<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 March 31, 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 March 31, 1995
- - - - ------------------------------ -------------------------
Common Stock, $1.00 par value 40,785,912 shares
<PAGE>
ALFA CORPORATION
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
Part I. Financial Information Page No.
--------
(Condensed Consolidated Unaudited)
Item 1. Financial Statements
Balance Sheets -- March 31, 1995 and
December 31, 1994 3
Statements of Income, Three Months
ended March 31, 1995 and 1994 4
Statements of Cash Flows, Three
Months ended March 31, 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
</TABLE>
2
<PAGE>
ALFA CORPORATION
CONSOLIDATED CONDENSED
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
-------------------------------------
1995 1994
-------------------------------------
Assets (Unaudited)
<S> <C> <C>
Investments:
Fixed Maturities Held for Investment, at amortized cost
(market value $4,736,766 in 1995 and $4,855,786 in 1994) $ 4,509,869 $ 4,701,143
Fixed Maturities Available for Sale, at market value
(amortized cost $520,159,103 in 1995 and $499,519,431 in 1994) 516,506,983 473,569,270
Equity Securities, at market (cost $60,785,903
in 1995 and $62,840,541 in 1994) 74,444,287 71,811,785
Mortgage Loans on Real Estate 1,137,268 1,180,085
Investment Real Estate (net of accumulated
depreciation of $1,084,341 in 1995 and
$1,034,764 in 1994) 1,395,425 1,425,765
Policy Loans 26,748,203 25,561,728
Other Long-term Investments 117,602,494 115,061,499
Short-term Investments 25,769,405 24,762,467
- - - - -------------------------------------------------------------------------------------------------------------
Total Investments 768,113,934 718,073,742
Cash 1,309,669 11,750,197
Accrued Investment Income 9,176,412 9,070,828
Accounts Receivable 6,716,568 9,008,302
Due from Affiliates 6,564,688 1,800,310
Deferred Policy Acquisition Costs 91,171,131 89,012,566
Deferred Income Taxes 2,913,291
Other Assets 4,685,884 4,740,961
- - - - -------------------------------------------------------------------------------------------------------------
Total Assets $887,738,286 $846,370,197
=============================================================================================================
Liabilities
Policy Liabilities and Accruals $363,586,497 $349,003,558
Unearned Premiums 82,484,394 79,426,172
Dividends to Policyholders 8,597,307 8,553,904
Premium Deposit and Retirement Deposit Funds 8,680,275 9,191,782
Deferred Income Taxes 7,413,979
Other Liabilities 28,650,000 31,446,801
Due to Affiliates 179,650
Notes Payable 89,179,893 93,128,142
Notes Payable to Affiliates 20,866,082 20,454,742
- - - - -------------------------------------------------------------------------------------------------------------
Total Liabilities 609,458,427 591,384,751
- - - - -------------------------------------------------------------------------------------------------------------
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) 5,164,633 (10,980,201)
Retained Earnings 214,579,461 207,429,882
Treasury Stock: at cost (1,105,600 shares) (4,631,770) (4,631,770)
- - - - -------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 278,279,859 254,985,446
- - - - -------------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $887,738,286 $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>
Three Months Ended
March 31,
-------------------------------
1995 1994
-------------------------------
<S> <C> <C>
Revenues
Premiums and Policy Charges $76,783,144 $58,392,434
Net Investment Income 12,138,844 10,894,375
Realized Investment Gains 265,277 2,497,825
Other Income 623,940 724,575
- - - - -------------------------------------------------------------------------------------------------------
Total Revenues 89,811,205 72,509,209
- - - - -------------------------------------------------------------------------------------------------------
Benefits and Expenses
Benefits & Settlement Expenses 55,655,814 47,915,566
Dividends to Policyholders 833,526 803,645
Amortization of Deferred Policy
Acquisition Costs 11,441,786 8,794,807
Other Operating Expenses 8,086,776 5,537,834
- - - - -------------------------------------------------------------------------------------------------------
Total Expenses 76,017,902 63,051,852
- - - - -------------------------------------------------------------------------------------------------------
Income Before Provision for Income Taxes 13,793,303 9,457,357
Provision for Income Taxes 4,379,237 3,298,454
- - - - -------------------------------------------------------------------------------------------------------
Net Income $9,414,066 $6,158,903
=======================================================================================================
