<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, 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 June 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)
<S> <C> <C>
Item 1. Financial Statements
Balance Sheets -- June 30, 1996 and
December 31, 1995 3
Statements of Income, Six Months
and Three Months
ended June 30, 1996 and 1995 4
Statements of Cash Flows, Six Months
ended June 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>
June 30, December 31,
----------------------------
1996 1995
----------------------------
<S> <C> <C>
Assets (Unaudited)
Investments:
Fixed Maturities Held for Investment, at amortized cost
(market value $3,324,964 in 1996 and $3,980,724
in 1995) $ 3,150,980 $ 3,711,475
Fixed Maturities Available for Sale, at market value
(amortized cost $570,918,282 in 1996 and
$539,217,454 in 1995) 577,904,298 572,403,242
Equity Securities, at market (cost $65,057,847
in 1996 and $61,247,187 in 1995) 95,424,214 89,014,464
Mortgage Loans on Real Estate 911,889 995,777
Investment Real Estate (net of accumulated
depreciation of $1,282,173 in 1996 and
$1,205,694 in 1995) 1,768,209 1,829,363
Policy Loans 30,130,172 29,084,753
Other Long-term Investments 106,726,213 111,073,137
Short-term Investments 17,356,788 33,010,906
- ---------------------------------------------------------------------------------------------
Total Investments 833,372,763 841,123,117
Cash 5,006,477 1,326,285
Accrued Investment Income 9,998,262 9,340,980
Accounts Receivable 6,181,859 13,771,367
Reinsurance Balances Receivable 3,669,666 4,546,506
Due from Affiliates 4,066,566 1,406,729
Deferred Policy Acquisition Costs 99,007,441 89,156,542
Other Assets 4,870,425 4,761,451
- ---------------------------------------------------------------------------------------------
Total Assets $966,173,459 $965,432,977
=============================================================================================
Liabilities
Policy Liabilities and Accruals $421,446,782 $402,352,509
Unearned Premiums 90,638,114 85,306,194
Dividends to Policyholders 8,902,580 8,863,633
Premium Deposit and Retirement Deposit Funds 7,214,215 7,861,070
Deferred Income Taxes 17,379,653 22,501,534
Other Liabilities 30,001,704 28,612,754
Due to Affiliates 0 6,135,599
Commercial Paper 76,931,783 81,949,616
Notes Payable 2,213,052 2,323,362
Notes Payable to Affiliates 11,521,927 10,916,962
- ---------------------------------------------------------------------------------------------
Total Liabilities 666,249,810 656,823,233
- ---------------------------------------------------------------------------------------------
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) 23,898,773 35,620,863
Retained Earnings 217,479,711 214,453,116
Treasury Stock: at cost (1996 - 1,104,800;1995 -
1,105,600 shares (4,627,670) (4,631,770)
- ---------------------------------------------------------------------------------------------
Total Stockholders' Equity 299,923,649 308,609,744
- ---------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $966,173,459 $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>
Six Months Ended Three Months Ended
June 30, June 30,
--------------------------- ---------------------------
1996 1995 1996 1995
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Revenues
Premiums and Policy Charges $165,689,053 $153,140,665 $82,728,834 $76,357,521
Net Investment Income 26,473,943 24,563,883 13,006,480 12,425,039
Realized Investment Gains 2,849,094 1,169,680 2,797,356 904,403
Other Income 1,049,841 1,211,914 594,684 587,974
- --------------------------------------------------------------------------------- ----------------------------
Total Revenues 196,061,931 180,086,142 99,127,354 90,274,937
- --------------------------------------------------------------------------------- ----------------------------
Benefits and Expenses
Benefits & Settlement Expenses 140,370,897 114,562,241 63,287,126 58,906,427
Dividends to Policyholders 1,654,804 1,609,340 797,079 775,814
Amortization of Deferred Policy
Acquisition Costs 24,557,914 23,199,544 12,699,419 11,757,758
Other Operating Expenses 14,783,185 15,353,294 6,938,027 7,266,518
- --------------------------------------------------------------------------------- ----------------------------
Total Expenses 181,366,800 154,724,419 83,721,651 78,706,517
