<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1996 Commission File Number 0-11773
ALFA CORPORATION
----------------
(Exact name of registrant as specified in its charter)
Delaware 063-0838024
- -------------------------------------------------------------------------------
(State of Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
2108 East South Boulevard, Montgomery, Alabama 36116
(Mail: P.O. Box 11000, Montgomery, Alabama 36191-0001)
- ------------------------------------------------------
(Address and Zip Code of Principal Executive Offices)
Registrant's Telephone Number
Including Area Code (334) 288-3900
--------------
None
- -----------------------------------
Former name, former address and former fiscal year if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- ------
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the close of the period covered by this report.
Class Outstanding March 31, 1996
- ----------------------------- --------------------------
Common Stock, $1.00 par value 40,786,712 shares
<PAGE>
ALFA CORPORATION
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information Page No.
(Condensed Consolidated Unaudited) -------
<S> <C> <C>
Item 1. Financial Statements
Balance Sheets -- March 31, 1996 and
December 31, 1995 3
Statements of Income, Three Months
ended March 31, 1996 and 1995 4
Statements of Cash Flows, Three Months
ended March 31, 1996 and 1995 5
Notes to Financial Statements 6
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Part II. Other Information 16
Item 6.
Exhibits and Reports on Form 8-K 16
</TABLE>
2
<PAGE>
ALFA CORPORATION
CONSOLIDATED CONDENSED
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
----------------------------------
1996 1995
----------------------------------
<S> <C> <C>
Assets
Investments
Fixed Maturities Held for Investment, at amortized cost
(market value $3,683,059 in 1996 and $3,980,724 in 1995) $3,445,247 $3,711,475
Fixed Maturities Available for Sale, at market value
(amortized cost $555,622,416 in 1996 and $539,217,454 in 1995) 569,929,822 572,403,242
Equity Securities, at market (cost $68,410,518 in 1996 and
$61,247,187 in 1995) 99,365,055 89,014,464
Mortgage Loans on Real Estate 941,527 995,777
Investment Real Estate (net of accumulated
depreciation of $1,243,449 in 1996 and $1,205,694 in 1995) 1,807,659 1,829,363
Policy Loans 30,002,112 29,084,753
Other Long-term Investments 103,904,063 111,073,137
Short-term investments 22,296,419 33,010,906
- ---------------------------------------------------------------------------------------------------
Total investments 831,691,904 841,123,117
Cash 2,046,788 1,326,285
Accrued Investment Income 9,574,464 9,340,980
Accounts Receivable 6,613,770 13,771,367
Reinsurance Balances Receivable 4,778,052 4,546,506
Due from Affiliates 1,297,150 1,406,729
Deferred Policy Acquisition Costs 95,669,866 89,156,542
Other Assets 4,008,588 4,761,451
- --------------------------------------------------------------------------------------------------
Total Assets $955,680,582 $965,432,977
==================================================================================================
Liabilities
Policy Liabilities and Accruals $416,905,244 $402,352,509
Unearned Premiums 88,337,372 85,306,194
Dividends to Policyholders 8,879,419 8,863,633
Premium Deposit and Retirement Deposit Funds 7,345,893 7,861,070
Deferred Income Taxes 18,899,647 22,501,534
Other Liabilities 31,125,818 28,612,754
Due to Affiliates 1,972,126 6,135,599
Commercial Paper 65,382,881 81,949,616
Notes Payable 2,268,455 2,323,362
Notes Payable to Affiliates 17,351,756 10,916,962
- --------------------------------------------------------------------------------------------------
Total Liabilities 658,468,611 656,823,233
- --------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 3)
Stockholders' Equity
Preferred Stock, $1 par value
Shares authorized: 1,000,000
Issued: None
Common Stock, $1 par value
Shares authorized: 110,000,000
Issued: 41,891,512
Outstanding: 1996 - 40,786,712; 1995 - 40,785,912 41,891,512 41,891,512
Capital in Excess of Par Value 21,281,323 21,276,023
Net Unrealized Investment Gains (Losses)
(Less applicable deferred income taxes) 28,066,920 35,620,863
Retained Earnings 210,599,886 214,453,116
Treasury Stock: at cost (1996 - 1,104,800; 1995 -
1,105,600 shares) (4,627,670) (4,631,770)
- --------------------------------------------------------------------------------------------------
Total Stockholders' Equity 297,211,971 308,609,744
- --------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $955,680,582 $965,432,977
==================================================================================================
</TABLE>
The accompanying notes are an integral part of these condensed unaudited
financial statements.
