<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 September 30, 1996 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 September 30, 1996
- ----------------------------- ------------------------------
Common Stock, $1.00 par value 40,786,712 shares
<PAGE>
ALFA CORPORATION
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information Page No.
---------
(Condensed Consolidated Unaudited)
<C> <S> <C>
Item 1. Financial Statements
Balance Sheets -- September 30, 1996 and
December 31, 1995 3
Statements of Income, Nine Months and
Three Months ended September 30, 1996
and 1995 4
Statements of Cash Flows, Nine Months
ended September 30, 1996 and 1995 5
Notes to Financial Statements 6
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results
of Operations 9
Part II. Other Information 17
Item 6.
Exhibits and Reports on Form 8-K 17
</TABLE>
2
<PAGE>
ALFA CORPORATION
CONSOLIDATED CONDENSED
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
------------------------------
1996 1995
------------------------------
Assets (Unaudited)
<S> <C> <C>
Investments:
Fixed Maturities Held for Investment, at amortized cost
(market value $3,130,918 in 1996 and $3,980,724 in 1995) $2,961,396 $3,711,475
Fixed Maturities Available for Sale, at market value
(amortized cost $589,195,943 in 1996 and $539,217,454 in 1995 598,466,176 572,403,242
Equity Securities, at market (cost $57,890,879
in 1996 and $61,247,187 in 1995) 88,406,542 89,014,464
Mortgage Loans on Real Estate 864,425 995,777
Investment Real Estate (net of accumulated
depreciation of $1,318,960 in 1996 and
$1,205,694 in 1995) 1,825,940 1,829,363
Policy Loans 30,726,300 29,084,753
Other Long-term Investments 105,373,706 111,073,137
Short-term Investments 29,401,301 33,010,906
- --------------------------------------------------------------------------------------------------------
Total Investments 858,025,786 841,123,117
Cash 1,614,548 1,326,285
Accrued Investment Income 9,760,797 9,340,980
Accounts Receivable 9,157,094 13,771,367
Reinsurance Balances Receivable 993,884 4,546,506
Due from Affiliates 5,673,464 1,406,729
Deferred Policy Acquisition Costs 100,713,316 89,156,542
Other Assets 5,155,817 4,761,451
- --------------------------------------------------------------------------------------------------------
Total Assets $991,094,706 $965,432,977
========================================================================================================
Liabilities
Policy Liabilities and Accruals $428,013,959 $402,352,509
Unearned Premiums 95,105,346 85,306,194
Dividends to Policyholders 8,982,837 8,863,633
Premium Deposit and Retirement Deposit Funds 7,034,576 7,861,070
Deferred Income Taxes 18,248,942 22,501,534
Other Liabilities 36,130,422 28,612,754
Due to Affiliates 6,135,599
Commercial Paper 74,875,925 81,949,616
Notes Payable 2,266,645 2,323,362
Notes Payable to Affiliates 11,139,798 10,916,962
- --------------------------------------------------------------------------------------------------------
Total Liabilities 681,798,450 656,823,233
- --------------------------------------------------------------------------------------------------------
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: 1996 - 40,786,712; 1995 - 40,785,912 41,891,512 41,891,512
Capital in Excess of Par Value 21,281,323 21,276,023
Net Unrealized Investment Gains
(Less applicable deferred income taxes) 25,011,928 35,620,863
Retained Earnings 225,739,163 214,453,116
Treasury Stock: at cost (1996 - 1,104,800; 1995 - 1,105,600 shares) (4,627,670) (4,631,770)
- --------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 309,296,256 308,609,744
- --------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $991,094,706 $965,432,977
========================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
unaudited financial statements.
