Infinity’s insurance subsidiaries lease 614,540 square feet of office and warehouse space in numerous cities throughout the United States. All of these leases expire within ten years. The most significant leased office spaces are located in Birmingham, Alabama and suburban Los Angeles, California. See Note 14 - Commitments and Contingencies of the Notes to Consolidated Financial Statements for further information about leases. Infinity owns a 33,515 square foot building in McAllen, Texas.
Despite a generally weak economy, the Company enjoyed strong growth in written premium during 2010. The fourth quarter of 2010 marks the fifth consecutive quarter that the Company has experienced growth in written premium. This increase is a result of aggressive marketing efforts intended to expand Infinity’s presence in its target markets, including the appointment of new agents in the Urban Zones and increased advertising and agency incentives. See Results of Operations - Underwriting - Premium for a more detailed discussion of Infinity’s gross written premium growth.
Net earnings and diluted earnings per share for the year ended December 31, 2010 were $91.5 million and $6.95, respectively, compared to $70.6 million and $5.09, respectively, for 2009. The increase in diluted earnings per share for 2010 is primarily due to an increase in earned premium coupled with a decline in other-than-temporary impairment losses.
Included in net earnings for the year ended December 31, 2010 were $48.0 million ($73.9 million pre-tax) of favorable development on prior accident period loss and LAE reserves, compared to $42.5 million ($65.4 million pre-tax) of favorable development during 2009. The following table displays combined ratio results by accident year developed through December 31, 2010.
Infinity’s book value per share increased 15.8% from $45.80 at December 31, 2009 to $53.03 at December 31, 2010. This increase was primarily due to earnings and the change in unrealized net gains on investments, net of shareholder dividends. Return on equity for the year ended December 31, 2010 was 14.3% compared to 12.3% for 2009.
Insurance reserves, or unpaid losses and LAE, are management’s best estimate of the ultimate amounts that will be paid for (i) all claims that have been reported up to the date of the current accounting period but have not yet been paid, (ii) all claims that have occurred but have not yet been reported to the Company (“incurred but not reported” or “IBNR”), and (iii) unpaid claim settlement expenses.
Paid and incurred Bornhuetter-Ferguson Methods adding expected development to actual paid or incurred experience to project ultimate losses.
For each subset of the business evaluated, each test generates a point estimate based on development factors applied to known paid and incurred losses and claim counts to estimate ultimate paid losses and claim counts. Selections of factors are based on historical loss development patterns with adjustment based on professional actuarial judgment where anticipated development patterns vary from those seen historically. This estimation of IBNR requires selection of hundreds of such factors. A single point estimate for the subset being evaluated is then selected from the results of various tests, based on a combination of simple averages of the point estimates of the various tests and selections based on professional actuarial judgment. During recent years, paid methods have been less reliable because of changes in settlement practices, so Infinity has more heavily relied on incurred methods.
Estimating the liability for unpaid losses and LAE is inherently judgmental and is influenced by factors that are subject to significant variation. Infinity estimates liabilities for the costs of losses and LAE for both reported and unreported (IBNR) claims based on historical trends in the following areas adjusted for deviations in such trends:
Where deviations from historical trends in these key areas exist, when possible, quantitative and qualitative modifications to, or selections of, such factors are made to reflect such deviations. Management analyzes the adequacy of reserves using actuarial data and analytical reserve development techniques, including projections of ultimate paid losses, to determine the ultimate amount of reserves. The list of historical trends provided above are non-exhaustive examples of major factors taken into account in developing these estimates.
Factors that can significantly affect actual frequency include, among others, changes in weather, driving patterns or trends and class of driver. Estimates of average frequency can be affected by changes in claims settlement and reserving practices. Auto repair and medical cost inflation, jury awards and changes in policy limit profiles can affect loss severity. Estimation of LAE reserves is subject to variation from factors such as the use of outside adjusters, frequency of lawsuits, claims staffing and experience levels.
Ultimate loss estimates, excluding extra-contractual obligation (“ECO”) losses, usually experience the greatest adjustment within the first twelve months after the accident year. Accordingly, the highest degree of uncertainty is associated with reserves for the current accident year because the current accident year contains the greatest proportion of losses that have not been reported or settled, and these elements must be estimated as of the current reporting date. The proportion of losses with these characteristics typically diminishes in subsequent years.
ECO losses represent estimates of losses incurred from actual or threatened litigation by claimants alleging improper handling of claims by the Company, which are commonly known as “bad faith” claims. Oftentimes, the onset of such litigation, subsequent discovery, settlement discussions, trial and appeal may occur several years after the date of the original claim. Because of the infrequent nature of such claims, a liability for each case is accrued based on the facts and circumstances in accordance with the Loss Contingency topic of the FASB Accounting Standards Codification, which requires that such loss be probable and estimable. As such, no reserve is permissible for IBNR for threatened litigation yet to occur on accidents with dates prior to the balance sheet date. Consequently, the effect of setting accruals for such items likely will result in unfavorable reserve development in the following reserve table.
