<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, 1996 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 28, 1997, was
$252,127,968.
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, 1996
----- -----------------------------
Common Stock, $1.00 par value 40,786,712 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's annual report to security holders for the fiscal year
ended December 31, 1996, and proxy statement for the annual meeting of
stockholders to be held April 24, 1997, 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), and other members of the 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, 1996, Life had in excess of $9.4 billion
of life insurance in force. As of December 31, for each year indicated the
Company had insurance in force as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------------
(in thousands)
<S> <C> <C> <C>
Ordinary Life $9,126,335 $8,313,698 $7,553,056
Credit Life $ 11,016 $ 14,382 $ 19,499
Group Life $ 325,704 $ 314,826 $ 295,254
</TABLE>
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, 1996, 1995,
and 1994:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Premiums and Policy Charges
Universal life $10,075 $ 8,789 $ 7,876
Interest sensitive life 8,589 7,991 7,705
Traditional life 19,584 18,320 17,224
-------------------------------------------
Total $38,248 $35,100 $32,805
===========================================
Operating income $14,952 $13,205 $12,039
===========================================
</TABLE>
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, 1996, 1995 and 1994 including
the business written through the property and casualty pooling agreement:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Earned Premiums
Personal lines $292,330 $270,109 $208,358
Commercial lines 11,231 10,606 8,524
Pools, associations
and fees 3,905 3,709 2,920
Reinsurance ceded (8,527) (11,435) (5,476)
---------------------------------
Total $298,939 $272,989 $214,326
=================================
Net Underwriting Income (Loss) $ (2,235) $(12,198) $ 10,793
=================================
Underwriting Margin (0.7%) (4.5%) 5.0%
=================================
Operating Income $ 15,143 $ 8,182 $ 20,179
=================================
</TABLE>
Pooling Agreement. Effective August 1, 1987, the Company entered into
-----------------
a property and casualty insurance Pooling Agreement (the "Pooling Agreement")
with Alfa Mutual Insurance Company (Mutual), and other members of the Mutual
Group. The Mutual Group is a direct writer primarily of personal lines of
property and casualty insurance in Alabama. The Company's subsidiaries
similarly are direct writers in Georgia and Mississippi. Both the Mutual Group
and the Company write preferred risk automobile, homeowner, farmowner and mobile
home insurance, fire and allied lines, standard risk automobile and homeowner
insurance, and a limited amount of commercial insurance, including church, and
businessowner insurance. Under the terms of the Pooling Agreement, the Company
cedes to Mutual all of its property and casualty business. All of the Mutual
Group's direct property and casualty business (together with the property and
casualty business ceded by the Company) is included in the pool. Until
September 30, 1994, Mutual retroceded 50% of the pooled premiums, losses, loss
adjustment expenses and other underwriting expenses to the Company while
retaining 50% of these amounts itself. On October 1, 1994, the Company
increased its participation in the Pooling Agreement. Mutual currently
retrocedes 65% of the pool to the Company and retains 35% within the Mutual
Group. On October 1, 1996, the Pooling Agreement was amended in conjunction
with the restructuring of the Alfa Insurance Group's catastrophe protection
program. Effective November 1, 1996, the allocation of catastrophe costs among
the members of the pool was changed to better reflect the economics of
catastrophe finance. The amendment limits Alfa Corporation's participation in
any single catastrophic event or series of disasters to its pool share (65%) of
$10 million unless the loss exceeds $249 million on a 100% basis in which case
the Company's share in the loss would be based upon its amount of surplus
relative to the other members of the group. Currently, the Company's share of
losses exceeding $249 million would be 13%. The change will allow the
catastrophe reinsurance buying decision to be made on a group basis which will
benefit each member of the group. The Company's participation in the Pooling
Agreement may be changed or terminated without the consent or approval of the
Company's shareholders, and the Pooling Agreement may be terminated by any party
thereto upon 90 days notice.
The Boards of Directors of the Mutual Group 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.
I-3
<PAGE>
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.
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 the
Mutual Group and two of whom are Executive Officers of Registrant.
Mutual owns 16,201,538 shares, or 39.72%, and Alfa Mutual Fire
Insurance Company 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.
I-4
<PAGE>
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.
(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, 1996, Registrant
was represented by 474 agents in Alabama who are employees of Mutual.
Registrant's property and casualty subsidiaries had 113 independent exclusive
agents in Georgia and Mississippi at December 31, 1996.
I-5
<PAGE>
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.
----------------------
Item 3. Legal Proceedings.
-----------------
Various legal proceedings arising in the normal course of business
with policyholders and agents are in process at December 31, 1996. These legal
proceedings involve alleged breaches of contract, torts, including bad faith and
fraud claims based on alleged wrongful or fraudulent acts of agents and
miscellaneous other causes of action. Many of these lawsuits involve claims for
punitive damages. The likelihood or extent of a punitive damage award in any
one of these given cases is not possible to predict. Although the Alfa
Insurance Group including Alfa Corporation and its subsidiaries have such legal
proceedings filed against it in which punitive damages are sought, to date, no
such lawsuit has resulted in the award of any significant amount of damages
against the Company. Based upon information presently available, applicable law
and the defenses available to Alfa Corporation and its subsidiaries, management
does not consider the contingent liabilities which might arise from pending
litigation to be material in relation to the financial position, result of
operations, or cash flows of the Company. Management's opinion is based upon
the company's experience in dealing with such claims and the historical results
of such claims against the Company. However, it should be noted that in
Alabama, where the company has substantial business, the frequency of large
punitive damage awards, bearing little or no relation to the actual damages
awarded by juries, continues to exist, creating the potential for unpredictable
material adverse judgements in any given suit.
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 24, 1997.
I-6
<PAGE>
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.
<TABLE>
<CAPTION>
NAME AGE POSITION SINCE
- ---- --- --------
<S> <C> <C> <C>
Goodwin L. Myrick 71 Director; Chairman of the Board and President, since 1978; 1973
President of its Subsidiaries and associated
companies; President Alabama Farmers Federation.
B. Phil Richardson 71 Director; Executive Vice President, Operations 1979
of Alfa Corporation and its subsidiaries;
Vice President, Treasurer.
Ken Wallis 55 Director; Secretary, General Counsel and 1993
Vice President, Government Relations.
Bill Harper, Jr. 52 Senior Vice President, Life Operations of Alfa Life 1986
Insurance Corporation Vice President, of Alfa
Financial Corporation since 1978.
C. Lee Ellis 45 Executive Vice President, Investments. 1983
Prior to 1993, Senior Vice President, Investments.
Donald Price 45 Senior Vice President, Finance and 1984
Chief Financial Officer.
John Holley 41 Vice President and Controller, Director Financial Relations 1986
Chief Accounting Officer.
Al Dees 50 Executive Vice President, Marketing 1993
Prior to 1993 Vice President Georgia and
Mississippi Marketing.
James Azar 60 Senior Vice President, Planning 1979
Terry McCollum 60 Senior Vice President, Claims 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, 1996, 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,
1996, 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, 1996, 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, 1996,
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 24, 1997 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 24, 1997, 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 2 through 4 of the Proxy Statement
for the annual meeting of stockholders to be held April 24, 1997, 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 24, 1997, 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 1996, 1995, and 1994.
Consolidated Balance Sheets as of
December 31, 1996 and 1995.
Consolidated Statements of Income for the three years ended
December 31, 1996, 1995 and 1994.
Consolidated Statements of Stockholders' Equity for the
three years ended December 31, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the three years
ended December 31, 1996, 1995 and 1994.
Notes to Consolidated Financial Statements.
Selected Quarterly Financial Data.
2. Financial Statement Schedules.
-----------------------------
Included in Part IV of this report:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Reports on Financial Statements and Financial Statement Schedules
of Independent Certified Public Accountants for 1996, 1995 and 1994. IV-3
Schedule I - Summary of Investments Other Than Investments
in Related Parties for the year ended December 31, 1996 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, 1996,
1995 and 1994 IV-9
Schedule V - Valuation and Qualifying Accounts IV-10
</TABLE>
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, 1996. 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 (23) Consents of Independent Accountants
(b) Reports on Form 8-K.
-------------------
An 8-K report was filed on February 19, 1997
reporting the retirement of Phil Richardson effective
April 1, 1997 and the promotion of Ken Wallis to the
position of Executive Vice President, Operations and
Assistant to the President.
IV-2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Stockholders and Board of Directors
Alfa Corporation
Montgomery, Alabama:
We have audited the accompanying consolidated balance sheets of Alfa
Corporation and subsidiaries (the Company) as of December 31, 1996 and 1995, and
the related consolidated statements of income, stockholders' equity, and cash
flows for the years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Alfa Corporation and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
Our audits for the years ended December 31, 1996 and 1995, were 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
years ended December 31, 1996 and 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 years ended December 31, 1996 and 1995.
KPMG Peat Marwick LLP
Birmingham, Alabama
February 4, 1997
IV-3(a)
<PAGE>
INDEPENDENT AUDITOR'S REPORT
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) for the
year ended December 31, 1994 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 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 financial statements and financial statement schedules
referred to above present fairly, in all material respects, the results of Alfa
Corporation and its subsidiaries operations and its cash flows for the year
ended December 31, 1994 in conformity with generally accepted accounting
principles.