3
<PAGE>
ALFA CORPORATION
CONSOLIDATED CONDENSED UNAUDITED
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
----------------------------------- -------------------------------
1996 1995 1996 1995
----------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Revenues
Premiums and Policy Charges $250,149,744 $231,651,934 $84,460,691 $78,511,269
Net Investment Income 40,433,481 37,936,906 13,959,538 13,373,023
Realized Investment Gains 5,207,103 1,423,826 2,358,009 254,146
Other Income 1,615,408 1,994,153 565,567 782,239
- ------------------------------------------------------------------------------------------- -------------------------------
Total Revenues 297,405,736 273,006,819 101,343,805 92,920,677
- ------------------------------------------------------------------------------------------- -------------------------------
Benefits and Expenses
Benefits & Settlement Expenses 202,720,199 173,172,329 62,349,302 58,610,088
Dividends to Policyholders 2,426,524 2,362,699 771,720 753,359
Amortization of Deferred Policy
Acquisition Costs 37,574,852 35,208,635 13,016,938 12,009,091
Other Operating Expenses 22,077,872 22,208,536 7,294,687 6,855,242
- ------------------------------------------------------------------------------------------- -------------------------------
Total Expenses 264,799,447 232,952,199 83,432,647 78,227,780
- ------------------------------------------------------------------------------------------- -------------------------------
Income Before Provision for Income Taxes 32,606,289 40,054,620 17,911,158 14,692,897
Provision for Income Taxes 9,583,435 12,255,589 5,626,952 4,246,100
- ------------------------------------------------------------------------------------------- -------------------------------
Net Income $23,022,854 $27,799,031 $12,284,206 $10,446,797
=========================================================================================== ===============================
Net Income Per Share $0.56 $0.68 $0.30 $0.26
=========================================================================================== ===============================
Operating Income $19,638,237 $26,873,544 $10,751,500 $10,281,602
Operating Income Per Share $0.48 $0.66 $0.26 $0.25
=========================================================================================== ===============================
Dividends Per Share $0.29 $0.28 $0.0975 $0.095
=========================================================================================== ===============================
Average Shares Outstanding 40,786,511 40,785,912 40,786,712 40,785,912
=========================================================================================== ===============================
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
unaudited financial statements.
4
<PAGE>
ALFA CORPORATION
CONSOLIDATED CONDENSED UNAUDITED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------------
1996 1995
--------------------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income $23,022,854 $27,799,031
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Policy Acquisition Costs Deferred (44,766,601) (38,607,481)
Amortization of Deferred Policy Acquisition Costs 37,574,852 35,208,635
Depreciation and Amortization 3,174,811 3,837,479
Provision for Deferred Taxes 966,209 (143,371)
Interest on Policyholders' Funds 9,059,615 7,879,256
Net Realized Investment Gains (5,207,103) (1,423,826)
Other 972,872 (1,181,982)
Changes in Operating Assets and Liabilities
Increase in Accrued Investment Income (419,817) (658,685)
Decrease (Increase) in Accounts Receivable 6,672,198 (4,010,607)
Decrease (Increase) in Reinsurance Balances Receivable 3,552,622 (425,493)
Increase in Amounts Due From Affiliates (4,266,735) (1,513,018)
Decrease in Amounts Due to Affiliates (6,135,599) (179,650)
Decrease (Increase) in Other Assets (394,366) 169,517
Increase in Liability for Policy Reserves 6,175,917 18,905,128
Increase in Liability for Unearned Premiums 9,799,152 8,519,624
Decrease in Amounts Held for Others (707,290) (988,830)
Increase (Decrease) in Other Liabilities 6,011,647 (5,845,796)
------------- --------------
Net Cash Provided by Operating Activities 45,085,238 47,339,931
------------- --------------
Cash Flows From Investing Activities:
Maturities and Redemptions of Fixed Maturities Held for Investment 767,841 774,466
Maturities and Redemptions of Fixed Maturities Available for Sale 32,873,057 21,721,239
Maturities and Redemptions of Other Investments 64,036,163 64,812,666
Sales of Fixed Maturities Available for Sale 35,503,696 2,225,746
Sales of Other Investments 42,763,041 22,567,004
Purchase of Fixed Maturities Available for Sale (127,620,504) (65,608,128)
Purchase of Other Investments (87,839,229) (91,098,527)
Net Decrease (Increase) in Short-term Investments 1,412,303 (3,405,548)
Net Decrease (Increase) in Receivable/Payable on Securities 2,192,700 (468)
------------- --------------
Net Cash Used in Investing Activities (35,910,932) (48,011,550)
------------- --------------
Cash Flows From Financing Activities:
Increase (Decrease) in Commercial Paper (7,073,691) 84,249,186
Decrease in Notes Payable (56,717) (90,750,362)
Increase (Decrease) in Notes Payable to Affiliates 222,836 (2,023,217)
Stockholder Dividends Paid (11,826,510) (11,420,056)
Proceeds from Exercise of Stock Options 9,400 -
Deposits of Policyholders' Funds 30,379,780 28,747,404
Withdrawal of Policyholders' Funds (20,541,141) (17,296,542)
------------- --------------
Net Cash Used in Financing Activities (8,886,043) (8,493,587)
------------- --------------
Net Increase (Decrease) in Cash 288,263 (9,165,206)
Cash - Beginning of Period 1,326,285 11,750,197
------------- --------------
Cash - End of Period $1,614,548 $2,584,991
============= ==============
Supplemental Disclosures of Cash Flow Information
Cash Paid as of September 30 for:
Interest $4,150,046 $4,953,972
Income Taxes $4,182,000 $18,231,776
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed unaudited financial statements.