- --------------------------------------------------------------------------------- ----------------------------
Income Before Provision for Income Taxes 14,695,131 25,361,723 15,405,703 11,568,420
Provision for Income Taxes 3,956,483 8,009,489 4,609,439 3,630,252
- --------------------------------------------------------------------------------- ----------------------------
Net Income $10,738,648 $17,352,234 $10,796,264 $7,938,168
- --------------------------------------------------------------------------------- ----------------------------
Net Income Per Share $0.26 $0.43 $0.26 $0.19
================================================================================= ============================
Operating Income $8,886,737 $16,591,942 $8,977,983 $7,350,306
Operating Income Per Share $0.22 $0.41 $0.22 $0.18
================================================================================= ============================
Dividends Per Share $0.1925 $0.185 $0.0975 $0.095
================================================================================= ============================
Average Shares Outstanding 40,786,409 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>
Six Months Ended
June 30,
----------------------------
1996 1995
----------------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income $10,738,648 $17,352,234
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Policy Acquisition Costs Deferred (29,440,110) (24,785,367)
Amortization of Deferred Policy Acquisition Costs 24,557,914 23,199,544
Depreciation and Amortization 2,272,366 2,537,193
Provision for Deferred Taxes 231,219 141,896
Interest on Policyholders' Funds 5,947,279 5,140,758
Net Realized Investment Gains (2,849,094) (1,169,680)
Other 603,637 (2,855,013)
Changes in Operating Assets and Liabilities:
Increase in Accrued Investment Income (657,282) (387,587)
Decrease (Increase) in Accounts Receivable 7,537,525 (1,980,769)
Decrease (Increase) in Reinsurance Balances Receivable 876,840 (2,558,648)
Decrease (Increase) in Amounts Due From Affiliates (2,659,837) 238,835
Increase (Decrease) in Amounts Due to Affiliates (6,135,599) 198,610
Increase in Other Assets (108,974) (736,126)
Increase in Liability for Policy Reserves 6,730,351 14,681,146
Increase in Liability for Unearned Premiums 5,331,920 5,934,333
Decrease in Amounts Held for Others (607,908) (706,932)
Increase (Decrease) in Other Liabilities 1,727,420 (5,651,449)
----------- ------------
Net Cash Provided by Operating Activities 24,096,315 28,592,978
----------- ------------
Cash Flows From Investing Activities:
Maturities and Redemptions of Fixed Maturities Held for
Investment 577,165 401,517
Maturities and Redemptions of Fixed Maturities Available
for Sale 25,291,799 13,715,068
Maturities and Redemptions of Other Investments 40,616,749 42,808,787
Sales of Fixed Maturities Available for Sale 36,310,801 3,746,470
Sales of Other Investments 30,709,861 16,853,798
Purchase of Fixed Maturities Available for Sale (94,584,840) (48,009,349)
Purchase of Other Investments (69,412,234) (60,157,498)
Net Decrease (Increase) in Short-term Investments 10,560,255 (3,920,085)
Net (Increase) Decrease in Receivable/Payable on Securities 5,159,804 (1,585,668)
----------- ------------
Net Cash Used in Investing Activities (14,770,640) (36,146,960)
----------- ------------
Cash Flows From Financing Activities:
Increase (Decrease) in Commercial Paper (5,017,833) 87,634,289
Decrease in Notes Payable (110,310) (90,694,944)
Increase (Decrease) in Notes Payable to Affiliates 604,965 (505,834)
Stockholder Dividends Paid (7,850,586) (7,545,394)
Proceeds from Exercise of Stock Options 9,400
Deposits of Policyholders' Funds 20,209,489 19,417,964
Withdrawal of Policyholders' Funds (13,490,608) (11,351,705)
----------- ------------
Net Cash Used in Financing Activities (5,645,483) (3,045,624)
----------- ------------
Net Increase (Decrease) in Cash 3,680,192 (10,599,606)
Cash - Beginning of Period 1,326,285 11,750,197
----------- ------------
Cash - End of Period $5,006,477 $1,150,591
=========== ============
Supplemental Disclosures of Cash Flow Information
Cash Paid as of June 30 for:
Interest $4,561,905 $3,409,487
Income Taxes $2,266,000 $13,992,776
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
unaudited financial statements.
