UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-K/A

Amendment No. 1 to Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

INFINITY PROPERTY AND CASUALTY CORPORATION

2204 Lakeshore Drive, Birmingham, Alabama 35209
(205) 870-4000

Securities Registered Pursuant to Section 12(b) of the Act: None

Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, no par value

Other securities for which reports are submitted pursuant to Section 15(d) of the Act: None

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and need not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

     Indicate by check mark whether the registrant is an accelerated filer. Yes [  ] No [X]

     As of March 1, 2004, there were 20,654,787 shares of the Registrant’s Common Stock outstanding. The aggregate market value of voting stock held by non-affiliates of the registrant was $285,262,096 as of June 30, 2003.

Documents Incorporated by Reference

Portions of the registrant’s proxy statement for the annual meeting of shareholders to be held on May 25, 2004, are incorporated by reference in Part III hereof.

INFINITY PROPERTY AND CASUALTY CORPORATION 10-K

INDEX TO ANNUAL REPORT

ON FORM 10-K

(a) The response to this Item is “none”.

1

FORWARD LOOKING STATEMENTS

This Form 10-K, chiefly in Items 1, 3, and 7, contains certain forward-looking statements that are subject to numerous assumptions, risks and uncertainties. The Private Securities Litigation Reform Act of 1995 provides safe harbor for forward-looking statements. Some of the forward-looking statements can be identified by the use of forward-looking words such as “anticipates”, “believes”,” estimates”, “expects”, “intends”, “plans”, “seeks”, “could”, “may”, “should”, “will”, or the negative version of those words or other comparable terminology. Examples of such forward-looking statements include statements relating to: expectations concerning market and other conditions, future premiums, revenues, earnings and investment activities, expected losses, rate increases, improved loss experience and expected expense savings resulting from consolidation of the operations of the Company’s subsidiaries.

Actual results could differ materially from those expected by the Company depending on certain risks and uncertainties including but not limited to:

The forward-looking statements herein are made only as of the date of this report. The Company assumes no obligation to publicly update any forward-looking statements.

PART I

ITEM 1

Business

Introduction

Infinity Property and Casualty Corporation (“Infinity”) is a holding company, which, through subsidiaries, provides personal automobile insurance on a national level with emphasis on nonstandard auto insurance. Infinity employs approximately 2,200 persons. Its address is 2204 Lakeshore Drive, Birmingham, Alabama 35209; its phone number is (205) 870-4000. SEC filings, news releases and other information may be accessed free of charge through Infinity’s Internet site at: www.ipacc.com.

Infinity was incorporated as an Ohio corporation in September 2002 as an indirect wholly owned subsidiary of American Financial Group, Inc. (“AFG”) to acquire and conduct, as a separate public company, AFG’s personal lines business written through independent agents. On December 31, 2002, AFG transferred to Infinity all of the issued and outstanding capital stock of the following personal auto insurance subsidiaries: Atlanta Casualty Company, Infinity Insurance Company, Leader Insurance Company and Windsor Insurance Company (collectively the “NSA Group”). In exchange, AFG received all of the issued and outstanding shares of Infinity Common Stock and a $55 million promissory note. In February 2003, AFG sold 12.5 million shares (61%) of Infinity in an initial public offering and in December of 2003 sold its remaining interest (7.9 million shares) in a secondary public offering.

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Business (continued)

As of January 1, 2003, Infinity acquired the in-force personal insurance business written through independent agents (the “Assumed Agency Business”) by AFG’s principal property and casualty subsidiary, Great American Insurance Company (“GAI”). Because this business is not a separate legal entity, the acquisition was effected through a reinsurance agreement under which an Infinity subsidiary assumed the inforce business, services the policyholders and handles the claims. GAI, in turn, transferred to Infinity assets (primarily investment securities) with a market value of $125.3 million and permits Infinity to continue to write standard and preferred insurance on policies issued by the same GAI companies that had previously issued such policies.

References to Infinity, unless the context requires otherwise includes the Combined Operations of the NSA Group and the Assumed Agency Business. Unless indicated otherwise, the financial information herein is presented on a GAAP basis.

Operations

Infinity estimates that approximately 90% of its personal auto business is nonstandard auto insurance. While there is no precise, industry-recognized definition of nonstandard auto insurance, it is generally understood to mean coverage to drivers who, due to their driving record, age or vehicle type, represent higher than normal risks and pay higher rates for comparable coverage. Based on data published by A.M. Best, Infinity believes that it is the second largest provider of nonstandard auto coverage through independent agents in the United States. Infinity also writes standard and preferred personal auto insurance, nonstandard commercial auto insurance and complementary personal lines insurance products.

Summarized historical financial data for Infinity is presented below (in millions). Data for periods prior to 2003 include only the NSA Group.

Infinity has a history of favorable underwriting results. The following table compares Infinity’s statutory combined ratio in past years with those of the personal lines insurance industry as a whole. The statutory combined ratio is the sum of the loss ratio (the ratio of losses and loss adjustment expenses to net earned premiums) and the expense ratio (when calculated on a statutory accounting basis, the ratio of underwriting expenses to net written premiums). When the combined ratio is under 100%, underwriting results are generally considered profitable; when the ratio is over 100%, underwriting results are generally considered unprofitable. The combined ratio does not reflect investment income, other income or federal income taxes.

(*) Industry combined ratios were obtained from A.M. Best

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Business (continued)

Products

Personal Automobile is Infinity’s primary insurance product. It provides coverage to individuals for liability to others for bodily injury and property damage and for physical damage to an insured’s own vehicle from collision and various other perils. In addition, many states require policies to provide for first party personal injury protection, frequently referred to as no-fault coverage. Infinity offers personal automobile insurance to nonstandard, standard and preferred customers. Personal automobile insurance accounted for approximately 95% of Infinity’s gross written premiums for both twelve month periods ended December 31, 2003 and 2002.

Nonstandard Commercial Automobile provides coverage to businesses for liability to others for bodily injury and property damage and for physical damage to businesses’ vehicles from collision and various other perils. Infinity offers nonstandard commercial automobile insurance to businesses that employ one or more nonstandard risk drivers. Target businesses include fleets of 12 or fewer vehicles. Businesses which are involved in what are considered to be hazardous operations or interstate commerce are generally avoided. Nonstandard commercial automobile insurance accounted for approximately 4% of gross written premiums for the twelve month periods ended December 31, 2003 and 2002.

