<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1998 Commission File Number 0-11773
ALFA CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 063-0838024
- ------------------------------- -------------------
(State of Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
2108 East South Boulevard, Montgomery, Alabama 36116
(Mail: P. O Box 11000, Montgomery, Alabama 36191-0001)
- ---------------------------------------------------------
(Address and Zip Code of Principal Executive Offices)
Registrant's Telephone Number
Including Area Code (334) 288-3900
--------------
None
- -------------------------------------------------------------------------------
Former name, former address and former fiscal year if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the close of the period covered by this report.
Class Outstanding June 30, 1998
- ----------------------------- -------------------------
Common Stock, $1.00 par value 40,836,912 shares
<PAGE>
ALFA CORPORATION
INDEX
Page No.
--------
Part I. Financial Information
(Condensed Consolidated Unaudited)
Item 1. Financial Statements
Balance Sheets -- June 30, 1998 and
December 31, 1997 3
Statements of Income, Six Months and Three Months
ended June 30, 1998 and 1997 4
Statements of Cash Flows, Six Months
ended June 30, 1998 and 1997 5
Notes to Financial Statements 6
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Part II. Other Information 18
Item 6.
Exhibits and Reports on Form 8-K 18
2
<PAGE>
ALFA CORPORATION
CONSOLIDATED CONDENSED
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------------- --------------
(Unaudited)
<S> <C> <C>
Assets
Investments:
Fixed Maturities Held for Investment, at amortized cost
(market value $1,839,076 in 1998 and $2,154,921 in 1997 $ 1,719,872 $ 2,011,449
Fixed Maturities Available for Sale, at market value
(amortized cost $730,023,508 in 1998 and $699,018,965 in 1997 766,205,520 731,550,744
Equity Securities, at market (cost $64,028,176
in 1998 and $55,893,931 in 1997) 134,728,637 116,133,472
Mortgage Loans on Real Estate 459,078 566,783
Investment Real Estate (net of accumulated
depreciation of $1,549,680 in 1998 and
$1,514,117 in 1997) 1,681,156 1,718,175
Policy Loans 36,851,824 34,900,547
Other Long-term Investments 98,024,556 115,727,331
Short-term Investments 27,792,096 25,051,026
-------------- --------------
Total Investments 1,067,462,739 1,027,659,527
Cash 2,986,625 5,820,597
Accrued Investment Income 12,278,351 11,114,372
Accounts Receivable 10,162,521 11,472,193
Reinsurance Balances Receivable 1,571,881 1,132,011
Due from Affiliates 9,824,113 2,505,157
Deferred Policy Acquisition Costs 109,259,380 105,855,585
Other Assets 4,533,684 4,506,360
-------------- --------------
Total Assets $1,218,079,294 $1,170,065,802
============== ==============
Liabilities
Policy Liabilities and Accruals $533,073,522 $498,387,318
Unearned Premiums 103,302,436 97,669,270
Dividends to Policyholders 9,140,165 9,024,751
Premium Deposit and Retirement Deposit Funds 6,327,194 6,488,037
Deferred Income Taxes 44,365,154 38,812,842
Other Liabilities 40,728,949 35,120,449
Commercial Paper 59,949,864 89,521,729
Notes Payable 107,412 1,978,024
Notes Payable to Affiliates 9,871,713 10,132,188
-------------- --------------
Total Liabilities 806,866,409 787,134,608
-------------- --------------
Commitments and Contingencies (Note 3)
Stockholders' Equity
Preferred Stock, $1 par value
Shares authorized: 1,000,000
Issued: None
Common Stock, $1 par value
Shares authorized: 110,000,000
Issued: 41,891,512
Outstanding: 1998 - 40,836,912; 1997 - 40,789,712 41,891,512 41,891,512
Capital in Excess of Par Value 21,617,773 21,301,198
Net Unrealized Investment Gains
(Less applicable deferred income taxes) 65,736,020 56,929,966
Retained Earnings 286,417,104 267,420,813
Treasury Stock: at cost (1998 - 1,054,600 shares;
1997 - 1,101,800 shares) (4,449,524) (4,612,295)
-------------- --------------
Total Stockholders' Equity 411,212,885 382,931,194
-------------- --------------
Total Liabilities and
Stockholders' Equity $1,218,079,294 $1,170,065,802
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
unaudited financial statements.