5
<PAGE>
ALFA CORPORATION
NOTES TO CONSOLIDATED CONDENSED UNAUDITED FINANCIAL STATEMENTS
JUNE 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 six month periods ended June 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 June 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), 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. Currently,
Mutual retrocedes 65% of the pool to the Company and an aggregate of 11% to
Fire and General while retaining 24% itself. 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 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, 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 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
6
<PAGE>
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 Alfa Corporation has
substantial business, the frequency of large punitive damage awards, bearing
little or no relation to actual damages awarded by juries, continues to
increase, creating the potential for unpredictable material adverse judgments 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 June 30, 1996,
there had been 800 options exercised, 576,669 options were exercisable and
39,134 had been cancelled leaving 1,015,734 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 Options
Granted 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>
Six Months Ended June 30, Three Months Ended June 30,
--------------------------- ---------------------------
1996 1995 1996 1995
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Net income, as reported $10,738,648 $17,352,234 $10,796,264 $7,938,168
============ =========== ============ ==========
Earnings per share, as reported $ 0.26 $ 0.43 $ 0.26 $ 0.19
============ =========== ============ ==========
Proforma net income $10,662,609 $17,323,334 $10,747,695 $7,910,773
============ =========== ============ ===========
Proforma earnings per share $ 0.26 $ 0.42 $ 0.26 $ 0.19
============ =========== ============ ===========
The information shown below is for options outstanding at June 30,
1996 and 1995:
June 30
------------------------------------------------------------------
1996 1995
------------------------------------------------------------------
Weighted- Weighted-
average average
Number Exercise Number Exercise
of Options Price of Options Price
-------------- ----------- ----------- -------------
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 (6,934) $ (11.750) (6,599) $ (11.750)
-------------------------------------------------------------
End of Period 983,466 $ 11.229 919,133 $ 11.149
=============================================================
Exercisable, end of
period 576,669 $ 11.123 280,814 $ 11.118
=============================================================
Range of exercise prices $9.40 to $12.25 $ 9.40 to $11.75
=============== ================
Weighted average remaining
contractual life 7.697 years 8.492 years
=========== ===========
Actual compensation cost
recognized during period $132,488 $242,408
======== ========
</TABLE>
8
<PAGE>
MANAGEMENT'S 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, 1996 and 1995::
<TABLE>
<CAPTION>
Six Months Ended June 30, THREE MONTHS ENDED JUNE 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 $ 165,689 $ 153,141 8% $82,729 $ 76,358 8%
================================= =============================
Net Investment income $ 26,474 $ 24,564 8% $13,006 $ 12,425 5%
================================= =============================
Total Revenues $ 196,062 $ 180,086 9% $99,127 $ 90,275 10%
================================ =============================
NET INCOME
Insurance operations $ 8,382 $ 16,717 (50%) $ 8,789 $ 7,437 18%
Noninsurance operations 1,386 1,571 (12%) 784 768 2%
Net realized investment gains 1,852 760 144% 1,818 588 209%
Corporate expenses (881) (1,696) 48% (595) (855) 30%
------------------------------- ----------------------------
Net income $ 10,739 $ 17,352 (38%) $10,796 $ 7,938 36%
=============================== ============================
Net income per share $0.26 $0.43 (38%) $0.26 $0.19 36%
=============================== ============================
Weighted average
shares outstanding 40,786,409 40,785,912 40,786,712 40,785,912
========================== ==========================
</TABLE>
Total premiums and policy charges increased 8% in both the first half and
second quarter of 1996. The combined pooled property casualty written premium
increased approximately 8.5% over the first half of 1996 due to an increase in
new business written, rate increases and a low lapse ratio of 3.7%. Total life
insurance premiums and policy charges increased 6% in the first half of 1996.
New life business also increased 6%. Net investment income increased 8% over
the first half of 1995 due to an increase in invested assets resulting from
positive cash flows.
