<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
<TABLE>
<CAPTION>
For Fiscal Year Ended December 31, 1997 Commission File Number 0-11773
- --------------------------------------- ------------------------------
ALFA CORPORATION
----------------
(Exact name of registrant as specified in its charter)
Delaware 63-0838024
- ------------------------------------------------------------------------------------------
<S> <C>
(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
-------------------------------
</TABLE>
Securities registered pursuant to Section 12 (b) of the Act:
None
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Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $1.00 per share
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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, 1998, was $361,509,984.
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, 1997
- ------------------ -----------------------------
Common Stock, $1.00 par value 40,789,712 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's annual report to security holders for the fiscal year
ended December 31, 1997, and proxy statement for the annual meeting of
stockholders to be held April 16, 1998, are incorporated by reference into Part
II and Part III.
Total pages included in this filing - 24 pages
Exhibit index - Page IV-2
<PAGE>
Part I
- ------
Item 1.
Alfa Corporation is a financial services holding company which operates
predominantly in the insurance industry through its wholly-owned subsidiaries
Alfa Life Insurance Corporation (Life), Alfa Insurance Corporation (AIC), Alfa
General Insurance Corporation (AGIC) and Alfa Agency Mississippi, Inc. Other
wholly-owned noninsurance subsidiaries include Alfa Financial corporation
(Financial), Alfa Investment Corporation, Alfa Builders, Inc. (Builders) and
Alfa Realty, Inc. (Realty), which are engaged in consumer financing, leasing,
real estate investments, residential and commercial construction and real estate
sales.
Alfa Corporation is affiliated with the Alfa Mutual Companies, which own 50.8%
of Alfa Corporation's common stock, their largest single investment. Alfa
Corporation and its subsidiaries (the Company) together with the Mutual
Companies comprise the Alfa Group (Alfa). The Company's common stock is traded
on the NASDAQ Stock Market's National Market under the symbol ALFA.
Alfa Corporation's insurance subsidiaries write life insurance in Alabama,
Georgia and Mississippi and property and casualty insurance in Georgia and
Mississippi. Its property and casualty business is pooled with that of the Alfa
Mutual Insurance Companies which write property and casualty business in
Alabama. Approximately 83.8% of the Company's property and casualty premium
income and 74.6% of its total premium income for 1997 was derived from the
Company's participation with the Mutual Companies in a Pooling Agreement. The
Company entered into the property and casualty insurance Pooling Agreement (the
"Pooling Agreement") effective August 1, 1987 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 benefits each member of the group.
The Boards of Directors of the Mutual Group and of the Company'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-1
<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 Company 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 Company 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
Company 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 the Company 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 the Company'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 the Company's earnings. Participants' respective abilities to
share in the Pooled Business are subject to regulatory capital requirements.
Alfa Corporation's 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, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Revenues
Life $ 73,224 $ 70,284 $ 63,517
Property and casualty 356,834 321,284 294,363
Noninsurance operations and corporate 3,952 4,768 4,883
---------- ---------- --------
$ 434,010 $ 396,336 $362,763
========== ========== ========
Net Income
Life $ 15,177 $ 16,761 $ 13,723
Property and casualty 38,156 15,205 8,428
Noninsurance operations and corporate (539) 223 167
---------- ---------- --------
$ 52,794 $ 32,189 $ 22,318
========== ========== ========
Assets
Life $ 607,266 $ 533,435 $490,926
Property and casualty 463,171 396,054 379,347
Noninsurance operations and corporate 99,629 89,841 95,160
---------- ---------- --------
$1,170,066 $1,019,330 $965,433
========== ========== ========
</TABLE>
Property and Casualty Business:
- -------------------------------
The Alfa Insurance Group's primary business is personal lines property and
casualty insurance, which accounts for over 75% of total revenues. Automobile
and homeowners insurance account for approximately 85% of property and casualty
premiums. In Alabama, the Alfa Insurance Group enjoys a 20% share of the
personal automobile and homeowners markets, second only to State Farm. The
I-2
<PAGE>
company is a direct writer and distributes its products utilizing the
employee/agent sales force of Mutual.
The following table shows the Company's premium distribution by product in
property and casualty insurance for 1997:
Automobile 66.1%
Homeowner 18.3%
Farmowner 5.4%
Commercial 4.7%
Manufactured Home 3.3%
Other 2.2%
------
100.0%
======
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, 1997, 1996 and 1995 including
the business written through the property and casualty pooling agreement:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1997 1996 1995
--------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Earned Premiums
Personal lines $315,650 $292,330 $270,109
Commercial lines 11,772 11,231 10,606
Pools, associations
and fees 4,014 3,905 3,709
Reinsurance ceded (1,130) (8,527) (11,435)
-------- -------- --------
Total $330,306 $298,939 $272,989
======== ======== ========
Net Underwriting Income (Loss) $ 28,061 $ (2,235) $(12,198)
======== ======== ========
Underwriting Margin 8.5% (0.7%) (4.5%)
======== ======== ========
Operating Income $ 36,464 $ 15,143 $ 8,182
======== ======== ========
</TABLE>
The Company's strategy in property and casualty business has been to operate
primarily in its niche, personal lines insurance, and to strive to be the low-
cost producer, thereby attracting and underwriting to achieve a preferred,
profitable book of business. The Company's objective is to operate with an
underwriting profit. Historically, this objective has been met except for five
years, which were primarily impacted by catastrophic weather. In the wake of
Hurricanes Opal and Erin, Alfa initiated intense studies of its catastrophe
management strategy. Effective November 1, 1996, Alfa restructured the
catastrophe program and amended the intercompany pooling agreement to allocate
catastrophe losses among the members of the pool in a fashion that more
equitably reflects the realities of catastrophe finance. As a result, Alfa
Corporation's share of the Alfa Group's storm-related losses has been
substantially reduced, thus providing much greater earnings stability and growth
potential. The lower exposure also means a substantial reduction in reinsurance
costs.
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
I-3
<PAGE>
Company's financial condition and operating results. However, the Company
believes that its current catastrophe protection program, which began November
1, 1996, will reduce the earnings volatility caused by such catastrophe
exposures.
Life Insurance:
- --------------
Life directly writes individual life insurance policies consisting primarily
of ordinary whole life, term life, interest sensitive whole life and universal
life products in Alabama, Georgia and Mississippi and distributes these products
utilizing the same employee/agent sales force used in the property and casualty
business. In the highly fragmented life insurance market in Alabama, Alfa ranks
second in market share.
Life offers several different types of whole life and term insurance products.
As of December 31, 1997, Life had in excess of $10.2 billion of life insurance
in force. As of December 31, for each year indicated the Company had insurance
in force as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Ordinary Life $10,201,001 $9,126,335 $8,313,698
Credit Life $ 8,296 $ 11,016 $ 14,382
Group Life $ 37,103 $ 325,704 $ 314,826
</TABLE>
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, 1997, 1996,
and 1995:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1997 1996 1995
-------- ------- -------
(in thousands)
<S> <C> <C> <C>
Premiums and Policy Charges
Universal life $11,296 $10,075 $ 8,789
Universal life - COLI 1,858
Interest sensitive life 9,306 8,589 7,991
Traditional life 19,958 18,931 17,700
Group Life (1,759) 653 620
------- ------- -------
Total $40,659 $38,248 $35,100
======= ======= =======
Operating income $14,580 $14,952 $13,205
======= ======= =======
</TABLE>
Life generally reinsures all life insurance risks in excess of $350,000 on any
one life for the purpose of limiting the liability of Life with respect to any
one risk and providing 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 the Company.
Life performs various underwriting procedures and blood testing for AIDS and
other diseases before issuance of insurance.
I-4
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Investments:
- ------------
The Company's income is directly affected by its investment income or loss
from its investment portfolio. The capital and reserves of the Company 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.
The Company's investment philosophy is long-term and value oriented with focus
on total return for both yield and growth potential. During the past ten years,
invested assets have grown from $277.7 million to over $1.0 billion at the end
of 1997, a compound annual growth rate of 14.0%. During that same period
investment income has tripled, growing from $19.3 million to over $57.5 million.
At year-end, the value of unrealized gains in Alfa's portfolio was $56.9
million, net of tax. The portfolio was invested 71.4% in fixed income,
securities, 11.3% in equities, 2.4% in short-term marketable securities, and
14.9% in other investments, which include consumer loans, leases and
partnerships and less than 0.3% in real estate and mortgage loans.
The rating of the Company's portfolio of fixed maturities using the Standard &
Poor's rating categories is as follows at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1997 1996
--------------
<S> <C> <C>
AAA to A- 87.1% 87.7%
BBB+ to BBB- 12.3 11.6
BB+ and below (below investment grade) 0.6 0.7
--------------
100.0% 100.0%
==============
</TABLE>
For more information about the Company's investments, see the investment
section of Management's Discussion and Analysis of Financial Condition and
Results of Operating on pages 18 and 19 of the Company's annual report to
security holders for the fiscal year ended December 31, 1997, which is
incorporated herein by reference in
Item 7.
