<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1995 Commission File Number 0-11773
ALFA CORPORATION
----------------
(Exact name of registrant as specified in its charter)
Delaware 063-0838024
-------- -----------
(State of Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
2108 East South Boulevard, Montgomery, Alabama 36116
(Mail: P. O Box 11000, Montgomery, Alabama 36191-0001)
-----------------------------------------------------------
(Address and Zip Code of Principal Executive Offices)
Registrant's Telephone Number
Including Area Code (334) 288-3900
--------------
None
-------------------------------------------
Former name, former address and former fiscal year if changed since last report
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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the close of the period covered by this report.
Class Outstanding June 30, 1995
------------------------------- -------------------------
Common Stock, $1.00 par value 40,785,912 shares
<PAGE>
ALFA CORPORATION
INDEX
Page No.
Part I. Financial Information --------
(Condensed Consolidated Unaudited)
Item 1. Financial Statements
Balance Sheets -- June 30, 1995 and
December 31, 1994 3
Statements of Income, Six Months and Three Months
ended June 30, 1995 and 1994 4
Statements of Cash Flows, Six
Months ended June 30, 1995 and 1994 5
Notes to Financial Statements 6
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Part II. Other Information 16
Item 6.
Exhibits and Reports on Form 8-K 16
2
<PAGE>
ALFA CORPORATION
CONSOLIDATED CONDENSED
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
----------- ------------
1995 1994
----------- ------------
(Unaudited)
<S> <C> <C>
Assets
Investments:
Fixed Maturities Held for Investment, at amortized cost
(market value $4,597,795 in 1995 and $4,855,786 in 1994) $ 4,304,539 $ 4,701,143
Fixed Maturities Available for Sale, at market value
(amortized cost $531,657,296 in 1995 and $499,519,431 547,025,430 473,569,270
Equity Securities, at market (cost $55,717,284
in 1995 and $62,840,541 in 1994) 73,301,484 71,811,785
Mortgage Loans on Real Estate 1,095,776 1,180,085
Investment Real Estate (net of accumulated
depreciation of $1,127,565 in 1995 and
$1,034,764 in 1994) 1,906,096 1,425,765
Policy Loans 27,513,483 25,561,728
Other Long-term Investments 117,542,878 115,061,499
Short-term Investments 28,674,032 24,762,467
------------ ------------
Total Investments 801,363,718 718,073,742
Cash 1,150,591 11,750,197
Accrued Investment Income 9,458,415 9,070,828
Accounts Receivable 11,449,778 9,008,302
Due from Affiliates 1,561,475 1,800,310
Deferred Policy Acquisition Costs 90,598,389 89,012,566
Deferred Income Taxes 2,913,291
Other Assets 5,477,087 4,740,961
------------ ------------
Total Assets $921,059,453 $846,370,197
============ ============
Liabilities
Policy Liabilities and Accruals $372,020,220 $349,003,558
Unearned Premiums 85,360,505 79,426,172
Dividends to Policyholders 8,678,762 8,553,904
Premium Deposit and Retirement Deposit Funds 8,359,992 9,191,782
Deferred Income Taxes 14,122,730
Other Liabilities 26,413,979 31,446,801
Due to Affiliates 378,260 179,650
Commercial Paper 87,634,289
Notes Payable 2,433,198 93,128,142
Notes Payable to Affiliates 19,948,908 20,454,742
------------ ------------
Total Liabilities 625,350,843 591,384,751
------------ ------------
Commitments and Contingencies (Note 3)
Stockholders' Equity
Preferred Stock, $1 par value
Shares authorized: 1,000,000
Issued: None
Common Stock, $1 par value
Shares authorized: 110,000,000
Issued: 41,891,512
Outstanding: 40,785,912 41,891,512 41,891,512
Capital in Excess of Par Value 21,276,023 21,276,023
Net Unrealized Investment Gains (Losses)
(Less applicable deferred income taxes) 21,675,653 (10,980,201)
Retained Earnings 215,497,192 207,429,882
Treasury Stock: at cost (1,105,600 shares) (4,631,770) (4,631,770)
------------ ------------
Total Stockholders' Equity 295,708,610 254,985,446
------------ ------------
Total Liabilities and
Stockholders' Equity $921,059,453 $846,370,197
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed unaudited
financial statements.
