News Column

INFINITY PROPERTY & CASUALTY CORP - 10-K - Management's Discussion and Analysis ("MD&A") of Financial Condition and Results of Operations INDEX TO MD&A

February 27, 2014

Page

Overview 15 Critical Accounting Policies 15 Insurance Reserves 16 Other-than-Temporary Losses on Investments 20 Accruals for Litigation 21 Goodwill 21 Liquidity and Capital Resources 22 Ratios 22 Sources and Uses of Funds 22 Contractual Obligations 23 Investments 24 General 24 Exposure to Market Risk 26 Interest Rate Risk 26 Credit Risk 28 Equity Price Risk 32 Results of Operations 33 Underwriting 33 Premium 33 Profitability 35 Net Investment Income 38 Realized Gains (Losses) on Investments 39 Gain on Sale of Subsidiaries 39 Other Income 39 Interest Expense 39 Corporate General and Administrative Expenses 39 Loss on Redemption of Long-term Debt 40 Other Expenses 40 Income Taxes 40



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

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-K



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

Operations Overview In 2013 our gross written premium grew 6.8%. The majority of this growth came from Florida, one of our most profitable states. See Results of Operations - Underwriting - Premium for a more detailed discussion of our gross written premium growth. Net earnings and diluted earnings per share for the year ended December 31, 2013 were $32.6 million and $2.80, respectively, compared to $24.3 million and $2.04, respectively, for 2012. The increase in diluted earnings per share for the year ended December 31, 2013 was primarily due to an increase in underwriting income with an improvement in the accident year combined ratio from 99.3% at December 31, 2012 to 97.7% at December 31, 2013. Included in net earnings for the year ended December 31, 2013 was $1.9 million ($2.9 million pre-tax) of unfavorable development on prior accident year loss and LAE reserves. This development was primarily due to bodily injury and personal injury protection coverages in the states of California and Florida, respectively, related to accident year 2012. This compares to $10.5 million ($16.2 million pre-tax) of unfavorable development for 2012. The following table displays GAAP combined ratio results by accident year developed through December 31, 2013. Prior Accident Prior Accident Year Favorable Year Favorable (Unfavorable) Accident Year Combined Ratio



(Unfavorable) Development

Developed Through



Development (in millions)

Dec. Mar. June Sep. Dec. Q4 YTD Q4 YTD Accident Year 2012 2013 2013 2013 2013 2013 2013 2013 2013 Prior $ (0.8 )$ (0.5 ) 2006 90.4 % 90.3 % 90.3 % 90.3 % 90.3 % 0.0 % 0.1 % 0.1 0.9 2007 92.3 % 92.2 % 92.2 % 92.2 % 92.2 % 0.0 % 0.1 % 0.0 1.5 2008 91.6 % 91.4 % 91.4 % 91.3 % 91.3 % 0.0 % 0.2 % (0.1 ) 2.0 2009 92.6 % 92.4 % 92.3 % 92.2 % 92.3 % 0.0 % 0.3 % (0.2 ) 3.0 2010 99.5 % 99.8 % 99.7 % 99.8 % 99.6 % 0.2 % (0.1 )% 1.6 (0.5 ) 2011 100.0 % 100.5 % 100.4 % 100.4 % 100.3 % 0.1 % (0.3 )% 1.2 (2.8 ) 2012 99.3 % 99.2 % 99.5 % 99.6 % 99.8 % (0.2 )%



(0.5 )% (2.4 ) (6.4 )

$ (0.8 )$ (2.9 )

See Results of Operations - Underwriting - Profitability for a more detailed discussion of our underwriting results. Pre-tax net investment income for the year ended December 31, 2013 was $35.5 million compared to $37.6 million for 2012. The decrease in pre-tax net investment income is a result of low investment yields on new money. Our book value per share increased 1.0% from $56.55 at December 31, 2012 to $57.09 at December 31, 2013. This increase was primarily due to net earnings partially offset by a decline in unrealized gains as a result of an increase in interest rates and shareholder dividends during 2013. Critical Accounting Policies (See Note 1- Significant Reporting and Accounting Policies of the Notes to Consolidated Financial Statements) The preparation of financial statements requires management to make estimates and assumptions that can have a significant effect on amounts reported in the financial statements. As more information becomes known, these estimates and assumptions could change and thus impact amounts reported in the future. We believe that the establishment of insurance reserves, the determination of "other-than-temporary" impairment on investments, accruals for litigation and goodwill are the areas where the degree of judgment required to determine amounts recorded in the financial statements makes the accounting policies critical. 15



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

Operations Insurance Reserves Insurance reserves, or unpaid losses and LAE, are our 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 us ("incurred but not reported" or "IBNR"), and (iii) unpaid claim settlement expenses. We establish IBNR reserves for the quarter and year-end based on a quarterly reserve analysis by our actuarial staff. We apply various standard actuarial tests to subsets of the business at a state, product and coverage level. Included in the analyses are the following: Paid and incurred extrapolation methods utilizing paid and incurred loss development to predict ultimate losses; Paid and incurred frequency and severity methods utilizing paid and



incurred claims count development and paid and incurred loss development

to predict ultimate average frequency (i.e. claims count per auto insured) or ultimate average severity (cost of claim per claim) and Paid and incurred Bornhuetter-Ferguson methods adding expected



development to actual paid or incurred experience to project ultimate

losses.

For each subset of the business evaluated, each test generates a point estimate based on development factors applied to known paid and incurred losses and claim counts to estimate ultimate paid losses and claim counts. We base our selection of factors 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. We then select a single point estimate for the subset evaluated 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. Estimating the liability for unpaid losses and LAE is inherently judgmental and is influenced by factors that are subject to significant variation. We estimate liabilities for the costs of losses and LAE for both reported and unreported (IBNR) claims based on historical trends in the following areas adjusted for deviations in such trends: Claims settlement and payment practices;



Business mix;

Coverage limits and deductibles;

Inflation trends in auto repair and medical costs; and

Legal and regulatory trends affecting claims settlements.

When possible, we make quantitative and qualitative modifications to, or selections of, such factors where deviations from historical trends in these key areas exist. We analyze 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 that we take into account in developing these estimates. We review loss reserve adequacy quarterly by accident year at a state and coverage level. We adjust reserves as additional information becomes known. We reflect such adjustments in current year operations. During each quarterly review by the internal actuarial staff, using the additional information obtained with the passage of time, factor selections are updated, which in turn adjust the ultimate loss estimates and held IBNR reserves for the subset of the business and accident periods affected by such updates. The actuarial staff also performs various tests to estimate ultimate average severity and frequency of claims. Severity represents the average cost per claim and frequency represents the number of claims per policy. As an overall review, the staff then evaluates for reasonableness loss and LAE ratios by accident year by state and by coverage. Factors that can significantly affect actual frequency include, among others, changes in weather, driving patterns or trends and class of driver. Changes in claims settlement and reserving practices can affect estimates of average frequency and severity. 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. We believe that our relatively low average policy limit and concentration on the nonstandard auto driver classification help stabilize fluctuations in frequency and severity. For example, approximately 83% of our policies include only the state-mandated minimum policy limits for bodily injury, which somewhat mitigates the challenge of estimating average severity. These low limits tend to 16



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INFINITY PROPERTY AND CASUALTY CORPORATION 10-K



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

Operations reduce the exposure of the loss reserves on this coverage to medical cost inflation on severe injuries since the minimum policy limits will limit the total payout. Ultimate loss estimates, excluding extra-contractual obligation ("ECO") losses, usually experience the greatest adjustment within the first twelve to eighteen 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 we must estimate these elements as of the current reporting date. The proportion of losses with these characteristics typically diminishes in subsequent years. As compared with loss and LAE reserves held at December 31, 2013, our best estimate of reserve ranges using indicated results from utilized estimates of loss and LAE could range from a deficiency of 10% or $62.4 million to a redundancy of 9% or $54.7 million. These ranges do not present a forecast of future redundancy or deficiency since actual development of future losses on current loss reserves may vary materially from those estimated in the year-end 2013 reserve tests. Reserves recorded are our best estimate of the ultimate amounts that will be paid. As noted above, the highest degree of uncertainty is associated with reserves in the first twelve to eighteen months. The following table displays the accident year combined ratios as developed through December 31, 2013 for the four most recent accident years along with the potential combined ratios based on the low and high outcomes of the loss and LAE tests utilized: Combined Ratios Developed Through December 31, 2013 Accident year Low As Reported High 2010 99.1 % 99.6 % 99.9 % 2011 99.8 % 100.3 % 100.8 % 2012 98.9 % 99.8 % 100.6 % 2013 95.4 % 97.7 % 101.0 % ECO losses represent estimates of losses incurred from actual or threatened litigation by claimants alleging improper handling of claims by us, 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, we accrue a liability for each case 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, gross and net of reinsurance, over the past five calendar years have ranged from $0.3 million to $1.7 million, averaging $0.9 million per year. Losses for 2013, 2012 and 2011 have been $1.3 million, $1.7 million and $0.8 million, respectively. The following tables present the development of our loss reserves, net of reinsurance, on a GAAP basis for the calendar years 2003 through 2013. 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, 2013, shows the re-estimated liability as of December 31, 2013. The remainder of the table presents intervening development as percentages of the initially estimated liability. Additional information and experience in subsequent years results in development. 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), note 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. 17