Reserves
- ---------
The Company's property and casualty insurance subsidiaries are required to
maintain reserves to cover their estimated ultimate liability for losses and
loss adjustment expenses with respect to reported and unreported claims
incurred. The Company's life insurance subsidiary is required to maintain
reserves for future policy benefits. To the extent that reserves prove to be
inadequate in the future, the Company would have to increase such reserves and
incur a charge to earnings in the period such reserves are increased which could
have a material adverse effect on the Company's results of operations and
financial condition. The establishment of appropriate reserves is an inherently
uncertain process and there can be no assurance that ultimate losses will not
materially exceed the Company's loss reserves. Reserves are estimates
involving actuarial and statistical projections at a given time of what the
Company expects to be the cost of the ultimate settlement and administration of
claims based on facts and circumstances then known, estimates of future trends
in claims severity and other variable factors.
I-5
<PAGE>
Property and Casualty Reserves: With respect to reported claims, reserves are
established on a case-by-case basis. The reserve amounts on each reported claim
are determined by taking into account the circumstances surrounding each claim
and policy provision relating to the type of loss. Loss reserves are reviewed on
a regular basis, and as new data becomes available, appropriate adjustments are
made to reserves.
For incurred but not reported ("IBNR") losses, a variety of methods have been
developed in the insurance industry for determining estimates of loss reserves.
One common method of actuarial evaluation, which is used by the Company, is the
loss development method. This method uses the pattern by which losses have been
reported over time and assumes that each accident year's experience will develop
in the same pattern as the historical loss development.
Reserves are computed by the Company based upon actuarial principles and
procedures applicable to the lines of business written by the Company. These
reserve calculations are reviewed regularly by management and as required by
state law, the Company periodically engages an independent actuary to render an
opinion as to the adequacy of statutory reserves established by management,
which opinions are filled with the various jurisdictions in which the Company is
licensed. Based upon practice and procedures employed by the Company, without
regard to independent actuarial opinions, management believes that the Company's
reserves are adequate.
Life Reserves: The life insurance policy reserves reflected in Life's
financial statements as future policy benefits are calculated based on generally
accepted accounting principles. These reserves, with the addition of premiums
to be received and the interest thereon compounded annually at assumed rates,
must be sufficient to cover policy and contract obligations as they mature.
Generally, the mortality and persistency assumptions used in the calculation of
reserves are based on company experience. A list of the assumptions used in the
calculation of Life's reserves are reported in the financial statements (See
Note 6 - Future Policy Benefits, Losses and Loss Expenses in the Notes to
Consolidated Financial Statements on page 32 of the Company's annual report to
security holders for the year ended December 31, 1997, incorporated herein by
reference).
I-6
<PAGE>
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>
1997 1996 1995
-----------------------------------------------------------------------------------
PROPERTY AND PROPERTY AND PROPERTY AND
CASUALTY LIFE CASUALTY LIFE CASUALTY LIFE
------------- ------------ ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, $117,672,492 $ 3,095,914 $108,303,253 $2,065,462 $ 88,486,091 $1,221,676
Less Reinsurance
recoverables
on unpaid losses (745,156) (801,496) (2,293,048) (717,018) (1,331,358) (168,665)
------------ ----------- ------------ ---------- ------------ ----------
Net balance at
January 1, 116,927,336 2,294,418 106,010,205 1,348,444 87,154,733 1,053,011
------------ ----------- ------------ ---------- ------------ ----------
Incurred related to:
Current year 240,327,428 11,600,573 241,879,860 8,717,628 222,060,992 9,627,020
Prior years (8,928,409) ( 7,995) (4,702,409) 151,950 (1,698,077) (187,383)
------------ ----------- ------------ ---------- ------------ ----------
Total incurred 231,399,019 11,592,578 237,177,451 8,869,578 220,362,915 9,439,637
------------ ----------- ------------ ---------- ------------ ----------
Paid related to:
Current year 164,640,000 10,605,018 172,087,000 7,363,636 161,526,000 8,757,344
Prior years 52,560,523 1,162,411 54,173,320 559,968 39,981,443 386,860
------------ ----------- ------------ ---------- ------------ ----------
Total paid 217,200,523 11,767,429 226,260,320 7,923,604 201,507,443 9,144,204
------------ ----------- ------------ ---------- ------------ ----------
Net balance at
December 31, 131,125,832 2,119,567 116,927,336 2,294,418 106,010,205 1,348,444
Plus reinsurance
coverables
on unpaid losses 960,376 123,474 745,156 801,496 2,293,048 717,018
------------ ----------- ------------ ---------- ------------ ----------
Balance at
December 31, $132,086,208 $ 2,243,041 $117,672,492 $3,095,914 $108,303,253 $2,065,462
============ =========== ============ ========== ============ ==========
</TABLE>
Other Business
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The Company 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.
Financial is a lending institution engaged principally in making consumer
loans. These loans are available through substantially all agency offices of
the Company. These loans are collateralized by automobiles and other property.
At December 31, 1997, the delinquency ratio on the loan portfolio was 2.19%, or
$1.1 million. Loans charged off in 1997 totaled $416,267 or 0.8% of the average
outstanding loan portfolio. At December 31, 1997, the Company maintained an
allowance for loan losses of $584,178 or approximately 1.1% of the outstanding
loan balance.
I-7
<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.
Relationship with Mutual Group.
- ------------------------------
The Company'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 the Company 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 the Company.
Mutual periodically conducts time usage and related expense allocation
studies. Mutual charges the Company for its allocable and directly attributable
salaries and other expenses, including office facilities in Montgomery, Alabama.
The Board of Directors of the Company 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 the Company.
Mutual owns 16,201,538 shares, or 39.72%, and Alfa Mutual Fire Insurance
Company owns 4,515,286 shares, or 11.07%, of the Company's Outstanding Common
Stock.
Competition
- -----------
Both the life and property and casualty insurance businesses are highly
competitive. There are numerous insurance companies in the Company's area of
operation and throughout the United States. Many of the companies which are in
direct competition with the Company 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 the Company. In
its life and property and casualty insurance businesses, the Company competes
with other insurers in the sale of insurance products to consumers and the
recruitment and retention of qualified agents. The company believes that the
main competitive factors in its business are price, name recognition and
service. The Company believes that it competes effectively in these areas in
Alabama. In Georgia and Mississippi, however, the Company's name is not as well
recognized, but such recognition is improving.
Financial Ratings:
- ------------------
The Company's property and casualty subsidiaries have the highest A.M. Best
rating of A++ and life has an A+ rating. The Company's commercial paper program
is rated A-1+ by Standard and Poor's and P-1 by Moody's, both the highest
ratings for commercial paper.
I-8
<PAGE>
Regulation:
- -----------
The Company'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 Company, annual and other reports required to be filed on the financial
condition and operation of the Company. 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 the Company'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.
Restrictions on Dividends to Stockholders: The Company's insurance
subsidiaries are subject to various state statutory and regulatory restrictions,
generally applicable to each insurance company in its state of incorporation,
which limit the amount of dividends or distributions by an insurance company to
its stockholders. The restrictions are generally based on certain levels of
surplus, investment income and operating income, as determined under statutory
accounting practices. Alabama law permits dividends in any year which, together
with other dividends or distributions made within the preceding 12 months that
do not exceed the greater of (i) 10% of statutory surplus as of the end of the
preceding year or (ii) for property and casualty companies - the net income for
the preceding year, or for life companies - the net gain from operations. Larger
dividends are payable only after receipt of prior regulatory approval. Future
dividends from the Company's subsidiaries may be limited by business and
regulatory considerations. However, based upon restrictions presently in effect,
the maximum amount available for payment of dividends to the Company by its
insurance subsidiaries in 1998 without prior approval of regulatory authorities
is approximately $49.7 million based on December 31, 1997 financial condition
and results of operations.
Risk-Based Capital Requirements: The NAIC adopted risk-based capital
requirements that require insurance companies to calculate and report
information under a risk-based formula which attempts to measure statutory
capital and surplus needs based on the risks in a company's mix of products and
investment portfolio. The formula is designed to allow state insurance
regulators to identify potential weakly capitalized companies. Under the
formula, a company determines it "risk-based capital" ("RBC") by taking into
account certain risks related to the insurer's assets (including risks related
to its investment portfolio and ceded reinsurance) and the Insurer's liabilities
(including underwriting risks related to the nature and experience of its
insurance business). Risk-based capital rules provide for different levels of
regulatory attention depending on the ratio of a company's total adjusted
capital to its "authorized control level" ("ACL") of RBC. Based on calculations
made by the Company, the risk-based capital levels for each of the Company's
insurance subsidiaries significantly exceed that which would require regulatory
attention.