Homeowners and Other includes homeowners insurance and several other personal lines insurance products. Infinity writes homeowners insurance for dwellings, condominiums and rental property contents on a limited basis in selected markets. Homeowners insurance provides protection against losses from a wide variety of perils, as well as coverage for liability arising from ownership or occupancy. Infinity also writes coverage on a limited basis for personal watercraft, personal articles, such as jewelry, and umbrella liability protection. Homeowners and other insurance accounted for less than 1% of gross written premiums for the twelve month periods ended December 31, 2003 and 2002. Infinity is taking steps to exit these lines of business and does not expect these actions to materially affect its results of operations.

The Personal Automobile Market

Personal auto insurance is the largest line of property and casualty insurance accounting for approximately 35% of the $418 billion of annual industry premiums. Personal auto insurance provides coverage to drivers for liability to others for both bodily injury and property damage and for physical damage to an insured’s own vehicle from collision and other perils. Personal auto insurance is comprised of preferred, standard and nonstandard risks. Nonstandard insurance is intended for drivers who, due to their driving record, age or vehicle type, represent a higher than normal risk. As a result, customers that purchase nonstandard auto insurance generally pay higher premiums for similar coverage than drivers qualifying for standard or preferred policies. While there is no established industry-recognized demarcation between nonstandard policies and all other personal auto policies, Infinity believes that nonstandard auto risks generally constitute between 15% and 20% of the personal automobile insurance market, with this range fluctuating according to competitive conditions in the market. Approximately one-third of all personal automobile insurance is sold by independent agents. The remainder is sold by exclusive agents or directly by insurance companies to their customers.

The personal auto insurance industry is cyclical, characterized by periods of price competition and excess capacity followed by periods of high premium rates and shortages of underwriting capacity. In the late 1990s, many automobile insurers attempted to capture more business by reducing rates. Infinity believes that these industry-wide rate reductions combined with increased severity trends during the years 1999 through 2001 contributed to the deterioration of industry loss ratios in that period. Infinity reacted by increasing personal auto rates across the NSA Group and Assumed Agency Business by 14% in 2000, 15% in 2001, 12% in 2002 and 2% in 2003. Since that time, most of the industry, including some of the largest companies, have raised rates and tightened underwriting standards in order to address poor results. Other insurance companies withdrew from the market because of their inability to compete successfully, impaired capital positions, or because of a decrease in the availability of reinsurance. In the second half of 2003, competitors who remained in the marketplace began to compete more aggressively for independent agents’ business by offering modestly increased sales and commission incentives. In 2003, Infinity has not observed widespread rate reductions such as those seen in the years 1999 through 2001 that contributed to the deterioration of industry-wide underwriting results during those years.

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Business (continued)

The personal auto insurance industry is highly competitive and, except for regulatory considerations, there are relatively few barriers to entry. Infinity generally competes with other insurers on the basis of price, coverages offered, claims handling, customer service, agent commission, geographic coverage and financial strength ratings. Infinity competes with both large national writers and smaller regional companies. In 2002, the five largest automobile insurance companies accounted for approximately 48% of the industry’s net written premiums and the largest ten accounted for approximately 62% (2003 industry data not available). Approximately 390 insurance groups compete in the personal auto insurance industry, according to A.M. Best. Some of these groups specialize in nonstandard auto insurance, while others provide a broad spectrum of personal auto insurance.

Pricing and Product Management

The pricing segmentation approach that Infinity utilizes requires the extensive involvement of product managers who are responsible for the underwriting profitability of a specific state or region with the direct oversight of rate level structure by senior managers. Product managers work closely with the pricing and business development departments to generate rate level indications and other relevant data. This data enables product managers to change the rate structure by evaluating detailed information, such as loss experience based on driver characteristics, financial responsibility scores and make/model of vehicles. Product managers are also responsible for obtaining approval of rate filings from state insurance departments. This approach has permitted a quicker response to adverse loss trends such as those experienced in 1999 and 2000 and allows Infinity to obtain faster approval for rate filings.

Beyond the detailed pricing analysis, product managers are responsible for developing innovative products which meet the needs of Infinity’s customers and provide a competitive advantage in the marketplace. Infinity has had success in designing products that provide the basic required coverage for nonstandard customers, and products that include expanded coverage for preferred customers.

Distribution and Marketing

Infinity distributes its products primarily through a network of approximately 14,000 independent agencies and strategic partnerships. Independent agencies were responsible for approximately 94.5% of Infinity’s gross written premiums for the twelve month period ended December 31, 2003. In 2003, no one independent agency accounted for more than 2% of Infinity’s gross written premiums, and only three agencies accounted for more than 1% of its gross written premiums. Another mode of distribution includes relationships, or strategic partnerships, with some non-affiliated property and casualty insurers that have their own captive agency forces. These companies usually provide standard and preferred auto coverage through one of their own companies while utilizing Infinity’s companies for their nonstandard risks. Infinity believes these are mutually beneficial relationships since its partners gain access to Infinity’s nonstandard auto expertise and Infinity gains access to a new distribution channel. This channel represented approximately 5.5% of gross written premiums in 2003.

Infinity holds licenses to write auto insurance in all 50 states, but is committed to growth in 15 focus states believed to provide the greatest opportunity for profitable growth considering the market size and the current legal and regulatory environment. Infinity’s operating states fall into four categories:

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Business (continued)

The following table sets forth the distribution of Infinity’s gross premiums written by state for the Franchise States, as well as the other categories, as a percent of total gross written premiums for the periods indicated:

Infinity’s business development department is responsible for the distribution and sale of its products through independent agencies and strategic partners. This department is split into two key areas, field operations and corporate business development. The responsibilities of Infinity’s field business development representatives include selecting agencies and strategic partners for appointment, training them to sell its products, and monitoring their operations to ensure compliance with its production and profitability standards. While most of the field activity occurs face-to-face in the producer’s office, Infinity has had success with other approaches such as group seminars that focus on promoting its products and conducting training for its agents.

Infinity’s corporate business development staff is responsible for its branding initiatives, cooperative advertising with its independent agents, sales promotions and agents’ incentives. In addition, this team is actively engaged in building agency relationships via telephone, e-mail, fax and direct mail.

Infinity fosters its agent relationships by providing its agents with Infinity’s software applications along with programs and services designed to strengthen and expand their marketing, sales and service capabilities. Infinity’s internet-base software applications provide many of its agents with real-time underwriting, claims and policy information. Infinity believes the array of services that it offers to its agents adds significant value to their businesses. For example, Infinity’s PASS Program (Providing Agents Service and Support) is an incentive-based program through which Infinity’s agents earn savings on service and support needs including technology, training, financial services, office supplies, advertising, promotion and travel.

