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<SEC-DOCUMENT>0000950152-03-003749.txt : 20030331
<SEC-HEADER>0000950152-03-003749.hdr.sgml : 20030331
<ACCEPTANCE-DATETIME>20030331145832
ACCESSION NUMBER: 0000950152-03-003749
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 22
CONFORMED PERIOD OF REPORT: 20021231
FILED AS OF DATE: 20030331
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: INFINITY PROPERTY & CASUALTY CORP
CENTRAL INDEX KEY: 0001195933
STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331]
IRS NUMBER: 030483872
STATE OF INCORPORATION: OH
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-50167
FILM NUMBER: 03629609
BUSINESS ADDRESS:
STREET 1: 11700 GREAT OAKS WAY
CITY: ALPHARETTA
STATE: GA
ZIP: 30022
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>l99910ae10vk.txt
<DESCRIPTION>INFINITY PROPERTY AND CASUALTY CORP/10-K 12-31-02
<TEXT>
<PAGE>
- ------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE
DECEMBER 31, 2002 NO. 0-50167
INFINITY PROPERTY AND CASUALTY CORPORATION
INCORPORATED UNDER IRS EMPLOYER I.D.
THE LAWS OF OHIO NO. 03-0483872
2204 LAKESHORE DRIVE, BIRMINGHAM, ALABAMA 35209
(205) 870-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, no
par value
OTHER SECURITIES FOR WHICH REPORTS ARE SUBMITTED PURSUANT TO SECTION 15(d) OF
THE ACT: None
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 No X
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and need not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated
filer. Yes No X
----- -----
As of March 15, 2003, there were 20,481,458 shares of the
Registrant's Common Stock outstanding. Infinity Property and Casualty
Corporation is a new corporation that was formed in September 2002. Prior to
an initial public offering completed in February of 2003, all shares of the
Registrant's Common Stock were owned by American Financial Group, Inc.
-------------
DOCUMENTS INCORPORATED BY REFERENCE: None
- -------------------------------------------------------------------------------
<PAGE>
INFINITY PROPERTY AND CASUALTY CORPORATION
INDEX TO ANNUAL REPORT
ON FORM 10-K
<TABLE>
<CAPTION>
Page
<S> <C>
PART I
Item 1 - Business:
Introduction 1
Operations 1
Investments 7
Regulatory Environment 9
Item 2 - Properties 10
Item 3 - Legal Proceedings 10
Item 4 - Submission of Matters to a Vote of Security Holders (a)
PART II
Item 5 - Market for Registrant's Common Equity and Related
Stockholder Matters 11
Item 6 - Selected Financial Data 12
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 7A - Quantitative and Qualitative Disclosures About
Market Risk 22
Item 8 - Financial Statements and Supplementary Data 22
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure (a)
PART III
Item 10 - Directors and Executive Officers of the Registrant 23
Item 11 - Executive Compensation 26
Item 12 - Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 31
Item 13 - Certain Relationships and Related Transactions 32
Item 14 - Controls and Procedures 36
PART IV
Item 15 - Exhibits, Financial Statement Schedules and
Reports on Form 8-K S-1
</TABLE>
(a) The response to this Item is "none".
- -------------------------------------------------------------------------------
<PAGE>
INFINITY PROPERTY AND CASUALTY CORPORATION
FORWARD-LOOKING STATEMENTS
This Form 10-K, chiefly in Items 1, 3, 5, 7 and 8, contains certain
forward-looking statements that are subject to numerous assumptions, risks or
uncertainties. The Private Securities Litigation Reform Act of 1995 provides a
safe harbor for forward-looking statements. Some of the forward-looking
statements can be identified by the use of forward-looking words such as
"anticipates", "believes", "estimates", "expects", "intends", "plans",
"seeks", "could", "may", "should", "will", or the negative version of those
words or other comparable terminology. Examples of such forward-looking
statements include statements relating to: expectations concerning market and
other conditions, long term financing, future premiums, revenues, earnings and
investment activities, expected losses, rate increases, improved loss
experience and expected expense savings resulting from consolidation of the
operations of the Company's subsidiaries.
Actual results could differ materially from those expected by the Company
depending on certain risks and uncertainties including but not limited to:
- changes in economic conditions and financial markets (including
interest rates);
- the adequacy or accuracy of its pricing methodologies;
- the presence of competitors with greater financial resources and the
impact of competitive pricing;
- the ability to obtain timely approval for requested rate changes;
- judicial and regulatory developments adverse to the automobile
insurance industry;
- the outcome of pending litigation against the Company;
- weather conditions (including the severity and frequency of storms,
hurricanes, snowfalls, hail and winter conditions);
- changes in driving patterns and loss trends;
- acts of war and terrorist activities; and
- the challenges posed by consolidating the operations of its insurance
subsidiaries.
The forward-looking statements herein are made only as of the date of this
report. The Company assumes no obligation to publicly update any
forward-looking statements.
<PAGE>
PART I
ITEM 1
BUSINESS
INTRODUCTION
Infinity Property and Casualty Corporation ("Infinity") is a holding
company which, through subsidiaries, provides personal automobile insurance on
a national level with an emphasis on nonstandard auto insurance. Infinity
employs approximately 2,800 persons. Its address is 2204 Lakeshore Drive,
Birmingham, Alabama 35209; its phone number is (205) 870-4000. SEC filings,
news releases and other information may be accessed free of charge through
Infinity's Internet site at: www.ipacc.com.
Infinity was incorporated as an Ohio corporation in September 2002 as
an indirect wholly-owned subsidiary of American Financial Group, Inc. ("AFG")
to acquire and conduct, as a separate public company, AFG's personal lines
business written through independent agents. On December 31, 2002, AFG
transferred to Infinity all of the issued and outstanding capital stock of the
following personal auto insurance subsidiaries: Atlanta Casualty Company,
Infinity Insurance Company, Leader Insurance Company and Windsor Insurance
Company (collectively the "NSA Group"). In exchange, AFG received all of the
issued and outstanding shares of Infinity Common Stock and a $55 million
promissory note. In February of 2003, AFG sold 12.5 million shares (61%) of
Infinity in an initial public offering.
As of January 1, 2003, Infinity acquired the inforce personal
insurance business written through independent agents (the "Assumed Agency
Business") by AFG's principal property and casualty subsidiary, Great American
Insurance Company ("GAI"). Because this business is not a separate legal
entity, the acquisition was effected through a reinsurance agreement under
which an Infinity subsidiary assumed the inforce business, services the
policyholders and handles the claims. GAI, in turn, transferred to Infinity
assets (primarily investment securities) with a market value of $125.3 million
and permits Infinity to continue to write standard and preferred insurance on
policies issued by the same GAI companies that had previously issued such
policies. This arrangement will continue for a period of up to three years
during which time Infinity intends to make the proper rate and form filings to
allow its insurance subsidiaries to write these policies.
References to Infinity, unless the context requires otherwise
includes the Combined Operations of the NSA Group and the Assumed Agency
Business. Unless indicated otherwise, the financial information herein is
presented on a GAAP basis.
OPERATIONS
Infinity estimates that approximately 80% of its personal auto
business is nonstandard auto insurance. While there is no precise,
industry-recognized definition of nonstandard auto insurance, such insurance
is generally understood to mean coverage to drivers who, due to their driving
record, age or vehicle type, represent higher than normal risks and pay higher
rates for comparable coverage. Based on data published by A.M. Best, Infinity
believes that it is the second largest provider of nonstandard auto coverage
through independent agents in the United States. Infinity also writes standard
and preferred personal auto insurance, nonstandard commercial auto insurance
and complementary personal lines insurance products.
The business acquired by Infinity generated $989 million in gross
premiums written and $687 million in net premiums written in 2002. In that
year, approximately 95% of Infinity's business was personal auto and the
remaining 5% was homeowners, umbrella liability, boat owners and nonstandard
commercial auto coverages.
Infinity has a history of favorable underwriting results. The
following table compares Infinity's statutory combined ratio in past years
with those of the personal lines insurance industry as a whole. The statutory
combined ratio is the sum of the loss ratio (the ratio of losses and loss
adjustment expenses to net
1
<PAGE>
earned premiums) and the expense ratio (when calculated on a statutory
accounting basis, the ratio of underwriting expenses to net written premiums).
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 or federal income taxes.
<TABLE>
<CAPTION>
2002 2001 2000 1999 1998 1998-2002 1993-2002
---- ---- ---- ---- ---- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Infinity 92.7% 104.6% 108.7% 98.7% 97.0% 100.9% 101.4%
Industry (*) 105.6% 110.9% 109.9% 104.5% 102.7% 105.9% 105.2%
</TABLE>
(*) Industry combined ratios were obtained from A.M. Best.
THE PERSONAL AUTOMOBILE MARKET
Personal auto insurance is the largest line of property and casualty
insurance accounting for approximately 40% of the $330 billion of annual
industry premiums. Personal auto insurance provides coverage to drivers for
liability to others for both bodily injury and property damage and for
physical damage to an insured's own vehicle from collision and other perils.
Personal auto insurance is comprised of preferred, standard and nonstandard
risks. Nonstandard insurance is intended for drivers who, due to their driving
record, age or vehicle type, represent a higher than normal risk. As a result,
customers that purchase nonstandard auto insurance generally pay higher
premiums for similar coverage than drivers qualifying for standard or
preferred policies. While there is no established industry-recognized
demarcation between nonstandard policies and all other personal auto policies,
Infinity believes that nonstandard auto risks generally constitute between 15%
and 20% of the personal automobile insurance market, with this range
fluctuating according to competitive conditions in the market. Approximately
one-third of all personal automobile insurance is sold by independent agents.
The personal auto insurance industry is cyclical, characterized by
periods of price competition and excess capacity followed by periods of high
premium rates and shortages of underwriting capacity. In the late 1990s, many
automobile insurers attempted to capture more business by reducing rates.
Infinity believes that these industry-wide rate reductions combined with
increased severity trends during the period contributed to the deterioration
of industry loss ratios in the years 1999 through 2001. Infinity began
implementing rate increases in early 2000. Since that time, most of the
industry, including some of the largest companies, have begun to raise rates
and tighten underwriting standards in order to address poor results. Other
insurance companies have recently withdrawn from the market because of their
inability to compete successfully, impaired capital positions, or because of a
decrease in the availability of reinsurance.
The personal auto insurance industry is highly competitive and,
except for regulatory considerations, there are relatively few barriers to
entry. Infinity competes with both large national writers and smaller regional
companies. In 2001, the five largest automobile insurance companies accounted
for approximately 47% of the industry's net written premiums and the largest
ten accounted for approximately 62% (2002 industry data not available). Over
380 insurance groups compete in the personal auto insurance industry,
according to A.M. Best. Some of these groups may specialize in nonstandard
auto insurance, while others provide a broad spectrum of personal auto
insurance.