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INFINITY PROPERTY AND CASUALTY CORPORATION 10-K Management's Discussion and Analysis of Financial Condition and Results of Operations (in millions) 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Liability for unpaid losses & LAE: As originally estimated $ 708$ 669$ 610$ 568$ 590$ 524$ 491$ 461$ 481$ 559$ 632 As re-estimated at December 31, 2013 712 611 511 462 468

392 392 451 494 562 N/A Liability re-estimated: One year later 99.2 % 97.5 % 94.9 % 97.6 % 95.0



% 87.5 % 85.0 % 101.0 % 103.4 % 100.5 % Two years later

100.3 % 94.2 % 91.6 % 91.3 % 86.5



% 78.7 % 83.0 % 99.2 % 102.7 % Three years later

99.6 % 93.7 % 89.1 % 85.2 % 81.7 % 76.8 % 81.0 % 97.8 % Four years later 100.2 % 93.7 % 85.6 % 82.4 % 80.5 % 75.5 % 79.7 % Five years later 101.5 % 91.9 % 84.0 % 81.7 % 79.6 % 74.7 % Six years later 100.6 % 91.2 % 83.8 % 81.5 % 79.3 % Seven years later 100.3 % 91.2 % 83.7 % 81.4 % Eight years later 100.5 % 91.1 % 83.7 % Nine years later 100.4 % 91.3 % Ten years later 100.6 % Cumulative deficiency (redundancy) 0.6 % (8.7 )% (16.3 )% (18.6 )% (20.7

)% (25.3 )% (20.3 )% (2.2 )% 2.7 % 0.5 % N/A Cumulative deficiency (redundancy) excluding ECO losses (8.0 )% (16.9 )% (22.9 )% (24.5 )% (24.5 )% (25.6 )% (20.9 )% (2.8 )% 2.1 % 0.3 % N/A Cumulative paid as of: One year later 48.4 % 52.6 % 50.3 % 48.4 % 54.6



% 46.8 % 48.2 % 62.5 % 64.5 % 62.7 % Two years later

75.8 % 72.6 % 66.5 % 69.1 % 67.4



% 61.0 % 65.9 % 81.1 % 84.2 % Three years later

87.7 % 80.1 % 77.4 % 74.8 % 72.9 % 67.9 % 72.7 % 88.8 % Four years later 91.6 % 87.3 % 79.9 % 77.4 % 75.8 % 70.9 % 75.5 % Five years later 97.4 % 88.5 % 81.1 % 78.8 % 77.1 % 72.3 % Six years later 98.2 % 89.3 % 81.7 % 79.5 % 77.8 % Seven years later 98.7 % 89.7 % 82.3 % 80.1 % Eight years later 99.0 % 90.1 % 82.7 % Nine years later 99.3 % 90.4 % Ten years later 97.6 % 18



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

Operations



The following table presents a reconciliation of our net liability to the gross liability for unpaid losses and LAE (in millions):

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 As originally estimated Net liability shown above $ 708$ 669$ 610$ 568$ 590$ 524$ 491$ 461$ 481$ 559$ 632 Add reinsurance recoverables 32 27 15 28 28 21 18 17 15 14 14 Gross liability $ 740$ 696$ 625$ 595$ 618$ 545$ 509$ 478$ 495$ 573$ 647 As re-estimated at December 31, 2013 Net liability shown above $ 712$ 611$ 511$ 462$ 468$ 392$ 392$ 451$ 494$ 562 N/A Add reinsurance recoverables 57 48 38 32 31 25 22 17 15 14 N/A Gross liability $ 769$ 659$ 549$ 494$ 499$ 417$ 414$ 468$ 508$ 576 N/A Gross cumulative deficiency (redundancy) 4.0 % (5.4 )% (12.3 )% (17.0 )% (19.4 )% (23.5 )% (18.8 )% (2.0 )% 2.6 % 0.5 % N/A Gross cumulative deficiency (redundancy) excluding ECO losses (6.7 )% (15.6 )% (19.8 )% (23.3 )% (23.5 )% (23.7 )% (19.3 )% (2.6 )% 2.1 % 0.3 % N/A We find 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): Accident Year Loss and LAE Ratios Through



Calendar Year End

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Accident Year 2004 71.0 % 68.2 % 66.3 % 65.4 % 64.3 % 63.7 % 63.4 % 63.3 % 63.3 % 63.3 % 2005 70.5 % 69.6 % 67.8 % 66.2 % 65.2 % 64.8 % 64.6 % 64.6 % 64.5 % 2006 70.3 % 71.0 % 68.9 % 67.4 % 66.8 % 66.5 % 66.4 % 66.3 % 2007 71.9 % 72.5 % 71.0 % 69.8 % 69.5 % 69.1 % 69.0 % 2008 73.5 % 71.9 % 69.9 % 69.6 % 69.4 % 69.2 % 2009 74.2 % 71.0 % 71.0 % 70.7 % 70.4 % 2010 75.1 % 76.7 % 76.8 % 76.9 % 2011 74.9 % 77.3 % 77.6 % 2012 78.2 % 78.7 % 2013 77.9 % The following table summarizes the effect on each calendar year of reserve re-estimates, net of reinsurance, for each of the accident years presented. The total of each column details the amount of reserve re-estimates made in the indicated calendar year and shows the accident years to which the re-estimates are applicable. Favorable reserve re-estimates are in parentheses. 19



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INFINITY PROPERTY AND CASUALTY CORPORATION 10-K Management's Discussion and Analysis of Financial Condition and Results of Operations Calendar Year Impact of Reserve Development by Accident Year (in millions) 2005 2006 2007 2008 2009 2010 2011 2012 2013 Accident year Prior $ 7$ (6 )$ 5$ 9$ (6 )$ (2 )$ 1$ (1 )$ 2 2004 (24 ) (17 ) (8 ) (9 ) (6 ) (3 ) (1 ) 0 (0 ) 2005 (9 ) (17 ) (15 ) (10 ) (4 ) (2 ) (0 ) (1 ) 2006 7 (21 ) (14 ) (6 ) (3 ) (1 ) (1 ) 2007 6 (16 ) (12 ) (3 ) (4 ) (1 ) 2008 (15 ) (19 ) (3 ) (2 ) (2 ) 2009 (28 ) 0 (3 ) (3 ) 2010 14 1 0 2011 25 3 2012 6



Total $ (17 )$ (31 )$ (13 )$ (29 )$ (65 )$ (74 )$ 5$ 16$ 3

Increases in severities in both bodily injury coverage in California and personal injury protection coverage in Florida related to accident year 2012 were the primary sources of the $2.9 million unfavorable reserve development during the twelve months ended December 31, 2013.

Increases in severities in both bodily injury coverage in California and personal injury protection coverage in Florida related to accident year 2011 were the primary sources of the $16.2 million unfavorable reserve development during the twelve months ended December 31, 2012. An increase in severity in Florida personal injury protection coverage related to accident year 2010 was the primary source of the $4.5 million of unfavorable development during the twelve months ended December 31, 2011. Other-than-Temporary Losses on Investments The determination of whether unrealized losses on investments are "other-than-temporary" requires judgment based on subjective as well as objective factors. We consider the following factors and resources: whether the unrealized loss is credit-driven or a result of changes in



market interest rates;

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

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

the intent to sell the security;

whether it is more likely than not that there will be a requirement to

sell the security before its anticipated recovery;

historical operating, balance sheet and cash flow data contained in

issuer SEC filings; issuer news releases;



near-term prospects for improvement in the issuer and/or its industry;

industry research and communications with industry specialists and

third-party research and credit rating reports.