Infinity develops innovative products and services niche markets across the entire range of automobile insurance segments. Infinity focuses particular attention on developing relationships with Latino agents, especially in Southern California. Over the past decade, Latinos have been the fastest growing segment of the United States population according to U.S. Census Bureau data. In Infinity’s Franchise States, Latinos constitute an estimated 21% of the population. Over the past decade, Infinity has actively developed close relationships with Latino agents by supporting their businesses and customers in their local communities. Infinity has developed products and services that support their particular needs and interests such as translating important documents to Spanish and providing bilingual customer service and claims personnel. Infinity considers its position in this unique niche of the market, including the Infinity brand, to be a significant competitive advantage.

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Business (continued)

Infinity’s distribution and marketing efforts are implemented with a focus on maintaining a low cost structure. Controlling expenses allows Infinity to price competitively and achieve better underwriting returns. Over the five years ended 2002, Infinity’s statutory ratio of underwriting expenses to premiums written has averaged 23.2%, which is 4.4% points better than the personal lines industry average of 27.6% for the same period.

Claims Handling

Infinity’s claims organization employs approximately 1,200 people and has 37 field branch offices and three regional offices. Infinity provides a 24-hour, seven days per week toll-free service for its customers to report claims. Infinity uses predominantly its own local adjusters who typically respond to claims within 24 hours of a report.

Infinity is committed to the field handling of claims and believes it provides better service to its customers and better control of the claim resolution process than alternative methods. Infinity opens claims branch offices in areas where it believes the volume of business will support them. Customer interactions can occur with generalists (multi-line claim representatives) and specialists (staff appraisers, field casualty representatives and special investigators) based on local market volume, density and performance. Nationally, over 65% of Infinity’s claims are handled face-to-face. Infinity strives for accuracy, consistency and fairness in its claim resolutions. Its claims audit program measures performance in investigations, damage documentation and other relevant areas.

Infinity’s claims organization is committed to defending against non-meritorious claims. This is done through referrals to its special investigations team. This team, made up of claims and former law enforcement professionals, works in concert with field operations to resolve questionable claims.

Reinsurance

Infinity reinsures a portion of its business with other insurance companies. Ceding reinsurance permits diversification of risk and limits the maximum loss arising from large or unusually hazardous risks or catastrophic events. Infinity is subject to credit risk with respect to its reinsurers, as the ceding of risk to reinsurers generally does not relieve Infinity of its liability to insureds until claims are fully settled. To attempt to mitigate this credit risk, Infinity cedes business only to reinsurers that meet its credit ratings criteria. Excess of loss and catastrophe reinsurance protection is utilized for both personal and commercial automobile risks.

In April 2001, Infinity entered into a 90% quota share agreement on the personal auto physical damage business written by the NSA Group with Inter-Ocean Reinsurance Company Ltd. (“Inter-Ocean”), an unaffiliated company which is rated “A (Excellent)” by A.M. Best. Under this agreement, credit risk was minimized by withholding premiums, in exchange for a fee, until all claims were resolved or the parties mutually agreed to terminate the agreement. This quota share agreement, which was later amended to include coverage of Great American’s personal lines that would otherwise be included in the Assumed Agency Business for both policies in effect since January 1, 2002 and unearned premium at December 31, 2001, covered business written through December 31, 2002. This agreement was renewed for 2003 on terms substantially equivalent to those in effect in 2002, except that Infinity added the flexibility to elect, on a quarterly basis, the percentage of business to be added under the reinsurance agreement. The amount ceded under this agreement was reduced from 90% to 20% for the remainder of 2003. Infinity then entered into a new agreement for 2004 with American Re-insurance Company (“American Re”), an unaffiliated company rated “A+” (Superior) by A.M. Best, under substantially the same terms, except that the minimum ceding threshold is 10% and the agreement no longer includes the Assumed Agency Business.

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Business (continued)

Loss and Loss Adjustment Expense Reserves

Loss and loss adjustment expense (“LAE”) reserves represent Infinity’s estimate of its ultimate liability for unpaid claims and related adjustment expenses. Infinity estimates liabilities for the costs of losses and LAE for both reported and unreported claims based on historical trends adjusted for changes in loss cost trends, underwriting standards, policy provisions, product mix and other factors. Estimating the liability for unpaid losses and loss adjustment expense is inherently judgmental and is influenced by factors which are subject to significant variation. Infinity monitors items such as the effect of inflation on medical, hospitalization, material repair and replacement costs, general economic trends and the legal environment. While the ultimate liability may be greater or lower than recorded loss reserves, the reserve tail for personal auto coverage is shorter than that associated with many other property and casualty coverages and can, therefore, be established with less uncertainty than coverages having longer reserve tails.

Infinity reviews loss reserve adequacy quarterly and its independent auditors also review the adequacy of loss reserves as part of their audit procedures. Loss and expense reserves are also certified to state regulators annually. Reserves are adjusted as additional information becomes known. Such adjustments are reflected in current year operations.

The internal actuarial staff reviews Infinity’s reserves quarterly by accident year at a state and coverage level and at the coverage level for the Assumed Agency Business. Quarterly reviews allow for timely adjustments to reserves based on additional information. As part of these quarterly reviews, the actuarial staff performs various tests to estimate ultimate average severity and frequency of claims. Severity represents the average cost per claim and frequency represents the number of claims per policy. As an overall review, the staff then evaluates loss and LAE ratios by accident year by state and by coverage for reasonableness. Actual frequency is fairly stable because policyholders generally report auto accidents within days of occurrence. Factors that can significantly affect actual frequency include, among others, changes in weather and class of driver. Estimates of average frequency can be affected by changes in claims settlement and reserving practices, but are generally reliable. Loss severity is not as readily estimable, and can be affected by auto repair and medical cost inflation, jury awards and changes in policy limit profiles. For the nonstandard book of business, the challenge of estimating average severity is somewhat mitigated by state-mandated minimum policy limits for bodily injury and property damage on over 90% of its policies. These low limits tend to reduce the exposure of the loss reserves on this coverage to medical cost inflation on severe injuries since the minimum policy limits will cap the total payout. Estimation of LAE reserves is subject to variation from factors such as use of outside adjusters, frequency of lawsuits, claims staffing and experience levels.