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, 1996
------------
<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 $ 64,299,445 $ 66,965,246 $ 66,965,246
States, municipalities and
political subdivisions 100,720,322 104,839,229 104,839,229
Public utilities 20,262,100 20,559,039 20,559,039
All other corporate bonds 140,490,488 148,614,365 148,614,365
Mortgage-backed securities 264,617,984 268,013,880 267,833,156
Redeemable preferred stocks 4,287,094 4,331,534 4,331,534
------------ ------------ ------------
Total fixed maturities 594,677,433 613,323,293 613,142,569
------------ ------------ ------------
Equity securities:
Common stocks:
Public utilities 6,746,778 8,070,626 8,070,626
Banks, trusts and insurance
companies 8,395,346 19,302,332 19,302,332
Industrial, miscellaneous
and all other 42,420,516 66,517,192 66,517,192
Nonredeemable preferred stocks 2,200,994 2,117,500 2,117,500
------------ ------------ ------------
Total equity securities 59,763,634 96,007,650 96,007,650
------------ ------------ ------------
Mortgage loans on real estate 826,480 826,480
Real estate 1,855,972 1,855,972
Policy loans 31,680,254 31,680,254
Other long-term investments 102,297,440 102,297,440
Short-term investments 40,206,951 40,206,951
------------ ------------
Total investments $831,308,164 $886,017,316
============ ============
</TABLE>
IV-4
<PAGE>
ALFA CORPORATION (PARENT COMPANY)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
-----------
<TABLE>
<CAPTION>
1996 1995
------------ ------------
ASSETS
<S> <C> <C>
Cash $ 48,082 $ 28,271
Short-term investments 374,058 437,090
Investment in subsidiaries 357,237,941 342,291,962
Note receivable from subsidiaries 46,358,539 54,445,000
Accounts receivable and other assets 218,054 283,274
------------ ------------
Total assets $404,236,674 $397,485,597
============ ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
<S> <C> <C>
Commercial paper $ 73,580,962 $ 81,949,616
Notes payable 4,600,000 4,600,000
Other liabilities 2,743,903 2,326,237
------------ ------------
Total liabilities 80,924,865 88,875,853
------------ ------------
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 33,926,747 35,620,863
Retained earnings 230,839,897 214,453,116
Treasury stock, at cost, 1996 - 1,104,800; 1995 - 1,105,600 shares (4,627,670) (4,631,770)
------------ ------------
Total stockholders' equity 323,311,809 308,609,744
------------ ------------
Total liabilities and stockholders' equity $404,236,674 $397,485,597
============ ============
</TABLE>
IV-5
<PAGE>
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
-------------
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Dividends from subsidiaries $18,671,103 $19,415,006 $16,241,650
Interest from subsidiaries 2,642,730 2,708,256
Other interest 12,911 25,171 1,456
Expenses:
Other expenses 5,667,475 6,071,779 3,596,198
----------- ----------- -----------
Income before equity in
undistributed income
of subsidiaries 15,659,269 16,076,654 12,646,908
Equity in undistributed income
of subsidiaries 16,529,946 6,241,297 20,219,830
----------- ----------- -----------
Net income $32,189,215 $22,317,951 $32,866,738
=========== =========== ===========
</TABLE>
IV-6
<PAGE>
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 32,189,215 $ 22,317,951 $ 32,866,738
------------ ------------ ------------
Adjustments to reconcile net
income to net cash provided by
operating activities:
Undistributed earnings of
subsidiaries (16,529,946) (6,241,297) (20,219,830)
(Increase) decrease in other assets
and accounts receivable 65,220 (255,113) (13,001)
Increase (decrease) in other
liabilities 417,666 (450,428) 1,202,683
------------------------------------------
Total adjustments (16,047,060) (6,946,838) (19,030,148)
------------------------------------------
Net cash provided by
operating activities 16,142,155 15,371,113 13,836,590
------------------------------------------
Cash flows from investing activities:
(Increase) decrease in note receivable from subsidiaries 8,086,461 (54,445,000)
Net (increase) decrease in short-term investments 63,032 (354,574) (81,963)
Other (110,149) (272,790) (4,925)
------------------------------------------
Net cash provided by (used in) investing activities 8,039,344 (55,072,364) (86,888)
------------------------------------------
Cash flows from financing activities:
Increase (decrease) in commercial paper (8,368,654) 81,949,616
Net increase (decrease) in notes payable (27,013,665) 198,665
Proceeds from exercise of stock options 9,400
Dividends to stockholders (15,802,434) (15,294,718) (13,969,175)
------------------------------------------
Net cash provided by (used in) financing activities (24,161,688) 39,641,233 (13,770,510)
------------------------------------------
Net increase (decrease) in cash 19,811 (60,018) (20,808)
Cash, beginning of year 28,271 88,289 109,097
------------------------------------------
Cash, end of year $ 48,082 $ 28,271 $ 88,289
==========================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 4,415,649 $ 4,470,881 $ 1,545,255
==========================================
Income taxes $ 5,418,000 $ 7,888,000 $ 13,927,719
==========================================
</TABLE>
IV-7
<PAGE>
ALFA CORPORATION
SCHEDULE III - SUPPLEMENTAL INSURANCE INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Future Policy Other
Benefits, Policy Benefits
Deferred Losses, Claims Premiums Claims,
Policy Claims And And And Net Losses And
Acquisition Loss Unearned Benefits Policy Investment Settlement
Segment Costs Expenses Premium Payable Charges Income Expenses
- ------- ------------ ------------ ------------ ------- -------------- ------------ ------------
1996
----
<S> <C> <C> <C> <C> <C> <C> <C>
Life Insurance $ 84,711,419 $325,206,008 $ 0 $0 $ 38,247,600 $29,253,591 $ 30,589,901
Property &
casualty
insurance 15,382,660 117,672,492 92,945,366 0 298,938,818 22,250,871 236,721,425
Noninsurance
and corporate 0 0 0 0 0 2,689,872 0
------------ ------------ ----------- -- ------------ ----------- ------------
Total $100,094,079 $442,878,500 $92,945,366 $0 $337,186,418 $54,194,334 $267,311,326
============ ============ =========== == ============ =========== ============
1995
----
Life Insurance $ 75,410,879 $294,049,256 $ 0 $0 $ 35,099,995 $27,620,913 $ 29,401,615
Property &
casualty
insurance 13,745,663 108,303,253 85,306,194 0 272,988,974 20,996,611 220,841,822
Noninsurance
and corporate 0 0 0 0 0 2,305,583 150,000
------------ ------------ ----------- -- ------------ ----------- ------------
Total $ 89,156,542 $402,352,509 $85,306,194 $0 $308,088,969 $50,923,107 $250,393,437
============ ============ =========== == ============ =========== ============
1994
----
Life Insurance $ 75,551,400 $262,017,490 $ 0 $0 $ 32,805,431 $25,729,717 $ 26,960,413
Property &
casualty
insurance 13,461,166 88,486,091 79,426,172 0 214,325,192 17,405,225 154,656,527
Noninsurance
and corporate 0 0 0 0 0 2,418,719 1,000,000
------------ ------------ ----------- -- ------------ ----------- ------------
Total $ 89,012,566 $350,503,581 $79,426,172 $0 $247,130,623 $45,553,661 $182,616,940
============ ============ =========== == ============ =========== ============
<CAPTION>
Amortization
Of Deferred
Policy Other
Acquisition Operating Premiums
Segment Costs Expenses Written
- ------- ------------ ------------- ------------
1996
----
<S> <C> <C> <C>
Life Insurance $ 6,061,063 $ 6,750,449 $ 0
Property &
casualty
insurance 45,050,788 19,653,730 311,251,916
Noninsurance
and corporate 0 2,599,112 0
----------- ----------- ------------
Total $51,111,851 $29,003,291 $311,251,916
=========== =========== ============
1995
----
Life Insurance $ 5,504,517 $ 5,977,846 $ 0
Property &
casualty
insurance 41,857,226 24,445,381 286,483,508
Noninsurance
and corporate 0 577,145 0
----------- ----------- ------------
Total $47,361,743 $31,000,372 $286,483,508
=========== =========== ============
1994
----
Life Insurance $ 4,832,612 $ 6,196,441 $ 0
Property &
casualty
insurance 32,913,610 19,351,233 234,392,978
Noninsurance
and corporate 0 (329,479) 0
----------- ----------- ------------
Total $37,746,222 $25,218,195 $234,392,978
=========== =========== ============
</TABLE>
IV-8
<PAGE>
ALFA CORPORATION AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
FOR YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Percentage of
Ceded to Amount Assumed by Assumed From
Gross Amount Other Companies Other Companies Net Amount to Net
--------------- ----------------- --------------- -------------- -------------
1996
----
<S> <C> <C> <C> <C> <C>
Life insurance in force $10,480,723,907 $1,017,669,000 $ 0 $9,463,054,907 0%
=============== ============== ============= ============== ===
Premiums and policy charges:
Life insurance $ 41,244,357 $ 3,086,247 $ 0 $ 38,158,110 0%
Accident and health insurance 89,490 0 0 89,490 0%
Property and liability insurance 47,939,310 55,523,791* 306,523,299* 298,938,818 103%
--------------- -------------- ------------- -------------- ---
$ 89,273,157 $ 58,610,038 $ 306,523,299 $ 337,186,418 91%
=============== ============== ============= ============== ===
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%
=============== ============== ============= ============== ===
</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, 1996 AND 1995
<TABLE>
<CAPTION>
BALANCE ADDITIONS
-------------------------------
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> <C>
1996 Reserve for loan losses $750,241 $318,851 $435,613 $633,479
============ ================ ========== =============
1995 Reserve for loan losses $769,544 $229,094 $248,397 $750,241
============ ================ ========== =============
</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
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
Director and Principal
/s/ Executive Officer March 31, 1997
- ----------------------------- --------------------
(Goodwin L. Myrick) (Date)
Senior Vice President
Finance, (Principal
/s/ Financial Officer) March 31, 1997
- ----------------------------- --------------------
(Donald Price) (Date)
Vice President and
Controller (Principal
/s/ Accounting Officer) March 31, 1997
- ----------------------------- --------------------
(John D. Holley) (Date)
/s/ Director March 31, 1997
- ----------------------------- --------------------
(Jerry A. Newby) (Date)
/s/ Director March 31, 1997
- ----------------------------- --------------------
(James E. Mobley) (Date)
<PAGE>
/s/ Director March 31, 1997
- ------------------------------ --------------
(James A. Tolar, Jr.) (Date)
/s/ Director March 31, 1997
- ------------------------------ --------------
(John W. Morris) (Date)
/s/ Director March 31, 1997
- ------------------------------ --------------
(Milborn N. Chesser) (Date)
/s/ Director March 31, 1997
- ------------------------------ --------------
(James I. Harrison, Jr.) (Date)
/s/ Director March 31, 1997
- ------------------------------ --------------
(Young J. Boozer) (Date)
/s/ Director March 31, 1997
- ------------------------------ --------------
(John R. Thomas) (Date)
/s/ Director March 31, 1997
- ------------------------------ --------------
(B. Phil Richardson) (Date)
/s/ Director March 31, 1997
- ------------------------------ --------------
(Boyd E. Christenberry) (Date)
/s/ Director March 31, 1997
- ------------------------------ --------------
(Ken Wallis) (Date)
<PAGE>
SELECTED FINANCIAL DATA
CONSOLIDATED SUMMARY OF OPERATIONS & RELATED DATA
(Dollars in Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1996 1995 1994 1993
-------------------------------------------------
<S> <C> <C> <C> <C>
Premiums and policy charges $ 337,186 $ 308,089 $ 247,131 $ 219,913
Net investment income 54,194 50,923 45,554 44,902
Net realized investment gains 2,808 1,106 572 4,890
Other income 2,148 2,645 3,057 2,918
-------------------------------------------------