Infinity generally competes with other insurers on the basis of
price, coverages offered, claims handling, customer service, agent commission,
geographic coverage and financial strength ratings.
PRICING AND PRODUCT MANAGEMENT
Infinity develops tailored rates for its personal automobile
customers based on a variety of factors, which may include the driving record
of the insureds, the number of and type of vehicles covered, credit history,
and other factors. Management believes this approach enables Infinity to
achieve adequate rates for each risk and to provide a means to serve a broad
spectrum of customers.
2
<PAGE>
Infinity evaluates risks in great detail and uses sophisticated
proprietary databases and risk models to offer each driver the appropriate
rate and coverage terms. For example, while many insurers evaluate drivers'
ages based on broad groupings, Infinity looks at exact age to reflect
differences in risk more accurately. In addition to varying rates, Infinity
offers coverage terms tailored to unique market needs.
The pricing segmentation approach that Infinity utilizes requires the
extensive involvement of product managers who are responsible for the
underwriting profitability of a specific state or region with the direct
oversight of rate level structure by Infinity's most senior managers. Product
managers work closely with pricing and product development departments to
generate rate level indications and other relevant data. Product managers are
also responsible for obtaining approval of Infinity's rate filings from state
insurance departments. Infinity believes this approach has permitted it to
respond more quickly than competitors to adverse loss trends such as those
experienced in 1999 and 2000 and to obtain faster approval for its filings.
Unlike many of its competitors, Infinity reacted by increasing personal auto
rates across the NSA Group and Assumed Agency Business by 14% in 2000, again
in 2001 and 12% in 2002. Infinity expects to benefit from these prior rate
actions as well as the price firming currently taking place in the market.
DISTRIBUTION AND MARKETING
Infinity distributes its products primarily through a network of
approximately 14,000 independent agencies. Independent agencies were
responsible for approximately 97% of Infinity's gross written premiums in
2002. In 2002, no one independent agency accounted for more than 2% of
Infinity's gross written premiums, and only one agency accounted for more than
1% of its gross written premiums. Another mode of distribution includes
relationships with some non-affiliated property and casualty insurers that
have their own captive agency forces. These companies usually provide standard
and preferred auto coverage through one of their own companies while utilizing
Infinity's companies for their nonstandard risks. Infinity believes these are
mutually beneficial relationships since its partners gain access to Infinity's
nonstandard auto expertise and Infinity gains access to a new distribution
channel. This channel represented approximately 3% of gross written premiums
in 2002. Infinity also sells a small amount of business (representing less
than 1% of its gross written premiums) via the Internet.
Infinity holds licenses to write auto insurance in all 50 states, but
it focuses on the 25 states which it believes provide the greatest opportunity
for profitable growth considering the market size and the current legal and
regulatory environment. In furtherance of this strategy, effective September
2002, Infinity no longer accepts new private passenger automobile insurance in
New Jersey, and during the first quarter of 2003, Infinity had its obligation
to issue renewal policies assumed by an unaffiliated insurance company. The
following table sets forth the distribution of Infinity's gross premiums
written by state as a percent of total gross written premiums for the periods
indicated:
<TABLE>
<CAPTION>
2002 2001 2000
---- ---- ----
<S> <C> <C> <C>
California 36% 25% 23%
Florida 10 10 10
New York 8 9 12
Georgia 7 8 8
Pennsylvania 7 7 6
Connecticut 6 8 7
All other states 26 33 34
---- ---- ----
100% 100% 100%
</TABLE>
Infinity's business development department is responsible for the
distribution and sale of its products through independent agencies and
strategic partners. This department is split into two key areas, field
operations and corporate business development. The responsibilities of
Infinity's field business development representatives include selecting
agencies and strategic partners for appointment, training them to sell its
products, and monitoring their operations to ensure compliance with its
production and profitability standards. While most of the field
3
<PAGE>
activity occurs face-to-face in the producer's office, Infinity has had
success with other approaches such as group seminars that focus on promoting
its products and conducting training for its agents.
Infinity's corporate business development staff is responsible for
its branding initiatives, cooperative advertising with its independent agents,
sales promotions and agents' incentives. In addition, this team is actively
engaged in building agency relationships via telephone, e-mail, fax and direct
mail.
Infinity fosters its agent relationships by providing them Infinity's
software applications along with programs and services designed to strengthen
and expand their marketing, sales and service capabilities. Infinity's
internet-based software applications provide many of its agents with real-time
underwriting, claims and policy information. Infinity believes the array of
services that it offers to its agents adds significant value to their
businesses. For example, Infinity recently established the PASS Program
(Providing Agents Service and Support). PASS is an incentive-based program
through which Infinity's agents earn savings on service and support needs
including technology, training, financial services, office supplies,
advertising, promotion and travel.
Infinity develops innovative products and services niche markets
across the entire range of automobile insurance segments. Infinity focuses
particular attention on developing relationships with Latino agents,
especially in Southern California. Over the past decade, Latinos have been the
fastest growing segment of the United States population according to U.S.
Census Bureau data. For example, Latinos constitute an estimated 45% of the
population in Los Angeles County. Over the past decade, Infinity has actively
developed close relationships with Latino agents by supporting their
businesses and customers in their local communities. Infinity has developed
products and services that support their particular needs and interests such
as translating important documents to Spanish and providing bilingual customer
service and claims personnel. Infinity considers its position in this unique
niche of the market, including the Infinity brand, to be a significant
competitive advantage.
Infinity's distribution and marketing efforts are implemented with a
focus on maintaining a low cost structure. Controlling expenses allows
Infinity to price competitively and achieve better underwriting returns. Over
the five years ended 2001, Infinity's statutory ratio of underwriting expenses
to premiums written has averaged 22.9%, which is 4.8 points better than the
personal lines industry average of 27.7% for the same period (2002 industry
data not available). Ongoing consolidation of Infinity's historically separate
business units is expected to generate savings during 2003 and additional
expense reductions in future years as the consolidation efforts continue.
CLAIMS HANDLING
Infinity's claims organization employs approximately 1,400 people and
has 40 field branch offices and three regional offices. Infinity provides a
24-hour, seven days per week toll-free service for its customers to report
claims. Infinity uses predominantly its own local adjusters who typically
respond to claims within 24 hours of a report.
Infinity is committed to the field handling of claims and believes it
provides better service to its customers and better control of the claim
resolution process than alternative methods. Infinity opens claims branch
offices in areas where it believes the volume of business will support them.
Customer interactions can occur with generalists (multi-line claim
representatives) and specialists (staff appraisers, field casualty
representatives and special investigators) based on local market volume,
density and performance. Nationally, over 50% of Infinity's claims are handled
face-to-face. Infinity strives for accuracy, consistency and fairness in its
claim resolutions. Infinity has an auditing program which measures performance
in investigations, damage documentation and other relevant areas.
Infinity's claims organization is committed to defending against
non-meritorious claims. This is done through referrals to its special
investigations team. This team, made up of claims and former law enforcement
professionals, works in concert with field operations to resolve questionable
claims.
4
<PAGE>
The recent consolidation of Infinity's separate claims departments
has allowed it to gain economies of scale and to eliminate redundancies.
Infinity believes that this will provide greater consistency in the claims
handling process. Infinity estimates that it will reduce claims handling costs
by approximately $6 million annually, about $2 million of which has been
realized during 2002.
REINSURANCE
Infinity reinsures a portion of its business with other insurance
companies. Ceding reinsurance permits diversification of risk and limits the
maximum loss arising from large or unusually hazardous risks or catastrophic
events. Infinity is subject to credit risk with respect to its reinsurers, as
the ceding of risk to reinsurers generally does not relieve Infinity of its
liability to insureds until claims are fully settled. To attempt to mitigate
this credit risk, Infinity cedes business only to reinsurers that meet its
credit ratings criteria.
In April 2001, Infinity entered into a 90% quota share agreement on
the personal auto physical damage business written by the NSA Group with
Inter-Ocean Reinsurance Company Ltd., an unaffiliated company which is rated
"A (Excellent)" by A.M. Best. Under this agreement, Infinity minimizes its
credit risk by withholding premiums, in exchange for a fee, until all claims
are resolved or the parties mutually agree to terminate the agreement. This
quota share agreement was amended effective January 1, 2002, to include
coverage of business written by GAI's personal lines that would otherwise be
part of the business assumed by Infinity. Infinity renewed this agreement for
2003 on terms substantially equivalent to those in effect in 2002. For 2003,
the agreement provides Infinity with the flexibility to adjust, on a quarterly
basis, the percentage of business to be ceded to the reinsurer. The percentage
ceded may be reduced from the current level of 90% to as low as 20%.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
Loss and loss adjustment expense (LAE) reserves represent Infinity's
estimate of its ultimate liability for unpaid claims and related adjustment
expenses. Estimation of ultimate payments for claims and LAE requires
significant judgment as payments can be influenced by factors that are subject
to variation in the future. Among these factors are medical and auto repair
cost inflation, jury awards and changes in the regulatory and legal
environment. As a result, the ultimate liability may be greater or less than
stated loss reserves.
Internal actuarial staff reviews the NSA Group's reserves quarterly
by accident year at a state and coverage level. Quarterly reviews allow for
timely adjustments to reserves based on additional information. As part of
these quarterly reviews, the actuarial staff 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 loss and LAE
ratios by accident year by state and by coverage for reasonableness. Actual
frequency is fairly stable because policyholders generally report auto
accidents within days of occurrence. Factors that can significantly affect
actual frequency include, among others, changes in weather and class of
driver. Estimates of average frequency can be affected by changes in claims
settlement and reserving practices, but are generally reliable. Loss severity
is not as readily estimable, and can be affected by auto repair and medical
cost inflation, jury awards and changes in policy limit profiles. For
Infinity's NSA Group, the challenge of estimating average severity is somewhat
mitigated by minimum policy limits for bodily injury on over 90% of its
policies. 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 cap the total payout. Estimation of LAE reserves is subject
to variation from factors such as use of outside adjusters, frequency of
lawsuits, claims staffing and experience levels.
Infinity's independent auditors review the adequacy of its loss
reserves as part of their audit procedures.
5
<PAGE>
The following tables present the development of the NSA Group's and
the Assumed Agency Business' loss reserves, net of reinsurance, on a GAAP
basis for the calendar years 1992 through 2002. The top line of each table
shows the estimated liability (in millions) for unpaid losses and loss
adjustment expense recorded at the balance sheet date for the indicated years.
The next line shows the re-estimated liability as of December 31, 2002. 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 may not be appropriate to extrapolate
future redundancies or deficiencies based on these tables.