Calendar year losses incurred for ECO losses, net of reinsurance, over the past five calendar years have ranged from $0.3 million to $18.6 million, averaging $8.9 million per year. Gross of reinsurance, ECO losses have ranged from $0.3 million to $21.1 million, averaging $10.1 million over the past five calendar years. Losses for 2010, 2009 and 2008 have been $0.3 million, $0.3 million and $18.6 million, respectively.
The following tables present the development of Infinity’s loss reserves, net of reinsurance, on a GAAP basis for the calendar years 2000 through 2010. The Infinity table includes the loss reserves of the NSA Group through December 31, 2002, the addition of the Assumed Agency Business on January 1, 2003, and those of Infinity combined for 2003 and all subsequent years. The top line of each table shows the estimated liability for unpaid losses and LAE recorded at the balance sheet date for the indicated years. The next line, captioned Liability for unpaid losses and LAE - as re-estimated at December 31, 2010, shows the re-estimated liability as of December 31, 2010. The remainder of the table presents intervening development as percentages of the initially estimated liability. The development results from additional information and experience in subsequent years. The middle line shows a cumulative deficiency (redundancy) which represents the aggregate percentage increase (decrease) in the liability initially estimated. The lower portion of the table indicates the cumulative amounts paid as of successive periods as a percentage of the original loss reserve liability.
These tables do not present accident or policy year development data. Furthermore, in evaluating the re-estimated liability and cumulative deficiency (redundancy), it should be noted that each percentage includes the effects of changes in amounts for prior periods. Conditions and trends that have affected development of the liability in the past may not necessarily exist in the future. Accordingly, it is not appropriate to extrapolate future redundancies or deficiencies based on these tables.
The following is a reconciliation of Infinity’s net liability to the gross liability for unpaid losses and LAE (in millions):
The Company finds it useful to evaluate accident year loss and LAE ratios by calendar year to monitor reserve development. The following table presents, by accident year, loss and LAE ratios (including IBNR):
During calendar year 2010, Infinity experienced $73.9 million of favorable reserve development primarily from loss and LAE reserves relating to bodily injury coverage in the California, Connecticut, Florida and Pennsylvania nonstandard programs as well as in the Commercial Vehicle program. During calendar years 2009 and 2008, Infinity experienced $65.4 million and $29.4 million, respectively, of favorable development, primarily from loss and LAE reserves relating to bodily injury and property damage coverages in the California, Florida and Pennsylvania nonstandard programs. The favorable development over the last several years has resulted from two significant changes in claims practices beginning in 2006 for which the effect on loss and LAE payment patterns has been recognized in 2008, 2009 and 2010.
Because Infinity’s selected reserves are influenced by both the paid and incurred tests, as the two sets of tests have converged for accident years 2007 through 2009, the Company has seen favorable development. However, as the effects of the increased claims settlement tempo have been in place for some time, the impact on the paid-incurred test differences are expected to continue to dissipate. The premium growth in 2010 adds another level of uncertainty to loss reserving that could cause either future redundancies or deficiencies.
whether it is more likely than not that there will be a requirement to sell the security before its anticipated recovery;
Management regularly evaluates its investment portfolio for potential impairment by evaluating each security position that has any of the following: a fair value of less than 95% of its book value, an unrealized loss that equals or exceeds $100,000 or one or more impairment charges recorded in the past. In addition, management reviews positions held related to an issuer of a previously impaired security. The process of evaluation includes assessments of each item listed above. Since it is not possible to accurately predict if or when a specific security will become other-than-temporarily impaired, total impairment charges could be material to the results of operations in a future period.
Infinity continually evaluates potential liabilities and reserves for litigation using the criteria established by the Loss Contingency topic of the FASB Accounting Standards Codification. Under this guidance, reserves for loss may only be recorded if the likelihood of occurrence is probable and the amount is reasonably estimable. Management considers each legal action and records reserves for losses in accordance with this guidance. Infinity believes the current assumptions and other considerations used to estimate potential liability for litigation are appropriate. Certain claims and legal actions have been brought against Infinity for which, under the rules described above, no loss has been accrued. While it is not possible to know with certainty the ultimate outcome of these claims or lawsuits, management does not expect them to have a material effect on Infinity’s financial condition or liquidity. See Note 13 - Legal and Regulatory Proceedings of the Notes to Consolidated Financial Statements for a discussion of the Company’s material Legal Proceedings.