5
<PAGE>
NOTES TO CONSOLIDATED CONDENSED UNAUDITED FINANCIAL STATEMENTS
September 30, 1996
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, 1995. The results of
operations for the three month and nine month periods ended September 30, 1996
and 1995 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
September 30, 1996 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), and other members of the Mutual Group. The Mutual Group is a
direct writer primarily of personal lines of property and casualty insurance in
Alabama. The Company's subsidiaries similarly are direct writers in Georgia and
Mississippi. Both the Mutual Group and the Company write preferred risk
automobile, homeowner, farmowner and mobile home insurance, fire and allied
lines, standard risk automobile and homeowner insurance, and 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. All of the Mutual Group's direct property and casualty
business (together with the property and casualty business ceded by the Company)
is included in the pool. Mutual retrocedes 65% of the pool to the Company and
retains 35% within the Mutual Group. Effective November 1, 1996, the allocation
of catastrophe costs among the members of the pool will be changed to better
reflect the economics of catastrophe finance, which will reduce the earnings
volatility caused by catastrophe exposure. The change will allow the catastrophe
reinsurance buying decision to be made on a group basis which will benefit each
member of the group. 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.
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
6
<PAGE>
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 September 30, 1996. These legal
proceedings involve alleged breaches of contract, torts, including bad faith and
fraud claims based on alleged wrongful or fraudulent acts of agents and
miscellaneous other causes of action. Many of these lawsuits involve claims for
punitive damages. The likelihood or extent of a punitive damage award in any
one of these given cases is not possible to predict. Although the Alfa
Insurance Group including Alfa Corporation and its subsidiaries have such legal
proceedings filed against it in which punitive damages are sought, to date, no
such lawsuit has resulted in the award of any significant amount of damages
against the Company. Based upon information presently available, applicable law
and the defenses available to Alfa Corporation and its subsidiaries, management
does not consider the contingent liabilities which might arise from pending
litigation to be material in relation to the financial position, result 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. However, it should be noted that in
Alabama, where the company has substantial business, the frequency of large
punitive damage awards, bearing little or no relation to the actual damages
awarded by juries, continues to increase, creating the potential for
unpredictable material adverse judgements in any given suit.
4. Accounting for Stock-Based Compensation
---------------------------------------
During 1995, the Financial Accounting Standards Board issued Financial
Accounting Statement No. 123, "Accounting for Stock-Based Compensation", ("FAS
123"). The Statement defines a fair value based method of accounting for an
employee stock option. It also allows an entity to continue using the intrinsic
value based accounting method prescribed by APB Opinion No. 25, "Accounting for
Stock Issued to Employees." Alfa Corporation has continued to use this method
to account for its stock options. However, FAS 123 requires entities electing
to remain with the intrinsic method of accounting to provide pro forma
disclosures of net income and earnings per share as if the fair value based
method of accounting had been applied as well as other disclosures about the
Company's stock-based employee compensation plans. FAS 123 and its related
disclosures have been adopted by the Company in the first quarter of 1996.
Information about the Company's stock option plan and the related required
disclosures follow.