Total revenues 396,336 362,763 296,313 272,624
Benefits and expenses 350,482 331,771 248,481 209,309
-------------------------------------------------
Income before provision for income taxes 45,854 30,993 47,832 63,315
Provision for income taxes 13,665 8,675 14,965 20,999
Cumulative effect of changes in accounting
principles 2,645
-------------------------------------------------
Net income $ 32,189 $ 22,318 $ 32,867 $ 44,960
=================================================
Balance sheet data at December 31:
Invested assets $ 886,017 $ 841,123 $ 718,074 $ 653,819
Total assets $1,019,330 $ 965,433 $ 847,870 $ 766,077
Future policy benefits, losses,
and claims, unearned premiums $ 535,824 $ 487,659 $ 429,930 $ 365,148
Total liabilites $ 696,018 $ 656,823 $ 592,885 $ 505,091
Stockholders' equity $ 323,312 $ 308,610 $ 254,985 $ 260,986
Per share data/1/:
Net income $ 0.79 $ 0.55 $ 0.81 $ 1.10
Cash dividends paid $ 0.3875 $ 0.375 $ 0.3425 $ 0.28
Annual dividend rate $ 0.39 $ 0.38 $ 0.36 $ 0.29
Stockholders' equity $ 7.93 $ 7.57 $ 6.25 $ 6.40
Closing sales price at December 31 $ 12 5/8 $ 16 3/4 $ 11 $ 11 1/2
Price earnings ratio 16.0x 30.6x 13.6x 10.4x
Weighted average shares outstanding 40,786 40,786 40,786 40,786
Return on average equity 10.2% 7.9% 12.7% 18.5%
Return on average invested assets 7.60% 7.74% 7.78% 8.03%
Life insurance in force $9,463,055 $8,642,907 $7,867,808 $7,064,335
Number of agents 587 585 562 562
</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
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1992 1991 1990 1989/4/ 1988 1987 1986
- -------------------------------------------------------------------------------------------
$ 202,440 $ 192,445 $ 175,448 $ 158,585 $ 148,287 $ 75,277 $ 25,254
39,425 34,785 32,224 30,048 26,224 19,288 17,288
4,232 3,790 2,842 2,882 2,005 1,316 943
2,340 1,919 1,861 1,172 1,402 1,086 803
- --------------------------------------------------------------------------------------------
248,437 232,939 212,375 192,687 177,918 96,967 44,288
194,859 192,144 180,611 159,912 144,229 75,414 27,488
- -------------------------------------------------------------------------------------------
53,578 40,795 31,764 32,775 33,689 21,553 16,800
16,660 12,354 8,877/2/ 9,919 10,842 7,495 3,744/3/
- --------------------------------------------------------------------------------------------
$ 36,918 $ 28,441 $ 22,887/2/$ 22,856 $ 22,847 $ 14,058 $ 13,056/3/
============================================================================================
$ 574,718 $ 511,931 $ 437,725 $ 410,266 $ 363,401 $ 277,684 $ 184,063
$ 665,247 $ 595,801 $ 515,681 $ 482,383 $ 432,312 $ 338,692 $ 226,952
$ 334,454 $ 295,443 $ 257,907 $ 223,925 $ 192,113 $ 158,242 $ 89,811
$ 440,669 $ 402,526 $ 347,861 $ 319,598 $ 288,094 $ 258,576 $ 155,529/3/
$ 224,578 $ 193,275 $ 165,820 $ 162,785 $ 144,218 $ 80,116 $ 71,423/3/
$ 0.91 $ 0.70 $ 0.55/2/$ 0.55 $ 0.58 $ 0.42 $ 0.39/3/
$ 0.2425 $ 0.215 $ 0.195 $ 0.1725 $ 0.145 $ 0.1275 $ 0.11625
$ 0.25 $ 0.22 $ 0.20 $ 0.18 $ 0.15 $ 0.13 $ 0.12
$ 5.51 $ 4.74 $ 4.03 $ 3.89 $ 3.67 $ 2.38 $ 2.12/3/
$ 11 7/8 $ 5 1/4 $ 4 5/8 $ 5 5/8 $ 5 $ 7 1/4 $ 4 7/16
13.1x 7.6x 8.4x 10.3x 8.6x 17.4x 13.6x
40,786 40,786 41,611 41,882 39,265 33,692 33,692
17.7% 15.8% 13.8%/2/ 14.9% 20.4% 18.6% 19.5%/3/
8.28% 8.66% 9.00% 9.43% 9.91% 9.92% 11.39%
$6,295,626 $5,578,661 $4,947,574 $4,318,605 $3,661,747 $3,131,656 $2,710,599
529 504 500 486 454 475 422
</TABLE>
7
<PAGE>
====================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
====================================
RESULTS OF OPERATIONS
The following tables set forth consolidated summarized income statement
information for the years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------
1996 1995 1994
------------------------------------------------------
(in thousands, except share and per share data)
<S> <C> <C> <C>
REVENUES
Premiums and
policy charges $ 337,186 $ 308,089 $ 247,131
===================================================
Net investment income $ 54,194 $ 50,923 $ 45,554
===================================================
Total revenues $ 396,336 $ 362,763 $ 296,313
===================================================
Net income
Insurance $ 30,141 $ 21,432 $ 32,290
operations
Noninsurance 3,339 3,668 3,358
operations
Net realized
investment gains 1,825 719 372
Corporate expenses (3,116) (3,500) (3,153)
---------------------------------------------------
Net income $ 32,189 $ 22,318 $ 32,867
===================================================
Net income per share $ .79 $ .55 $ .81
===================================================
Weighted average shares
outstanding 40,786,561 40,785,912 40,785,912
===================================================
</TABLE>
Premiums and policy charges increased 9.4% in 1996, 24.7% in 1995 and 12.3%
in 1994. The growth in 1996 is due primarily to production of new business in
both property/casualty and life insurance. In addition, rate increases and a low
lapse ratio contributed to the growth. 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 Note 2 to the Consolidated Financial
Statements). Net investment income grew 6.4% in 1996 and 11.8% in 1995 due to an
increase in invested assets resulting from positive cash flows. The growth in
1995 was also positively impacted by the effects of the pooling agreement
amendment.
Net income improved 44.2% in 1996 compared to 1995. Both year's results
include the effects of significant catastrophic storm activity. However, in the
fourth quarter of 1995, the effects of the single largest storm in the Company's
history, Hurricane Opal, resulted in a $5.5 million fourth quarter net loss, the
first quarterly loss ever sustained. The results for 1996 include the effects of
significant first quarter storms, which resulted in a net loss of the first
quarter of $57,616. Comparatively, the effects of Opal and other storms in 1995
were much more significant that those in 1996, and this is the primary reason
for the earnings improvement. In addition to this improvement, life insurance
operating income, which excludes realized investment gains or losses, grew 13.2%
in 1996 due to favorable mortality experience and favorable market conditions
resulted in a significant increase in realized investment gains. Net income in
1995 declined over 32% compared to 1994 due primarily to the effects of
Hurricane Opal. Life insurance operating income in 1995 improved almost 10%
over 1994 due to increased premiums and improved mortality rates.
Noninsurance operating income decreased 9.0% in 1996 due to declines in
profits of the construction and real estate subsidiaries, offset partially by a
slight improvement in earnings of the consumer finance subsidiary. Noninsurance
operating income increased 9.2% in 1995 and 16.5% in 1994 as a result of
increased profits in the consumer loan subsidiary in both periods, and from the
construction and real estate subsidiaries in 1994.
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, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------
1996 1995 1994
------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Earned premiums
Personal lines $ 292,330 $270,109 $208,358
Commercial lines 11,231 10,606 8,524
Pools, associations
and fees 3,905 3,709 2,920
Reinsurance ceded (8,527) (11,435) (5,476)
------------------------------------------------------
Total $ 298,939 $ 272,989 $ 214,326
======================================================
Net underwriting
income (loss) $ (2,235) $ (12,198) $ 10,793
======================================================
Underwriting margin (0.7%) (4.5%) 5.0%
======================================================
Operating income $ 15,143 $ 8,182 $ 20,179
======================================================
</TABLE>
14 Alfa Corporation 1996
<PAGE>
====================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
====================================
1996 COMPARED TO 1995
Earned premiums increased 9.5% in 1996 due to new business, rate increases,
a low lapse ratio of 3.9% and a reduction in reinsurance ceded related to prior
year fourth quarter reinsurance cost as a result of Hurricane Opal. However, due
to the effects of storms in the first quarter of 1996, the Company had a $2.2
million net underwriting loss for the year.
Claims from snow and ice in February, 1996 and tornados in March, 1996
combined to produce losses of $27.0 million for the entire Alfa Group pool.
After taxes, the impact in 1996 of Alfa Corporation was approximately $11.4
million, or $0.28 per share. These storm losses compare favorably, however, to
the fourth quarter of 1995 when the effects of Hurricane Opal produced the first
quarterly loss ever for the Company. The Company and the Alfa Group intensified
its studies of catastrophe financing alternatives in response to Hurricane Opal
and the increased frequency and severity of other catastrophes and their effects
over the past several years. As a result of such studies, the overall
catastrophe program for the group was restructured. An amendment to the
intercompany pooling agreement (see Note 2 to the Consolidated Financial
Statements) changes the allocation of catastrophe costs among the members of the
pool to better reflect the economics of catastrophe finance. The impact will
result in a reduction in the volatility of earnings caused by catastrophes. Had
the restructured program been in place during all of 1996, the after tax
catastrophe impact would have been reduced to $4.2 million, or $.10 per share.
Another likely effect will be the reduction of expenditures for reinsurance
protection as the reinsurance buying decision will now be made on a group basis.
Such expense for 1996 was approximately $8.5 million, or $0.13 per share.
Another factor affecting results is the non-storm loss ratio, which was
67.0% in 1996, up from 63.6% in 1995, primarily due to an unsatisfactory loss
ratio in the automobile line of business. Rate increases made in August, 1996,
which had a modest impact in 1996, will have a greater impact in 1997 as the
business renews. In addition, the Company, has started an extensive risk review
program and has tightened underwriting guidelines and has taken other measures
to improve the loss ratio.
The expense ratio improved in 1996 due primarily to an intensified
corporate focus on expenses, a reduction in technology and equipment costs and
to improvement in employee benefit costs, partially offset by an increase in
legal expenses.
Invested assets grew 6.3% and investment income increased 6.0% in 1996 in
the property casualty companies, offsetting the underwriting loss, and resulting
in an 85% increase in operating income for the subsidiaries over 1995 when Opal
occurred. In spite of the effects from the underwriting loss, the level of
investments and investment income produced positive cash flows in 1996, which
increased invested assets and investment income.
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, 1996,
the Company's property and casualty subsidiaries' Adjusted Capital calculated in
accordance with NAIC Risk-Based Capital (RBC) guidelines was $137.5 million
compared to the Authorized Control Level RBC of $15.0 million.
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
$100 million in severe weather claims in 1995 with approximately $80 million
from Hurricane Opal, compared to storm claims of 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 overall 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 63.6% and the expense ratio was relatively
flat. Expenses included 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
15
<PAGE>
===================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
====================================
allocation had a similar but less pronounced impact on increased
invested assets. The increased investment income partially offset the
underwriting loss in 1995.