3
<PAGE>
ALFA CORPORATION
CONSOLIDATED CONDENSED UNAUDITED
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
---------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Revenues
Premiums and Policy Charges $194,085,800 $182,724,322 $ 97,049,291 $ 92,240,084
Net Investment Income 30,825,971 27,916,606 15,307,378 13,917,544
Realized Investment Gains 4,074,883 5,218,026 1,496,215 1,962,958
Other Income 1,087,865 1,128,702 468,646 578,314
------------ ------------ ----------- -----------
Total Revenues 230,074,519 216,987,656 114,321,530 108,698,900
------------ ------------ ----------- -----------
Benefits and Expenses
Benefits & Settlement Expenses 142,493,468 134,096,397 73,593,015 66,449,972
Dividends to Policyholders 1,737,188 1,688,054 835,611 807,859
Amortization of Deferred Policy
Acquisition Costs 28,911,359 27,660,005 14,555,752 13,916,568
Other Operating Expenses 16,596,884 14,778,108 8,411,132 7,697,800
------------ ------------ ----------- -----------
Total Expenses 189,738,899 178,222,564 97,395,510 88,872,199
------------ ------------ ----------- -----------
Income Before Provision for Income Taxes 40,335,620 38,765,092 16,926,020 19,826,701
Provision for Income Taxes 12,393,803 12,018,172 5,044,445 6,134,028
------------ ------------ ----------- -----------
Net Income $ 27,941,817 $ 26,746,920 $11,881,575 $13,692,673
============ ============ =========== ===========
Net Income Per Share - Basic and Diluted $ 0.68 $ 0.66 $ 0.29 $ 0.34
============ ============ =========== ===========
Operating Income $ 25,293,143 $ 23,355,203 $10,909,035 $12,416,750
Operating Income Per Share - Basic and Diluted $ 0.62 $ 0.57 $ 0.27 $ 0.30
============ ============ =========== ===========
Average Shares Outstanding - Basic 40,813,636 40,786,712 40,830,127 40,786,712
Average Shares Outstanding - Diluted 41,098,166 40,854,174 41,149,299 40,866,226
============ ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
unaudited financial statements.
4
<PAGE>
ALFA CORPORATION
CONSOLIDATED CONDENSED UNAUDITED
STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
------------------------ ------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Income $27,941,817 $26,746,920 $11,881,575 $13,692,673
Other Comprehensive Income, net of tax:
Unrealized Investment Gain on Securities Available for Sale 11,454,728 11,202,004 1,213,885 16,955,902
Less: Realized Investment Gains 2,648,674 3,391,717 972,540 1,275,923
----------- ----------- ----------- -----------
Total Other Comprehensive Income 8,806,054 7,810,287 241,345 15,679,979
----------- ----------- ----------- -----------
Total Comprehensive Income $36,747,871 $34,557,207 $12,122,920 $29,372,652
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
unaudited financial Statements.
5
<PAGE>
ALFA CORPORATION
CONSOLIDATED CONDENSED UNAUDITED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income $ 27,941,817 $ 26,746,920
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Policy Acquisition Costs Deferred (32,378,773) (32,370,604)
Amortization of Deferred Policy Acquisition Costs 28,911,359 27,660,005
Depreciation and Amortization 1,777,542 2,247,377
Provision for Deferred Taxes 1,241,547 820,816
Interest on Policyholders' Funds 7,754,450 7,075,095
Net Realized Investment Gains (4,074,882) (5,218,026)
Other (2,091,222) (1,369,668)
Changes in Operating Assets and Liabilities:
(Increase) in Accrued Investment Income (1,163,979) (1,048,280)
Decrease in Accounts Receivable 952,684 1,672,617
(Increase) Decrease in Reinsurance Balances Receivable (439,870) 824,979
(Increase) in Amounts Due From Affiliates (7,318,956) (2,177,202)
(Increase) Decrease in Other Assets (27,324) 551,672
Increase in Liability for Policy Reserves 10,108,407 9,493,724
Increase in Liability for Unearned Premiums 5,633,166 5,453,046
(Decrease) in Amounts Held for Others (45,429) (307,123)
Increase in Other Liabilities 5,328,643 451,182
------------ ------------
Net Cash Provided by Operating Activities 42,109,180 40,506,530
------------ ------------
Cash Flows From Investing Activities:
Maturities and Redemptions of Fixed Maturities Held for Investment 291,525 308,824
Maturities and Redemptions of Fixed Maturities Available for Sale 26,799,008 18,261,965
Maturities and Redemptions of Other Investments 71,546,004 48,556,224
Sales of Fixed Maturities Available for Sale 38,647,363 4,327,188
Sales of Other Investments 27,954,521 29,324,921
Purchase of Fixed Maturities Available for Sale (96,252,946) (76,242,694)
Purchase of Other Investments (90,123,910) (74,172,184)
Net (Increase) Decrease in Short-term Investments (2,825,639) 9,766,677
Net (Increase) Decrease in Receivable/Payable on Securities 1,471,124 (5,229,854)
------------ ------------
Net Cash Used in Investing Activities (22,492,950) (45,098,933)
------------ ------------
Cash Flows From Financing Activities:
(Decrease) in Commercial Paper (29,571,865) (8,175,952)
(Decrease) in Notes Payable (1,870,612) (115,041)
Increase (Decrease) in Notes Payable to Affiliates (260,475) 567,637
Stockholder Dividends Paid (8,674,053) (8,055,375)
Proceeds from Exercise of Stock Options 479,346
Deposits of Policyholders' Funds 35,879,891 34,870,162
Withdrawal of Policyholders' Funds (18,432,434) (16,881,132)
------------ ------------
Net Cash Provided by (Used in) Financing Activities (22,450,202) 2,210,299
------------ ------------
Net (Decrease) in Cash (2,833,972) (2,382,104)
Cash--Beginning of Period 5,820,597 4,424,123
------------ ------------
Cash--End of Period $ 2,986,625 $ 2,042,019
============ ============
Supplemental Disclosures of Cash Flow Information
Cash Paid as of June 30 for:
Interest $ 2,350,142 $ 2,491,623
Income Taxes $ 8,985,000 $ 12,661,566
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
unaudited financial statements.