NSA GROUP
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liability for unpaid losses
and loss adjustment expenses:
As originally estimated $262 $385 $489 $569 $511 $525 $589 $543 $627 $608 $571
As re-estimated at
December 31, 2002 230 347 494 567 532 534 544 508 634 609 N/A
Liability re-estimated:
One year later 89.0% 89.6% 96.8% 97.8% 99.5% 100.8% 95.0% 95.3% 98.5% 100.2%
Two years later 87.0% 89.3% 100.4% 98.6% 101.9% 103.3% 93.6% 92.9% 101.1%
Three years later 87.5% 89.7% 101.1% 99.2% 104.7% 102.5% 91.0% 93.6%
Four years later 87.3% 90.2% 100.9% 100.3% 104.3% 100.9% 92.5%
Five years later 87.8% 90.1% 101.5% 100.0% 103.5% 101.7%
Six years later 88.0% 90.4% 101.3% 99.5% 103.9%
Seven years later 88.3% 90.6% 100.9% 99.7%
Eight years later 88.4% 90.1% 101.0%
Nine years later 87.9% 90.1%
Ten years later 87.9%
Cumulative deficiency
(redundancy): (12.1%) ( 9.9%) 1.0% ( .3%) 3.9% 1.7% ( 7.5%) ( 6.4%) 1.1% 0.2% N/A
======= ====== ==== ======= ==== ==== ======= ======= ==== ==== ====
Cumulative paid as of:
One year later 59.9% 58.8% 64.1% 63.8% 62.9% 59.3% 54.5% 53.0% 53.5% 51.5%
Two years later 76.1% 76.9% 87.2% 85.0% 83.9% 81.3% 73.2% 69.6% 76.6%
Three years later 82.1% 84.6% 95.2% 93.2% 94.3% 90.8% 80.6% 81.4%
Four years later 84.9% 87.5% 98.2% 96.6% 98.7% 94.8% 86.5%
Five years later 86.2% 88.7% 99.6% 98.3% 100.4% 98.0%
Six years later 86.9% 89.4% 100.5% 98.4% 101.9%
Seven years later 87.3% 89.9% 100.3% 98.8%
Eight years later 87.7% 89.6% 100.6%
Nine years later 87.3% 89.8%
Ten years later 87.5%
</TABLE>
The following is a reconciliation of the NSA Group's net liability to the
gross liability for unpaid losses and loss adjustment expense.
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
As originally estimated:
Net liability shown above $262 $385 $489 $569 $511 $525 $589 $543 $627 $608 $571
Add reinsurance
recoverables 7 11 7 5 12 6 10 10 13 37 33
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Gross liability $269 $396 $496 $574 $523 $531 $599 $553 $640 $645 $604
==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ====
As re-estimated at December 31, 2002:
Net liability shown above $230 $347 $494 $567 $532 $534 $544 $508 $634 $609
Add reinsurance
recoverables 12 16 8 6 17 13 16 18 16 40
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Gross liability $242 $363 $502 $573 $549 $547 $560 $526 $650 $649 N/A
==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ===
Gross cumulative deficiency
(redundancy) (9.9%) (8.3%) 1.2% (0.3%) 4.9% 2.9% (6.7%) (4.9%) 1.5% 0.7% N/A
==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ===
</TABLE>
During 2002, the NSA Group settled for $5.1 million a state class
action lawsuit involving the issue of whether there is an inherent diminished
value in a damaged automobile that should be accounted for when calculating
claim payments. The settlement increased the reserve deficiency for the 2001
calendar year-end reserves by $5.1 million. Excluding this, Infinity's NSA
Group experienced an overall redundancy for the calendar year-end 2001
reserves of about $4 million.
6
<PAGE>
The following table presents the development of loss reserves for the
Assumed Agency Business (in millions). 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
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liability for unpaid losses
and loss adjustment expenses:
As originally estimated $170 $171 $181 $189 $213 $190 $150 $118 $106 $116 $126
As re-estimated at
December 31, 2002 157 184 203 205 196 145 123 119 113 123 N/A
Liability re-estimated:
One year later 94.6% 104.2% 104.0% 114.4% 106.2% 88.9% 84.1% 102.9% 104.9% 106.3%
Two years later 94.6% 104.3% 114.1% 118.0% 99.3% 78.0% 86.2% 100.6% 106.9%
Three years later 92.0% 108.9% 115.7% 113.6% 93.9% 79.5% 82.3% 101.2%
Four years later 93.7% 109.4% 113.7% 110.2% 93.3% 76.6% 81.8%
Five years later 94.2% 108.2% 112.3% 109.3% 91.7% 76.6%
Six years later 93.4% 107.7% 111.1% 108.0% 92.2%
Seven years later 93.1% 106.7% 110.6% 108.7%
Eight years later 92.0% 106.1% 111.6%
Nine years later 91.5% 107.2%
Ten years later 92.6%
Cumulative deficiency
(redundancy): (7.8%) 7.3% 11.6% 8.7% (7.8%) (23.4%) (18.2%) 1.2% 6.9% 6.3% N/A
====== ====== ====== ====== ====== ======= ======= ===== ===== ===== ===
Cumulative paid as of:
One year later 50.0% 56.7% 60.5% 57.6% 51.4% 37.8% 38.6% 47.5% 47.0% 43.6%
Two years later 71.1% 81.3% 85.7% 86.0% 71.1% 55.2% 57.9% 69.5% 70.8%
Three years later 81.8% 94.9% 100.7% 97.7% 80.6% 65.2% 69.4% 83.3%
Four years later 88.3% 103.0% 106.4% 102.6% 85.6% 70.2% 75.3%
Five years later 91.8% 105.3% 108.9% 104.5% 88.1% 73.3%
Six years later 92.4% 106.5% 108.8% 105.8% 90.2%
Seven years later 92.8% 105.2% 109.5% 107.4%
Eight years later 91.1% 105.8% 111.0%
Nine years later 91.5% 107.2%
Ten years later 92.6%
</TABLE>
For the Assumed Agency Business, the internal actuarial staff
evaluates reserves quarterly by accident year and in most instances on a
countrywide basis. In 2002, the year-end 2001 reserves for the Assumed Agency
Business developed adversely by about $7 million, mostly from accident year
2001. The adverse development related primarily to higher average claims
frequency on business written in New Jersey and Pennsylvania.
INVESTMENTS
GENERAL
Infinity employs a conservative approach to investment and capital
management intended to ensure that there is sufficient capital to support all
the insurance premium that it can profitably write. The investment portfolio
is managed by American Money Management Corporation, a wholly-owned subsidiary
of AFG. Infinity's board of directors sets investment guidelines and
periodically reviews the portfolio performance for compliance with such
guidelines.
7
<PAGE>
The following table presents the percentage distribution of the NSA Group's
year end investment portfolio (excluding investment in equity securities of
affiliate corporations). The December 31, 2002 percentage distribution of the
NSA Group's investment portfolio was adjusted to include the investments
transferred to Infinity (approximately $125 million) in connection with the
January 1, 2003 acquisition of GAI's Assumed Agency Business.
<TABLE>
<CAPTION>
2002 2001 2000
---- ---- ----
<S> <C> <C> <C>
Cash and Cash Equivalents 8.3% 5.1% 13.4%
Fixed Maturities:
U.S. Government and Agencies 7.9 8.9 4.7
State and Municipal 5.6 4.2 4.1
Public Utilities 10.7 10.7 9.1
Mortgage-Backed Securities 12.3 11.7 8.0
Corporate and Other 49.7 54.8 56.5
Redeemable Preferred Stocks .8 .6 .4
----- ----- -----
87.0 90.9 82.8
Net Unrealized Gains (Losses) 3.2 .2 (1.2)
----- ----- -----
90.2 91.1 81.6
Equity Securities 1.5 3.8 5.0
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
The following table presents the yields of the NSA Group's investment portfolios
as reflected in the financial statements.
<TABLE>
<CAPTION>
2002 2001 2000
---- ---- ----
<S> <C> <C> <C>
Yield on Fixed Income Securities:
Excluding realized gains and losses 6.4% 6.7% 6.7%
Including realized gains and losses 6.3% 6.8% 6.3%
Yield on Equity Securities:
Excluding realized gains and losses 3.4% 2.8% 2.7%
Including realized gains and losses (12.6%) (10.7%) 0.8%
Yield on All Investments:
Excluding realized gains and losses 6.3% 6.6% 6.5%
Including realized gains and losses 5.7% 6.1% 6.0%
</TABLE>
FIXED MATURITY INVESTMENTS
Infinity's fixed maturity portfolio is invested primarily in taxable
bonds. The NAIC assigns quality ratings which range from Class 1 (highest
quality) to Class 6 (lowest quality). The following table shows Infinity's
bonds and redeemable preferred stocks, by NAIC designation and comparable
Standard & Poor's Corporation rating as of December 31, 2002. The table also
includes $114.6 million in fixed maturity investments that were transferred to
Infinity in connection with the January 1, 2003 acquisition of GAI's Assumed
Agency Business.
<TABLE>
<CAPTION> Market Value
NAIC Amortized -----------------
Rating Comparable S&P Rating Cost Amount %
------ --------------------- --------- -------- ---
<S> <C> <C> <C>
1 AAA, AA, A $ 646.6 $ 681.4 64%
2 BBB 286.3 298.8 28
--------- -------- ---
Total investment grade 932.9 980.2 92%
--------- -------- ---
3 BB 63.2 55.3 5
4 B 30.2 29.6 3
5 CCC, CC, C 3.6 3.3 *
6 D 1.8 1.7 *
--------- -------- ---
Total noninvestment grade 98.8 89.9 8%
--------- -------- ---
Total $ 1,031.7 $1,070.1 100%
========= ======== ===
</TABLE>
-------------------
(*) Less than 1%
Fixed income investment funds are generally invested in securities
with short-term and intermediate-term maturities with an objective of
optimizing total return while allowing flexibility to react to changes in
market conditions and maintaining sufficient liquidity to meet policyholder
obligations. At December 31, 2002, the average life of Infinity's fixed
maturities was about 5 years. See Note C to the
8
<PAGE>
financial statements for the composition of Infinity's fixed income portfolio
by scheduled maturity.
For additional information regarding Infinity's investment portfolio
and results, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources - Investments."
RATINGS
A.M. Best has currently assigned Infinity's insurance company
subsidiaries a group rating of "A (Excellent)". According to A.M. Best, "A"
ratings are assigned to insurers which have, on balance, "excellent balance
sheet strength, operating performance and business profile" when compared to
the standards established by A.M. Best and, in A.M. Best's opinion, "have an
excellent ability to meet their ongoing obligations to policyholders."
REGULATORY ENVIRONMENT
Infinity's insurance company subsidiaries are generally subject to
regulation and supervision by insurance departments of the jurisdictions in
which they are domiciled or licensed to transact business. State insurance
departments have broad administrative power relating to licensing insurers and
agents, regulating premium rates and policy forms, establishing reserve
requirements, prescribing statutory accounting methods and the form and
content of statutory financial reports, regulating certain transactions
involving the insurers and prescribing the type and amount of investments.
