<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Fiscal Year Ended December 31, 1995 Commission File Number 0-11773
- --------------------------------------- -------
ALFA CORPORATION
----------------
(Exact name of registrant as specified in its charter)
Delaware 63-0838024
------------------------------- ------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
2108 East South Boulevard
P. O Box 11000, Montgomery, Alabama 36191-0001
- ---------------------------------------- --------------
(Address of principal executive offices) (Zip-Code)
Registrant's Telephone Number including Area Code (334) 288-3900
--------------------
Securities registered pursuant to Section 12 (b) of the Act:
None
----
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $1.00 per share
---------------------------------------
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
--------- ---------
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of February 29, 1996, was
$255,880,872.
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 December 31, 1995
----------------------------- -----------------------------
Common Stock, $1.00 par value 40,785,912 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's annual report to security holders for the fiscal year
ended December 31, 1995, and proxy statement for the annual meeting of
stockholders to be held April 18, 1996, are incorporated by reference into Part
II and Part III.
Total pages included in this filing - 23 pages
Exhibit index - Page 12
<PAGE>
Part I
------
Item 1. Business.
--------
(a) General Development of Business. Alfa Corporation is a holding
-------------------------------
company for Alfa Life Insurance Corporation (Life), Alfa Insurance Corporation
(AIC), Alfa General Insurance Corporation (AGI), Alfa Financial Corporation
(AFC), Alfa Investment Corporation, Alfa Realty, Inc. (ARI), and Alfa Agency
Mississippi, Inc. The Registrant's property and casualty insurance subsidiaries
are rated "A++ Superior" and its life subsidiary is rated "A+ Superior" by A. M.
Best Company, the leading rating organization in the insurance industry. The
Registrant's commercial paper ratings are A-1+ by Standard & Poors and P-1 by
Moody's Investors Service. The commercial paper is guaranteed by an affiliate,
Alfa Mutual Insurance Company.
Until August 1, 1987, Registrant's life insurance subsidiary was its
principal source of revenue. Effective that date Registrant's property and
casualty subsidiaries entered into a pooling agreement with Alfa Mutual
Insurance Company (Mutual), Alfa Mutual Fire Insurance Company (Fire) and Alfa
Mutual General Insurance Company (General) (collectively referred to as Mutual
Group) pursuant to which premiums, losses, loss adjustment expenses and other
underwriting expenses attributable to the direct property and casualty insurance
business of each party are pooled and reallocated among the parties. Under the
pooling agreement, sixty five percent of the pooled business is allocated to
Registrant's subsidiaries, Alfa Insurance Corporation and Alfa General Insurance
Corporation.
The majority of the Company's Property Casualty Premiums are derived from
the Company's participation in the Pooling Agreement.
(b) Information as to Industry Segments. Prior to August 1, 1987,
-----------------------------------
Registrant considered it operated in one main reportable segment, that being the
life insurance industry which is operated through its subsidiary, Life.
Effective August 1, 1987, Registrant entered into a property and casualty
Pooling Agreement. Because of the Pooling Agreement, Registrant substantially
increased its property and casualty insurance business. As a result Registrant
is now engaged in two major industry segments, the life and property and
casualty insurance industries. The Information as to Industry Segments
contained in Note 13 to Financial Statements on page 37 of Registrant's Annual
Report is incorporated herein by reference.
(c) Narrative Description of Business. Registrant is a holding company
---------------------------------
organized and existing under the laws of the State of Delaware. Until August 1,
1987, Registrant's life insurance business was its principal source of revenue.
Life directly writes individual life insurance policies consisting primarily of
ordinary whole life, term life, interest sensitive whole life and universal life
products. Life maintains an agency force in Alabama, Georgia and Mississippi.
(i) Life offers several different types of whole life and term
insurance products. As of December 31, 1995, Life had in excess of $8.6
billion of life insurance in force. As of December 31, for each year
indicated the Company had insurance in force as follows:
1995 1994 1993
---------- ---------- ----------
(in thousands)
[S] [C] [C] [C]
Ordinary Life $8,313,698 $7,553,056 $6,782,539
Credit Life $ 14,382 $ 19,499 $ 9,326
Group Life $ 314,826 $ 295,254 $ 272,470
I-1
<PAGE>
The following table shows Life's premiums and policy charges by type of policy
and life insurance operating income for the years ended December 31, 1995, 1994,
and 1993:
Years Ended December 31,
-------------------------
1995 1994 1993
------- ------- -------
(in thousands)
Premiums and Policy Charges
Universal life $ 8,789 $ 7,876 $ 6,354
Interest sensitive life 7,991 7,705 7,361
Traditional life 18,320 17,224 17,141
-------------------------
Total $35,100 $32,805 $30,856
=========================
Operating income $13,205 $12,039 $14,520
=========================
Life generally reinsures all life insurance risks in excess of
$200,000 on any one life. The purpose of this is to limit the liability of Life
with respect to any one risk and afford it a greater diversification of its
exposure. When Life reinsures a portion of its risk it must cede the premium
income to the company who reinsures the risk, thereby decreasing the income of
Registrant.
Life performs various underwriting procedures and blood testing for
AIDS and other diseases before issuance of insurance.
In addition to the income from premiums of life insurance contracts,
Life's income is directly affected by its investment income or loss from its
investment portfolio. The capital and reserves of the Registrant are invested
in assets comprising its investment portfolio. The insurance laws prescribe the
nature and quality of investments that may be made, and included in its
investment portfolio are qualified state, municipal and federal obligations,
high quality corporate bonds and stocks, mortgage backed securities, mortgages
and certain other assets.
Property and Casualty Insurance. Registrant's two property and
--------------------------------
casualty subsidiaries, Alfa Insurance Corporation and Alfa General Insurance
Corporation, are direct writers of preferred and standard risk property and
casualty insurance in Georgia and Mississippi. Registrant's business is
predominantly in personal, rather than commercial lines, including automobile,
homeowner and fire insurance and similar policies. These companies also write
limited commercial lines (church and business owner's insurance). Registrant
also assumes property and liability insurance written in Alabama through the
pooling agreement.
I-2
<PAGE>
The following table sets forth the components of property and casualty
insurance earned premiums, net underwriting income, underwriting margin and
operating income for the years ended December 31, 1995, 1994 and 1993 including
the business written through the property and casualty pooling agreement:
Years Ended December 31,
-------------------------------
1995 1994 1993
-------- ------- -------
(in thousands)
Earned Premiums
Personal lines $270,109 $208,358 $181,686
Commercial lines 10,606 8,524 8,920
Pools, associations
and fees 3,709 2,920 2,541
Reinsurance ceded (11,435) (5,476) (4,090)
-------------------------------
Total $272,989 $214,326 $189,057
===============================
Net Underwriting Income (Loss) $(10,598) $ 10,793 $ 17,217
===============================
Underwriting Margin (3.9%) 5.0% 9.1%
===============================
Operating Income $ 8,182 $ 20,179 $ 24,144
===============================
Pooling Agreement. Effective August 1, 1987, the Registrant's
-----------------
property and casualty insurance subsidiaries entered into the Pooling Agreement
with Mutual, Fire, and General. Under the terms of the Pooling Agreement, the
Registrant ceded to Mutual all of its property and casualty insurance business
in force and written on or after August 1, 1987, net of reinsurance ceded to
others. All of the Mutual Group's direct property and casualty insurance
business, net of such reinsurance, in force or written on or after such date, is
also included in the pool. Mutual retrocedes 65% of the pooled premiums,
losses, loss adjustment expenses and other underwriting expenses to Registrant.
The Pooling Agreement enabled Registrant, in effect, to expand its property and
casualty insurance revenues and to spread and stabilize the underwriting risks
borne by each party through the creation of a larger and more diversified risk
pool.
The Boards of Directors of Mutual, Fire and General and of the
Registrant's property and casualty insurance subsidiaries have established the
pool participation percentages and must approve any changes in such
participation. The Alabama Insurance Department reviewed the Pooling Agreement
and determined that its implementation did not require its approval.
A committee consisting of two members of the Boards of Directors of
the Mutual Group, two members of the Board of Directors of the Registrant and
Goodwin Myrick, as chairman of each such Board, has been established to review
and approve any changes in the Pooling Agreement. The committee is responsible
for matters involving actual or potential conflicts of interest between the
Registrant and the Mutual Group and for attempting to ensure that, in operation,
the Pooling Agreement is equitable to all parties. Conflicts in geographic
markets are currently minimal because the Mutual Group writes property and
casualty insurance only in Alabama and at present all of such insurance written
by the Registrant is outside of Alabama. The Pooling Agreement is intended to
reduce conflicts which could arise in the selection of risks to be insured by
the participants by making the results of each participant's operations
dependent on the results of all of the Pooled Business. Accordingly, the
participants should have substantially identical direct underwriting ratios for
the Pooled Business as long as the Pooling Agreement remains in effect.
I-3
<PAGE>
The participation of Registrant in the Pooling Agreement may be
changed or terminated without the consent or approval of the shareholders, and
the Pooling Agreement may be terminated by any party thereto upon 90 days
notice. Any such termination, or a change in Registrant's allocated share of the
Pooled Business, inclusion of riskier business or certain types of reinsurance
assumed in the pool, or other changes to the Pooling Agreement, could have a
material adverse impact on Registrant's earnings. Participants' respective
abilities to share in the Pooled Business are subject to regulatory capital
requirements.
Relationship with Mutual Group. The Registrant's business and
------------------------------
operations are substantially integrated with and dependent upon the management,
personnel and facilities of Mutual. Under a Management and Operating Agreement
with Mutual all management personnel are provided by Mutual and Registrant
reimburses Mutual for field office expenses and operations services rendered by
Mutual in the areas of advertising, sales administration, underwriting, legal,
sales, claims, management, accounting, securities and investment, and other
services rendered by Mutual to Registrant.
Mutual periodically conducts time usage and related expense allocation
studies. Mutual charges Registrant for its allocable and directly attributable
salaries and other expenses, including office facilities in Montgomery, Alabama.
The Board of Directors of Registrant consisted at year end of eleven
members, six of whom serve on the Executive Committee of the Boards of Mutual,
Fire and General and two of whom are Executive Officers of Registrant.
Mutual owns 16,201,538 shares, or 39.72%, and Fire owns 4,515,286
shares, or 11.07%, of Registrant's Outstanding Common Stock.
Other Business
- --------------
Registrant operates five other subsidiaries which are not considered
to be significant by SEC Regulations. These subsidiaries are Alfa Financial
Corporation (AFC), a lending institution, Alfa Investment Corporation, a real
estate investment business and its wholly owned subsidiary, Alfa Builders, Inc.,
a construction company, Alfa Realty, Inc., a real estate sales agency, and Alfa
Agency Mississippi, Inc.
AFC is a lending institution engaged principally in making consumer
loans. These loans are available through substantially all agency offices of
Registrant.
Alfa Investment Corporation is a Florida corporation engaged in the
real estate investment business. Alfa Builders, Inc. is engaged in the
construction business in Alabama and is also engaged in real estate investments.
Alfa Realty, Inc., is engaged in the business of listing and selling
real estate in the Montgomery and Autauga County, Alabama, areas.
Alfa Agency Mississippi Inc. places substandard insurance risks with
third party insurers for a commission.
(ii) - (ix). Not applicable.
I-4
<PAGE>
(x) Both the life and property and casualty insurance businesses are
highly competitive. There are numerous insurance companies in Registrant's area
of operation and throughout the United States. Many of the companies which are
in direct competition with the Registrant have been in business for a much
longer period of time, have a larger volume of business, offer a more
diversified line of insurance coverage, and have greater financial resources
than Registrant. In its life and property and casualty insurance businesses,
Registrant competes with other insurers in the sale of insurance products to
consumers and the recruitment and retention of qualified agents. Registrant
believes that the main competitive factors in its business are price, name
recognition and service. Registrant believes that it competes effectively in
these areas in Alabama. In Georgia and Mississippi, however, the Registrant's
name is not as well recognized.
Registrant's insurance subsidiaries are subject to licensing and
supervision by the governmental agencies in the jurisdictions in which they do
business. The nature and extent of such regulation varies, but generally has
its source in State Statutes which delegate regulatory, supervisory and
administrative powers to State Insurance Commissioners. Such regulation,
supervision and administration relate, among other things, to standards of
solvency which must be met and maintained, licensing of the companies and the
benefit of policyholders, periodic examination of the affairs and financial
condition of the Registrant, annual and other reports required to be filed on
the financial condition and operation of the Registrant. Life insurance rates
are generally not subject to prior regulatory approval. Rates of property and
casualty insurance are subject to regulation and approval of regulatory
authorities.
The Mutual Group and Registrant's insurance subsidiaries are subject
to the Alabama Insurance Holding Company Systems Regulatory Act and are subject
to reporting to the Alabama Insurance Department and to periodic examination of
their transactions and regulation under the Act with Mutual being considered the
controlling party.
(xi-xii) Not applicable.
(xiii) The Registrant has no management or operational employees.
Registrant and its subsidiaries have a Management and Operating Agreement with
Mutual whereby Registrant and its subsidiaries reimburse Mutual for salaries and
expenses of employees provided to Registrant under the Agreement. Involved are
employees in the areas of Life Underwriting, Life Processing, Accounting, Sales,
Administration, Legal, Files, Data Processing, Programming, Research, Policy
Issuing, Claims, Investments, and Management. At December 31, 1995, Registrant
was represented by 469 agents in Alabama who are employees of Mutual.
Registrant's property and casualty subsidiaries had 116 independent exclusive
agents in Georgia and Mississippi at December 31, 1995.
Item 2. Properties.
----------
(a) Physical Properties of Registrant and Its Subsidiaries. The
-------------------------------------------------------
Registrant leases it home office facilities in Montgomery, Alabama,from Mutual.
Registrant and its subsidiaries own several investment properties,
none of which are material to Registrant's business.
(b) Oil and Gas Operations. Not applicable.
----------------------
I-5
<PAGE>
Item 3. Legal Proceedings.
-----------------
Various legal proceedings arising during the normal course of business
with policyholders and agents are in process at December 31, 1995. 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
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.
Item 4. Submission of Matters to Vote of Security Holders.
-------------------------------------------------
Not applicable.
Executive Officers of the Registrant:
- ------------------------------------
Pursuant to General Instruction G(3) of Form 10-K, the following is
included as an unnumbered item in part I of this report in lieu of being
included in the proxy statement for the annual meeting of stockholders to be
held April 18, 1996.
The following is a list of name and ages of all of the executive
officers of the Registrant indicating all positions and offices with the
Registrant held by such person and each such person's principal occupation or
employment during the past five years. No person other than those listed below
has been chosen to become an executive officer of the Registrant.
I-6
<PAGE>
<TABLE>
<CAPTION>
NAME AGE POSITION SINCE
- ---- --- -------- -----
<S> <C> <C> <C>
Goodwin L. Myrick 70 Director; Chairman of the Board and President, since 1978; 1973
President of its Subsidiaries and associated companies;
President Alabama Farmers Federation.
B. Phil Richardson 70 Director; Executive Vice President, Operations 1979
of Alfa Corporation and its subsidiaries;
Vice President, Treasurer.
Bill Harper, Jr. 51 Senior Vice President, Life Operations of Alfa Life 1986
Insurance Corporation Vice President, of Alfa
Financial Corporation since 1978.
C. Lee Ellis 44 Executive Vice President, Investments. 1983
Prior to 1993, Senior Vice President, Investments.
Donald Price 44 Senior Vice President, Finance and 1984
Chief Financial Officer.
John Holley 40 Vice President and Controller, Director Financial Relations 1986
Chief Accounting Officer.
Al Dees 49 Executive Vice President, Marketing 1993
Prior to 1993 Vice President Georgia and
Mississippi Marketing.
Ken Wallis 54 Secretary and General Counsel. 1993
Prior to 1993 Vice President, Government Relations.
James Azar 59 Senior Vice President, Planning 1979
Terry McCollum 59 Senior Vice President, Claims 1979
Bill Oswalt 62 Senior Vice President, Underwriting 1979
</TABLE>
I-7
<PAGE>
Part II
-------
Item 5. Market for Registrant's Common Stock and Related Security Holder
----------------------------------------------------------------
Matters.
--------
The "Stockholder Information" section on the Inside Back Cover of
Registrant's annual report to security holders for the fiscal year ended
December 31, 1995, is incorporated herein by reference.
Item 6. Selected Financial Data.
------------------------
The "Selected Financial Data" section on pages 6 and 7 of the
Registrant's annual report to security holders for the year ended December 31,
1995, is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
----------------------------------------------------------------
Results of Operations.
----------------------
The "Management's Discussion and Analysis" section on pages 14 through
20 of the Registrant's annual report to security holders for the fiscal year
ended December 31, 1995, is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
--------------------------------------------
The Financial Statements on pages 21 through 40 of the Registrant's
annual report to security holders for the fiscal year ended December 31, 1995,
are incorporated herein by reference.
Item 9. Disagreements on Accounting and Financial Disclosure.
----------------------------------------------------
None.
II-1
<PAGE>
Part III
--------
Item 10. Directors and Executive Officers of the Registrant.
--------------------------------------------------
For information with respect to the Executive Officers of the
Registrant see Executive Officers of the Registrant at the end of Part I of this
Report. For information with respect to the Directors of the Registrant, see
Election of Directors on Page 2 of the Proxy statement for the annual meeting of
stockholders to be held April 18, 1996, which is incorporated herein by
reference.
Item 11. Executive Compensation.
----------------------
The information set forth under the caption "Executive Compensation"
on Page 6 of the Proxy Statement for the annual meeting of stockholders to be
held April 18, 1996, except for the report of the Compensation Committee and
Performance Graph, is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
--------------------------------------------------------------
The information appearing on Pages 1 through 3 of the Proxy Statement
for the annual meeting of stockholders to be held April 18, 1996, relating to
the security ownership of certain beneficial owners and management is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
----------------------------------------------
The information set forth under the caption "Executive Compensation"
on Page 6 of the Proxy Statement for the annual meeting of stockholders to be
held April 18, 1996, is incorporated herein by reference.
III-1
<PAGE>
Part IV
-------
Item 14. Exhibits, Financial Statement Schedules, Reports on Form 8-K.
------------------------------------------------------------
(a) The following documents are filed as part of this report:
1. Financial Statements.
--------------------
Report of Independent Certified Public
Accountants for 1995, 1994, and 1993.
Consolidated Balance Sheets as of
December 31, 1995 and 1994.
Consolidated Statements of Income for the three years ended
December 31, 1995, 1994 and 1993.
Consolidated Statements of Stockholders' Equity for the
three years ended December 31, 1995, 1994 and 1993.
Consolidated Statements of Cash Flows for the three years
ended December 31, 1995, 1994 and 1993.
Notes to Consolidated Financial Statements.
Selected Quarterly Financial Data.