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<PAGE>
Year 2000: 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 has begun projects to address this issue and believes all its systems
will be successfully compliant when completed prior to the year 2000. The costs
the Company has incurred and will incur until this project is completed is in
the form of incremental payroll costs of current personnel. As a result, it is
difficult to quantify the total estimate of costs, however the Company believes
such costs will not have a significant impact on its financial condition or
results of operations. 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.
Personnel:
- ---------
The Company has no management or operational employees. The Company and its
subsidiaries have a Management and Operating Agreement with Mutual whereby it
reimburses Mutual for salaries and expenses of employees provided to the Company
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, 1997, the Company was represented by 476 agents in
Alabama who are employees of Mutual. The Company's property and casualty
subsidiaries had 98 independent exclusive agents in Georgia and Mississippi at
December 31, 1997.
Item 2. Properties.
----------
(a) Physical Properties of the Company and Its Subsidiaries. The Company
--------------------------------------------------------
leases it home office facilities in Montgomery, Alabama,from Mutual.
The Company and its subsidiaries own several investment properties, none of
which are material.
Item 3. Legal Proceedings.
-----------------
Certain legal proceedings involving policyholders and agents are in process at
December 31, 1997. Costs for these and similar legal proceedings including
accruals for outstanding cases was $3.6 million in 1997, $2.7 million in 1996
and $1.3 million in 1995. 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 difficult 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 judgments in any given suit.
Item 4. Submission of Matters to Vote of Security Holders. Not applicable.
-------------------------------------------------
I-10
<PAGE>
Executive Officers of the Company:
- ---------------------------------
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 16,
1998.
The following is a list of name and ages of all of the executive officers of
the Company indicating all positions and offices with the Company 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 Company.
<TABLE>
<CAPTION>
NAME AGE POSITION SINCE
- ---- --- -------
<S> <C> <C> <C>
Goodwin L. Myrick 72 Director; Chairman of the Board and President, since 1978; 1973
President of its Subsidiaries and associated
companies; President Alabama Farmers Federation.
Ken Wallis 56 Director; Executive Vice President, Operations 1993
of Alfa Corporation and its subsidiaries, Assistant
to the President and Vice President, Treasurer.
C. Lee Ellis 46 Executive Vice President, Investments. 1983
Prior to 1993, Senior Vice President, Investments.
Al Dees 51 Executive Vice President, Marketing 1993
Prior to 1993 Vice President Georgia and
Mississippi Marketing.
Donald Price 46 Senior Vice President, Finance and 1984
Chief Financial Officer.
Al Scott 42 Secretary and General Counsel 1997
Prior to 1997, Assistant General Counsel
John Holley 42 Vice President and Controller, Director Financial Relations 1986
Chief Accounting Officer.
James Azar 61 Senior Vice President, Planning 1979
Terry McCollum 61 Senior Vice President, Claims 1979
Bill Harper, Jr. 53 Senior Vice President, Life Operations of Alfa Life 1986
Insurance Corporation, Vice President of Alfa
Financial Corporation since 1978.
Wyman Cabaniss 46 Senior Vice President, Underwriting 1998
Prior to 1998, Vice President Underwriting
</TABLE>
I-11
<PAGE>
Part II
-------
Item 5. Market for the Company's Common Stock and Related Security Holder
-----------------------------------------------------------------
Matters.
--------
The "Stockholder Information" section on the Inside Back Cover of the
Company's annual report to security holders for the fiscal year ended December
31, 1997, is incorporated herein by reference.
Item 6. Selected Financial Data.
------------------------
The "Selected Financial Data" section on pages 6 and 7 of the Company's annual
report to security holders for the year ended December 31, 1997, 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 15 through 20 of
the Company's annual report to security holders for the fiscal year ended
December 31, 1997, is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
--------------------------------------------
The Financial Statements on pages 21 through 40 of the Company's annual report
to security holders for the fiscal year ended December 31, 1997, 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 Company.
-----------------------------------------------
For information with respect to the Executive Officers of the Company see
Executive Officers of the Company at the end of Part I of this Report. For
information with respect to the Directors of the Company, see Election of
Directors on Page 2 of the Proxy statement for the annual meeting of
stockholders to be held April 16, 1998 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
16, 1998, 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 16, 1998, 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
16, 1998, 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. (incorporated by reference from page 21 through
--------------------
40 of the Company's annual report to security holders for the year ended
December 31, 1997)
Report of Independent Certified Public
Accountants for 1997 and 1996.
Consolidated Balance Sheets as of
December 31, 1997 and 1996.
Consolidated Statements of Income for the three years ended
December 31, 1997, 1996 and 1995.
Consolidated Statements of Stockholders' Equity for the three years
ended December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the three years ended
December 31, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
Selected Quarterly Financial Data.
2. Financial Statement Schedules.
-----------------------------
<TABLE>
<CAPTION>
Included in Part IV of this report Page
----
<S> <C>
Report on Financial Statements and Financial Statement Schedules
of Independent Certified Public Accountants for 1997, 1996 and 1995. IV-3
Schedule I - Summary of Investments Other Than Investments
in Related Parties for the year ended December 31, 1997 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, 1997,
1996 and 1995 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 Company are incorporated by
reference from the Company'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 the
Company's 10-K for the year ended
December 31, 1992.
(10(b)) Insurance Pooling Agreement is
incorporated by reference from the
Company's 10-K for the year ended December
31, 1987.
Exhibit (13) The Company'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 the Company's 10-K for the
year ended December 31, 1993.
Exhibit (23) Consent 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 AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES
-------------------------------------------------------------
The Board of Directors
Alfa Corporation:
We have audited and reported separately on the financial statements of Alfa
Corporation as of December 31, 1997 and 1996, and for each of the years in the
three-year period ended December 31, 1997. Our report and the financial
statements of Alfa Corporation are incorporated by reference in the Form 10-K.
Our audits were made for the purpose of forming an opinion on the basic
financial statements of Alfa Corporation taken as a whole. The supplementary
information included in financial statement Schedules I through V 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 audits 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.
KPMG Peat Marwick LLP
Birmingham, Alabama
February 5, 1998
IV-3
<PAGE>
ALFA CORPORATION AND SUBSIDIARIES
SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN
INVESTMENTS IN RELATED PARTIES
FOR THE YEAR ENDED DECEMBER 31, 1997
<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 $ 67,833,619 $ 72,387,819 $ 72,387,819
States, municipalities and
political subdivisions 141,088,695 147,829,741 147,829,741
Public utilities 25,946,399 26,947,330 26,947,330
All other corporate bonds 162,145,589 172,478,618 172,478,618
Mortgage-backed securities 299,928,078 309,795,919 309,652,447
Redeemable preferred stocks 4,088,034 4,266,238 4,266,238
------------ -------------- --------------
Total fixed maturities 701,030,414 733,705,665 733,562,193
------------ -------------- --------------
Equity securities:
Common stocks:
Public utilities 6,678,063 9,329,728 9,329,728
Banks, trusts and insurance
companies 5,794,148 26,207,487 26,207,487
Industrial, miscellaneous and all other 41,720,726 79,022,507 79,022,507
Nonredeemable preferred stocks 1,700,994 1,573,750 1,573,750
------------ -------------- --------------
Total equity securities 55,893,931 116,133,472 116,133,472
------------ -------------- --------------
Mortgage loans on real estate 566,783 566,783 566,783