The following tables present the development of Infinity’s loss reserves, net of reinsurance, on a GAAP basis for the calendar years 1993 through 2003. The Infinity table includes the loss reserves of the NSA Group through December 31, 2002, then the addition of the Assumed Agency Business for 2003. The top line of each table shows the estimated liability (in millions) for unpaid losses and LAE recorded at the balance sheet date for the indicated years. The next line, captioned Liability for Unpaid Losses and Loss Adjustment Expenses — as re-estimated at December 31, 2003, shows the re-estimated liability as of December 31, 2003. 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.

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Business (continued)

These tables do not present accident or policy year development data. Furthermore, in evaluating the re-estimated liability and cumulative deficiency (redundancy), it should be noted that each percentage includes the effects of changes in amounts for prior periods. Conditions and trends that have affected development of the liability in the past may not necessarily exist in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on these tables.

INFINITY

The following is a reconciliation of Infinity’s net liability to the gross liability for unpaid losses and loss adjustment expense.

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Business (continued)

The following table presents the development of loss reserves for the Assumed Agency Business (in millions) through December 31, 2002. Development for 2003 for the Assumed Agency Business is included in the Infinity table on the prior page. Under the reinsurance agreement entered into with GAI, Infinity’s insurance subsidiaries assumed the net reserves from GAI. Accordingly, gross reserves and net reserves are the same.

ASSUMED AGENCY BUSINESS

During 2002, the NSA Group settled for $5.1 million a state class action lawsuit involving the issue of whether there is an inherent diminished value in a damaged automobile that should be accounted for when calculating claim payments. The settlement increased the reserve deficiency for the 2001 calendar year-end reserves by $5.1 million. Excluding this, Infinity’s NSA Group experienced an overall redundancy for the calendar year-end 2001 reserves of about $4 million. During 2003, $14 million of adverse LAE reserve development occurred primarily due to business from New York, partially offset by other reserve releases.

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Business (continued)

Investments

General

Infinity employs a conservative approach to investment and capital management intended to ensure that there is sufficient capital to support its business. The investment portfolio is managed by American Money Management Corporation, a subsidiary of AFG. Infinity’s board of directors sets investment guidelines and periodically reviews the portfolio performance for compliance with such guidelines.

The following table presents the percentage distribution of Infinity’s year-end investment portfolio (excluding investment in equity securities of affiliate corporations). The December 31, 2002 percentage distribution of the NSA Group’s investment portfolio was adjusted to include the investments transferred to Infinity (approximately $125 million) in connection with the January 1, 2003 acquisition of GAI’s Assumed Agency Business.

The following table presents the yields of Infinity’s investment portfolios as reflected in the financial statements.

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Business (continued)

Fixed Maturity Investments

Infinity’s fixed maturity portfolio is invested primarily in taxable bonds. The National Association of Insurance Commissioners (“NAIC”) assigns quality ratings which range from Class 1 (highest quality) to Class 6 (lowest quality). The following table shows Infinity’s bonds and redeemable preferred stocks, by NAIC designation and comparable Standard & Poor’s Corporation rating as of December 31, 2003.

Fixed income investment funds are generally invested in securities with short-term and intermediate-term maturities with an objective of optimizing total return while allowing flexibility to react to changes in market conditions and maintaining sufficient liquidity to meet policyholder obligations. At December 31, 2003, the average duration of Infinity’s fixed maturities was about 4.6 years. See Note 3 to the financial statements for the composition of Infinity’s fixed income portfolio by scheduled maturity. For additional information regarding Infinity’s investment portfolio and results, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources - Investments.”

Ratings

A.M. Best has currently assigned Infinity’s insurance company subsidiaries a group rating of “A” (Excellent). According to A.M. Best, “A” ratings are assigned to insurers which have, on balance, “excellent balance sheet strength, operating performance and business profile” when compared to the standards established by A.M. Best and, in A.M. Best’s opinion, “have an excellent ability to meet their ongoing obligations to policyholders.”

Regulatory Environment

Infinity’s insurance company subsidiaries are generally subject to regulation and supervision by insurance departments of the jurisdictions in which they are domiciled or licensed to transact business. State insurance departments have broad administrative power relating to licensing insurers and agents, regulating premium rates and policy forms, establishing reserve requirements, prescribing statutory accounting methods and the form and content of statutory financial reports, regulating certain transactions involving the insurers and prescribing the type and amount of investments. Under state insolvency and guaranty laws, regulated insurers can be assessed or required to contribute to state guaranty funds to cover policyholder losses resulting from insurer insolvencies. Insurers are also required by many states, as a condition of doing business in the state, to participate in various assigned risk pools, reinsurance facilities or underwriting associations, which provide various insurance coverages to individuals that otherwise, are unable to purchase that coverage in the voluntary market. Participation in these involuntary plans is generally in proportion to voluntary writings of related lines of business in that state. The underwriting results of these plans traditionally have been unprofitable. The amount of premiums Infinity might be required to assume in a given state in connection with an involuntary plan may be reduced because of credits Infinity may receive for nonstandard policies that it writes voluntarily. Many states have laws and regulations that limit an insurer’s ability to exit a market. For example, certain states limit an automobile insurer’s ability to cancel and non-renew policies.

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Business (continued)

State insurance departments that have jurisdiction over Infinity’s insurance subsidiaries may conduct on-site visits and examinations of the insurers’ affairs. These examinations have from time to time given rise to, and are likely to give rise to in the future, regulatory orders requiring remedial, injunctive, or other action on the part of an insurance subsidiary or assessing fines or other penalties against Infinity’s insurance subsidiaries. Currently, Infinity’s insurance subsidiaries are involved in seven market conduct examinations.

The insurance laws of the states of domicile of Infinity’s insurance subsidiaries contain provisions to the effect that the acquisition or change of “control” of a domestic insurer or of any person that controls a domestic insurer cannot be consummated without the prior approval of the relevant insurance regulator. In general, a presumption of “control” arises from the ownership, control, possession with the power to vote or possession of proxies with respect to a specified percentage (generally 10%) or more of the voting securities of a domestic insurer or of a person that controls a domestic insurer. In addition, certain state insurance laws contain provisions that require pre-acquisition notification to state agencies of a change in control with respect to a non-domestic insurance company licensed to do business in that state. While such pre-acquisition notification statutes do not authorize the state agency to disapprove the change of control, such statutes do authorize certain remedies, including the issuance of a cease and desist order with respect to the non-domestic insurer if certain conditions exist, such as undue market concentration. Such approval requirements may deter, delay or prevent certain transactions affecting the ownership of Infinity’s common stock (“Common Stock”).