We regularly evaluate our investment portfolio for potential impairment by evaluating each security position that has any of the following: a fair value of less than 95% of our book value, an unrealized loss that equals or exceeds $100,000 or one or more impairment charges recorded in the past. In addition, we review positions held related to an issuer of a previously impaired security. The process of evaluation includes assessments of each item listed above. Since accurately predicting if or when a specific security will become other-than-temporarily impaired is not possible, total impairment charges could be material to the results of operations in a future period. 20



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

Operations For fixed maturity securities that are other-than-temporarily impaired, we assess our intent to sell and the likelihood that we will be required to sell the security before recovery of our amortized cost. If a fixed maturity security is considered other-than-temporarily impaired but we do not intend to and will not more than likely be required to sell the security before our recovery to amortized cost, the amount of the impairment is separated into a credit loss component and the amount due to all other factors. The excess of the amortized cost over the present value of the expected cash flows determines the credit loss component of an impairment charge on a fixed maturity security. The present value is determined using the best estimate of cash flows discounted at (1) the effective interest rate implicit at the date of acquisition for non-structured securities or (2) the book yield for structured securities. The techniques and assumptions for determining the best estimate of cash flows vary depending on the type of security. We recognize the credit loss component of an impairment charge in net earnings and the non-credit component in accumulated other comprehensive income. If we intend to sell or will, more likely than not, be required to sell a security, the entire amount of the impairment is treated as a credit loss. Accruals for Litigation We continually evaluate potential liabilities and reserves for litigation using the criteria established by the Loss Contingency topic of the FASB Accounting Standards Codification. Under this guidance, we may only record reserves for loss if the likelihood of occurrence is probable and the amount is reasonably estimable. We consider each legal action and record reserves for losses in accordance with this guidance. We believe the current assumptions and other considerations used to estimate potential liability for litigation are appropriate. Certain claims and legal actions have been brought against us 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, we do not expect them to have a material effect on our financial condition or liquidity. See Note 13 - Legal and Regulatory Proceedings of the Notes to Consolidated Financial Statements for a discussion of our material Legal Proceedings. Goodwill In accordance with the Goodwill topic of the FASB Accounting Standards Codification, we perform impairment test procedures for goodwill on an annual basis. These procedures require us to calculate the fair value of goodwill, compare the result to our carrying value and record the amount of any shortfall as an impairment charge. We performed this test as of October 1, 2013 using a variety of methods, including estimates of future discounted cash flows and comparisons of our market value to that of our major competitors. Our cash flow projections rely on assumptions that are subject to uncertainty, including premium growth, loss and LAE ratios, interest rates and capital requirements. The October 1, 2013 test results indicated that the fair value of our goodwill exceeded our carrying value and therefore no impairment charge was required at that date. Additionally, there was no indication of impairment at December 31, 2013. 21



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

Operations Liquidity and Capital Resources Ratios The National Association of Insurance Commissioners' ("NAIC") 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, 2013, the capital ratios of all our insurance subsidiaries exceeded the RBC requirements. Sources of Funds We are a holding company and our insurance subsidiaries conduct our operations. Accordingly, we will have continuing cash needs for administrative expenses, the payment of interest on borrowings, shareholder dividends, share repurchases and taxes. Funds to meet expenditures at the holding company come primarily from dividends from the insurance subsidiaries as well as cash and investments held by the holding company. The ordinary dividend capacity and payment activity of our insurance companies for the two most recent years as well as the dividend capacity for the upcoming year are shown in the following table (in thousands): 2014 2013



2012

Maximum ordinary dividends available to Infinity $ 66,770$ 60,770$ 53,121 Dividends paid from subsidiaries to parent

N/A 125



425

As of December 31, 2013, the holding company had $111.8 million of cash and investments. In 2014, our insurance subsidiaries may pay us up to $66.8 million in ordinary dividends without prior regulatory approval. Rating agency capital requirements, among other factors, will be considered when determining the actual amount of dividends paid in 2014. Our insurance subsidiaries generate liquidity to satisfy their obligations, primarily by collecting and investing premium in advance of paying claims. Our insurance subsidiaries had positive cash flow from operations of approximately $145.6 million in 2013, $175.3 million in 2012 and $72.4 million in 2011. In addition, to satisfy their obligations, our insurance subsidiaries generate cash from maturing securities from their combined $1.4 billion portfolio. In September 2012, we issued $275 million principal of senior notes due September 2022 (the "5.0% Senior Notes"). The 5.0% Senior Notes accrue interest at 5.0%, payable semiannually each March and September. The majority of the proceeds from this issuance were used to redeem the 5.5% Senior Notes. On October 17, 2012, we fully redeemed the $195.0 million outstanding principal of 5.5% Senior Notes due 2014 at a price of 106.729%, or $208.1 million plus accrued interest of $1.8 million. Refer to Note 4 to the Consolidated Financial Statements for more information on our long-term debt. In August 2011, we renewed our agreement for a $50 million three-year revolving credit facility (the "Credit Agreement") that requires us to meet certain financial and other covenants. We are currently in compliance with all covenants under the Credit Agreement. At December 31, 2013, there were no borrowings outstanding under the Credit Agreement. In June 2013, we filed a "shelf" registration statement with the Securities and Exchange Commission registering $300.0 million of our securities, which will allow us 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 we choose to do so in the future. Uses of Funds In February 2014, we increased our quarterly dividend to $0.36 per share from $0.30 per share. At this current amount, our 2014 annualized dividend payments will be approximately $16.6 million. On August 3, 2010, our Board of Directors adopted a share and debt repurchase program set to expire on December 31, 2011. On August 2, 2011, our Board of Directors increased the authority under this program by $50.0 million and extended the date to execute the program to December 31, 2012. On November 6, 2012, our Board of Directors again increased the authority under this share and debt repurchase plan by $25.0 million and extended the date to execute the program to December 31, 2014. During 2013, we repurchased 181,900 shares at an average cost, excluding commissions, of $58.84. As of December 31, 2013, we had $43.8 million of authority remaining under this program. 22



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

Operations



We believe that cash balances, cash flows generated from operations or borrowings, and maturities and sales of investments are adequate to meet our future liquidity needs and those of our insurance subsidiaries. Contractual Obligations

Our contractual obligations and those of our insurance subsidiaries as of December 31, 2013, were (in thousands):

Post-retirement Long-Term Loss and LAE Benefit Payments Due in: Debt & Interest Operating Leases Capital Leases Reserves (a) (b) Total 2014 $ 13,750 $ 9,563 $ 742 $ 399,884 $ 292 $ 424,231 2015-2016 27,500 12,652 940 183,450 650 $ 225,192 2017-2018 27,500 5,430 98 37,003 759 $ 70,791 2019 and after 330,000 1,157 3 26,240 2,459 $ 359,859 Total $ 398,750 $ 28,803 $ 1,783 $ 646,577 $ 4,160 $ 1,080,073



________________

(a) We base the payout pattern for reserves for losses and LAE upon historical

payment patterns and they do not represent actual contractual obligations.

The timing and amounts ultimately paid will vary from these estimates, as

discussed above under "Critical Accounting Policies" and in Note 1-

Significant Reporting and Accounting Policies of the Notes to Consolidated

Financial Statements. (b) The payments for post-retirement benefits do not represent actual contractual obligations. The payments presented represent the best estimate of future contributions. 23



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

Operations Investments



General

Our Investment Committee, which is composed exclusively of independent directors, has approved our investment guidelines. The guidelines specifically address overall investment objectives, permissible assets, prohibited assets, permitted exceptions to the guidelines and credit quality. We engage three unaffiliated money managers for our fixed income portfolio and we own a Vanguard exchange-traded fund designed to track the FTSE Global All Cap Index for our equity portfolio. The investment managers conduct, in accordance with our investment guidelines, all of our investment purchases and sales. Our Chief Financial Officer and the Investment Committee, at least quarterly, review the performance of the money managers and compliance with our investment guidelines. National banks unaffiliated with the money managers maintain physical custody of securities. Our consolidated investment portfolio at December 31, 2013 contained $1.4 billion in fixed maturity securities, $91.1 million in equity securities and $2.6 million of short-term investments, all carried at fair value with unrealized gains and losses reported in accumulated other comprehensive income, a separate component of shareholders' equity on an after-tax basis. At December 31, 2013, we had pre-tax net unrealized gains of $9.2 million on fixed maturities and pre-tax net unrealized gains of $16.4 million on equity securities. Combined, the pre-tax net unrealized gain declined by $21.3 million for the twelve months ended December 31, 2013 as a result of increases in market interest rates during 2013. Approximately 90.6% of our fixed maturity portfolio at December 31, 2013 was rated "investment grade" (credit rating of AAA to BBB) by nationally recognized rating agencies. The average credit rating of our fixed maturity portfolio was AA- at December 31, 2013. Investment grade securities generally bear lower yields and lower degrees of risk than those that are unrated or non-investment grade. We believe that a high quality investment portfolio is more likely to generate stable and predictable investment returns. Since we carry all of these securities at fair value in the Consolidated Balance Sheets, there is virtually no effect on liquidity or financial condition upon the sale and ultimate realization of unrealized gains and losses. The average duration of our fixed maturity portfolio was 3.6 years at December 31, 2013. Fair values of instruments are based on (i) quoted prices in active markets for identical assets (Level 1), (ii) quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all significant inputs are observable in active markets (Level 2) or (iii) valuations derived from valuation techniques in which one or more significant inputs are unobservable in the marketplace (Level 3). 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 nationally recognized statistical rating organizations do not rate. A third party nationally recognized pricing service provides the fair value of securities in Level 2. We periodically review the third party pricing methodologies used by our primary independent pricing service to verify that prices are determined in accordance with fair value guidance in U.S. GAAP, including the use of observable market inputs, and to ensure that assets are properly classified in the fair value hierarchy. Further, for all Level 2 securities, we compare the market price from the primary independent third party pricing service that is used to value the security with market prices from recent sales activity or, for those securities with no recent sales activity, with prices from another independent third party pricing service or non-binding broker quotes. This comparison is performed in order to determine if the price obtained from the primary independent pricing service is a reasonable price to use in our financial statements. We made no adjustments to the prices obtained from the primary independent pricing service as a result of this comparison. 24