2. Financial Statement Schedules.
-----------------------------
Included in Part IV of this report:
Page
----
Reports on Financial Statements and Financial Statement Schedules
of Independent Certified Public Accountants for 1995, 1994 and 1993. IV-3
Schedule I - Summary of Investments Other Than Investments in
Related Parties for the year ended December 31, 1995 IV-4
Schedule II - Condensed Financial Information IV-5-7
Schedule III - Supplementary Insurance Information IV-8
Schedule IV - Reinsurance for the years ended December 31, 1995,
1994 and 1993 IV-9
Schedule V - Valuation and Qualifying Accounts IV-10
IV-1
<PAGE>
Schedules other than those listed above have been omitted because the
required information is contained in the financial statements and notes thereto,
or because such schedules are not required or applicable.
3. Exhibits.
--------
Exhibit (3) - Articles of Incorporation and By-Laws
of the Registrant are incorporated by
reference from Registrant's 10-K for
the year ended December 31, 1987.
Exhibit (10(a)) - Amendment No. 2 to Management and
Operating Agreement effective January
1, 1992 is incorporated by reference
from Registrant's 10-K for the year
ended December 31, 1992.
(10(b)) - Insurance Pooling Agreement is
incorporated by reference from
registrant's 10-K for the year ended
December 31, 1987.
Exhibit (13) - Registrant's Annual Report to Security
Holders for the fiscal year ended
December 31, 1995. Such report, except
for the portions incorporated herein by
reference, is furnished to the
Commission for information only and is
not deemed filed as part of this
report.
Exhibit (19) - Employee Stock Purchase Plan and 1993
Stock Incentive Plan are incorporated
by reference from registrant's 10-K for
the year ended December 31, 1993.
Exhibit (24) - Consents of Independent Accountants
(b) Reports on Form 8-K.
-------------------
An 8-K report was filed on May 22, 1995 reporting a
change in certifying accountants from Coopers & Lybrand
L.L.P. to KPMG Peat Marwick LLP .
IV-2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Stockholders and Board of Directors
Alfa Corporation
Montgomery, Alabama:
We have audited the accompanying consolidated balance sheet of Alfa Corporation
and subsidiaries (the Company) as of December 31, 1995, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1995 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Alfa
Corporation and subsidiaries as of December 31, 1995, and the results of their
operations and their cash flows for the year ended December 31, 1995, in
conformity with generally accepted accounting principles.
Our audit for the year ended December 31, 1995, was made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
supplementary information included in Schedules I through V for the year ended
December 31, 1995, is presented for purposes of additional analysis and is not a
required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole for the year ended
December 31, 1995.
KPMG Peat Marwick LLP
Birmingham, Alabama
January 31, 1996
IV-3(a)
<PAGE>
Report of Independent Accountants
To the Stockholders and Board of Directors
Alfa Corporation
Montgomery, Alabama
We have audited the consolidated financial statements and the financial
statement schedules of Alfa Corporation and subsidiaries (the Company) as of
December 31, 1994 and for each of the years ended December 31, 1994 and 1993 as
listed in the index on page IV-1 of this Form 10-K. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial statement schedules
referred to above present fairly, in all material respects, the financial
position of Alfa Corporation and its subsidiaries as of December 31, 1994 and
the results of its operations and its cash flows for the years ended December
31, 1994 and 1993 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the Consolidated Financial Statements, the Company
changed its method of accounting for certain investments in debt and equity
securities in 1994 and in 1993 the Company changed its methods of accounting for
income taxes, postretirement benefits other than pensions, and for certain
reinsurance contracts to comply with new Financial Accounting Standards Board
pronouncements.
Coopers & Lybrand L.L.P.
Birmingham, Alabama
February 2, 1995
IV-3(b)
<PAGE>
ALFA CORPORATION AND SUBSIDIARIES
SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN
INVESTMENTS IN RELATED PARTIES
FOR THE YEAR ENDED DECEMBER 31, 1995
------------
<TABLE>
<CAPTION>
Amount At
Cost Or Which Shown
Amortized Market In Balance
Type Of Investment Cost Value Sheet
- ------------------ ------------ ------------ ------------
<S> <C> <C> <C>
Fixed maturities:
Bonds:
United States Government
and government agencies $ 63,606,264 $ 69,739,296 $ 69,739,296
States, municipalities and
political subdivisions 89,129,790 94,480,408 94,480,408
Public utilities 20,497,766 21,089,250 21,089,250
All other corporate bonds 126,092,593 139,154,137 139,154,137
Mortgage-backed securities 238,897,886 247,141,713 246,872,464
Redeemable preferred stocks 4,704,630 4,779,162 4,779,162
------------ ------------ ------------
Total fixed maturities 542,928,929 576,383,966 576,114,717
------------ ------------ ------------
Equity securities:
Common stocks:
Public utilities 9,941,759 12,411,810 12,411,810
Banks, trusts and insurance
companies 9,113,562 17,177,032 17,177,032
Industrial, miscellaneous
and all other 39,190,866 56,187,122 56,187,122
Nonredeemable preferred stocks 3,001,000 3,238,500 3,238,500
------------ ------------ ------------
Total equity securities 61,247,187 89,014,464 89,014,464
------------ ------------ ------------
Mortgage loans on real estate 995,777 995,777
Real estate 1,829,363 1,829,363
Policy loans 29,084,753 29,084,753
Other long-term investments 111,073,137 111,073,137
Short-term investments 33,010,906 33,010,906
------------ ------------
Total investments $780,170,052 $841,123,117
============ ============
</TABLE>
IV-4
<PAGE>
ALFA CORPORATION (PARENT COMPANY)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
------------
<TABLE>
<CAPTION>
1995 1994
------------ ------------
ASSETS
<S> <C> <C>
Cash $ 28,271 $ 88,289
Short-term investments 437,090 82,516
Investment in subsidiaries 342,291,962 289,176,810
Note receivable from subsidiary 54,445,000
Accounts receivable and other assets 283,274 28,161
------------ ------------
Total assets $397,485,597 $289,375,776
============ ============
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Liabilities:
<S> <C> <C>
Commercial paper $ 81,949,616
Notes payable 4,600,000 $ 31,613,665
Other liabilities 2,326,237 2,776,665
------------ ------------
Total liabilities 88,875,853 34,390,330
------------ ------------
Common stock, $1 par value, shares
authorized - 110,000,000;
issued - 41,891,512
outstanding - 40,785,912 41,891,512 41,891,512
Capital in excess of par value 21,276,023 21,276,023
Net unrealized investment (losses) gains 35,620,863 (10,980,201)
Retained earnings 214,453,116 207,429,882
Treasury stock, at cost, 1,105,600 shares; (4,631,770) (4,631,770)
------------ ------------
Total stockholders' equity 308,609,744 254,985,446
------------ ------------
Total liabilities and stockholders' equity $397,485,597 $289,375,776
============ ============
</TABLE>
IV-5
<PAGE>
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
-------------
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Dividends from subsidiaries $19,415,006 $16,241,650 $13,722,532
Interest from subsidiary 2,708,256
Other interest 25,171 1,456 974
Expenses:
Other expenses 6,071,779 3,596,198 1,814,621
----------- ----------- -----------
Income before equity in
undistributed income
of subsidiaries 16,076,654 12,646,908 11,908,885
Equity in undistributed income
of subsidiaries 6,241,217 20,219,830 33,051,345
----------- ----------- -----------
Net income $22,317,951 $32,866,738 $44,960,230
=========== =========== ===========
</TABLE>
IV-6
<PAGE>
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 22,317,951 $ 32,866,738 $ 44,960,230
------------ ------------ ------------
Adjustments to reconcile net
income to net cash provided by
operating activities:
Undistributed earnings of
subsidiaries (6,241,297) (20,219,830) (33,051,345)
Increase in other assets
and accounts receivable (255,113) (13,001) (15,000)
Increase (decrease) in other
liabilities (450,428) 1,202,683 792,331
------------ ------------ ------------
Total adjustments (6,946,838) (19,030,148) (32,274,014)
------------ ------------ ------------
Net cash provided by
operating activities 15,371,113 13,836,590 12,686,216
------------ ------------ ------------
Cash flows from investing activities:
Increase in note receivable from subsidiary (54,445,000)
Net increase in short-term investments (354,574) (81,963) (480)
Other (272,790) (4,925) (1,023,222)
------------ ------------ ------------
Net cash used in investing activities (55,072,264) (86,888) (1,023,702)
------------ ------------ ------------
Cash flows from financing activities:
Increase in commercial paper 81,949,616
Net increase (decrease) in notes payable (27,013,665) 198,665 (205,000)
Dividends to stockholders (15,294,718) (13,969,175) (11,420,057)
------------ ------------ ------------
Net cash provided by (used in) financing activities 39,641,233 (13,770,510) (11,625,057)
------------ ------------ ------------
Net (decrease) increase in cash (60,018) (20,808) 37,457
Cash, beginning of year 88,289 109,097 71,640
------------ ------------ ------------
Cash, end of year $ 28,271 $ 88,289 $ 109,097
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 4,470,881 $ 1,545,255 $ 1,186,663
============ ============ ============
Income taxes $ 7,888,000 $ 13,927,719 $ 12,581,159
============ ============ ============
</TABLE>
IV-7
<PAGE>
ALFA CORPORATION
SCHEDULE III - SUPPLEMENTAL INSURANCE INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
Other
Future Policy Policy
Deferred Benefits, Claims
Policy Losses, And
Segment Acquisition Claims And Unearned Benefits
1995 Costs Loss Expenses Premium Payable
- ------- ----------- ------------ ---------- -------------
<S> <C> <C> <C> <C>
Life Insurance $75,410,879 $294,049,256 $ 0 $0
Property &
casualty
insurance 13,745,663 108,303,253 85,306,194 0
Noninsurance
and corporate 0 0 0 0
----------- ------------ ----------- --
Total $89,156,542 $402,352,509 $85,306,194 $0
=========== ============ =========== ==
1994
- -------
Life Insurance $75,551,400 $262,017,490 $ 0 $0
Property &
casualty
insurance 13,461,166 88,486,091 79,426,172 0
Noninsurance
and corporate 0 0 0 0
----------- ------------ ----------- --
Total $89,012,566 $350,503,581 $79,426,172 $0
=========== ============ =========== ==
1993
- -------
Life insurance $68,825,574 $232,379,119 $ 0 $0
Property &
casualty
insurance 9,707,852 77,984,288 57,077,350 0
Noninsurance
and corporate 0 0 0 0
----------- ------------ ----------- --
Total $78,533,426 $310,363,407 $57,077,350 $0
=========== ============ =========== ==
<CAPTION>
Benefits Amortization
Premiums Claims, Of Deferred
And Net Losses And Policy Other
Segment Policy Investment Settlement Acquisition Operating Premiums
1995 Charges Income Expenses Costs Expenses Written
- ------- ------------ ---------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Life Insurance $ 35,099,995 $27,620,913 $ 29,301,615 $ 5,504,517 $ 6,077,846 $ 0
Property &
casualty
insurance 272,988,974 20,996,611 220,330,040 41,857,226 24,957,163 286,483,508
Noninsurance
and corporate 0 2,305,583 0 0 727,145 0
------------ ----------- ------------ ----------- ----------- ------------
Total $308,088,969 $50,923,107 $249,631,655 $47,361,743 $31,762,164 $286,483,508
============ =========== ============ =========== =========== ============
1994
- -------
Life Insurance $ 32,805,431 $25,729,717 $ 26,960,413 $ 4,832,612 $ 6,196,441 $ 0
Property &
casualty
insurance 214,325,192 17,405,225 154,656,527 32,913,610 19,351,233 234,392,978
Noninsurance
and corporate 0 2,418,719 1,000,000 0 (329,479) 0
------------ ----------- ------------ ----------- ----------- ------------
Total $247,130,623 $45,553,661 $182,616,940 $37,746,222 $25,218,195 $234,392,978
============ =========== ============ =========== =========== ============
1993
- -------
Life insurance $ 30,856,337 $25,530,790 $ 24,007,967 $ 4,159,869 $ 4,926,546 $ 0
Property &
casualty
insurance 189,056,892 17,185,737 130,592,373 27,027,526 15,459,954 189,934,400
Noninsurance
and corporate 0 2,185,422 0 0 (374,412) 0
------------ ----------- ------------ ----------- ----------- ------------
Total $219,913,229 $44,901,949 $154,600,340 $31,187,395 $20,760,912 $189,934,400
============ =========== ============ =========== =========== ============
</TABLE>
IV-8
<PAGE>
ALFA CORPORATION AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
FOR YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
Percentage of
Ceded to Amount Assumed by Assumed From
Gross Amount Other Companies Other Companies Net Amount to Net
-------------- ------------------ ---------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
1995
- ----------
Life insurance in force $9,534,858,844 $891,952,000 $ 0 $8,642,906,844 0%
============== ============ ============ ============== ===
Premiums and policy charges:
Life Insurance $ 37,735,370 $ 2,735,919 $ 34,999,451 0%
Accident and health insurance 100,544 100,544 0%
Property and liability insurance 42,029,253 52,264,315* $283,224,036* 272,988,974 104%
-------------- ------------ ------------ -------------- ---
$ 79,865,167 $ 55,000,234 $283,224,036 $ 308,088,969 92%
============== ============ ============ ============== ===
1994
- ----------
Life insurance in force $8,638,808,254 $771,000,000 $ 0 $7,867,808,254 0%
============== ============ ============ ============== ===
Premiums and policy charges:
Life Insurance $ 35,195,373 $ 2,535,275 $ 32,660,098 0%
Acccident and health insurance 145,333 145,333 0%
Property and liability insurance 36,961,724 42,485,376* $219,848,844* 214,325,192 103%
-------------- ------------ ------------ -------------- ---
$ 72,302,430 $ 45,020,651 $219,848,844 $ 247,130,623 89%
============== ============ ============ ============== ===
1993
- ----------
Life insurance in force $7,749,942,364 $685,607,000 $ 0 $7,064,335,364 0%
============== ============ ============ ============== ===
Premiums and policy charges:
Life insurance $ 33,009,114 $ 2,293,796 $ 30,715,318 0%
Accident and health insurance 141,019 141,019 0%
Property and liability insurance 32,539,660 34,836,237* $191,353,469* 189,056,892 101%
-------------- ------------ ------------ -------------- ---
$ 65,689,793 $ 37,130,033 $191,353,469 $ 219,913,229 87%
============== ============ ============ ============== ===
</TABLE>
- --------------
*These amounts are subject to the pooling agreement.
IV-9
<PAGE>
ALFA CORPORATION AND SUBSIDIARIES
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
ADDITIONS
BALANCE ---------------------------------
AT BEGINNING CHARGED TO COSTS CHARGED TO BALANCE
DESCRIPTION OF PERIOD AND EXPENSES OTHER ACCOUNTS DEDUCTIONS END OF PERIOD
- ------------- --------------- ---------------- -------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
1995 Reserve for loan losses $769,544 $454,952 $248,397 $976,100
======== ======== ======== ========
1994 Reserve for loan losses $453,900 $315,644 $769,544
======== ======== ========
</TABLE>
IV-10
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ALFA CORPORATION
By /s/ Goodwin L. Myrick
--------------------------------------
Goodwin L. Myrick
President
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Chairman of the Board
/s/ Goodwin L. Myrick Director and Principal
- -------------------------- Executive Officer ---------
(Goodwin L. Myrick) (Date)
Senior Vice President,
/s/ Donald Price Finance, (Principal
- -------------------------- Financial Officer) ---------
(Donald Price) (Date)
/s/ John D. Holley Vice President and
- -------------------------- Controller --------
(John D. Holley) (Date)
/s/ Jerry A. Newby
- -------------------------- Director --------
(Jerry A. Newby) (Date)
/s/ James E. Mobley
- -------------------------- Director --------
(James E. Mobley) (Date)
/s/ James A. Tolar, Jr.
- -------------------------- Director --------
(James A. Tolar, Jr.) (Date)
<PAGE>
/s/ John W. Morris
- -------------------------- Director --------
(John W. Morris) (Date)
/s/ Milborn N. Chesser
- -------------------------- Director --------
(Milborn N. Chesser) (Date)
/s/ James I. Harrison, Jr.
- -------------------------- Director --------
(James I. Harrison, Jr.) (Date)
/s/ Young J. Boozer
- -------------------------- Director --------
(Young J. Boozer) (Date)
/s/ John R. Thomas
- -------------------------- Director --------
(John R. Thomas) (Date)
/s/ B. Phil Richardson
- -------------------------- Director --------
(B. Phil Richardson) (Date)
/s/ Boyd E. Christenberry
- -------------------------- Director --------
(Boyd E. Christenberry) (Date)
/s/ Thomas H. Miller
- -------------------------- Director --------
(Thomas H. Miller) (Date)
<PAGE>
EXHIBIT 13
[LOGO] 1995
ALFA ANNUAL
CORPORATION
REPORT
- --------------------------------------------------------------------------------
Alfa has been a strong, reliable and fair partner to
generations of policyholders while continuing to grow
[LOGO] prosperously, consistently adding value for our
stockholders. Today we say with confidence that the best is
yet to come.
- --------------------------------------------------------------------------------
<PAGE>
ALFA CORPORATION
---------------------------------------------------------
THE ALFA CORPORATION PROFILE
Alfa Corporation is a financial services holding company affiliated with the
Alfa Mutual Companies, which own 50.8% of Alfa Corporation's common stock, their
largest single investment. Alfa Corporation and its subsidiaries together with
the Alfa Mutual Companies comprise the Alfa Group, or "Alfa". Alfa's primary
business is personal lines of property and casualty insurance and life
insurance. Alfa Corporation's common stock is traded on the NASDAQ Stock
Market's National Market under the symbol ALFA.
THE ALFA GROUP'S BUSINESSES
Alfa Corporation's insurance subsidiaries write life insurance in Alabama,
Georgia and Mississippi and property and casualty insurance in Georgia and
Mississippi. Its property and casualty business is pooled with that of the Alfa
Mutual Insurance Companies which write property and casualty business in
Alabama. The Company's noninsurance subsidiaries are engaged in consumer
financing, leasing, real estate investments, residential and commercial
construction, and real estate sales.
Alfa Insurance Group
[FLOW CHART APPEARS HERE]
Property and Casualty Insurance Life Insurance
Alfa Mutual
Insurance ---------- 39.72% --
Company
50.8%
Alfa Mutual Fire
Insurance ---------- 11.07% --
Company
Alfa Mutual General
Insurance Company
members of the pooling agreement
[logo]
Alfa Insurance
Corporation -------- Alfa Life
Insurance
Alfa General Corporation
Insurance Corp. -----
NON INSURANCE
ALFA FINANCIAL ALFA INVESTMENT ALFA REALTY
CORPORATION CORPORATION INC.
ALFA BUILDERS
INC.
TABLE OF CONTENTS
Letter to Shareholders.................................................. 2
Financial Summary....................................................... 4
Selected Financial Data................................................. 6
Board of Directors...................................................... 8
Executive Officers...................................................... 9
Alfa at a Glance........................................................ 10
Management's Discussion and Analysis.................................... 14
Consolidated Financial Statements....................................... 21
Independent Auditors' Report............................................ 39
Quarterly Financial Information - Unaudited............................. 40
Stockholder Information................................. Inside Back Cover
<PAGE>
Severe weather . . .