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, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1996 1995 1994
-------------------------------------------------
( in thousands)
<S> <C> <C> <C>
Premiums and policy charges
Universal life policy charges $10,075 $ 8,789 $ 7,876
Interest sensitive
life policy charges 8,589 7,991 7,705
Traditional life
insurance premiums 19,584 18,320 17,224
-------------------------------------------------
Total $38,248 $35,100 $32,805
=================================================
Operating income $14,952 $13,205 $12,039
=================================================
</TABLE>
1996 COMPARED TO 1995
In 1996, life insurance premiums and policy charges increased 9.0% and
operating income increased 13.2%. New premium production increased 11.7% and
persistency remained high at 92.3%. The Company's Universal Life product
continued to be the leading policy in new sales. Total Universal Life policy
charges increased 14.6% in 1996. Only the product's policy charges are accounted
for as revenues.
The primary factor in the growth in operating income was the mortality
experience. Not only did the already favorable mortality ratio improve from 86%
in 1995 to 85% in 1996, total death claims declined 6.0%. Expense levels
remained relatively flat except for a slight increase in legal expenses and an
increase in premium tax due to both the increase in premiums and an increase in
the rate.
Investment income grew 5.9% in 1996 due to increased positive cash flows
which increased invested assets 7.6%. The investment yield rate was lower in
1996, due primarily to an investment in certain tax credits which lowered income
taxes and had an overall positive impact on income.
At December 31, 1996 the life subsidiary's Adjusted Capital calculated in
accordance with NAIC Risk-Based Capital guidelines was $130.9 million compared
to the Authorized Control Level amount of $12.9 million. The Risk-Based Capital
analysis serves as the benchmark for the regulation of life insurance
enterprises' solvency by state insurance regulators.
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%, 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% 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.
NONINSURANCE OPERATIONS
1996 COMPARED TO 1995
Noninsurance earnings decreased 9.0% in 1996. Most significant was a 75%
decline in net income in the construction subsidiary, or a drop of approximately
$352,000. A 65% decline in net commercial income was the result of a significant
commercial project in 1995 that was completed in 1996. Residential activity also
declined 4% in 1996. Another factor in the earnings decrease was a decline of
approximately $92,000, or 38% in the real estate sales subsidiary, both from
residential and commercial activity. Partially offsetting these declines was a
3.9% increase in earnings in the consumer finance subsidiary. Although the loan
portfolio dropped 14% to $61.5 million and leasing revenues declined 4% in 1996,
the cost of funds also declined resulting in a slight improvement in net
interest income. The company had its A-1+ and P-1 commercial paper ratings
affirmed by Standard & Poor's and Moody's in 1996. The commercial paper is
guaranteed by an affiliate, Alfa Mutual Insurance Company. In addition to the
improvement from interest income, a decline in expenses, primarily legal
expense, also improved net income.
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 $68.1 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
16 Alfa Corporation 1996
<PAGE>
====================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
====================================
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 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.
CORPORATE
Interest expense on short term corporate debt is the primary corporate
expense for each year presented. Interest expense totaled $1.8 million in 1996,
$2.0 million in 1995 and $1.6 million in 1994. The decrease in interest expense
in 1996 is due to a decrease in interest rates on the outstanding debt. At
December 31, 1996, corporate debt was $31.0 million at an average rate of 5.5%.
The remaining corporate expenses represent general operating expenses which may
fluctuate from time to time. These expenses raised total corporate expense to
$3.1 million in 1996, $3.5 million in 1995, and $3.2 million in 1994.
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, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995 1994
--------------------------
<S> <C> <C> <C>
Increase (decrease) in cash
flow from operations 14.0% (2.8%) 30.4%
Increase in invested assets 5.3% 17.1% 9.8%
Investment yield rate 7.6% 7.7% 7.8%
Increase in net investment
income 6.4% 11.8% 1.5%
</TABLE>
Positive cash flow from operations increased 14.0% in 1996 due entirely to
the impact on cash flows of Hurricane Opal, which occurred in October, 1995.
Prior to the fourth quarter of 1996, positive cash flows had decreased as a
result of significant first quarter storms. The overall increase in positive
cash flow in 1996 increased invested assets 7.4% excluding the market value
impact of SFAS 115, using amortized cost in both periods. Net investment income
increased 6.4% over 1995. The yield rate, calculated using amortized cost, has
remained relatively flat over the past three years.
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. As a result of the stable yield and increased
assets, investment income grew 11.8% in 1995.
Cash flow from operations increased 30.4% in 1994 due primarily to the
impact of the amendment to the pooling agreement. 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%.
The Company had realized investment gains of approximately $2.8 million in
1996, $1.1 million in 1995, and $572,000 in 1994. The gains are primarily from
sales of equity securities and from gains in the Company's covered call option
writing program offset by net losses from sales of fixed maturities available
for sale.
The composition of the Company's investment portfolio is as follows at
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
-------------------
<S> <C> <C>
Fixed maturities
Taxables
Mortgage backed (CMOs) 30.2% 29.4%
Corporate bonds 29.1 29.1
-------------------
Total taxable 59.3 58.5
Tax exempts 9.9 10.0
------------------
Total fixed maturities 69.2 68.5
------------------
Equity securities 10.8 10.6
Mortgage loans .1 .1
Real estate .2 .2
Policy loans 3.6 3.5
Other long term investments 11.6 13.2
Short term investments 4.5 3.9
------------------
100.0% 100.0%
===================
</TABLE>
17
<PAGE>
====================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
====================================
The majority of the Company's investment portfolio consists of fixed
maturities which are diverse as to both industry and geographic concentration.
In 1996 and 1995, the Company increased its investments in mortgage backed
securities and increased the level of short term investments. In addition, the
decline in other long term investments was due to a drop in the consumer loan
portfolio of approximately 14.3%.
The rating of the Company's portfolio of fixed maturities using the
Standard & Poor's rating categories is as follows at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
-------------------
<S> <C> <C>
AAA to A- 87.7% 86.9%
BBB+ to BBB- 11.6 12.2
BB+ and below (below investment grade) 0.7 0.9
-------------------
100.0% 100.0%
===================
</TABLE>
One hundred percent of the fixed maturity portfolio was rated by an outside
rating service. No securities were rated by Company management. The Company
considers bonds with a quality rating of BB+ and below to be below investment
grade or high yield bonds (also called junk bonds).
The following is information concerning the Company's portfolio of high
yield fixed maturity investments at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
% of % of
Statutory Statutory
1996 Surplus 1995 Surplus
----------------------------------------------------------
<S> <C> <C> <C> <C>
High-yield fixed maturities:
Amortized value $3,490,866 1.4% $ 4,512,625 1.9%
Carrying value (market) $3,656,750 1.5% $ 4,411,332 1.9%
Unrealized gain (loss) $ 165,884 0.1% $ (101,293) --
</TABLE>
During 1996 and 1995 the Company had net losses on disposals of high yield
debt securities of $1,250 and $482,770, respectively. In addition, in 1996 the
Company wrote down one bond issue totaling $420,345 and four equity securities
totaling $2.0 million whose declines in value were deemed to be other than
temporary. Similarly, in 1995 the Company wrote down one equity investment in
the amount of $501,125. At December 31, 1996 and 1995, there were no
nonperforming bonds in the portfolio.
Included in the Company's portfolio of equity securities are common stocks
of issuers of high yield debt instruments. Information concerning this category
of equity securities is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
% of % of
Statutory Statutory
1996 Surplus 1995 Surplus
--------------------------------------------------
<S> <C> <C> <C> <C>
Equity investments
held in issuers of
high-yield debt securities:
Carrying value (market) $8,243,223 3.3% $4,141,041 1.8%
Cost $7,587,555 3.1% $3,877,250 1.7%
Unrealized gain $ 655,668 0.3% $ 263,791 0.1%
</TABLE>
During 1996, the Company sold approximately $85.7 million in fixed
maturities available for sale. These sales resulted in gross realized gains of
$572,686 and gross realized losses of approximately $3.6 million. During 1995
the Company sold approximately $13.0 million in fixed maturities available for
sale. These sales resulted in gross realized gains of $500,601 and gross
realized losses of $566,637. 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 investment gains with losses, which reduced taxes.
At December 31, 1996, approximately 43.6% 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 impact of prepayment risk on the
Company's financial position is not believed to be significant. At December 31,
1996 the Company's total portfolio of fixed maturities had gross unrealized
gains of $22.4 million and gross unrealized losses of $3.8 million. Securities
are priced by nationally recognized pricing services or by broker/dealers
securities firms. No securities were priced by the Company.
The Company's investment in other long term investments consists primarily
of consumer finance receivables collateralized by automobiles and other property
and of assets leased under operating leases. At December 31, 1996, the
delinquency ratio on the portfolio was 2.56%, or $1.5 million. Loans charged off
in 1996 totaled
18 Alfa Corporation 1996
<PAGE>
====================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
====================================
$508,055 or 0.8% of the average outstanding loan portfolio. At December 31,
1996, the Company maintained an allowance for loan losses of $633,479 or
approximately 1.1% 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 effective tax rate was 29.8% in 1996, 28.0% in 1995 and 31.3% in 1994.
The increase in income tax expense in 1996 is due primarily to the increase in
income before provision for income taxes. The increase in the effective rate is
due to the impact in 1995 of Hurricane Opal on the relative mix of taxable
versus tax-exempt income. The effective rate has also been impacted by the
Company's investment in certain tax credits which has lowered income tax
expense.
The decline in income tax expense in 1995 from 1994 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.
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 investment 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 December 31,
1996 there had been 800 options exercised, 814,988 were exercisable and 47,600
had been cancelled leaving 1,024,200 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
December 31, 1996, the Company had repurchased 1,097,600 shares at a cost of
$4,630,770. The Company reissued 800 treasury shares as a result of option
exercises in 1996.
Total notes payable decreased $8.6 million in 1996 to $86.6 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, 1996 the Company had
approximately $73.6 million in commercial paper at rates ranging from 5.38% to
5.58% with maturities ranging from January 10, 1997 to January 29, 1997. 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 $10.8 million in short-term debt
outstanding to affiliates with interest equal to commercial paper rates payable
monthly and $2.2 million outstanding in other short-term debt at a rate of 3.6%.
Cash surrenders paid to policyholders on a statutory basis totaled $10.2
million in 1996 and $7.5 million in 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 persistency is
19
<PAGE>
====================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
====================================
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, 1996 the total amount of cash that would be
required to fund all amounts subject to surrender was approximately $233.2
million.