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, 80,000 options on March 27, 1995 and 80,000 options on April 18,
1996. The options ratably become exercisable annually over three years, and may
not be exercised after ten years after the date of the award. At September 30,
1996, there had been 800 options exercised, 572,403 options were exercisable and
45,134 had been cancelled leaving 1,021,734 options available for grant under
the plan.
FAS 123 requires certain disclosures and pro forma information for each
reporting period, which is presented below. To determine the fair value of the
options granted during the first half of 1995 and 1996, the Company has used the
Black-Scholes model for valuations. The significant assumptions used to estimate
the fair value of such options using this method and the fair value of the
options at the date of grant are as follows:
<TABLE>
<CAPTION>
Options Granted Options Granted
April 18, 1996 March 27, 1995
---------------- -----------------
<S> <C> <C>
Risk-free interest rate 6.58% 7.05%
Expected life (in years) 10 10
Expected volatility 0.4666 0.6165
Expected future dividend yield 2.9% 2.9%
Fair value at date of grant $486,898 $507,138
======== ========
Option price $ 12.25 $ 11.50
======== ========
</TABLE>
7
<PAGE>
Using the fair value shown above, the proforma net income and earnings per
share as if FAS 123 had been applied is as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30, Three Months Ended September 30,
--------------------------------- ----------------------------------
1996 1995 1996 1995
---------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net income, as reported $23,022,854 $27,799,031 $12,284,206 $10,446,797
=========== =========== =========== ===========
Earnings per share, as reported $0.56 $0.68 $0.30 $0.26
===== ===== ===== =====
Proforma net income $22,892,755 $27,742,435 $12,230,146 $10,419,101
=========== =========== =========== ===========
Proforma earnings per share $0.56 $0.68 $0.30 $0.26
===== ===== ===== =====
</TABLE>
The information shown below is for options
outstanding at September 30, 1996 and 1995:
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------------------
1996 1995
----------------------------------------------------------------
Weighted- Weighted-
average average
Number Exercise Number Exercise
of Options Price of Options Price
---------- --------- ---------- --------
<S> <C> <C> <C> <C>
Outstanding
Beginning of year 911,200 $11.144 845,732 $11.121
Add (deduct):
Granted 80,000 $12.250 80,000 $11.500
Exercised (800) ($11.750) 0 -
Cancelled (12,934) ($11.750) (12,466) ($11.750)
-----------------------------------------------------------------
End of Period 977,466 $11.226 913,266 $11.145
=================================================================
Exercisable, end of period 572,403 $11.118 279,081 $11.114
=================================================================
Range of exercise prices $9.40 to $12.25 $9.40 to $11.75
=============== ===============
Weighted average
remaining contractual life 7.448 years 8.241 years
=========== ===========
Actual compensation cost
recognized during period $199,906 $310,552
======== ========
</TABLE>
8
<PAGE>
MANAGEMENTS' DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
- ---------------------
The following table sets forth consolidated summarized income statement
information for the nine months and three months ended September 30, 1996 and
1995:
<TABLE>
<CAPTION>
Nine Months Ended September 30, Three Months Ended September 30,
-------------------------------------- --------------------------------------
1996 1995 % Change 1996 1995 % Change
-------------------------------------- --------------------------------------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C>
Premiums and Policy Charges $250,150 $231,652 8% $ 84,461 $78,511 8%
=================================== ===================================
Net Investment income $ 40,433 $ 37,937 7% $ 13,960 $13,373 4%
=================================== ===================================
Total Revenues $297,406 $273,007 9% $101,344 $92,921 9%
=================================== ===================================
Net income
Insurance operations $ 19,558 $ 26,747 (27%) $ 11,176 $ 10,030 11%
Noninsurance operations 2,229 2,557 (13%) 843 986 (15%)
Net realized investment gains 3,385 925 266% 1,533 165 829%
Corporate expenses (2,149) (2,430) 12% (1,268) (734) (73%)
----------------------------------- -----------------------------------
Net income $ 23,023 $ 27,799 (17%) $ 12,284 $ 10,447 18%
=================================== ===================================
Net income per share $0.56 $0.68 (17%) $0.30 $0.26 18%
=================================== ===================================
Weighted average
shares outstanding 40,786,511 40,785,912 40,786,712 40,785,912
========================= =========================
</TABLE>
Total premiums and policy charges increased 8% in both the first nine
months and third quarter of 1996. The combined pooled property casualty written
premium increased approximately 8.3% over the first nine months of 1996 due to
an increase in new business written, rate increases and a low lapse ratio of
3.8%. Total life insurance premiums and policy charges increased 7% in the
first nine months of 1996. New life business increased almost 9% year to date
and 15% for the third quarter. Net investment income increased 7% over the
first nine months of 1995 due to an increase in invested assets resulting from
positive cash flows.