3
<PAGE>
ALFA CORPORATION
CONSOLIDATED CONDENSED UNAUDITED
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
------------------------ ------------------------
1995 1994 1995 1994
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Revenues
Premiums and Policy Charges $153,140,665 $115,297,178 $76,357,521 $56,904,744
Net Investment Income 24,563,883 22,746,643 12,425,039 11,852,268
Realized Investment Gains 1,169,680 3,911,392 904,403 1,413,567
Other Income 1,211,914 1,521,491 587,974 796,916
------------ ------------ ----------- -----------
Total Revenues 180,086,142 143,476,704 90,274,937 70,967,495
------------ ------------ ----------- -----------
Benefits and Expenses
Benefits & Settlement Expenses 114,562,241 85,298,730 58,906,427 37,383,164
Dividends to Policyholders 1,609,340 1,548,182 775,814 744,537
Amortization of Deferred Policy
Acquisition Costs 23,199,544 17,388,850 11,757,758 8,594,043
Other Operating Expenses 15,353,294 11,928,085 7,266,518 6,390,251
------------ ------------ ----------- -----------
Total Expenses 154,724,419 116,163,847 78,706,517 53,111,995
------------ ------------ ----------- -----------
Income Before Provision for Income Taxes 25,361,723 27,312,857 11,568,420 17,855,500
Provision for Income Taxes 8,009,489 8,550,327 3,630,252 5,251,873
------------ ------------ ----------- -----------
Net Income $17,352,234 $18,762,530 $7,938,168 $12,603,627
============ ============ =========== ===========
Net Income Per Share $0.43 $0.46 $0.19 $0.31
============ ============ =========== ===========
Operating Income $16,591,942 $16,220,125 $7,350,306 $11,684,808
Operating Income Per Share $0.41 $0.40 $0.18 $0.29
============ ============ =========== ===========
Dividends Per Share $0.185 $0.1625 $0.095 $0.09
============ ============ =========== ===========
Average Shares Outstanding 40,785,912 40,785,912 40,785,912 40,785,912
============ ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed unaudited
financial statements.
4
<PAGE>
ALFA CORPORATION
CONSOLIDATED CONDENSED UNAUDITED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1995 1994
---------- -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income $17,352,234 $18,762,530
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Policy Acquisition Costs Deferred (24,785,367) (21,068,964)
Amortization of Deferred Policy Acquisition Costs 23,199,544 17,276,228
Depreciation and Amortization 2,537,193 1,994,365
Provision for Deferred Taxes 141,896 (2,953,076)
Interest on Policyholders' Funds 5,140,758 4,630,414
Net Realized Investment Gains (1,169,680) (3,911,392)
Other (2,855,013) (1,932,818)
Changes in Operating Assets and Liabilities:
Increase in Accrued Investment Income (387,587) (1,299,070)
(Increase) Decrease in Accounts Receivable (35,922) 3,330,993
Decrease (Increase) in Amounts Due From Affiliates 238,835 (1,144,177)
Increase (Decrease) in Amounts Due to Affiliates 198,610 (2,176,866)
Increase in Other Assets (736,126) (1,568,101)
Increase in Liability for Policy Reserves 10,177,651 6,267,593
Increase in Liability for Unearned Premiums 5,934,333 3,781,376
(Decrease) Increase in Amounts Held for Others (706,932) 29,319
(Decrease) Increase in Other Liabilities (5,651,449) 3,233,500
----------- -----------
Net Cash Provided by Operating Activities 28,592,978 23,251,854
----------- -----------
Cash Flows From Investing Activities:
Maturities and Redemptions of Fixed Maturities Held for Investment 401,517 2,280,580
Maturities and Redemptions of Fixed Maturities Available for Sale 13,715,068 30,813,654
Maturities and Redemptions of Other Investments 42,808,787 29,876,019
Sales of Fixed Maturities Available for Sale 3,746,470 36,758,148
Sales of Other Investments 16,853,798 20,494,080
Purchase of Fixed Maturities Available for Sale (48,009,349)(107,956,039)
Purchase of Other Investments (60,157,498) (78,371,486)
Net (Increase) Decrease in Short-term Investments (3,920,085) 28,098,686
Net Increase in Receivable/Payable on Securities (1,585,668) (11,478,309)
----------- -----------
Net Cash Used in Investing Activities (36,146,960) (49,484,667)
----------- -----------
Cash Flows From Financing Activities:
Increase in Commercial Paper 87,634,289 0
Increase (Decrease) in Notes Payable (90,694,944) 25,494,602
Decrease in Notes Payable to Affiliates (505,834) (2,703,795)
Stockholder Dividends Paid (7,545,394) (6,627,711)
Deposits of Policyholders' Funds 19,417,964 18,041,830
Withdrawal of Policyholders' Funds (11,351,705) (10,840,301)
----------- -----------
Net Cash Provided by (Used in) Financing Activities (3,045,624) 23,364,625
----------- -----------
Net Decrease in Cash (10,599,606) (2,868,188)
Cash - Beginning of Period 11,750,197 6,746,555
----------- -----------
Cash - End of Period $1,150,591 $3,878,367
=========== ===========
Supplemental Disclosures of Cash Flow Information
Cash Paid as of June 30 for:
Interest $3,409,487 $1,613,911
Income Taxes $13,992,776 $11,704,719
</TABLE>
The accompanying notes are an integral part of these condensed unaudited
financial statements.