Infinity is a holding company with no business operations of its own. Consequently, Infinity’s ability to pay dividends to shareholders and meet its debt payment obligations is largely dependent on dividends or other distributions from its insurance company subsidiaries. State insurance laws restrict the ability of Infinity’s insurance company subsidiaries to declare shareholder dividends. These subsidiaries may not make an “extraordinary dividend” until thirty days after the applicable commissioner of insurance has received notice of the intended dividend and has not objected in such time or the commissioner has approved the payment of the extraordinary dividend within the 30-day period. An extraordinary dividend is defined as any dividend or distribution that, together with other distributions made within the preceding twelve months, exceeds the greater of 10% of the insurer’s surplus as of the preceding December 31, or the insurer’s net income for the twelve-month period ending the preceding December 31, in each case determined in accordance with statutory accounting practices. In addition, an insurer’s remaining surplus after payment of a cash dividend to shareholder affiliates must be both reasonable in relation to its outstanding liabilities and adequate to its financial needs.

Generally, the net admitted assets of insurance companies that, subject to other applicable insurance laws and regulations, are available for transfer to the parent company cannot include the net admitted assets required to meet the minimum statutory surplus requirements of the states where the companies are licensed. The maximum amount of dividends payable during 2004 to Infinity by its insurance companies without seeking regulatory approval is approximately $46 million. In 2003, Infinity’s insurance companies paid $39 million of dividends to the holding company.

State insurance law requires Infinity’s insurance companies to maintain specified levels of statutory capital and surplus. In addition, for competitive reasons, Infinity’s insurance company subsidiaries need to maintain adequate financial strength ratings from independent rating agencies. Both of these factors may limit the ability of Infinity’s insurance subsidiaries to declare and pay dividends.

Risk Factors

Infinity’s ongoing business operations face a number of risks, including, but not limited to those outlined below. These risks should be read and considered with the other information provided in this report.

Completion of Infinity’s ongoing consolidation of the operations of its insurance subsidiaries may not be successful.

Infinity is combining the operations of several insurance companies that were operated previously as independent business units. The process of consolidating the operations of insurance subsidiaries, while complete in many respects, poses managerial, strategic, and technological challenges, particularly in connection with the integration of historically separate information systems to a single system. The prospective costs and benefits of the consolidation may not result in equivalent or greater operating efficiencies and savings than those that have already been achieved. Such consolidation may negatively impact Infinity’s revenues.

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Because Infinity is primarily a personal automobile insurer, its business may be adversely affected by conditions in that business.

Approximately 95% of Infinity’s gross written premiums for the twelve month periods ended December 31, 2002 and 2003 were generated from personal automobile insurance policies. Adverse developments in the market for personal automobile insurance, or the personal automobile insurance industry in general, could cause the results of operations to suffer. This industry is exposed to the risks of severe weather conditions, such as rainstorms, snowstorms, hail and ice storms, hurricanes, tornadoes, earthquakes and, to a lesser degree, explosions, terrorist attacks and riots. The automobile insurance business is also affected by cost trends that impact profitability. Factors which negatively affect cost trends include inflation in automobile repair costs, automobile parts costs, used car prices and medical care. Increased litigation of claims may also negatively affect loss costs.

Infinity’s results may fluctuate as a result of cyclical changes in the personal auto insurance industry.

The personal auto insurance industry historically is cyclical in nature. The industry has been characterized by periods of price competition and excess capacity followed by periods of high premium rates and shortages of underwriting capacity. Adverse future fluctuations in the business cycle would be likely to negatively impact future revenues.

Intense competition could adversely affect Infinity’s profitability.

The personal automobile insurance business is highly competitive and, except for regulatory considerations, there are relatively few barriers to entry. Infinity competes with both large national writers and smaller regional companies. Some of Infinity’s competitors have more capital and greater resources, and may offer a broader range of products and lower prices. Some competitors that are direct writers may have certain competitive advantages, including increased name recognition, direct relationships with policyholders rather than with independent agents and, potentially, lower cost structures.

Infinity is vulnerable to a reduction in the amount of business written by independent agents.

Reliance on the independent agency market makes Infinity vulnerable to a reduction in the amount of business written by independent agents. Many competitors share Infinity’s significant reliance on the independent agency market. Approximately two-thirds of all personal automobile insurance sold in the United States is sold direct or through captive agents (agents employed by one company or selling only one company’s products) and approximately one-third is sold by independent agents. A material reduction in the amount of business independent agents sell would negatively impact future revenues.

If Infinity is not able to attract and retain independent agents, revenues could be negatively affected.

Infinity must compete with other insurance carriers for independent agents’ business. Some competitors offer a larger variety of products, lower prices for insurance coverage, higher commissions, or more attractive non-cash incentives. Although Infinity believes that the products, pricing, commissions and services offered to agents are competitive, it may not be able to continue to attract and retain independent agents to sell Infinity insurance products, in which case revenues could be negatively affected.

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Infinity is subject to comprehensive regulation, and its ability to earn profits may be restricted by these regulations.

Infinity is subject to comprehensive regulation by government agencies in the states where Infinity insurance company subsidiaries are domiciled (California, Indiana, Ohio, Oklahoma and Texas) and where these subsidiaries issue policies and handle claims. Infinity is subject to regulations involving:

In addition, state insurance department examiners perform periodic financial and market conduct examinations of insurance companies. Such regulation is generally intended for the protection of policyholders rather than security holders.

Regulation may become more extensive in the future.

Existing insurance-related laws and regulations may become more restrictive in the future, and new restrictive laws may be enacted. New or more restrictive regulation in the future could make it more expensive to conduct business, restrict the premiums Infinity is able to charge or otherwise change the way Infinity does business. See “Regulatory Environment.”

Infinity’s insurance subsidiaries are subject to minimum capital and surplus requirements. A failure to meet these requirements could subject Infinity to regulatory action.

Infinity’s insurance subsidiaries are subject to minimum capital and surplus requirements imposed under the laws of California, Indiana, Ohio, Oklahoma and Texas. Any failure by an insurance subsidiary to meet the minimum capital and surplus requirements imposed by applicable state law will subject it to corrective action, including requiring the adoption of a comprehensive financial plan, examination and the issuance of a corrective order by the applicable state insurance department, revocation of its license to sell insurance products or placing the subsidiary under state regulatory control. Any new minimum capital and surplus requirements adopted in the future may require increases in Infinity’s capital and surplus levels, which may not be possible. As of December 31, 2003, each insurance company subsidiary had capital and surplus substantially in excess of the currently required amounts.