The Company's business is concentrated geographically in Alabama, Georgia
and Mississippi. Accordingly, unusually severe storms or other disasters in
these contiguous states might have a more significant effect on the Company than
on a more geographically diversified insurance company. Although the company
believes its reinsurance coverages are adequate, unusually severe storms, other
natural disasters and other events could have an adverse impact on the Company's
financial condition and operating results. However, the Company's catastrophe
protection program which began November 1, 1996, will reduce the earnings
volatility caused by such catastrophe exposure.
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.
INFORMATION ABOUT FORWARD-LOOKING STATEMENTS
Any statement contained in this report which is not a historical fact, or
which might otherwise be considered an opinion or projection concerning the
Company or its business, whether express or implied, is meant as and should be
considered a forward- looking statement as that term is defined in the Private
Securities Litigation Reform Act of 1996. Forward-looking statements are based
on assumptions and opinions concerning a variety of known and unknown risks,
including but not necessarily limited to changes in market conditions, natural
disasters and other catastrophic events, increased competition, changes in
availability and cost of reinsurance, changes in governmental regulations, and
general economic conditions, as well as other risks more completely described in
the Company's filings with the Securities and Exchange Commission, and in this
Annual Report. If any of these assumptions or opinions prove incorrect, any
forward-looking statements made on the basis of such assumptions or opinions may
also prove materially incorrect in one or more respects.
20 Alfa Corporation 1996
<PAGE>
ALFA CORPORATION CONSOLIDATED BALANCE SHEETS
---------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1996 1995
--------------------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed Maturities held for investment, at amortized
cost (market value $2,998,688 in 1996 and
$3,980,724 in 1995) $ 2,817,964 $ 3,711,475
Fixed maturities available for sale, at market
value (amortized cost $591,859,469 in 1996 and
$539,217,454 in 1995) 610,324,605 572,403,242
Equity securities, at market (cost $59,763,634
in 1996 and $61,247,187 in 1995) 96,007,650 89,014,464
Mortgage loans on real estate 826,480 995,777
Investment real estate (net of accumulated
depreciation of $1,356,829 in 1996 and
$1,205,694 in 1995) 1,855,972 1,829,363
Policy loans 31,680,254 29,084,753
Other long-term investments 102,297,440 111,073,137
Short-term investments 40,206,951 33,010,906
--------------------------------------
Total investments 886,017,316 841,123,117
Cash 4,424,123 1,326,285
Accrued investment income 10,032,275 9,340,980
Accounts receivable 9,498,914 13,771,367
Reinsurance balances receivable 1,689,654 4,546,506
Due from affiliates 2,709,492 1,406,729
Deferred policy acquisition costs 100,094,079 89,156,542
Other assets 4,864,302 4,761,451
--------------------------------------
Total assets $ 1,019,330,155 $ 965,432,977
======================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy liabilities and accruals $ 442,878,500 $ 402,352,509
Unearned premiums 92,945,366 85,306,194
Dividends to policyholders 8,988,574 8,863,633
Premium deposit and retirement deposit funds 6,925,786 7,861,070
Deferred income taxes 24,686,336 22,501,534
Other liabilities 32,974,237 28,612,754
Due to affiliates 6,135,599
Commercial paper 73,580,963 81,949,616
Notes payable 2,209,958 2,323,362
Notes payable to affiliates 10,828,626 10,916,962
--------------------------------------
Total liabilities 696,018,346 656,823,233
======================================
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: 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, net of tax 33,926,747 35,620,863
Retained earnings 230,839,897 214,453,116
Treasury stock: at cost, 1996 - 1,104,800;
1995 - 1,105,600 shares (4,627,670) (4,631,770)
--------------------------------------
Total stockholders' equity 323,311,809 308,609,744
--------------------------------------
Total liabilities and stockholders' equity $ 1,019,330,155 $ 965,432,977
</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,
------------------------------------------
1996 1995 1994
-------------------------------------------
<S> <C> <C> <C>
Revenues:
Premiums and policy charges $337,186,418 $308,088,969 $247,130,623
Net investment income 54,194,334 50,923,107 45,553,661
Net realized investment gains 2,807,588 1,106,016 571,966
Other income 2,147,688 2,645,243 3,056,928
------------------------------------------
Total revenues 396,336,028 362,763,335 296,313,178
------------------------------------------
Benefits and expenses:
Benefits and settlement expenses 267,311,326 250,393,437 182,616,940
Dividends to policyholders 3,055,700 3,015,079 2,900,027
Amortization of deferred policy acquisition costs 51,111,851 47,361,743 37,746,222
Other operating expenses 29,003,291 31,000,372 25,218,195
------------------------------------------
Total expenses 3 50,482,168 331,770,631 248,481,384
------------------------------------------
Income before provision for income taxes 45,853,860 30,992,704 47,831,794
Provision for income taxes 13,664,645 8,674,753 14,965,056
------------------------------------------
Net income $32,189,215 $22,317,951 $32,866,738
==========================================
Net income per share $.79 $.55 $.81
==========================================
Weighted average shares outstanding 40,786,561 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, 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
($.375 per share) (15,294,717) (15,294,717)
Net income 22,317,951 22,317,951
--------------------------------------------------------------------------------------
Balance, December 31,1995 41,891,512 21,276,023 35,620,863 214,453,116 (4,631,770) 308,609,744
Change in net unrealized
investment gains/losses (1,694,116) (1,694,116)
Dividends to stockholders
($.3875 per share) (15,802,434) (15,802,434)
Exercise of stock options 5,300 4,100 9,400
Net income 32,189,215 32,189,215
--------------------------------------------------------------------------------------
Balance, December 31, 1996 $41,891,512 $21,281,323 $33,926,747 $230,839,897 $(4,627,670) $323,311,809
======================================================================================
</TABLE>
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,
--------------------------------------------------
1996 1995 1994
--------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $32,189,215 $22,317,951 $32,866,738
Adjustments to reconcile net income to net cash
provided by operating activities:
Policy acquisition costs deferred (59,234,604) (54,231,803) (44,427,854)
Amortization of deferred policy acquisition costs 51,111,851 47,361,743 37,746,222
Depreciation and amortization 4,447,490 4,781,522 4,011,402
Provision for deferred taxes 1,859,058 471,030 (9,083,866)
Interest on policyholders' funds 12,273,381 10,715,806 9,484,217
Net realized investment gains (2,807,588) (1,106,016) (571,966)
Other 2,460,366 1,127,332 545,644
Changes in operating assets and liabilities:
Increase in accrued investment income (691,295) (270,152) (716,825)
Decrease (increase) in accounts receivable 4,077,468 (6,656,298) 4,272,274
Decrease (increase) in reinsurance balances receivable 3,745,010 (1,101,267) (1,957,774)
Decrease (increase) in amounts due from affiliates (1,302,763) 393,581 (1,242,775)
Increase (decrease) in amounts due to affiliates (6,135,599) 5,955,949 (1,997,216)
Increase in other assets (102,851) (20,490) (630,304)
Increase in liability for policy reserves 14,161,376 25,492,677 15,781,187
Increase in liability for unearned premiums 7,639,172 5,880,022 3,361,282
Decrease in amounts held for others (810,343) (1,020,983) (84,771)
Increase (decrease) in other liabilities 2,394,885 (2,834,047) 11,546,865
--------------------------------------------------
Net cash provided by operating activities 65,274,229 57,256,557 58,902,480
--------------------------------------------------
Cash flows from investing activities:
Maturities and redemptions of fixed maturities held for investment 912,250 1,014,623 5,494,458
Maturities and redemptions of fixed maturities available for sale 37,623,173 32,053,653 48,709,692
Maturities and redemptions of other investments 86,205,777 85,578,545 63,434,944
Sales of fixed maturities available for sale 85,651,625 12,972,473 114,656,045
Sales of other investments 54,618,422 19,752,645 42,618,304
Purchase of fixed maturities available for sale (175,124,345) (74,324,150) (243,495,912)
Purchase of other investments (135,251,325) (117,676,379) (149,583,434)
Net (increase) decrease in short-term investments (12,482,017) (2,759,648) 26,538,805
Net (increase) decrease in receivable/payable on securities 7,304,553 (5,540,774) (5,536,364)
Net cash used in -----------------------------------------------------
investing activities (50,541,887) (48,929,012) (97,163,462)
-----------------------------------------------------
Cash flows from financing activities:
Increase (decrease) in commercial paper (8,368,653) 81,949,616
Increase (decrease) in notes payable (113,404) (90,804,780) 42,417,139
Increase (decrease) in notes payable to affiliates (88,336) (9,537,780) 233,589
Stockholder dividends paid (15,802,434) (15,294,718) (13,969,175)
Proceeds from exercise of stock options 9,400
Deposits of policyholders' funds 40,369,961 38,106,084 36,460,374
Withdrawal of policyholders' funds (27,641,038) (23,169,879) (21,877,303)
-----------------------------------------------------
Net cash (used in) provided by financing activities (11,634,504) (18,751,457) 43,264,624
-----------------------------------------------------
Net (decrease) increase in cash 3,097,838 (10,423,912) 5,003,642
Cash at beginning of year 1,326,285 11,750,197 6,746,555
Cash at end of year -----------------------------------------------------
$ 4,424,123 1,326,285 11,750,197
=====================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $4,976,921 $6,254,471 $4,524,267
Income taxes $10,536,000 $20,376,776 $19,583,700
</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.
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 by the National Association of
Insurance Commissioners (NAIC) and state regulatory authorities.
The accompanying consolidated financial statements include, after
intercompanying 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
$309 million of premiums and policy charges representing 89% of such amounts in
1996 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 are 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 expenses.
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
------------------------------------------
(Note 1. continued)
INVESTMENTS
Fixed maturities 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 are
recorded as a component of stockholders' equity, net of taxes. 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.
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 on real
estate 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 $225,782 in options outstanding
at December 31, 1996.
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
The Company's method of accounting for income taxes is the liability
method. Under the liability method, deferred tax assets and liabilities are
adjusted to reflect changes in statutory tax rates resulting in income
adjustments in the period such changes are enacted.
REINSURANCE
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 acquisition 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 1995 and 1994 amounts in order
to conform to 1996 classifications and descriptions.
26
<PAGE>
ALFA CORPORATION
================
2. POOLING AGREEMENT
Effective August 1, 1987, the Company entered into a property and casualty
insurance Pooling Agreement (the "Pooling Agreement") with Alfa Mutual Insurance
Company (Mutual), and other members of the Mutual Group. The Mutual Group is a
direct writer primarily of personal lines of property and casualty insurance in
Alabama. The Company's subsidiaries similarly are direct writers in Georgia and
Mississippi. Both the Mutual Group and the Company write preferred risk
automobile, homeowner, farmowner and mobile home insurance, fire and allied
lines, standard risk automobile and homeowner insurance, and a limited amount of
commercial insurance, including church, and businessowner insurance. Under the
terms of the Pooling Agreement, the Company cedes to Mutual all of its property
and casualty business. All of the Mutual Group's direct property and casualty
business (together with the property and casualty business ceded by the Company)
is included in the pool. Until September 30, 1994, Mutual retroceded 50% of the
pooled premiums, losses, loss adjustment expenses and other underwriting
expenses to the Company while retaining 50% of these amounts itself. On October
1, 1994, the Company increased its participation in the Pooling Agreement.