5
<PAGE>
ALFA CORPORATION
NOTES TO CONSOLIDATED CONDENSED UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 1995
1. SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
In the opinion of the Company, the accompanying consolidated condensed
unaudited financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly its financial position,
results of operations and cash flows. The accompanying financial statements
have been prepared on the basis of generally accepted accounting principles. A
summary of the more significant accounting policies related to the Company's
business is set forth in the notes to its audited consolidated financial
statements for the fiscal year ended December 31, 1994. The results of
operations for the three month periods ended June 30, 1995 and 1994 are not
necessarily indicative of the results to be expected for the full year. For
purposes of this report, the Company has defined operating income as income
excluding net realized investment gains. Certain reclassifications have been
made to conform previous classifications to June 30, 1995 classifications and
descriptions.
2. POOLING AGREEMENT
-----------------
Effective August 1, 1987, the Company entered into a property and casualty
insurance Pooling Agreement (the "Pooling Agreement") with Alfa Mutual Insurance
Company (Mutual), Alfa Mutual Fire Insurance Company (Fire) and Alfa Mutual
General Insurance Company (General) (collectively, the "Mutual Group"). Mutual,
Fire and General are direct writers primarily of personal lines of property and
casualty insurance in Alabama. Mutual writes preferred risk automobile,
homeowner, farmowner and mobile home insurance. Fire writes fire and allied
lines insurance. General writes standard risk automobile and homeowner
insurance. Mutual also writes a limited amount of commercial insurance,
including church, and businessowner insurance. Under the terms of the Pooling
Agreement, the Company cedes to Mutual all of its property and casualty business
net of reinsurance ceded to others. All of the Mutual Group's direct property
and casualty business net of reinsurance (together with the property and
casualty business ceded by the Company) is included in the pool. Until
September 30, 1994, Mutual retroceded 50% of the pooled premiums, losses, loss
adjustment expenses and other underwriting expenses to the Company and an
aggregate of 18% to Fire and General, while retaining 32% of these amounts
itself. On October 1, 1994, the Company increased its participation in the
Pooling Agreement. Effective that date Mutual retrocedes 65% of the pool to
the Company and an aggregate of 11% to Fire and General while retaining 24%
itself. In connection with the increased participation, the Company assumed
both an additional liability of $19.0 million for the increase in unearned
premium reserves and $15.2 million in fixed maturities to fund the additional
liability from the Mutual Group. The $3.8 million difference in the unearned
premium reserves and the invested assets assumed represents the commission the
Mutual group was paid to reimburse it for estimated expenses previously incurred
related to the unearned premiums. The Company's participation in the Pooling
Agreement may be changed or terminated without the consent or approval of the
Company's shareholders, and the Pooling Agreement may be terminated by any party
thereto upon 90 days notice.
6
<PAGE>
3. CONTINGENT LIABILITIES
-----------------------
The property and casualty subsidiaries have entered into a reinsurance
pooling agreement with Alfa Mutual Insurance Company and its affiliates. Should
any member of the affiliated group be unable to meet its obligation on a claim
for a policy written by the Company's property and casualty subsidiaries, the
obligation to pay the claim would remain with the Company's subsidiaries.
The liability for estimated unpaid property and casualty losses and loss
adjustment expenses is based upon an evaluation of reported losses and on
estimates of incurred but not reported losses. Adjustments to the liability
based upon subsequent developments are included in current operations.
Various legal proceedings arising in the normal course of business with
policyholders and agents are in process at June 30, 1995. Based upon
information presently available to Alfa Corporation and its subsidiaries,
management does not consider that contingent liabilities which might arise from
pending litigation are material in relation to the financial position, results
of operations or cash flows of the Company. Management's opinion is based upon
the Company's experience in dealing with such claims and the historical results
of such claims against the Company.