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INFINITY PROPERTY AND CASUALTY CORPORATION 10-K



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

Operations Summarized information for our investment portfolio at December 31, 2013 follows (in thousands): % of Amortized Fair Total Fair Cost Value Value Fixed maturities: U.S. government $ 64,194$ 64,666 4.5 % State and municipal 478,092 487,111 33.6 % Mortgage-backed, collateralized mortgage obligations and asset-backed: Residential mortgage-backed securities 330,169 323,346 22.3 % Commercial mortgage-backed securities 35,781 35,816 2.5 % Collateralized mortgage obligations ("CMOs"): Sequentials 421 451 0.0 % Whole loan 807 840 0.1 % Total CMOs 1,228 1,291 0.1 % Asset-backed securities ("ABS"): Auto loans 53,318 53,382 3.7 % Equipment leases 8,948 8,953 0.6 % Home equity 505 500 0.0 % Credit card receivables 7,618 7,621 0.5 % Tax liens 685 686 0.0 % Student loans 110 117 0.0 % Total ABS 71,183 71,259 4.9 % Total mortgage-backed, CMOs and asset-backed 438,361 431,712 29.8 % Corporates Investment grade 240,005 243,427 16.8 % Non-investment grade 124,425 127,389 8.8 % Total corporates 364,430 370,816 25.6 % Total fixed maturities 1,345,077 1,354,305 93.5 % Equity securities 74,718 91,127 6.3 % Short-term investments 2,595 2,596 0.2 % Total investment portfolio $ 1,422,390$ 1,448,027 100.0 % The following table presents the returns, gross of investment expenses, of our investment portfolios based on quarterly investment balances as reflected in the financial statements, excluding equities invested in a rabbi trust. Twelve months ended December 31, 2013 2012 2011 Return on fixed income securities: Excluding realized gains and losses 2.5 % 3.0 % 3.5 % Including realized gains and losses 2.9 % 3.8 % 4.0 % Return on equity securities: Excluding realized gains and losses 2.5 % 4.1 % 2.7 % Including realized gains and losses 3.5 % 44.5 % 13.3 % Return on all investments: Excluding realized gains and losses 2.5 % 3.1 % 3.5 % Including realized gains and losses 2.9 % 4.9 % 4.2 % 25



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INFINITY PROPERTY AND CASUALTY CORPORATION 10-K



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

Operations



Receivable for Securities Sold

The $2.8 million and $48.5 million balances in receivable for securities sold at December 31, 2013 and December 31, 2012, respectively, represent fixed income securities sold in the normal course of business that had not settled prior to the end of the respective years.



Payable for Securities Purchased

The $39.9 million and $132.4 million balances in payable for securities purchased at December 31, 2013 and December 31, 2012, respectively, represent fixed income securities and treasury stock purchased in the normal course of business that had not settled prior to the end of their respective years. Exposure to Market Risk Market risk represents the potential economic loss arising from adverse changes in the fair value of financial instruments. Our exposures to market risk relate primarily to our investment portfolio, which is exposed primarily to interest rate risk and credit risk and, to a lesser extent, equity price risk. Changes in market interest rates directly affect the fair value of our fixed maturity portfolio. Generally, the fair value of fixed-income investments moves inversely with movements in market interest rates. Our fixed maturity portfolio is comprised of substantially all fixed rate investments with primarily short-term and intermediate-term maturities. We strive to maintain a "laddered" portfolio, with maturities and prepaid principal spread across the maturity spectrum. This portfolio composition allows flexibility in reacting to fluctuations of interest rates. In addition, higher market rates available for new funds available for investment partially mitigate the risk of loss in fair value. We manage the portfolios of our insurance companies to achieve an adequate risk-adjusted return while maintaining sufficient liquidity to meet policyholder obligations. Interest Rate Risk The fair values of our fixed maturity investments fluctuate in response to changes in market interest rates. Increases and decreases in prevailing interest rates generally translate into decreases and increases, respectively, in fair values of those instruments. Additionally, the creditworthiness of the issuer, prepayment options, relative values of alternative investments, the liquidity of the instrument and other general market conditions may affect fair values of interest rate sensitive instruments. The following table summarizes the estimated effects of hypothetical increases and decreases in interest rates resulting from parallel shifts in market yield curves on our fixed maturity portfolio and long-term debt. We assume that we will realize the effects immediately upon the change in interest rates. The hypothetical changes in market interest rates do not reflect best or worst case scenarios. Variations in market interest rates could produce significant changes in the timing of repayments due to prepayment options available. For these reasons, actual results might differ from those reflected in the table. Sensitivity to Instantaneous Interest Rate Changes (basis points) (in thousands) (200) (100) (50) - 50 100 200 Fair value of fixed maturity portfolio $ 1,436,748$ 1,400,150$ 1,378,026$ 1,354,305

$ 1,330,311$ 1,306,313$ 1,258,308 Fair value of long-term debt 314,122 292,502 282,358 272,632 263,306 254,360 237,546 The following table provides information about our fixed maturity investments at December 31, 2013, 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. 26



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INFINITY PROPERTY AND CASUALTY CORPORATION 10-K Management's Discussion and Analysis of Financial Condition and Results of Operations (in thousands) Expected Principal Cash Flows MBS, CMO and Excluding MBS, ABS only CMO and ABS Total Maturing Book Yield For the twelve months ending December 31, 2014 $ 68,465 $ 92,813 $ 161,278 2.2 % 2015 59,381 164,050 223,431 2.8 % 2016 49,950 156,748 206,698 2.8 % 2017 38,940 184,270 223,210 2.5 % 2018 23,718 77,594 101,312 2.6 % Thereafter 129,717 226,482 356,199 3.2 % Total $ 370,171$ 901,957$ 1,272,128 2.7 %



The cash flows presented take into consideration historical relationships of market yields and prepayment rates. However, the actual prepayment rate may differ from historical trends resulting in actual principal cash flows that differ from those presented above.

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-K



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

Operations Credit Risk We manage credit risk by diversifying our 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 securities, is $8.4 million or 0.6% of the fixed income investment portfolio. The top five investments in fixed income securities, excluding those issued by the U.S. government, make up 2.5% 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 $0.1 million or less than 0.1% of the $1.4 billion fixed portfolio as of December 31, 2013. We categorize securities by rating based upon ratings issued by Moody's, Standard & Poor's or Fitch, where available. If all three ratings are available but not equivalent, we exclude the lowest rating and the lower of the remaining ratings is used. If ratings are only available from two agencies, the lowest is used. This methodology is consistent with that used by the major bond indices. State and municipal bond ratings presented are underlying ratings without regard to any insurance. The following table presents the credit rating and fair value (in thousands) of our fixed maturity portfolio by major security type: Rating Non- % of investment Total AAA AA A BBB Grade Total Fair Value Exposure U.S. government $ 64,666$ 0$ 0$ 0$ 0 $ 64,666 4.8 % State and municipal 92,705 284,204 110,202 0 0 487,111 36.0 %



Mortgage-backed,

asset-backed and CMO 407,062 19,138 5,512 0 0 431,712 31.9 % Corporates 0 17,138 116,391 109,898 127,389 370,816 27.4 % Total fair value $ 564,433$ 320,480$ 232,105$ 109,898$ 127,389$ 1,354,305 100.0 % % of total fair value 41.7 % 23.7 % 17.1 % 8.1 % 9.4 % 100.0 % The following table presents the credit rating and fair value of our residential mortgage-backed securities at December 31, 2013 by deal origination year (in thousands): 28