Real estate 1,718,175 1,718,175 1,718,175
Policy loans 34,900,547 34,900,547 34,900,547
Other long-term investments 115,727,331 116,883,066 115,727,331
Short-term investments 25,051,026 25,051,026 25,051,026
------------ -------------- --------------
Total investments $934,888,207 $1,028,958,734 $1,027,659,527
============ ============== ==============
</TABLE>
IV-4
<PAGE>
ALFA CORPORATION (PARENT COMPANY)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF THE COMPANY
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------- -------------
ASSETS
<S> <C> <C>
Cash $ 41,334 $ 48,082
Short-term investments 1,995,321 374,058
Investment in subsidiaries 416,815,803 357,237,941
Note receivable from subsidiaries 60,646,539 46,358,539
Accounts receivable and other assets 233,939 218,054
------------ ------------
Total assets $479,732,936 $404,236,674
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Commercial paper $ 89,521,729 $ 73,580,962
Notes payable 4,600,000 4,600,000
Other liabilities 2,679,013 2,743,903
------------ ------------
Total liabilities 96,800,742 80,924,865
------------ ------------
Common stock, $1 par value, shares
authorized - 110,000,000;
issued - 41,891,512
outstanding - 1997 - 40,789,712; 1996 - 40,786,712 41,891,512 41,891,512
Capital in excess of par value 21,301,198 21,281,323
Net unrealized investment gains 56,929,966 33,926,747
Retained earnings 267,420,813 230,839,897
Treasury stock, at cost, 1997 - 1,101,800; 1996 - 1,104,800 shares (4,611,295) (4,627,670)
------------ ------------
Total stockholders' equity 382,932,194 323,311,809
------------ ------------
Total liabilities and stockholders' equity $479,732,936 $404,236,674
============ ============
IV-5
</TABLE>
<PAGE>
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF ALFA CORPORATION
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Dividends from subsidiaries $18,956,247 $18,671,103 $19,415,006
Interest from subsidiaries 2,208,548 2,642,730 2,708,256
Other interest 21,777 12,911 25,171
Expenses:
Other expenses 5,310,031 5,667,475 6,071,779
----------- ----------- -----------
Income before equity in
undistributed income
of subsidiaries 15,876,541 15,659,269 16,076,654
Equity in undistributed income
of subsidiaries 36,917,092 16,529,946 6,241,297
----------- ----------- -----------
Net income $52,793,633 $32,189,215 $22,317,951
=========== =========== ===========
</TABLE>
IV-6
<PAGE>
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF ALFA CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $52,793,633 $ 32,189,215 $ 22,317,951
----------------------------------------------------------------------
Adjustments to reconcile net
income to net cash provided by
operating activities:
Undistributed earnings of
subsidiaries (36,917,092) (16,529,946) (6,241,297)
(Increase) decrease in other assets
and accounts receivable (15,885) 65,220 (255,113)
Increase (decrease) in other
liabilities (64,890) 417,666 (450,428)
----------------------------------------------------------------------
Total adjustments (36,997,867) (16,047,060) (6,946,838)
----------------------------------------------------------------------
Net cash provided by
operating activities 15,795,766 16,142,155 15,371,113
----------------------------------------------------------------------
Cash flows from investing activities:
(Increase) decrease in note receivable from subsidiaries (14,288,000) 8,086,461 (54,445,000)
Net (increase) decrease in short-term investments (1,621,263) 63,032 (354,574)
Other 343,449 (110,149) (272,790)
----------------------------------------------------------------------
Net cash provided by (used in) investing activities (15,565,814) 8,039,344 (55,072,364)
----------------------------------------------------------------------
Cash flows from financing activities:
Increase (decrease) in commercial paper 15,940,767 (8,368,654) 81,949,616
(Decrease) in notes payable (27,013,665)
Proceeds from exercise of stock options 35,250 9,400
Dividends to stockholders (16,212,717) (15,802,434) (15,294,718)
----------------------------------------------------------------------
Net cash provided by (used in) financing activities (236,700) (24,161,688) 39,641,233
----------------------------------------------------------------------
Net increase (decrease) in cash (6,748) 19,811 (60,018)
Cash, beginning of year 48,082 28,271 88,289
----------------------------------------------------------------------
Cash, end of year $ 41,334 $ 48,082 $ 28,271
======================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 4,132,679 $ 4,415,649 $ 4,470,881
======================================================================
Income taxes $20,529,974 $ 5,418,000 $ 7,888,000
======================================================================
</TABLE>
IV-7
<PAGE>
ALFA CORPORATION
SCHEDULE III - SUPPLEMENTAL INSURANCE INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Future Policy
Deferred Benefits,
Policy Losses,
Acquisition Claims And Unearned
Segment Costs Loss Expenses Premium
- ------- ----------- ------------- --------
<S> <C> <C> <C>
1997
----
Life Insurance $ 90,130,439 $366,301,110 $ 0
Property &
casualty
insurance 15,725,146 132,086,208 97,669,270
Noninsurance
and corporate 0 0 0
------------ ------------ -----------
Total $105,855,585 $498,387,318 $97,669,270
============ ============ ===========
1996
----
Life Insurance $ 84,711,419 $325,206,008 $ 0
Property &
casualty
insurance 15,382,660 117,672,492 92,945,366
Noninsurance
and corporate 0 0 0
------------ ------------ -----------
Total $100,094,079 $442,878,500 $92,945,366
============ ============ ===========
1995
----
Life Insurance $ 75,410,879 $294,049,256 $ 0
Property &
casualty
insurance 13,745,663 108,303,253 85,306,194
Noninsurance
and corporate 0 0 0
------------ ------------ -----------
Total $ 89,156,542 $402,352,509 $85,306,194
============ ============ ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Other
Policy Benefits Amortization
Claims Premiums Claims, Of Deferred
And And Net Losses And Policy Other
Benefits Policy Investment Settlement Acquisition Operating Premiums
Segment Payable Charges Income Expenses Costs Expenses Written
- ------- ------- --------- -------- ----------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997
----
Life Insurance $ 0 $ 40,659,098 $31,646,118 $ 33,407,772 $ 6,514,175 $ 7,209,933 $ 0
Property &
casualty
insurance 0 330,305,948 23,935,303 232,670,184 49,483,552 21,544,277 332,192,026
Noninsurance
and corporate 0 0 1,947,248 0 0 3,215,022 0
-------- ------------- ------------ ------------ ------------ ------------ ------------
Total $ 0 $370,965,046 $57,528,669 $266,077,956 $55,997,727 $31,969,232 $332,192,026
======== ============ ============ ============ =========== =========== ============
1996
----
Life Insurance $ 0 $ 38,247,600 $29,253,591 $ 30,589,901 $ 6,061,063 $ 6,750,449 $ 0
Property &
casualty
insurance 0 298,938,818 22,250,871 236,721,425 45,050,788 19,653,730 311,251,916
Noninsurance
and corporate 0 0 2,689,872 0 0 2,599,112 0
-------- ------------ ----------- ------------ ----------- ----------- ------------
Total $ 0 $337,186,418 $54,194,334 $267,311,326 $51,111,851 $29,003,291 $311,251,916
======== ============ =========== ============ =========== =========== ============
1995
----
Life Insurance $ 0 $ 35,099,995 27,620,913 $ 29,401,615 $ 5,504,517 $ 5,977,846 $ 0
Property &
casualty
insurance 0 272,988,974 20,996,611 220,841,822 41,857,226 24,445,381 286,483,508
Noninsurance
and corporate 0 0 2,305,583 150,000 0 577,145 0
-------- ------------ ----------- ------------ ----------- ----------- ------------
Total $ 0 $308,088,969 $50,923,107 $250,393,437 $47,361,743 $31,000,372 $286,483,508
======== ============ =========== ============ =========== =========== ============
</TABLE>
IV-8
<PAGE>
ALFA CORPORATION AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
FOR YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Percentage of
Ceded to Amount Assumed from Assumed From
Gross Amount Other Companies Other Companies Net Amount to Net
------------ --------------- -------------------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
1997
----
Life insurance in force $11,388,494,076 $1,142,094,000 $ 0 $10,246,400,076 0%
====================================================================================================
Premiums and policy
charges:
Life Insurance $ 43,917,690 $ 3,343,116 $ 0 $ 40,574,574 0%
Accident and health
insurance 84,524 0 0 84,524 0%
Property and liability
insurance 53,854,336 53,919,118* 330,370,730* 330,305,948 100%
----------------------------------------------------------------------------------------------------
$ 97,856,550 $ 57,262,234 $ 330,370,730 $ 370,965,046 89%
====================================================================================================
1996
----
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 0 $ 34,999,451 0%
Accident and health
insurance 100,544 0 0 100,544 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%
===================================================================================================
*These amounts are subject to the pooling agreement.