THE story of 1995.
Alfa Insurance Group Historical Gross Catastrophic Losses
[GRAPH APPEARS HERE]
--------------------------------
| Alfa has |
| weathered the storm |
| and we are |
| stronger than ever. |
--------------------------------
1995 Growth Rates
-----------------------------------------------
o Stockholders' Equity +21%
o Total Assets +14%
o Investments +17%
o Stock Price +52%
<PAGE>
TO OUR SHAREHOLDERS
- --------------------------------------------------------------------------------
It may be unusual for a company to report lower earnings and still feel
good about its progress, but that is exactly how we feel at Alfa Corporation. In
1995, the Alfa Group incurred a record $99 million in gross storm related claims
before reinsurance and taxes and still increased our capital and surplus
position to an all-time high. We once again met the needs of our policyholders
while continuing to build the Company's financial strength. The storms during
1995 also masked solid performances from all of our core businesses.
The amendment to the pooling agreement, which became effective October 1,
1994, meant that Alfa Corporation added an additional 15 points of underwriting
risks, moving the Company up to 65% of combined risks. Because of the storms,
the benefits of the additional business were not as readily apparent as we
believe they will be in the future.
[PHOTO]
Other 1995 highlights included another increase in the cash dividend, a
strong performance in our investment portfolio as indicated by the increase in
surplus, and a continued improvement in operational capabilities to serve our
markets.
FINANCIAL COMPARISONS
Operating income for 1995, which excludes realized investment gains, was
$21.6 million, or $.53 per share, compared with 1994 operating income of $32.5
million, or $.80 per share. Net income for 1995 was $22.3 million or $.55 per
share, including $1.1 million in realized investment gains, compared with 1994
net income of $32.9 million, which included $572,000 in realized investment
gains.
Total revenues for 1995 increased 22.4% to $362.8 million and insurance
premiums were up 24.7% to $308.1 million. Strong equity and bond markets during
most of the year produced a $46.6 million increase in unrealized gains, while
investment income increased 11.8% to $50.9 million.
Hurricane Opal, which occurred on October 4, 1995, produced the largest
number of claims of any single storm in the Alfa Group's history. We have
processed over 31,000 claims and paid more than $76 million in damages. This was
in addition to storm claims from Hurricane Erin and other storms earlier in the
year, which brought the total for storm-related claims in 1995 to a record $99
million. Alfa Corporation's share of claims arising from the Alfa Group Pool for
all storms in 1995, net of reinsurance and taxes and including the cost of
reinstating our reinsurance protections, was $18 million, or $.45 per share. Of
this amount, Hurricane Opal accounted for about $14 million, or $.35 per share.
All of those connected with the processing of claims for the Alfa Group are to
be commended for the exemplary efforts during a time of real crisis in Alabama.
Our claims personnel and our field force of agents and customer service
representatives provided the kind of outstanding front line service that makes
our Company stand out.
2 Alfa Corporation 1995
<PAGE>
BALANCE SHEET STRENGTH
Alfa finished 1995 in a very strong financial position. At year-end, total
assets were $965 million, up 14%, and stockholders' equity was $309 million, up
21% on the strength of the growth in investments, in spite of the impact of the
extremely severe weather. As a result of our financial strength, the Company
continued to receive excellent financial ratings. A.M. Best Company rated our
property and casualty subsidiaries A++ and our life insurance subsidiary A+.
Both ratings are among the highest in the industry. Ward Financial Group again
listed Alfa in its list of the Top 50 Insurance Companies. Standard & Poor's and
Moody's Investors Service gave Alfa their top commercial paper ratings of A-1+
and P-1, respectively.
In recognition of Alfa's continued progress and favorable prospects, the
Board of Directors voted in April 1995 to increase the quarterly cash dividend
5.6% to $.095 per share from the previous quarterly rate of $.09 per share. The
new rate represents an annual cash dividend of $.38 per share and is the
twenty-first consecutive yearly increase in the cash payout. The cash dividend
has grown at a compound annual rate of 14.0% during the past five years.
We met or exceeded most of our operational objectives for 1995. We
maintained a strong market share in Alabama in both life and property/casualty
insurance. Our agent retention improved and the total number of agents at
year-end increased. Policyholder persistency was 93.2% for our life business and
96.3% for property/casualty. Training and technical support remained an
ongoing priority.
In January 1996, Thomas H. Miller was added to Alfa Corporation's board of
directors, expanding the number of directors to twelve. Mr. Miller, a Farmer,
who has previously served on our board and is currently also a board member of
the Alfa Mutual Group, is a welcomed addition to our board.
OUTLOOK
Our goals for the year are to maintain or increase our market share in core
property/casualty and life insurance products. Investment income should be up
again in 1996, but probably not to the extent of the record-setting pace of
1995. Favorable interest rates should help our real estate and consumer finance
subsidiaries. On the expense side, we are increasing our use of technology to
improve productivitiy and operating efficiency. By improving the underwriting
and claims processing, we also will improve the level of customer satisfaction.
That reduces policyholder turnover and leads to long-term stability. Barring
large-scale damage from major storms, we are optimistic that 1996 will be
another year of solid performance.
The past year was perhaps an excellent example of Alfa Corporations's
success in achieving its two primary goals -- protecting our policyholders and
creating value for our shareholders. If you live in our market area, we hope you
will give us the opportunity to help you with your insurance needs. The annual
meeting of shareholders will be held at the Company's executive offices in
Montgomery at 10 a.m. on April 18, 1996. We hope to see you then.
Sincerely,
/s/ Goodwin L. Myrick
Goodwin L. Myrick
President, CEO and Chairman of the Board
3
<PAGE>
FINANCIAL SUMMARY
---------------------------------------
The following tables were represented by bar charts in the printed material.
EARNINGS PER SHARE*
10-Yr. Compound Avg. Growth Rate 7.0%
1985 $0.28
1986 $0.39
1987 $0.42
1988 $0.58
1989 $0.55
1990 $0.55
1991 $0.70
1992 $0.91
1993 $1.10
1994 $0.81
1995 $0.55
* Reflects 2-for-1 stock splits in 1987 and 1993
NET INCOME (in millions)
10-Yr. Compound Avg. Growth Rate 8.9%
1985 $09.5
1986 $13.1
1987 $14.1
1988 $22.8
1989 $22.9
1990 $22.9
1991 $28.4
1992 $36.9
1993 $45.0
1994 $33.0
1995 $22.3
PROPERTY/CASUALTY
NET UNDERWRITING
PROFIT MARGIN
1987 2.0%
1988 5.7%
1989 1.9%
1990 (0.4)%
1991 4.1%
1992 8.9%
1993 9.1%
1994 5.0%
1995 (3.9)%*
* Includes efffects of Hurricanes Opal, Erin and other storms. Worst
catastrophic losses in Company's history.
STOCKHOLDERS'
EQUITY PER SHARE*
10-Yr. Compound Avg. Growth Rate 15.2%
1985 $1.84
1986 $2.12
1987 $2.38
1988 $3.67
1989 $3.89
1990 $4.03
1991 $4.74
1992 $5.51
1993 $6.40
1994 $6.25
1995 $7.57
* Reflects 2-for-1 stock splits in 1987 and 1993
CASH DIVIDENDS PAID
PER SHARE*
10-Yr. Compound Avg. Growth Rate 13.8%
1985 $0.1025
1986 $0.11625
1987 $0.1275
1988 $0.145
1989 $0.1725
1990 $0.195
1991 $0.215
1992 $0.2425
1993 $0.28
1994 $0.3425
1995 $0.375
* Reflects 2-for-1 stock splits in 1987 and 1993
CLOSING SALES PRICE
OF COMMON STOCK*
At December 31
1985 $3 1/4
1986 $4 7/16
1987 $7 1/4
1988 $5
1989 $5 5/8
1990 $4 5/8
1991 $5 1/4
1992 $11 7/8
1993 $11 1/2
1994 $11
1995 $16 3/4
* Reflects 2-for-1 stock splits in 1987 and 1993
4 Alfa Corporation 1995
<PAGE>
FINANCIAL SUMMARY
---------------------------------------
The following tables were represented by bar charts in the printed material.
ASSETS (in millions)
10-Yr. Compound Avg. Growth Rate 17.4%
1985 $193.9
1986 $227.0
1987 $338.7
1988 $432.3
1989 $482.4
1990 $515.7
1991 $595.8
1992 $665.2
1993 $766.1
1994 $846.4
1995 $962.4
TOTAL REVENUES
(in millions)
10-Yr. Compound Avg. Growth Rate 25.2%
1985 $ 38.4
1986 $ 44.3
1987 $ 97.0
1988 $177.9
1989 $192.7
1990 $212.4
1991 $232.9
1992 $248.4
1993 $272.6
1994 $296.3
1995 $362.8
PREMIUMS AND
POLICY CHARGES
(in millions)
10-Yr. Compound Avg. Growth Rate 29.9%
1985 $ 22.6
1986 $ 25.3
1987 $ 75.3
1988 $148.3
1989 $158.6
1990 $175.4
1991 $192.4
1992 $202.4
1993 $219.9
1994 $247.1
1995 $308.1
NET INVESTMENT INCOME
(in millions)
10-Yr. Compound Avg. Growth Rate 13.1%
1985 $14.9
1986 $17.3
1987 $19.3
1988 $26.2
1989 $30.0
1990 $32.2
1991 $34.8
1992 $39.4
1993 $44.9
1994 $45.6
1995 $50.9
AVERAGE YIELD ON
INVESTED ASSETS
1985 11.33%
1986 11.39%
1987 9.92%
1988 9.91%
1989 9.43%
1990 9.00%
1991 8.66%
1992 8.28%
1993 8.03%
1994 7.78%
1995 7.74%
RETURN ON
AVERAGE EQUITY
1985 16.2%
1986 19.5%
1987 18.6%
1988 20.4%
1989 14.9%
1990 13.8%
1991 15.8%
1992 17.7%
1993 18.5%
1994 12.7%
1995 7.9%
5
<PAGE>
SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Consolidated Summary of Operations & Related Data
(Dollars in Thousands Except Per Share Amounts)
Years Ended December 31, 1995 1994 1993 1992
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums and policy charges $ 308,089 $ 247,131 $ 219,913 $ 202,440
Net investment income 50,923 45,554 44,902 39,425
Net realized investment gains 1,106 572 4,890 4,232
Other income 2,645 3,057 2,918 2,340
-----------------------------------------------------------------------
Total revenues 362,763 296,313 272,624 248,437
Benefits and expenses 331,771 248,481 209,309 194,859
-----------------------------------------------------------------------
Income before provision for income taxes 30,993 47,832 63,315 53,578
Provision for income taxes 8,675 14,965 20,999 16,660
Cumulative effect of changes in accounting principles 2,645
-----------------------------------------------------------------------
Net income $ 22,318 $ 32,867 $ 44,960 $ 36,918
=======================================================================
Balance sheet data at December 31:
Invested assets $ 841,123 $ 718,074 $653,819 $ 574,718
Total assets $ 965,433 $ 847,870 $766,077 $ 665,247
Future policy benefits, losses and claims, unearned
premiums $ 487,659 $ 429,930 $365,148 $ 334,454
Total liabilities $ 656,823 $ 592,885 $505,091 $ 440,669
Stockholders' equity $ 308,610 $ 254,985 $260,986 $ 224,578
Per share data/1/:
Net income $ 0.55 $ 0.81 $ 1.10 $ 0.91
Cash dividends paid $ 0.375 $ 0.3425 $ 0.28 $ 0.2425
Annual dividend rate $ 0.38 $ 0.36 $ 0.29 $ 0.25
Stockholders' equity $ 7.57 $ 6.25 $ 6.40 $ 5.51
Closing sales price at December 31 $ 16 3/4 $ 11 $ 11 1/2 $ 11 7/8
Price/earnings ratio 30.6x 13.6x 10.4x 13.1x
Weighted average shares outstanding 40,786 40,786 40,786 40,786
Return on average equity 7.9% 12.7% 18.5% 17.7%
Return on average invested assets 7.74% 7.78% 8.03% 8.28%
Life insurance in force $8,642,907 $7,867,808 $7,064,335 $6,295,626
Number of agents 585 562 562 529
</TABLE>
/1/ Per share amounts have been restated where appropriate to reflect 2-for-1
stock splits in June 1993 and June 1987.
/2/ Reflects effects of fresh start tax benefits of approximately $570,000, or
$.03 per share in 1990.
/3/ Reflects the adoption in 1993 of FASB Statement No. 109, which reduced the
1986 provision for income taxes by approximately $2.1 million. Accordingly,
the balance sheet data, per share data and other appropriate data have also
been restated for 1986 through 1992.
/4/ Amounts for 1989 and prior have been restated to reflect adoption in 1989 of
FASB statement No. 97.
6 Alfa Corporation 1995
<PAGE>
SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1991 1990 1989/4/ 1988 1987 1986 1985
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 192,445 $ 175,448 $ 158,585 $ 148,287 $ 75,277 $ 25,254 $ 22,603
34,785 32,224 30,048 26,224 19,288 17,288 14,873
3,790 2,842 2,882 2,005 1,316 943 325
1,919 1,861 1,172 1,402 1,086 803 585
- ---------------------------------------------------------------------------------------------------------------------------
232,939 212,375 192,687 177,918 96,967 44,288 38,386
192,144 180,611 159,912 144,229 75,414 27,488 24,171
- ---------------------------------------------------------------------------------------------------------------------------
40,795 31,764 32,775 33,689 21,553 16,800 14,215
12,354 8,877/2/ 9,919 10,842 7,495 3,744/3/ 4,741
- ---------------------------------------------------------------------------------------------------------------------------
$ 28,441 $ 22,887/2/ $ 22,856 $ 22,847 $ 14,058 $ 13,056/3/ $ 9,474
===========================================================================================================================
$ 511,931 $ 437,725 $ 410,266 $ 363,401 $ 277,684 $ 184,063 $ 157,125
$ 595,801 $ 515,681 $ 482,383 $ 432,312 $ 338,692 $ 226,952 $ 193,868
$ 295,443 $ 257,907 $ 223,925 $ 192,113 $ 158,242 $ 89,811 $ 77,247
$ 402,526 $ 347,861 $ 319,598 $ 288,094 $ 258,576 $ 155,529/3/ $ 131,722
$ 193,275 $ 165,820 $ 162,785 $ 144,218 $ 80,116 $ 71,423/3/ $ 62,146
$ 0.70 $ 0.55/2/ $ 0.55 $ 0.58 $ 0.42 $ 0.39/3/ $ 0.28
$ 0.215 $ 0.195 $ 0.1725 $ 0.145 $ 0.1275 $ 0.11625 $ 0.1025
$ 0.22 $ 0.20 $ 0.18 $ 0.15 $ 0.13 $ 0.12 $ 0.105
$ 4.74 $ 4.03 $ 3.89 $ 3.67 $ 2.38 $ 2.12/3/ $ 1.84
$ 5 1/4 $ 4 5/8 $ 5 5/8 $ 5 $ 7 1/4 $ 4 7/16 $ 3 1/4
7.6x 8.4x 10.3x 8.6x 17.4x 13.6x 11.6x
40,786 41,611 41,882 39,265 33,692 33,692 33,692
15.8% 13.8%/2/ 14.9% 20.4% 18.6% 19.5%/3/ 16.2%
8.66% 9.00% 9.43% 9.91% 9.92% 11.39% 11.33%
$5,578,661 $4,947,574 $4,318,605 $3,661,747 $3,131,656 $2,710,599 $2,301,675
504 500 486 454 475 422 382
</TABLE>
7
<PAGE>
BOARD OF DIRECTORS
------------------------
[PHOTOGRAPH]
Standing left to right:
Boyd E. Christenberry (2)
Retired, Alfa Insurance Group;
Director, Colonial Bank,
Montgomery Region.
James I. Harrison, Jr.
Chairman & Chief Executive Officer,
Harco, Inc.;
Director, Pharmacy Direct Network;
Director, AmSouth Bancorporation.
Young J. Boozer (1,3)
Retired, Alfa Life Insurance Corporation;
Director, Colonial BancGroup
and Colonial Bank,
Montgomery Region.
Jerry A. Newby (1,3)
Farmer, Athens, Alabama;
Director, Alabama Department of
Agriculture and Industries;
Director, Cotton, Inc.
B. Phil Richardson
Vice President and Treasurer,
Alfa Corporation;
Executive Vice President,
Operations, Alfa Insurance Group;
Director Emeritus, AmSouth
Bancorporation.
Goodwin L. Myrick (1)
President & Chairman,
Alfa Corporation,
Alfa Insurance Group and
Alabama Farmers Federation;
Director, Compass Bancshares
and Compass Bank.
Milborn N. Chesser (1,3)
Farmer, Fyffe, Alabama;
Chairman, Horizon Bank.
James Earl Mobley (1,2,3)
Farmer, Shorterville, Alabama;
Director Compass Bank of Dothan,
Alabama;
Director First Federal Savings and Loan
Association, Russell County, Alabama.
John R. Thomas (1,3)
President, Chief Executive Officer
and Director of
Aliant National Corporation;
Director, First Montgomery Bank;
Director, Elmore County
National Bank.
John W. Morris (1,2,3)
Farmer, Warrior, Alabama;
District Supervisor, Jefferson County
Soil and Water Conservation District;
Board of Directors, State of Alabama
Farmers Market.
James A. Tolar, Jr. (1,3)
Farmer, Uniontown, Alabama;
Director, Compass Bank of
Uniontown, Alabama.
Not pictured:
Thomas H. Miller
Farmer,Linden, Alabama.
(1) Member, Executive Committee
(2) Member, Audit Committee
(3) Member, Compensation Committee
8 Alfa Corporation 1995
<PAGE>
EXECUTIVE OFFICERS
----------------------------------------
[PHOTO]
Left to Right:
Alvin H. Dees, Jr. B. Phil Richardson
Executive Vice President, Marketing Executive Vice President, Operations
Age 49, with Alfa since 1984. Vice President and Treasurer
Age 70, Board Member since 1981,
Goodwin L. Myrick with Alfa since 1950. Also is a
President & Chairman of the Board Director Emeritus of AmSouth
Age 70, Board Member since 1973. Bancorporation.
Also serves as President and Chairman
of the Board of Alfa Insurance Group, C. Lee Ellis
President of the Alabama Farmers Executive Vice President, Investments
Federation; and is a Director of Age 44, with Alfa since 1975.
Compass Bancshares and Compass Bank. Also serves as a Director of First
Liberty Financial Corporation.