Under state insolvency and guaranty laws, regulated insurers can be assessed
or required to contribute to state guaranty funds to cover policyholder losses
resulting from insurer insolvencies. Insurers are also required by many
states, as a condition of doing business in the state, to participate in
various assigned risk pools, reinsurance facilities or underwriting
associations which provide various insurance coverages to individuals that
otherwise are unable to purchase that coverage in the voluntary market.
Participation in these involuntary plans is generally in proportion to
voluntary writings of related lines of business in that state. The
underwriting results of these plans traditionally have been unprofitable. The
amount of premiums Infinity might be required to assume in a given state in
connection with an involuntary plan may be reduced because of credits Infinity
may receive for nonstandard policies that it writes voluntarily. Many states
have laws and regulations that limit an insurer's ability to exit a market.
For example, certain states limit an automobile insurer's ability to cancel
and non-renew policies.
The insurance laws of the states of domicile of Infinity's insurance
subsidiaries contain provisions to the effect that the acquisition or change
of "control" of a domestic insurer or of any person that controls a domestic
insurer cannot be consummated without the prior approval of the relevant
insurance regulator. In general, a presumption of "control" arises from the
ownership, control, possession with the power to vote or possession of proxies
with respect to a specified percentage (generally 10%) or more of the voting
securities of a domestic insurer or of a person that controls a domestic
insurer. In addition, certain state insurance laws contain provisions that
require pre-acquisition notification to state agencies of a change in control
with respect to a non-domestic insurance company licensed to do business in
that state. While such pre-acquisition notification statutes do not authorize
the state agency to disapprove the change of control, such statutes do
authorize certain remedies, including the issuance of a cease and desist order
with respect to the non-domestic insurer if certain conditions exist, such as
undue market concentration. Such approval requirements may deter, delay or
prevent certain transactions affecting the ownership of Infinity's Common
Stock.
Infinity is a holding company with no business operations of its own.
Consequently, Infinity's ability to pay dividends to shareholders and meet its
debt payment obligations is largely dependent on dividends or other
distributions from its insurance company subsidiaries. State insurance laws
restrict the ability of Infinity's insurance company subsidiaries to declare
shareholder dividends. These subsidiaries may not make an "extraordinary
dividend" until thirty days after the applicable commissioner of insurance has
received notice of the intended dividend and has not objected in such time or
the commissioner has approved the payment of
9
<PAGE>
the extraordinary dividend within the 30 day period. An extraordinary dividend
is defined as any dividend or distribution that, together with other
distributions made within the preceding twelve months, exceeds the greater of
10% of the insurer's surplus as of the preceding December 31, or the insurer's
net income for the twelve-month period ending the preceding December 31, in
each case determined in accordance with statutory accounting practices. In
addition, an insurer's remaining surplus after payment of a cash dividend to
shareholder affiliates must be both reasonable in relation to its outstanding
liabilities and adequate to its financial needs.
Generally, the net admitted assets of insurance companies that,
subject to other applicable insurance laws and regulations, are available for
transfer to the parent company cannot include the net admitted assets required
to meet the minimum statutory surplus requirements of the states where the
companies are licensed. The maximum dividends payable during 2003 to Infinity
by its insurance companies without seeking regulatory approval is
approximately $51 million.
State insurance law requires Infinity's insurance companies to
maintain specified levels of statutory capital and surplus. In addition, for
competitive reasons, Infinity's insurance company subsidiaries need to
maintain adequate financial strength ratings from independent rating agencies.
Both of these factors may limit the ability of Infinity's insurance
subsidiaries to declare and pay dividends.
ITEM 2
PROPERTIES
Infinity's insurance subsidiaries lease approximately 680,000 square
feet of office space in numerous cities throughout the United States. Most of
these leases expire within 8 years. The most significant leased office spaces
are located in suburban Atlanta, Birmingham (Infinity's principal office),
Cincinnati, Windsor (Connecticut) and Los Angeles. An Infinity subsidiary also
owns a 46,000 square foot office building in Dallas.
ITEM 3
LEGAL PROCEEDINGS
Infinity's subsidiaries are, from time to time, named as defendants
in various lawsuits incidental to its insurance business. There are currently
class action lawsuits pending against the Company in various state courts that
involve disputes over methods used to calculate claim payments on vehicles
determined to be a total loss, the assessment of nonpayment cancellation fees,
and interpretations of state mandated fee schedules under no fault insurance
laws. Also pending are lawsuits that seek extra contractual damages in
addition to damages claimed under insurance policies. Based on information
currently known by the Company and the status of these lawsuits, management
believes that the subsidiaries' ultimate liability in these actions, if any,
will not have a material adverse effect on the Company's results of
operations, liquidity or financial position.
10
<PAGE>
PART II
ITEM 5
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Infinity issued 100 shares of Common Stock to American Premier
Underwriters, Inc. ("APU"), a 100%-owned subsidiary of AFG, in connection with
the formation of Infinity in September 2002. On December 31, 2002, Infinity
issued an additional 900 shares of Common Stock to APU in exchange for the
capital stock of the NSA Group companies. In January 2003, Infinity increased
its authorized capital stock to 50,000,000 shares of Common Stock and
10,000,000 shares of Preferred Stock and implemented a common stock split.
After the stock split, Infinity had 20,347,083 shares of Common Stock
outstanding. No Preferred Stock has been issued.
AFG completed an initial public offering of Infinity's Common Stock
in February of 2003. Because virtually all shares are being held in nominee
names for beneficial owners following the public offering, there were only
seven registered holders of record at March 15, 2003. Infinity's Common Stock
is listed and traded on the NASDAQ under the symbol IPCC. Infinity intends to
pay a quarterly dividend of $.055 per share beginning in the second quarter of
2003.
EQUITY COMPENSATION PLAN INFORMATION
<TABLE>
<CAPTION>
Number of securities Number of securities
issued as available for future
restricted shares or issuance under equity
to be issued upon Weighted-average compensation plans
exercise of exercise price of (excluding securities
Equity Compensation Plans outstanding options outstanding options reflected in column (a))
- ------------------------- -------------------- ------------------- ------------------------
<S> <C> <C> <C>
(a) (b) (c)
Approved by shareholders none n/a 2,500,000 (1)
Not approved by
shareholders none n/a none
</TABLE>
(1) In 2002, Infinity established and its sole shareholder approved a stock
option plan and a restricted stock plan to enable it to attract and
motivate employees and to align their interests with those of Infinity's
shareholders.
11
<PAGE>
ITEM 6
SELECTED FINANCIAL DATA
At December 31, 2002, AFG transferred the NSA Group to Infinity.
Financial information for periods prior to the date of transfer represents the
combined information of the NSA Group. Infinity also acquired the Assumed
Agency Business from GAI through a reinsurance transaction effective January
1, 2003. The historical financial information shown below (in millions) as of
and for each of the four years ended December 31, 2002 was derived from
audited financial statements. Data as of and for the year ended December 31,
1998 was derived from unaudited financial statements which include all
adjustments, consisting of normal recurring accruals, that management
considers necessary for a fair presentation of the financial position and
results of operations for those periods.
<TABLE>
<CAPTION>
(unaudited)
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
INFINITY
Earnings Statement Data:
Earned Premiums $ 645.9(a) $ 916.4(a) $1,043.3 $944.5 $1,156.7
Total Revenues 704.5 990.0 1,110.8 1,044.9 1,244.8
Operating Earnings (Loss) before
Income Taxes 70.9 15.8 (58.9) 81.6 94.2
Net Earnings (Loss) 45.9 9.7 (50.1) 50.9 64.0
Balance Sheet Data:
Cash and Investments $1,061.3 $1,188.1 $1,216.2 $1,095.6 $1,276.7
Total Assets 1,545.2 1,760.4 1,787.9 1,594.9 1,778.4
Unpaid Losses and Loss Adjustment
Expenses 604.0 645.2 640.3 553.3 599.5
Total Liabilities 1,158.4 1,197.6 1,173.7 1,060.9 1,136.7
Shareholder's Equity 386.8 562.8 614.2 534.0 641.7
ASSUMED AGENCY BUSINESS
Earnings Statement Data:
Earned Premiums $ 107.2(b) $ 149.9 $128.9 $138.5 $148.2
Underwriting Gain (Loss) (10.0) (14.7) (3.6) 18.6 19.4
Balance Sheet Data:
Assets (excluding Investments)
to be Transferred $ 53.5 $ 78.8 $ 65.2 $ 55.4 $ 62.1
Investments to be Transferred 125.3 - - - -
Unpaid Losses and Loss Adjustment
Expenses 125.6 115.9 105.9 118.3 150.5
Liabilities to be Transferred 178.8 200.5 173.3 183.1 222.2
</TABLE>
(a) The decline in earned premiums during 2001 and 2002 is due primarily to a
reinsurance agreement pursuant to which Infinity ceded 90% of the
automobile physical damage business written by it as more fully discussed
in "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(b) The decline in earned premiums during 2002 reflects the inclusion of the
Assumed Agency Business in the reinsurance agreement discussed above
effective January 1, 2002.
12
<PAGE>
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Following is a discussion and analysis of the financial statements of
Infinity and the financial statements of the agency business that Infinity
assumed from GAI on January 1, 2003. Together, these businesses comprise
Infinity's operations going forward. References in this discussion to Infinity
include the NSA Group and the Assumed Agency Business unless the context
indicates otherwise. This discussion should be read in conjunction with the
audited financial statements beginning on page F-1.
Infinity was incorporated in the state of Ohio in September 2002 as
an indirect wholly-owned subsidiary of AFG. On December 31, 2002, AFG
transferred to Infinity all of the outstanding common stock of the following
personal auto insurance subsidiaries: Atlanta Casualty Company, Infinity
Insurance Company, Leader Insurance Company and Windsor Insurance Company
(collectively the "NSA Group").
Through a reinsurance transaction effective January 1, 2003, Infinity
acquired the Assumed Agency Business consisting of the personal lines business
written through independent agents by AFG's principal property and casualty
subsidiary, GAI. The Assumed Agency Business had net earned premiums of $107
million in 2002 consisting primarily of standard and preferred private
passenger automobile insurance. The Assumed Agency Business is not included in
Infinity's historical financial statements.
The acquisition of the NSA Group has been accounted for, and the
assumption of the Assumed Agency Business will be accounted for, at AFG's
historical carrying amounts as transfers of net assets between entities under
common control in accordance with Statement of Financial Accounting Standards
No. 141.
CRITICAL ACCOUNTING POLICIES
Significant accounting policies are summarized in Note B to the
financial statements. The preparation of financial statements in conformity
with generally accepted accounting principles 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 and
the determination of "other than temporary" impairment on investments are the
two areas where the degree of judgment required to determine amounts recorded
in the financial statements make the accounting policies critical. These two
policies are discussed below under the headings "Liquidity and Capital
Resources - Investments" and "Liquidity and Capital Resources -Uncertainties."