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INFINITY PROPERTY AND CASUALTY CORPORATION 10-K Management's Discussion and Analysis of Financial Condition and Results of Operations Rating Deal Non- % of Origination investment Total Fair Total Year AAA AA A BBB Grade Value Exposure 2002 $ 165$ 0$ 0$ 0 $ 0 $ 165 0.1 % 2003 1,985 0 0 0 0 1,985 0.6 % 2004 2,857 0 0 0 0 2,857 0.9 % 2005 4,624 0 0 0 0 4,624 1.4 % 2006 5,087 0 0 0 0 5,087 1.6 % 2007 3,876 0 0 0 0 3,876 1.2 % 2008 12,305 0 0 0 0 12,305 3.8 % 2009 34,127 0 0 0 0 34,127 10.6 % 2010 46,853 0 0 0 0 46,853 14.5 % 2011 37,906 0 0 0 0 37,906 11.7 % 2012 92,942 0 0 0 0 92,942 28.7 % 2013 77,173 0 0 0 0 77,173 23.9 % 2014 3,446 0 0 0 0 3,446 1.1 % Total fair value $ 323,346$ 0$ 0$ 0 $ 0 $ 323,346 100.0 % % of total fair value 100.0 % 0.0 % 0.0 % 0.0 % 0.0 % 100.0 %



Of the $323.3 million of residential mortgage-backed securities, $239.8 million were issued by government-sponsored enterprises ("GSE").

The following table presents the credit rating and fair value of our commercial mortgage-backed securities at December 31, 2013 by deal origination year (in thousands): Rating Deal % of Origination Non-investment Total Year AAA AA A BBB Grade Total Fair Value Exposure 2004 $ 1,362$ 0$ 0$ 0 $ 0 $ 1,362 3.8 % 2005 11,740 0 0 0 0 11,740 32.8 % 2006 13,817 0 0 0 0 13,817 38.6 % 2007 3,862 0 0 0 0 3,862 10.8 % 2008 0 756 0 0 0 756 2.1 % 2010 1,853 0 0 0 0 1,853 5.2 % 2012 979 0 0 0 0 979 2.7 % 2013 1,447 0 0 0 0 1,447 4.0 % Total fair value $ 35,060$ 756$ 0$ 0 $ 0 $ 35,816 100.0 % % of total fair value 97.9 % 2.1 % 0.0 % 0.0 % 0.0 % 100.0 %



None of the $35.8 million of commercial mortgage-backed securities were issued by GSEs.

The following table presents the credit rating and fair value of our collateralized mortgage obligation portfolio at December 31, 2013 by deal origination year (in thousands):

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-K Management's Discussion and Analysis of Financial Condition and Results of Operations Rating Deal % of Origination Non-investment Total Year AAA AA A BBB Grade Total Fair Value Exposure 2002 $ 0$ 840$ 0$ 0 $ 0 $ 840 65.0 % 2003 0 0 451 0 0 451 35.0 % Total fair value $ 0$ 840$ 451$ 0 $ 0 $ 1,291 100.0 % % of total fair value 0.0 % 65.0 % 35.0 % 0.0 % 0.0 % 100.0 %



None of the $1.3 million of collateralized mortgage obligations were issued by GSEs.

The following table presents the credit rating and fair value of our ABS portfolio at December 31, 2013 by deal origination year (in thousands): Rating Deal % of Origination Non-investment Total Year AAA AA A BBB Grade Total Fair Value Exposure 2001 $ 77$ 0$ 0$ 0 $ 0 $ 77 0.1 % 2003 423 0 0 0 0 423 0.6 % 2004 5,001 0 0 0 0 5,001 7.0 % 2010 529 0 0 0 0 529 0.7 % 2011 4,109 366 0 0 0 4,475 6.3 % 2012 13,779 6,484 2,693 0 0 22,956 32.2 % 2013 24,737 10,692 2,368 0 0 37,797 53.0 % Total fair value $ 48,656$ 17,542$ 5,061$ 0 $ 0 $ 71,259 100.0 % % of total fair value 68.3 % 24.6 % 7.1 % 0.0 % 0.0 % 100.0 % The following table presents the credit rating and fair value of our state and municipal bond portfolio, by state, at December 31, 2013 (in thousands): Rating Non- investment Total Fair % of Total State AAA AA A BBB Grade Value Exposure NY $ 8,827$ 40,049$ 14,163$ 0 $ 0 $ 63,039 12.9 % CA 0 33,584 9,906 0 0 43,490 8.9 % GA 10,656 10,352 6,518 0 0 27,526 5.7 % MD 22,050 3,957 0 0 0 26,007 5.3 % WA 848 19,539 2,999 0 0 23,386 4.8 % TX 9,118 8,128 5,457 0 0 22,703 4.7 % VA 4,410 17,346 0 0 0 21,756 4.5 % PA 0 13,458 8,262 0 0 21,720 4.5 % NC 9,827 10,018 0 0 0 19,845 4.1 % FL 1,023 9,879 5,449 0 0 16,351 3.4 % All other states 25,946 117,894 57,447 0 0 201,287 41.3 % Total fair value $ 92,705$ 284,204$ 110,202$ 0 $ 0 $ 487,111 100.0 %

% of total fair value 19.0 % 58.3 % 22.6 % 0.0 % 0.0 % 100.0 %



The following table presents the fair value of our state and municipal bond portfolio, by state and type of bond, at December 31, 2013 (in thousands):

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INFINITY PROPERTY AND CASUALTY CORPORATION 10-K Management's Discussion and Analysis of Financial Condition and Results of Operations Type General Obligation Total Fair % of Total State State Local Revenue Other Value Exposure NY $ 1,789$ 8,373$ 52,877$ 0$ 63,039 12.9 % CA 9,014 10,631 23,846 0 43,490 8.9 % GA 10,656 1,144 15,726 0 27,526 5.7 % MD 10,444 11,607 3,957 0 26,007 5.3 % WA 6,761 3,102 13,523 0 23,386 4.8 % TX 0 7,817 14,886 0 22,703 4.7 % VA 1,052 6,791 13,913 0 21,756 4.5 % PA 8,547 794 12,379 0 21,720 4.5 % NC 5,954 3,873 10,018 0 19,845 4.1 % FL 1,023 0 10,670 4,657 16,351 3.4 % All other states 43,537 23,442 132,314 1,993 201,287 41.3 % Total fair value $ 98,777$ 77,573$ 304,111$ 6,650$ 487,111 100.0 % % of total fair value 20.3 % 15.9 % 62.4 % 1.4 % 100.0 %



The following table presents the fair value of the revenue category of our state and municipal bond portfolio, by state and further classification, at December 31, 2013 (in thousands):

Revenue Bonds % of Total State Transportation Utilities Education Other Total Fair Value Exposure NY $ 25,271 $ 0 $ 7,207$ 20,399 $ 52,877 17.4 % CA 8,041 9,640 0 6,165 23,846 7.8 % GA 6,770 4,510 1,310 3,136 15,726 5.2 % TX 2,194 3,003 2,873 6,815 14,886 4.9 % VA 1,139 0 3,935 8,839 13,913 4.6 % WA 0 8,601 0 4,922 13,523 4.4 % CO 0 0 7,125 5,366 12,491 4.1 % PA 8,262 0 2,843 1,274 12,379 4.1 % IL 0 0 0 11,119 11,119 3.7 % FL 4,910 0 0 5,760 10,670 3.5 % All other states 16,923 21,091 17,048 67,616 122,679 40.3 %



Total fair value $ 73,510$ 46,846$ 42,342$ 141,411$ 304,111 100.0 % % of total fair value

24.2 % 15.4 % 13.9 % 46.5 % 100.0 % The following table presents the fair value of our corporate bond portfolio, by industry sector and rating of bond, at December 31, 2013 (in thousands): 31



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INFINITY PROPERTY AND CASUALTY CORPORATION 10-K Management's Discussion and Analysis of Financial Condition and Results of Operations Rating Non- investment Total Fair % of Total Industry Sector AAA AA A BBB Grade Value Exposure Financial $ 0$ 12,088$ 74,514$ 39,752$ 16,760$ 143,113 38.6 % Consumer, Non-cyclical 0 3,797 22,393 8,401 19,923 $ 54,514 14.7 % Communications 0 0 2,805 19,858 19,345 $ 42,008 11.3 % Energy 0 0 7,680 11,541 18,675 $ 37,895 10.2 % Consumer, Cyclical 0 1,253 2,883 7,835 16,495 $ 28,466 7.7 % Industrial 0 0 1,667 6,493 16,293 $ 24,452 6.6 % Utilities 0 0 2,745 4,872 8,646 $ 16,263 4.4 % Technology 0 0 1,705 6,018 5,632 $ 13,355 3.6 % Basic Materials 0 0 0 5,129 5,621 $ 10,750 2.9 %