Infinity performed this test as of September 30, 2010 using a variety of methods, including estimates of future discounted cash flows and comparisons of the market value of Infinity to its major competitors. Infinity’s cash flow projections rely on assumptions that are subject to uncertainty, including premium growth, loss and LAE ratios, interest rates and capital requirements.
The September 30, 2010 test results indicated that the fair value of Infinity’s goodwill exceeded its carrying value and there was no impairment charge required at that date. Additionally, there was no indication of impairment at December 31, 2010.
In August 2010, Infinity filed a “shelf” registration statement with the Securities and Exchange Commission, which will allow the Company to sell any combination of senior or subordinated debt securities, common stock, preferred stock, warrants, depositary shares and units in one or more offerings should the Company choose to do so in the future.
In February 2011, Infinity increased its quarterly dividend to $0.18 per share from $0.14 per share. At this current amount, Infinity’s 2011 annualized dividend payments will be approximately $9.2 million.
Infinity and its insurance subsidiaries’ contractual obligations as of December 31, 2010, are (in thousands):
Infinity engages two unaffiliated money managers for its fixed income portfolio and internally manages a Vanguard exchange-traded fund designed to track the MSCI U.S. Broad Market Index for the equity portfolio. The investment managers conduct, in accordance with the Company’s investment guidelines, all of the investment purchases and sales for the Company and its subsidiaries. The Company’s Chief Financial Officer and the Investment Committee, at least quarterly, review the performance of the portfolio management and compliance with the Company’s investment guidelines. Physical custody of securities is maintained at national banks unaffiliated with the money managers.
Level 1 securities are U.S. Treasury securities, an exchange-traded fund and equity securities held in a rabbi trust. Level 2 securities are comprised of securities whose fair value was determined using observable market inputs. Level 3 securities are comprised of (i) securities for which there is no active or inactive market for similar instruments, (ii) securities whose fair value is determined based on unobservable inputs and (iii) securities that are not rated by a nationally recognized statistical rating organization.
Summarized information for Infinity’s investment portfolio at December 31, 2010 follows (in thousands):
The following table provides information about Infinity’s fixed maturity investments at December 31, 2010, which are sensitive to interest rate risk. The table shows expected principal cash flows 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. MBS and sinking fund issues are included based on maturity year adjusted for expected payment patterns.
Infinity manages credit risk by diversifying the portfolio to avoid concentrations in any single industry group or issuer and by limiting investments in securities with lower credit ratings. The largest investment in any one fixed income security, excluding U.S. government and agencies securities, is $7.7 million or 0.7% of the fixed income investment portfolio. The top five investments in fixed income securities, excluding those issued by the U.S. government and its agencies, make up 2.8% of the fixed income portfolio. The fair value of non-performing fixed maturities, securities that have not produced their stated rate of investment income during the previous twelve months, was $0.2 million or less than 0.1% of the $1.2 billion portfolio as of December 31, 2010.
investments. At December 31, 2010, Infinity’s fixed maturity portfolio included 6 securities, or less than 1% of the total fair value of the fixed maturity portfolio, with exposure to sub-prime and Alt-A mortgages. Although these securities have sub-prime mortgages as underlying collateral, all are rated AA or better.
The following table presents the credit rating and fair value of Infinity’s residential mortgage backed securities at December 31, 2010 by deal origination year (in thousands):
The following table presents the credit rating and fair value of Infinity’s commercial mortgage-backed securities at December 31, 2010 by deal origination year (in thousands):
The following table presents the credit rating and fair value of Infinity’s collateralized mortgage obligation portfolio at December 31, 2010 by deal origination year (in thousands):
Of the $42.4 million of collateralized mortgage obligations, $27.9 million are GSE.
The following table shows Infinity’s fixed maturity securities, by NAIC designation and comparable Standard & Poor’s Corporation rating as of December 31, 2010 (in thousands).
The following table presents the fair value of Infinity’s state and municipal bond portfolio, by state and type of bond, at December 31, 2010 (in thousands):
Equity price risk is the potential economic loss from adverse changes in equity security prices. Infinity’s exposure to equity price risk is limited, as its equity investments comprise only 3.5% of its total investment portfolio. At December 31, 2010, the fair value of Infinity’s equity portfolio was $42.3 million.
(1) 2009 and 2008 exclude less than $(0.1) million each of premium written on behalf of other companies.
During 2010, personal auto insurance gross written premium in Infinity’s Focus States grew 14.7% when compared with 2009, with growth in all states excluding Nevada. The increase in gross written premium is primarily a result of growth in California, Florida and Texas.
Texas gross written premium grew by 31.0% during 2010 compared to 2009. The growth in premiums in Texas primarily relates to the standard program, which Infinity introduced in late 2009.
Infinity’s Commercial Vehicle gross written premium grew 6.7% during 2010 compared to 2009. This growth is primarily due to growth in California resulting from the appointment of new agents.