15

Business (continued)

A failure to maintain a commercially acceptable financial strength rating would significantly and negatively affect Infinity’s ability to implement its business strategy successfully.

Financial strength ratings are an important factor in establishing the competitive position of insurance companies and may be expected to have an effect on an insurance company’s sales. A.M. Best has currently assigned Infinity’s insurance company subsidiaries a group rating of “A (Excellent)”. According to A.M. Best, “A” ratings are assigned to insurers which have, on balance, excellent balance sheet strength, operating performance and business profile when compared to the standards established by A.M. Best and, in A.M. Best’s opinion, have a strong ability to meet their ongoing obligations to policyholders. A.M. Best bases its ratings on factors that concern policyholders and not upon factors concerning investor protection. Such ratings are subject to change and are not recommendations to buy, sell or hold securities. There can be no assurance that Infinity’s rating or future changes to its rating will not affect its competitive position.

New claim and coverage issues are continually emerging, and these new issues could negatively impact Infinity’s revenues or its method of doing business.

As automobile insurance industry practices and regulatory, judicial, and consumer conditions change, unexpected and unintended issues related to claims and coverage may emerge. The issues can have a negative effect on Infinity’s business by either extending coverage beyond Infinity’s underwriting intent or by increasing the size of claims. Recent examples of emerging claims and coverage issues include:

The effects of these and other unforeseen emerging claim and coverage issues could negatively impact Infinity’s revenues or methods of doing business. See “Item 3 - Legal Proceedings.”

Infinity’s reserves may be inadequate, which could significantly affect its financial results.

Infinity records reserve liabilities for the estimated payment of losses and loss adjustment expenses for both reported and unreported claims. Due to the inherent uncertainty of estimating reserves, it has been necessary in the past, and may continue to be necessary in the future, to revise estimated liabilities as reflected in reserves for claims and related expenses. To the extent that reserves are inadequate and are strengthened, the amount of such increase is treated as a charge to earnings in the period in which the deficiency is recognized. The historic development of reserves for losses and loss adjustment expense may not necessarily reflect future trends in the development of these amounts. Accordingly, it is not appropriate to extrapolate redundancies or deficiencies based on historical information.

Infinity is dependent on key executives.

Infinity’s success will depend in part upon the continued service of Chief Executive Officer and President, James R. Gober, Executive Vice President, John R. Miner, Senior Vice President and General Counsel, Samuel J. Simon, Senior Vice President and Chief Financial Officer, Roger Smith and Senior Vice President, Joseph A. Pietrangelo. Infinity has employment agreements with Mr. Gober, Mr. Miner, Mr. Simon, and Mr. Smith. Infinity does not have key person insurance on the lives of any of these individuals. Future success will also depend on the ability of Infinity to attract and retain additional executives and personnel. The loss of key personnel could cause disruption in Infinity’s business. As Infinity grows, it will need to recruit and retain additional qualified personnel, and it may not be able to do so.

16

Business (continued)

Adverse securities market conditions can have significant and negative effects on Infinity’s investment portfolio.

Infinity’s results of operations depend in part on the performance of its invested assets. As of December 31, 2003, 98% of Infinity’s investment portfolio was invested in fixed maturity securities and 2% in equity securities. Certain risks are inherent in connection with fixed maturity securities including loss upon default and price volatility in reaction to changes in interest rates and general market factors. An increase in interest rates lowers prices on fixed maturity securities, and any sales during a period of increasing interest rates may result in losses. Conversely, investment income earned from future investments in fixed maturity securities will decrease if interest rates decrease.

Infinity’s results may be adversely affected by conditions in the states where its business is concentrated.

For the year ended December 31, 2003, Infinity generated approximately 87% of gross written premiums in its top 15 states. California, Infinity’s largest market, generated approximately 34% and 46%, respectively, of Infinity’s gross written premiums in 2002 and 2003. Revenues and profitability are therefore subject to prevailing regulatory, legal, economic, demographic, competitive and other conditions in these states. Changes in any of these conditions could make it less attractive to do business in those states. Adverse regulatory developments in any of these states, which could include, among others, reductions in the rates permitted to be charged, inadequate rate increases, an inability to reduce the amount of insurance Infinity writes in those states, or more fundamental changes in the design or implementation of the automobile insurance regulatory framework, could negatively affect premium revenue or make it more expensive or less profitable to conduct business.

ITEM 2

Properties

Infinity’s insurance subsidiaries lease approximately 680,000 square feet of office space in numerous cities throughout the United States. Most of these leases expire within 7 years. The most significant leased office spaces are located in suburban Atlanta, Birmingham (Infinity’s principal office), Cincinnati, Windsor (Connecticut) and Los Angeles.

ITEM 3

Legal Proceedings

Refer to “Forward Looking Statements” on page 2.

Infinity’s subsidiaries are, from time to time, named as defendants in various lawsuits incidental to its insurance operations. Legal actions relating to claims made under insurance policies are considered by Infinity in establishing loss and LAE reserves. There are also several class action lawsuits pending against Infinity in various stages of development that involve issues not unlike those facing other insurance companies. One suit in a California state court alleges that Infinity improperly cancelled a class of insureds’ automobile insurance policies. Another group of related lawsuits challenges Infinity’s use of certain automated database vendors to assist in evaluating total loss claims. Also pending are lawsuits that seek extra contractual damages in addition to damages claimed under insurance policies. Infinity believes it has recorded adequate reserves for these liabilities and that, based on the status of these lawsuits, there is no individual pending case that is likely to have a material adverse effect on Infinity’s financial condition, liquidity, or results of operations.

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ITEM 4

Submission of Matters to a Vote of Security Holders

There were no matters subject to a vote of shareholders during the fourth quarter of 2003.

PART II

ITEM 5

Market for Registrant’s Common Equity and Related Stockholder Matters

Infinity issued 100 shares of Common Stock to American Premier Underwriters, Inc. (“APU”), a 100%-owned subsidiary of AFG, in connection with the formation of Infinity in September 2002. On December 31, 2002, Infinity issued an additional 900 shares of Common Stock to APU in exchange for the capital stock of the NSA Group companies. In January 2003, Infinity increased its authorized capital stock to 50,000,000 shares of Common Stock and 10,000,000 shares of Infinity preferred stock (“Preferred Stock”) and implemented a common stock split. After the stock split, Infinity had 20,347,083 shares of Common Stock outstanding. No Preferred Stock has been issued.