Total fair value $ 0$ 17,138$ 116,391$ 109,898

$ 127,389$ 370,816 100.0 % % of total fair value 0.0 % 4.6 % 31.4 % 29.6 %



34.4 % 100.0 %

Included in our investments in corporate fixed income securities at December 31, 2013 are $37.2 million of dollar-denominated investments with issues or guarantors in foreign countries, as follows (in thousands): Rating Non- investment % of Total Issuer or Guarantor AAA AA A BBB Grade Total Fair Value Exposure Britain $ 0$ 6,409$ 12,300$ 0 $ 0 $ 18,709 50.3 % Canada 0 3,546 1,684 0 581 $ 5,811 15.6 % Switzerland 0 0 4,624 0 0 $ 4,624 12.4 % Australia 0 1,704 2,730 0 0 $ 4,434 11.9 % France 0 2,081 990 0 0 $ 3,071 8.3 % Cayman Islands 0 0 0 0 531 $ 531 1.4 % Total fair value $ 0$ 13,740$ 22,329$ 0$ 1,112$ 37,180 100.0 % % of total fair value 0.0 % 37.0 % 60.1 % 0.0 % 3.0 % 100.0 %



We own no investments that are denominated in a currency other than the U.S. dollar.

Equity Price Risk Equity price risk is the potential economic loss from adverse changes in equity security prices. Our exposure to equity price risk is limited, as our equity investments comprise only 6.3% of our total investment portfolio. At December 31, 2013, the fair value of our equity portfolio was $91.1 million. 32



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INFINITY PROPERTY AND CASUALTY CORPORATION 10-K Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Underwriting Premium Our net earned premium was as follows ($ in thousands): Twelve months ended December 31, 2013 2012 Change % Change Net earned premium Gross written premium Personal Auto Focus States $ 1,216,368$ 1,130,434$ 85,934 7.6 % Other States 24,845 35,499 (10,654 ) (30.0 )% Total Personal Auto 1,241,213 1,165,932 75,280 6.5 % Commercial Vehicle 85,301 76,618 8,682 11.3 % Classic Collector 13,305 12,379 927 7.5 % Other 0 (1 ) 1 (100.0 )% Total gross written premium 1,339,819 1,254,929 84,890 6.8 % Ceded reinsurance (9,927 ) (7,731 ) (2,196 ) 28.4 % Net written premium 1,329,892 1,247,198 82,694 6.6 % Change in unearned premium (27,367 ) (63,108 ) 35,741 (56.6 )% Net earned premium $ 1,302,525$ 1,184,090$ 118,435 10.0 % Twelve months ended December 31, 2012 2011 Change % Change Net earned premium Gross written premium Personal Auto Focus States $ 1,130,434$ 970,758$ 159,675 16.4 % Other States 35,499 36,491 (992 ) (2.7 )% Total Personal Auto 1,165,932 1,007,249 158,684 15.8 % Commercial Vehicle 76,618 64,444 12,175 18.9 % Classic Collector 12,379 10,774 1,605 14.9 % Other (1 ) 0 (1 ) NM Total gross written premium 1,254,929 1,082,466 172,463 15.9 % Ceded reinsurance (7,731 ) (6,490 ) (1,241 ) 19.1 % Net written premium 1,247,198 1,075,976 171,222 15.9 % Change in unearned premium (63,108 ) (56,916 ) (6,192 ) 10.9 % Net earned premium $ 1,184,090$ 1,019,060$ 165,030 16.2 % NM = Not meaningful 33



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INFINITY PROPERTY AND CASUALTY CORPORATION 10-K



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

Operations



The following table shows our policies in force:

Twelve months ended December 31, 2013 2012 Change % Change Policies in Force Personal Auto Focus States 830,808 859,674 (28,866 ) (3.4 )% Other States 16,239 27,941 (11,702 ) (41.9 )%



Total Personal Auto 847,047 887,615 (40,568 ) (4.6 )% Commercial Vehicle 40,183 39,621 562 1.4 % Classic Collector 39,179 38,235 944 2.5 % Total policies in force 926,409 965,471 (39,062 ) (4.0 )%

Twelve months ended December 31, 2012 2011 Change % Change Policies in Force Focus States 859,674 799,077 60,597 7.6 % Other States 27,941 28,340 (399 ) (1.4 )%



Total Personal Auto 887,615 827,417 60,198 7.3 % Commercial Vehicle 39,621 35,108 4,513 12.9 % Classic Collector 38,235 35,527 2,708 7.6 % Total policies in force 965,471 898,052 67,419 7.5 %

2013 compared to 2012

Gross written premium grew 6.8% during 2013. We implemented rate revisions in various states with an overall rate increase of 6.9% during the year. Excluding the effect of rate changes in California and Florida, our largest states, the overall rate increase was 10.7%. Policies in force at December 31, 2013 declined 4.0% compared with 2012. Gross written premium grew despite the decline in policies in force due to a shift in overall business mix toward policies offering broader coverage and higher average premium as well as growth in Florida business, which has a higher average premium per policy than our other states. During 2013, personal auto insurance gross written premium in our Focus States grew 7.6% when compared with 2012. The increase in gross written premium is primarily due to growth in California and Florida, which grew a combined 14.6% during 2013 as a result of higher average premium and renewal business growth in both states. The growth in California and Florida was partially offset by declines in the remaining Focus States. We have raised rates and tightened underwriting restrictions in these states in order to improve their profitability. Our Commercial Vehicle gross written premium grew 11.3% during the twelve months ended December 31, 2013. This growth is primarily due to higher average premium and renewal business growth for this product. Gross written premium in our Classic Collector product grew 7.5% during 2013. This growth is primarily due to growth in renewal business.



2012 compared to 2011

Gross written premium grew 15.9% during 2012. We implemented rate revisions in various states with an overall rate increase of 8.0% during the year. Excluding the effect of rate changes in California, our largest state, the overall rate increase was 12.1%. Policies in force at December 31, 2012 increased 7.5% compared with 2011. Gross written premium grew more than policies in force due to a shift in overall business mix toward policies offering broader coverage and higher average premium as well as growth in Florida business, which had a higher average premium per policy than our other states. During 2012, personal auto insurance gross written premium in our Focus States grew 16.4% when compared with 2011. The increase in gross written premium was primarily due to growth in California and Florida. 34



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INFINITY PROPERTY AND CASUALTY CORPORATION 10-K Management's Discussion and Analysis of Financial Condition and Results of Operations California gross written premium grew 7.4% during the twelve months ended December 31, 2012. Rate actions taken by competitors and an increase in business retention stimulated premium growth in the state.



Florida gross written premium grew 66.7% during the twelve months ended

December 31, 2012. This growth was primarily a result of a 66% increase

in new business application counts, higher business retention, an

increase of 6.8% in average premium from rate increases and competitor

rate increases.

A decline of 17.0% in Texas during 2012 partially offset the growth in California and Florida. The decline in Texas gross written premium was primarily due to actions taken, such as rate increases and the elimination of annual policies, to improve profitability in the state.

Our Commercial Vehicle gross written premium grew 18.9% during the twelve months ended December 31, 2012. This growth was primarily due to higher average premium and better retention for this product. Gross written premium in our Classic Collector product grew 14.9% during 2012. This growth was primarily due to growth in Florida and Texas resulting from an increase in the number of agencies actively producing business for this product.



Profitability

A key operating performance measure of insurance companies is underwriting profitability, as opposed to overall profitability or net earnings. We measure underwriting profitability by the combined ratio. When the combined ratio is under 100%, we consider underwriting results profitable; when the ratio is over 100%, we consider underwriting results unprofitable. The combined ratio does not reflect investment income, other income, interest expense, corporate general and administrative expenses, other expenses or federal income taxes. While we report financial results in accordance with GAAP for shareholder and other users' purposes, we report it on a statutory basis for insurance regulatory purposes. We evaluate underwriting profitability based on a combined ratio calculated using statutory accounting principles. The statutory combined ratio represents the sum of the following ratios: (i) losses and LAE incurred as a percentage of net earned premium and (ii) underwriting expenses incurred, net of fees, as a percentage of net written premium. Certain expenses are treated differently under statutory and GAAP accounting principles. Under GAAP, commissions, premium taxes and other variable costs incurred in connection with successfully writing new and renewal business are capitalized as deferred policy acquisition costs and amortized on a pro rata basis over the period in which the related premium is earned. On a statutory basis, these items are expensed as incurred. Additionally, bad debt charge-offs on agent balances and premium receivables are included only in the GAAP combined ratios.