LIQUIDITY AND CAPITAL RESOURCES
RATIOS The National Association of Insurance Commissioners' model law
for risk based capital ("RBC") provides formulas to determine the amount of
capital that an insurance company needs to ensure that it has an acceptable
expectation of not becoming financially impaired. At December 31, 2002, the
capital ratios of all Infinity insurance companies substantially exceeded the
RBC requirements.
SOURCES 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 principal and interest on borrowings, shareholder dividends, and
taxes. Funds to meet these obligations will come primarily from dividend and
tax payments from Infinity's insurance subsidiaries.
13
<PAGE>
Under the state insurance laws, dividends and capital distributions
from insurance companies are subject to restrictions relating to statutory
surplus and earnings. The maximum amount of dividends payable during 2003
without regulatory approval by Infinity's insurance subsidiaries is $51
million.
Following the completion of the public offering in February of 2003,
Infinity plans to file consolidated federal income tax returns including all
80%-owned U.S. subsidiaries. Under tax allocation agreements with Infinity,
its eligible subsidiaries will compute tax provisions as if filing separate
returns based on book taxable income computed in accordance with generally
accepted accounting principles. The resulting provision (or credit) will be
currently payable to (or receivable from) Infinity.
Infinity intends to establish a bank credit line in 2003 that will
provide resources to meet liquidity requirements. However, if these funds and
funds generated from operations, including dividends and tax payments from its
insurance subsidiaries, are insufficient to meet fixed charges in any period,
Infinity would have to generate cash through alternative methods of financing,
sales of assets, or similar transactions.
Infinity's insurance subsidiaries generate liquidity primarily by
collecting and investing premiums in advance of paying claims. Infinity had
positive cash flow from operations of approximately $45 million in 2002, $33
million in 2001 and $25 million in 2000.
QUOTA SHARE AGREEMENT Effective April 2001, Infinity's insurance
subsidiaries entered into a reinsurance agreement with Inter-Ocean Reinsurance
Limited, under which Infinity's subsidiaries agreed to cede 90% of its
personal auto physical damage business on a funds withheld basis for policies
written from April 1, 2001 to December 31, 2002. Infinity has renewed this
agreement for 2003 on terms substantially equivalent to those in effect in
2002. Infinity has the flexibility in 2003 to adjust, on a quarterly basis,
the percentage of business to be ceded under the reinsurance agreement. The
percentage ceded may be reduced from the current level of 90% to as low as
20%. No adjustments with respect to future quarters can be predicted at this
time but will be determined based on business conditions. Premiums ceded under
this agreement from inception through December 31, 2001, and for the year
ended December 31, 2002, were $219.5 million and $296.1 million, respectively.
The Inter-Ocean reinsurance agreement also includes coverage of GAI's
personal lines business written through independent agents for policies in
effect since January 1, 2002, and unearned premium at December 31, 2001 that
Infinity would otherwise assume as part of the Assumed Agency Business.
Accordingly, GAI's participation in the Inter-Ocean reinsurance agreement
reduces the size of the Assumed Agency Business. Premiums ceded by GAI under
this agreement were $78.5 million in 2002.
INVESTMENTS Infinity's investment portfolio at December 31, 2002,
contained $956 million in fixed maturity securities and $18 million in equity
securities, all carried at market value with unrealized gains and losses
reported as a separate component of shareholder's equity on an after-tax
basis. At December 31, 2002, Infinity had a pretax net unrealized gain of
$38.5 million on fixed maturities and a pretax unrealized loss of $1.5 million
on equity securities.
Approximately 91% of the fixed maturities that Infinity holds were
rated "investment grade" (credit rating of AAA to BBB) by nationally
recognized rating agencies at December 31, 2002. Investment grade securities
generally bear lower yields and lower degrees of risk than those that are
unrated or noninvestment grade.
Investments in mortgage-backed securities ("MBSs") represented
approximately one-seventh of Infinity's fixed maturities at December 31, 2002.
MBSs are subject to significant prepayment risk due to the fact that, in
periods of declining interest rates, mortgages may be repaid more rapidly than
scheduled as borrowers refinance higher rate mortgages to take advantage of
lower rates. Due to the significant decline in the general level of interest
rates in 2002, Infinity has experienced an increase in the level of
prepayments on its MBSs; these prepayments have not been reinvested at
interest rates comparable to the rates earned on the prepaid MBSs.
Approximately 95% of Infinity's MBSs are rated "AAA" and all are investment
grade.
14
<PAGE>
Summarized information for securities with unrealized gains and losses
in Infinity's balance sheet at December 31, 2002 is shown in the following
table (dollars in millions). Approximately $1.6 million of "Fixed Maturities"
and $883,000 of "Equity Securities" had no unrealized gains or losses at
December 31, 2002.
<TABLE>
<CAPTION>
Securities Securities
With With
Unrealized Unrealized
Gains Losses
---------- ----------
<S> <C> <C>
Fixed Maturities
Market value of securities $844.8 $109.2
Amortized cost of securities $793.9 $121.6
Gross unrealized gain (loss) $ 50.9 ($ 12.4)
Market value as a % of amortized cost 106.4% 89.8%
Number of security positions held 345 61
Number individually exceeding $500,000 gain or loss 14 6
Concentration of gains (losses) by type or industry
(exceeding 5% of unrealized):
Mortgage-backed securities $ 6.1 ($ .4)
Banks 4.7 (.2)
U.S. Government and government agencies 4.1 -
State, municipalities and political subdivisions 3.8 (.1)
Electric services 2.3 (1.8)
Natural gas transmission and distribution 1.2 (.9)
Air transportation .4 (4.7)
Percentage rated investment grade 98% 44%
Equity Securities
Market value of securities $ 1.0 $ 15.7
Cost of securities $ .6 $ 17.6
Gross unrealized gain (loss) $ .4 ($ 1.9)
Market value as % of cost 166.7% 89.2%
Number individually exceeding $500,000 gain or loss - 1
</TABLE>
The table below sets forth the scheduled maturities of fixed maturity
securities at December 31, 2002 based on their market values. Securities that
do not have a single maturity date are reported at average maturity. Actual
maturities may differ from contractual maturities because certain securities
may be called or prepaid by the issuers.
<TABLE>
<CAPTION>
Securities Securities
With With
Unrealized Unrealized
Maturity Gains Losses
-------- ---------- ----------
<S> <C> <C>
One year or less 8% 8%
After one year through five years 32 41
After five years through ten years 37 38
After ten years 7 8
--- ---
84 95
Mortgage-backed securities 16 5
--- ---
100% 100%
=== ===
</TABLE>
Infinity realized aggregate losses of $5.9 million during 2002 on $34
million in sales of fixed maturity securities (12 issues; 9 issuers) that had
individual unrealized losses greater than $100,000 at December 31, 2001. The
market value of four of the securities did not change from December 31, 2001
to the sale date. Market values of three of the securities increased an
aggregate of $1.4 million from December 31, 2001 to date of sale. One of the
securities was a Qwest Communications bond that decreased in value by $2.2
million from December 31, 2001 to the date of sale due to the decline in
Qwest's financial condition. Market values of the remaining four securities
decreased an aggregate of $694,000 from December 31, 2001 to the sale date.
Although Infinity had the ability to continue holding these
investments, its intent to hold them changed due primarily to deterioration in
the issuers' credit-worthiness, decisions to lessen exposure to a particular
credit or industry, or decisions to modify asset allocation within the
portfolio.
15
<PAGE>
The table below (dollars in millions) summarizes the length of time
securities have been in an unrealized gain or loss position at December 31,
2002.
<TABLE>
<CAPTION>
Market
Aggregate Aggregate Value as
Market Unrealized % of Cost
Value Gain (Loss) Basis
<S> <C> <C> <C>
Fixed Maturities
SECURITIES WITH UNREALIZED GAINS:
Exceeding $100,000 at 12/31/02 and for:
Less than one year (160 issues) $556.7 $ 38.5 107.4%
More than one year (19 issues) 64.2 6.2 110.7
Less than $100,000 at 12/31/02 (166 issues) 223.9 6.2 102.8
------ --------
$844.8 $ 50.9 106.4%
====== ========
SECURITIES WITH UNREALIZED LOSSES:
Exceeding $100,000 at 12/31/02 and for:
Less than one year (22 issues) $ 40.5 $ ( 7.4) 84.6%
More than one year (12 issues) 24.1 (4.1) 85.5
Less than $100,000 at 12/31/02 (27 issues) 44.6 (.9) 98.0
------ --------
$109.2 $ ( 12.4) 89.8%
====== ========
Equity Securities
SECURITIES WITH UNREALIZED GAINS:
Exceeding $100,000 at 12/31/02 and for:
Less than one year (none) $ - $ - - %
More than one year (2 issues) .7 .4 233.3
Less than $100,000 at 12/31/02 (4 issues) .3 - 100.0
------ --------
$ 1.0 $ .4 166.7%
====== ========
SECURITIES WITH UNREALIZED LOSSES:
Exceeding $100,000 at 12/31/02 and for:
Less than one year (3 issues) $ 14.0 $ ( 1.0) 93.3%
More than one year (1 issue) .5 (.6) 45.5
Less than $100,000 at 12/31/02 (6 issues) 1.2 (.3) 80.0
------ --------
$ 15.7 $ ( 1.9) 89.2%
====== ========
</TABLE>
When a decline in the value of a specific investment is considered to
be "other than temporary", a provision for impairment is charged to earnings
(accounted for as a realized loss) and the cost basis of that investment 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:
- whether the unrealized loss is credit-driven or a result of
changes in market interest rates,
- the extent to which market 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,
- third party research and credit rating reports,
- internally generated financial models and forecasts,
- discussions with issuer management, and
- ability and intent to hold the investment for a period of
time sufficient to allow for any anticipated recovery in
market value.
Based on its analysis of the factors enumerated above, management
believes (i) Infinity will recover its cost basis in the securities with
unrealized losses and (ii) that Infinity has the ability and intent to hold
the 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 impairment could be material to results of operations in a future
period. Management believes it is not likely that future impairment charges
will have a significant effect on Infinity's liquidity.
16
<PAGE>
Net realized gains (losses) on securities sold and charges for "other
than temporary" impairment on securities held were as follows (in millions):
<TABLE>
<CAPTION>
Net Realized
Gains (Losses) Charges for
on Sales Impairment Other Total
-------------- ----------- -------- ------
<S> <C> <C> <C> <C>
2002 $ 3.0 ($ 9.4) ($.3)(a) ($6.7)
2001 10.3 (16.2) - (5.9)
2000 (2.4) (3.0) - (5.4)
</TABLE>
(a) Adjustments to reflect warrants at fair value.
Increased impairment charges in recent years reflect, among other
things, a rise in corporate defaults in the marketplace.