The decline in net income in the first nine months of 1996 is due primarily
to catastrophic storm activity in the first quarter. Following the adversity
from Hurricane Opal in the fourth quarter of 1995, which resulted in the first
quarterly loss in the Company's history, the Company sustained the second ever
quarterly loss in the first quarter of 1996 due to snow and ice in February and
tornados in March. Conversely, the improvement in net income in the second and
third quarters of 1996 over the same periods in 1995 is due to significant
weather related events in those same periods in 1995. Net income from life
insurance operations improved 12% in the first nine months of 1996 compared to
the first nine months of 1995 and noninsurance operations declined 13%,
primarily in the construction company. Corporate expense, primarily interest
expense, declined due to lower interest rates on corporate debt and a decline in
the average balance outstanding. Realized investment gains were up
significantly in both periods due to timing and market conditions.
9
<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 nine months and three months ended September 30, 1996 and 1995:
<TABLE>
<CAPTION>
Nine Months Ended September 30, Three Months Ended September 30,
----------------------------------- ------------------------------------
1996 1995 % Change 1996 1995 % Change
----------------------------------- ------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Earned Premiums
Personal lines $216,629 $200,238 8.2% $73,574 $68,337 7.7%
Commercial lines 8,367 7,882 6.2% 2,817 2,669 5.5%
Pools, associations and fees 2,911 2,764 5.3% 976 916 6.5%
Reinsurance ceded (6,430) (5,937) 8.3% (2,334) (1,978) 18.0%
---------------------------------- ----------------------------------
Total $221,477 $204,947 8.1% $75,032 $69,944 7.3%
================================== ==================================
Net underwriting income $ (6,130) $ 7,091 (186.4%) $ 3,130 $ 3,151 (0.6%)
================================== ==================================
Underwriting margin ( 2.8%) 3.5 % 4.2% 4.5%
===================== =====================
Operating Income $ 8,520 $ 16,879 (50%) $ 6,823 $ 6,680 2%
================================== ==================================
</TABLE>
Earned premiums increased 8.1% in the first nine months of 1996 and 7.3%
in the third quarter due to an increase in new business and a low lapse ratio of
3.7%. Rate increases also positively impacted the growth rate. However, in spite
of these positive growth factors, catastrophic storm activity in the first
quarter produced significant claims resulting in a net underwriting loss for the
first nine months of 1996.
Claims from snow and ice in February and tornados in March combined to
produce losses estimated at September 30, 1996 to be $27.0 million for the
entire Alfa Group pool, which includes $3.6 million development in the second
quarter. After taxes, the impact in the first nine months on Alfa Corporation
was approximately $11.4 million, or $0.28 per share. These storm losses
followed the impact in the fourth quarter of 1995 of Hurricane Opal, which
produced the first quarterly loss ever for the Company. For the first nine
months of 1995, storms impacted underwriting results by $6.1 million, or $0.15
per share.
The Company and the Alfa Group intensified its studies of catastrophe
financing alternatives in response to Hurricane Opal and its effects. As a
result of such studies, the overall catastrophe program for the group was
restructured. An amendment to the intercompany pooling agreement (see Note 2 to
the Consolidated Financial Statements) changes the allocation of catastrophe
costs among the members of the pool to better reflect the economics of
catastrophe finance. The impact will be a reduction in the volatility of
earnings caused by catastrophes. Had the restructured program been in place
during all of 1996, the catastrophe impact would have been reduced to $6.5
million, or $0.10 per share. Another likely effect will be the reduction of
expenditures for reinsurance protection as the reinsurance buying decision will
be made on a group basis. Such expense for 1996 is expected to be approximately
$8.5 million, or $0.13 per share.