6
<PAGE>
ALFA CORPORATION
NOTES TO CONSOLIDATED CONDENSED UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 1998
1. SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
In the opinion of the Company, the accompanying consolidated condensed
unaudited financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly its financial position,
results of operations and cash flows. The accompanying financial statements
have been prepared on the basis of generally accepted accounting principles. A
summary of the more significant accounting policies related to the Company's
business is set forth in the notes to its audited consolidated financial
statements for the fiscal year ended December 31, 1997. The results of
operations for the and six month and three month periods ended June 30, 1998 are
not necessarily indicative of the results to be expected for the full year. For
purposes of this report, the Company has defined operating income as income
excluding net realized investment gains. Certain reclassifications have been
made to conform previous classifications to June 30, 1998 classifications and
descriptions.
2. POOLING AGREEMENT
-----------------
Effective August 1, 1987, the Company entered into a property and casualty
insurance Pooling Agreement (the "Pooling Agreement") with Alfa Mutual Insurance
Company (Mutual), and other members of the Mutual Group. The Mutual Group is
a direct writer primarily of personal lines of property and casualty insurance
in Alabama. The Company's subsidiaries similarly are direct writers in Georgia
and Mississippi. Both the Mutual Group and the Company write preferred risk
automobile, homeowner, farmowner and mobile home insurance, fire and allied
lines, standard risk automobile and homeowner insurance, and a limited amount of
commercial insurance, including church, and businessowner insurance. Under the
terms of the Pooling Agreement, the Company cedes to Mutual all of its property
and casualty business. All of the Mutual Group's direct property and casualty
business (together with the property and casualty business ceded by the
Company) is included in the pool. 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 allows 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 following table sets forth the premiums and losses ceded to and assumed
from the pool for the six month and three month periods ended June 30, 1998:
<TABLE>
<CAPTION>
Six Months Ended June 30, Three Months Ended June 30,
------------------------- ---------------------------
1998 1997 1998 1997
-------- -------- ----------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Premiums ceded to pool $ 27,948 $ 25,878 $14,097 $13,144
Premiums assumed from pool $171,354 $163,512 $86,351 $82,420
Losses ceded to pool $ 21,965 $ 20,140 $12,024 $ 9,885
Losses assumed from pool $112,546 $107,228 $59,115 $51,893
</TABLE>
Alfa Group pooled catastrophe losses for 1998, all of which were incurred in
the second quarter, totaled $27 million. The Company's share of these
catastrophe losses totaled $6.5 million. The Alfa Group incurred no pooled
catastrophe losses in the first six months of 1997.
7
<PAGE>
3. CONTINGENT LIABILITIES
-----------------------
The property and casualty subsidiaries have entered into the reinsurance
pooling agreement with Alfa Mutual Insurance Company and its affiliates as
discussed in Note 2. 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.
The Company has devoted resources to evaluating, testing and determining that
its internally developed and purchased software systems for its mainframe and
personal computer applications are year 2000 compliant before January 1, 2000.
This critical data management issue could have substantial consequences for
companies worldwide. Because of the use of only two digits in the date field,
many computer applications could fail completely or create erroneous results by
the year 2000 unless corrective measures are taken. The Company believes all
its systems will be successfully compliant when completed prior to the year
2000. A discussion of the Company's efforts related to year 2000 issues is
more fully described in Management's Discussion and Analysis contained in this
10-Q report. However, to the extent the problem is not corrected timely and
successfully, material adverse consequences could occur which could affect
future financial conditions or results of operations.
Certain legal proceedings involving policyholders and agents are in process at
June 30, 1998. Costs for these and similar legal proceedings including
accruals for outstanding cases were $1,091,000 and $524,000 respectively, for
the six month and three month periods ended June 30, 1998 and $691,000 and
$461,000, respectively in the similar periods in 1997. These 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 cases is not possible to predict. Based upon information presently
available, applicable law and defenses available to the Company, management does
not consider material losses which might arise from pending litigation to be
probable of occurrence. 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 and severity of large punitive
damage awards by juries, bearing little or no relation to actual damages,
continues to exist, creating the potential for unpredictable material adverse
judgements in any given suit.