Mutual currently retrocedes 65% of the pool to the Company and retains 35%
within the Mutual Group. On October 1, 1996, the Pooling Agreement was amended
in conjunction with the restructuring of the Alfa Insurance Group's catastrophe
protection program. Effective November 1, 1996, the allocation of catastrophe
costs among the members of the pool was changed to better reflect the economics
of catastrophe finance. The amendment limits Alfa Corporation's participation in
any single catastrophic event or series of disasters to its pool share (65%) of
$10 million unless the loss exceeds $249 million on a 100% basis in which case
the Company's share in the loss would be based upon its amount of surplus
relative to the other members of the group. Currently, the Company's share of
losses exceeding $249 million would be 13%. The change will allow the
catastrophe reinsurance buying decision to be made on a group basis which will
benefit each member of the group. The Company's participation in the Pooling
Agreement may be changed or terminated without the consent or approval of the
Company's shareholders, and the Pooling Agreement may be terminated by any party
thereto upon 90 days notice.
As a result of the Pooling Agreement, the Company had a receivable of
$1,983,832 from the Mutual Group and a payable of $6,135,599 to the Mutual Group
at December 31, 1996 and December 31, 1995, respectively, for cash transactions
originating in December and settled the following month. Approximately 84.4% of
the Company's property and casualty premium income and 75.1% of its total
premium income for 1996 was derived from the Company's participation in the
Pooling Agreement.
3. RELATED PARTY TRANSACTIONS
Mutual owns 39.72% and Alfa Mutual Fire (Fire) owns 11.07% of the Company's
common stock. The Board of Directors of the Company consists of eleven members,
six of whom serve as Directors of Mutual, Fire and Alfa Mutual General (General)
and two of whom at December 31, 1996 were executive officers of the Company. Two
of the Company's directors and most of the Company's executive officers,
including the Company's President, also hold the same positions with Mutual,
Fire and General. The Company paid stockholder dividends to Mutual and Fire
totaling $8,027,769 in 1996 and $7,768,809 in 1995 and $7,095,512 in 1994.
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 $27.1 million in 1996, $26.0 million in 1995 and
$25.3 million in 1994. 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.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Note 3. continued)
Mutual's employees are covered by a group life insurance plan provided by
Life. Group life insurance premiums paid to Life totaled $1,708,058 in 1996,
$1,606,169 in 1995 and $2,104,223 in 1994. Policy reserves and insurance in
force on this plan at December 31, 1996 were approximately $703,000 and $325
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 $2,138,167 in 1996, $2,141,934 in 1995 and $2,015,787 in 1994
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 were, $1,628,626 and $916,962 at December 31, 1996 and 1995
respectively. Interest paid by Financial to the Mutual Group was $206,117 in
1996, $566,380 in 1995 and $474,683 in 1994. The Mutual Group's sponsoring
organization, the Alabama Farmers' Federation (Federation), and Alfa Services,
Inc., a Federation subsidiary, invest in short-term lines of credit with the
Company and Financial. At December 31, 1996 and 1995, the balance outstanding on
these lines of credit included in notes payable to affiliates was $9,200,000 and
$10,000,000. Interest paid by the Company and Financial to the Federation and
its subsidiary was $521,938 in 1996, $618,132 in 1995 and $468,621 in 1994. The
Mutual Group is a partner in a real estate partnership, which in 1996
established a revolving line of credit with Financial of $1.0 million at a rate
of interest equal to the Company's commercial paper rate plus 1.0%. At December
31, 1996 the amount loaned to the partnership under the line of credit was
$510,000. Interest accrued in 1996 by Financial from such loan was $1,919, which
was paid in January, 1997.
The Company's real estate construction subsidiary (Builders) contracts with
the Mutual Group for the construction of certain commercial facilities. The
Mutual Group paid $5,273,906 in 1996, $9,214,674 in 1995 and $4,615,162 in 1994
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 $98,780 in 1996,
$224,760 in 1995 and $152,150 in 1994 for such sales services.
The Company periodically has investment transactions with the Mutual Group.
In 1996, the Company sold a security totaling $919,375 to the Mutual Group at
market value, for a loss of $30,718. No such transactions occurred in 1995. In
1994, the Company sold securities totaling $1,174,553 to the Mutual Group at
market value, for a loss of approximately $659,980. The Company has also entered
into an investment partnership with the Mutual Group. The amount invested in the
partnership was $8 million and $6.7 million at December 31, 1996 and 1995
respectively. The Company had committed to fund up to $5.2 million additional
investment in the partnership at December 31, 1996. The Company's life
subsidiary is the general partner in two investment partnerships with a
Charitable Remainder Unit Trust created by Mutual. The amount invested in the
partnerships was $616,238 and $564,673 at December 31, 1996 and 1995,
respectively.
28
<PAGE>
ALFA CORPORATION
----------------
4. INVESTMENTS
Net investment income is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities:
Held for investment $ 317,070 $ 424,437 $ 538,428
Available for sale 43,886,976 41,300,467 37,125,999
--------------------------------------------------------
Total fixed maturities 44,204,046 41,724,904 37,664,427
Equity securities 2,849,287 2,856,503 2,451,891
Mortgage loans on real estate 79,693 95,414 113,638
Investment real estate 429,386 320,044 299,610
Policy loans 2,246,242 2,102,457 1,824,634
Other long-term investments 15,044,988 15,998,978 12,078,507
Short-term investments 1,388,853 1,537,560 893,870
--------------------------------------------------------
Total investment income 66,242,495 64,635,860 55,326,577
Investment expenses, including
interest expense 12,048,161 13,712,753 9,772,916
--------------------------------------------------------
Net investment income $54,194,334 $50,923,107 $45,553,661
========================================================
Net realized investment gains
(losses) are summarized as follows:
1996 1995 1994
--------------------------------------------------------
Fixed maturities:
Held for investment $ 2,190 6,227 $ 271,717
Available for sale (4,132,690) 126,916 (7,964,208)
--------------------------------------------------------
Total fixed maturities $(4,130,500) $ 133,143 $(7,692,491)
Equity securities 6,388,549 429,310 7,415,236
Other investments 549,539 543,563 849,221
--------------------------------------------------------
Net realized investment gains $ 2,807,588 $ 1,106,016 $ 571,966
========================================================
</TABLE>
Changes in net unrealized investment
gains and losses on fixed maturities
and equity securities are as follows:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------------------------------------------
1996 1995 1994
--------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities:
Held for investment $ (88,525) $ 114,606 $(24,935,799)
========================================================
Available for sale, net of tax $(7,738,814) $ 34,066,412 $(16,867,605)
========================================================
Equity securities, net of tax $ 6,044,698 $ 12,534,652 $ (8,030,077)
========================================================
</TABLE>
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.
At December 31, 1996, gross unrealized gains for equity securities amounted
to $39,079,225 while gross unrealized losses amounted to $2,162,789 and
applicable deferred income taxes aggregated $12,449,682.
The Company's fixed maturity portfolio is predominantly comprised of
investment grade securities. At December 31, 1996, approximately $4.0 million in
fixed maturities (0.7% 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 CONSOLDIATED 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, 1996
--------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------------------------------------------------------------
<S> <C> <C> <C> <C>
HELD FOR INVESTMENT:
Mortgage-backed securities $ 2,817,964 $ 180,724 $ $ 2,998,688
==============================================================
AVAILABLE FOR SALE:
U.S. Treasury securities &
obligations of U.S. Government
corporations and agencies $ 64,299,445 $ 2,822,162 $ (156,361) $ 66,965,246
Obligations of states & political
subdivisions 100,720,322 4,356,271 (237,364) 104,839,229
Corporate securities 160,752,588 8,915,562 (494,746) 169,173,404
Mortgage-backed securities 261,800,020 6,031,249 (2,816,077) 265,015,192
Other debt securities 4,287,094 99,410 (54,970) 4,331,534
--------------------------------------------------------------
Totals $ 591,859,469 $ 22,224,654 $ (3,759,518) $ 610,324,605
==============================================================
</TABLE>
<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 5,487,781 (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 fixed maturities available
---------
for sale at December 31, 1996 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.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------
ESTIMATED
AMORTIZED MARKET
COST VALUE
-----------------------------
<S> <C> <C>
AVAILABLE FOR SALE:
Due in one year or less $ 4,869,297 $ 4,952,961
Due after one year through five years 71,293,118 74,900,909
Due after five years through ten years 142,383,419 147,617,737
Due after ten years 111,513,615 117,837,806
-----------------------------
330,059,449 345,309,413
Mortgage-backed securities 261,800,020 265,015,192
-----------------------------
$591,859,469 $610,324,605
=============================
</TABLE>
30
<PAGE>
ALFA CORPORATION
----------------
(Note 4. continued)
Proceeds from sales of fixed maturities available for sale were $85,651,625
in 1996, $12,972,473 in 1995 and $114,656,045 in 1994. Gross gains of $572,686
in 1996, $500,601 in 1995 and $2,031,792 in 1994 and gross losses of $3,616,504
in 1996, $566,637 in 1995 and $8,859,861 in 1994 were realized on those sales.
In addition, the Company recorded a loss of approximately $2,450,000 in 1996,
$501,000 in 1995 and $804,000 in 1994 for securities whose valuation was deemed
to be an other than temporary decline. At December 31, 1996 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 such securities is subject to significant fluctuations 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, 1996 and 1995, the Company's mortgage loan portfolio
totaled approximately $826,000 and $1.0 million respectively, and the collateral
loan portfolio, included in "Other long-term investments", totaled $61.5 million
and $68.1 million, respectively. These portfolios consisted of consumer loans 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 $59.0 million and $73.0 million at December 31, 1996 and
1995, respectively. The estimated market value was determined by discounting the
estimated future cash flows from the loan portfolio at 7.75% for 1996 and 8.0%
for 1995, 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, 1996.
The Company's policy loans earn interest at rates ranging from 5.0% to 8.0%
at December 31, 1996. 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.
The company's investments in partnerships and leases, included in other
long term investments, are carried at cost. Management believes the carrying
value and fair value is not materially different.