There were 10 registered holders of record at March 15, 2004. Infinity’s Common Stock is listed and traded on the NASDAQ National Market under the symbol IPCC.

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ITEM 6

Selected Financial Data

At December 31, 2002, AFG transferred the NSA Group to Infinity. Financial information for periods prior to the date of transfer represents the combined information of the NSA Group. Infinity also acquired the Assumed Agency Business from GAI through a reinsurance transaction effective January 1, 2003. The historical financial information shown below (in millions) as of and for each of the four years ended December 31, 1999 through 2002 was derived from audited financial statements. The Infinity financial data as of and for the twelve months ended December 31, 2003 include the results of the Assumed Agency Business. This information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related footnotes.

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ITEM 7

Management’s Discussion and Analysis
of Financial Condition and Results of Operations

Refer to “Forward Looking Statements” on page 2.

GENERAL

Following is a discussion and analysis of the financial statements of Infinity and the financial statements of the agency business that Infinity assumed from GAI on January 1, 2003. Together, these businesses comprise Infinity’s operations since that date. References in this discussion to Infinity include the NSA Group and the Assumed Agency Business unless the context indicates otherwise. This discussion should be read in conjunction with the audited financial statements, and following, the financial statements of the Assumed Agency Business as of and for the twelve month periods ended December 31, 2002 and 2001.

Infinity was incorporated in the state of Ohio in September 2002 as an indirect wholly owned subsidiary of AFG. On December 31, 2002, AFG transferred to Infinity all of the outstanding common stock of the NSA Group.

Through a reinsurance transaction effective January 1, 2003, Infinity acquired the Assumed Agency Business consisting of the personal lines business written through independent agents by AFG’s principal property and casualty subsidiary, GAI. The Assumed Agency Business had net earned premiums of $107 million in 2002 consisting primarily of standard and preferred private passenger automobile insurance. The Assumed Agency Business is not included in Infinity’s historical financial statements for periods prior to 2003.

The acquisition of the NSA Group and the assumption of the Assumed Agency Business have been accounted for at AFG’s historical carrying amounts as transfers of net assets between entities under common control in accordance with Statement of Financial Accounting Standards No. 141.

CRITICAL ACCOUNTING POLICIES

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. Management believes that the establishment of insurance reserves, the determination of “other than temporary” impairment on investments, and accruals for litigation are the areas where the degree of judgment required to determine amounts recorded in the financial statements make the accounting policies critical.

Insurance Reserves

Insurance reserves, or “Unpaid Losses and Loss Adjustment Expenses”, are management’s best estimate of the ultimate amounts that will be paid for all claims that have been reported up to the date of the current accounting period but that have not yet been paid, plus an estimate of claims that have occurred but have not yet been reported to the company (“incurred but not reported”, or “IBNR”), and the expenses to be paid to settle claims (allocated and unallocated loss adjustment expenses, or “ALAE” and “ULAE”).

Liabilities for the costs of losses and LAE for both reported and unreported claims are estimated based on historical trends adjusted for changes in loss cost trends, underwriting standards, policy provisions, product mix and other factors. Estimating dollar amounts for unpaid losses and LAE is inherently judgmental and is influenced by factors, which are subject to significant variation. Changes in underlying estimates or assumptions and the resulting adjustments to reserves are reflected in the results of operations in the periods in which estimates change.

20

Management’s Discussion and Analysis
of Financial Condition and Results of Operations (continued)

Management analyzes the adequacy of reserves using actuarial data and analytical reserve development techniques, including projections of ultimate paid losses, to determine the ultimate amounts of reserves. Historical medical, hospitalization, material repair and replacement costs, general economic trends and the legal environment are examples of major factors taken into account in developing these estimates.

In developing IBNR reserve amounts, quarterly estimates are made of ultimate frequency, or number of claims per earned car year, and severity, or claim cost per earned car year. Frequency can be affected by factors such as driving patterns, gas prices, changes in classes of insured drivers, and weather events. Factors affecting the severity trend include medical cost and product repair cost trends, and litigation expense patterns. Management believes that Infinity’s relatively low average policy limit and concentration on the nonstandard auto driver classification help stabilize fluctuations in frequency and severity.

An increase in either frequency or severity of 1% for the current accident year would decrease earnings per share by $0.14.

Other Than Temporary Losses on Investments

Changes in the market values of investment securities are usually recorded as changes in unrealized gains or losses on investments, a component of shareholders’ equity. Net earnings are not affected until the disposition of a given security or, if an unrealized loss is deemed to be other than temporary, an impairment charge is recorded as a realized capital loss and the cost basis of the security is reduced.

The determination of whether unrealized losses are “other than temporary” requires judgment based on subjective as well as objective factors. Factors considered and resources used by management include:

Infinity recorded pretax impairment charges on securities as follows (in thousands):

21

Management’s Discussion and Analysis
of Financial Condition and Results of Operations (continued)

The following chart summarizes Infinity’s security positions with unrealized losses which were less than twelve months old and greater than twelve months old as of December 31, 2003 (in thousands):

Management regularly evaluates for potential impairment each security position that (i) has a market value of less than 80% of its book value or (ii) exceeds $100,000, as well as each position held for which one or more impairment charges have been recorded in the past. The process of evaluation includes assessments of each bullet point listed above. For the unrealized loss positions in the chart, the majority of the evidence that management gathered and considered indicated near term recovery, resulting in conclusions that these particular unrealized losses were more likely of a temporary nature. Should the preponderance of evidence turn negative for one or all of these positions in the future, impairment charges would likely be recorded. 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. Management believes that it is not likely, however, that such impairment charges will have a significant effect on Infinity’s liquidity.

Accruals for Litigation

Infinity continually evaluates potential liabilities and reserves for litigation using the criteria established by Statement of Financial Accounting Standard (“SFAS”) No. 5, Accounting for Contingencies. 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 using this guidance and records reserves for losses as appropriate. Infinity believes the current assumptions and other considerations used to estimate potential liability for litigation are appropriate. 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, liquidity, or results of operations.