4. COMPREHENSIVE INCOME
--------------------
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income" (SFAS 130) in June
1997. Comprehensive Income is defined as net income and all other changes in
stockholders' equity exclusive of transactions with stockholders. The primary
additional component for Alfa Corporation is unrealized gains and losses.
Comprehensive Income was $36,747,871 for the first six months of 1998 and
$34,557,207 for the first six months of 1997. For the three months ended June
30, 1998 and 1997, comprehensive income was $12,122,920 and $29,372,652,
respectively.
8
<PAGE>
5. SEGMENT INFORMATION
-------------------
In June, 1997, the FASB issued Financial Accounting Statement No. 131,
Disclosures about Segments of an Enterprise and Related Information, ("FAS131").
FAS131 requires that financial and descriptive information be disclosed for each
reportable operating segment based on the management approach. The management
approach focuses on financial information that an enterprise uses to assess
performance and make decisions about resource allocation. The statement also
prescribes the disclosures to be made about products, services, geographic areas
and other information. FAS131 is effective for annual financial statements
issued for periods beginning after December 15, 1997, and for interim financial
statements in the second year of application. The Company adopted FAS131 for
its year ending December 31, 1998.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
- ---------------------
The following table sets forth consolidated summarized income statement
information for the six months and three months ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
-------------------------------------- --------------------------------------
1998 1997 % CHANGE 1998 1997 % CHANGE
------------ ------------ ---------- ------------ ------------ ----------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C>
Premiums and Policy Charges $ 194,086 $ 182,724 6% $ 97,049 $ 92,240 5%
=========== =========== === =========== =========== ===
Net Investment income $ 30,826 $ 27,917 10% $ 15,307 $ 13,918 10%
=========== =========== === =========== =========== ===
Total Revenues $ 230,075 $ 216,988 6% $ 114,322 $ 108,699 5%
=========== =========== === =========== =========== ===
NET INCOME
Insurance operations $ 26,225 $ 23,401 12% $ 11,513 $ 12,554 (8%)
Noninsurance operations 1,151 1,448 (21%) 481 680 (29%)
Net realized investment gains 2,649 3,392 (22%) 973 1,276 (24%)
Corporate expenses (2,083) (1,494) (39%) (1,084) (817) (33%)
----------- ----------- --- ----------- ----------- ---
Net income $ 27,942 $ 26,747 4% $ 11,883 $ 13,693 (13%)
=========== =========== === =========== =========== ===
Net income per share-
Basic and Diluted $0.68 $0.66 4% $0.29 $0.34 (13%)
=========== =========== === =========== =========== ===
Weighted average
shares outstanding - Basic 40,813,636 40,786,712 40,830,127 40,786,712
=========== =========== =========== ===========
Diluted 41,098,166 40,854,174 40,149,299 40,866,226
=========== =========== =========== ===========
</TABLE>
Total premiums and policy charges increased 6% in the first half of 1998 and
5% in the second quarter due primarily to increased property casualty business.
Net investment income increased 10% over both the first half and second quarter
of 1997 while invested assets increased 3.9% in the six months since December
31, 1997 resulting from increased positive cash flows.
The Company's net income increased 4% in the first half of 1998 due primarily
to improved operating results in the property and casualty business. Such
improvement was offset in the second quarter when net income declined 13% due
primarily to the impact of claims from tornadoes, hail and other severe weather.
Life insurance operations had a 2% improvement in results in the first half of
1998 but declined 5% in the second quarter due primarily to increased death
claims. Noninsurance operating income declined in both the six month and three
10
<PAGE>
month periods due primarily to declines in income in the consumer finance
subsidiary. Realized investment gains were down in the first half and second
quarter of 1998 compared to more significant gains in the similar periods last
year, primarily from sales of equity securities. Such gains are the result of
market conditions and can fluctuate from period to period.
PROPERTY AND CASUALTY INSURANCE OPERATIONS
- ------------------------------------------
The following table sets forth the components of property and casualty
insurance earned premiums, net underwriting income, GAAP basis combined ratio,
underwriting margin and operating income for the six months and three months
ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
------------------------------- -------------------------------
1998 1997 % CHANGE 1998 1997 % CHANGE
--------- --------- --------- --------- -------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Earned Premiums
Personal lines $163,219 $155,701 5% $82,255 $78,497 5%
Commercial lines 6,104 5,798 5% 3,086 2,918 6%
Pools, associations and fees 2,031 2,014 1% 1,010 1,006 1%
Reinsurance ceded (607) (593) 2% (316) (329) (4%)
-------- -------- -- ------- ------- ---
Total $170,747 $162,920 5% $86,035 $82,092 5%
======== ======== == ======= ======= ===
Net underwriting income $ 14,189 $ 11,795 20% $ 4,697 $ 6,715 (30%)
======== ======== == ======= ======= ===
GAAP basis combined ratio 91.7% 92.8% 94.5% 91.8%
======== ======== ======= =======
Underwriting margin 8.3% 7.2% 5.5% 8.2%
======== ======== ======= =======
Operating Income $ 19,079 $ 16,397 16% $ 7,887 $ 8,733 (10%)
======== ======== == ======= ======= ===
</TABLE>
Earned premiums increased 5% in the first half and in the second quarter of
1998 due to the impact of prior year rate changes, new business and a low lapse
ratio of 3.8%. Operating results in the first half of 1998 increased 16% to
$19.1 million due primarily to the growth in underwriting income. The
underwriting margin of 8.3% is the result of a 65.7% loss ratio (61.9% excluding
storm losses) and a 25.9% expense ratio compared to a loss ratio of 66.2% and an
expense ratio of 26.5% in the first half of 1997. The loss ratio improvement is
due to an improved loss ratio in the auto line of business which accounts for
over 65% of property casualty premiums.