9
<PAGE>
ALFA AT A GLANCE
----------------
Revenues by Source
[The table was represented as a pie chart in the printed material]
Property & Casualty .................. 75.4%
Net Investment Income ................ 14.0%
Life ................................. 9.7%
Realized Investment Gains ............ 0.3%
Other ................................ 0.7%
- --------------------------------------------------------------------------------
Property & Casualty Insurance
[The table was represented as 2 pie charts in the printed material]
(1) Property & Casualty Premium ......... 75.4%
(2) Auto ................................. 65.0%
Homeowner ............................ 18.7%
Farmowner ............................ 5.8%
Commercial ........................... 4.8%
Fire ................................. 2.5%
Mobile Home .......................... 3.2%
Products and Service
o A direct writer using 585 exclusive agents supported by 665 customer
service representatives, the Alfa Group is the second largest writer of
both private passenger automobile and homeowner insurance in Alabama and is
the largest writer of farmowner insurance in the state. Over 90% of the
Company's property and casualty business is written at preferred rates.
Alfa has its own employee adjusters who provide quality service for all
property casualty claims.
1995 Highlights
o Premiums up 27% - full year of pooling at 65%.
o Worst year of catastrophes and severe weather in Alfa's history.
1996 Outlook
o The company will make investments in additional agents and in technical
support in 1996.
o Assuming improvement in weather-related claims, we are hopeful 1996 will
be a year of growth.
- --------------------------------------------------------------------------------
Life Insurance
[The table was represented as 2 pie charts in the printed material]
(1) Life Insurance Premium .............. 9.7%
(2) UL ................................... 37.4%
ISP .................................. 34.2%
Term ................................. 18.1%
Other ................................ 10.3%
Products and Services
o A full line of life insurance products emphasizing universal life, interest
sensitive life and term insurance.
o Using the same 585 agents and 665 customer service representatives who
write property casualty business, Alfa Life is the third largest life
insurance writer in Alabama.
1995 Highlights
o Life premiums and policy charges up 7.0%.
o Persistency rate 93.2%.
o Insurance in force up 8.6%.
o Earnings up 9.7%.
1996 Outlook
o We expect improvement in premiums and persistency and another year of
growth.
o New technology will allow us to provide even better service to our
policyholders in a more productive, efficient manner.
- --------------------------------------------------------------------------------
Investments
[The table was represented as 2 pie charts in the printed material]
(1) Net Investment Income ............... 14.0%
(2) Fixed Maturities ..................... 68.5%
Equity Securities .................... 10.6%
Short Term Investments ............... 3.9%
Other Long Term Investments .......... 13.2%
Mortgage Loans/Real Estate ........... 0.3%
Policy Loans ......................... 3.5%
Investment Portfolio
o The investment portfolio totaled $841 million at year-end with 68.5% in
fixed income securities, 10.6% in equities, 3.9% in short-term investments,
13.2% in consumer loans and other long term investments and 3.8% in other
investments.
1995 Highlights
o Strong year for equities and fixed income securities.
o Market performance of portfolio resulted in stockholders' equity increase
of 21%.
o Investment income up 11.8% to $50.9 million due to positive cash flows from
operations and from the full year of increased pooling.
1996 Outlook
o It is unlikely that market performance or investment income will grow to
the extent it did in 1995, but with continued positive cash flow, we expect
investment income to show continued improvement.
- --------------------------------------------------------------------------------
Non-Insurance
Consumer Finance
o Net interest income up 9.3% from improved spreads.
o Loan portfolio down 8.6% after two years of almost 100% growth.
o Net finance company earnings of $2.9 million, up 8%.
o Expect modest growth in portfolio in 1996.
Construction and Real Estate
o Gross construction revenues of $18.2 million, up 8%.
o Commercial $10.3 million versus residential of $7.9 million
o Net construction company earnings of $422,000, down 28%.
o Gross real estate sales commissions of $2.3 million.
o Residential $1.9 million versus commercial of $266,000 in commission
revenue.
o Net real estate company earnings of $143,000, down 13%.
10 Alfa Corporation 1995
<PAGE>
ALFA AT A GLANCE
------------------------------
PROPERTY AND CASUALTY INSURANCE
Hurricane Opal was THE event of 1995 in our property and casualty
operations. Opal was the costliest storm in Alfa's history and the 3rd most
costly in U.S. history. On October 4, 1995, Opal began its movement up and
across eastern Alabama. Property damage was extensive. The Alfa Group handled
over 31,000 claims representing damages of over $76 million. Our claims
personnel were dispatched to the affected areas almost immediately and many
claims were processed within 24 hours. With substantial assistance from our
agents and customer service representatives, they continued to assess damages
for weeks to come.
[The following table was represented by a bar chart in the printed material.]
1969 Hurricane 1.3
1973 Tornado 1.6
1974 Tornado 3.9
1975 Hurricane 5.8
1979 Hurricane 22.5
1985 Hurricane 2.0
1988 Snow 19.5
1988 Hail 13.5
1989 Hail 7.0
1990 Tornado 13.0
1990 Tornado 12.0
1991 Tornado 12.0
1992 Tornado 7.8
1993 Snow 20.0
1994 Tornado 19.5
1995 Hurricane 99.0
Even before Opal, 1995 was already a big year for storm-related claims.
Hurricane Erin, which hit Alabama in the third quarter, and other wind and hail
storms earlier in 1995, added an additional $23 million in storm damage claims
incurred by the Alfa Group, bringing the total for the year to over $99 million
for the Group.
The combined losses and expenses expressed as a percentage of earned
premiums for 1995 was 103.9% compared with 95.0% in 1994. This represents only
the fourth time in the last 28 years that Alfa has failed to make an
underwriting profit. Excluding the major storm-related claims, our combined
ratio for 1995 would have been very much in line with our historical target of
5% for underwriting profits.
[The following table was represented by a line chart in the printed material.]
Date Alfa Industry
---- ---- --------
1969 11.5 -2.5
1970 15.0 -0.5
1971 14.0 1.0
1972 15.5 1.7
1973 13.5 0.0
1974 1.5 -6.0
1975 -1.5 -9.0
1976 19.0 -5.0
1977 25.0 0.5
1978 18.5 0.4
1979 -12.5 -0.2
1980 13.0 -1.5
1981 5.0 -4.5
1982 7.5 -10.0
1983 9.9 -12.0
1984 8.5 -18.0
1985 3.0 -19.0
1986 1.5 -10.0
1987 3.5 -5.0
1988 8.0 -6.0
1989 5.0 -10.5
1990 -0.5 -9.5
1991 4.1 -8.3
1992 8.9 -13.2
1993 9.1 -7.4
1994 5.0 -9.8
1995 -3.9 -9.5
The outlook for our property and casualty business is good. We have
very high persistency on our business because our business strategy emphasizes
high-quality policies. An ongoing priority is to improve the training and
technical support of our agents and customer service representatives. The object
is to make them more productive and to improve customer satisfaction by making
the experience of dealing with Alfa as easy as possible. A stable workforce at
the home office and in the field adds to quality of service we deliver in each
market.
The 1995 storms obscured what was otherwise a good year in our property
and casualty business. We expect premiums to grow in 1996 on the strength of new
sales, rate increases and a continued low lapse ratio.
LIFE INSURANCE
Alfa's life insurance business is very important to the Company's
overall operations. In addition to providing our agents with a competitive
portfolio of insurance products, life insurance is a stable source of operating
earnings. In 1995, our life operation produced another year of growth. Operating
earnings were up 9.7%, life premiums increased 7.8% and insurance in force
increased 10% to $8.6 billion. Persistency, which measures the percentage of
policies renewing, remained high at 93.2%, among the best in the industry. Agent
productivity also remained strong. Premium per agent was a record high for 1995
and among the best in the multi-line insurance industry.
11
<PAGE>
ALFA AT A GLANCE
------------------------------
The number of agents rose to 585 at year-end for a net addition of 23
agents. During the year, we also added ten new service centers in our
three-state market area. We believe we offer new and experienced agents the best
opportunities in the industry. The combination of training, technical
capabilities, insurance products, field and home office support, and income
potential make our agents among the best in the business.
Our objective for 1996 is to produce another year of growth. Our goals
include and 8% increase in new life premiums written and a 10% increase in
insurance in force. We have a target of having 618 agents in place at year-end.
Long-term, one of our greatest growth opportunities is to continue to cross-sell
our life products to new and existing property and casualty policyholders. With
over 1,000,000 property and casualty policies in force and less than 20% of
those insureds having an Alfa life policy, we believe we can continue to develop
our position as a one-stop insurance underwriter. We have been and are currently
continuing to put into place new technology that not only will improve our
current underwriting productivity and efficiency while improving customer
service, but will allow us to handle future growth at current costs for years to
come.
INVESTMENTS
Total Portfolio
At Alfa, we invest with a total return strategy emphasizing both
current yield and growth potential. This strategy produces cash flow needed for
operations and allows for continued portfolio diversification as well as
opportunity for overall appreciation. We believe our past results bear this
strategy out.
At year-end, the value of Alfa's portfolio was $841 million. The
portfolio was invested 68.5% in fixed income, interest-bearing securities, 10.6%
in equities, 3.9% in short-term marketable securities, and 17% in other
investments, which include consumer loans and leases and less than 0.4% in real
estate and mortgage loans.
[The following table was represented by a pie chart in the printed material.]
Fixed Maturities 68.5%
Equity Securities 10.6%
Short Term Investments 3.9%
Other Long Term Investments 13.2%
Mortgage Loans/Real Estate 0.3%
Policy Loans 3.5%
At year-end 1993 Alfa implemented Financial Accounting Standards Board
Statement No. 115 which requires us to mark-to-market the majority of our bond
portfolio. The change in market value of bonds designated by the company as
available for sale flow through the stockholders' equity portion of the balance
sheet. This change caused us to include in stockholders' equity unrealized
losses of $25.9 million in 1994 and unrealized gains of $33.2 million in 1995.
The last several years have been an unusually volatile period for interest
rates. While we think it is very important to understand the economic value of
your company we would also like to add a few words worth noting. This is the
same company that has been through many interest rate cycles before and FASB 115
quantifies the fact that when interest rates drop, the market value of the bond
portfolio increases and vice versa. This increased volatility in book value,
though it should not be ignored should be properly understood.
YEAR IN REVIEW
Fixed Income
As we discussed in last year's annual report, the Federal Reserve
boosted rates six times during 1994. It pushed up the federal-funds rate 2.5
percentage points over the year to 5.5% and the discount rate 1.75 percentage
points to 4.75%. Because of these moves, the U.S. bond market returns in 1994,
based on almost any measure, were terrible. The decrease in bond prices ranked
as the second worst since 1926.
What a difference a year makes! At the start of 1995 the U.S. economy
looked strong and there were worries about a resurgence in inflation. Federal
Rerserve
12 Alfa Corporation 1995
<PAGE>
ALFA AT A GLANCE
------------------------------
policy makers remained concerned and increased interest rates in the first
quarter. As we progressed into the year, these same policy makers realized they
had not only erred in the magnitude of these adjustments but also in the
direction. The Federal Reserve cut rates twice during the last two quarters of
the year. Slowing economic growth coupled with lower inflation and fiscal
restraint set up an environment which led to the best performances for bonds in
many years. At year end 1995, The Wall Street Journal reported that Treasury
bond funds with average maturities of five years, and corporate bonds, on
average, posted returns of between 15% and 20%. At December 31, 1995, our fixed
income portfolio has a market value of $576.4 million versus a cost of $542.9
million. Alfa's total return on its bond portfolio for the year ended December
31, 1995 was 16.5% calculated on a pretax basis. We are very pleased with these
results.
Equities
[The following table was represented by a bar chart in the printed material.]
Common Stock Portfolio Total Rates on Return
Alfa S&P
---- ---
1 Year 36.7% 37.6%
2 Year 12.6% 18.0%
3 Year 13.3% 15.3%
4 Year 15.1% 13.3%
5 Year 18.6% 16.6%
10 Year 15.7% 14.8%
15 Year 17.8% 14.8%
The equity market had an outstanding performance in 1995 primarily due
to the influence of lower interest rates. As a result of cost cutting and
productivity gains, corporations delivered solid profit gains in 1995. The S&P
500 index total return was 37.6%, which is the third best annual gain in the
post-World War II era (1954 +45% and 1958 +38%). The S&P 500 outperformed the
bulk of money managers in 1995. According to Goldman Sachs & Company research,
the price return on a broader market of 6,611 stocks was well below the S&P 500
in 1995. This same research indicates that from its 1995 high of 621.69, the S&P
500 declined only 0.9% by year end, while the average decline of the 500 stocks
from their respective highs was a more substantial 10.2%. Against this backdrop,
we had a very successful year investing in equity securities. Alfa's portfolio
had a total return of 36.7% in 1995. This is not a one year phenomenon. Our
long-term equity returns are among the most competitive in the industry. Alfa's
10-year and 5-year annual returns are 15.7% and 18.6%, respectively, versus the
S&P 500 returns which are 14.8% and 16.6%, respectively.
ALFA'S FUTURE
Our business objectives remain the same:
o Offer quality insurance protection at
reasonable prices;
o Create above average value for our
shareholders;
o Provide a working environment that
encourages our employees to reach
their full potential;
o Maintain a high quality investment portfolio;
o Create new growth opportunities;
o Support the communities where we live.
To achieve these objectives requires us to continuously build upon the
strengths of this organization. Alfa has a strong distribution system and offers
a full line of property/casualty, life and consumer finance products. The system
is supported by some of the best people and technology in the industry. Our
investment portfolio is strong and has produced consistent, solid growth without
taking unnecessary risk. We have served the Alabama market for over 50 years. We
know the territory and understand the needs of the people we serve. Last year
was perhaps one of the best examples of the Company's strength. We handled more
claims and provided our insureds with the means to replace their losses on a
scale never before seen at Alfa, and still finished the year in a stronger
financial position than the previous year. Over the past 25 years, we have
consistently outperformed our competitors and we have every intention of keeping
that record intact.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-----------------------------------------------------------
RESULTS OF OPERATIONS
The following table sets forth consolidated summarized income
statement information for the years ended December 31, 1995, 1994 and 1993:
Years Ended December 31,
----------------------------------
1995 1994 1993
----------------------------------
(in thousands, except share
Revenues and per share data)
Premiums and
policy charges $308,089 $247,131 $219,913
==================================
Net investment
income $ 50,923 $ 45,554 $ 44,902
==================================
Total revenues $362,763 $296,313 $272,624
==================================
Net income
Insurance operations $ 21,432 $ 32,290 $ 38,738
Noninsurance operations 3,668 3,358 2,882
Net realized
investment gains 719 372 3,179
Corporate expenses (3,500) (3,153) (2,483)
----------------------------------
Income before changes in
accounting principles $ 22,318 $ 32,867 $ 42,316
Cumulative effects of
changes in accounting
principles 2,644
----------------------------------
Total net income $ 22,318 $ 32,867 $ 44,960
==================================
Per Share Amounts
----------------------------------
Income per share before
changes in accounting
principles $.55 $.81 $1.04
Per share cumulative
effects of changes in
accounting principles .06
---------------------------------
Net income per share $.55 $.81 $1.10
==================================
Weighted average
shares outstanding 40,785,912 40,785,912 40,785,912
==================================
Premiums and policy charges increased 24.7% in 1995, 12.3% in 1994 and
8.6% in 1993. The majority of the growth in 1995 and 1994 is due to the
amendment to the pooling agreement with the Alfa Mutual Companies effective
October 1, 1994, which increased the allocation of the pooled business to Alfa
Corporation (see the Property and Casualty Insurance Operations section of this
discussion and Note 2 to the Consolidated Financial Statements). Net investment
income grew 11.8% in 1995 due to an increase in invested assets resulting from
positive cash flows and from the effects of the pooling agreement amendment. Net
investment income grew 1.6% in 1994. The growth rate was affected by lower
yields as cash flows were reinvested at lower rates.
Net income in 1995 declined over 32% compared to 1994 due primarily to the
effects of catastrophic storm activity. Most prominent was Hurricane Opal, the
single largest storm in the Company's history, which occurred in the fourth
quarter of 1995 and resulted in a $5.5 million dollar fourth quarter net loss,
the first quarterly loss ever sustained. Also significant to the adverse impact
of Opal was the increased pool allocation. Although other storm activity prior
to Opal was significant, the Company's operating results would have shown
overall improvement in 1995 excluding Opal due to good non-storm operating
trends. Life insurance operating income improved almost 10% due to increased
premiums and improved mortality rates. Operating income excludes realized
investment gains and losses. Net income declined 22.3% to $32.9 million in 1994
compared to 1993 net income before accounting changes of $42.3 million.
Increases in property and casualty claims frequency and higher death claims are
the primary factors which caused the drop in earnings. Management believes the
results achieved in 1994 are in line with long-term goals, however, the
comparison to prior year's results was unfavorable due to better performance
during the prior period. Net income increased 21.8% in 1993. All of the
Company's operating segments contributed to the growth in 1993 with the majority
related to better than normal claims experience in both life insurance and
property casualty insurance.
Noninsurance operating income increased 9.2% in 1995, 16.5% in 1994,
and 29.4% in 1993 as a result of increased profits in the consumer loan
subsidiary in all three periods, and from the construction and real estate
subsidiaries in 1994 and 1993. Also affecting net income significantly in 1994
was a $2.8 million decrease in net realized investment gains which occurred as a
result of management's decision to offset realized gains with losses in the
investment portfolio to reduce income taxes. This strategy should have a
positive long term effect. Net realized investment gains are primarily the
result of sales of equity securities. Net income in 1993 was affected by changes
resulting from new accounting principles, including $461,446 of expense, net of
tax, related to postretirement benefits and $3,105,963 additional income related
to retrospectively rated reinsurance. (See Note 1 to the Consolidated Financial
Statements.)
14 Alfa Corporation 1995
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
-----------------------------------------------------------
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 years ended December 31, 1995, 1994 and 1993:
Years Ended December 31,
----------------------------------
1995 1994 1993
----------------------------------
(in thousands)
Earned premiums
Personal lines $ 270,109 $208,358 $181,686
Commercial lines 10,606 8,524 8,920
Pools, associations
and fees 3,709 2,920 2,541
Reinsurance ceded (11,435) (5,476) (4,090)
----------------------------------
Total $ 272,989 $214,326 $189,057
==================================
Net underwriting
income $ (10,598) $ 10,793 $ 17,217
==================================
Underwriting margin (3.9%) 5.0% 9.1%
==================================
Operating income $ 8,182 $ 20,179 $ 24,144
==================================
1995 Compared to 1994
There were two significant factors affecting property casualty
operations in 1995, the increased pool allocation and the worst storm activity
in the Company's history, primarily Hurricane Opal on October 4, 1995. The 27.3%
increase in earned premiums is due primarily to the pooling amendment which
occurred October 1, 1994. It increased the allocation of the pooled business to
Alfa Corporation's property and casualty operations by 15 points from 50% to
65%, which increased earned premiums by approximately $50.0 million in 1995.
Similarly, the allocation of losses and expenses associated with the pooled
business also increased. The overall increase of the entire pool of written
premiums increased 7.1% in 1995 due to growth in new business of 3.0% and a low
lapse ratio of 3.7% compared to 3.8% in 1994.