The underwriting income comparison has improved due to the impact of storm
activity in the second quarter of the prior year and from improvement in the
current year's expense ratio. Such improvement has been offset by the
deterioration of non-storm loss ratios.
The non-storm loss ratio for the first nine months of 1996 was 67.2%, up
from 61.7% in the similar period in 1995. The combined ratio, which includes the
effect of storm claims was 102.8% for the first nine months of 1996. Investment
income in the property casualty subsidiaries partially offset the net
underwriting loss. Continued positive cash flow from non-storm results have
increased invested assets which has increased investment income.
10
<PAGE>
LIFE INSURANCE OPERATIONS
-------------------------
The following table sets forth life insurance premiums and policy charges,
by type of policy, and operating income for the nine months and three months
ended September 30, 1996 and 1995:
<TABLE>
<CAPTION>
Nine Months Ended September 30, Three Months Ended September 30,
-------------------------------- ---------------------------------
1996 1995 % Change 1996 1995 % Change
-------------------------------- ---------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Premiums and Policy Charges
Universal life policy charges $ 7,447 $ 6,502 15% $2,589 $2,229 16%
Interest sensitive life policy charges 6,467 5,961 8% 2,229 2,013 11%
Traditional life insurance premiums 14,759 14,242 4% 4,611 4,326 7%
-------------------------- ---------------------------
Total $28,673 $26,705 7% $9,429 $8,568 10%
========================== ===========================
Operating Income $11,017 $ 9,830 12% $4,348 $3,342 30%
========================== ===========================
</TABLE>
Total life insurance premiums and policy charges grew 7% in the first nine
months and 10% in the second quarter of 1996. New premium production increased
8.5% over the same period in 1995 and was up 14.9% in the third quarter. 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 12% in the first
nine months of 1996 and 30% in the third quarter. The improvement is primarily
due to a 13 % reduction in death claims for the nine month period and a 35%
decline for the quarter. Mortality was 76% and 68% of expected in the
respective periods which compares favorably to the similar periods in 1995.
Net investment income increased 6% in the first nine months of 1996 compared to
the same period in 1995 due to positive cash flows which increased invested
assets.
NONINSURANCE OPERATIONS
- -----------------------
Noninsurance earnings declined 13% in the first nine months of 1996. Most
significant was a 75% decline in operating income of the construction subsidiary
due primarily to a drop in residential construction activity and a drop in new
home sales. Operating profits in the consumer finance subsidiary have declined
2%. The loan portfolio declined 14% to $65.3 million at September 30, 1996. The
interest margin has improved but an increase in loan losses and legal expenses
offset any improvement. The average delinquency ratio, however, has improved
from 3.1% in 1995 to 2.0% for the nine month period ended September 30, 1996.
Earnings declined 30% in the real estate sales subsidiary due to a decline in
commercial sales activity.
CORPORATE
- ---------
Interest expense on corporate debt is the primary corporate expense
incurred. Interest expense in the first nine months of 1996 was approximately
$1,351,000 compared to approximately $1,532,000 for the similar period in 1995.
The decrease in interest expense is due to the decrease in interest rates on the
outstanding debt. The remainder of the corporate expense represents general
operating expenses which may fluctuate from time to time.