Underwriting income and operating income declined in the second quarter due to
the impact of tornadoes, hail and other severe weather which occurred in April
and June 1998. The effect of claims on underwriting results from these events
was $6.5 million pre-tax, or $0.10 per share, net of taxes, based upon the
intercompany pooling arrangement and Alfa group- wide reinsurance protection.
Such claims reduced the second quarter underwriting margin by 7.6% of premiums
11
<PAGE>
or increased the combined ratio to 94.5% for the second quarter. The Company
had no significant storm related losses in the six months or three month periods
in 1997.
Excluding the impact of these weather events, the non-storm loss ratio for the
second quarter of 1998 was 60.8% compared to 64.5% for the similar period in
1997 and the expense ratio for the respective periods were 26.2% compared to
27.4%. Net investment income was up 11.6% in the first half of 1998 and 11.8%
in the second quarter due to increased positive cash flow from improved
underwriting results which has increased invested assets.
LIFE INSURANCE OPERATIONS
- -------------------------
The following table sets forth life insurance premiums and policy charges, by
type of policy, and life insurance operating income for the six months and three
months ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
----------------------------- ------------------------------
1998 1997 % CHANGE 1998 1997 % CHANGE
------- -------- ---------- -------- -------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Premiums and Policy Charges
Universal life policy charges $ 6,056 $ 5,780 5% $ 3,050 $ 2,929 4%
Universal life policy charges - COLI 1,448 1,256 15% 343 303 13%
Interest sensitive life policy charges 4,859 4,647 5% 2.436 2,342 4%
Traditional life insurance premiums 10,727 9,991 7% 5,185 4,576 13%
Group life insurance premiums 249 (1,869) (113%) 0 (1) (100%)
------- ------- ---- ------- ------- ----
Total $23,339 $19,805 18% $11,014 $10,149 9%
======= ======= ==== ======= ======= ====
Operating Income $ 7,146 $ 7,004 2% $ 3,626 $ 3,821 (5%)
======= ======= ==== ======= ======= ====
</TABLE>
The Company's life insurance premiums and policy charges increased 18% in the
first half of 1998 and 9% in the second quarter. Premiums and policy charges
were significantly impacted by a change in 1997 in group life insurance, which
is provided by Alfa Mutual Insurance Company, (Mutual), an affiliate, to its
employees. In 1997, Mutual began utilizing corporate owned life insurance
(COLI) using Alfa Life's universal life product. The result was an increase in
1997 policy charges of $953,000 and a net reduction in group term premium of
$1.9 million, including an experience refund of premium reserves held by Life.
Although these changes affected premium revenue growth rates, they did not have
a material impact on earnings in the first half and second quarter of 1998 or
1997. Both the Company and the other members of the Alfa Group believe the new
program will be mutually beneficial to results in the future.
Excluding the impact on premiums from such business, the premium growth rate
for the first half of 1998 was 6.0% and for the second quarter was 8.3%. New
business premium has increased 3.8% for the first half of 1998, primarily from
sales of universal life policies and term business. The persistency rate
remained high at 91.9%.
12
<PAGE>
Life insurance operating income increased approximately 2% in the first half
1998 and declined 5% in the second quarter. Death claims were 112% and 114% of
expected in the six month and three month periods, respectively, which compares
unfavorably to the 92% and 93% mortality ratios in the first half and second
quarter of 1997. Positive cash flows resulted in an 11.6% and 11.5% increase in
net investment income for the six month and three month periods. Invested
assets have increased 16.5% since June 30, 1997. An increase in general
expenses impacted the growth in income primarily as a result of increases in
lawsuit costs of $356,070 and increased premium taxes of $216,991. Premium
taxes increased due to both the increase in premiums and an increase in the
premium tax rate. The rate has increased in 1998 from 1.8% to 2.1% and will
increase to 2.3% in 1999 and thereafter.