4. NOTES PAYABLE
-------------
Prior to 1995, notes payable consisted of short term debt outstanding under
various credit lines with commercial banks which was used primarily to fund the
Company's consumer loan portfolio and for other corporate purposes. During the
first quarter of 1995 the Company began issuing commercial paper which replaced
the majority of the short term debt. At June 30, 1995 the Company had issued
approximately $87.6 million in commercial paper at rates ranging from 6.01% to
6.11% with maturities ranging from July 6, 1995 to August 28, 1995. The Company
intends to continue to use the commercial paper program to fund its short term
needs. Backup lines of credit are in place up to $125 million. The commercial
paper is guaranteed by Alfa Mutual Insurance Company, an affiliate.
7
<PAGE>
MANAGEMENTS' DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
---------------------
The following table sets forth consolidated summarized income
statement information for the six months and three months ended June 30, 1995
and 1994:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
-------------------------------------- ---------------------------------
1995 1994 % CHANGE 1995 1994 % CHANGE
------------ ------------ ---------- -------- ------------ ----------
(in thousands, except per share data*)
<S> <C> <C> <C> <C> <C> <C>
Premiums and Policy Charges $ 153,141 $ 115,297 33% $76,358 $ 56,905 34%
=========== =========== === ======= =========== ===
Net Investment income $ 24,564 $ 22,747 8% $12,425 $ 11,853 5%
=========== =========== === ======= =========== ===
Total Revenues $ 180,086 $ 143,477 26% $90,275 $ 70,968 27%
=========== =========== === ======= =========== ===
NET INCOME
Insurance operations $ 16,717 $ 15,652 7% $ 7,437 $ 11,381 (35%)
Noninsurance operations $ 1,571 1,680 (6%) 769 873 (12%)
Net realized investment gains 760 2,542 (70%) 588 918 (36%)
Corporate expenses (1,696) (1,111) 53% (856) (568) 51%
----------- ----------- --- ------- ----------- ---
Net income $ 17,352 $ 18,763 (8%) $ 7,938 $ 12,604 (37%)
=========== =========== === ======= =========== ===
Net income per share $0.43 $0.46 (8%) $0.19 $0.31 (37%)
=========== =========== === ======= =========== ===
Weighted average
shares outstanding 40,785,912 40,785,912 40,785,912 40,785,912
=========== =========== ========== ===========
</TABLE>
The majority of the growth in premiums in the first six months and second
quarter of 1995 is due to the amendment to the pooling agreement with the Alfa
Mutual Companies which occurred on October 1, 1994. (See Note 2 to the
consolidated condensed unaudited financial statements.) The Combined pooled
property casualty written premium increased approximately 6.8% over the first
half of 1995 and increased 7.5% for the second quarter. Total life insurance
premiums and policy charges increased 5.9% and 11.7% for the six months and
second quarter, respectively, and new business in 1995 is up 9.8%. Net
investment income increased 8% over the first half of 1995 due to an increase in
invested assets resulting from positive cash flows.
For the six months ended June 30, 1995, both property casualty and life
insurance operating income grew approximately 7%. The growth in the life
company's income is due to positive second quarter results, which increased 35%
over the first six months in the prior year. Claims from significant storms
have affected both year's property casualty results, but such claims in 1995
occurred in the second quarter, which resulted in a 35% decline in insurance
operating income for the second quarter. However, continued good operating
trends and the higher pooling allocation had a positive impact on results for
the first half of 1995. Declines in operating income in the noninsurance
subsidiaries,
8
<PAGE>
much lower net realized investment gains and higher corporate expenses offset
the insurance operations improvement for the first half of 1995.
PROPERTY AND CASUALTY INSURANCE OPERATIONS
------------------------------------------
The following table sets forth the components of property and casualty
insurance earned premiums, net underwriting income, underwriting margin
and operating income for the six months and three months ended June 30, 1995
and 1994:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
------------------------------- ------------------------------------
1995 1994 % CHANGE 1995 1994 % CHANGE
--------- -------- ---------- -------- ------------ -------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Earned Premiums
Personal lines $131,901 $95,130 38.7% $66,632 $47,993 38.8%
Commercial lines 5,213 4,027 29.4% 2,630 1,968 33.6%
Pools, associations and fees 1,848 1,350 36.9% 919 672 36.8%
Reinsurance ceded (3,959) (2,338) 69.3% (2,150) (1,183) 81.8%
-------- ------- ----- ------- ------- -----
Total $135,003 $98,169 37.5% $68,031 $49,450 37.6%
======== ======= ===== ======= ======= =====
Net underwriting income $ 3,940 $ 4,696 (16.1%) $ 283 $ 7,609 (96.3%)
======== ======= ===== ======= ======= =====
Underwriting margin 2.9% 4.8% 0.4% 15.4%
======== ======= ===== =======
Operating Income $ 10,199 $ 9,568 6.6% $ 3,995 $ 8,828 (54.7%)
======== ======= ===== ======= ======= =====
</TABLE>
The 37.5% increase in earned premiums is due primarily to the pooling
amendment which occurred October 1, 1994. It increased the allocation of the
pooled business to Alfa Corporation's property and casualty operations by 15
points from 50% to 65%, which increased earned premiums by approximately $32.1
million for the first half of 1995 and $16.2 million for the second quarter.