11
<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 nine months ended September 30, 1996 and 1995:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------
1996 1995
---------- --------
<S> <C> <C>
(Decrease)Increase in cash flow from operations (4.7%) 19.4%
Increase in invested assets since January 1 2.0% 14.2%
Investment yield rate 8.0% 8.4%
Increase in net investment income 6.6% 14.6%
</TABLE>
Positive cash flow from operations declined 4.7% in the first nine months of
1996 due to significant first quarter storm losses that negatively affected
income and cash flow. Such cash flow was positively impacted by income tax
refunds and benefits as a result of fourth quarter losses in 1995 related to
Hurricane Opal and from the first quarter operating loss and by improvement in
second and third quarter operating results. Positive cash flow has increased
invested assets 4.5% since September 30, 1995. The higher level of invested
assets combined with a yield rate of 8.0% has increased net investment income by
6.6%. The Company had net realized investment gains of approximately $5.2
million in the first nine months of 1996 and $1.4 million in the similar period
in 1995. These net gains are primarily from sales of equity securities and
also 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
September 30, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
September 30, December 31,
-----------------------------
1996 1995
-----------------------------
<S> <C> <C>
Fixed maturities
Taxables
Mortgage Backed (CMO's) 29.3% 29.4%
Corporate Bonds 30.7% 29.1%
--------------------
Total taxable 60.0% 58.5%
Tax exempts 10.1% 10.0%
--------------------
Total fixed maturities 70.1% 68.5%
--------------------
Equity Securities 10.3% 10.6%
Mortgage Loans 0.1% 0.1%
Real Estate 0.2% 0.2%
Policy loans 3.6% 3.5%
Other long term investments 12.3% 13.2%
Short term investments 3.4% 3.9%
--------------------
100.0% 100.0%
====================
</TABLE>
12
<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 slight
changes due to market value changes in equities and fixed maturities and from
maturing mortgage back securities. In addition, in the first half of 1996,
short-term investments were used to fund a higher level of claims payments from
storms. The consumer loan portfolio declined over 14%, which reduced 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 September 30, 1996 and
December 31, 1995:
<TABLE>
<CAPTION>
RATING
- ------
September 30, December 31,
-----------------------------
1996 1995
-----------------------------
<S> <C> <C>
AAA to A- 87.0% 86.9%
BBB+ to BBB- 12.3% 12.2%
Below investment grade (BB+ and Below) 0.7% 0.9%
---- -----
100.0% 100.0%
===== =====
</TABLE>
One hundred percent of the fixed maturity portfolio was rated by an
outside rating service. No securities were 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 September 30, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
September 30, December 31,
-------------------------------------------------
% of % of
1996 Statutory 1995 Statutory
Surplus Surplus
-------------------------------------------------
<S> <C> <C> <C> <C>
High-yield fixed maturities:
Amortized value $3,736,781 1.6% $ 4,512,625 1.9%
Market value $3,735,561 1.6% $ 4,411,332 1.9%
Unrealized loss ($1,220) - ($ 101,293) -
</TABLE>
During the first nine months of 1996 the Company had net losses on
disposals of high yield debt securities of $1,250. In addition, the Company
wrote down one bond issue totaling $420,345 and four equity securities totaling
$2.0 million whose declines in value were deemed to be other than temporary. At
September 30, 1996 and December 31, 1995, there were no nonperforming bonds in
the portfolio.
13
<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>
September 30, December 31,
----------------------------------------------
% of % of
1996 Statutory 1995 Statutory
Surplus Surplus
----------------------------------------------
<S> <C> <C> <C> <C>
Equity investments held
in issuers of high-yield
debt securities:
Carrying value (market) $4,232,534 1.8% $4,141,041 1.8%
Cost $3,784,901 1.6% $3,877,250 1.7%
Unrealized gain $ 447,633 0.2% $ 263,791 0.1%
</TABLE>
During the first nine months of 1996, the Company sold approximately $35.5
million in fixed maturities available for sale. These sales resulted in gross
realized gains of $526,303 and gross realized losses of $1.3 million. At
September 30, 1996, approximately 29.3% of fixed maturities were mortgage-backed
securities. Such securities are comprised of CMO's and pass through securities.
Based on 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 impact of prepayment risk on the Company's financial
position is not believed to be significant. At September 30, 1996 the Company's
total portfolio of fixed maturities had gross unrealized gains of $19,183,182
and gross unrealized losses of $9,743,427. Securities are priced by nationally
recognized pricing services or by broker/dealer securities firms. No securities
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. At September 30, 1996 the
delinquency ratio on the portfolio was 1.98%. Loans charged off in the first
nine months of 1996 totaled $412,294. At September 30, 1996, the Company
maintained an allowance for loan losses of $786,534 or approximately 1.31% 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
- ------------
The decline in income tax expense in the first nine months of 1996 is the
result of the decline in income before provision for income taxes, which
decreased over $7.4 million due to the impact of storms. The effective tax rate
for the first nine months of 1996 was 29.4% compared to 30.6% for the similar
period in 1995. The decline is due to the impact of storms on the relative mix
of taxable versus tax-exempt income.