UNCERTAINTIES
INSURANCE RESERVES Liabilities for the costs of losses and loss
adjustment expenses for both reported and unreported claims are estimated
based on historical trends adjusted for changes in loss cost trends,
underwriting standards, policy provisions, product mix and other factors.
Estimating the liability for unpaid losses and loss adjustment expense is
inherently judgmental and is influenced by factors which are subject to
significant variation. Through the use of analytical reserve development
techniques, management monitors items such as the effect of inflation on
medical, hospitalization, material repair and replacement costs, general
economic trends and the legal environment. Adjustments to reserves are
reflected in the results of operations in the periods in which estimates
change.
EXPOSURE TO MARKET RISK Market risk represents the potential economic
loss arising from adverse changes in the fair value of financial instruments.
Infinity's exposures to market risk relate primarily to its investment
portfolio which is exposed to interest rate risk and, to a lesser extent,
equity price risk.
FIXED MATURITY PORTFOLIO The fair value of Infinity's fixed maturity
portfolio is directly impacted by changes in market interest rates. Infinity's
fixed maturity portfolio is comprised of substantially all fixed rate
investments with primarily short-term and intermediate-term maturities. This
practice allows flexibility in reacting to fluctuations of interest rates. The
portfolios of Infinity's insurance companies are managed with an attempt to
achieve an adequate risk-adjusted return while maintaining sufficient
liquidity to meet policyholder obligations.
The following table provides information about Infinity's fixed
maturity investments at December 31, 2002 and 2001, that are sensitive to
interest rate risk. The table shows expected principal cash flows (in
millions) and related weighted average interest rates by expected maturity
date for each of the five subsequent years and collectively for all years
thereafter. Callable bonds and notes are included based on call date or
maturity date depending upon which date produces the most conservative yield.
Mortgage-backed securities ("MBSs") and sinking fund issues are included based
on maturity year adjusted for expected payment patterns. Actual cash flows may
differ from those expected.
<TABLE>
<CAPTION>
December 31, 2002 December 31, 2001
---------------------- ---------------------
Principal Principal
Cash Flows Rate Cash Flows Rate
---------- ---- ---------- ----
<S> <C> <C> <C> <C> <C>
2003 $105.0 6.7% 2002 $ 63.7 7.5%
2004 76.6 7.1 2003 143.9 7.1
2005 122.9 6.4 2004 89.1 7.0
2006 100.3 6.5 2005 119.4 6.6
2007 97.9 6.6 2006 137.1 6.3
Thereafter 404.1 6.2 Thereafter 523.1 6.8
------ --------
Total $906.8 6.4% Total $1,076.3 6.8%
====== ========
Fair Value $955.6 Fair Value $1,082.8
====== ========
</TABLE>
17
<PAGE>
EQUITY PRICE RISK Equity price risk is the potential economic loss
from adverse changes in equity security prices. Although Infinity's investment
in equity securities is only 2% of total investments, it is concentrated in a
relatively limited number of positions; approximately four-fifths of the total
is in three investments. While this approach allows management to more closely
monitor the companies and industries in which they operate, it does increase
risk exposure to adverse price declines in a major position.
RESULTS OF OPERATIONS
UNDERWRITING Infinity's insurance subsidiaries sell nonstandard, standard and
preferred personal auto insurance and, to a lesser extent, nonstandard
commercial auto coverage and a complement of other personal lines insurance
products. Nonstandard coverage is a product designed for drivers who, due to
their driving record, age or vehicle type, represent higher than normal risks
and pay higher rates for comparable coverage.
Underwriting profitability is measured by the combined ratio which is
a sum of the ratios of losses, loss adjustment expenses ("LAE") and
underwriting expenses to earned premiums. 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 or federal
income taxes.
While losses on claims reported are generally determinable, the
process of determining overall loss and LAE reserves is also highly dependent
upon the use of estimates in the case of losses incurred or expected but not
yet reported or developed. Actuarial procedures and projections are used to
obtain "best estimates" which are then included in the overall results. These
estimates are subject to changes in claim amounts and frequency and are
periodically reviewed and adjusted as additional information becomes known. In
accordance with industry practices, such adjustments are reflected in current
year underwriting results. As a result, the ratio of loss and LAE expenses
component of the combined ratio includes development of prior year reserves in
addition to provision for losses and LAE occurring in the current year.
Underwriting expenses include expenses that vary directly with
premium volume (commissions and premium taxes) as well as expenses that are
relatively fixed (administrative expenses). Accordingly, underwriting expenses
tend to move in the same direction as premiums but at a slower rate. As a
result, the underwriting expense ratio tends to decrease when premiums grow
and increase when premiums decline.
Since early 2000, Infinity's insurance subsidiaries have been
increasing their premium rates with a goal of achieving underwriting profits,
even if it entails foregoing volume. Management expects rate increases to
continue during 2003 but at a reduced pace and level. As with all property and
casualty companies, the beneficial impact of these price increases is
reflected in Infinity's financial results over time. Infinity implements price
increases on its in-force policies as they are renewed, which generally takes
between six and twelve months for the entire book of business. Infinity
recognizes increased premiums on particular policies as the premiums are
earned, generally over the course of the six to twelve months after the policy
is effective.
18
<PAGE>
Net earned premiums and combined ratios for Infinity and the Assumed
Agency Business were as follows (dollars in millions):
<TABLE>
<CAPTION>
2002 2001 2000
---- ---- ----
<S> <C> <C> <C>
Net Earned Premiums (GAAP)
Infinity:
Gross written premiums $ 914.6 $ 962.3 $1,077.7
Ceded reinsurance (301.6) (224.7) (3.8)
------- ------- --------
Net written premiums 613.0 737.6 1,073.9
Change in unearned premiums 32.9 178.8 (30.6)
------- ------- --------
Net earned premiums $ 645.9 $ 916.4 $1,043.3
======= ======= ========
Assumed Agency Business:
Net written premiums (a) $ 74.3 $ 165.3 $ 133.1
Change in unearned premiums 32.9 (15.4) (4.2)
------- ------- --------
Net earned premiums $ 107.2 $ 149.9 $ 128.9
======= ======= ========
Combined Ratios (GAAP)
Infinity:
Loss and LAE ratio 81.8% 82.1% 87.8%
Underwriting expense ratio 12.2 22.1 22.0
Combined ratio 94.0% 104.2% 109.8%
Assumed Agency Business:
Loss and LAE ratio 84.9% 81.2% 72.4%
Underwriting expense ratio 24.4 28.6 30.4
Combined ratio 109.3% 109.8% 102.8%
Weighted Average of Infinity and Agency:
Loss and LAE ratio 82.2% 82.0% 86.1%
Underwriting expense ratio 13.9 22.9 22.9
Combined ratio 96.1% 104.9% 109.0%
</TABLE>
(a) Under a reinsurance agreement entered into with GAI, Infinity's
insurance subsidiaries assumed net written premiums from GAI.
Accordingly, gross written premiums and net written premiums are
the same.
2002 COMPARED TO 2001 Infinity's net earned premiums decreased $271
million (30%) during 2002 due primarily to the Inter-Ocean reinsurance
agreement, effective April 1, 2001, under which Infinity ceded 90% of the
personal automobile physical damage business written by its insurance
subsidiaries during 2002. Excluding the effect of this agreement, net earned
premiums declined approximately 9%, reflecting lower business volume partially
offset by the impact of rate increases. Policies in force declined 16% from
approximately 734,000 on December 31, 2001 to 616,000 on December 31, 2002.
The decline in policy counts is due to rate increases and actions taken to
reduce business in certain non-focus or non-profitable states as well as
decisions by insureds not to renew. During 2002, Infinity increased personal
auto rates about 12% over rates in effect at year end 2001. Underwriting
expenses in 2002 include the effect of $130.4 million in ceding commissions
earned under the Inter-Ocean reinsurance agreement. Commissions earned under
this agreement generally vary directly with the loss and LAE ratio on the
business ceded. Accordingly, Infinity's expense ratio reflects the benefit of
strong underwriting results in the business ceded to Inter-Ocean. Overall,
Infinity's combined ratio improved 10.2 points over 2001 due primarily to
recent rate increases. Excluding the effect of the Inter-Ocean agreement,
Infinity's combined ratio for 2002 was 95.9% compared to 103.7% in 2001.
Net earned premiums of the Assumed Agency Business decreased $43
million (28%) in 2002 reflecting the impact of the Inter-Ocean reinsurance
agreement, effective January 1, 2002, under which 90% of GAI's personal
automobile physical damage business written through independent agents was
ceded. Excluding the effect of this agreement, net earned premiums increased
$12.1 million (8%) reflecting rate increases implemented in the later part of
2001, partially offset by a reduction in volume from certain unprofitable
business. The combined ratio was flat as an increase in prior year development
was offset by the shift away from underperforming business and the increase in
rates over the past year. Underwriting expenses fell $16.6 million in 2002
compared to 2001 reflecting GAI's $19.7 million ceding commission earned on
premiums ceded under the Inter-Ocean reinsurance agreement.
19
<PAGE>
2001 COMPARED TO 2000 Infinity's net earned premiums decreased $127
million (12%) in 2001 due primarily to the automobile physical damage
reinsurance agreement discussed above. Excluding the effect of the agreement,
net earned premiums were flat in 2001. Policies in force declined 19% as some
customers decided not to renew policies at higher rates. Infinity's insurance
subsidiaries increased personal auto rates approximately 15% in 2001. The 2001
combined ratio improved 5.6 points compared to 2000 as the effect of rate
increases in 2001 and 2000 more than offset a $5.1 million charge to write-off
policy-processing software that was not in use. Infinity's underwriting
expenses decreased $27 million (12%) during 2001 as the $38 million ceding
commission earned on the reinsurance agreement more than offset increased
salaries and employee-related expenses.
The $21 million (16%) increase in net earned premiums for the Assumed
Agency Business was due primarily to volume growth across numerous states
stemming from a 10% increase in new agents. The increase in the combined ratio
resulted from insufficient pricing on new business. The Assumed Agency
Business' underwriting expenses increased $3.6 million (9%) in 2001 primarily
due to increased commissions on higher premiums.
The remaining discussion of results of operations relates to
Infinity's Consolidated Statement of Operations.
INVESTMENT INCOME Changes in investment income reflect fluctuations in market
rates and changes in average invested assets. Fluctuations in average invested
assets reflect primarily the timing of dividends and capital contributions as
capital requirements and the cash needs of Infinity change.
The Assumed Agency Business represents a portion of GAI's personal
lines business and is not a separate legal entity; accordingly, it does not
have a separate investment portfolio and related investment income.
2002 COMPARED TO 2001 Net investment income decreased $14.0 million
in 2002 compared to 2001 due primarily to (i) a $4.6 million increase in
interest expense (included in net investment income) on funds held from the
aforementioned automobile reinsurance agreement (ii) a decrease in interest
rates and (iii) an 8% decrease in average invested assets. Average invested
assets decreased due primarily to dividends paid in the fourth quarter of 2001
and the last three quarters of 2002.
