.4 million and $20.2 million, respectively, of favorable development on loss and LAE reserves compared to $6.3 million and $12.2 million of favorable development for the same periods of 2008, respectively. Losses from catastrophes were $0.2 million for each of the three and six months ended June 30, 2009, respectively, compared to $0.3 million and $0.4 million for the same periods of 2008.
Excluding the impact of the favorable development of loss and LAE reserves, overall statutory combined ratios for the second quarter and six months ended June 30, 2009 were 96.0% and 95.8%, respectively. For the second quarter and six months ended June 30, 2008, excluding the impact of the favorable development of loss and LAE reserves, the statutory combined ratios were 96.7% and 96.0%, respectively. The slight improvement in the second quarter and six months ended June 30, 2009 as compared with the same periods a year earlier is due to an improvement in 2009 for the underwriting expense ratios, partially offset by a slight deterioration of the loss and LAE ratio.
This slight increase in the overall loss and LAE ratio, excluding the impact of the favorable development is due to a 1.3 point increase in the loss and LAE ratio for the California personal auto business, which was a result of rate decreases taken on this business in late 2007 and mid-2008 in order to comply with this state's Fair Rate of Return regulations.
The overall underwriting expense ratio improved 2.6% and 1.3% for the three and six month periods ended June 30, 2009 as compared with the same periods a year earlier as a result of increases in fees as percentage of premium (which are accounted for as a contra-expense) as well as reductions in advertising, sales promotion and salaries. In late 2008, management undertook an initiative to reduce expenses in anticipation of a drop in written premiums in 2009 due to the economic recession. This initiative resulted in these staffing and other expense reductions in the first half of 2009.
The loss and LAE ratio increase of 2.5% in the Focus States during the second quarter of 2009 compared to the second quarter of 2008 is primarily a result of favorable development on LAE reserve recognized during the second quarter of 2008 in Arizona and California Urban Zones. Excluding the impact of this favorable development, the loss and LAE ratios for the Focus States were up slightly from that reported a year earlier, as a result of an increase in the California personal auto loss and LAE discussed earlier.
Management's Discussion and Analysis of Financial Condition and Results of Operations
The underwriting expense ratio for the Focus States improved 1.5 points and 0.8 points for the three and six months ended June 30, 2009 as compared with the same periods a year earlier as a result of the expense reduction initiative mentioned earlier, as well as increased fees in some of the Focus States.
The loss and LAE ratio in the Maintenance States declined during both the second quarter and first six months of 2009 as a result of favorable development in . . .
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