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.
14
<PAGE>
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, 80,000 options on March 27, 1995 and 80,000 options on April 18,
1996. The options ratably become exercisable annually over three years, and may
not be exercised after ten years after the date of award. At September 30,
1996, there had been 800 options exercised, 572,403 options were exercisable and
45,134 had been cancelled leaving 1,021,7344 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 2,000,000 shares 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
September 30, 1996, the Company had repurchased 1,097,600 shares at a cost of
$4,630,770. In the first nine months of 1996, the Company reissued 800 treasury
shares as a result of the option exercises in the period.
Total notes payable decreased $6.9 million in the first nine months of 1996
to $88.3 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 September 30, 1996
the Company had approximately $74.9 million in commercial paper at a rates
ranging from 5.42% to 5.45% with maturities ranging from October 4, 1996 to
October 21, 1996. 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 $11.1 million in short-
term debt outstanding to affiliates with interest equal to bank short-term rates
payable monthly and $2.3 million outstanding in other short-term debt at a rate
of 3.6%.
Cash surrenders paid to policyholders on a statutory basis totaled $8.0
million in the first nine months of 1996 and $5.5 million for the first nine
months of 1995. Although this level of surrenders is within the Company's
pricing expectations and historical persistency rates and policy termination
rates indicate a normal pattern of surrender activity in interest sensitive
products, there is currently an upward trend in traditional policy surrender
activity. This trend is being reviewed for any necessary corrective action, but
such trend is not believed to have a significant impact at current termination
rates. 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 September 30, 1996 the total amount of cash that would be required to fund
15
<PAGE>
all amounts subject to surrender was approximately $228.6 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.
16
<PAGE>
PART II. OTHER INFORMATION
Item 6.
-------
EXHIBITS AND REPORTS ON FORM 8-K.
---------------------------------
None.
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JUL-01-1996
<PERIOD-END> SEP-30-1996 SEP-30-1996
<DEBT-HELD-FOR-SALE> 598,466,176 0
<DEBT-CARRYING-VALUE> 2,961,396 0
<DEBT-MARKET-VALUE> 3,130,918 0
<EQUITIES> 88,406,542 0
<MORTGAGE> 864,425 0
<REAL-ESTATE> 1,825,940 0
<TOTAL-INVEST> 858,025,786 0
<CASH> 1,614,548 0
<RECOVER-REINSURE> 993,884 0
<DEFERRED-ACQUISITION> 100,713,316 0
<TOTAL-ASSETS> 991,094,706 0
<POLICY-LOSSES> 428,013,959 0
<UNEARNED-PREMIUMS> 95,105,346 0
<POLICY-OTHER> 8,982,837 0
<POLICY-HOLDER-FUNDS> 7,034,576 0
<NOTES-PAYABLE> 88,282,368 0
0 0
0 0
<COMMON> 41,891,512 0
<OTHER-SE> 267,404,744 0
<TOTAL-LIABILITY-AND-EQUITY> 991,094,706 0
250,149,744 84,460,691
<INVESTMENT-INCOME> 40,433,481 13,959,538
<INVESTMENT-GAINS> 5,207,103 2,358,009
<OTHER-INCOME> 1,615,408 565,567
<BENEFITS> 205,146,723 63,121,022
<UNDERWRITING-AMORTIZATION> 37,574,852 13,016,938
<UNDERWRITING-OTHER> 22,077,872 7,294,687
<INCOME-PRETAX> 32,606,289 17,911,158
<INCOME-TAX> 9,583,435 5,626,952
<INCOME-CONTINUING> 23,022,854 12,284,206
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 23,022,854 12,284,206
<EPS-PRIMARY> .56 .30
<EPS-DILUTED> .56 .30
<RESERVE-OPEN> 110,368,715 0
<PROVISION-CURRENT> 187,032,962 0
<PROVISION-PRIOR> (1,249,179) 0
<PAYMENTS-CURRENT> 138,012,701 0
<PAYMENTS-PRIOR> 43,733,571 0
<RESERVE-CLOSE> 114,401,226 0
<CUMULATIVE-DEFICIENCY> 0 0
</TABLE>