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Management’s Discussion and Analysis
of Financial Condition and Results of Operations (continued)

LIQUIDITY AND CAPITAL RESOURCES

Ratios

The NAIC’s 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, 2003, the capital ratios of all Infinity insurance companies substantially exceeded the RBC requirements.

Sources of Funds

Infinity is organized as a holding company with all of its operations being conducted by its insurance subsidiaries. Accordingly, Infinity will have continuing cash needs for administrative expenses, the payment of principal and interest on borrowings, shareholder dividends, and taxes. Funds to meet these obligations will come primarily from dividends and distributions from the insurance subsidiaries.

Infinity plans to file a consolidated federal income tax return including all 80%-owned U.S. subsidiaries for periods after the initial public offering. Infinity has executed a tax allocation agreement with its eligible subsidiaries under which each subsidiary agrees to pay Infinity taxes computed on a separate company taxable income basis. Infinity agrees to pay each subsidiary for the tax benefit, if any, of net losses used by other members of the consolidated group. The resulting provision or credit will be currently payable to or from the parent company, Infinity Property and Casualty Corporation.

In July 2003, Infinity secured a $200 million, seven-year amortizing term loan and added a revolving credit line of $20 million in the fourth quarter of 2003. Proceeds of $110 million were contributed to Infinity’s insurance subsidiaries to support future growth of their business and reduce their reliance on reinsurance. The remaining proceeds were used to repay a $55 million promissory note issued in connection with Infinity’s initial public offering and for general corporate purposes. The term loan was collateralized by the assets of Infinity including a pledge of stock of Infinity’s insurance subsidiaries and contained various covenants that require Infinity to meet certain minimum net worth and financial ratio standards. Principal payments of $4.5 million were made in 2003 and a required supplemental payment of $2.5 million was made in January 2004 from the proceeds of the overallotment share issuance in connection with the secondary stock offering.

In February 2004 Infinity issued $200 million of senior notes due 2014, bearing a fixed 5.5% interest rate. Interest payments due in 2004 are $5.5 million. The proceeds of this offering were used to prepay in full the principal balance of the term loan. Refer to footnote 14 of the Consolidated Financial Statements for more information on this transaction.

Infinity’s insurance subsidiaries generate liquidity primarily by collecting and investing premiums in advance of paying claims. Infinity had positive cash flow from operations of approximately $69 million in 2003, $45 million in 2002, and $33 million in 2001.

As of December 31, 2003, Infinity Property and Casualty Corporation had $64.5 million of cash and investments, of which $11.1 million was owed to its subsidiaries.

In 2003, Infinity’s operating subsidiaries paid Infinity $39 million in ordinary dividends. In 2004, they may pay to Infinity up to $46 million in ordinary dividends without prior regulatory approval. Management believes that Infinity’s cash and investment balances and cash flows generated from operations, including dividends and distributions from its subsidiaries, are adequate to meet its future liquidity needs.

Quota Share Agreement

Infinity utilizes the reinsurance market to manage its capital and surplus levels relative to its reserve liabilities, supporting its capacity for growth (as well as manage its risk). Throughout 2002, Infinity’s insurance subsidiaries ceded 90% of their personal auto physical damage business on a funds withheld basis to Inter-Ocean. Infinity renewed this agreement for 2003 on terms substantially equivalent to those in effect in 2002 except that Infinity added the flexibility to elect, on a quarterly basis, the percentage of business to be ceded under the reinsurance agreement. The allowable range was between 90% and 20%.

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Management’s Discussion and Analysis
of Financial Condition and Results of Operations (continued)

Because Infinity obtained the $200 million term loan facility, the amount of premiums ceded under this agreement was reduced from 90% to 20% for the third and fourth quarters of 2003. Premiums ceded under this agreement for the twelve month periods ended December 31, 2003 and 2002 were $169.5 million and $296.1 million, respectively.

In September 2002, the Inter-Ocean agreement was amended to include coverage of GAI’s personal lines that Infinity would otherwise assume as part of the Assumed Agency Business. Accordingly, GAI’s participation in the Inter-Ocean reinsurance agreement reduces the size of the Assumed Agency Business. Premiums ceded by GAI under this agreement were $22.2 million and $78.5 million for the twelve month periods ended December 31, 2003 and 2002, respectively.

Effective January 1, 2004, Infinity entered into a new reinsurance agreement with American Re under essentially the same terms as the Inter-Ocean agreement except the minimum amount of physical damage premiums permitted to be ceded is 10% and the agreement does not cover the Assumed Agency Business. Infinity is ceding 10% of physical damage premiums for the first quarter of 2004.

Investments

Infinity’s investment portfolio at December 31, 2003, contained $1,245.8 million in fixed maturity securities and $21.4 million in equity securities, all carried at market value with unrealized gains and losses reported as a separate component of shareholder’s equity on an after-tax basis. At December 31, 2003, Infinity had pretax net unrealized gains of $53 million on fixed maturities and $2 million on equity securities.

Approximately 92% of the fixed maturities that Infinity held were rated “investment grade” (credit rating of AAA to BBB) by nationally recognized rating agencies at December 31, 2003. Investment grade securities generally bear lower yields and lower degrees of risk than those that are unrated or non-investment grade. Management believes that a high quality investment portfolio is more likely to generate a stable and predictable investment return.

Investments in mortgage-backed securities (“MBSs”) represented approximately one-fifth of Infinity’s fixed maturities at December 31, 2003. MBSs are subject to significant prepayment risk due to the fact that, in periods of declining interest rates, mortgages may be repaid more rapidly than scheduled as borrowers refinance higher rate mortgages to take advantage of lower rates. When these prepayments occur faster than planned, market rates are usually lower for new investments than those that were prepaid. For both twelve month periods ended December 31, 2003 and 2002, prepayments on MBSs were approximately $45 million. Approximately 98% of Infinity’s MBSs are rated “AAA” and all are investment grade.

Individual portfolio securities are sold creating gains or losses as market opportunities exist. Since all of these securities are carried at market value on the balance sheet, 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 Infinity’s fixed maturity portfolio was 4.6 years at December 31, 2003.

Summarized information for securities with unrealized gains and losses in Infinity’s balance sheet at December 31, 2003 is shown in the following table (dollars in millions). Approximately $6.8 million of “Fixed Maturities” and $3.3 million of “Equity Securities” had no unrealized gains or losses at December 31, 2003.

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Management’s Discussion and Analysis
of Financial Condition and Results of Operations (continued)

Summarized information for Infinity’s investment portfolio follows (in millions):