The negative underwriting margin and underwriting loss reflect the
significant increase in storm related claims in 1995. The Alfa Group incurred
almost $99 million in severe weather claims in 1995 with approximately $79
million from Hurricane Opal, compared to approximately $15.0 million in 1994.
The earnings impact of such significant storm claims and related costs were
approximately $18 to $19 million, or $0.46 per share with Opal accounting for
$14 million, or $0.35 per share. These estimates represent the Company's 65%
share of the Alfa Group Pool and are net of reinsurance and taxes. These
estimates include approximately $4.3 million of reinstatement reinsurance
premiums, reflected in the total ceded reinsurance cost shown in the table
above. Hurricane Opal ranks as the third most costly hurricane in U.S. history.
The last major hurricane affecting the Alfa Group was Hurricane Frederick in
1979.
Non-storm underwriting trends were generally favorable during 1995. The
loss ratio excluding storm claims was 63.2% and the expense ratio was relatively
flat. Expenses include approximately $1.9 million of additional investment in
technology and systems which should improve operating efficiencies and
competitiveness.
Investment income grew significantly in the property casualty
subsidiaries in 1995. The 20.6% growth was due primarily to increased
investments and positive cash flow prior to the fourth quarter and prior to the
effects of Hurricane Opal. The increased pool allocation had a similar but less
pronounced impact on increased invested assets. The increased investment income
partially offset the underwriting loss in 1995.
Risk-Based Capital measures were adopted by the property and casualty
industry during 1994. These measures serve as a benchmark for the regulation of
an organization's solvency by state insurance regulators. At December 31, 1995,
the Company's property and casualty subsidiaries' Adjusted Capital calculated in
accordance with NAIC Risk-Based Capital (RBC) guidelines was $129.9 million
compared to the Authorized Control Level RBC of $13.0 million.
1994 Compared to 1993
Net underwriting income from the property and casualty subsidiaries
declined 37.3% to $10.8 million in 1994 and operating income declined 16.4% to
$20.2 million. However, premiums grew 13.3% in 1994. The majority of the growth
occurred in the last quarter of 1994 due to the amendment to the pooling
agreement. The increased pool allocation had the effect of increasing premiums
by $15.2 million in 1994. The losses and expenses associated with the increased
pool business were similarly increased.
The primary factor affecting the decline in both operating income and
underwriting income was the return of operating trends to a level which is in
line with the Company's long-term goals compared to years which significantly
exceeded expected operating goals. The overall loss ratio for 1994 was 64.9%,
slightly better than the goal of 65%. The 1994 loss ratio follows that in 1993
of 64.0% and 61.4% in 1992. Increased expenses also affected profitability in
1994. The increase is primarily the result of the Company's investment in
technology, systems and physical facilities, which should improve future
operations and permit more efficient growth.
In spite of these increases in loss and expense ratios, the Company
ended the year with a 5.0% underwriting margin, which
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
-----------------------------------------------------------
meets the goal for overall underwriting results. New business premium increased
9.0% in 1994. New policies written improved 1.2% and total policies in force
increased 3.5% on the strength of a lapse ratio of 3.79% in 1994, the lowest
level in the history of the Company.
Net underwriting income and operating income were also impacted by
major weather events in both 1994 and 1993. In March 1994, tornadoes, high winds
and hail resulted in significant claims to the Alfa Group. Similarly, in March
1993, a record snowstorm also resulted in significant amounts of claims
incurred.
Investment income in the property and casualty subsidiaries was relatively
flat in 1994. Cash flow was impacted by storm claims in both periods, while
lower yield rates put downward pressure on investment income. Yield rates
somewhat bottomed out in 1994.
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 years
ended December 31, 1995, 1994 and 1993:
Years Ended December 31,
-------------------------------
1995 1994 1993
-------------------------------
(in thousands)
Premiums and policy charges
Universal life
policy charges $ 8,789 $ 7,876 $ 6,354
Interest sensitive life
policy charges 7,991 7,705 7,361
Traditional life
insurance premiums 18,320 17,224 17,141
-------------------------------
Total $35,100 $32,805 $30,856
===============================
Operating income $13,205 $12,039 $14,520
===============================
1995 Compared to 1994
Life insurance operating income increased approximately 10% in 1995
primarily due to the growth in premiums and favorable mortality. Premiums and
policy charges increased 7.0% in 1995. The growth in Universal Life policy
charges was 11.6%, which is an increase of $2.4 million in statutory premium
making it the leading product in new sales for 1995. Also significant was the
Company's term product sales, up 14.3%, or $1.3 million in 1995. Total new
business premium increased 9.6%, total statutory premium in force increased 6.5%
and the persistency ratio, already high, improved to 93.2% from 92.0%. Mortality
was 86% of expected in 1995 which compares favorably to the 1994 mortality rate
of 96% of expected.
Investment income grew 7% in 1995. Positive cash flow increased
invested assets which increased investment income and offset the impact of
paying over $19.4 million in cash dividends to fund the holding company's
stockholder dividends in 1995. Overall life subsidiary investment yield rates
were flat.
At December 31, 1995 the life subsidiary's Adjusted Capital calculated
in accordance with NAIC Risk-Based Capital guidelines was $121.9 million
compared to the Authorized Control Level amount of $14.3 million. The Risk-Based
Capital analysis serves as the benchmark for the regulation of life insurance
enterprises' solvency by state insurance regulators.
1994 Compared to 1993
Life insurance operating income declined 17.1% in 1994 to $12.0
million. The most significant factor causing the decline was a 36% increase in
death claims in 1994, which follows a 14% decline in 1993. The absolute level of
claims in 1994 is within an acceptable range of 96% of expected mortality, which
compares unfavorably to 1993 when mortality was only 73% of expected.
The 6.3% increase in premiums and policy charges is a result of new
production and persistency. Alfa Life ended 1994 with an 11.4% increase in new
premium production and a 6.9% increase in policies in force. Universal Life was
the primary policy for sales of new business in 1994.
The impact of lower yields continued to put downward pressure on growth
in investment income. Lower yields on new positive cash flows and reinvested
maturities resulted in a 37 basis point decline in overall yield in the life
company in 1994. As a result, investment income grew only 0.8%.
NONINSURANCE OPERATIONS
1995 Compared to 1994
Noninsurance earnings increased 9.2% in 1995. The consumer finance
subsidiary, which experienced significant growth in its loan portfolio in 1994
and 1993, ended 1995 with an 8.6% decline in loans outstanding to $72.9 million.
The decline in the portfolio was due to payoffs of first mortgage equity lines.
Due to declines in the cost of funds, the interest margin improved 9.3% for the
year. This subsidiary was a primary beneficiary in 1995 when Alfa Corporation
began issuing Commercial Paper which is used to fund the loan portfolio. Alfa
Corporation received an A-1+ commercial paper rating from Standard & Poor's and
a P-1 rating from Moody's Investors Service. The commercial paper is guaranteed
by an affiliate, Alfa
16 Alfa Corporation 1995
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
-----------------------------------------------------------
Mutual Insurance Company. The construction subsidiary experienced a 19% decline
due to a decrease in its residential activity, offset partially by an increase
in commercial construction and related operating profit. Similarly, a drop in
residential real estate sales commission in the realty subsidiary was partially
offset by commercial commission increases. In addition, the noninsurance
subsidiaries experienced a decline in overall tax expense in 1995 due to the
decline in earnings and related taxes of the affiliated property casualty
subsidiaries, with which they file a consolidated tax return.
1994 Compared to 1993
Earnings from the Company's noninsurance subsidiaries increased 16.5%
in 1994. Over 75% of the earnings and over 85% of the growth was the result of a
63% increase in the consumer finance subsidiary's loan portfolio to $79.7
million at December 31, 1994.
The other noninsurance subsidiaries were also profitable during 1994
with the construction company's earnings up 19% to approximately $500,000.
CORPORATE
Interest expense on short term corporate debt is the primary corporate
expense for each year presented. Interest expense totaled $2.0 million in 1995,
$1.6 million in 1994, and $1.3 million in 1993. The change in interest expense
in 1995 is due to a 4.4% increase in the average corporate debt during 1995 and
an increase in the average interest rate from 5.13% to 6.15%. At December 31,
1995, corporate debt was $32.7 million at a rate of 5.64%. The remaining
corporate expenses represent general operating expenses which may fluctuate from
time to time. These expenses raised total corporate expense to $3.5 million in
1995, $3.2 million in 1994, and $2.5 million in 1993.
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 years ended December 31, 1995, 1994 and
1993:
Years Ended December 31,
--------------------------------
1995 1994 1993
--------------------------------
Increase (decrease) in
cash flow from operations (2.8%) 30.4% (20.5%)
Increase in invested assets 17.1% 9.8% 13.8%
Investment yield rate 7.7% 7.8% 8.0%
Increase in net investment
income 11.8% 1.5% 10.6%
The Company experienced a 2.8% decline in positive cash flow in 1995
due entirely to the effects of Hurricane Opal on October 4, 1995. At September
30, 1995, cash flow had increased 19.4%. Favorable operating results and the
increased pool participation positively impacted cash flow in the first three
quarters. However, in the fourth quarter, cash required to fund the payment of
claims from Opal more than offset the earlier growth. In spite of the effects of
Opal, the Company ended 1995 with a 17.1% increase in invested assets, or an
8.6% increase excluding the market value impact of SFAS 115, using amortized
cost in both periods. The yield rates, which were calculated using amortized
cost, remained fairly constant, actually dropping only four basis points. The
weighted average coupon for the overall portfolio of fixed maturities dropped
steadily during 1995 as rates, which had increased temporarily toward the end of
1994 and early in 1995, declined during the third and fourth quarters, and as
new cash flows and proceeds from sales or maturities were reinvested at lower
rates. The yield decline on fixed maturities was somewhat offset by higher
dividends, improved partnership income and other increased investment income in
1995 resulting in the relatively flat yield. As a result of the stable yield and
increased assets, investment income grew 11.8% in 1995.
There were several factors affecting cash flow, invested assets and
investment income in 1994. First, cash flow from operations increased 30.4% in
1994 due primarily to the impact of the amendment to the pooling agreement.
Second, cash flow was adversely impacted by claims from tornadoes and wind in
the first quarter of 1994. Finally, although interest rates somewhat bottomed
out in 1994 the Company's proceeds from maturities or sales of securities were
generally reinvested at lower yields. Consequently, the overall yield rate
declined to 7.8%.
Cash flow from operations declined in 1993 and was primarily affected
by the adverse impact of claims from a record snowstorm in March as well as by
the timing of this storm which adversely impacted the early cash flow buildup.
The Company had realized investment gains of approximately $1.1 million in 1995,
$572,000 in 1994 and $4.9 million in 1993. The gains are primarily from sales of
equity securities and from gains in the Company's covered call option writing
program.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
-----------------------------------------------------------
The composition of the Company's investment portfolio is as follows at
December 31, 1995 and 1994:
December 31,
--------------------
1995 1994
--------------------
Fixed maturities
Taxables
Mortgage backed (CMOs) 29.4% 26.3%
Corporate bonds 29.2 30.1
--------------------
Total taxable 58.5 56.4
Tax exempts 10.0 10.3
--------------------
Total fixed maturities 68.5 66.7
--------------------
Equity securities 10.6 9.9
Mortgage loans .1 .2
Real estate .2 .2
Policy loans 3.5 3.6
Other long term investments 13.2 16.0
Short term investments 3.9 3.4
--------------------
100.0% 100.0%
====================
The majority of the Company's investment portfolio consists of fixed
maturities which are diverse as to both industry and geographic concentration.
In 1995 and 1994, the Company continued to increase its investments in mortgage
backed securities. In addition, the decline in other long term investments was
due to a drop in the consumer loan portfolio of approximately 8.6%. The loan
portfolio had increased significantly in 1994.
The rating of the Company's portfolio of fixed maturities using the
Standard & Poor's rating categories is as follows at December 31, 1995 and 1994:
December 31,
--------------------
1995 1994
--------------------
AAA to A- 86.9% 86.7%
BBB+ to BBB- 12.2 12.1
BB+ and below
(below investment grade) .9 1.2
--------------------
100.0% 100.0%
====================
Less than one-half of one percent of the fixed maturity portfolio was
not rated by an outside rating service but was rated by Company management. The
Company considers bonds with a quality rating of BB+ and below to be below
investment grade or high yield bonds (also called junk bonds).
The following is information concerning the Company's portfolio of high
yield fixed maturity investments at December 31, 1995 and 1994:
December 31
----------------------------------------------
% of % of
Statutory Statutory
1995 Surplus 1994 Surplus
----------------------------------------------
High-yield fixed
maturities:
Amortized value $4,512,625 1.9% $ 5,768,973 2.5%
Carrying value (market) $4,411,352 1.9% $ 5,003,004 2.2%
Unrealized loss $ (101,293) - $ (765,969) (0.3%)
During 1995 and 1994 the Company had net losses on disposals of high
yield debt securities of $482,770 and $2.2 million, respectively. In addition,
the Company wrote down one equity investment in 1995 in the amount of $501,125
and one bond in 1994 totaling $803,590 whose declines in value were deemed to be
other than temporary. At December 31, 1995, there were no non-performing bonds
in the portfolio. At December 31, 1994, non-performing bonds included in the
above high yield fixed maturity investments total $154,000. All such bonds were
disposed of in 1995.
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:
December 31
----------------------------------------------
% of % of
Statutory Statutory
1995 Surplus 1994 Surplus
----------------------------------------------
Equity investments
held in issuers of
high-yield debt
securities:
Carrying value (market) $4,141,041 1.8% $8,758,871 3.9%
Cost $3,877,250 1.7% $8,580,962 3.8%
Unrealized gain $ 263,791 0.1% $ 177,909 0.1%
During 1995 the Company sold approximately $7.6 million in
fixed maturities available for sale. These sales resulted in gross realized
gains of $500,601 and gross realized losses of $566,637, or a combined net loss
of $66,036. During 1994 the Company sold approximately $114.7 million in fixed
maturities available for sale. These sales resulted in gross realized gains of
$2.0 million and gross realized losses of $8.9 million. These losses in 1994 are
due in part to the impact the rise in interest rates had on the bond market. In
the latter part of 1994, management made the decision to offset realized
18 Alfa Corporation 1995
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
-----------------------------------------------------------
investment gains with losses, which reduced taxes. During 1993 the Company sold
approximately $76.9 million in fixed maturities. These sales resulted in gross
realized gains of $5.3 million and gross realized losses of $5.5 million. Such
losses in 1993 are primarily the result of the Company's liquidation of all its
holdings in interest-only mortgage-backed securities in which prepayments had
exceeded assumptions.
At December 31, 1995, approximately 42.9% 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
December 31, 1995 the Company's total portfolio of fixed maturities had gross
unrealized gains of $37.0 million and gross unrealized losses of $3.5 million.
Securities are priced by nationally recognized pricing services or by
broker/dealers securities firms. Less than one half of one percent of 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 December 31,
1995, the delinquency ratio on the portfolio was 3.1%, or $2.1 million. Since
year end the ratio has declined to 2.3%. Loans charged off in 1995 totaled
$423,681 or .6%. At December 31, 1995, the Company maintained an allowance for
loan losses of $976,100 or approximately 1.4% of the outstanding loan balance.
The Company's investment 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 1995 is primarily the result of
the decline in income before provision for income taxes, which decreased over
35% due to the impact of Hurricane Opal. The effective tax rate also dropped in
1995 due to the decline in taxable earnings related to Opal which changed the
relative mix of taxable versus tax exempt income. The effective tax rate was
28.0% in 1995, 31.3% in 1994 and 32.2% in 1993.
The marginal corporate tax rate increased to 35% from 34% as a result
of the Omnibus Budget Reconciliation Act of 1993 (the Act) passed by Congress in
August 1993. However, during 1994 a decline in the relative mix of taxable
versus tax exempt income reduced the Company's effective tax rate. Under
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes", which the Company adopted in the first quarter of 1993, deferred tax
assets and liabilities are adjusted to reflect changes in statutory tax rates
such as that imposed under the Act. Resulting income adjustments are required in
the period such changes are enacted, which increased the effective tax rate in
1993.
IMPACT OF INFLATION
Inflation increases consumers' needs for both life and property and
casualty insurance coverage. Inflation increases claims incurred by property and
casualty insurers as property repairs, replacements and medical expenses
increase. Such cost increases reduce profit margins to the extent that rate
increases are not maintained on an adequate and timely basis. Since inflation
has remained relatively low in recent years, financial results have not been
significantly impacted by inflation.
LIQUIDITY AND CAPITAL RESOURCES
Alfa Corporation receives funds from its subsidiaries consisting of
dividends, payments for funding federal income taxes, and reimbursement of
expenses incurred at the corporate level for the subsidiaries. These funds are
used for paying dividends to stockholders, corporate interest and expenses,
federal income taxes, and for funding additional investments in its
subsidiaries' operations.
Alfa Corporation's subsidiaries require cash in order to fund policy
acquisition costs, claims, other policy benefits, interest expense, general
operating expenses, and dividends to Alfa Corporation. The major sources of the
Company's liquidity are operations and cash provided by maturing or liquidated
investments. A significant portion of the Company's investment portfolio
consists of readily marketable securities which can be sold for cash. Based on a
review of the Company's matching of asset and liability maturities and on the
interest sensitivity of the majority of policies in force, management believes
the ultimate exposure to loss from interest rate fluctuations is not
significant.
On October 25, 1993, the Company established a Stock Incentive Plan,
pursuant to which a maximum aggregate of 2,000,000 shares of common stock have
been reserved for grant to key personnel. The plan expires on October 24, 2003.
The Company granted 783,400 such options on October 25, 1993, 80,000 options on
March 28, 1994 and 80,000 options on March 27, 1995. The options ratably become
exercisable annually over three years, and may not be exercised after ten years
after the date of award. At December 31, 1995 no options had been exercised,
although 527,608 options were exercisable and 32,200 had been cancelled leaving
1,088,800 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
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
-----------------------------------------------------------
market or in negotiated transactions in such quantities and at such times and
prices as management may decide. At December 31, 1995, the Company had
repurchased 1,097,600 shares at a cost of $4,630,770.
Total notes payable decreased $18.4 million in 1995 to $95.2 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 December 31, 1995 the Company had
approximately $81.9 million in commercial paper at rates ranging from 5.71% to
5.84% with maturities ranging from January 25, 1996 to March 15, 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 $10.9 million in short-term debt
outstanding to affiliates with interest equal to commercial paper 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 $7.5
million in 1995 and $6.6 million in 1994. This level of surrenders is within the
Company's pricing expectations. Historical persistency rates indicate a normal
pattern of surrender activity. The structure of the surrender charges is such
that persistency is encouraged. The majority of the policies in force have
surrender charges 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 December 31, 1995 the total amount
of cash that would be required to fund all amounts subject to surrender was
approximately $208.4 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.