2001 COMPARED TO 2000 Net investment income increased $5.9 million in
2001 due primarily to a 12% increase in average invested assets in fixed
maturity securities, partially offset by $3.1 million in interest expense on
funds held from the Inter-Ocean reinsurance agreement discussed above. Average
invested assets increased due primarily to a capital contribution received in
the fourth quarter of 2000.
REALIZED GAINS (LOSSES) ON INVESTMENTS
2002 COMPARED TO 2001 Realized gains (losses) on investments include
provisions for other than temporary impairment of securities still held of
$9.4 million in 2002 and $16.2 million in 2001. Increased impairment charges
in recent years reflect, among other things, a rise in corporate defaults in
the marketplace.
Infinity owns warrants to buy the common stock of a publicly traded
company. Under generally accepted accounting principles, these investments are
considered derivatives and marked to market resulting in realized gains and
losses. Realized gains (losses) on investments include a loss of $281,000 in
2002 to adjust the carrying value of these warrants to their market value of
$883,000 at December 31, 2002.
2001 COMPARED TO 2000 Realized gains (losses) on investments include
provisions for other than temporary impairment of securities still held of
$16.2 million in 2001 and $3.0 million in 2000.
20
<PAGE>
OTHER OPERATING AND GENERAL EXPENSES
2002 COMPARED TO 2001 Other operating and general expenses for 2001
include goodwill amortization of $2.2 million. Under SFAS No. 142, which was
implemented January 1, 2002, goodwill is no longer amortized. Excluding 2001
goodwill amortization, other operating and general expenses increased $9.2
million due primarily to a $5.3 million litigation settlement.
2001 COMPARED TO 2000 Other operating and general expenses decreased
$4.6 million (19%) due primarily to a $3.7 million reduction in corporate
litigation expenses.
INCOME TAXES Infinity's effective tax rate was 35% in 2002, 38% in 2001 and
35% in 2000. See Note H to Infinity's financial statements for an analysis of
items affecting the effective tax rate.
EQUITY IN AFFILIATE LOSSES Equity in net losses of affiliates for 2000
represents Infinity's proportionate share of the results of Chiquita Brands
International, an affiliate of AFG during this period. Chiquita reported net
losses attributable to common shareholders of $112 million in 2000.
Equity in net losses of affiliates for 2000 also includes a $14.2
million pretax charge to writedown Infinity's investment in Chiquita to quoted
market value at December 31, 2000. In 2001, Infinity suspended accounting for
Chiquita under the equity method due to Chiquita's pending restructuring. In
March 2002, Chiquita completed its reorganization under Chapter 11 of the U.S.
Bankruptcy Code. All remaining shares held by Infinity after the restructuring
were sold in 2002.
RECENT ACCOUNTING STANDARDS In July 2001, the Financial Accounting Standards
Board issued SFAS No. 141, "Business Combinations", and No. 142, "Goodwill and
Other Intangible Assets". Under SFAS No. 141, business combinations initiated
after June 30, 2001 are required to be accounted for using the purchase method
of accounting. Under SFAS No. 142, goodwill is no longer amortized beginning
January 1, 2002, but is subject to an impairment test at least annually.
Infinity completed the transitional test for impairment in 2002 with no
writedown required. Other operating and general expenses for Infinity
includes goodwill amortization of $2.2 million in both 2001 and 2000. The
carrying value of goodwill at December 31, 2002, was $70.3 million for
Infinity and $5.0 million for the Assumed Agency Business.
21
<PAGE>
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 7A is included in Management's
Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<S> <C>
INFINITY PROPERTY AND CASUALTY CORPORATION:
Report of Independent Auditors F-1
Consolidated Balance Sheet:
December 31, 2002 and 2001 F-2
Consolidated Statement of Operations:
Years ended December 31, 2002, 2001, and 2000 F-3
Consolidated Statement of Changes in Shareholder's Equity:
Years ended December 31, 2002, 2001, and 2000 F-4
Consolidated Statement of Cash Flows:
Years ended December 31, 2002, 2001, and 2000 F-5
Notes to Financial Statements F-6
PERSONAL LINES AGENCY BUSINESS OF GREAT AMERICAN INSURANCE COMPANY:
Report of Independent Auditors F-16
Financial Statements F-17
Notes to Financial Statements F-18
</TABLE>
"Selected Quarterly Financial Data" has been included in Note I to the
Consolidated Financial Statements of Infinity Property and Casualty
Corporation and Note D to the Financial Statements of the Personal Lines
Agency Business of Great American Insurance Company.
22
<PAGE>
PART III
ITEM 10
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers, directors and other key employees are as follows:
<TABLE>
<CAPTION>
Age(1) Position
------ -----------------------------------------------
<S> <C> <C>
James R. Gober 51 Chief Executive Officer, President and Director
John R. Miner 42 Executive Vice President
Samuel J. Simon 46 Senior Vice President, General Counsel and
Secretary
Roger Smith 42 Senior Vice President and Chief Financial
Officer
Joseph A. Pietrangelo 37 Senior Vice President
Carl H. Lindner III 49 Chairman of the Board
Thomas A. Hayes (2)(3) 60 Director
Ethan Jackson (3)(4) 66 Director
Keith A. Jensen 51 Director
Gregory G. Joseph (2)(4) 40 Director
Gregory C. Thomas (2)(3)(4) 55 Director
</TABLE>
(1) As of March 1, 2003.
(2) Became a member of the Audit Committee upon completion of the public
offering in February of 2003. Mr. Thomas serves as Chairman of the Audit
Committee.
(3) Became a member of the Compensation Committee upon completion of the public
offering. Mr. Hayes serves as Chairman of the Compensation Committee.
(4) Became a member of the Nominating/Governance Committee upon completion of
the public offering. Mr. Joseph serves as Chairman of the
Nominating/Governance Committee.
James R. Gober was elected Chief Executive Officer and President and a
director in November 2002. Mr. Gober has served in various capacities with
Infinity's companies since 1978, including Director and President of Infinity
Insurance Company and subsidiaries, and most recently as Director, President and
Chief Executive Officer of each of the companies comprising the NSA Group. Since
1991, Mr. Gober has been the principal operating officer for some or all of the
companies within the NSA Group.
John R. Miner was elected Executive Vice President in September 2002. Mr.
Miner has served in various capacities with GAI since 1988, most recently as
President of GAI's personal lines division and Director and Senior Vice
President of GAI.
Samuel J. Simon was elected Secretary in September 2002 and Senior Vice
President and General Counsel in December 2002. Since October 1996, Mr. Simon
has served as Assistant General Counsel of AFG. From 1993 to October 1996, Mr.
Simon was Senior Vice President and General Counsel of Citicasters Inc., a
public company that was engaged primarily in the ownership and operation of
television and radio stations. Citicasters was formerly an affiliate of AFG.
Roger Smith was elected Senior Vice President and Chief Financial Officer
in September 2002. Mr. Smith has served in various capacities with GAI since
1989 including Controller and Vice President of GAI and most recently as Vice
President with responsibilities for Corporate Development.
Joseph A. Pietrangelo was elected Senior Vice President in September 2002.
Mr. Pietrangelo has served in various capacities with Infinity's companies since
1999, most recently as Senior Vice President -- Claims for the NSA Group and
GAI's personal lines. From 1997 to 1999, Mr. Pietrangelo was with Zurich/Farmers
Personal Insurance, and for ten years prior to such time, Mr. Pietrangelo served
in various capacities with The Progressive Corporation.
23
<PAGE>
Carl H. Lindner III was elected Chairman of the Board in September 2002.
For more than five years, Mr. Lindner has served as Co-President and a director
of AFG. For over ten years, Mr. Lindner has been principally responsible for
AFG's property and casualty insurance operations. Mr. Lindner is also a director
of American Financial Corporation ("AFC"). Carl H. Lindner III is the son of
Carl H. Lindner, who serves as Chairman of the Board of AFG and Great American
Financial Resources, Inc. ("GAFRI", a public company controlled by AFG) as well
as Chief Executive Officer of AFG. Carl H. Lindner III is also the brother of
Keith E. Lindner and S. Craig Lindner, both of whom serve as directors and
executive officers of AFG. S. Craig Lindner is also an executive officer and
director of GAFRI.
Thomas A. Hayes joined the board of directors upon completion of the public
offering. Mr. Hayes joined KMK Consulting Company, a Cincinnati, Ohio-based
business consulting firm, as Vice President in January 2002. From December 1998
to November 1999, Mr. Hayes served as Executive Vice President and Chief
Operating Officer of the Ohio Casualty Group, a public corporation. Prior to
that time, Mr. Hayes was employed in various positions by GAI including, among
others, General Counsel and President of the Commercial Division. Mr. Hayes also
serves as a member of the board of directors of U.S.I. Holding Corporation, a
distributor of insurance and financial products and services to businesses
throughout the United States.
Ethan Jackson joined the board of directors upon completion of the public
offering. For more than five years Mr. Jackson has been a private investor
serving as Chairman and Chief Executive Officer of Basic American Financial,
Inc., a private company not affiliated with AFG, which primarily manages family
holdings. Mr. Jackson spent the majority of his business career in real estate
development and commercial construction, specializing in the medical field. Mr.
Jackson is on the Board of Advisors to Indiana Mills and Manufacturing, Inc., a
private company specializing in safety equipment for the transportation
industry, and serves as Chairman of the Board of the Oral and Maxillofacial
Surgery Foundation.
Keith A. Jensen was elected a director in September 2002. Mr. Jensen has
served as a Senior Vice President of AFG since February 1999. He served as a
Senior Vice President of GAFRI from February 1997 until he was named Executive
Vice President of that company in May 1999. From 1975 until January 1997, Mr.
Jensen was employed by Deloitte and Touche LLP, an independent accounting firm,
having served as partner for the last 11 of those years.
Gregory G. Joseph joined the board of directors upon completion of the
public offering. Mr. Joseph is, and has been for over 10 years, a principal
executive officer and attorney for a number of family-owned, Cincinnati-based
automotive dealerships. He also serves on the advisory board to Xavier
University, Cincinnati, Ohio, and has served as President of the Greater
Cincinnati Auto Dealers Association. Mr. Joseph is the son of Ronald G. Joseph,
who serves as a director of GAFRI.
Gregory C. Thomas joined the board of directors upon completion of the
public offering. Mr. Thomas is currently retired after serving, from May 1990
through September 1996, as Executive Vice President and Chief Financial Officer
of Citicasters Inc., and prior to that, served in several capacities with Taft
Broadcasting Company and as a certified public accountant with Peat Marwick (now
KMPG Peat Marwick). From November 2000 to March 2002, Mr. Thomas served as a
director, chairman of the audit committee and a member of the compensation
committee of Chiquita Brands International, Inc., a leading international
marketer, producer and distributor of quality fresh fruits and vegetables and
processed foods. Both Citicasters and Chiquita were formerly affiliates of AFG.