</TABLE>
IV-9
<PAGE>
ALFA CORPORATION AND SUBSIDIARIES
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ADDITIONS
BALANCE ---------------------------------
AT BEGINNING CHARGED TO COSTS CHARGED TO BALANCE
DESCRIPTION OF PERIOD AND EXPENSES OTHER ACCOUNTS DEDUCTIONS END OF PERIOD
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 Reserve for Loan losses $633,479 $642,023 $691,324 $584,178
=======================================================================
1996 Reserve for loan losses $750,241 $318,851 $435,613 $633,479
=======================================================================
</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, 1998
- ----------------------------- --------------------
(Goodwin L. Myrick) (Date)
Senior Vice President
Finance, (Principal
/s/ Financial Officer) March 31, 1998
- ----------------------------- --------------------
(Donald Price) (Date)
Vice President and
Controller (Principal
/s/ Accounting Officer) March 31, 1998
- ----------------------------- --------------------
(John D. Holley) (Date)
/s/ Director March 31, 1998
- ----------------------------- --------------------
(Jerry A. Newby) (Date)
/s/ Director March 31, 1998
- ----------------------------- --------------------
(James E. Mobley) (Date)
<PAGE>
/s/ Director March 31, 1998
- ------------------------------ --------------
(James A. Tolar, Jr.) (Date)
/s/ Director March 31, 1998
- ------------------------------ --------------
(John W. Morris) (Date)
/s/ Director March 31, 1998
- ------------------------------ --------------
(Milborn N. Chesser) (Date)
/s/ Director March 31, 1998
- ------------------------------ --------------
(James I. Harrison, Jr.) (Date)
/s/ Director March 31, 1998
- ------------------------------ --------------
(Young J. Boozer) (Date)
/s/ Director March 31, 1998
- ------------------------------ --------------
(John R. Thomas) (Date)
/s/ Director March 31, 1998
- ------------------------------ --------------
(B. Phil Richardson) (Date)
/s/ Director March 31, 1998
- ------------------------------ --------------
(Boyd E. Christenberry) (Date)
/s/ Director March 31, 1998
- ------------------------------ --------------
(Ken Wallis) (Date)
<PAGE>
<TABLE>
<CAPTION>
Alfa Corporation
Consolidated Balance Sheets
December 31,
-------------------------------
1997 1996
-------------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities held for investment, at amortized cost
(market value $2,154,921 in 1997 and $2,998,688 in 1996) $ 2,011,449 $ 2,817,964
Fixed maturities available for sale, at market value
(amortized cost $699,018,965 in 1997 and $591,859,469 in 1996) 731,550,744 610,324,605
Equity securities, at market (cost $55,893,931 in 1997 and $59,763,634 in 1996) 116,133,472 96,007,650
Mortgage loans on real estate 566,783 826,480
Investment real estate (net of accumulated depreciation
of $1,514,117 in 1997 and $1,356,829 in 1996) 1,718,175 1,855,972
Policy loans 34,900,547 31,680,254
Other long-term investments 115,727,331 102,297,440
Short-term investments 25,051,026 40,206,951
-------------------------------
Total investments 1,027,659,527 886,017,316
Cash 5,820,597 4,424,123
Accrued investment income 11,114,372 10,032,275
Accounts receivable 11,472,193 9,498,914
Reinsurance balances receivable 1,132,011 1,689,654
Due from affiliates 2,505,157 2,709,492
Deferred policy acquisition costs 105,855,585 100,094,079
Other assets 4,506,360 4,864,302
-------------------------------
Total assets $1,170,065,802 $1,019,330,155
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy liabilities and accruals $ 498,387,318 $ 442,878,500
Unearned premiums 97,669,270 92,945,366
Dividends to policyholders 9,024,751 8,988,574
Premium deposit and retirement deposit funds 6,488,037 6,925,786
Deferred income taxes 38,812,842 24,686,336
Other liabilities 35,120,449 32,974,237
Commercial paper 89,521,729 73,580,963
Notes payable 1,978,024 2,209,958
Notes payable to affiliates 10,132,188 10,828,626
-------------------------------
Total liabilities 787,134,608 696,018,346
-------------------------------
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: 1997 - 40,789,712; 1996 - 40,786,712 41,891,512 41,891,512
Capital in excess of par value 21,301,198 21,281,323
Net unrealized investment gains, net of tax 56,929,966 33,926,747
Retained earnings 267,420,813 230,839,897
Treasury stock: at cost, 1997 - 1,101,800; 1996 - 1,104,800 shares (4,612,295) (4,627,670)
-------------------------------
Total stockholders' equity 382,931,194 323,311,809
-------------------------------
Total liabilities and stockholders' equity $1,170,065,802 $1,019,330,155
===============================
</TABLE>
The accompanying notes are an integral part of these financial statements.
Alfa Corporation 1997 21
<PAGE>
<TABLE>
<CAPTION>
Alfa Corporation
Consolidated Statements Of Income
For the years ended December 31,
----------------------------------------
1997 1996 1995
----------------------------------------
<S> <C> <C> <C>
Revenues:
Premiums and policy charges $370,965,046 $337,186,418 $308,088,969
Net investment income 57,528,669 54,194,334 50,923,107
Net realized investment gains 3,356,231 2,807,588 1,106,016
Other income 2,159,683 2,147,688 2,645,243
----------------------------------------
Total revenues 434,009,629 396,336,028 362,763,335
----------------------------------------
Benefits and expenses:
Benefits and settlement expenses 266,077,956 267,311,326 250,393,437
Dividends to policyholders 3,165,092 3,055,700 3,015,079
Amortization of deferred policy acquisition costs 55,997,727 51,111,851 47,361,743
Other operating expenses 31,969,232 29,003,291 31,000,372
----------------------------------------
Total expenses 357,210,007 350,482,168 331,770,631
----------------------------------------
Income before provision for income taxes 76,799,622 45,853,860 30,992,704
Provision for income taxes 24,005,989 13,664,645 8,674,753
----------------------------------------
Net income $ 52,793,633 $ 32,189,215 $ 22,317,951
========================================
Net income per share - Basic and Diluted $1.29 $0.79 $0.55
========================================
Weighted average shares outstanding - Basic 40,787,047 40,786,561 40,785,912
========================================
Weighted average shares outstanding - Diluted 40,930,894 40,843,458 40,810,979
========================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
22 Alfa Corporation 1997
<PAGE>
<TABLE>
<CAPTION>
Alfa Corporation
Consolidated Statements Of Stockholders' Equity
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, 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
($.3875 per share) (15,802,434) (15,802,434)
Exercise of stock options 5,300 4,100 9,400
Net income 32,189,215 32,189,215
-----------------------------------------------------------------------------------
Balance, December 31, 1996 41,891,512 21,281,323 33,926,747 230,839,897 (4,627,670) 323,311,809
Change in net unrealized
investment gains/losses 23,003,219 23,003,219
Dividends to stockholders
($.3975 per share) (16,212,717) (16,212,717)
Exercise of stock options 19,875 15,375 35,250
Net income 52,793,633 52,793,633
-----------------------------------------------------------------------------------
Balance, December 31, 1997 $41,891,512 $ 21,301,198 $ 56,929,966 $267,420,813 $(4,612,295) $382,931,194
===================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
Alfa Corporation 1997 23
<PAGE>
<TABLE>
<CAPTION>
Alfa Corporation
Consolidated Statements Of Cash Flows
For the years ended December 31,
---------------------------------------------
1997 1996 1995
---------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 52,793,633 $ 32,189,215 $ 22,317,951
Adjustments to reconcile net income to net cash
provided by operating activities:
Policy acquisition costs deferred (63,576,796) (59,234,604) (54,231,803)
Amortization of deferred policy acquisition costs 55,997,727 51,111,851 47,361,743
Depreciation and amortization 4,488,679 4,447,490 4,781,522
Provision for deferred taxes 1,411,344 1,859,058 471,030
Interest on policyholders' funds 14,127,507 12,273,381 10,715,806
Net realized investment gains (3,356,231) (2,807,588) (1,106,016)
Other 2,306,276 2,460,366 1,127,332
Changes in operating assets and liabilities:
(Increase) in accrued investment income (1,082,097) (691,295) (270,152)
(Increase) decrease in accounts receivable (1,616,291) 4,077,468 (6,656,298)
(Increase) decrease in reinsurance balances receivable 557,643 3,745,010 (1,101,267)
(Increase) decrease in amounts due from affiliates 204,335 (1,302,763) 393,581
Increase (decrease) in amounts due to affiliates (6,135,599) 5,955,949
(Increase) decrease in other assets 357,942 (102,851) (20,490)
Increase in liability for policy reserves 17,694,934 14,161,376 25,492,677
Increase in liability for unearned premiums 4,723,904 7,639,172 5,880,022
(Decrease) in amounts held for others (401,572) (810,343) (1,020,983)
Increase (decrease) in other liabilities 4,075,892 2,394,885 (2,834,047)
---------------------------------------------
Net cash provided by operating activities 88,706,829 65,274,229 57,256,557
---------------------------------------------
Cash flows from investing activities:
Maturities and redemptions of fixed maturities held for investment 810,279 912,250 1,014,623
Maturities and redemptions of fixed maturities available for sale 46,658,709 37,623,173 32,053,653
Maturities and redemptions of other investments 105,534,625 86,205,777 85,578,545
Sales of fixed maturities available for sale 26,157,682 85,651,625 12,972,473
Sales of other investments 47,218,250 54,618,422 19,752,645
Purchase of fixed maturities available for sale (193,675,998) (175,124,345) (74,324,150)
Purchase of other investments (154,426,039) (135,251,325) (117,676,379)
Net (increase) decrease in short-term investments 15,050,033 (12,482,017) (2,759,648)
Net (increase) decrease in receivable/payable on securities (2,180,776) 7,304,553 (5,540,774)
---------------------------------------------
Net cash used in investing activities (108,853,235) (50,541,887) (48,929,012)
---------------------------------------------
Cash flows from financing activities:
Increase (decrease) in commercial paper 15,940,766 (8,368,653) 81,949,616
(Decrease) in notes payable (231,934) (113,404) (90,804,780)
(Decrease) in notes payable to affiliates (696,438) (88,336) (9,537,780)
Stockholder dividends paid (16,212,717) (15,802,434) (15,294,717)
Proceeds from exercise of stock options 35,250 9,400
Deposits of policyholders' funds 55,798,414 40,369,961 38,106,083
Withdrawal of policyholders' funds (33,090,461) (27,641,038) (23,169,879)
---------------------------------------------
Net cash provided by (used in) financing activities 21,542,880 (11,634,504) (18,751,457)
---------------------------------------------
Net increase (decrease) in cash 1,396,474 3,097,838 (10,423,912)
Cash at beginning of year 4,424,123 1,326,285 11,750,197
---------------------------------------------
Cash at end of year $ 5,820,597 $ 4,424,123 $ 1,326,285
=============================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 4,978,901 $ 4,976,921 $ 6,254,471
Income taxes $ 24,642,566 $ 10,536,000 $ 20,376,776
</TABLE>
The accompanying notes are an integral part of these financial statements.