FUTURE FINANCIAL ACCOUNTING CHANGES
During 1995, the Financial Accounting Standards Board issued Financial
Accounting Statement No. 123, "Accounting for Stock-Based Compensation,"
("FAS123"). FAS123 encourages, but does not require, companies to account for
stock compensation awards based on their fair value at the date of grant, with
the resulting compensation cost reflected as expense in the statement of
operations. FAS123 requires companies that choose not to reflect the
compensation cost in the statement of operations to provide footnote disclosure
of the pro forma effect of stock compensation awards on net income and earnings
per share. FAS123 is effective for fiscal years beginning after December 15,
1995. The Company will adopt FAS123 in the first quarter of 1996, but has not
chosen whether it will reflect stock compensation costs in its statement of
earnings or provide pro forma disclosure of the impact of such costs. It is not
believed that the adoption of FAS123 will have a material impact on financial
position or results of operations.
20 Alfa Corporation 1995
<PAGE>
ALFA CORPORATION
CONSOLIDATED BALANCE SHEETS
-----------------------------------------------
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1995 1994
-----------------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities held for investment, at amortized cost
(market value $3,980,724 in 1995 and $4,855,786 in 1994) $ 3,711,475 $ 4,701,143
Fixed maturities available for sale, at market value
(amortized cost $539,217,454 in 1995 and $499,519,431 in 1994) 572,403,242 473,569,270
Equity securities, at market (cost $61,247,187 in 1995 and
$62,840,541 in 1994) 89,014,464 71,811,785
Mortgage loans on real estate 995,777 1,180,085
Investment real estate (net of accumulated depreciation
of $1,205,694 in 1995 and $1,034,764 in 1994) 1,829,363 1,425,765
Policy loans 29,084,753 25,561,728
Other long-term investments 111,073,137 115,061,499
Short-term investments 33,010,906 24,762,467
-----------------------------------
Total investments 841,123,117 718,073,742
Cash 1,326,285 11,750,197
Accrued investment income 9,340,980 9,070,828
Accounts receivable 13,771,367 7,063,086
Reinsurance balances receivable 4,546,506 3,445,239
Due from affiliates 1,406,729 1,800,310
Deferred policy acquisition costs 89,156,542 89,012,566
Deferred income taxes 2,913,291
Other assets 4,761,451 4,740,961
-----------------------------------
Total assets $965,432,977 $847,870,220
===================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Future policy benefits, losses and loss expenses $402,352,509 $350,503,581
Unearned premiums 85,306,194 79,426,172
Dividends to policyholders 8,863,633 8,553,904
Premium deposit and retirement deposit funds 7,861,070 9,191,782
Deferred income taxes 22,501,534
Other liabilities 28,612,754 31,446,801
Due to affiliates 6,135,599 179,650
Commercial Paper 81,949,616
Notes payable 2,323,362 93,128,142
Notes payable to affiliates 10,916,962 20,454,742
-----------------------------------
Total liabilities 656,823,233 592,884,774
-----------------------------------
Commitments and contingencies (Notes 1, 9 and 12)
Stockholders' equity:
Preferred stock, $1 par value, 1,000,000 shares authorized; none issued
Common stock, $1 par value,
shares authorized, 110,000,000
issued, 41,891,512
outstanding, 40,785,912 41,891,512 41,891,512
Capital in excess of par value 21,276,023 21,276,023
Net unrealized investment gains (losses), net of tax 35,620,863 (10,980,201)
Retained earnings 214,453,116 207,429,882
Treasury stock, at cost, 1,105,600 shares (4,631,770) (4,631,770)
-----------------------------------
Total stockholders' equity 308,609,744 254,985,446
-----------------------------------
Total liabilities and stockholders' equity $965,432,977 $847,870,220
===================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
ALFA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
-----------------------------------------
<TABLE>
<CAPTION>
For the years ended December 31,
-----------------------------------------------------
1995 1994 1993
-----------------------------------------------------
<S> <C> <C> <C>
Revenues:
Premiums and policy charges $308,088,969 $247,130,623 $219,913,229
Net investment income 50,923,107 45,553,661 44,901,949
Net realized investment gains 1,106,016 571,966 4,890,169
Other income 2,645,243 3,056,928 2,918,328
-----------------------------------------------------
Total revenues 362,763,335 296,313,178 272,623,675
-----------------------------------------------------
Benefits and expenses:
Benefits and settlement expenses 249,631,655 182,616,940 154,600,340
Dividends to policyholders 3,015,079 2,900,027 2,760,453
Amortization of deferred policy acquisition costs 47,361,743 37,746,222 31,187,395
Other operating expenses 31,762,154 25,218,195 20,760,912
-----------------------------------------------------
Total expenses 331,770,631 248,481,384 209,309,100
-----------------------------------------------------
Income before provision for income taxes and
cumulative effects of changes in accounting principles 30,992,704 47,831,794 63,314,575
Provision for income taxes 8,674,753 14,965,056 20,998,862
-----------------------------------------------------
Income before cumulative effects of changes in
accounting principles 22,317,951 32,866,738 42,315,713
Cumulative effects of changes in accounting principles:
Effect of adopting SFAS 106
(Net of tax of $237,715) (Note 1) (461,446)
Effect of adopting EITF Issue 93-6
(Net of tax of $1,600,040) (Note 1) 3,105,963
-----------------------------------------------------
Net income $ 22,317,951 $ 32,866,738 $ 44,960,230
=====================================================
Income per share before cumulative effects
of changes in accounting principles $.55 $.81 $1.04
Per share cumulative effects of changes in accounting principles:
Effect of adopting SFAS 106 (Note 1) (.01)
Effect of adopting EITF Issue 93-6 (Note 1) .07
-----------------------------------------------------
Net income per share $.55 $ .81 $1.10
=====================================================
Pro forma amounts assuming the EITF 93-6 consensus
is applied retroactively (Note 1):
Net income $ 41,854,267
=====================================================
Net income per share $1.03
=====================================================
Weighted average shares outstanding 40,785,912 40,785,912 40,785,912
=====================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
ALFA CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
<TABLE>
<CAPTION>
NET
UNREALIZED
CAPITAL IN INVESTMENT
COMMON EXCESS OF GAINS RETAINED TREASURY
STOCK PAR VALUE (LOSSES) EARNINGS STOCK TOTAL
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992* $41,891,512 $21,276,023 $ 11,050,060 $154,992,148 $ (4,631,770) $224,577,973
Change in net unrealized
investment gains/losses 2,867,421 2,867,421
Dividends to stockholders
($.28 per share)* (Note 10) (11,420,059) (11,420,059)
Net income 44,960,230 44,960,230
-------------------------------------------------------------------------------------
Balance, December 31, 1993 41,891,512 21,276,023 13,917,481 188,532,319 (4,631,770) 260,985,565
Change in net unrealized
investment gains/losses (24,897,682) (24,897,682)
Dividends to stockholders
($.3425 per share) (13,969,175) (13,969,175)
Net income 32,866,738 32,866,738
-------------------------------------------------------------------------------------
Balance, December 31, 1994 41,891,512 21,276,023 (10,980,201) 207,429,882 (4,631,770) 254,985,446
Change in net unrealized
investment gains/losses 46,601,064 46,601,064
Dividends to stockholders
($.375 per share) (15,294,717) (15,294,717)
Net income 22,317,951 22,317,951
-------------------------------------------------------------------------------------
Balance, December 31, 1995 $41,891,512 $21,276,023 $35,620,863 $214,453,116 $(4,631,770) $308,609,744
=====================================================================================
</TABLE>
* After giving retroactive effect for a two-for-one stock split effected in the
form of a 100% stock dividend which was paid on June 1, 1993.
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
ALFA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------------------------
1995 1994 1993
--------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 22,317,951 $ 32,866,738 $ 44,960,230
Adjustments to reconcile net income to net cash
provided by operating activities:
Policy acquisition costs deferred (54,231,803) (44,427,854) (37,655,043)
Amortization of deferred policy acquisition costs 47,361,743 37,746,222 31,187,395
Depreciation and amortization 4,781,522 4,011,402 1,124,462
Provision for deferred taxes 471,030 (9,083,866) 1,055,021
Interest on policyholders' funds 10,715,806 9,484,217 8,379,981
Net realized investment gains (1,106,016) (571,966) (4,890,169)
Other 1,127,332 545,644 1,042,624
Changes in operating assets and liabilities:
Increase in accrued investment income (270,152) (716,825) (737,119)
Decrease (increase) in accounts receivable (6,656,298) 4,272,274 (2,864,143)
Increase in reinsurance balances receivable (1,101,267) (1,957,774) (4,696,653)
Decrease (increase) in amounts due from affiliates 393,581 (1,242,775) (370,548)
Increase (decrease) in amounts due to affiliates 5,955,949 (1,997,216) 1,317,307
Increase in other assets (20,490) (630,304) (1,232,835)
Increase in liability for policy reserves 25,492,677 15,781,187 7,288,704
Increase in liability for unearned premiums 5,880,022 3,361,282 2,905,434
Increase (decrease) in amounts held for others (1,020,983) (84,771) 339,908
Increase (decrease) in other liabilities (2,834,047) 11,546,865 (1,997,144)
--------------------------------------------------------------
Net cash provided by operating activities 57,256,557 58,902,480 45,157,412
--------------------------------------------------------------
Cash flows from investing activities:
Maturities and redemptions of fixed maturities held for investment 1,014,623 5,494,458 109,308,504
Maturities and redemptions of fixed maturities available for sale 32,053,653 48,709,692
Maturities and redemptions of other investments 85,578,545 63,434,944 53,909,221
Sales of fixed maturities held for investment 76,930,760
Sales of fixed maturities available for sale 12,972,473 114,656,045
Sales of other investments 19,752,645 42,618,304 65,724,691
Purchase of fixed maturities held for investment (249,882,615)
Purchase of fixed maturities available for sale (74,324,150) (243,495,912)
Purchase of other investments (117,676,379) (149,583,434) (142,403,653)
Net (increase) decrease in short-term investments (2,759,648) 26,538,805 12,025,157
Net (increase) decrease in receivable/payable on securities (5,540,774) (5,536,364) 8,377,631
--------------------------------------------------------------
Net cash used in investing activities (48,929,012) (97,163,462) (66,010,304)
--------------------------------------------------------------
Cash flows from financing activities:
Increase in commercial paper 81,949,616
Increase (decrease) in notes payable (90,804,780) 42,417,139 10,306,002
Increase (decrease) in notes payable to affiliates (9,537,780) 233,589 12,651,439
Stockholder dividends paid (15,294,718) (13,969,175) (11,420,057)
Deposits of policyholders' funds 38,106,084 36,460,374 32,845,614
Withdrawal of policyholders' funds (23,169,879) (21,877,303) (19,237,934)
--------------------------------------------------------------
Net cash (used in) provided by financing activities (18,751,457) 43,264,624 25,145,064
--------------------------------------------------------------
Net (decrease) increase in cash (10,423,912) 5,003,642 4,292,172
Cash at beginning of year 11,750,197 6,746,555 2,454,383
--------------------------------------------------------------
Cash at end of year $ 1,326,285 $ 11,750,197 $ 6,746,555
==============================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 6,254,471 $ 4,524,267 $ 2,215,539
Income taxes $ 20,376,776 $ 19,583,700 $ 23,577,531
</TABLE>
Supplemental disclosures of non-cash investing and financing activities: In
connection with the Company's increased participation in the pooling agreement a
non-cash transaction occurred on October 1, 1994 which increased unearned
premiums $19.0 million, increased investments $15.2 million and increased
deferred acquisition costs $3.8 million. (Note 2).
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements are prepared on the
basis of generally accepted accounting principles. Such principles differ from
statutory reporting practices prescribed or permitted by the National
Association of Insurance Commissioners (NAIC) and state regulatory authorities.
The accompanying consolidated financial statements include, after
intercompany eliminations, Alfa Corporation and its wholly-owned subsidiaries,
Alfa Life Insurance Corporation (Life), Alfa Insurance Corporation, Alfa General
Insurance Corporation, Alfa Financial Corporation (Financial), Alfa Investment
Corporation, Alfa Builders, Inc. (Builders), Alfa Realty, Inc. (Realty) and Alfa
Agency Mississippi, Inc. The Company's primary market area is Alabama, Georgia
and Mississippi.
Nature of Operations
Alfa Corporation operates predominantly in the insurance industry. Its
insurance subsidiaries write life insurance in Alabama, Georgia and Mississippi
and property and casualty insurance in Georgia and Mississippi. The Company's
noninsurance subsidiaries are engaged in consumer financing, leasing, real
estate investments, residential and commercial construction, and real estate
sales. As more fully discussed in Note 2, its property and casualty insurance
business is pooled with that of the Alfa Mutual Insurance Companies which write
property and casualty business in Alabama. The Company's business is
concentrated geographically in Alabama, Georgia and Mississippi. Approximately
$289 million of premiums and policy charges representing 94% of such amounts in
1995 were from policies written in Alabama. Accordingly, unusually severe storms
or other disasters in this state 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 in this one state 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.
Revenues, Benefits, Claims and Expenses
Traditional Life Insurance Products: Traditional life insurance
products include those products with fixed and guaranteed premiums and benefits
and consist principally of whole life insurance policies, term life insurance
policies, and certain annuities with life contingencies. Premiums are recognized
over the premium-paying period of the policy. The liability for future policy
benefits is computed using a net level method including assumptions as to
investment yields, mortality, withdrawals, and other assumptions based on the
Company's experience modified as necessary to reflect anticipated trends and to
include provisions for possible unfavorable deviations. Policy benefit claims
are charged to expense in the period that the claims are incurred.
Universal Life Products: Universal life products include universal life
insurance and other interest-sensitive life insurance policies. Universal life
revenues, which are considered operating cash flows, consist of policy charges
for the cost of insurance, policy administration, and surrender charges that
have been assessed against policy account balances during the period. Benefit
reserves for universal life represent policy account balances before applicable
surrender charges. Benefit claims incurred in the period in excess of related
policy account balances and interest credited to policy account balances are
charged to expense.
Property and Casualty Products: Property and casualty premiums are
earned ratably over the term of the policies. The liability for unearned
premiums represents the portion of premiums written which is applicable to the
unexpired term of the policies.
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.
Policy Acquisition Costs
Commissions and other costs of acquiring insurance that vary with and
are primarily related to the production of new and renewal business have been
deferred. Traditional life insurance acquisition costs are being amortized over
the premium-payment period of the related policies using assumptions consistent
with those used in computing policy benefit reserves. Acquisition costs for
universal life type policies are being amortized over the lives of the policies
in relation to the present value of estimated gross profits which are determined
based upon surrender charges and investment, mortality, and expense margins.
Acquisition costs for property and casualty insurance are amortized over the
period in which the related premiums are earned.
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Investments
In the first quarter of 1994, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." SFAS No. 115 requires that such
securities be segmented as securities held to maturity, securities available for
sale and securities held for trading purposes.
Securities held to maturity include investments which the Company has
both the ability and positive intent to hold until maturity; such securities are
reported at amortized cost. Securities available for sale include investments
which the Company may elect to sell prior to maturity and are reported at their
current market value. The unrealized gains or losses on these securities, net of
taxes, are recorded as a component of stockholders' equity. Furthermore,
deferred acquisition costs are adjusted to reflect the effect that would have
been recognized had the unrealized holding gains and losses been realized. This
adjustment to deferred acquisition costs results in a corresponding adjustment
to stockholders' equity. The effect of SFAS No. 115 at December 31, 1995 was an
increase in fixed maturities of $33.2 million, a decrease in deferred
acquisition costs of $6.7 million, an increase in deferred taxes payable of $9.3
million and an increase in stockholders' equity of $17.2 million.
Equity securities (common and non-redeemable preferred stocks) are
carried at market value, real estate is carried at cost less accumulated
depreciation and mortgage loans, policy loans and installment loans are carried
at unpaid principal balances. Declines in market values of fixed maturities and
equity securities deemed to be other than temporary are recognized in the
determination of net income. Realized gains and losses on sales of investments
are recognized in net income using the specific identification method.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the assets.
The Company has a covered call option writing program. Call premiums
received from options written are carried at market value as a liability with
net unrealized gains or losses reflected in stockholders' equity. Realized gains
and losses on options written are recognized in net income upon settlement of
the option contract. While the covered call option program involves elements of
off-balance-sheet risk, the Company had only $63,375 in options outstanding at
December 31, 1995.
Realized investment gains and losses are reported on a pre-tax basis as
a component of revenues. Income taxes applicable to net realized investment
gains and losses are included in the provision for income tax.
Income Taxes
In the first quarter of 1993, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes,"
which changed the Company's method of accounting for income taxes from the
deferred method required under Accounting Principles Board Opinion No. 11 to the
liability method. The principal difference between the two methods is that,
under the liability method, deferred tax assets and liabilites are adjusted to
reflect changes in statutory tax rates resulting in income adjustments in the
period such changes are enacted.
Postretirement Benefits
In the first quarter of 1993, the Company adopted SFAS 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." As a result of the
Management and Operating Agreement and the Pooling Agreement with the affiliated
Alfa Mutual Group of insurance companies, the Company shares the expense of
providing certain health care and life insurance benefits to eligible retired
employees. At January 1, 1993, the Company changed its method of accounting for
its share of the costs of postretirement benefits to an accrual method, and
elected to recognize an accumulated transition obligation of $699,161. This
amount, net of $237,715 tax, was accounted for as a cumulative effect of a
change in accounting principle and shown as a reduction to income. The Company's
net periodic cost for 1995 and 1994 was approximately $257,000 and $223,000,
respectively. The Company's obligation is not materially affected by a 1% change
in the health care cost trend assumption used in the calculation of the
obligation.
Reinsurance
In the second quarter of 1993, the Company adopted the provisions of
the consensus opinion of the Financial Accounting Standards Board Emerging
Issues Task Force (EITF) Issue No. 93-6, "Accounting for Multiple-Year
Retrospectively-Rated Contracts by Ceding and Assuming Enterprises" (Issue
93-6). In Issue 93-6, the Task Force reached a consensus that a liability should
be recognized by the ceding enterprise to the extent that the ceding enterprise
has an obligation to pay cash or other consideration to a reinsurer that would
not have been required absent experience under the contract. The amount to be
recognized is the lower of the termination liability that would result if the
contract were canceled or the incremental amount payable based on loss
experience. Similarly, an asset should be recognized by the ceding enterprise to
the extent that the ceding enterprise would be entitled to cash or other
consideration from the reinsurer based on experience to date under the contract.
26
<PAGE>
ALFA CORPORATION
---------------------------
Based on the Company's evaluation of Issue 93-6, a change was required
from the previously applied accounting to comply with the Task Force consensus.
The consensus permits a cumulative catch-up adjustment method to be utilized for
the accounting change. In accordance with Issue 93-6, the $3,105,963 cumulative
effect of the change on prior years (after reduction for income taxes of
$1,600,040) is included in income for 1993. The pro forma amounts included on
the face of the income statement reflect the retroactive application of the
accounting change and the related income tax effects of its application. The
effect of the change for 1993 was to decrease income before cumulative effect of
a change in accounting principle by $2,220,560 ($.05 per share) and to increase
net income $885,413 ($.02 per share).