3
<PAGE>
ALFA CORPORATION
CONSOLIDATED CONDENSED UNAUDITED
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
1996 1995
------------------------------
<S> <C> <C>
Revenues
Premiums and Policy Charges $82,960,219 $76,783,144
Net Investment Income 13,467,463 12,138,844
Realized Investment Gains 51,738 265,277
Other Income 455,157 623,940
- ------------------------------------------------------------------------------
Total Revenues 96,934,577 89,811,205
- ------------------------------------------------------------------------------
Benefits and Expenses
Benefits & Settlement Expenses 77,083,771 55,655,814
Dividends to Policyholders 857,725 833,526
Amortization of Deferred Policy
Acquisition Costs 11,858,495 11,441,786
Other Operating Expenses 7,845,158 8,086,776
- ------------------------------------------------------------------------------
Total Expenses 97,645,149 76,017,902
- ------------------------------------------------------------------------------
Income (Loss) Before Provision for Income Taxes (710,572) 13,793,303
Provision for Income Taxes (652,956) 4,379,237
- ------------------------------------------------------------------------------
Net Income (Loss) ($57,616) $9,414,066
==============================================================================
Net Income (Loss) Per Share ($0.001) $0.23
==============================================================================
Operating Income (Loss) ($91,246) $9,241,636
Operating Income (Loss) Per Share ($0.002) $0.23
==============================================================================
Dividends Per Share $0.095 $0.09
==============================================================================
Average Shares Outstanding 40,786,105 40,785,912
==============================================================================
</TABLE>
The accompanying notes are an integral part of these condensed unaudited
financial statements.
4
<PAGE>
ALFA CORPORATION
CONSOLIDATED CONDENSED UNAUDITED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1996 1995
--------------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income (Loss) ($57,616) $9,414,066
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by Operating Activities:
Policy Acquisition Costs Deferred (14,621,652) (13,600,351)
Amortization of Deferred Policy Acquisition Costs 11,858,495 11,441,786
Depreciation and Amortization 1,203,613 1,269,456
Provision for Deferred Taxes 37,452 757,664
Interest on Policyholders' Funds 2,909,469 2,501,980
Net Realized Investment Gains (51,738) (265,277)
Other 233,677 160,928
Changes in Operating Assets and Liabilities:
Increase in Accrued Investment Income (233,484) (105,584)
Decrease in Accounts Receivable 7,105,614 346,835
(Increase) Decrease in Reinsurance Balances Receivable (231,546) 1,942,194
Decrease (Increase) in Amounts Due From Affiliates 109,579 (4,764,378)
Decrease in Amounts Due to Affiliates (4,163,473) (179,650)
Decrease in Other Assets 752,863 55,077
Increase in Liability for Policy Reserves 8,084,877 7,737,891
Increase in Liability for Unearned Premiums 3,031,178 3,058,222
Decrease in Amounts Held for Others (499,391) (468,104)
Increase (Decrease) in Other Liabilities 1,613,496 (2,702,402)
------------ -----------
Net Cash Provided by Operating Activities 17,081,413 16,600,353
------------ -----------
Cash Flows From Investing Activities:
Maturities and Redemptions of Fixed Maturities Held for
Investment 275,416 194,608
Maturities and Redemptions of Fixed Maturities Available
for Sale 11,185,308 4,562,633
Maturities and Redemptions of Other Investments 26,682,569 21,726,325
Sales of Fixed Maturities Available for Sale 6,811,067 2,841,471
Sales of Other Investments 3,563,868 5,154,909
Purchase of Fixed Maturities Available for Sale (35,655,840) (26,426,029)
Purchase of Other Investments (30,666,948) (31,183,485)
Net Decrease in Short-term Investments 5,351,689 427,389
Net (Increase) Decrease in Receivable/Payable on Securities 6,492,504 (1,411,323)
------------ -----------
Net Cash Used in Investing Activities (5,960,367) (24,113,502)
------------ -----------
Cash Flows From Financing Activities:
(Decrease) Increase in Commercial Paper (16,566,735) 86,539,313
Decrease in Notes Payable (54,907) (90,487,562)
Increase in Notes Payable to Affiliates 6,434,794 411,340
Stockholder Dividends Paid (3,874,662) (3,670,732)
Proceeds from Exercise of Stock Options 9,400
Deposits of Policyholders' Funds 10,209,055 9,965,243
Withdrawal of Policyholders' Funds (6,557,487) (5,684,981)
------------ -----------
Net Cash Used in Financing Activities (10,400,542) (2,927,379)
------------ -----------
Net Increase (Decrease) in Cash 720,503 (10,440,528)
Cash -- Beginning of Period 1,326,285 11,750,197
------------ -----------
Cash -- End of Period $2,046,788 $1,309,669
============ ===========
Supplemental Disclosures of Cash Flow Information
Cash Paid as of March 31 for:
Interest $1,618,713 $1,729,078
Income Taxes $0 $6,582,776
</TABLE>
The accompanying notes are an integral part of these condensed unaudited
financial statements.