NONINSURANCE OPERATIONS
- -----------------------
Noninsurance earnings declined 20.5% in the first half of 1998 due primarily
to a decrease of 19.1% or approximately $253,000 in net income in the consumer
finance subsidiary. A 3.7% decrease in the loan portfolio to $56.6 million
combined with a decline in the overall portfolio yield rate of 37 basis points
resulted in a 10.8% decrease in loan and leasing income. The real estate sales
subsidiary's earnings were down $7,800, or 16.0% and construction subsidiary
income declined $36,000, or 50% in 1998 due to a reduction in both commercial
and residential sales activity.
CORPORATE
- ---------
Interest expense on corporate debt is the primary corporate expense incurred.
Interest expense in the first six months of 1998 was approximately $922,000
compared to approximately $889,000 for the similar period in 1997. The increase
in interest expense is due to the increase in the average balance outstanding.
The remainder of the corporate expense represents general operating expenses
which may fluctuate from time to time. The increase in other corporate expenses
in the first six months is due to an increase in legal expenses in the period of
approximately $800,000.
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 six months ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1998 1997
--------- --------
<S> <C> <C>
Increase in cash flow from operations since June 30, 1997 and 1996 4.0% 68.1%
Increase in invested assets since January 1, 1998 and 1997 3.9% 5.8%
Investment yield rate (annualized) 6.9% 7.2%
Increase in net investment income since June 30, 1997 and 1996 6.2% 5.5%
</TABLE>
13
<PAGE>
The 4.0% increase in positive cash flow from operations is due primarily to
improved operating results in the Company's property and casualty subsidiaries,
which had an increase of $2.4 million in underwriting income. Positive cash
flow was adversely impacted in the second quarter of 1998 by the effect of
claims from severe weather. The COLI plan in the life insurance subsidiary has
provided positive cash flow in 1998 and 1997. As a result of the overall
positive cash flows, invested assets grew 3.9% since January 1, 1998 and 13.8%
since June 30, 1997 (based on amortized cost, which excludes the impact of SFAS
115), and net investment income increased 6.2%. The overall yield rate,
calculated using amortized cost, has declined as maturing investments are
reinvested at lower rates due to a decline in interest rates generally. The
Company had net realized investment gains of approximately $4.1 million in the
first six months of 1998 and $5.2 million in the similar period in 1997. These
net gains are primarily from sales of equity securities. Such realized gains
are the result of market conditions and therefore can fluctuate from period to
period.
The composition of the Company's investment portfolio is as follows at June
30, 1998 and December 31,1997:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
--------- -------------
1998 1997
--------- -------------
<S> <C> <C>
Fixed maturities
Taxable
Mortgage backed (CMO's) 28.5% 30.2%
Corporate bonds 32.0 29.6
----- -----
Total taxable 60.5 59.8
Tax exempts 11.4 11.6
----- -----
Total fixed maturities 71.9 71.4
----- -----
Equity securities 12.6 11.3
Mortgage loans 0.0 0.1
Real estate 0.2 0.2
Policy loans 3.5 3.4
Other long term investments 9.2 11.2
Short term investments 2.6 2.4
----- -----
100.0% 100.0%
===== =====
</TABLE>
The majority of the Company's investment portfolio consists of fixed
maturities which are diverse as to both industry and geographic concentration.
Since year-end, the mix of investments has remained stable with changes due to
increased market values in equities. Long term investments decreased due
primarily to a reduction in loan receivable from Alfa Mutual Insurance Company,
an affiliate.
14
<PAGE>
The rating of the Company's portfolio of fixed maturities using the Standard &
Poor's rating categories is as follows at June 30, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
--------- -------------
1998 1997
--------- -------------
<S> <C> <C>
RATING
------
AAA to A- 89.7% 87.1%
BBB+ to BBB- 9.8 12.3
BB+ and Below (Below investment grade) 0.5 0.6
----- -----
100.0% 100.0%
===== =====
</TABLE>
Approximately 0.09% of the fixed maturity portfolio was not rated by an
outside rating service. 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).
At June 30, 1998, approximately 39.7% of fixed maturities were mortgage-backed
securities. Such securities are comprised of Collateralized Mortgage
Obligations (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 periodic review of asset liability matching and
inherent flexibility in its interest sensitive type product liabilities the
impact of prepayment risk on the Company's financial position is not believed to
be significant. At June 30, 1998 the Company's total portfolio of fixed
maturities had gross unrealized gains of $38,365,615 and gross unrealized losses
of $2,064,399. Securities are priced by nationally recognized pricing services
or by broker/dealer securities firms. Only 0.09% were priced by the Company.
During the first six months of 1998, the Company sold approximately $38.6
million in fixed maturities available for sale. These sales resulted in gross
realized gains of $116,971 and gross realized losses of $55,873. During the
first six months of 1997 the Company sold approximately $4.3 million in fixed
maturities available for sale. These sales resulted in gross realized gains of
$75,182.
The Company monitors its level of investments in high yield fixed maturities
and equity investments held in issuers of high yield debt securities.