The following table presents the statutory and GAAP combined ratios:

Twelve months ended December 31, 2013 2012 % Point Change Loss & Loss & Loss & LAE Underwriting Combined LAE



Underwriting Combined LAE Underwriting Combined

Ratio Ratio Ratio Ratio Ratio Ratio Ratio Ratio Ratio Personal Auto: Focus States 78.5 % 17.6 % 96.1 % 80.2 % 18.3 % 98.4 % (1.7 )% (0.7 )% (2.4 )% Other States 81.5 % 21.3 % 102.8 % 80.3 % 20.9 % 101.1 % 1.3 % 0.4 % 1.7 % Subtotal 78.6 % 17.7 % 96.2 % 80.2 % 18.3 % 98.5 % (1.6 )% (0.7 )% (2.3 )% Commercial Vehicle 75.8 % 16.7 % 92.4 % 70.8 % 17.9 % 88.7 % 5.0 % (1.2 )% 3.7 % Classic Collector 54.7 % 36.6 % 91.4 % 78.7 % 38.4 % 117.0 % (23.9 )% (1.7 )% (25.6 )% Total statutory ratios 78.2 % 17.8 % 96.0 % 79.7 % 18.6 % 98.3 % (1.5 )% (0.8 )% (2.2 )% Total statutory ratios excluding development 78.0 % 17.8 % 95.8 % 78.3 % 18.6 % 96.9 % (0.3 )% (0.8 )% (1.1 )% GAAP ratios 78.1 % 19.9 % 98.0 % 79.6 % 21.1 % 100.7 % (1.5 )% (1.2 )% (2.7 )% GAAP ratios excluding development 77.9 % 19.9 % 97.7 % 78.2 % 21.1 % 99.3 % (0.3 )% (1.2 )% (1.6 )% 35



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INFINITY PROPERTY AND CASUALTY CORPORATION 10-K Management's Discussion and Analysis of Financial Condition and Results of Operations Twelve months ended December 31, 2012 2011 % Point Change Loss & Loss & Loss & LAE Underwriting Combined LAE Underwriting Combined LAE Underwriting Combined Ratio Ratio Ratio Ratio Ratio Ratio Ratio Ratio Ratio Personal Auto: Focus States 80.2 % 18.3 % 98.4 % 75.4 % 20.4 % 95.7 % 4.8 % (2.1 )% 2.7 % Other States 80.3 % 20.9 % 101.1 % 85.8 % 23.8 % 109.6 % (5.5 )% (3.0 )% (8.5 )% Subtotal 80.2 % 18.3 % 98.5 % 75.8 % 20.5 % 96.3 % 4.4 % (2.2 )% 2.3 % Commercial Vehicle 70.8 % 17.9 % 88.7 % 70.6 % 17.9 % 88.5 % 0.2 % 0.0 % 0.2 % Classic Collector 78.7 % 38.4 % 117.0 % 63.5 %



38.7 % 102.2 % 15.2 % (0.4 )% 14.8 % Total statutory ratios

79.7 % 18.6 % 98.3 % 75.4 % 20.4 % 95.8 % 4.3 % (1.8 )% 2.5 % Total statutory ratios excluding development 78.3 % 18.6 % 96.9 % 75.0 % 20.4 % 95.4 % 3.4 % (1.8 )% 1.5 % GAAP ratios 79.6 % 21.1 % 100.7 % 75.3 % 22.7 % 98.0 % 4.2 % (1.6 )% 2.6 % GAAP ratios excluding development 78.2 % 21.1 % 99.3 % 74.9 % 22.7 % 97.6 % 3.3 % (1.6 )% 1.7 % In evaluating the profit performance of our business, we review underwriting profitability using statutory combined ratios. Accordingly, the discussion of underwriting results that follows will focus on these ratios and the components thereof, unless otherwise indicated. 2013 compared to 2012 The statutory combined ratio for the twelve months ended December 31, 2013 decreased by 2.2 points from the same period of 2012. The twelve months ended December 31, 2013 included $2.9 million of unfavorable development on prior year loss and LAE reserves compared to $16.2 million of unfavorable development on prior year loss and LAE reserves in 2012. Excluding the effect of development from both periods, the statutory combined ratio decreased by 1.1 points for the twelve months ended December 31, 2013 compared to 2012. The GAAP combined ratio for the twelve months ended December 31, 2013 decreased by 2.7 points compared to 2012. Excluding the effect of development from both periods, the GAAP combined ratio decreased by 1.6 points for the twelve months ended December 31, 2013 compared to 2012. The GAAP underwriting ratio declined by 1.2 points for the twelve months ended December 31, 2013 as a result of reduced commission rates on new and renewal business, a lower proportion of new business, on which we pay a higher commission rate than renewal business, and a lower ratio of fixed costs to premium as a result of premium growth in 2013. Excluding the effect of development, the GAAP combined ratio was 97.7% for the twelve months ended December 31, 2013. As we did in 2013, we will continue to raise rates and tighten underwriting standards in under performing states such as Arizona, Georgia and Pennsylvania. We will also continue to grow our profitable business in California and Florida personal auto as well as our Commercial Vehicle product. We expect these actions to result in a lower combined ratio. Accordingly, we expect the GAAP combined ratio, excluding reserve development, to be between 95.5% and 96.5% for 2014.



Losses from catastrophes were $1.8 million for the twelve months ended December 31, 2013 compared to $4.0 million for 2012.

The combined ratio in the Focus States decreased by 2.4 points for the twelve months ended December 31, 2013. The decline was primarily due to improvement in the loss and LAE ratio in all states except California coupled with an overall decline in the underwriting ratio in the Focus States. As we experience premium growth in these states, the ratio of fixed underwriting costs to premium has declined. Also, the average commission ratios declined due to a shift in business mix from new to renewal business. We typically pay lower commission rates on renewal business than on new business. The combined ratio in the Other States increased by 1.7 points for the twelve months ended December 31, 2013, primarily due to increases in the loss and LAE ratios in Alabama and Illinois. We have raised rates and tightened underwriting restrictions in these states in order to improve their profitability. The combined ratio for the Commercial Vehicle product increased by 3.7 points during the twelve months ended December 31, 2013, due to an increase in the loss and LAE ratio. 36



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Operations 2012 compared to 2011 The statutory combined ratio for the twelve months ended December 31, 2012 increased by 2.5 points from the same period of 2011. The twelve months ended December 31, 2012 included $16.2 million of unfavorable development on prior year loss and LAE reserves compared to $4.5 million of unfavorable development on prior year loss and LAE reserves in 2011. Excluding the effect of development from both periods, the statutory combined ratio increased by 1.5 points for the twelve months ended December 31, 2012 compared to 2011. The increase was primarily due to an increase in the current accident year loss and LAE ratio offset by a decline in the underwriting ratio. The increase in the loss and LAE ratio was primarily attributable to an increase in new business in states such as Florida. The underwriting ratio declined primarily as a result of spreading fixed underwriting costs over a larger written premium base as well as a decline in advertising spending. The GAAP combined ratio for the twelve months ended December 31, 2012 increased by 2.6 points compared to 2011. Excluding the effect of development from both periods, the GAAP combined ratio increased by 1.7 points for the twelve months ended December 31, 2012 compared to 2011. Losses from catastrophes were $4.0 million for the twelve months ended December 31, 2012 compared to $4.4 million for 2011. Losses from catastrophes during 2012 were primarily due to hail storms in Texas during the second quarter and Hurricane Sandy during the fourth quarter. The combined ratio in the Focus States increased by 2.7 points for the twelve months ended December 31, 2012. An increase in the loss and LAE ratio was offset by a decline in the underwriting ratio. The increase in the loss and LAE ratio was primarily due to unfavorable development in California and Florida. The increase in the loss and LAE ratio in the Focus States was partially offset by a decline in the underwriting ratio of 2.1 points. As we experienced premium growth in these states, the ratio of fixed underwriting costs to premium declined. The combined ratio in the Other States decreased by 8.5 points for the twelve months ended December 31, 2012, primarily due to a decline in the loss and LAE ratio in Illinois. We reclassified Illinois from a Focus State to an Other State in 2012 and slowed new business production which drove the decline in the loss and LAE ratio. The combined ratio for the Commercial Vehicle product increased by 0.2 points during the twelve months ended December 31, 2012, due to an increase in the loss and LAE ratio. The increase was due to several large losses incurred during the third quarter of 2012. 37