5
<PAGE>
ALFA CORPORATION
NOTES TO CONSOLIDATED CONDENSED UNAUDITED FINANCIAL STATEMENTS
March 31, 1996
1. Significant Accounting Policies
-------------------------------
In the opinion of the Company, the accompanying consolidated condensed
unaudited financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly its financial position,
results of operations and cash flows. The accompanying financial statements
have been prepared on the basis of generally accepted accounting principles. A
summary of the more significant accounting policies related to the Company's
business is set forth in the notes to its audited consolidated financial
statements for the fiscal year ended December 31, 1995. The results of
operations for the three month periods ended March 31, 1996 and 1995 are not
necessarily indicative of the results to be expected for the full year. For
purposes of this report, the Company has defined operating income as income
excluding net realized investment gains. Certain reclassifications have been
made to conform previous classifications to March 31, 1996 classifications and
descriptions.
2. Pooling Agreement
-----------------
Effective August 1, 1987, the Company entered into a property and casualty
insurance Pooling Agreement (the "Pooling Agreement") with Alfa Mutual Insurance
Company (Mutual), Alfa Mutual Fire Insurance Company (Fire) and Alfa Mutual
General Insurance Company (General) (collectively, the "Mutual Group"). Mutual,
Fire and General are direct writers primarily of personal lines of property and
casualty insurance in Alabama. Mutual writes preferred risk automobile,
homeowner, farmowner and mobile home insurance. Fire writes fire and allied
lines insurance. General writes standard risk automobile and homeowner
insurance. Mutual also writes a limited amount of commercial insurance,
including church, and businessowner insurance. Under the terms of the Pooling
Agreement, the Company cedes to Mutual all of its property and casualty business
net of reinsurance ceded to others. All of the Mutual Group's direct property
and casualty business net of reinsurance (together with the property and
casualty business ceded by the Company) is included in the pool. Currently,
Mutual retrocedes 65% of the pool to the Company and an aggregate of 11% to
Fire and General while retaining 24% itself. The Company's participation in the
Pooling Agreement may be changed or terminated without the consent or approval
of the Company's shareholders, and the Pooling Agreement may be terminated by
any party thereto upon 90 days notice.
3. Contingent Liabilities
-----------------------
The property and casualty subsidiaries have entered into a reinsurance
pooling agreement with Alfa Mutual Insurance Company and its affiliates. Should
any member of the affiliated group be unable to meet its obligation on a claim
for a policy written by the Company's property and casualty subsidiaries, the
obligation to pay the claim would remain with the Company's subsidiaries.
The liability for estimated unpaid property and casualty losses and loss
adjustment expenses is based upon an evaluation of reported losses and on
estimates of incurred but not reported losses. Adjustments to the liability
based upon subsequent developments are included in current operations.
Various legal proceedings arising in the normal course of business with
policyholders and agents are in process at March 31, 1996. 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
6
<PAGE>
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.
4. Accounting for Stock-Based Compensation
---------------------------------------
During 1995, the Financial Accounting Standards Board issued Financial
Accounting Statement No. 123, "Accounting for Stock-Based Compensation, ("FAS
123"). The Statement defines a fair value based method of accounting for an
employee stock option. It also allows an entity to choose to continue the
intrinsic value based accounting method prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Alfa Corporation has chosen to
continue using Opinion 25 to account for its stock options. However, FAS 123
requires entities electing to remain with the accounting in Opinion 25 to
provide pro forma disclosures of net income and earnings per share as if the
fair value based method of accounting had been applied as well as other
disclosures about the Company's stock-based employee compensation plans.
FAS 123 and its related disclosures have been adopted by the Company in the
first quarter of 1996. Information about the Company's stock option plan and
the related required disclosures follow.
On October 25, 1993, the Company established a Stock Incentive Plan,
pursuant to which a maximum aggregate of 2,000,000 shares of common stock have
been reserved for grant to key personnel. The plan expires on October 24, 2003.