Management believes the level of such investments is not significant to the
Company's financial condition. At June 30, 1998, the Company had unrealized
gains of approximately $3.0 million in such investments.
During the first half of 1998, the Company had no disposals of high yield debt
securities. However, the Company wrote down one fixed maturity totaling
$933,075, and three equity securities totaling $366,125 whose declines in value
were deemed to be other than temporary. At June 30, 1998 there were no
nonperforming bonds in the portfolio.
The Company's investment in other long term investments consists primarily of
loans originated by the consumer finance subsidiary. These loans are
collateralized by automobiles and other property. At June 30, 1998 the
delinquency ratio on the portfolio was 2.06%, down from 2.19% at December 31,
1997. Loans charged off in the second quarter of 1998 totaled $193,322 or 0.4%
15
<PAGE>
of the outstanding loan balance. At June 30, 1998, the Company maintained an
allowance for loan losses of $584,178 or approximately 1.1% of the outstanding
loan balance. Long term investments also include assets leased under operating
leases, partnership investments and certain other investments.
INCOME TAXES
- ------------
The increase in income tax expense in the first half of 1998 is the result of
the increase in income before provision for income taxes, which improved $1.5
million due primarily to the impact of increased property casualty underwriting
results. The effective tax rate in the first half of 1998 was 30.7% compared to
31.3% for the full year 1997 and 31.0% for the first half of 1997.
IMPACT OF INFLATION
- -------------------
Inflation increases consumers' needs for both life and property and casualty
insurance coverage. Inflation increases claims incurred by property and
casualty insurers as property repairs, replacements and medical expenses
increase. Such cost increases reduce profit margins to the extent that rate
increases are not maintained on an adequate and timely basis. Since inflation
has remained relatively low in recent years, financial results have not been
significantly impacted by inflation.
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------
Alfa Corporation receives funds from its subsidiaries consisting of dividends,
payments for funding federal income taxes, and reimbursement of expenses
incurred at the corporate level for the subsidiaries. These funds are used for
paying dividends to stockholders, corporate interest and expenses, federal
income taxes, and for funding additional investments in its subsidiaries'
operations.
Alfa Corporation's subsidiaries require cash in order to fund policy
acquisition costs, claims, other policy benefits, interest expense, general
operating expenses, and dividends to Alfa Corporation. The major sources of the
Company's liquidity are operations and cash provided by maturing or liquidated
investments. A significant portion of the Company's investment portfolio
consists of readily marketable securities which can be sold for cash. Based on
a review of the Company's matching of asset and liability maturities and on the
interest sensitivity of the majority of policies in force, management believes
the ultimate exposure to loss from interest rate fluctuations is not
significant.
On October 25, 1993, the Company established a Stock Option 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, 80,000 options on April 18, 1996, 75,000
options on February 18, 1997 and 452,500 options on March 23, 1998. The options
ratably become exercisable annually over three years, and may not be exercised
after ten years after the date of award. At June 30, 1998, there had been
56,000 options exercised, 907,322 options were exercisable and 59,900 had been
canceled leaving 509,000 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
16
<PAGE>
common stock in the open market or in negotiated transactions in such quantities
and at such times and prices as management may decide. During the first six
months of 1998 the Company repurchased 5,000 shares at a cost of $94,054. At
June 30, 1998 the total repurchased was 1,102,600 shares at a cost of
$4,724,824. The Company has reissued 56,000 treasury shares as a result of
option exercises.
Total borrowings decreased $31.7 million in the first six months of 1998 to
$69.9 million. At June 30, 1998 the Company had approximately $59.9 million in
commercial paper at rates ranging from 5.59% to 5.60% with maturities ranging
from July 6, 1998 to July 23, 1998. The Company intends to continue to use the
commercial paper program to fund the consumer loan portfolio and other corporate
short term needs. Backup lines of credit are in place up to $80 million. The
Company has an A-1+, P-1 commercial paper rating from Standard & Poor's and
Moody's Investors Service. The commercial paper is guaranteed by an affiliate,
Alfa Mutual Insurance Company. In addition, the Company had $9.9 million in
short-term debt outstanding to affiliates at June 30, 1998 with interest equal
to commercial paper rates payable monthly and $107,412 outstanding in other
short-term debt at a rate of 7.0%.
Cash surrenders paid to policyholders on a statutory basis totaled $5.9
million in the first six months of 1998 and $5.5 million for the first six
months of 1997. This level of surrenders is within the Company's pricing
expectations. Historical persistency rates indicate a normal pattern of
surrender activity. The structure of the surrender charges is such that
persistency is encouraged. The majority of the policies in force have surrender
charges which grade downward over a 12 to 15 year period. In addition, the
majority of the in-force business is interest sensitive type policies which
generally have lower rates of surrender. At June 30, 1998 the total amount of
cash that would be required to fund all amounts subject to surrender was
approximately $299.2 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. 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
current catastrophe protection program, which began November 1, 1996, reduced
the earnings volatility caused by such catastrophe exposures.