At December 31, 1996, the Company had $1,682,845 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,
---------------------------------------------------------
1996 1995
---------------------------------------------------------
COST Fair Value Cost Fair Value
---------------------------------------------------------
<S> <C> <C> <C> <C>
Investments:
Fixed maturities held
for investment $ 2,817,964 $ 2,998,688 $ 3,711,475 $ 3,980,724
Fixed maturities available
for sale $591,859,469 $610,324,605 $539,217,454 $572,403,242
Equity securities $ 59,763,634 $ 96,007,650 $ 61,247,187 $ 89,014,464
Short-term investments $ 40,206,951 $ 40,206,951 $ 33,010,906 $ 33,010,906
Other long-term investments $102,297,440 $103,871,171 $111,073,137 $116,447,626
Liabilities:
Commercial paper $ 73,580,963 $ 73,580,963 $ 81,949,616 $ 81,949,616
Notes payable $ 13,038,584 $ 13,038,584 $ 13,240,324 $ 13,240,324
</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
LIABILITY --------------------------------------------------
INSURANCE ---------------------------- YEARS INTEREST MORTALITY WITH-
IN FORCE 12/31/96 12/31/95 OF ISSUE RATE AND MORBIDITY DRAWALS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ordinary $4,098,484,677 $ 105,049,177 $100,079,665 1955 5% 1955-60 Basic Select Company
life to and Ultimate experience
1978 Mortality Tables
1979 7% Modified 1965-70 Basic Company
and graded Select and Ultimate experience
1980 to 5% Mortality Tables
1981 9% Modified 1965-70 Basic Company
to graded Select and Ultimate experience
1993 to 7% Mortality Tables
1994 6% Modified 1965-70 Basic Company
to Select and Ultimate experience
1996 Mortality Tables
Interest 1,804,110,187 131,550,135 118,175,945 1984 6.5% to Modified 1965-70 Basic Company
sensitive to 6.85%* Select and Ultimate experience
life 1996 Mortality Tables
Universal 3,223,739,769 71,768,286 60,529,011 1987 5.75% to Modified 1965-70 Basic Company
Life to 6.85%* Select and Ultimate experience
1996 Mortality Tables
Annuities w/o 12,337,709 11,636,422 1974 5.5% to -- --
life contingencies to 6.5%*
1996
Group Credit 11,016,097 377,918 516,303 1992 3.0% 1958 CET --
life to
1996
Group life 325,704,177 702,818 703,751 1996 4.5% 1960 CSG --
---------------------------------------------
$9,463,054,907 $ 321,786,043 $291,641,097
==============
Accident
& Health 324,051 342,697 5% 1972 intercompany 200% N&W III
reports
Losses and loss
adjustment
expenses 120,768,406 110,368,715
----------------------------
$ 442,878,500 $402,352,509
============================
</TABLE>
* Rates are adjustable annually on policyholders' anniversary dates.
Participating policies represent approximately 3% of the ordinary life
insurance in force and 7% 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)
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>
1996 1995 1994
--------------------------------------------------------------------------------------------
Property and Property and Property and
Casualty Life Casualty Life Casualty Life
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, $ 108,303,253 $ 2,065,462 $ 88,486,091 $ 1,221,676 $ 77,984,288 $ 1,477,679
Less Reinsurance
recoverables on
unpaid losses (2,293,048) (717,018) (1,331,358) (168,665) (1,770,656) (522,156)
--------------------------------------------------------------------------------------------
Net balance at
January 1, 106,010,205 1,348,444 87,154,733 1,053,011 76,213,632 955,523
--------------------------------------------------------------------------------------------
Incurred related to:
Current year 241,616,410 8,717,628 222,060,992 9,627,020 161,643,885 8,069,065
Prior years (4,702,409) 151,950 (1,698,077) (187,383) (6,403,800) 209,893
--------------------------------------------------------------------------------------------
Total incurred 236,914,001 8,869,578 220,362,915 9,439,637 155,240,085 8,278,958
--------------------------------------------------------------------------------------------
Paid related to:
Current year 172,087,000 7,363,636 161,526,000 8,757,344 111,427,984 7,380,951
Prior years 54,173,320 559,968 39,981,443 386,860 32,871,000 800,519
--------------------------------------------------------------------------------------------
Total paid 226,260,320 7,923,604 201,507,443 9,144,204 144,298,984 8,181,470
--------------------------------------------------------------------------------------------
Net balance at
December 31, 116,663,886 2,294,418 106,010,205 1,348,444 87,154,733 1,053,011
Plus reinsurance
recoverables on
unpaid losses 745,156 801,496 2,293,048 717,018 1,331,358 168,665
--------------------------------------------------------------------------------------------
Balance at
December 31, $ 117,409,042 $ 3,095,914 $ 108,303,253 $ 2,065,462 $ 88,486,091 $ 1,221,676
============================================================================================
</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 provisions (benefits) for income tax:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------------------------------
<S> <C> <C> <C>
Current $11,805,587 $8,203,723 $ 24,048,922
Deferred 1,859,058 471,030 (9,083,866)
-------------------------------------------------
Total $13,664,645 $8,674,753 $ 14,965,056
=================================================
</TABLE>
Reconciliations of the differences between income taxes computed at Federal
statutory tax rates and provisions for income taxes are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------------------------
<S> <C> <C> <C>
Income taxes computed at
Federal statutory tax rate $ 16,048,851 $ 10,847,446 $ 16,741,128
Dividends received deduction
and tax exempt interest (2,237,859) (2,376,925) (2,135,354)
Other, net (146,347) 204,232 359,282
--------------------------------------------
$ 13,664,645 $ 8,674,753 $ 14,965,056
============================================
</TABLE>
Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
1996 1995
-----------------------------
<S> <C> <C>
Deferred Tax Assets:
Reserve computational method differences $ 20,327,460 $ 20,439,467
Unearned premium reserve 6,506,176 5,971,434
Other 2,464,850 3,343,305
-----------------------------
Total deferred tax asset $ 29,298,486 $ 29,754,206
-----------------------------
Deferred Tax Liabilities:
Unrealized gains $ 17,861,287 $ 20,748,907
Deferred acquisition costs 33,883,532 30,206,740
Other 2,240,003 1,300,093
-----------------------------
Total deferred tax liability $ 53,984,822 $ 52,255,740
-----------------------------
Net deferred tax liability $(24,686,336) $(22,501,534)
=============================
</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, 1996 was $86.6 million. Of this amount, the
Company had approximately $73.6 million in commercial paper at rates ranging
from 5.38% to 5.58% with maturities ranging from January 10, 1997 to January 29,
1997. 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 $10.8 million in short-term
debt outstanding to affiliates with interest equal to commercial paper rates
payable monthly and $2.2 million outstanding in other short-term debt at a rate
of 3.6%.
9. CONTINGENT LIABILITIES
The property and casualty subsidiaries participate in 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, 1996. These legal
proceedings involve alleged breaches of contract, torts, including bad faith and
fraud claims based on alleged wrongful or fraudulent acts of agents and
miscellaneous other causes of action. Many of these lawsuits involve claims for
punitive damages. The likelihood or extent of a punitive damage award in any one
of these given cases is not possible to predict. Although the Alfa Insurance
Group including Alfa Corporation and its subsidiaries has such legal proceedings
filed against it in which punitive damages are sought, to date, no such lawsuit
has resulted in the award of any significant amount of damages against the
Company. Based upon information presently available, applicable law and the
defenses available to Alfa Corporation and its subsidiaries, management does not
consider the contingent liabilities which might arise from pending litigation to
be material in relation to the financial position, 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 the
Company has substantial business, the frequency of large punitive damage awards,
bearing little or no relation to the actual damages awarded by juries, continues
to exist, creating the potential for unpredictable material adverse judgments in
any given suit.
10. STOCKHOLDERS' EQUITY
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, 1996, the Company had repurchased 1, 097,600 shares at a cost of
$4,630,770 and due to the exercise of stock options has reissued 800 shares at a
cost of $4,100 under this program, which decreased the total number of shares
outstanding to 40,786,712 shares.
The amounts of statutory stockholders' equity and net income for the
Company's life and property casualty insurance subsidiaries are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------
<S> <C> <C> <C>
Statutory net income:
Life insurance subsidiary $ 11,857,726 $ 6,287,576 $ 27,145,478
==========================================
Property and casualty
subsidiaries $ 11,534,172 $ 7,040,081 $ 18,387,643
==========================================
Statutory stockholders' equity:
Life insurance subsidiary $110,983,883 $105,665,754 $110,988,988
==========================================
Property and casualty subsidiaries $137,543,765 $129,870,498 $115,393,261
==========================================
</TABLE>
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 $24.9 million without prior regulatory approval in 1997 based on
December 31, 1996 financial condition and results of operations.
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Note 10. continued)
At December 31, 1996 the life subsidiary's Adjusted Capital calculated in
accordance with NAIC Risk-Based Capital guidelines was $130.9 million compared
to the Authorized Control Level amount of $12.9 million and the property and
casualty subsidiaries' Adjusted Capital was $137.5 million compared to the
Authorized Control Level amount of $15.0 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, 1996, 1995 and 1994 was approximately
$2,961,000, $2,983,000 and $2,674,000, respectively. The cost and net book value
of major classes of leased property at December 31, 1996 was:
<TABLE>
<CAPTION>
COST NET BOOK VALUE
-----------------------------
<S> <C> <C>
Transportation equipment $ 9,120,430 $ 7,063,780
Furniture and equipment 20,211,088 7,530,902
Buildings 2,550,548 1,623,169
----------------------------
Total $31,882,066 $16,217,851
============================
</TABLE>
At December 31, 1996, the aggregate minimum rental payments to be received
under leases having initial or remaining lease terms in excess of one year are
approximately $2,193,000 in 1997, $1,089,000 in 1998, $404,700 in 1999, $67,190
in 2000 and $3,420 in 2001.
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
$1,017,669,000 of its life insurance in force with other insurance companies and
has taken reserve credits for approximately $3,285,000 on account of such
reinsurance at December 31,1996. 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 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.
The following table summarizes the effects of reinsurance on premiums and
losses for the three years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1996 1995 1994
-----------------------------------------------------
<S> <C> <C> <C>
Direct premiums earned $ 89,273,157 $ 79,865,167 $ 72,302,430
Premiums ceded to nonaffiliates (10,705,073) (13,099,076) (8,210,130)
Premiums ceded to pooling agreement (47,904,965) (41,901,158) (36,810,521)
Premiums assumed from pooling agreement 306,461,981 283,180,565 219,806,947
Premiums assumed from nonaffiliates 61,318 43,471 41,897
-----------------------------------------------------
Net premiums earned $ 337,186,418 $ 308,088,969 $ 247,130,623
=====================================================
Direct Losses $ 64,387,651 $ 60,434,336 $ 48,061,296
Losses ceded to nonaffiliates (4,355,459) (39,356,037 (1,520,101)
Losses ceded to pooling agreement (37,521,843) (32,594,000) (25,945,188)
Losses assumed from pooling agreement 224,835,694 241,712,916 143,518,957
Losses assumed from nonaffiliates 63,805 43,330 77,318
-----------------------------------------------------
Net Losses $ 247,409,848 $ 230,240,545 $ 164,192,282
=====================================================
</TABLE>
36
<PAGE>
ALFA CORPORATION
----------------
(Note 12. continued)
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, 1996, the Company does not believe there to be a significant
concentration of credit risk related to its reinsurance program. The Company
significantly reduced its need for and amount of reinsurance effective November
1, 1996. (See Note 2.)