The decline in net income in the first half 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
quarter of 1996 was primarily the result of significant weather related events
in the same period in 1995. Net income from life insurance operations improved
3% in the first half of 1996 compared to the first six months
9
<PAGE>
of 1995 and noninsurance operations declined 12%, primarily in the consumer
finance subsidiary and 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.
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, 1996 and
1995:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
-------------------------------- -------------------------------
1996 1995 % CHANGE 1996 1995 % CHANGE
-------------------------------- -------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Earned Premiums
Personal lines $143,055 $131,901 8.5% $72,189 $66,632 8.3%
Commercial lines 5,550 5,213 6.5% 2,802 2,630 6.5%
Pools, associations and fees 1,936 1,848 4.8% 962 919 4.7%
Reinsurance ceded (4,096) (3,959) 3.5% (2,039) (2,150) (5.1%)
------------------------------ -----------------------------
Total $146,445 $135,003 8.5% $73,914 $68,031 8.6%
============================== =============================
Net underwriting income $ (9,260) $ 3,940 (335.0%) $ 1,570 $ 283 454.8%
============================== =============================
Underwriting margin (6.3%) 2.9% 2.1% 0.4%
============== ==============
Operating Income $ 1,697 $ 10,199 (83.0%) $ 5,116 $ 3,994 28.0%
================================ =============================
</TABLE>
Earned premiums increased 8.5% in the first half of 1996 and 8.6% in the
second 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 produced
significant claims resulting in a net underwriting loss for the first half of
1996.
Claims from snow and ice in February and tornados in March combined to
produce losses estimated at June 30, 1996 to be $26.6 million for the entire
Alfa Group pool, which includes $3.6 million development in the second quarter.
After taxes, the impact in the first half on Alfa Corporation was approximately
$11.2 million, or $0.28 per share. These storm losses follow the impact in the
fourth quarter of 1995 of Hurricane Opal, which produced the first quarterly
loss ever for the Company.
The improvement in underwriting income in the second quarter of 1996 is
primarily related to the impact of storm activity in the second quarter of the
prior year and improvement in the current year's expense ratio. Such
improvement has been offset by the deterioration of non-storm loss ratios in
both the second quarter and first six months of 1996.
10
<PAGE>
The non-storm loss ratio for the first half of 1996 was 67.7%, up from
59.6% in the similar period in 1995. The combined ratio, which includes the
effect of storm claims was 106.3% for the first half 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.
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 six months and
three months ended June 30, 1996 and 1995:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
--------------------------- -----------------------------
1996 1995 % CHANGE 1996 1995 % CHANGE
------- ------- --------- ------- ------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Premiums and Policy Charges
Universal life policy charges $ 4,858 $ 4,273 14% $2,466 $2,135 16%
Interest sensitive life policy charges 4,238 3,948 7% 2,190 1,977 11%
Traditional life insurance premiums 10,148 9,916 2% 4,159 4,214 (1%)
----------------------- -------------------------
Total $19,244 $18,137 6% $8,815 $8,326 6%
======================= ==========================
Operating Income $ 6,669 $ 6,488 3% $3,662 $3,425 7%
======================= ==========================
</TABLE>
Total life insurance premiums and policy charges grew 6% in both the first
half and second quarter of 1996. New premium production increased 6.2% over the
same period in 1995 and was up 9.3% in the second 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 3% in the first six
months of 1996 and 7% in the second quarter. The improvement is primarily due
to a 2 % reduction in death claims for the six month period and a 17% decline
for the quarter. Mortality was 88% and 85% of expected in the respective
periods which compares favorably to the similar period in 1995. Net investment
income increased 6% in the first six months of 1996 compared to the same period
in 1995 due to positive cash flows which increased invested assets .
NONINSURANCE OPERATIONS
- -----------------------
Noninsurance earnings declined 12% in the first half of 1996. Most
significant was an 80% 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 4%. The loan portfolio declined 14% to $67.9 million at June 30,
1996. The interest margin has improved but an increase in loan losses and legal
expenses offset any improvement. The delinquency ratio, however, has improved
to 2.1% at June 30, 1996. Earnings declined 17% in the real estate sales
subsidiary due to a decline in commercial sales activity.