Net Income Per Share $0.23 $0.15
=======================================================================================================
Operating Income $9,241,636 $4,535,317
Operating Income Per Share $0.23 $0.11
=======================================================================================================
Dividends Per Share $0.09 $0.0725
=======================================================================================================
Average Shares Outstanding 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>
Three Months Ended
March 31,
------------------------------
1995 1994
------------------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income $9,414,066 $6,158,903
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Policy Acquisition Costs Deferred (13,600,351) (10,718,347)
Amortization of Deferred Policy Acquisition Costs 11,441,786 8,794,807
Depreciation and Amortization 1,269,456 997,387
Provision for Deferred Taxes 757,664 697,035
Interest on Policyholders' Funds 2,501,980 2,278,732
Net Realized Investment Gains (265,277) (2,497,825)
Other 160,928 (723,254)
Changes in Operating Assets and Liabilities:
Increase in Accrued Investment Income (105,584) (1,056,799)
Decrease in Accounts Receivable 2,291,734 3,848,350
Increase in Amounts Due From Affiliates (4,764,378) (2,967,486)
Decrease in Amounts Due to Affiliates (179,650) (2,176,866)
Decrease (Increase) in Other Assets 55,077 (409,164)
Increase in Liability for Policy Reserves 7,735,186 11,371,515
Increase in Liability for Unearned Premiums 3,058,222 2,211,876
(Decrease) Increase in Amounts Held for Others (468,104) 67,186
(Decrease) Increase in Other Liabilities (2,702,402) 2,485,282
--------------- --------------
Net Cash Provided by Operating Activities 16,600,353 18,361,332
--------------- --------------
Cash Flows From Investing Activities:
Maturities and Redemptions of Fixed Maturities Held for Investment 194,608 742,996
Maturities and Redemptions of Fixed Maturities Available for Sale 4,562,633 12,843,099
Maturities and Redemptions of Other Investments 21,726,325 20,162,164
Sales of Fixed Maturities Available for Sale 2,841,471 27,817,629
Sales of Other Investments 5,154,909 9,729,738
Purchase of Fixed Maturities Available for Sale (26,426,029) (97,785,352)
Purchase of Other Investments (31,183,485) (34,769,667)
Net Decrease in Short-term Investments 427,389 37,642,105
Net Increase in Receivable/Payable on Securities (1,411,323) (7,089,372)
--------------- --------------
Net Cash Used in Investing Activities (24,113,502) (30,706,660)
--------------- --------------
Cash Flows From Financing Activities:
Increase (Decrease) in Notes Payable (3,948,249) 6,863,999
Increase (Decrease) in Notes Payable to Affiliates 411,340 (674,431)
Stockholder Dividends Paid (3,670,732) (2,956,979)
Deposits of Policyholders' Funds 9,965,243 9,344,588
Withdrawal of Policyholders' Funds (5,684,981) (5,481,143)
--------------- --------------
Net Cash Provided by (Used in) Financing Activities (2,927,379) 7,096,034
--------------- --------------
Net Decrease in Cash (10,440,528) (5,249,294)
Cash - Beginning of Period 11,750,197 6,746,555
--------------- --------------
Cash - End of Period $1,309,669 $1,497,261
=============== ==============
Supplemental Disclosures of Cash Flow Information
Cash Paid as of March 31 for:
Interest $1,729,078 $702,110
Income Taxes $6,582,776 $2,090,363
</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
MARCH 31, 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 March 31, 1995 and 1994 are not
necessarily indicative of the results to be expected for the full year. Certain
reclassifications have been made to conform previous classifications to March
31, 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 March 31, 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 March 31, 1995 the
Company had issued approximately $87.0 million in commercial paper at a rate of
6.075% with maturities ranging from April 13, 1995 to April 26, 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>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
- - - - ---------------------
The following table sets forth consolidated summarized income statement
information for the three months ended March 31, 1995 and 1994:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------------
1995 1994 % Change
-------------------------------------
(in thousands)
<S> <C> <C> <C>
Premiums and policy charges $76,783 $58,392 31%
=====================================
Net investment income $12,139 $10,894 11%
=====================================
Total revenues $89,811 $72,509 24%
=====================================
NET INCOME
Insurance operations $ 9,280 $ 4,272 117%