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

Operations Net Investment Income Investment income primarily includes gross investment revenue and investment management fees as shown in the following table (in thousands): Twelve months ended December 31, 2013 2012 2011 Investment income: Interest income on fixed maturities, cash and cash equivalents $ 36,113$ 38,234$ 41,900 Dividends on equity securities 1,711 1,415 693 Gross investment income $ 37,825$ 39,649$ 42,593 Investment expenses (2,279 ) (2,077 ) (2,036 ) Net investment income $ 35,546$ 37,571$ 40,557 Average investment balance, at cost $ 1,511,558$ 1,294,932$ 1,225,885 Annualized returns excluding realized gains and losses 2.4 % 2.9 % 3.3 % Annualized returns including realized gains and losses 2.8 % 4.8 % 4.0 % 2013 compared to 2012 Annualized returns declined due to new money rates that were lower than the book yields of maturing securities. Additionally, new money from operating cash flows was invested at these lower new money rates. Changes in investment income reflect fluctuations in market rates and changes in average invested assets. Net investment income in 2013 declined when compared to 2012 primarily due to a decline in book yields because of a general decline in market interest rates for high quality bonds. Included in investment income in 2013 was $1.7 million related to a change in estimate for principal prepayments for mortgage-backed securities. In October 2013, we began using a better estimate of expected mortgage principal prepayments. Until then, we had used an estimate that was based on the past three months of actual prepayments. The new estimate takes into consideration current and expected market conditions. 2012 compared to 2011 Net investment income for the year ended December 31, 2012 decreased compared to 2011 primarily due to a decline in book yields because of a general decline in market interest rates for high quality bonds. 38



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

Operations Realized Gains (Losses) on Investments We recorded realized gains (losses) on sales and disposals and impairments for unrealized losses deemed other-than-temporary as follows (before tax, in thousands): Twelve months ended December 31, 2013 Net Realized Impairments Gains (Losses) Recognized in Total Realized on Sales Earnings Gains (Losses) Fixed maturities $ 6,818 $ (1,468 ) $ 5,349 Equities 677 0 677 Total $ 7,495 $ (1,468 ) $ 6,026 Twelve months ended December 31, 2012 Net Realized Impairments Gains (Losses) Recognized in Total Realized on Sales Earnings Gains (Losses) Fixed maturities $ 11,594$ (1,393 )$ 10,202 Equities 13,853 0 13,853 Total $ 25,447$ (1,393 )$ 24,055 Twelve months ended December 31, 2011 Net Realized Impairments Gains (Losses) Recognized in Total Realized on Sales Earnings Gains (Losses)

Fixed maturities $ 7,295 $ (1,447 ) $ 5,848 Equities 2,750 0 2,750 Total $ 10,045$ (1,447 ) $ 8,598 2013 compared to 2012 The decline in the total realized gain in 2013 is primarily due to a large capital gain from the sale of our investment in the Vanguard U.S. broad based exchange-traded fund in 2012. 2012 compared to 2011 The increase in the total realized gain in 2012 was primarily a result of securities sold in the fourth quarter of 2012. To improve diversification, we sold our investment in a Vanguard U.S. broad based exchange-traded fund for a pretax gain of $13.8 million and reinvested in a global exchange-traded fund. Gain on Sale of Subsidiaries On September 30, 2012, we completed the sale of an inactive, shell subsidiary company to an unaffiliated third party. The total gain recorded on a GAAP basis was $2.9 million. On December 31, 2011, we completed the sale of two inactive, shell subsidiary companies to an unaffiliated third party. The total gain recorded on a GAAP basis was $4.1 million. In the future we intend to sell or dissolve other inactive shell companies. The primary reason for the sale of the companies is to reduce the administrative costs associated with maintaining licenses that are no longer needed to support our insurance operations. Other Income



Other income of $0.7 million, $1.0 million and $0.3 million for the twelve months ended December 31, 2013, 2012 and 2011, respectively, is primarily made up of items of a non-recurring nature.

Interest Expense (in thousands) Twelve months ended December 31, 2013 2012 2011 5.5% Senior Notes $ 0 $ 8,605$ 10,807 5.0% Senior Notes 13,826 3,934 0 Total $ 13,826$ 12,539$ 10,807 At December 31, 2013 we had $275.0 million of senior notes outstanding. These notes carry a coupon rate of 5.0% and require no principal payment until maturity in September 2022. On October 17, 2012, we fully redeemed the $195.0 million outstanding principal of senior notes (the "5.5% Senior Notes") due 2014 at a price of 106.729%, or $208.1 million plus accrued interest of $1.8 million. (See Note 4 - Long-Term Debt of the Notes to Consolidated Financial Statements for additional information on the Senior Notes). Corporate General and Administrative Expenses (in thousands) Twelve months ended



December 31,

2013 2012 2011 Corporate general and administrative expenses $ 7,870 $



7,408 $ 7,664

Corporate general and administrative expenses are comprised of expenses of the holding company, including board of directors' fees, directors and officers insurance and a portion of the salaries and benefits of senior executives.

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Loss on Redemption of Long-Term Debt

On October 17, 2012 we fully redeemed the $195.0 million principal outstanding of the 5.5% Senior Notes at a price of 106.729%, or $208.1 million, plus accrued interest of $1.8 million. As a result, we recognized a pre-tax loss on redemption as follows (in thousands): Redemption price $ 208,122 Amortized cost at redemption (194,878 ) Unamortized issuance costs 352



Loss on redemption of debt, pre-tax $ 13,595

Other Expenses (in thousands) Twelve months ended December 31, 2013 2012 2011 Corporate litigation expense $ 1,169$ 910$ 630 Loss on subleases 56 109 (824 ) Loss on disposal of software and equipment 46 59 635 Other 803 448 893 Total other expenses $ 2,073$ 1,526$ 1,334 2013 compared to 2012 Other expenses for the twelve months ended December 31, 2013 increased $0.5 million, primarily due to a $0.3 million increase in corporate litigation expense made up of items of a non-recurring nature. 2012 compared to 2011 Other expenses for the twelve months ended December 31, 2012 increased $0.2 million, primarily due to $1.0 million in sublease losses reversed in 2011. This increase was partially offset by a $0.6 million decline in losses on disposals of EDP software and equipment. Income Taxes The following table reconciles our U.S. statutory rate and effective tax rate for the periods ended December 31, 2013, 2012 and 2011: Twelve months ended December 31, 2013 2012 2011 U.S. Statutory tax rate 35.0 % 35.0 % 35.0 % Adjustments: Dividends received deduction (0.8 )% (1.3 )% (0.3 )% Tax exempt interest (6.1 )% (14.9 )% (6.5 )% Adjustment to valuation allowance (0.1 )% (29.0 )% (6.5 )% Other (0.4 )% 0.1 % 0.3 % Effective tax rate 27.6 % (10.1 )% 22.0 % In 2008, as a result of the significant fall in the stock market, the fair value of both our exchange-traded fund ("ETF") and fixed securities fell significantly. At that time, we wrote the book value of these securities down to market as an other-than-temporary impairment ("OTTI") and thereby incurred a GAAP pre-tax loss. This loss created a basis difference that generated a significant deferred tax asset. Given the market conditions at the time, and the fact that we were in a capital loss carryforward position, we did not believe that it was more-likely-than-not that this deferred tax asset would be recognized. Therefore, a full valuation allowance was established for this deferred tax asset. This was consistent with the full valuation allowance that had 40



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been established for the deferred tax asset relating to the capital loss carryforward.

The valuation allowance on the capital loss carryforward was released as the carryforward was utilized. In 2011, the capital loss carryforward was fully utilized. The valuation allowance on the OTTI deferred tax asset was released as the securities were sold. In the fourth quarter of 2012, the ETF was sold as part of our plan to seek better diversification in our equity portfolio, resulting in a release of the valuation allowance related to the ETF. Due to the market recovery, the tax loss was fully recognized. Based on the remaining OTTI balance as of December 31, 2012, and our carryback potential, it was management's belief that it was more likely-than-not that we would be able to fully utilize the tax deductions related to OTTI that would be recognized in the future. Therefore, the balance in the valuation allowance was released in the fourth quarter of 2012. We also maintain a valuation allowance on a net operating loss carryforward for a 51% owned subsidiary that is required to file its federal tax return on a separate company basis. The release of the valuation allowance for 2013 relates to the utilization of a portion of the net operating loss during 2013. 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 under the caption, Exposure to Market Risk.


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