Gross written premium decreased 5.4% during the twelve months ended December 31, 2009 compared with the twelve months ended December 31, 2008. Although premium declined for the year, Infinity did experience gross written premium growth during each month of the fourth quarter. Infinity’s growth during the fourth quarter of 2009 was the first quarterly increase the company has had since the second quarter of 2007. During 2009, Infinity implemented 29 rate revisions in various states with an overall rate impact of a 0.3% decrease. Policies in force at December 31, 2009 decreased 3.1% compared with December 31, 2008. Gross written premium declined more than policies in force due to a shift in the business mix to more liability only policies, which have lower average premium.
During 2009, personal auto insurance gross written premium in Infinity’s eight Focus States decreased 4.4% compared with 2008. This decline in gross written premium is primarily a result of declines in Arizona, Florida and Georgia.
In Georgia, gross written premium was down 25.1% for the twelve months. This decline is primarily a result of rate increases intended to improve profitability in the state.
An increase in gross written premium in Illinois partially offset the decline in premium in Arizona, Florida and Georgia during 2009. Illinois’s gross written premium increased 155.0% during 2009 primarily because of continued growth in the recently introduced Chicago Urban Zone. Gross written premium in California, Infinity’s largest state by premium volume, was down just 0.1% for the year.
Gross written premium in the Maintenance States declined 27.5% during 2009 with declines in all states in this category. Infinity increased rates in several of the Maintenance States during 2009 in an effort to improve profitability.
The 1.3 point increase in the Focus States’ combined ratio for the year ended December 31, 2010 was primarily driven by an increase in the underwriting ratio. The underwriting ratio is up due to growth in new business, on which the Company pays higher commission rates. The Urban Zone loss and LAE ratio declined slightly because of improvement in the California Urban Zones. An increase in the Non-urban Zone loss and LAE ratio, driven by Florida Non-urban Zones, offset this decline. Florida’s Non-urban zone loss ratio rose because of growth in new business in late 2009 and into 2010. Infinity has taken actions, including raising rates and modifying certain underwriting standards, to improve the underperforming segments of the Florida business.
The loss and LAE ratio in the Maintenance States declined 11.0 points for the year ended December 31, 2010, because of declines in the loss ratios in all Maintenance States excluding South Carolina and Tennessee.
The loss and LAE ratio in the Maintenance States declined for the year ended December 31, 2009 compared with 2008, primarily because of favorable development on LAE reserves in Connecticut. The underwriting ratio in these states grew in 2009 due to fixed expenses over a decline in premium.
The loss and LAE ratio for the Commercial Vehicle business decreased substantially during 2009 when compared with 2008 primarily because of an extra-contractual claim in Florida recorded during 2008. Excluding this claim, the combined ratio for the twelve months ended December 31, 2008 would be 79.8%. This compares with 93.8% for the twelve months ended December 31, 2009. The increase in the combined ratio, excluding the extra-contractual claim, is a result of an increase in the loss ratio in California due to a shift toward new business, which typically has a higher loss ratio than renewal business.
Other income for the twelve months ended December 31, 2009 decreased $1.5 million when compared to 2008. This decline is primarily attributable to a $0.6 million decline in fees received on renewal premium from the 2005 sale of the Assumed Agency Business’s Connecticut personal auto book. The other items included in Other Income of $1.3 million in 2008 and $0.4 million in 2009 are of a non-recurring nature.
Corporate general and administrative expenses increased by $1.1 million in 2010 compared to 2009. The increase is primarily due to an increase in the accrual for Performance Share Plan expense. Due to recent premium growth, Infinity now expects a larger share award than was previously anticipated. (See Note 7 - Share-Based Compensation of the Notes to the Consolidated Financial Statements for additional information on the Performance Share Plan.)
Other expenses declined $1.5 million for the twelve-month period ended December 31, 2009 as compared to 2008. The decline is primarily due to $0.8 million in restructuring charges incurred in 2008 as the company completed its restructuring efforts as well as a decrease in operating expenses relating to Infinity’s retail store initiative, which the Company ceased pursuing. The loss on sublease in 2009 was due to the sublet of 11,494 square feet of the Company’s Colonnade Park corporate headquarters. Staff reductions and the shift of some operations to the Liberty Park building in 2008 and 2009 freed this space for sublet.
The following table reconciles the Company’s U.S. statutory rate and effective tax rate for the periods ending December 31, 2010, 2009 and 2008.
In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update Number 2010-06. This update requires new disclosures regarding fair value measurements and clarifies existing fair value disclosures. Infinity adopted the provisions of this update for all periods ending after December 15, 2009. The disclosures required by this update can be found in Note 2 of the Consolidated Financial Statements.