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, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------------------
(in thousands)
<S> <C> <C> <C>
Revenues: Life $ 70,284 $ 63,517 $ 59,078
Property and casualty 321,284 294,363 232,033
Noninsurance operations
and corporate 4,768 4,883 5,202
----------------------------------------
$ 396,336 $ 362,763 $296,313
========================================
Net Income: Life $ 16,761 $ 13,723 $ 12,216
Property and casualty 15,205 8,428 20,376
Noninsurance operations
and corporate 223 167 275
----------------------------------------
$ 32,189 $ 22,318 $ 32,867
========================================
Assets: Life $ 533,435 $ 490,926 $433,343
Property and casualty 396,054 379,347 302,906
Noninsurance operations
and corporate 89,841 95,160 111,621
----------------------------------------
$1,019,330 $ 965,433 $847,870
========================================
</TABLE>
14. ACCOUNTING FOR STOCK-BASED COMPENSATION
During 1995, the Financial Accounting Standards Board issued Financial
Accounting Statement No. 123, "Accounting for Stock-Based Compensation", ("FAS
123"). The Statement defines a fair value based method of accounting for an
employee stock option. It also allows an entity to continue using the intrinsic
value based accounting method prescribed by APB Opinion No. 25, "Accounting for
Stock Issued to Employees." Alfa Corporation has continued to use this method to
account for its stock options. However, FAS 123 requires entities electing to
remain with the intrinsic method of accounting to provide pro forma disclosures
of net income and earnings per share as if the fair value based method of
accounting had been applied as well as other disclosures about the Company's
stock-based employee compensation plans. FAS 123 and its related disclosures
have been adopted by the Company in the first quarter of 1996. Information about
the Company's stock option plan and the related 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 with 565,500 of
those options exercisable at $11.75/share and 218,000 options exercisable at
$9.40/share. The Company also granted 80,000 options on March 28, 1994
exercisable at $11.50/share, 80,000 options on March 27, 1995 exercisable at
$11.50/share and 80,000 options on April 18, 1996 exercisable at $12.25/share.
The options ratably become exercisable annually over three years, and may not be
exercised after ten years after the date of the award. At December 31, 1996,
there had been 800 options exercised, 814,988 options were exercisable and
47,600 had been cancelled leaving 1,024,200 options available for grant under
the plan.
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Note 14. continued)
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 1996 and 1995, the Company has used the Black-Scholes
model for valuations. The significant assumptions used to estimate the fair
value of such options using this method and the fair value of the options at the
date of grant are as follows:
<TABLE>
<CAPTION>
OPTIONS GRANTED OPTIONS GRANTED
April 18, 1996 March 27, 1996
--------------- ---------------
<S> <C> <C>
Risk-free interest rate 6.58% 7.05%
Expected life (in years) 10 10
Expected volatility 0.47 0.62
Expected future dividend yield 2.9% 2.9%
Fair value at date of grant $486,898 $507,138
=======================
Option exercise price $12.25 $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>
DECEMBER 31,
------------------------------
1996 1995
------------------------------
<S> <C> <C>
Net income, as reported $32,189,215 $22,317,951
==============================
Earnings per share, as reported $ 0.79 $ 0.55
==============================
Proforma net income $32,005,055 $22,233,660
==============================
Proforma earnings per share $ 0.78 $ 0.55
==============================
</TABLE>
The information shown below is for options outstanding at December 31,
1996, 1995 and 1994:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- --------------------------- ----------------------
1996 1995 1994
-------------------------- --------------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
-------------------------- --------------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding
Beginning of
year 911,200 $11.14 845,732 $11.12 783,400 $11.10
Add (deduct):
Granted 80,000 $12.25 80,000 $11.50 80,000 $11.50
Exercised (800) ($11.75) 0 - 0 -
Cancelled (15,400) ($11.75) (14,532) ($11.75) (17,668) ($11.75)
-----------------------------------------------------------------------------------
End of Period 975,000 $11.23 911,200 $11.14 845,732 $11.12
===================================================================================
Exercisable,
end of period 814,988 $11.10 527,608 $11.09 256,485 $11.08
===================================================================================
Range of
exercise prices $9.40 to $12.25 $9.40 to $11.75 $9.40 to $11.75
=============== =============== ===============
Weighted
average
remaining
contractual
life 7.2 years 8.0 years 8.9 years
=============== =============== ==============
Actual
compensation
cost
recognized
during period $237,398 $376,676 $142,860
=============== =============== ==============
</TABLE>
38
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Stockholders and Board of Directors
Alfa Corporation
Montgomery, Alabama
We have audited the accompanying consolidated balance sheets of Alfa
Corporation and subsidiaries (the Company) as of December 31, 1996 and 1995, and
the related consolidated statements of income, stockholders' equity, and cash
flows for the years 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 audits. The
consolidated financial statements of the Company as of and for the year ended
December 31, 1994, were audited by other auditors whose report dated February 2,
1995, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 1996 and 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, 1996, and
1995, and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Birmingham, Alabama
February 4, 1997
39
<PAGE>
QUARTERLY FINANCIAL INFORMATION -- UNAUDITED
--------------------------------------------
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------------------------------------------------
March 31 June 30 September 30 December 31
---------------------------------------------------------------------------------------------------------
1996 1995 1996 1995 1996 1995 1996 1995
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Premiums and
Policy Charges $82,960,219 $76,783,144 $82,728,834 $76,357,521 $84,460,691 $78,511,269 $87,036,674 $76,437,035
Net Investment
Income $13,467,463 $12,138,844 $13,006,480 $12,425,039 $13,959,538 $13,373,023 $13,760,853 $12,986,201
Net Income
(Loss) ($57,616) $ 9,414,066 $10,796,264 $ 7,938,168 $12,284,206 $10,446,797 $ 9,166,361 ($5,481,080)
Average Shares
Outstanding 40,786,105 40,785,912 40,786,712 40,785,912 40,786,712 40,785,912 40,786,712 40,785,912
Net Income
(Loss) per
share* ($0.001) $ 0.23 $ 0.26 $ 0.19 $ 0.30 $ 0.26 $ 0.22 $ (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
<TABLE>
<CAPTION>
EXECUTIVE OFFICES DIVIDEND REINVESTMENT PLAN
<S> <C>
2108 East South Boulevard Alfa Corporation stockholders can reinvest their dividends in additional
Montgomery, Alabama 36116-2015 shares of stock and also may purchase additional shares with optional
Telephone: (334) 288-3900 cash payments. Alfa Corporation pays all costs and brokerage fees related
FAX (334) 288-0905 to the purchases under the plan. For more information contact Investor
Relations at the above address or call AmSouth Bank of Alabama at
FORM 10-K (205) 326-4062.
The Company's Form 10-K, as filed with
the Securities and Exchange Commission DEBT RATINGS
may be obtained by writing:
Ken Wallis, Secretary Standard Moody's
Alfa Corporation & Poor's Investors Service
P.O. Box 11000 ----------------------------------------------
Montgomery, Alabama 36191-0001 Alfa Corporation-- A-1+ P-1
Commercial Paper
COMMON STOCK INDEPENDENT ACCOUNTANTS
The common stock of Alfa Corporation is KPMG Peat Marwick LLP
traded on the NASDAQ National Market Financial Center
System under the symbol ALFA. Alfa Suite 1200
Corporation has approximately 3,200 Birmingham, Alabama 35203
stockholders of record. Newspaper listings
of NASDAQ stocks list Alfa Corporation as FOR FINANCIAL INFORMATION PLEASE CONTACT:
ALFACP.
Donald Price
STOCK TRANSFER AGENT Senior Vice President, Finance
AmSouth Bank of Alabama
Corporate Securities Services ADDITIONAL INFORMATION PLEASE CONTACT:
P.O. Box 11426
Birmingham, Alabama 35202 (205) 326-1062 John D. Holley
Vice President and Controller
STOCK PRICE AND DIVIDEND INFORMATION
- ----------------------------------------------- NASDAQ MARKET MAKERS
DIVIDENDS
1996 HIGH LOW PER SHARE Goldman, Sachs & Co.
- ----------------------------------------------- Herzog, Heine, Geduld, Inc.
First Quarter $16 1/4 $12 1/2 $.095 J.C. Bradford & Co.
Second Quarter 14 10 7/8 .0975 Mayer & Schweitzer, Inc.
Third Quarter 13 1/4 10 1/4 .0975 The Robinson-Humphrey Company, Inc.
Fourth Quarter 14 1/4 10 3/4 .0975 Sterne, Agee & Leach, Inc.
- ----------------------------------------------- Troster Singer Corp.
DIVIDENDS
1995 HIGH LOW PER SHARE ANNUAL MEETING
- -----------------------------------------------
First Quarter $12 $10 $.09 The Annual Meeting of Alfa Corporation stockholders will be held at
Second Quarter 12 1/4 11 .095 10:00 a.m., Thursday, April 24, 1997, in the auditorium of the Company's
Third Quarter 12 5/8 10 1/4 .095 executive offices in Montgomery.
Fourth Quarter 18 1/4 9 3/4 .095
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.
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Alfa Corporation
We consent to the incorporation by reference in the registration statements
(No. 33-77916 and No. 33-76460) on Forms S-8 and (No. 33-83134) on Form S-3 of
Alfa Corporation of our report dated February 4, 1997 relating to the
consolidated balance sheets of Alfa Corporation and subsidiaries as of December
31, 1996 and 1995, and the related consolidated statements of income,
stockholders' equity and cash flows for the years then ended, and all related
schedules, which report appears in the December 31, 1996, annual report on Form
10-K of Alfa Corporation.
KPMG Peat Marwick LLP
Birmingham, Alabama
March 26, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Alfa Corporation
We consent to the incorporation by reference in the registration statements of
Alfa Corporation of 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 on our audit
of the consolidated financial statements and financial statement schedules of
Alfa Corporation for the year ended December 31, 1994, which report is included
in the Annual Report on Form 10-K.
Coopers & Lybrand L.L.P.
Birmingham, Alabama
March 24, 1997
<TABLE> <S> <C>
<PAGE>
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<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
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