Similarly, the allocation of losses and expenses associated with the pooled
business also increased. The overall increase of the entire pool of written
premiums increased 6.8% in the first half of 1995 due to growth in new business
of 4.5% and a low lapse ratio of 3.5% compared to 3.7% in the first six months
of 1994.
The decline in underwriting margin and underwriting income reflects a
higher level of storm related claims in 1995 over 1994. The Alfa Group incurred
approximately $22 million in severe weather claims in the first half of 1995
compared to approximately $15.5 million in 1994. However, such storm activity
occurred in the second quarter of 1995 and in the first quarter of 1994, which
is the reason for the significant decline in both underwriting and operating
income for the second quarter. Operating income for the six months increased
6.6%, however, reflecting a higher level of cash flow and investment income,
primarily due to the increased level of pooling. Non-storm underwriting trends
were good during the first half of 1995. The loss ratio excluding storm claims
was 58.1% and the expense ratio was relatively flat.
9
<PAGE>
LIFE INSURANCE OPERATIONS
-------------------------
The following table sets forth life insurance premiums and policy charges,
by type of policy, and operating income for the six months and three months
ended June 30, 1995 and 1994:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
---------------------------- -----------------------------
1995 1994 % CHANGE 1995 1994 % CHANGE
------- ------- ---------- ------- ------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Premiums and Policy Charges
Universal life policy charges $ 4,273 $ 3,668 16% $2,135 $1,874 14%
Interest sensitive life policy charges 3,948 3,943 0% 1,977 1,916 3%
Traditional life insurance premiums 9,916 10,118 (2%) 4,214 4,266 (1%)
------- ------- -- ------ ------ --
Total $18,137 $17,729 2% $8,326 $8,056 3%
======= ======= == ====== ====== ==
Operating Income $ 6,488 $ 6,048 7% $3,425 $2,535 35%
======= ======= == ====== ====== ==
</TABLE>
Life insurance premiums and policy charges grew only 2% in the first half
of 1995. However, new production increased 9.8% over the same period in 1994.
The improved production has come primarily in sales of the Company's Universal
Life product for which only the product's policy charges are accounted for as
revenues.
Life insurance operating income increased approximately 7% in the first
half of 1995 reflecting a strong second quarter improvement of 35% which is
primarily due to a 21% reduction in death claims. Mortality was 85% of expected
in the period which compares favorably to the second quarter of 1994 which had a
mortality rate of 123% of expected. Net investment income increased 5% in the
first half of 1995 compared to the same period in 1994 due to higher yield rates
and positive cash flows which increased invested assets.
NONINSURANCE OPERATIONS
-----------------------
Noninsurance earnings declined 6% in the first half of 1995. Most
significant was a 34% decline in operating income of the construction subsidiary
due to a drop in residential construction activity and a drop in new home sales.
The consumer finance loan portfolio grew 15% to $79.1 million at June 30, 1995.
However, the interest margin has tightened and operating profits are flat in the
finance subsidiary.
CORPORATE
---------
Interest expense on corporate debt is the primary corporate expense
incurred. Interest expense in the first six months of 1995 was approximately
$993,000 compared to approximately $688,000 for the similar period in 1994. The
increase in interest expense is due to the increase in interest rates on the
outstanding debt. The remainder of the corporate expense represents general
operating expenses which may fluctuate from time to time.