11
<PAGE>
CORPORATE
- ---------
Interest expense on corporate debt is the primary corporate expense
incurred. Interest expense in the first six months of 1996 was approximately
$896,000 compared to approximately $996,000 for the similar period in 1995. The
decrease in interest expense is due to the decrease in interest rates on the
outstanding debt. In addition, corporate expense was lower due to the income tax
benefit in the first half of 1996. The remainder of the corporate expense
represents general operating expenses which may fluctuate from time to time.
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 June 30, 1996 and 1995:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1996 1995
---------- -------
<S> <C> <C>
Increase (decrease) in cash flow from operations (15.7%) 23.0%
(Decrease) Increase in invested assets since January 1 (0.9%) 11.6%
Investment yield rate 8.0% 8.4%
Increase in net investment income 7.8% 8.0%
</TABLE>
Positive cash flow from operations declined 15.7% in the first half of 1996.
The company incurred significant storm losses that negatively affected income
and cash flow, although 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. In addition, the life
company paid higher income taxes in the first half of 1995. Positive cash flow
has increased invested assets 4.5% since June 30, 1995. The higher level of
invested assets combined with a yield rate of 8.0% has increased net investment
income by 7.8%. The Company had net realized investment gains of approximately
$2.8 million in the first six months of 1996 and $1.2 million in the similar
period in 1995. 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.
12
<PAGE>
The composition of the Company's investment portfolio is as follows at June
30 , 1996 and December 31,1995:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
--------- -------------
1996 1995
--------- -------------
<S> <C> <C>
Fixed maturities
Taxable
Mortgage backed (CMO's) 27.4% 29.4%
Corporate bonds 31.9% 29.1%
--------------------
Total taxable 59.3% 58.5%
Tax exempts 10.4% 10.0%
--------------------
Total fixed maturities 69.7% 68.5%
--------------------
Equity securities 11.5% 10.6%
Mortgage loans 0.1% 0.1%
Real estate 0.2% 0.2%
Policy loans 3.6% 3.5%
Other long term investments 12.8% 13.2%
Short term investments 2.1% 3.9%
--------------------
100.0% 100.0%
====================
</TABLE>
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 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 June 30, 1996 and December
31, 1995:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
------------------------
1996 1995
------------------------
<S> <C> <C>
RATING
AAA to A- 86.2% 86.9%
BBB+ to BBB- 13.1% 12.2%
BB+ and Below (Below investment grade) .7% .9%
------------------------
100.0% 100.0%
------------------------
</TABLE>
Approximately 0.1% 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).
13
<PAGE>
The following is information concerning the Company's portfolio of high
yield fixed maturity investments at June 30, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------------------------------------------------
% OF % OF
1996 STATUTORY 1995 STATUTORY
SURPLUS SURPLUS
----------------------------------------------------
<S> <C> <C> <C> <C>
High-yield fixed maturities:
Amortized value $ 3,732,795 1.6% $4.512,625 1.9%
Carrying value (market) $ 3,624,639 1.6% $4,411,352 1.9%
Unrealized los s ($ 108,156) - $ (101,293) -
</TABLE>
During the first half 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 two equity securities totaling $1.6 million
whose declines in value were deemed to be other than temporary. At June 30,
1996 and December 31, 1995, there were no nonperforming bonds in the portfolio.