24 Alfa Corporation 1997
<PAGE>
Alfa Corporation
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 intercompany
eliminations, Alfa Corporation and its wholly-owned subsidiaries, Alfa Life
Insurance Corporation (Life), Alfa Insurance Corporation, Alfa General Insurance
Corporation, Alfa Financial Corporation (Financial), Alfa Investment
Corporation, Alfa Builders, Inc. (Builders), Alfa Realty, Inc. (Realty) and Alfa
Agency Mississippi, Inc. The Company's primary market area is Alabama, Georgia
and Mississippi.
Nature of Operations
Alfa Corporation operates predominantly in the insurance industry. Its
insurance subsidiaries write life insurance in Alabama, Georgia and Mississippi
and property and casualty insurance in Georgia and Mississippi. The Company's
noninsurance subsidiaries are engaged in consumer financing, leasing, real
estate investments, residential and commercial construction, and real estate
sales. As more fully discussed in Note 2, its property and casualty insurance
business is pooled with that of the Alfa Mutual Insurance Companies which write
property and casualty business in Alabama. The Company's business is
concentrated geographically in Alabama, Georgia and Mississippi. Approximately
$333 million of premiums and policy charges representing 90% of such amounts in
1997 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 and
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 expense.
Property and Casualty Products: Property and casualty premiums are earned
ratably over the term of the policies. The liability for unearned premiums
represents the portion of premiums written which is applicable to the unexpired
term of the policies.
The liability for estimated unpaid property and casualty losses and loss
adjustment expenses is based upon an evaluation of reported losses and on
estimates of incurred but not reported losses. Adjustments to the liability
based upon subsequent developments are included in current operations.
Policy Acquisition Costs
Commissions and other costs of acquiring insurance that vary with and are
primarily related to the production of new and renewal business have been
deferred. Traditional life insurance acquisition costs are being amortized over
the premium-payment period of the related policies using assumptions consistent
with those used in computing policy benefit reserves. Acquisition costs for
universal life type policies are being amortized over the lives of the policies
in relation to the present value of estimated gross profits which are determined
based upon surrender charges and investment, mortality, and expense margins.
Acquisition costs for property and casualty insurance are amortized over the
period in which the related premiums are earned.
Alfa Corporation 1997 25
<PAGE>
Alfa Corporation
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 and policy loans are carried at unpaid principal balances.
Longterm investments include installment loans, carried at unpaid principal
balances, leased assets, carried at cost less accumulated depreciation and
partnerships, accounted for on the equity method.
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 $354,013 in options outstanding at
December 31, 1997.
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.
Earnings Per Share
The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings per Share" (EPS) in accordance with the provisions of the
statement. SFAS No. 128 specifies the computation, presentation and disclosure
requirements for both basic EPS and diluted EPS. Basic EPS is computed by
dividing net income by the weighted average number of shares outstanding.
Diluted EPS is computed similarly except that the shares outstanding is
increased to give effect to all potentially dilutive shares that would have been
outstanding if such shares had been issued. For Alfa Corporation, basic and
diluted computations are the same amount for all periods presented. The
weighted average diluted shares outstanding include the potentially diluted
shares which total 143,847 shares in 1997, 56,897 shares in 1996 and 25,067
shares in 1995, and are based on the employee stock options outstanding during
each period presented. (See Note 14).
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 1996 and 1995 amounts in order to
conform to 1997 classifications and descriptions.
26 Alfa Corporation 1997
<PAGE>
Alfa Corporation
Notes to Consolidated Financial Statements
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 (See Note 3). 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 benefits 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 $1,255,157
and $1,983,832 from the Mutual Group at December 31, 1997 and December 31, 1996,
respectively, for cash transactions originating in December and settled the
following month. Approximately 83.8% of the Company's property and casualty
premium income and 74.6% of its total premium income for 1997 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 twelve members,
six of whom serve as Directors of Mutual, Fire and Alfa Mutual General (General)
(collectively, the Mutual Group) and two of whom at December 31, 1997 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 $8,234,938 in 1997, $8,027,769 in 1996
and $7,768,809 in 1995.
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 $27.7 million in 1997, $27.1 million in 1996 and
$26.0 million in 1995. 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.
Until January 31, 1997, Mutual's employees were covered by a group life
insurance plan provided by Life. Group life insurance premiums paid to Life
were approximately $1.7 million in 1996 and $1.6 million in 1995. On February
1, 1997, Mutual began covering its employees with a Corporate Owned Life
Insurance (COLI) plan utilizing Life's universal life product. Premiums paid to
Life totaled approximately $13.2 million in 1997. Policy charges recorded from
such premiums totaled approximately $1.9 million. Policy reserves and insurance
in force on the COLI plan at December 31, 1997 were approximately $11.7 million
and $311.4 million, respectively. In 1997, Life refunded the remaining
experience reserve on the group plan of approximately $2.1 million to Mutual.
Certain of Mutual's employees and those of the affiliated Alabama Farmers'
Federation not covered by the COLI plan are covered by group life insurance
provided by Life. Group life insurance premiums paid to Life totaled $345,434
in 1997. Policy reserves and insurance in force on this plan at December 31,
1997 were approximately $56,000 and $37.1 million, respectively.
Certain of the Company's subsidiaries purchase property insurance and general
liability insurance protection from Mutual and Fire. The annual premium paid
for such policies totaled approximately $62,000 in 1997, $62,000 in 1996 and
$59,000 in 1995.
Alfa Corporation 1997 27
<PAGE>
Alfa Corporation
Notes to Consolidated Financial Statements
(Note 3. continued)
The Company's consumer finance and leasing subsidiary (Financial) leases
equipment, automobiles, furniture and other property to the Mutual Group. The
Mutual Group paid $2,010,969 in 1997, $2,138,167 in 1996 and $2,141,934 in 1995
under these leases. The Mutual Group invests in automobile and other
installment loans issued and serviced by Financial. The amount invested by the
Mutual Group in such loans was $932,188 and $1,628,626 at December 31, 1997 and
1996, respectively. Interest paid by Financial to the Mutual Group was $109,576
in 1997, $206,117 in 1996 and $566,380 in 1995. 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, 1997 and 1996, the balance outstanding
on these lines of credit included in notes payable to affiliates was $9,200,000.
Interest paid by the Company and Financial to the Federation and its subsidiary
was $489,125 in 1997, $521,938 in 1996 and $618,132 in 1995. 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, 1997 and 1996, the
amount loaned to the partnership under the line of credit was $425,000 and
$510,000, respectively. Interest paid to Financial was $27,853 in 1997.
Interest accrued in 1996 by Financial from such loan was $1,919, which was paid
in January 1997. In 1997, Mutual established a revolving line of credit with
Financial of $20 million at a rate of interest equal to the one month London
Interbank Offered Rate (LIBOR) plus .75%. At December 31, 1997, the amount
loaned to Mutual under the line of credit was $20 million. Interest accrued in
1997 by Financial from such loan was $47,860.
The Company's real estate construction subsidiary (Builders) contracts with the
Mutual Group for the construction of certain commercial facilities. The Mutual
Group paid $1,943,560 in 1997, $5,273,906 in 1996 and $9,214,674 in 1995 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 $185,029 in 1997,
$98,780 in 1996 and $224,760 in 1995 for such sales services.
The Company periodically has investment transactions with the Mutual Group. In
1997, the company purchased securities totaling $7,796,291 from the Mutual Group
at market value. 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. The Company has also entered into an investment partnership
with the Mutual Group. The amount invested in the partnership was $9 million and
$8 million at December 31, 1997 and 1996, respectively. The Company had
committed to fund up to $7.8 million additional investment in the partnership at
December 31, 1997. 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 $638,059 and $616,238 at
December 31, 1997 and 1996, respectively.