The Company granted 783,400 such options on October 25, 1993, 80,000 options on
March 28, 1994, 80,000 options on March 27, 1995 and 80,000 options on April 18,
1996. The options ratably become exercisable annually over three years, and may
not be exercised after ten years after the date of the award. At March 31, 1996,
there had been 800 options exercised, 577,069 options were exercisable and
36,800 had been cancelled leaving 1,093,400 options available for grant under
the plan.
FAS 123 requires certain disclosures and pro forma information for each
reporting period, which is presented below. To determine the fair value of the
options granted during the first quarter of 1995 and 1996, the Company has used
the Black-Scholes model for valuations. The significant assumptions used to
estimate the fair value of such options using this method were (1) a risk-free
interest rate of 7.05%, (2) an expected life or term of 10 years, (3) an
expected volatility of .6165, and (4) an expected future dividend yield of 2.9%.
Using this method, the fair value of the options at the date of grant are as
follows:
<TABLE>
<CAPTION>
Options Granted
March 27, 1995
--------------
<S> <C>
Fair value at date of grant $507,138
========
Option price $ 11.50
========
</TABLE>
Using the fair value shown above, the proforma net income and earnings per
share as if FAS 123 had been applied is as follows:
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------
March 31, 1996 March 31, 1995
--------------- --------------
<S> <C> <C>
Net income (loss), as reported $(57,616) $9,414,066
======== ==========
Earnings per share, as reported $ (.001) $ 0.23
======== ==========
Proforma net income $(85,086) $9,412,561
======== ==========
Proforma earnings per share $ (.002) $ 0.23
======== ==========
</TABLE>
The information shown below is for options outstanding at March 31, 1996 and
1995:
<TABLE>
<CAPTION>
March 31, 1996 March 31, 1995
--------------------- ---------------------
Weighted- Weighted-
average average
Number Exercise Number Exercise
of Options Price of Options Price
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Outstanding
Beginning of year 911,200 $ 11.144 845,732 $ 11.121
Add (deduct):
Granted 0 80,000 $ 11.500
Exercised (800) $(11.750) 0
Cancelled (4,600) $(11.750) (2,732) $(11.750)
------- -------- ------- --------
End of Period 905,800 $ 11.140 923,000 $ 11.152
======= ======== ======= ========
Exercisable, end of period 577,069 $ 11.124 281,214 $ 11.119
======= ======== ======= ========
Range of exercise prices $9.40 to $11.75 $9.40 to $11.75
=============== ===============
Weighted average remaining
contractual life 7.741 years 8.740 years
=========== ===========
Actual compensation cost
recognized during period $65.937 $ 63,330
======= ========
</TABLE>
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
- ---------------------
The following table sets forth consolidated summarized income statement
information for the three months ended March 31, 1996 and 1995:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------------
1996 1995 % Change
------------ ------------ ----------
(in thousands)
<S> <C> <C> <C>
Premiums and policy charges $ 82,960 $ 76,783 8%
=========== =========== =====
Net investment income $ 13,467 $ 12,139 11%
=========== =========== =====
Total revenues $ 96,935 $ 89,811 8%
=========== =========== =====
Net Income (Loss)
Insurance operations $ (407) $ 9,280 (104%)
Noninsurance operations 602 803 (25%)
Net realized investment gains 34 172 (80%)
Corporate expenses (286) (841) 66%
----------- ----------- -----
Net income (loss) $ (57) $ 9,414 (101%)
=========== =========== =====
Net income (loss) per share $0.001 $0.23 (101%)
=========== =========== =====
Weighted average shares outstanding 40,786,105 40,785,912
=========== ===========
</TABLE>
Total premiums and policy charges increased 8% in the first quarter of
1996. The combined pooled property casualty written premium increased
approximately 8% over the first quarter of 1995 due to an increase in new
business written, rate increases and a low lapse ratio of 3.9%. Total life
insurance premiums and policy charges increased 6% in the first quarter. New
life business increased 3.6%. Net investment income increased 11% over the
first quarter of 1995 due to an 8.2% increase in invested assets since March 31,
1995 resulting from positive cash flows.
The net loss in the first quarter of 1996 is due primarily to catastrophic
storm activity for the second consecutive quarter. Following the adversity from
Hurricane Opal in the fourth quarter of 1995, which resulted in the first
quarterly loss in the Company's history, the Company sustained the second ever
quarterly loss in the first quarter of 1996 due to snow and ice in February and
tornados in March. In addition, net income from life insurance operations,
although positive, declined 2% for the quarter compared to the first three
months of 1995 and noninsurance operations declined 25%, primarily in the
consumer finance subsidiary and the construction company. Corporate expense,
primarily interest expense, declined due to lower interest rates on corporate
debt and a decline in the average balance outstanding. Realized investment
gains were insignificant in both periods.