Amounts recoverable from property and casualty reinsurers are estimated
in a manner consistent with the claim liability associated with the reinsured
policy. Amounts paid for reinsurance contracts are expensed over the contract
period during which insured events are covered by the reinsurance contracts.
Use of Estimates in the Preparation of the Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The estimates and assumptions are particularly important in
determining the reserves for future policy benefits, losses and loss expenses
and deferred policy aquisition costs. Actual results could differ from those
estimates.
Net Income Per Share
Net income per share is computed using the weighted average number of
shares outstanding during the year.
Cash
Cash consists of demand deposits at banks. Short-term investments with
maturities of three months or less are considered to be investments and are not
considered to be cash or cash equivalents for the purposes of the statements of
cash flows.
Other
Certain reclassifications have been made to 1994 and 1993 amounts in
order to conform to 1995 classifications and descriptions.
2. POOLING AGREEMENT
Effective August 1, 1987, the Company entered into a property and
casualty insurance Pooling Agreement (the "Pooling Agreement") with Alfa Mutual
Insurance Company (Mutual), Alfa Mutual Fire Insurance Company (Fire) and Alfa
Mutual General Insurance Company (General), (collectively, the "Mutual Group").
Mutual, Fire and General are direct writers primarily of personal lines of
property and casualty insurance in Alabama. Mutual writes preferred risk
automobile, homeowner, farmowner and mobile home insurance. Fire writes fire and
allied lines insurance. General writes standard risk automobile and homeowner
insurance. Mutual also writes a limited amount of commercial insurance,
including church, and businessowner insurance. Under the terms of the Pooling
Agreement, the Company cedes to Mutual all of its property and casualty business
net of reinsurance ceded to others. All of the Mutual Group's direct property
and casualty business (together with the property and casualty business ceded by
the Company) is included in the pool. Until September 30, 1994, Mutual
retroceded 50% of the pooled premiums, losses, loss adjustment expenses and
other underwriting expenses to the Company and an aggregate of 18% to Fire and
General, while retaining 32% of these amounts itself. On October 1, 1994, the
Company increased its participation in the Pooling Agreement. Effective that
date Mutual retrocedes 65% of the pool to the Company and an aggregate of 11% to
Fire and General while retaining 24 % itself. In connection with the increased
participation, the Company assumed both an additional liability of $19.0 million
for the increase in unearned premium reserves and $15.2 million in fixed
maturities to fund the additional liability from the Mutual Group. The $3.8
million difference in the unearned premium reserves and the invested assets
assumed represents the commission the Mutual Group was paid to reimburse it for
estimated expenses previously incurred related to the unearned premiums. The
Company's participation in the Pooling Agreement may be changed or terminated
without the consent or approval of the Company's shareholders, and the Pooling
Agreement may be terminated by any party thereto upon 90 days notice.
As a result of the Pooling Agreement, the Company had a payable of
$6,135,599 to the Mutual Group and a receivable of $709,170 from the Mutual
Group at December 31, 1995 and December 31, 1994, respectively, for cash
transactions originating in December and settled the following month.
Approximately 85% of the Company's property and casualty premium income and 79%
of its total premium income is derived from the Company's participation in the
Pooling Agreement.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
3. RELATED PARTY TRANSACTIONS
Mutual owns 39.72% and Fire owns 11.07% of the Company's common stock.
The Board of Directors of the Company consists of twelve members, seven of whom
serve as Directors of Mutual, Fire and General and two of whom are executive
officers of the Company. Two of the Company's directors and most of the
Company's executive officers, including the Company's President and its Chief
Financial Officer, also hold the same positions with Mutual, Fire and General.
The Company paid stockholder dividends to Mutual and Fire totaling $7,768,809 in
1995, $7,095,512 in 1994 and $5,800,710 in 1993.
The Mutual Group and the Company's insurance subsidiaries are
considered an insurance company holding system with Mutual being the controlling
party under the Alabama Insurance Holding Company Systems Regulatory Act and
their activities and transactions are subject to reporting, examination and
regulation thereunder.
Under a Management and Operating Agreement, Mutual provides
substantially all facilities, management and other operational services to the
Company and its subsidiaries and to other companies associated with Mutual. Most
of the personnel providing management services to the Company are full-time
employees of, and are directly compensated by Mutual. The Company's business is
substantially integrated with that of Mutual, Fire and General. Mutual
periodically conducts time usage and other special expense allocation studies.
Mutual charges the Company for both its allocated and direct salaries, employee
benefits and other expenses, including those for the use of office facilities.
The amounts paid by the Company to Mutual under the Management and Operating
Agreement were approximately $26.0 million in 1995, $25.3 million in 1994 and
$22.8 million in 1993. In Alabama, the Company's life insurance agents are
career employees of Mutual. The Company reimburses Mutual for the full amount of
all its agents' commissions paid by Mutual for the sale of the Company's
insurance products.
Mutual's employees are covered by a group life insurance plan provided
by Life. Group life insurance premiums paid to Life totaled $1,606,169 in 1995,
$2,104,223 in 1994 and $735,293 in 1993. Policy reserves and insurance in force
on this plan at December 31, 1995 were approximately $704,000 and $314 million,
respectively.
The Company's consumer finance and leasing subsidiary (Financial)
leases equipment, automobiles, furniture and other property to the Mutual Group.
The Mutual Group paid $2,141,934 in 1995, $2,015,787 in 1994 and $1,607,781 in
1993 under these leases. The Mutual Group invests in automobile and other
installment loans issued and serviced by Financial. The amount invested by the
Mutual Group in such loans was $916,962 and $10,454,742 at December 31, 1995 and
1994, respectively. Interest paid by Financial to the Mutual Group was $566,380
in 1995, $474,683 in 1994 and $350,761 in 1993. The Mutual Group's sponsoring
organization, the Alabama Farmers' Federation (Federation), and Alfa Services,
Inc., a Federation subsidiary, invests in short-term lines of credit with the
Company and Financial. At December 31, 1995 and 1994, the balance outstanding on
these lines of credit included in notes payable to affiliates was $10,000,000 .
Interest paid by the Company and Financial to the Federation and its subsidiary
was $618,132 in 1995, $468,621 in 1994 and $248,512 in 1993.
The Company's real estate construction subsidiary (Builders) contracts
with the Mutual Group for the construction of certain commercial facilities. The
Mutual Group paid $9,214,674 in 1995, $4,615,162 in 1994 and $3,709,119 in 1993
to Builders under such contracts. The Company's commercial real estate sales
subsidiary (Realty) receives commissions for sales and leasing of certain of the
Mutual Group's commercial facilities. The Mutual Group paid $224,760 in 1995,
$152,150 in 1994, and $221,814 in 1993 for such sales services.
The Company periodically has investment transactions with the Mutual
Group. No such transactions occurred in 1995. In 1994, the Company sold
securities totaling $1,174,553 to the Mutual Group at market value, which was a
loss of $659,980. In 1993, the Company sold securities totaling approximately
$7.9 million to the Mutual Group at market value, which was a loss of
approximately $4.2 million. The Company has also entered into an investment
partnership with the Mutual Group. The amount invested in the partnership was
$6.7 million and $6.4 million at December 31, 1995 and 1994, respectively. The
Company had committed to fund up to $6.7 million additional investment in the
partnership at December 31, 1995.
28
<PAGE>
ALFA CORPORATION
----------------
4. INVESTMENTS
Net investment income is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-----------------------------------------------
<S> <C> <C> <C>
Fixed maturities:
Held for investment $ 424,437 $ 538,428 $37,214,861
Available for sale 41,300,467 37,125,999
-----------------------------------------------
Total fixed maturities 41,724,904 37,664,427 37,214,861
Equity securities 2,856,503 2,451,891 2,955,894
Mortgage loans on real estate 95,414 113,638 148,231
Investment real estate 320,044 299,610 300,744
Policy loans 2,102,457 1,824,634 1,617,322
Other long-term investments 15,998,978 12,078,507 7,663,126
Short-term investments 1,537,560 893,870 837,637
-----------------------------------------------
Total investment income 64,635,860 55,326,577 50,737,815
Investment expenses, including interest expense 13,712,753 9,772,916 5,835,866
-----------------------------------------------
Net investment income $50,923,107 $45,553,661 $44,901,949
===============================================
</TABLE>
Net realized investment gains (losses) are summarized as follows:
1995 1994 1993
------------------------------------------
Fixed maturities:
Held for investment $ 6,227 $ 271,717 $ 474,813
Available for sale 126,916 (7,964,208)
------------------------------------------
Total fixed maturities 133,143 (7,692,491) 474,813
Equity securities 429,310 7,415,236 3,170,510
Other investments 543,563 849,221 1,244,846
------------------------------------------
Net realized investment gains $ 1,106,016 $ 571,966 $ 4,890,169
==========================================
Changes in net unrealized investment gains and losses on fixed maturities and
equity securities are as follows:
Increase (Decrease)
------------------------------------------
1995 1994 1993
------------------------------------------
Fixed maturities:
Held for investment $ 114,606 $(24,935,799) $5,260,485
==========================================
Available for sale, net of tax $34,066,412 $(16,867,605)
==========================================
Equity securities, net of tax $12,534,652 $ (8,030,077) $2,867,421
==========================================
Unrealized investment gains and losses are based on market values which
were determined using nationally recognized pricing services, broker/dealers
securities firms and market makers. Less than one half of 1% were marked to
market using internally developed methods.
At December 31, 1995, gross unrealized gains for equity securities
amounted to $29,768,220 while gross unrealized losses amounted to $2,029,562 and
applicable deferred income taxes aggregated $9,316,602.
The Company's fixed maturity portfolio is predominantly comprised of
investment grade securities. At December 31, 1995, approximately $5.0 million in
fixed maturities (0.9% of the total fixed maturity portfolio) are considered
below investment grade. The Company considers bonds with a quality rating of BB+
and below, based on Standard & Poor's rating scale, to be below investment
grade.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Note 4. continued)
The amortized cost and estimated market value of investments in fixed maturity
securities are as follows:
<TABLE>
<CAPTION>
December 31, 1995
----------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held for investment:
Mortgage-backed securities $ 3,711,475 $ 269,249 $ $ 3,980,724
======================================================================
Available for sale:
U.S. Treasury securities & obligations of U.S.
Government corporations and agencies $ 63,606,264 $ 6,133,032 $ $ 69,739,296
Obligations of states & political subdivisions 89,129,790 5,847,781 (137,163) 94,480,408
Corporate securities 146,590,359 14,312,121 (659,093) 160,243,387
Mortgage-backed securities 235,186,411 10,691,072 (2,716,494) 243,160,989
Other debt securities 4,704,630 111,726 (37,194) 4,779,162
----------------------------------------------------------------------
Totals $539,217,454 $36,735,732 $(3,549,944) $572,403,242
======================================================================
</TABLE>
The amortized cost and estimated market value of investments in fixed maturity
securities are as follows:
<TABLE>
<CAPTION>
December 31, 1994
----------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held for investment:
Mortgage-backed securities $ 4,701,143 $ 155,199 $ (1,268) $ 4,855,786
======================================================================
Available for sale:
U.S. Treasury securities & obligations of U.S.
Government corporations and agencies $ 55,597,529 $ 383,558 $ (3,946,367) $ 52,034,720
Obligations of states & political subdivisions 85,636,396 1,848,400 (3,133,348) 84,351,448
Corporate securities 152,615,683 3,083,428 (5,643,465) 150,055,646
Mortgage-backed securities 202,365,193 528,137 (18,622,114) 184,271,216
Other debt securities 3,304,630 (448,390) 2,856,240
----------------------------------------------------------------------
Totals $499,519,431 $ 5,843,523 $(31,793,684) $473,569,270
======================================================================
</TABLE>
The amortized cost and estimated market value of fixed maturities
available for sale at December 31, 1995, by contractual maturity, are shown
below. Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
December 31, 1995
-------------------------------
ESTIMATED
AMORTIZED MARKET
Available for sale: COST VALUE
-------------------------------
Due in one year or less $ 5,356,578 $ 5,416,747
Due after one year through five years 56,920,500 61,075,418
Due after five years through ten years 116,455,933 125,789,507
Due after ten years 125,298,032 136,951,581
-------------------------------
304,031,043 329,242,253
Mortgage-backed securities 235,186,411 243,160,989
-------------------------------
$539,217,454 $572,403,242
===============================
30
<PAGE>
ALFA CORPORATION
----------------
Proceeds from sales of fixed maturities available for sale were
$7,625,006 in 1995 and $114,656,045 in 1994. Gross gains of $500,601 in 1995 and
$2,031,792 in 1994 and gross losses of $566,637 in 1995 and $8,859,861 in 1994
were realized on those sales. The losses in 1994 were primarily the result of
sales late in the fourth quarter due to management's decision to offset
previously taken gains with losses in the portfolio which reduced taxes and
should improve future cash flows. In addition, the Company recorded a loss of
approximately $501,000 in 1995 and $804,000 in 1994 for securities whose
evaluation was deemed to be an other than temporary decline. At December 31,
1994 the Company's mortgage backed securities were comprised of CMO's and
passthrough securities. Because of the Company's significant investment in fixed
maturities, the valuation of its portfolio is subject to significant adjustments
due to changes in interest rates. However, due to the Company's history of
positive cash flow, and the ability to hold such investments to maturity and
management's periodic assessment and monitoring of the portfolio, the ultimate
exposure to loss from interest rate fluctuations is not considered significant.
As of December 31, 1995 and 1994, the Company's mortgage loan portfolio
totaled approximately $1.0 million and $1.2 million respectively, and the
collateral loan portfolio, included in "Other long-term investments," totaled
$68.1 million and $73.9 million respectively. These portfolios consisted of
loans to individuals in the Company's primary market area of Alabama, Georgia
and Mississippi. Management evaluates the creditworthiness of customers on a
case-by-case basis and obtains collateral as deemed necessary based on this
evaluation.
The Company has estimated the market value of the collateral loan
portfolio to be approximately $73.0 million and $77.9 million at December 31,
1995 and 1994, respectively. The estimated market value was determined by
discounting the estimated future cash flows from the loan portfolio at 8.0% for
1995 and 9.0% for 1994, the current interest rates offered for similar loans,
and after allowing for estimated loan losses. The Company had no impaired loans
subject to individual valuation at or during the year ended December 31, 1995.
The Company's policy loans earn interest at rates ranging from 5.0% to
8.0% at December 31, 1995. Because the policy loans have no stated maturity and
are often repaid by reductions to benefits and surrenders, it is not practicable
to determine the fair value of the policy loan portfolio.
At December 31, 1995, the Company had $444,031 in investments on
deposit with regulatory agencies in order to meet statutory requirements.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
Information about specific valuation techniques and related fair value
detail is provided in Note 1 - Summary of Significant Accounting Policies, Note
4 - Investments and Note 8- Notes Payable and Commercial Paper. Pursuant to SFAS
119, the cost and fair value of the financial instruments as of December 31 are
summarized as follows:
<TABLE>
<CAPTION>
December 31
--------------------------------------------------------------------
1995 1994
--------------------------------------------------------------------
Cost Fair Value Cost Fair Value
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investments:
Fixed maturities held for investment $ 3,711,475 $ 3,980,724 $ 4,701,143 $ 4,855,786
Fixed maturities available for sale $539,217,454 $572,403,242 $499,519,431 $473,569,270
Equity securities $ 61,247,187 $ 89,014,464 $ 62,840,541 $ 71,811,785
Short-term investments $ 33,010,906 $ 33,010,906 $ 24,762,467 $ 24,762,467
Other long-term investments $111,073,137 $116,447,626 $115,061,499 $119,109,133
Liabilities:
Commercial paper $ 81,949,616 $ 81,949,616
Notes payable $ 13,240,324 $ 13,240,324 $113,582,884 $113,582,884
</TABLE>
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
6. FUTURE POLICY BENEFITS, LOSSES AND LOSS EXPENSES
The composition of the liability for future policy benefits, losses and
loss adjustment expenses and the more significant assumptions used in its
calculation are as follows:
<TABLE>
<CAPTION>
BASIS OF ASSUMPTION
------------------------------------------------------
INSURANCE 12/31/95 YEARS INTEREST MORTALITY WITH-
IN FORCE LIABILITY OF ISSUE RATE AND MORBIDITY DRAWALS
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Ordinary life $3,685,348,339 $100,079,665 1955 to 1978 5% 1955-60 Basic Select Company
and Ultimate Mortality experience
Tables
1979 and 1980 7% graded to Modified 1965-70 Basic Company
5% Select and Ultimate experience
Mortality Tables
1981 - 1993 9% graded to Modified 1965-70 Basic Company
7% Select and Ultimate experience
Mortality Tables
1994 - 1995 6% Modified 1965-70 Basic Company
Select and Ultimate experience
Mortality Tables
Interest sensitive life 1,686,244,217 118,175,945 1984 - 1995 6.85% to Modified 1965-70 Basic Company
7.0%* Select and Ultimate experience
Mortality Tables
Universal life 2,942,105,733 60,529,011 1987 - 1995 6.25% to Modified 1965-70 Basic Company
7.0%* Select and Ultimate experience
Mortality Tables
Annuities 11,636,422 1974 - 1995 5.25% to 6.5%*
Group credit life 14,382,395 516,303
Group life 314,826,160 703,751 4.5% 1960 CSG
-------------------------------
$8,642,906,844 $291,641,097
==============
Accident and health 342,697 5% 1972 intercompany 200% N&W III
reports
Losses and loss
adjustment expenses 110,368,715
------------
$402,352,509
============
</TABLE>
*Rates are adjustable annually on policyholders' anniversary dates.
Participating policies represent approximately 4% of the ordinary life
insurance in force and 8% of life insurance premium income. The amount of
dividends paid to policyholders is fixed by the Board of Directors and allocated
to participating policyholders.
32
<PAGE>
ALFA CORPORATION
----------------
(Note 6. continued)
In 1994, the Company adopted SOP 94-5, "Disclosures of Certain Matters
in the Financial Statements of Insurance Enterprises." The adoption of SOP 94-5
had no effect on results of operations or financial condition.