10
<PAGE>
INVESTMENTS
-----------
The Company has historically produced positive cash flow from operations
which has resulted in increasing amounts of funds available for investment and,
consequently, higher investment income. Investment income is also affected by
yield rates. Information about cash flows, invested assets and yield rates is
presented below for the six months ended June 30, 1995 and 1994:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1995 1994
-------- ---------
<S> <C> <C>
Increase (decrease) in cash flow from operations 23.0% (17.3%)
Increase in invested assets since January 1 11.6% 2.4%
Investment yield rate 8.4% 7.9%
Increase in net investment income 8.0% 4.9%
</TABLE>
Positive cash flow from operations increased in the first half of 1995 as
a result of improved operating results in both the life and property casualty
subsidiaries. In addition, higher levels of premium and invested assets as a
result of the pooling amendment has also positively affected cash flow, which
has increased invested assets 11.6% since year-end. The higher level of
invested assets combined with a higher yield rate of 8.4% has increased net
investment income by 8.0%. The Company had net realized investment gains of
$760,292 in the first six months of 1995 and $2.5 million in the similar period
in 1994. These net gains are primarily from sales of equity securities and from
gains in the Company's covered call option writing program. Such realized gains
are the result of market conditions and therefore can fluctuate from period to
period.
The composition of the Company's investment portfolio is as follows at June
30, 1995 and December 31, 1994:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
--------- -------------
1995 1994
--------- -------------
<S> <C> <C>
Fixed maturities
Taxables
Mortgage Backed (CMO's) 29.1% 26.3%
Corporate Bonds 29.5% 30.1%
----- -----
Total taxable 58.6% 56.4%
Tax exempts 10.2% 10.3%
----- -----
Total fixed maturities 68.8% 66.7%
----- -----
Equity Securities 9.2% 9.9%
Mortgage Loans 0.1% 0.2%
Real Estate 0.2% 0.2%
Policy loans 3.4% 3.6%
Other long term investments 14.7% 16.0%
Short term investments 3.6% 3.4%
----- -----
100.0% 100.0%
===== =====
</TABLE>
11
<PAGE>
The majority of the Company's investment portfolio consists of fixed
maturities which are diverse as to both industry and geographic concentration.
Since year-end, the portfolio mix has remained relatively stable with an
increase in mortgage-backed securities and a lower growth rate of the
collateralized loan portfolio (included in Other long-term investments).
The rating of the Company's portfolio of fixed maturities using the
Standard & Poor's rating categories is as follows at June 30, 1995 and December
31, 1994:
<TABLE>
<CAPTION>
RATING
------
JUNE 30, DECEMBER 31,
--------- -------------
1995 1994
--------- -------------
<S> <C> <C>
AAA to A- 89.0% 86.7%
BBB+ to BBB- 9.8% 12.1%
Below investment grade (BB+ and Below) 1.2% 1.2%
---- -----
100.0% 100.0%
----- -----
</TABLE>
Approximately 1.0% of the fixed maturity portfolio was not rated by an
outside rating service but was rated by Company management. The Company
considers bonds with a quality rating of BB+ and below to be below investment
grade or high yield bonds (also called junk bonds).
The following is information concerning the Company's portfolio of high
yield fixed maturity investments at
June 30, 1995 and December 31, 1994:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
------------------------- -------------------------
% OF % OF
STATUTORY STATUTORY
1995 SURPLUS 1994 SURPLUS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
High-yield fixed maturities:
Amortized value $ 4,677,505 2.0% $ 5,768,973 2.5%
Market value $ 4,480,484 1.9% $ 5,003,004 2.2%
Unrealized gain (loss) $ (197,021) (0.1%) $ (765,969) (0.3%)
</TABLE>
During the first half of 1995 the Company had net losses on disposals of
high yield debt securities of $495,026. Non-performing bonds included in the
above high yield fixed maturity investments total $154,000 at December 31, 1994.
At June 30, 1995, there were no nonperforming bonds in the portfolio.
12
<PAGE>
Included in the Company's portfolio of equity securities are common stocks
of issuers of high yield debt instruments. Information concerning this category
of equity securities is as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
---------------------- ----------------------
% OF % OF
1995 STATUTORY 1994 STATUTORY
SURPLUS SURPLUS
------ ---------- ------- ----------
<S> <C> <C> <C> <C>
Equity investments held
in issuers of high-yield
debt securities:
Carrying value (market) $6,299,717 2.7% $8,758,871 3.9%
Cost $6,162,583 2.6% $8,580,962 3.8%
Unrealized gain (loss) $ 137,134 0.1% $ 171,909 0.1%
</TABLE>
During the first half of 1995, the Company sold approximately $3.7 million
in fixed maturities available for sale. These sales resulted in gross realized
gains of $68,379 and gross realized losses of $548,173. At June 30, 1995,
approximately 42.3% of fixed maturities were mortgage-backed securities. Such
securities are comprised of CMO's and pass through securities. Based on periodic
reviews of the Company's portfolio of mortgage-backed securities and due to
favorable liquidity, capital strength, a constant review of asset liability
matching and inherent flexibility in its interest sensitive type product
liabilities the Company's exposure to prepayment risk is minimized and is not
believed to be significant. At June 30, 1995 the Company's total portfolio of
fixed maturities had gross unrealized gains of $25,670,348 and gross unrealized
losses of $10,008,958. Securities are priced by nationally recognized pricing
services or by broker/dealer securities firms. Approximately 1.0% were priced by
the Company.