8
<PAGE>
PROPERTY AND CASUALTY INSURANCE OPERATIONS
- ------------------------------------------
The following table sets forth the components of property and casualty
insurance earned premiums, net underwriting income, underwriting margin and
operating income for the three months ended March 31, 1996 and 1995:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------------
1996 1995 % Change
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Earned Premiums
Personal lines $ 70,865 $65,270 8.6%
Commercial lines 2,749 2,583 6.4%
Pools, associations and fees 973 928 4.8%
Reinsurance ceded (2,056) (1,809) 13.7%
-------- ------- ------
Total $ 72,531 $66,972 8.3%
======== ======= ======
Net underwriting income (loss) $(10,830) $ 3,657 (396.1%)
======== ======= ======
Underwriting margin (14.9%) 5.5%
======== =======
Operating income $ (3,414) $ 6,204 (155.0%)
======== ======= ======
</TABLE>
Earned premiums increased 8.3% in the first quarter of 1996 due to an
increase in new business and a low lapse ratio of 3.9%. Rate increases also
positively impacted the growth rate. However, in spite of these positive growth
factors, catastrophic storm activity produced significant claims resulting in a
net underwriting loss and a net operating loss, which is only the second such
quarterly loss in the Company's history.
Claims from snow and ice in February and tornados in March combined to
produce losses estimated at March 31, 1996 to be $23 million for the entire Alfa
Group pool. After taxes, the impact in the first quarter on Alfa Corporation
was approximately $9.7 million, or $0.24 per share. These storm losses follow
the impact in the fourth quarter of 1995 of Hurricane Opal, which produced the
first quarterly loss ever for the Company.
The non-storm loss ratio for the quarter was 67.6%, up from 64.1% in the
similar period in 1995 and the expense ratio was relatively flat. The combined
ratio, which includes the effect of storm claims was 114.9% for the quarter.
Investment income in the property casualty subsidiaries partially offset the net
underwriting loss. Continued positive cash flow from non-storm results have
increased invested assets which has increased investment income.
9
<PAGE>
LIFE INSURANCE OPERATIONS
- -------------------------
The following table sets forth life insurance premiums and policy charges,
by type of policy, and life insurance operating income for the three months
ended March 31, 1996 and 1995:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1996 1995 % Change
------- ------ ----------
(in thousands)
<S> <C> <C> <C>
Premiums and policy charges
Universal life policy charges $ 2,392 $2,138 11.9%
Interest sensitive life policy charges 2,048 1,971 3.9%
Traditional life insurance premiums 5,989 5,702 5.0%
------- ------ ----
Total $10,429 $9,811 6.3%
======= ====== ====
Operating income $ 3,007 $3,063 (1.8%)
======= ====== ====
</TABLE>
Life insurance premiums grew 6.3% in the first quarter of 1996. New
production increased 3.6% over the same period in 1995. The improved
production has come primarily in sales of the Company's Universal Life product
and from term insurance premium growth. The persistency rate remained high at
92.9%.
Life insurance operating income declined approximately 1.8% in the first
quarter of 1996 as a result of a 13% increase in death claims. Mortality was
97% of expected in the period which compared unfavorably to the first quarter of
1995 which had a mortality rate of 92% of expected. Net investment income
increased 8% in the first quarter of 1996 compared to the same period in 1995
due to positive cash flows which increased invested assets .
NONINSURANCE OPERATIONS
- -----------------------
Noninsurance earnings declined 25% in the first quarter of 1996 due to
declines in each of the noninsurance subsidiaries. Most significant was the
13.5% decrease in operating earnings in the consumer finance subsidiary. The
loan portfolio declined 18.1% to $66.2 million at March 31, 1996. The interest
margin has improved, but such improvement was offset in the first quarter by the
recognition of loan losses. The delinquency ratio, however, has improved to
2.34% at March 31, 1996. The construction subsidiary incurred a loss in the
first quarter due to declines in residential sales activity. The real estate
sales subsidiary, although profitable for the quarter, had a decrease in
earnings from commercial sales which compared unfavorably to a very successful
first quarter in 1995.