Activity in the liability for unpaid losses and loss adjustment
expenses, prepared in accordance with generally accepted accounting principles,
is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------------------------------------------------------------------------------------------
Property and Property and Property and
Casualty Life Casualty Life Casualty Life
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, $ 88,486,091 $ 1,221,676 $ 77,984,288 $ 1,477,679 $ 74,774,493 $ 1,389,460
Less Reinsurance recoverables
on unpaid losses (1,331,358) (168,665) (1,770,656) (522,156) (172,532) (236,127)
---------------------------------------------------------------------------------------------
Net balance at January 1, 87,154,733 1,053,011 76,213,632 955,523 74,601,961 1,153,333
---------------------------------------------------------------------------------------------
Incurred related to:
Current year 222,060,992 9,627,020 161,643,885 8,069,065 137,255,048 6,595,281
Prior years (1,698,077) (187,383) (6,403,800) 209,893 (5,939,400) (81,152)
---------------------------------------------------------------------------------------------
Total incurred 220,362,915 9,439,637 155,240,085 8,278,958 131,315,648 6,514,129
---------------------------------------------------------------------------------------------
Paid related to:
Current year 161,526,000 8,757,344 111,427,984 7,380,951 96,026,977 5,677,962
Prior years 39,981,443 386,860 32,871,000 800,519 33,677,000 1,033,977
---------------------------------------------------------------------------------------------
Total paid 201,507,443 9,144,204 144,298,984 8,181,470 129,703,977 6,711,939
---------------------------------------------------------------------------------------------
Net balance at December 31, 106,010,205 1,348,444 87,154,733 1,053,011 76,213,632 955,523
Plus reinsurance recoverables
on unpaid losses 2,293,048 717,018 1,331,358 168,665 1,770,656 522,156
---------------------------------------------------------------------------------------------
Balance at December 31, $ 108,303,253 $ 2,065,462 $ 88,486,091 $ 1,221,676 $ 77,984,288 $ 1,477,679
=============================================================================================
</TABLE>
The liability for estimated unpaid losses and loss adjustment expenses
is based on a detailed evaluation of reported losses and of estimates of
incurred but not reported losses. Adjustments to the liability based on
subsequent developments are included in current operations. Because the Company
is primarily an insurer of private passenger motor vehicles and of single family
homes, it has limited exposure for environmental, product and general liability
claims. The Company does not believe that any such claims will have a material
impact on the Company's liquidity, results of operations, cash flows or
financial condition.
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
7. INCOME TAXES
Below is a comparative analysis of the provisions (benefits) for income taxes:
<TABLE>
<CAPTION>
1995 1994 1993
------------------------------------------------------
<S> <C> <C> <C>
Current $ 8,203,723 $ 24,048,922 $ 21,543,882
Deferred 471,030 (9,083,866) (1,074,243)
Adjustment relating to increase in enacted tax rates 529,223
------------------------------------------------------
Total $ 8,674,753 $ 14,965,056 $ 20,998,862
======================================================
</TABLE>
Reconciliations of the differences between income taxes computed at Federal
statutory tax rates and provisions for income taxes are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------------------------------------------------
<S> <C> <C> <C>
Income taxes computed at Federal statutory tax rate $ 10,847,446 $ 16,741,128 $ 22,160,101
Dividends received deduction and tax exempt interest (2,376,925) (2,135,354) (2,102,074)
Adjustment relating to increase in enacted tax rates 529,223
Other, net 204,232 359,282 411,612
------------------------------------------------------
$ 8,674,753 $ 14,965,056 $ 20,998,862
======================================================
</TABLE>
Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
1995 1994
----------------------------------
<S> <C> <C>
Deferred Tax Assets:
Reserve computational method differences $ 20,439,467 $ 19,327,317
Unrealized losses 5,957,376
Unearned premium reserve 5,971,434 5,559,832
Other 3,343,305 1,874,499
----------------------------------
Total deferred tax asset $ 29,754,206 $ 32,719,024
----------------------------------
Deferred Tax Liabilities:
Unrealized gains $ 20,748,907
Deferred acquisition costs 30,206,740 $ 28,059,631
Other 1,300,093 1,746,102
----------------------------------
Total deferred tax liability $ 52,255,740 $ 29,805,733
----------------------------------
Net deferred tax asset (liability) $(22,501,534) $ 2,913,291
==================================
</TABLE>
The Company did not establish a valuation allowance related to the
deferred tax assets due to the existence of sufficient taxable income related to
future reversals of existing taxable temporary differences.
34
<PAGE>
ALFA CORPORATION
----------------
8. NOTES PAYABLE AND COMMERCIAL PAPER
Short term debt at December 31, 1995 was $95.2 million. Prior to 1995,
short term debt consisted of 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 December
31, 1995 the Company had approximately $81.9 million in commercial paper at
rates ranging from 5.71% to 5.84% with maturities ranging from January 25, 1996
to March 15, 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. The commercial paper is guaranteed by Alfa Mutual
Insurance Company, an affiliate. In addition, the Company had $10.9 million in
short-term debt outstanding to affiliates with interest equal to commercial
paper rates payable monthly and $2.3 million outstanding in other short-term
debt at a rate of 3.6%.
9. CONTINGENT LIABILITIES
The property and casualty subsidiaries participate in a reinsurance
pooling agreement with Mutual 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 December 31, 1995. 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
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.
10. STOCKHOLDERS' EQUITY
On April 22, 1993, the Company's stockholders voted to increase the
number of authorized shares of common stock from 30,000,000 shares to
110,000,000 shares. The Company's Board of Directors also approved a two-for-one
stock split to be effected in the form of a 100% stock dividend of common stock.
The record date for the stock split was May 14, 1993, bringing the total number
of outstanding shares to 40,785,912.
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
December 31, 1995, the Company had repurchased 1,097,600 shares at a cost of
$4,630,770 under this program, which decreased the total number of shares
outstanding to 40,785,912 shares.
The amounts of statutory stockholders' equity and net income for the
Company's life and property casualty insurance subsidiaries are as follows:
1995 1994 1993
-----------------------------------------
Statutory net income:
Life insurance subsidiary $ 6,287,576 $ 27,145,478 $ 12,040,753
=========================================
Property and casualty subsidiaries $ 7,040,081 $ 18,387,643 $ 25,542,146
=========================================
Statutory stockholders' equity:
Life insurance subsidiary $105,665,754 $110,988,988 $ 96,159,889
=========================================
Property and casualty subsidiaries $129,870,498 $115,393,261 $110,850,328
=========================================
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Note 10 continued)
Alfa Corporation is a holding company with no operations and,
accordingly, any cash available for dividends or other distributions must be
obtained by it from borrowings or in the form of distributions from its
operating subsidiaries. Distributions to the Company from its insurance
subsidiaries are subject to regulatory restrictions. Under applicable regulatory
requirements the Company's insurance subsidiaries can distribute to the Company
an aggregate of approximately $31.6 million without prior regulatory approval in
1995 based on December 31, 1995 financial condition and results of operations.
At December 31, 1995 the life subsidiary's Adjusted Capital calculated
in accordance with NAIC Risk-Based Capital guidelines was $121.9 million
compared to the Authorized Control Level amount of $14.3 million and the
property and casualty subsidiaries' Adjusted Capital was $129.9 million compared
to the authorized control level amount of $13.0 million.The Risk-Based Capital
analysis serves as the benchmark for the regulation of insurance enterprises'
solvency by state insurance regulators.
11. OPERATING LEASES
The Company leases certain property and equipment to Mutual and its
affiliates (Note 3) and to third parties under operating leases. Total rental
income for the years ended December 31, 1995, 1994 and 1993 was approximately
$2,983,000, $2,674,000 and $2,102,000, respectively. The cost and net book value
of major classes of leased property at December 31, 1995 was:
NET BOOK
COST VALUE
-------------------------------
Transportation equipment $ 8,877,591 $ 7,248,898
Furniture and equipment 20,072,363 10,065,933
Buildings 2,973,041 1,767,347
-------------------------------
Total $31,922,996 $19,082,178
===============================
At December 31, 1995, the aggregate minimum rental payments to be
received under leases having initial or remaining lease terms in excess of one
year are approximately $2,572,000 in 1996, $1,954,000 in 1997, $ 1,161,000 in
1998, $333,000 in 1999 and $28,000 in 2000.
12. REINSURANCE
Life reinsures portions of its risks with other insurers. While the
amount retained on an individual life will vary depending upon age and mortality
prospects of the risk, Life generally will not retain more than $200,000
individual life insurance on a single risk. Life has reinsured approximately
$891,952,000 of its life insurance in force with other insurance companies and
has taken reserve credits for approximately $2,770,000 on account of such
reinsurance at December 31, 1995. Amounts paid or deemed to have been paid for
Life's reinsurance contracts are recorded as reinsurance receivables.The cost of
reinsurance related to long-duration contracts is accounted for over the life of
the underlying reinsured policies using assumptions consistent with those used
to account for the underlying policies.
The Company's property and casualty insurance subsidiaries together
with Mutual and its affiliates, participate in catastrophe and other reinsurance
ceded arrangements to protect them from abnormal losses. The Company's
subsidiaries and Mutual and its affiliates are also required to participate in
certain assigned risk pools and associations by the states in which they
operate.
36
<PAGE>
ALFA CORPORATION
----------------
The following table summarizes the effects of reinsurance on premiums
and losses for the three years ended December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1995 1994 1993
---------------------------------------------------------
<S> <C> <C> <C>
Direct premiums earned $ 79,865,167 $ 72,302,430 $ 65,689,793
Premiums ceded to nonaffiliates (13,099,076) (8,210,130) (4,918,657)
Premiums ceded to pooling agreement (41,901,158) (36,810,521) (32,211,376)
Premiums assumed from pooling agreement 283,180,565 219,806,947 191,211,864
Premiums assumed from nonaffiliates 43,471 41,897 141,605
---------------------------------------------------------
Net premiums earned $ 308,088,969 $ 247,130,623 $ 219,913,229
=========================================================
Direct losses $ 60,434,336 $ 48,061,296 $ 43,556,773
Losses ceded to nonaffiliates (39,356,037) (1,520,101) (955,249)
Losses ceded to pooling agreement (32,594,000) (25,945,188) (23,127,320)
Losses assumed from pooling agreement 241,712,916 143,518,957 121,609,002
Losses assumed from nonaffiliates 43,330 77,318 99,405
---------------------------------------------------------
Net losses $ 230,240,545 $ 164,192,282 $ 141,182,611
=========================================================
</TABLE>
Reinsurance contracts do not relieve the Company from its obligations
to policyholders. Failure of reinsurers to honor their obligations could result
in losses to the Company; therefore allowances are established if amounts are
determined to be uncollectible. The Company evaluates the financial condition of
its reinsurers and monitors concentration of credit risk arising from similar
geographic regions, activities, or economic characteristics of the reinsurance
to minimize exposure to significant losses from reinsurer insolvencies. At
December 31, 1995, the Company does not believe there to be a significant
concentration of credit risk related to its reinsurance program. There are
numerous participants in the Company's reinsurance program with the largest
position of any one reinsurer being 26%.
13. SEGMENT INFORMATION
Alfa Corporation operations include life insurance, property and
casualty insurance and noninsurance segments. Presented below is summarized
financial information for the Company's three business segments as of and for
the years ended December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
-------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Revenues: Life $ 63,517 $ 59,078 $ 59,816
Property and casualty 294,363 232,033 208,136
Noninsurance operations and corporate 4,883 5,202 4,671
-------------------------------------------------
$362,763 $296,313 $272,624
=================================================
Net Income: Life $ 13,723 $ 12,216 $ 16,480
Property and casualty 8,428 20,376 28,420
Noninsurance operations and corporate 167 275 60
-------------------------------------------------
$ 22,318 $ 32,867 $ 44,960
=================================================
Assets: Life $490,926 $433,343 $419,245
Property and casualty 379,347 302,906 286,658
Noninsurance operations and corporate 95,160 111,621 62,467
-------------------------------------------------
$965,433 $847,870 $768,370
=================================================
</TABLE>
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
14. STOCK OPTIONS
On October 25, 1993 the Company's Board of Directors adopted the Stock
Incentive Plan (the "Plan"). Under the Plan an aggregate of 2,000,000 shares of
common stock have been reserved for awards of nonqualified and incentive stock
options to eligible key officers and employees. The Plan expires on October 24,
2003.
The Company awarded 783,400 stock options in 1993, 80,000 stock options
in 1994 and 80,000 stock options in 1995. The options ratably become exercisable
annually over three years, and may not be exercised after ten years from the
date of award. Of the 1993 options awarded 565,400 were exercisable at $11.75
per share and 218,000 were exercisable at $9.40 per share. The 80,000 options
awarded in 1994 and the 80,000 options awarded in 1995 are exercisable at $11.50
per share.
A summary of all stock option activity during the years ended December 31, 1995,
1994 and 1993 follows:
December 31,
------------------------------------------
1995 1994 1993
------------------------------------------
Outstanding
Beginning of year 845,732 783,400 0
Add (deduct):
Granted 80,000 80,000 783,400
Exercised 0 0 0
Cancelled (14,532) (17,668) 0
------------------------------------------
End of year 911,200 845,732 783,400
==========================================
Exercisable, end of year 527,608 256,485 0
==========================================
Available for grant or award,
end of year 1,088,800 1,154,268 1,216,600
==========================================
38
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Stockholders and Board of Directors
Alfa Corporation
Montgomery, Alabama
We have audited the accompanying consolidated balance sheet of Alfa
Corporation and subsidiaries (the Company) as of December 31, 1995, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. The
consolidated financial statements of the Company as of December 31, 1994 and for
the years ended December 31, 1994 and 1993, were audited by other auditors whose
report dated February 2, 1995, expressed an unqualified opinion on those
statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1995 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Alfa
Corporation and its subsidiaries as of December 31, 1995, and the results of
their operations and their cash flows for the year ended December 31, 1995, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Birmingham, Alabama
January 31, 1996
39
<PAGE>
QUARTERLY FINANCIAL INFORMATION -- UNAUDITED
--------------------------------------------
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------------------------------------------------------------
March 31 June 30 September 30 December 31
----------------------------------------------------------------------------------------------------------------
1995 1994 1995 1994 1995 1994 1995 1994
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Premiums and
Policy Charges $76,783,144 $57,620,339 $78,357,521 $57,676,839 $78,511,269 $58,052,659 $ 76,437,035 $73,780,786
Net Investment
Income $12,138,844 $10,792,302 $12,425,039 $11,269,387 $13,373,023 $11,034,021 $ 12,986,201 $11,188,242
Net Income (Loss) $ 9,414,068 $ 6,158,903 $ 7,838,166 $12,603,627 $10,446,797 $ 8,840,168 $ (5,481,080) $ 5,264,040
Average Shares
Outstanding 40,785,912 40,785,912 40,785,912 40,785,912 40,785,912 40,785,912 40,785,912 40,785,912
Net Income (Loss)
per share* $ 0.23 $ 0.15 $ 0.19 $ 0.31 $ 0.26 $ 0.22 $ (0.13) $ 0.13
</TABLE>
* The sum of the quarters may not equal the annual earnings per share due to
the rounding effects on a quarterly basis.
40
<PAGE>
STOCKHOLDER INFORMATION
- --------------------------------------------------------------------------------
Executive Offices
2108 East South Boulevard
Montgomery, Alabama 36116-2015
Telephone: (334) 288-3900 FAX: (334) 288-0905
Form 10-K
The Company's Form 10-K, as filed with the Securities and Exchange Commission,
may be obtained by writing:
Kenneth D. Wallis, II, Secretary
Alfa Corporation
P.O. Box 11000
Montgomery, Alabama 36191-0001
Common Stock
The common stock of Alfa Corporation is traded on the
NASDAQ National Market System under the symbol ALFA. Alfa Corporation has
approximately 3,200 stockholders of record. Newspaper listings of NASDAQ stocks
list Alfa Corporation as AlfaCp.
Stock Transfer Agent
AmSouth Bank of Alabama
Corporate Securities Services
P.O. Box 11426
Birmingham Alabama 35202 (205) 326-4062
Stock Price and Dividend Information
- -------------------------------------------------------
Dividends
1995 High Low Per Share
- -------------------------------------------------------
First Quarter $12 $10 $.09
Second Quarter 12 1/4 11 .095
Third Quarter 12 5/8 10 1/4 .095
Fourth Quarter 18 1/4 9 3/4 .095
1994
- -------------------------------------------------------
First Quarter $12 1/4 $10 3/4 $.0725
Second Quarter 12 1/4 10 3/4 .09
Third Quarter 12 1/4 10 1/2 .09
Fourth Quarter 12 1/2 10 .09
The Company has paid cash dividends annually since 1974 and quarterly since
September 1977. There are no restrictions on the Company's present or future
ability to pay dividends other than the usual statutory restrictions. There is a
present expectation that the dividends will continue to be paid in the future,
provided that operations of the Company continue to be profitable.
Dividend Reinvestment Plan
Alfa Corporation stockholders can reinvest their dividends in additional shares
of stock and also may purchase additional shares with optional cash payments.
Alfa Corporation pays all costs and brokerage fees related to the purchases
under the plan. For more information contact Investor Relations at the above
address or call AmSouth Bank of Alabama at (205) 326-4062.
Debt Ratings
Standard Moody's
& Poor's Investors Service
---------------------------------
Alfa Corporation--
Commercial Paper A-1+ P-1
Independent Accountants
KPMG Peat Marwick LLP
Financial Center
Suite 1200
Birmingham, Alabama 35203
For Financial Information Please Contact:
Donald Price
Senior Vice President, Finance
Additional Information Please Contact:
John D. Holley
Vice President and Controller
NASDAQ Market Makers
Goldman, Sachs & Co.
Herzog, Heine, Geduld, Inc.
J.C. Bradford & Co.
Mayer & Schweitzer, Inc.
The Robinson-Humphrey Company, Inc.
Sterne, Agee & Leach, Inc.
Troster Singer Corp.
Annual Meeting
The Annual Meeting of Alfa Corporation stockholders will be held at 10:00 a.m.,
Thursday, April 18, 1996, in the auditorium of the Company's executive offices
in Montgomery.
This specially designed Alfa Insurance Companies corporate logo
is in celebration of the Alfa Group's 50th Anniversary.
[LOGO] Throughout 1996, the logo will be used in conjunction with
special activities commemorating this milestone.
<PAGE>
[LOGO]
ALFA CORPORATION
2108 E. South Blvd. / Montgomery, Alabama / 36116-2105
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Alfa Corporation
We consent to incorporation by reference in the registration statements (No. 33-
77916 and 33-76460) on Form S-8 and (No. 33-83134) on Form S-3 of Alfa
Corporation of our report dated January 31, 1996, relating to the consolidated
balance sheet of Alfa Corporation and subsidiaries as of December 31, 1995, and
the related consolidated statements of income, stockholders' equity and cash
flows for the year then ended, and all related schedules, which report appears
in the December 31, 1995, annual report on Form 10-K of Alfa Corporation.
KPMG Peat Marwick LLP
Birmingham, Alabama
March 20, 1996
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTS
We consent to the incorporation by reference in the registration statements of
Alfa Corporation on Forms S-8 (File No. 33-77916 and File No. 33-76460) and Form
S-3 (File No. 33-83134) of our report dated February 2, 1995, which includes an
explanatory paragraph with respect to a change in the Company's method of
accounting for certain investments in debt and equity securities in 1994 to
comply with a new Financial Accounting Standards Board pronouncement, and
changes in the Company's methods of accounting for income taxes, postretirement
benefits other than pensions, and for certain reinsurance contracts to comply
with Financial Accounting Standards Board pronouncements in 1993, on our audits
of the consolidated financial statements and financial statement schedules of
Alfa Corporation as of December 31, 1994 and for the years ended December 31,
1994 and 1993 which report is included in this Annual Report on Form 10-K.
Coopers & Lybrand L.L.P.
Birmingham, Alabama
March 18, 1996
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