Noninsurance operations 803 807 (1%)
Net realized investment gains 172 1,624 (89%)
Corporate expenses (841) (544) 55%
-------------------------------------
Net income $ 9,414 $ 6,159 53%
=====================================
Net income per share $ 0.23 $ 0.15 53%
=====================================
Weighted average shares outstanding 40,785,912 40,785,912
===========================
</TABLE>
The majority of the 31% growth in premiums in the first 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% over the first quarter of 1994. Total life insurance
premiums and policy charges increased 1.4% in the first quarter, although new
business increased 14.4%. Net investment income increased 11% over the first
quarter of 1994 due to a 13.7% increase in invested assets resulting from
positive cash flows.
The growth in net income is due entirely to the improvement in property and
casualty operating income. The improvement is primarily due to the reduction in
claims from significant storms which occurred in the first quarter of 1994,
however, continued good operating trends and the higher pooling allocation had a
positive impact on results for the first quarter of 1995. Declines in operating
income in the life insurance and noninsurance subsidiaries, much lower net
realized investment gains and higher corporate expenses offset the property and
casualty improvement.
8
<PAGE>
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 three months ended March 31, 1995 and 1994:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------------
1995 1994 % Change
-------------------------------------
(in thousands)
<S> <C> <C> <C>
Earned Premiums
Personal lines $65,270 $47,137 38.5%
Commercial lines 2,583 2,059 25.4%
Pools, associations and fees 928 678 36.9%
Reinsurance ceded (1,809) (1,155) 56.6%
-------------------------------------
Total $66,972 $48,719 37.5%
=====================================
Net underwriting income (loss) $ 3,657 $(2,913) 225.5%
=====================================
Underwriting margin 5.5% (6.0%)
=======================
Operating income $ 6,204 $ 739 739.5%
=====================================
</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 $15.9
million for the quarter. Similarly, the allocation of losses and expenses
associated with the pooled business also increased. The overall increase of the
entire pool of earned premiums increased 6.0% in the first quarter due to growth
in new business of 1.4% and a low lapse ratio of 3.6% compared to 3.8% in the
first three months of 1994.
The significantly improved underwriting margin and operating results reflect a
much lower level of storm related claims for the quarter. The Alfa Group
incurred approximately $3.1 million in severe weather claims in the first
quarter of 1995 compared to approximately $15.5 million in 1994.
Non-storm underwriting trends were good during the quarter. The loss ratio
excluding storm claims was 61.7% and the expense ratio was relatively flat which
resulted in a favorable underwriting margin of 5.5%. Investment income also
added to improved operating earnings as higher levels of cash flows and invested
assets related to the pooling amendment and improved yield rates positively
impacted earnings.
9
<PAGE>
LIFE INSURANCE OPERATIONS
- - - - -------------------------
The following table sets forth life insurance premiums and policy charges, by
type of policy, and life insurance operating income for the three months ended
March 31, 1995 and 1994:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------------
1995 1994 % Change
-------------------------------------
(in thousands)
<S> <C> <C> <C>
Premiums and policy charges
Universal life policy charges $2,138 $1,794 19.2%
Interest sensitive life policy charges 1,971 2,027 (2.8%)
Traditional life insurance premiums 5.702 5,852 (2.6%)
-------------------------------------
Total $9,811 $9,673 1.4%
=====================================
Operating income $3,063 $3,513 (12.8%)
=====================================
</TABLE>
Life insurance premiums grew only 1.4% in the first quarter of 1995. However,
new production increased 14.4% 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 declined approximately 12.8% in the first
quarter of 1995 as a result of a 74% increase in death claims. Mortality was 92%
of expected in the period which compared unfavorably to the first quarter of
1994 which had a mortality rate of only 61% of expected. Net investment income
increased 7% in the first quarter 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 1% in the first quarter of 1995. Most
significant was a 41% decline in operating income of the construction subsidiary
due to a drop in commercial construction activity and a drop in new home sales.