CORPORATE
- ---------
Interest expense on corporate debt is the primary corporate expense
incurred. Interest expense in the first three months of 1996 was approximately
$455,000 compared to approximately $525,000 for the similar period in 1995. The
decrease in interest expense is due to the decrease in interest rates on the
outstanding debt and a decline in the average balance outstanding related
primarily to the decline in funding requirements of the consumer finance loan
portfolio. In addition, corporate expense was lower due to the income tax
benefit in the first quarter of 1996. The remainder of the corporate expense
represents general operating expenses which may fluctuate from time to time.
10
<PAGE>
INVESTMENTS
- -----------
The Company has historically produced positive cash flow from operations
which has resulted in increasing amounts of funds available for investment and,
consequently, higher investment income. Investment income is also affected by
yield rates. Information about cash flows, invested assets and yield rates is
presented below for the three months ended March 31, 1996 and 1995:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Increase (Decrease) in cash flow from operations 2.9% (9.6%)
(Decrease) Increase in invested assets since January 1 (1.1%) 7.0%
Investment yield rate 8.3% 8.4%
Increase in net investment income 10.9% 11.4%
</TABLE>
Positive cash flow from operations increased 2.9% in the first quarter of
1996. Although the company incurred significant storm losses that negatively
affected income and cash flow, such cash flow was positively impacted by income
tax refunds and benefits as a result of fourth quarter losses in 1995 related to
Hurricane Opal and from the first quarter operating loss. In addition, the life
company paid higher income taxes in the first quarter of 1995. Positive cash
flow has increased invested assets 8.2% since March 31, 1995. The higher
level of invested assets combined with a yield rate of 8.3% has increased net
investment income by 10.9%. The Company had net realized investment gains of
approximately $51,000 in the first three months of 1996 and $265,000 in the
similar period in 1995. These net gains are primarily from sales of equity
securities and from gains in the Company's covered call option writing program.
Such realized gains are the result of market conditions and therefore can
fluctuate from period to period.
The composition of the Company's investment portfolio is as follows at
March 31, 1996 and December 31,1995:
<TABLE>
<CAPTION>
March 31, December 31,
--------- ------------
1996 1995
--------- ------------
<S> <C> <C>
Fixed maturities
Taxable
Mortgage backed (CMO's) 27.7% 29.4%
Corporate bonds 30.7% 29.1%
----- -----
Total taxable 58.4% 58.5%
Tax exempts 10.5% 10.0%
----- -----
Total fixed maturities 68.9% 68.5%
----- -----
Equity securities 12.0% 10.6%
Mortgage loans 0.1% 0.1%
Real estate 0.2% 0.2%
Policy loans 3.6% 3.5%
Other long term investments 12.5% 13.2%
Short term investments 2.7% 3.9%
----- -----
100.0% 100.0%
===== =====
</TABLE>
11
<PAGE>
The majority of the Company's investment portfolio consists of fixed
maturities which are diverse as to both industry and geographic concentration.
Since year-end, the portfolio mix has remained relatively stable with slight
changes due to market value changes in equities and from maturing mortgage back
securities. In addition, in the first quarter of 1995, short-term investments
were used to fund claims payments from storms. The consumer loan portfolio
declined over 18%, which reduced other long term investments.
The rating of the Company's portfolio of fixed maturities using the
Standard & Poor's rating categories is as follows at March 31, 1996 and December
31, 1995:
<TABLE>
<CAPTION>
March 31, December 31,
---------- -------------
1996 1995
---------- -------------
<S> <C> <C>
RATING
AAA to A- 87.0% 86.9%
BBB+ to BBB- 12.2% 12.2%
BB+ and Below (Below investment grade) .8% .9%
----- -----
100.0% 100.0%
----- -----
</TABLE>
Approximately 0.1% of the fixed maturity portfolio was not rated by an
outside rating service but was rated by Company management. The Company
considers bonds with a quality rating of BB+ and below to be below investment
grade or high yield bonds (also called junk bonds).
The following is information concerning the Company's portfolio of high
yield fixed maturity investments at March 31, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
March 31, December 31,
--------------------------------------------------
% of % of
1996 Statutory 1995 Statutory
Surplus Surplus
--------------------------------------------------
<S> <C> <C> <C> <C>
High-yield fixed maturities:
Amortized value $ 4,012,836 1.8% $4,512,625 1.9%
Carrying value (market) $ 3,782,373 1.7% $4,411,352 1.9%
Unrealized loss ($ 230,463) (0.1%) $ (101,293) -
</TABLE>
During the first quarter of 1996 the Company had net losses on disposals of
high yield debt securities of $1,250. In addition, the Company wrote down one
equity security totaling $446,000 whose decline in value was deemed to be other
than temporary. There were no such fixed maturity writedowns. At March 31,
1996 and December 31, 1995, there were no nonperforming bonds in the portfolio.