28 Alfa Corporation 1997
<PAGE>
Alfa Corporation
Notes to Consolidated Financial Statements
4. INVESTMENTS
Net investment income is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------
<S> <C> <C> <C>
Fixed maturities:
Held for investment $ 223,979 $ 317,070 $ 424,437
Available for sale 48,732,496 43,886,976 41,300,467
-------------------------------------
Total fixed maturities 48,956,475 44,204,046 41,724,904
Equity securities 2,393,257 2,849,287 2,856,503
Mortgage loans on real estate 62,814 79,693 95,414
Investment real estate 401,937 429,386 320,044
Policy loans 2,594,516 2,246,242 2,102,457
Other long-term investments 13,073,001 15,044,988 15,998,978
Short-term investments 1,501,606 1,388,853 1,537,560
-------------------------------------
Total investment income 68,983,606 66,242,495 64,635,860
Investment expenses, including interest expense 11,454,937 12,048,161 13,712,753
-------------------------------------
Net investment income $57,528,669 $54,194,334 $50,923,107
=====================================
</TABLE>
Net realized investment gains (losses) are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------
<S> <C> <C> <C>
Fixed maturities:
Held for investment $ 418 $ 2,190 $ 6,227
Available for sale 935,666 (4,132,690) 126,916
------------------------------------
Total fixed maturities 936,084 (4,130,500) 133,143
Equity securities 1,294,462 6,388,549 429,310
Other investments 1,125,685 549,539 543,563
------------------------------------
Net realized investment gains $3,356,231 $ 2,807,588 $1,106,016
====================================
</TABLE>
Changes in net unrealized investment gains and losses on
fixed maturities and equity securities are as follows:
<TABLE>
<CAPTION>
Increase (Decrease)
---------------------------------------
1997 1996 1995
---------------------------------------
<S> <C> <C> <C>
Fixed maturities:
Held for investment $ (37,252) $ (88,525) $ 114,606
=======================================
Available for sale, net of tax $ 7,961,902 $(7,738,814) $34,066,412
=======================================
Equity securities, net of tax $15,041,317 $ 6,044,698 $12,534,652
=======================================
</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, 1997 and 1996, gross unrealized gains for equity securities
amounted to $61,415,534 and $39,079,225, respectively, while gross unrealized
losses amounted to $1,140,159 and $2,162,789, respectively, and applicable
deferred income taxes aggregated $20,767,304 and $12,449,682, respectively.
The Company's fixed maturity portfolio is predominantly comprised of investment
grade securities. At December 31, 1997, approximately $4.0 million in fixed
maturities (0.6% 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.
Alfa Corporation 1997 29
<PAGE>
Alfa Corporation
Notes to Consolidated Financial Statements
(Note 4. continued)
The amortized cost and estimated market value of investments in fixed maturity
securities are as follows:
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Held for investment:
Mortgage-backed securities $ 2,011,449 $ 143,472 $ $ 2,154,921
===========================================================
Available for sale:
U.S. Treasury securities & obligations of U.S.
Government corporations and agencies $ 67,833,619 $ 4,575,294 $ (21,094) $ 72,387,819
Obligations of states & political subdivisions 141,088,695 6,878,248 (137,202) 147,829,741
Corporate securities 188,091,988 13,161,147 (1,827,187) 199,425,948
Mortgage-backed securities 297,916,629 10,802,185 (1,077,816) 307,640,998
Other debt securities 4,088,034 194,470 (16,266) 4,266,238
-----------------------------------------------------------
Totals $699,018,965 $35,611,344 $(3,079,565) $731,550,744
===========================================================
<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>
The amortized cost and estimated market value of fixed maturities available for
sale at December 31, 1997 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, 1997
--------------------------
ESTIMATED
AMORTIZED MARKET
COST VALUE
--------------------------
<S> <C> <C>
Available for sale:
Due in one year or less $ 18,481,764 $ 18,352,190
Due after one year through five years 58,706,286 61,706,218
Due after five years through ten years 179,138,164 187,781,444
Due after ten years 144,776,122 156,069,894
--------------------------
401,102,336 423,909,746
Mortgage-backed securities 297,916,629 307,640,998
--------------------------
$699,018,965 $731,550,744
==========================
</TABLE>
30 Alfa Corporation 1997
<PAGE>
Alfa Corporation
Notes to Consolidated Financial Statements
(Note 4. continued)
Proceeds from sales of fixed maturities available for sale were $26,157,682 in
1997, $85,651,625 in 1996 and $12,972,473 in 1995. Gross gains of $714,990 in
1997, $572,686 in 1996 and $500,601 in 1995 and gross losses of $61,526 in 1997,
$3,616,504 in 1996 and $566,637 in 1995 were realized on those sales. In
addition, the Company recorded a loss of approximately $927,000 in 1997,
$2,450,000 in 1996 and $501,000 in 1995 for securities whose valuation was
deemed to be an other than temporary decline. At December 31, 1997, 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, 1997 and 1996, the Company's mortgage loan portfolio totaled
approximately $567,000 and $826,000, respectively, and the collateral loan
portfolio, included in "Other long-term investments," totaled $56.2 million and
$61.5 million, respectively. These portfolios consisted of mortgage and
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 $57.4 million and $63.1 million at December 31, 1997 and 1996,
respectively. The estimated market value was determined by discounting the
estimated future cash flows from the loan portfolio at 7.25% for 1997 and 7.75%
for 1996, 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, 1997.
The Company's policy loans earn interest at rates ranging from 5.0% to 8.0% at
December 31, 1997. Because the policy loans have no stated maturity and are
often repaid by reductions to benefits and surrenders, it is not practicable to
determine the fair value of the policy loan portfolio.
At December 31, 1997, the Company had $1,875,149 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 Policies, Note 4 - Investments and
Note 8 - Notes Payable. 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,
------------------------------------------------------
1997 1996
------------------------------------------------------
Investments: Cost Fair Value Cost Fair Value
------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturities held for investment $ 2,011,449 $ 2,154,921 $ 2,817,964 $ 2,998,688
Fixed maturities available for sale $699,018,965 $731,550,744 $591,859,469 $610,324,605
Equity securities $ 55,893,931 $116,133,472 $ 59,763,634 $ 96,007,650
Short-term investments $ 25,051,026 $ 25,051,026 $ 40,206,951 $ 40,206,951
Mortgage and Collateral loans $ 56,771,659 $ 57,927,394 $ 62,344,857 $ 63,918,588
Liabilities:
Commercial paper $ 89,521,729 $ 89,521,729 $ 73,580,963 $ 73,580,963
Notes payable $ 12,110,212 $ 12,110,212 $ 13,038,584 $ 13,038,584
</TABLE>
Alfa Corporation 1997 31
<PAGE>
Alfa Corporation
Notes to Consolidated Financial Statements
6. FUTURE POLICY BENEFITS, LOSSES AND LOSS EXPENSES
The composition of the liability for future policy benefits, losses and loss
adjustment expenses and the more significant assumptions used in its calculation
are as follows:
<TABLE>
<CAPTION>
BASIS OF ASSUMPTION
-------------------------------------------------
INSURANCE LIABILITY YEARS INTEREST MORTALITY WITH-
IN FORCE 12/31/97 12/31/96 OF ISSUE RATE AND MORBIDITY DRAWALS
<S> <C> <C> <C> <C> <C> <C> <C>
Ordinary $ 4,516,781,100 $110,509,770 $105,049,177 1955 to 5% 1955-60 Basic Select Company
life 1978 and Ultimate Mortality experience
Tables
1979 and 7% Modified 1965-70 Basic Company
1980 graded Select and Ultimate experience
to 5% Mortality Tables
1981 to 9% Modified 1965-70 Basic Company
1993 graded Select and Ultimate experience
to 7% Mortality Tables
1994 to 6% Modified 1965-70 Basic Company
1997 Select and Ultimate experience
Mortality Tables
Interest 1,910,881,646 145,702,965 131,550,135 1984 to 6.5%* Modified 1965-70 Basic Company
sensitive 1997 Select and Ultimate experience
life Mortality Tables
Universal 3,773,337,888 94,840,006 71,768,286 1987 to 5.75% to Modified 1965-70 Basic Company
life 1997 6.5%* Select and Ultimate experience
Mortality Tables
Annuities w/o 12,376,502 12,337,709 1974 to 5.5% to -- --
life contingencies 1997 6%*
Group credit 8,295,994 262,993 377,918 1992 to 3% 1958 CET --
life 1997
Group life 37,103,448 55,689 702,818 1997 4.5% 1960 CSG --
---------------------------------------------
$10,246,400,076 $363,747,925 $321,786,043
===============
Accident & 310,144 324,051 5% 1972 intercompany 200% N&W III
health reports
Losses and loss
adjustment expenses 134,329,249 120,768,406
---------------------------
$498,387,318 $442,878,500
===========================
</TABLE>
*Rates are adjustable annually on policyholders' anniversary dates.