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
1996 STATUTORY 1995 STATUTORY
SURPLUS SURPLUS
--------------------------------------------
<S> <C> <C> <C> <C>
Equity investments held
in issuers of high-yield
debt securities:
Carrying value (market) $4,527,201 1.9% $4,141,041 1.8%
Cost $3,937,501 1.7% $3,877,250 1.7%
Unrealized gain $ 589,700 0.3% $ 263,791 0.1%
</TABLE>
During the first half of 1996, the Company sold approximately $29.9 million
in fixed maturities available for sale. These sales resulted in gross realized
gains of $492,992 and gross realized losses of $1.3 million. At June 30, 1996,
approximately 39.3% 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
Company's exposure to prepayment risk is deemed to be minimized and is not
believed to be significant. At June 30, 1996 the Company's total portfolio of
fixed maturities
14
<PAGE>
had gross unrealized gains of $18,142,260 and gross unrealized losses of
$10,982,260. Securities are priced by nationally recognized pricing services or
by broker/dealer securities firms. Less than .1% 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 June 30, 1996 the delinquency
ratio on the portfolio was 2.11%. Loans charged off in the first half of 1996
totaled $310,511. At June 30, 1996, the Company maintained an allowance for
loan losses of $989,437 or approximately 1.59% 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 half of 1996 is the result
of the decline in income before provision for income taxes, which decreased over
$10.6 million due to the impact of storms. The effective tax rate for the first
half of 1996 was 26.9% compared to 31.6% 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.
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,
15
<PAGE>
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 June 30, 1996, there had
been 800 options exercised, 576,669 options were exercisable and 39,134 had been
cancelled leaving 1,015,734 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 June
30, 1996, the Company had repurchased 1,097,600 shares at a cost of $4,630,770.
In the first half of 1996, the Company reissued 800 treasury shares as a result
of the option exercises in the period.
Total notes payable decreased $4.5 million in the first half of 1996 to
$90.7 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, 1996 the
Company had approximately $76.9 million in commercial paper at a rates ranging
from 5.4% to 5.47% with maturities ranging from July 8, 1996 to July 25, 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 $11.5 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%.
Cash surrenders paid to policyholders on a statutory basis totaled $5.4
million in the first half of 1996 and $3.7 million for the first six 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 June
30, 1996 the total amount of cash that would be required to fund all amounts
subject to surrender was approximately $223.2 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> 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 APR-01-1996
<PERIOD-END> JUN-30-1996 JUN-30-1996
<DEBT-HELD-FOR-SALE> 577,904,298 0
<DEBT-CARRYING-VALUE> 3,150,980 0
<DEBT-MARKET-VALUE> 3,324,964 0
<EQUITIES> 95,424,214 0
<MORTGAGE> 911,889 0
<REAL-ESTATE> 1,768,209 0
<TOTAL-INVEST> 833,372,763 0
<CASH> 5,006,477 0
<RECOVER-REINSURE> 3,669,666 0
<DEFERRED-ACQUISITION> 99,007,441 0
<TOTAL-ASSETS> 966,173,459 0
<POLICY-LOSSES> 421,446,782 0
<UNEARNED-PREMIUMS> 90,638,114 0
<POLICY-OTHER> 8,902,580 0
<POLICY-HOLDER-FUNDS> 7,214,215 0
<NOTES-PAYABLE> 90,666,762 0
0 0
0 0
<COMMON> 41,891,512 0
<OTHER-SE> 258,032,137 0
<TOTAL-LIABILITY-AND-EQUITY> 966,173,459 0
165,689,053 82,728,834
<INVESTMENT-INCOME> 26,473,943 13,006,480
<INVESTMENT-GAINS> 2,849,094 2,797,356
<OTHER-INCOME> 1,049,841 594,684
<BENEFITS> 142,025,701 64,084,205
<UNDERWRITING-AMORTIZATION> 24,557,914 12,699,419
<UNDERWRITING-OTHER> 14,783,185 6,938,027
<INCOME-PRETAX> 14,695,131 15,405,703
<INCOME-TAX> 3,956,483 4,609,439
<INCOME-CONTINUING> 10,738,648 10,796,264
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 10,738,648 10,796,264
<EPS-PRIMARY> .26 .26
<EPS-DILUTED> .26 .26
<RESERVE-OPEN> 110,368,715 0
<PROVISION-CURRENT> 129,650,570 0
<PROVISION-PRIOR> (861,348) 0
<PAYMENTS-CURRENT> 95,263,956 0
<PAYMENTS-PRIOR> 30,192,766 0
<RESERVE-CLOSE> 113,701,215 0
<CUMULATIVE-DEFICIENCY> 0 0
</TABLE>