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.
YEAR 2000
The Company fully expects all of its year 2000 issues to be successfully
addressed prior to the year 2000. The Company initially started the
identification of year 2000 issues in 1993 and 1994 and began its internal
programming modifications in 1995. These phases along with the testing have
continued during the last three years. The Company believes it has
substantially completed these steps and at June 30, 1998 is approximately 30%
complete with actual application and scenario testing, whereby dates are
17
<PAGE>
manipulated and results are compared for accuracy. Such testing and the
completion of internal programming is expected to be completed by the end of
1998. In addition, in 1998 the Company is addressing the issues related to year
2000 in regards to material relationships with third parties, vendors suppliers,
etc. and is identifying such providers, surveying their efforts and requesting
written assurances that year 2000 issues have been addressed. Also, the Company
is reviewing all significant non-information technology systems for year 2000
compliance. The most significant such system, the telephone system, has already
been determined to be year 2000 compliant. These efforts as well as the final
phase, follow-up on any unresolved year 2000 issues, are expected to be
completed during the first and second quarters of 1999.
The Company has not utilized any year 2000 solution providers. To date the
issues have been addressed with internal resources. Due to the longevity of the
process, the number of employees and resources devoted to the efforts and the
time spent, it is not practicable to estimate the costs, which have been
expensed as incurred. Although such costs are believed to have been
substantial, the Company has absorbed them into its operations with no
significant adverse impact on its financial condition or results of operations.
The resources utilized have caused some normal operational enhancements and
systems development to be deferred or delayed, however, any systems maintenance
or statutory required updates have not been affected.
To the extent the year 2000 issues are not corrected timely and successfully,
the Company's ability to process its business and pay its claims timely could be
impacted. Such an event could have material adverse consequences on future
financial conditions and results of operations. The Company has not yet
established a formal contingency plan should an adverse year 2000 issue occur.
However, based on results of its efforts to date, and those anticipated to be
completed prior to year 2000, the Company believes any necessary contingency
plans will be addressed timely.
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, including
this Annual Report on Form 10-K. 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.
18
<PAGE>
PART II. OTHER INFORMATION
Item 6.
- -------
EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
None.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALFA CORPORATION
Date 8/14/98 By: /S/ Goodwin L. Myrick
-------------- ----------------------------------------
Goodwin L. Myrick
President
Date 8/14/98 By: /S/ Donald Price
-------------- ----------------------------------------
Donald Price
Senior Vice President, Finance
(Chief Financial Officer)
Date 8/14/98 By: /S/ John Holley
-------------- ----------------------------------------
John Holley
Vice President and Controller
(Chief Accounting Officer)
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1998 APR-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<DEBT-HELD-FOR-SALE> 766,205,520 0
<DEBT-CARRYING-VALUE> 1,719,872 0
<DEBT-MARKET-VALUE> 1,839,076 0
<EQUITIES> 134,728,637 0
<MORTGAGE> 459,078 0
<REAL-ESTATE> 1,681,156 0
<TOTAL-INVEST> 1,067,462,739 0
<CASH> 2,986,625 0
<RECOVER-REINSURE> 1,571,881 0
<DEFERRED-ACQUISITION> 109,259,380 0
<TOTAL-ASSETS> 1,218,079,294 0
<POLICY-LOSSES> 533,073,522 0
<UNEARNED-PREMIUMS> 103,302,436 0
<POLICY-OTHER> 9,140,165 0
<POLICY-HOLDER-FUNDS> 6,327,194 0
<NOTES-PAYABLE> 69,928,989 0
0 0
0 0
<COMMON> 41,891,512 0
<OTHER-SE> 369,321,373 0
<TOTAL-LIABILITY-AND-EQUITY> 1,218,079,294 0
194,085,800 97,049,291
<INVESTMENT-INCOME> 30,825,971 15,307,378
<INVESTMENT-GAINS> 4,074,883 1,496,215
<OTHER-INCOME> 1,087,865 468,646
<BENEFITS> 144,230,656 74,428,626
<UNDERWRITING-AMORTIZATION> 28,911,359 14,555,752
<UNDERWRITING-OTHER> 16,596,884 8,411,132
<INCOME-PRETAX> 40,335,620 16,926,020
<INCOME-TAX> 12,393,803 5,044,445
<INCOME-CONTINUING> 27,941,817 11,881,575
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 27,941,817 11,881,575
<EPS-PRIMARY> .68 .29
<EPS-DILUTED> .68 .29
<RESERVE-OPEN> 134,329,249 0
<PROVISION-CURRENT> 132,346,066 0
<PROVISION-PRIOR> (4,633,305) 0
<PAYMENTS-CURRENT> 95,461,216 0
<PAYMENTS-PRIOR> 28,870,109 0
<RESERVE-CLOSE> 138,194,901 0
<CUMULATIVE-DEFICIENCY> 0 0
</TABLE>