The consumer finance loan portfolio grew 39% to $80.9 million at March 31, 1995.
However, the interest margin has tightened and operating profits increased only
5%.
CORPORATE
- - - - ---------
Interest expense on corporate debt is the primary corporate expense incurred.
Interest expense in the first three months of 1995 was approximately $636,000
compared to approximately $316,000 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 three months ended March 31, 1995 and 1994:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1995 1994
------------------
<S> <C> <C>
Decrease in cash flow from operations (9.6%) (20.1%)
Increase in invested assets since January 1 7.0% 3.3%
Investment yield rate 8.4% 7.6%
Increase in net investment income 11.4% 5.8%
</TABLE>
Positive cash flow from operations declined in the first quarter of 1995 due
to cash flow from the life subsidiary. In 1994 the life company recognized
higher statutory and taxable income which resulted in higher income taxes paid
in the first quarter of 1995. However, positive cash flow has increased invested
assets 7.0% since year-end and 13.7% from March 31, 1994. Also, increased assets
related to the pooling amendment has increased investment income. The higher
level of invested assets combined with a higher yield rate of 8.4% has increased
net investment income by 11.4%. The Company had net realized investment gains of
approximately $265,000 in the first three months of 1995 and $2.5 million in the
similar period in 1994. These net gains are primarily from sales of fixed
maturities, 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 March
31, 1995 and December 31,1994:
<TABLE>
<CAPTION>
March 31, December 31,
----------------------------
1995 1994
----------------------------
<S> <C> <C>
Fixed maturities
Taxable
Mortgage backed (CMO's) 27.5% 26.3%
Corporate bonds 30.0% 30.1%
----------------------------
Total taxable 57.5% 56.4%
Tax exempts 10.3% 10.3%
----------------------------
Total fixed maturities 67.8% 66.7%
----------------------------
Equity securities 9.7% 9.9%
Mortgage loans 0.1% 0.2%
Real estate 0.2% 0.2%
Policy loans 3.5% 3.6%
Other long term investments 15.3% 16.0%
Short term investments 3.4% 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 realtively stable with a slight
increase in mortgage-backed securities. In the first quarter of 1994, the
Company moved short-term investments, new cash flows and proceeds of matured and
called bonds into fixed maturities and also increased its collateralized loan
portfolio.
The rating of the Company's portfolio of fixed maturities using the Standard &
Poor's rating categories is as follows at March 31, 1995 and December 31, 1994:
<TABLE>
<CAPTION>
March 31, December 31,
------------------------
1995 1994
------------------------
RATING
------
<S> <C> <C>
AAA to A- 88.3% 86.7%
BBB+ to BBB- 10.3% 12.1%
BB+ and Below (Below investment grade) 1.4% 1.2%
------------------------
100.0% 100.0%
------------------------
</TABLE>
Approximately 0.6% 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 March 31, 1995 and December 31, 1994:
<TABLE>
<CAPTION>
March 31, December 31,
------------------------------------------------------------
% of % of
1995 Statutory 1994 Statutory
Surplus Surplus
------------------------------------------------------------
<S> <C> <C> <C> <C>
High-yield fixed maturities:
Amortized value $6,763,551 2.9% $5,768,973 2.5%
Carrying value (market) $5,951,280 2.6% $5,003,004 2.2%
Unrealized loss ($ 812,271) (0.4%) $(765,969) (0.3%)
</TABLE>
During the first quarter of 1995 the Company had net losses on disposals of
high yield debt securities of $307,905. Non-performing bonds included in the
above high yield fixed maturity investments total $154,000 at December 31, 1994.