The Company's investment in other long term investments consists primarily
of consumer finance receivables collateralized by automobiles and other property
and of assets leased under operating leases. The Company has not experienced any
significant delinquencies or charge-offs on such investments. At June 30, 1995,
the Company maintained an allowance for loan losses of $757,505 or approximately
1% of the outstanding loan balance. The Company's investments in high yield debt
securities, mortgage loans and real estate have not had and are not expected to
have a material effect on liquidity, capital resources or financial condition.
INCOME TAXES
------------
Income tax expense declined in the first half of 1995 primarily as a result
of the decrease in income before provision for income taxes. The effective tax
rate was 31.5% in the first half of 1995, similar to the effective rate for the
first half and full year of 1994.
13
<PAGE>
IMPACT OF INFLATION
-------------------
Inflation increases consumers' needs for both life and property and
casualty insurance coverage. Inflation increases claims incurred by property and
casualty insurers as property repairs, replacements and medical expenses
increase. Such cost increases reduce profit margins to the extent that rate
increases are not maintained on an adequate and timely basis. Since inflation
has remained relatively low in recent years, financial results have not been
significantly impacted by inflation.
LIQUIDITY AND CAPITAL RESOURCES
--------------------------------
Alfa Corporation receives funds from its subsidiaries consisting of
dividends, payments for funding federal income taxes, and reimbursement of
expenses incurred at the corporate level for the subsidiaries. These funds are
used for paying dividends to stockholders, corporate interest and expenses,
federal income taxes, and for funding additional investments in its
subsidiaries' operations.
Alfa Corporation's subsidiaries require cash in order to fund policy
acquisition costs, claims, other policy benefits, interest expense, general
operating expenses, and dividends to Alfa Corporation. The major sources of the
Company's liquidity are operations and cash provided by maturing or liquidated
investments. A significant portion of the Company's investment portfolio
consists of readily marketable securities which can be sold for cash. Based on a
review of the Company's matching of asset and liability maturities and on the
interest sensitivity of the majority of policies in force, management believes
the ultimate exposure to loss from interest rate fluctuations is not
significant.
On October 25, 1993, the Company established a Stock Incentive Plan,
pursuant to which a maximum aggregate of 2,000,000 shares of common stock have
been reserved for grant to key personnel. The plan expires on October 24, 2003.
The Company granted 783,400 such options on October 25, 1993, 80,000 options on
March 28, 1994 and 80,000 options on March 27, 1995. The options ratably become
exercisable annually over three years, and may not be exercised after ten years
after the date of award. At June 30, 1995 no options had been exercised,
although 280,614 options were exercisable and 25,667 had been cancelled leaving
1,082,267 options available for grant under the plan.
In October 1989, the Company's Board of Directors approved a stock
repurchase program authorizing the repurchase of up to 1,000,000 shares (now
2,000,000 as a result of two-for-one stock split on June 1, 1993) of its
outstanding common stock in the open market or in negotiated transactions in
such quantities and at such times and prices as management may decide. At June
30, 1995, the Company had repurchased 1,097,600 shares at a cost of $4,630,770.
Total notes payable decreased $3.6 million since December 31, 1994 to
$110.0 million. Prior to 1995, notes payable consisted of short term debt
outstanding under various credit lines with commercial banks which was used
primarily to fund the Company's consumer loan portfolio and for other corporate
purposes. During the first quarter of 1995 the Company began issuing commercial
paper which replaced the majority of the short term debt. At June 30, 1995 the
Company had issued approximately $87.6 million in commercial paper at rates
ranging from 6.01% to 6.11% with maturities ranging from July 6, 1995 to August
28, 1995. The Company intends to continue to use the commercial paper program to
fund its short term needs however, backup lines of credit are in place up to
$125 million. In addition, the Company had $19.9 million in short-term debt
outstanding to affiliates with interest equal to bank short-term rates payable
monthly and $2.4 million outstanding in other short-term debt at a rate of 3.6%.