24
<PAGE>
BOARD OF DIRECTORS
The board is divided into two classes of directors who serve for staggered
two-year terms. Infinity's initial Class I directors, whose terms expire in
2004, are James R. Gober, Ethan Jackson and Gregory G. Joseph. Infinity's
initial Class II directors, whose terms expire in 2005, are Thomas A. Hayes,
Keith A. Jensen, Carl H. Lindner III and Gregory C. Thomas. It is expected that
the composition (but not the number) of individuals serving as independent
directors will change prior to the expiration of the terms set forth above.
BOARD COMMITTEES
Following the completion of the public offering, Infinity's board of
directors appointed an audit committee, a compensation committee and a
nominating/governance committee. The audit committee is responsible for
selecting independent accountants, reviewing the results and scope of the
independent accountants' audit and the services provided by them, and reviewing
and evaluating Infinity's audit and control functions. The compensation
committee administers Infinity's stock plans, and makes recommendations
concerning salaries and incentive compensation for its employees and establishes
the compensation of its executive officers. The nominating/governance committee
selects the director nominees to stand for election at annual meetings of
shareholders and develops and recommends to the board a set of corporate
governance principles for the Company.
25
<PAGE>
ITEM 11
EXECUTIVE COMPENSATION
None of Infinity's officers received compensation from Infinity in 2002.
After the public offering, the compensation committee of Infinity's board of
directors will establish compensation and benefits for Infinity's executive
officers.
The following table sets forth information with respect to compensation
earned by Infinity's Chief Executive Officer and by its four other executive
officers for the fiscal years ended December 31, 2002 and 2001. All of the
compensation discussed below was paid by AFG or subsidiaries of AFG.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-term Compensation
------------------------------------- ---------------------------
Other Annual LTIP All Other
Name and Position Year Salary Bonus Compensation(a) Payouts(b) Compensation(c)
----------------- ---- ------ ----- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
James R. Gober 2002 $385,096 $250,000 $ 9,571 $352,850 $29,000
Chief Executive Officer 2001 362,020 162,500 10,182 208,725 28,400
and President
John R. Miner 2002 389,428 91,732 3,065 196,350 28,058
Executive Vice President 2001 383,334 171,407 8,683 - 28,400
Samuel J. Simon 2002 300,000 35,000 990 - 20,750
Senior Vice President and 2001 300,000 20,000 1,350 - 19,400
General Counsel
Roger Smith 2002 182,520 37,400 2,194 - 15,374
Senior Vice President and 2001 177,802 20,000 750 9,804 13,290
Chief Financial Officer
Joseph A. Pietrangelo 2002 205,961 50,000 400 - 14,996
Senior Vice President 2001 180,000 60,000 330 - 15,400
</TABLE>
- ------------
(a) Consists of automobile allowance and insurance premiums.
(b) Executives and other key employees of AFG insurance subsidiaries
participate in long-term incentive plans which reward profitable results
for individual business units based on targeted objectives for the unit
tied to long-term profitability. The plans generally measure cumulative
underwriting profit for the business unit over five years. Payment of
earned amounts is generally made over a three year period following the
term of the plan.
(c) Consists of retirement plan contributions but excludes options granted
under AFG's stock option plan which will immediately vest and remain
exercisable by the executives for a period of three years following
completion of this offering. See "Formation and Separation" in Item 13.
OPTION GRANTS IN LAST FISCAL YEAR
The following table shows 2002 grants to the above named executive officers
of options to purchase AFG common stock under the AFG Stock Option Plan:
<TABLE>
<CAPTION>
Number of Percent of Total
AFG Securities Options Granted Exercise
Underlying to AFG Employees Price Expiration
Options Granted(a) in Fiscal 2002 Per Share(b) Date
--------------- ---------------- --------- ----------
<S> <C> <C> <C> <C>
James R. Gober 17,500 1.7% $25.78 2/22/12
John R. Miner 17,500 1.7% 25.78 2/22/12
Samuel J. Simon 7,000 0.7% 25.78 2/22/12
Roger Smith 7,500 0.7% 25.78 2/22/12
Joseph A. Pietrangelo 5,000 0.5% 25.78 2/22/12
</TABLE>
(a) Following the completion of the offering, all options held by Infinity's
employees immediately vested and remain exercisable for a period of three
years.
(b) On December 31, 2002, the price of AFG common stock on the New York Stock
Exchange was $23.07.
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AGGREGATE OPTION EXERCISES TABLE
The following table shows the total number of shares underlying options for
AFG common stock exercised in 2002 and the value at December 31, 2002 of
outstanding options for AFG common stock held by Infinity's named executive
officers.
<TABLE>
<CAPTION>
Number of AFG Securities Value of Unexercised
AFG Shares Underlying Unexercised In-the-Money AFG
Acquired AFG Options at Year End Options at Year End (a)
on Value --------------------------- ----------------------------
Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
-------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James R. Gober 5,455 13,011 37,500 40,000 $39,300 $58,950
John R. Miner - - 48,500 39,500 39,300 58,950
Samuel J. Simon 1,000 9,725 13,200 16,500 9,870 19,650
Roger Smith - - 13,200 15,800 14,464 21,696
Joseph A. Pietrangelo - - 2,000 7,000 2,656 3,984
</TABLE>
(a) The value of unexercised in-the-money options is calculated based on the
New York Stock Exchange closing market price of AFG's common stock at
year-end 2002. This price was $23.07 per share.
DIRECTOR COMPENSATION
Infinity's Regulations provide that, at the discretion of the board of
directors, the directors may be paid their expenses, if any, at each meeting of
the board of directors and may be paid a fixed sum for attendance at each
meeting of the board of directors and a fixed annual fee or a stated salary as a
director. At the discretion of the board, members of special or standing
committees may be allowed like compensation for attending committee meetings.
None of the directors received compensation for services as a board or committee
member in 2002.
With the completion of the initial public offering, directors who are not
an Infinity or AFG employee each receive an annual fee of $25,000 per year, are
paid an attendance fee of $1,500 for each board and committee meeting attended,
are granted options to purchase 2,500 shares of Infinity's Common Stock per year
and are reimbursed for reasonable travel expenses incurred in connection with
their services as directors. Each chairman of a board committee receives an
additional $5,000 annual fee.
EMPLOYMENT AGREEMENT WITH JAMES R. GOBER
Infinity has entered into an employment agreement with James R. Gober which
became effective upon the completion of the initial public offering. Under the
agreement, Infinity has agreed to employ Mr. Gober for a period of two years,
during which time he will be primarily responsible for overseeing Infinity's
business strategy and have other duties commensurate with his position as Chief
Executive Officer. The agreement provides that Infinity pays him a base salary
of at least $550,000 and that he will have an opportunity for an annual bonus of
at least $500,000 under a bonus plan to be established by the compensation
committee. The bonus plan will be based on considerations of Infinity's reported
earnings per share and the underwriting profitability of the insurance
subsidiaries.
In connection with the employment agreement, Mr. Gober has been issued
62,500 shares of Infinity Common Stock under Infinity's 2002 Restricted Stock
Plan and has been granted options to acquire 101,500 shares of Common Stock
under Infinity's 2002 Stock Option Plan.
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The restrictions on the restricted shares lapse and the stock options vest:
- 30 days prior to the consummation of a change of control, which the
agreement defines as a person or group owning more than 40% of
Infinity's voting stock and a greater percentage than AFG;
- within two years after a merger, consolidation, liquidation or sale of
assets or similar transactions involving Infinity, if the individuals
who are Infinity's directors immediately prior to a merger,
consolidation, liquidation or sale of assets no longer constitute a
majority of the Board; or
- within two years after a tender offer or exchange offer for Infinity's
voting securities if the individuals who are directors of the Company
immediately prior to the commencement of the tender or exchange offer no
longer constitute a majority of the Board.
If Mr. Gober's employment is terminated other than for cause, the agreement
provides that Mr. Gober will receive payment of earned but unpaid salary and
bonus amounts accrued through the date of termination, continual payment of his
most recent salary for a period of 24 months from the date of termination,
payment of two times his annual base bonus amount to be paid over a 24-month
period if certain performance criteria are met, payment of accrued but unused
vacation time, reimbursement of business expenses, 100% vesting of any stock
options and restricted shares which have been granted to Mr. Gober within three
years of the termination date and payment of Mr. Gober's life insurance, medical
and dental benefits for a period of 24 months after termination. Mr. Gober has
agreed not to compete with Infinity or solicit its employees for a period of 24
months following certain events of termination.
STOCK OPTION PLAN
Infinity established the 2002 Stock Option Plan to enable it to attract and
motivate its employees and to encourage the identification of their interests
with those of Infinity's shareholders. The plan also provides for the grant of
options to purchase shares by Infinity's non-employee directors. The plan
provides for the grant of "incentive stock options" that are qualified under the
Internal Revenue Code of 1986, as amended (the "Code"), and for the grant of
nonqualified stock options.
The maximum number of shares of Infinity's Common Stock for which options
may be granted under the plan is 2,000,000 (subject to antidilution provisions).
Infinity's compensation committee administers the plan. Each member of the
committee is an "outside director," as such term is defined under Section 162(m)
of the Code, and a "Non-Employee Director" as defined in Rule 16b-3(b)
promulgated under the Securities Exchange Act of 1934.
Subject to specific limitations contained in the Plan, Infinity's board of
directors has the ability to amend, suspend or terminate the plan at any time
without shareholder approval. Unless earlier terminated, the plan may continue
in effect until December 16, 2012.
Options generally expire ten years after the date of grant, though the
committee can provide for a shorter term for a particular grant. Generally,
subject to the discretion of the compensation committee, 20% of the shares
underlying an option will become exercisable upon the first anniversary of the
date of grant, and 20% become exercisable on each subsequent anniversary.
Exercise prices for options granted under the plan may not be less than the fair
market value on the date of grant. The compensation committee has broad
discretion in determining the terms of the grant of awards under the plan,
subject to the restrictions outlined above. Upon a change of control, as defined
in the plan, all outstanding options will immediately vest in full and become
exercisable.
Payment for shares purchased upon exercise of an option must be made in
cash. The committee, however, may permit payment by delivery of shares of Common
Stock already owned by the optionee having a fair market value equal to the cash
option price of the shares, by assigning the proceeds of a sale or loan with
respect to
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some or all of the shares being acquired (subject to applicable law), by a
combination of the foregoing or by any other method.
Persons who receive options incur no federal income tax liability at the
time of grant. Persons exercising nonqualified options recognize taxable income,
and Infinity has a tax deduction at the time of exercise to the extent of the
difference between market price on the day of exercise and the exercise price.
Persons exercising incentive stock options do not recognize tax