At March 31, 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>
March 31, 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) $9,162,291 4.0% $8,758,871 3.9%
Cost $8,554,141 3.7% $8,580,962 3.8%
Unrealized gain $ 608,150 0.3% $ 171,909 0.1%
</TABLE>
During the first quarter of 1995, the Company sold approximately $2.8 million
in fixed maturities available for sale. These sales resulted in gross realized
gains of $68,379 and gross realized losses of $361,052. At March 31, 1995,
approximately 40.6% 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 March 31, 1995 the Company's total portfolio of
fixed maturities had gross unrealized gains of $15,504,923 and gross unrealized
losses of $18,930,146. Securities are priced by nationally recognized pricing
services or by broker/dealer securities firms. Less than .5% 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 March 31, 1995,
the Company maintained an allowance for loan losses of $775,165 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 increased in the first quarter of 1995 primarily as a
result of the increase in income before provision for income taxes. The
effective tax rate was 31.7% in the first quarter of 1995, similar to the
effective rate for the 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 March 31, 1995 no options had been exercised,
although 281,214 options were exercisable and 20,400 had been cancelled leaving
1,077,000 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 March 31, 1995, the Company
had repurchased 1,097,600 shares at a cost of $4,630,770.
Total notes payable decreased $3.5 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 March 31, 1995 the
Company had issued approximately $87.0 million in commercial paper at a rate of
6.075% with maturities ranging from April 13, 1995 to April 26, 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 $20.9 million in short-term debt
outstanding to affiliates with interest equal to bank short-term rates payable
monthly and $2.2 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 $1.7
million in the first quarter of 1995 and $1.8 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 March 31, 1995
the total amount of cash that would be required to fund all amounts subject to
surrender was approximately $188.1 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.
- - - - ------- ---------------------------------
(27) Financial Data Schedule
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 May 11, 1995 By:/s/GOODWIN L.MYRICK
---------------- -----------------------------
Goodwin L. Myrick
President
Date May 11, 1995 By:/s/DONALD PRICE
---------------- -----------------------------
Donald Price
Senior Vice President, Finance
(Chief Financial Officer)
Date May 11, 1995 By:/s/JOHN HOLLEY
---------------- -----------------------------
John Holley
Vice President and Controller
(Chief Accounting Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<DEBT-HELD-FOR-SALE> 516,506,983
<DEBT-CARRYING-VALUE> 4,509,869
<DEBT-MARKET-VALUE> 4,736,766
<EQUITIES> 74,444,287
<MORTGAGE> 1,137,268
<REAL-ESTATE> 1,395,425
<TOTAL-INVEST> 768,113,934
<CASH> 1,309,669
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 91,171,131
<TOTAL-ASSETS> 887,738,286
<POLICY-LOSSES> 363,586,497
<UNEARNED-PREMIUMS> 82,484,394
<POLICY-OTHER> 8,597,307
<POLICY-HOLDER-FUNDS> 8,680,275
<NOTES-PAYABLE> 110,045,975
<COMMON> 41,891,512
0
0
<OTHER-SE> 236,388,347
<TOTAL-LIABILITY-AND-EQUITY> 887,738,286
76,783,144
<INVESTMENT-INCOME> 12,138,844
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<OTHER-INCOME> 623,940
<BENEFITS> 56,489,340
<UNDERWRITING-AMORTIZATION> 11,441,786
<UNDERWRITING-OTHER> 8,086,776
<INCOME-PRETAX> 13,793,303
<INCOME-TAX> 4,379,237
<INCOME-CONTINUING> 9,414,066
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,414,066
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
<RESERVE-OPEN> 88,207,011
<PROVISION-CURRENT> 51,784,026
<PROVISION-PRIOR> (1,925,151)
<PAYMENTS-CURRENT> 32,090,288
<PAYMENTS-PRIOR> 12,676,117
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