12
<PAGE>
Included in the Company's portfolio of equity securities are common stocks
of issuers of high yield debt instruments. Information concerning this category
of equity securities is as follows:
<TABLE>
<CAPTION>
March 31, December 31,
-----------------------------------------------------
% of % of
1996 Statutory 1995 Statutory
Surplus Surplus
-----------------------------------------------------
<S> <C> <C> <C> <C>
Equity investments held
in issuers of high-yield
debt securities:
Carrying value (market) $9,115,039 4.0% $4,141,041 1.8%
Cost $6,514,324 2.9% $3,877,250 1.7%
Unrealized gain $2,600,715 1.1% $ 263,791 0.1%
</TABLE>
During the first quarter of 1996, the Company sold approximately $5.4
million in fixed maturities available for sale. These sales resulted in gross
realized gains of $45,667 and gross realized losses of $30,857. At March 31,
1996, approximately 40.2% 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 March 31, 1996 the Company's total
portfolio of fixed maturities had gross unrealized gains of $23,067,203 and
gross unrealized losses of $8,521,985. Securities are priced by nationally
recognized pricing services or by broker/dealer securities firms. Less than .1%
were priced by the Company.
The Company's investment in other long term investments consists primarily
of consumer finance receivables collateralized by automobiles and other property
and of assets leased under operating leases. At March 31, 1996 the delinquency
ratio on the portfolio was 2.34%. Loans charged off in the first quarter of
1996 totaled $131,185. At March 31, 1996, the Company maintained an allowance
for loan losses of $978,384 or approximately 1.51% of the outstanding loan
balance. The Company's investments in high yield debt securities, mortgage
loans and real estate have not had and are not expected to have a material
effect on liquidity, capital resources or financial condition.
INCOME TAXES
- ------------
The decline in income tax expense in the first quarter of 1996 is the
result of the decline in income before provision for income taxes, which
decreased over $14.5 million due to the impact of storms. As a result of the
first quarter loss the Company paid no income tax in the period and recorded an
income tax benefit.
13
<PAGE>
IMPACT OF INFLATION
- -------------------
Inflation increases consumers' needs for both life and property and
casualty insurance coverage. Inflation increases claims incurred by property
and casualty insurers as property repairs, replacements and medical expenses
increase. Such cost increases reduce profit margins to the extent that rate
increases are not maintained on an adequate and timely basis. Since inflation
has remained relatively low in recent years, financial results have not been
significantly impacted by inflation.
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------
Alfa Corporation receives funds from its subsidiaries consisting of
dividends, payments for funding federal income taxes, and reimbursement of
expenses incurred at the corporate level for the subsidiaries. These funds are
used for paying dividends to stockholders, corporate interest and expenses,
federal income taxes, and for funding additional investments in its
subsidiaries' operations.
Alfa Corporation's subsidiaries require cash in order to fund policy
acquisition costs, claims, other policy benefits, interest expense, general
operating expenses, and dividends to Alfa Corporation. The major sources of the
Company's liquidity are operations and cash provided by maturing or liquidated
investments. A significant portion of the Company's investment portfolio
consists of readily marketable securities which can be sold for cash. Based on a
review of the Company's matching of asset and liability maturities and on the
interest sensitivity of the majority of policies in force, management believes
the ultimate exposure to loss from interest rate fluctuations is not
significant.
On October 25, 1993, the Company established a Stock Incentive Plan,
pursuant to which a maximum aggregate of 2,000,000 shares of common stock have
been reserved for grant to key personnel. The plan expires on October 24, 2003.
The Company granted 783,400 such options on October 25, 1993, 80,000 options on
March 28, 1994, 80,000 options on March 27, 1995 and 80,000 options on April 18,
1996. The options ratably become exercisable annually over three years, and may
not be exercised after ten years after the date of award. At March 31, 1996,
there had been 800 options exercised, 577,069 options were exercisable and
36,800 had been cancelled leaving 1,093,400 options available for grant under
the plan.
In October 1989, the Company's Board of Directors approved a stock
repurchase program authorizing the repurchase of up to 2,000,000 shares of its
outstanding common stock in the open market or in negotiated transactions in
such quantities and at such times and prices as management may decide. At March
31, 1996, the Company had repurchased 1,097,600 shares at a cost of $4,630,770.
In the first quarter of 1996, the Company reissued 800 treasury shares as a
result of the option exercises in the period.