14
<PAGE>
Cash surrenders paid to policyholders on a statutory basis totaled $3.7
million in the first half of 1995 and $3.6 million in the similar period in
1994. This level of surrenders is within the Company's pricing expectations.
Historical persistency rates indicate a normal pattern of surrender activity.
The structure of the surrender charges is such that lapses are discouraged. The
majority of the policies in force have surrender charges equal to the total
policy cash value in the early years which grade downward over a 12 to 15 year
period. In addition, the majority of the in-force business is interest sensitive
type policies which generally have lower rates of surrender. At June 30, 1995
the total amount of cash that would be required to fund all amounts subject to
surrender was approximately $195.8 million.
The Company's business is concentrated geographically in Alabama, Georgia
and Mississippi. Accordingly, unusually severe storms or other disasters in
these contiguous states might have a more significant effect on the Company than
on a more geographically diversified insurance company. Although the Company
believes its reinsurance coverages are adequate, unusually severe storms, other
natural disasters and other events could have an adverse impact on the Company's
financial condition and operating results.
Increasing public interest in the availability and affordability of
insurance has prompted legislative, regulatory and judicial activity in several
states. This includes efforts to contain insurance prices, restrict underwriting
practices and risk classifications, mandate rate reductions and refunds,
eliminate or reduce exemptions from antitrust laws and generally expand
regulation. Because of Alabama's low automobile rates as compared to rates in
most other states, the Company does not expect the type of punitive legislation
and initiatives found in some states to be a factor in its primary market in the
immediate future.
15
<PAGE>
PART II. OTHER INFORMATION
Item 6.
-------
EXHIBITS AND REPORTS ON FORM 8-K.
---------------------------------
Registrant filed a report on Form 8-K on June 7, 1995. This 8-K
amended the 8-K filed on May 22, 1995 which reported a change in
Registrant's certifying accountants.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALFA CORPORATION
Date 8/10/95 By: /s/ Goodwin L. Myrick
----------------------- -------------------------
Goodwin L. Myrick
President
Date 8/10/95 By: /s/ Donald Price
----------------------- -------------------------
Donald Price
Senior Vice President,
Finance
(Chief Financial Officer)
Date 8/10/95 By: /s/ John Holey
----------------------- -------------------------
John Holley
Vice President and Controller
(Chief Accounting Officer)
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995
<PERIOD-START> JAN-01-1995 APR-01-1995
<PERIOD-END> JUN-30-1995 JUN-30-1995
<DEBT-HELD-FOR-SALE> 547,025,430 0
<DEBT-CARRYING-VALUE> 4,304,539 0
<DEBT-MARKET-VALUE> 4,597,795 0
<EQUITIES> 73,301,484 0
<MORTGAGE> 1,095,776 0
<REAL-ESTATE> 1,906,096 0
<TOTAL-INVEST> 801,363,718 0
<CASH> 1,150,591 0
<RECOVER-REINSURE> 0 0
<DEFERRED-ACQUISITION> 90,598,389 0
<TOTAL-ASSETS> 921,059,453 0
<POLICY-LOSSES> 372,020,220 0
<UNEARNED-PREMIUMS> 85,360,505 0
<POLICY-OTHER> 8,678,762 0
<POLICY-HOLDER-FUNDS> 8,359,992 0
<NOTES-PAYABLE> 110,016,395 0
<COMMON> 41,891,512 0
0 0
0 0
<OTHER-SE> 253,817,098 0
<TOTAL-LIABILITY-AND-EQUITY> 921,059,453 0
153,140,665 76,357,521
<INVESTMENT-INCOME> 24,563,883 12,425,039
<INVESTMENT-GAINS> 1,169,680 904,403
<OTHER-INCOME> 1,211,914 587,974
<BENEFITS> 116,171,581 59,682,241
<UNDERWRITING-AMORTIZATION> 23,199,544 11,757,758
<UNDERWRITING-OTHER> 15,353,294 7,266,518
<INCOME-PRETAX> 25,361,723 11,568,420
<INCOME-TAX> 8,009,489 3,630,252
<INCOME-CONTINUING> 17,352,234 7,938,168
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 17,352,234 7,938,168
<EPS-PRIMARY> .43 .19
<EPS-DILUTED> .43 .19
<RESERVE-OPEN> 88,207,011 0
<PROVISION-CURRENT> 108,468,530 0
<PROVISION-PRIOR> (3,993,143) 0
<PAYMENTS-CURRENT> 70,553,330 0
<PAYMENTS-PRIOR> 27,952,138 0
<RESERVE-CLOSE> 94,176,930 0
<CUMULATIVE-DEFICIENCY> 0 0
</TABLE>