Total notes payable decreased $10.2 million in the first quarter of 1996 to
$85.0 million. Prior to 1995, notes payable consisted of short term debt
outstanding under various credit lines with commercial banks which was used
primarily to fund the Company's consumer loan portfolio and for other corporate
purposes. During the first quarter of 1995 the Company began issuing commercial
paper which replaced the majority of the short term debt. At March 31, 1996 the
Company had approximately $65.4 million in commercial paper at a rates ranging
from 5.3% to 5.46% with maturities ranging from April 3, 1996 to April 29,
1996. The Company intends to continue
14
<PAGE>
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
$17.3 million in short-term debt outstanding to affiliates with interest equal
to bank short-term rates payable monthly and $2.3 million outstanding in other
short-term debt at a rate of 3.6%.
Cash surrenders paid to policyholders on a statutory basis totaled $2.4
million in the first quarter of 1996 and $1.7 million for the first three months
of 1995. This level of surrenders is within the Company's pricing expectations.
Historical persistency rates indicate a normal pattern of surrender activity.
The structure of the surrender charges is such that lapses are discouraged. The
majority of the policies in force have surrender charges equal to the total
policy cash value in the early years which grade downward over a 12 to 15 year
period. In addition, the majority of the in-force business is interest
sensitive type policies which generally have lower rates of surrender. At March
31, 1996 the total amount of cash that would be required to fund all amounts
subject to surrender was approximately $216.7 million.
The Company's business is concentrated geographically in Alabama, Georgia
and Mississippi. Accordingly, unusually severe storms or other disasters in
these contiguous states might have a more significant effect on the Company than
on a more geographically diversified insurance company. Although the Company
believes its reinsurance coverages are adequate, unusually severe storms, other
natural disasters and other events could have an adverse impact on the Company's
financial condition and operating results.
Increasing public interest in the availability and affordability of
insurance has prompted legislative, regulatory and judicial activity in several
states. This includes efforts to contain insurance prices, restrict
underwriting practices and risk classifications, mandate rate reductions and
refunds, eliminate or reduce exemptions from antitrust laws and generally expand
regulation. Because of Alabama's low automobile rates as compared to rates in
most other states, the Company does not expect the type of punitive legislation
and initiatives found in some states to be a factor in its primary market in the
immediate future.
15
<PAGE>
PART II. OTHER INFORMATION
Item 6.
- -------
EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
None.
16
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALFA CORPORATION
Date By:
---------------------------- -------------------------------
Goodwin L. Myrick
President
Date By:
---------------------------- -------------------------------
Donald Price
Senior Vice President, Finance
(Chief Financial Officer)
Date By:
---------------------------- -------------------------------
John Holley
Vice President and Controller
(Chief Accounting Officer)
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 569,929,822
<DEBT-CARRYING-VALUE> 3,445,247
<DEBT-MARKET-VALUE> 3,683,059
<EQUITIES> 99,365,055
<MORTGAGE> 941,527
<REAL-ESTATE> 1,807,659
<TOTAL-INVEST> 831,691,904
<CASH> 2,046,788
<RECOVER-REINSURE> 4,778,052
<DEFERRED-ACQUISITION> 95,669,866
<TOTAL-ASSETS> 955,680,582
<POLICY-LOSSES> 416,905,244
<UNEARNED-PREMIUMS> 88,337,372
<POLICY-OTHER> 8,879,419
<POLICY-HOLDER-FUNDS> 7,345,893
<NOTES-PAYABLE> 85,003,092
0
0
<COMMON> 41,891,512
<OTHER-SE> 255,320,459
<TOTAL-LIABILITY-AND-EQUITY> 955,680,582
82,960,219
<INVESTMENT-INCOME> 13,467,463
<INVESTMENT-GAINS> 51,738
<OTHER-INCOME> 455,157
<BENEFITS> 77,941,496
<UNDERWRITING-AMORTIZATION> 11,858,495
<UNDERWRITING-OTHER> 7,845,158
<INCOME-PRETAX> (710,572)
<INCOME-TAX> (652,956)
<INCOME-CONTINUING> (57,616)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (57,616)
<EPS-PRIMARY> (.001)
<EPS-DILUTED> (.001)
<RESERVE-OPEN> 110,368,715
<PROVISION-CURRENT> 70,929,225
<PROVISION-PRIOR> (466,777)
<PAYMENTS-CURRENT> 50,087,040
<PAYMENTS-PRIOR> 15,893,102
<RESERVE-CLOSE> 115,227,705
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