Participating policies represent approximately 3% of the ordinary life insurance
in force and 6% 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 Alfa Corporation 1997
<PAGE>
Alfa Corporation
Notes to Consolidated Financial Statements
(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>
1997 1996 1995
-----------------------------------------------------------------------------------
Property and Property and Property and
Casualty Life Casualty Life Casualty Life
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, $117,672,492 $ 3,095,914 $108,303,253 $2,065,462 $ 88,486,091 $1,221,676
Less Reinsurance recoverables
on unpaid losses (745,156) (801,496) (2,293,048) (717,018) (1,331,358) (168,665)
-----------------------------------------------------------------------------------
Net balance at January 1, 116,927,336 2,294,418 106,010,205 1,348,444 87,154,733 1,053,011
-----------------------------------------------------------------------------------
Incurred related to:
Current year 240,327,428 11,600,573 241,879,860 8,717,628 222,060,992 9,627,020
Prior years (8,928,409) ( 7,995) (4,702,409) 151,950 (1,698,077) (187,383)
-----------------------------------------------------------------------------------
Total incurred 231,399,019 11,592,578 237,177,451 8,869,578 220,362,915 9,439,637
-----------------------------------------------------------------------------------
Paid related to:
Current year 164,640,000 10,605,018 172,087,000 7,363,636 161,526,000 8,757,344
Prior years 52,560,523 1,162,411 54,173,320 559,968 39,981,443 386,860
-----------------------------------------------------------------------------------
Total paid 217,200,523 11,767,429 226,260,320 7,923,604 201,507,443 9,144,204
-----------------------------------------------------------------------------------
Net balance at December 31, 131,125,832 2,119,567 116,927,336 2,294,418 106,010,205 1,348,444
Plus reinsurance recoverables
on unpaid losses 960,376 123,474 745,156 801,496 2,293,048 717,018
-----------------------------------------------------------------------------------
Balance at December 31, $132,086,208 $ 2,243,041 $117,672,492 $3,095,914 $108,303,253 $2,065,462
===================================================================================
</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.
Alfa Corporation 1997 33
<PAGE>
Alfa Corporation
Notes to Consolidated Financial Statements
7. INCOME TAXES
Below is a comparative analysis of the provisions for income tax:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------
<S> <C> <C> <C>
Current $22,594,645 $11,805,587 $ 8,203,723
Deferred 1,411,344 1,859,058 471,030
------------------------------------------
Total $24,005,989 $13,664,645 $ 8,674,753
==========================================
</TABLE>
Reconciliations of the differences between
income taxes computed at Federal statutory tax rates
and provisions for income taxes are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------
<S> <C> <C> <C>
Income taxes computed at
Federal statutory tax rate $26,879,868 $16,048,851 $10,847,446
Dividends received deduction
and tax exempt interest (2,011,505) (2,237,859) (2,376,925)
Other, net (862,374) (146,347) 204,232
------------------------------------------
$24,005,989 $13,664,645 $ 8,674,753
==========================================
</TABLE>
Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
1997 1996
---------------------------
<S> <C> <C>
Deferred Tax Assets:
Reserve computational method differences $ 20,282,436 $ 20,327,460
Unearned premium reserve 6,836,849 6,506,176
Other 2,945,886 2,464,850
---------------------------
Total deferred tax asset $ 30,065,171 $ 29,298,486
---------------------------
Deferred Tax Liabilities:
Unrealized gains $ 32,447,809 $ 17,861,287
Deferred acquisition costs 34,949,539 33,883,532
Other 1,480,665 2,240,003
---------------------------
Total deferred tax liability $ 68,878,013 $ 53,984,822
---------------------------
Net deferred tax liability $(38,812,842) $(24,686,336)
===========================
</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.
8. NOTES PAYABLE AND COMMERCIAL PAPER
Short term debt at December 31, 1997 was $101.6 million. Of this amount, the
Company had approximately $89.5 million in commercial paper at rates ranging
from 5.92% to 5.95% with maturities ranging from January 27, 1998 to February 6,
1998. 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
$100 million. The commercial paper is guaranteed by Alfa Mutual Insurance
Company, an affiliate. In addition, the Company had $10.1 million in short-term
debt outstanding to affiliates with interest equal to commercial paper rates
payable monthly and $2.0 million outstanding in other short-term debt at a rate
of 3.6%. Due to the short term nature of the Company's borrowings, their fair
values approximate their carrying values.
34 Alfa Corporation 1997
<PAGE>
Alfa Corporation
Notes to Consolidated Financial Statements
9. CONTINGENT LIABILITIES
The property and casualty subsidiaries participate in a reinsurance pooling
agreement with Mutual and its affiliates. Should any member of the affiliated
group be unable to meet its obligation on a claim for a policy written by the
Company's property and casualty subsidiaries, the obligation to pay the claim
would remain with the Company's subsidiaries.
The liability for estimated unpaid property and casualty losses and loss
adjustment expenses is based upon an evaluation of reported losses and on
estimates of incurred but not reported losses. Adjustments to the liability
based upon subsequent developments are included in current operations.
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 has begun
projects to address this issue and believes all its systems will be successfully
compliant when completed prior to the year 2000. 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
December 31, 1997. Costs for these and similar legal proceedings including
accruals for outstanding cases were $3.6 million in 1997, $2.7 million in 1996
and $1.3 million in 1995. 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.
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, 1997,
the Company had repurchased 1,097,600 shares at a cost of $4,630,770 and due to
the exercise of stock options had reissued 3,800 shares at a cost of $19,475
under this program, which decreased the total number of shares outstanding to
40,789,712 shares.
<PAGE>
The amounts of statutory stockholders' equity and net income for the Company's
life and property casualty insurance subsidiaries are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------
<S> <C> <C> <C>
Statutory net income:
Life insurance subsidiary $ 7,650,641 $ 11,857,726 $ 6,287,576
========================================
Property and casualty subsidiaries $ 37,062,691 $ 11,534,172 $ 7,040,081
========================================
Statutory stockholders' equity:
Life insurance subsidiary $126,716,550 $110,983,883 $105,665,754
========================================
Property and casualty subsidiaries $171,727,913 $137,543,765 $129,870,498
========================================
</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 $49.7 million without prior regulatory approval in 1998 based on
December 31, 1997 financial condition and results of operations.
Alfa Corporation 1997 35
<PAGE>
Alfa Corporation
Notes to Consolidated Financial Statements
(Note 10. continued)
At December 31, 1997 the life subsidiary's Adjusted Capital calculated in
accordance with NAIC Risk-Based Capital guidelines was $146.1 million compared
to the Authorized Control Level amount of $14.9 million and the property and
casualty subsidiaries' Adjusted Capital was $171.7 million compared to the
Authorized Control Level amount of $16.0 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, 1997, 1996 and 1995 was approximately $2,694,000,
$2,961,000, and $2,983,000, respectively. The cost and net book value of major
classes of leased property at December 31, 1997 was:
NET BOOK
COST VALUE
------------------------
Transportation equipment $ 8,478,749 $ 6,130,780
Furniture and equipment 19,658,768 5,045,226
Buildings 3,176,098 1,661,981
------------------------
Total $31,313,615 $12,837,987
========================
At December 31, 1997, the aggregate minimum rental payments to be received under
leases having initial or remaining lease terms in excess of one year are
approximately $1,508,000 in 1998, $492,800 in 1999, $123,700 in 2000, $28,800 in
2001 and $5,300 in 2002.
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 $350,000
individual life insurance on a single risk. Life has reinsured approximately
$1,142,094,000 of its life insurance in force with other insurance companies and
has taken reserve credits for approximately $3,773,000 on account of such
reinsurance at December 31, 1997. Amounts paid or deemed to have been paid for
Life's reinsurance contracts are recorded as reinsurance receivables. The cost
of reinsurance related to long-duration contracts is accounted for over the life
of the underlying reinsured policies using assumptions consistent with those
used to account for the underlying policies.
The Company's property and casualty insurance subsidiaries together with Mutual
and its affiliates, participate in catastrophe and other reinsurance ceded
arrangements to protect them from abnormal losses. The Company's subsidiaries
and Mutual and its affiliates are also required to participate in certain
assigned risk pools and associations by the states in which they operate.
The following table summarizes the effects of reinsurance on premiums and losses
for the three years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1997 1996 1995
--------------------------------------------
<S> <C> <C> <C>
Direct premiums earned $ 97,856,550 $ 89,273,157 $ 79,865,167
Premiums ceded to nonaffiliates (3,472,978) (10,705,073) (13,099,076)
Premiums ceded to pooling agreement (53,789,256) (47,904,965) (41,901,158)
Premiums assumed from pooling agreement 330,325,696 306,461,981 283,180,565
Premiums assumed from nonaffiliates 45,034 61,318 43,471
--------------------------------------------
Net premiums earned $370,965,046 $337,186,418 $308,088,969
============================================
Direct losses $ 51,875,909 $ 46,804,925 $ 45,059,080
Losses ceded to nonaffiliates (1,693,990) (4,355,459) (39,356,037)
Losses ceded to pooling agreement (38,051,264) (37,521,843) (32,594,000)
Losses assumed from pooling agreement 214,317,668 224,835,694 241,712,916
Losses assumed from nonaffiliates 45,086 63,805 43,330
Loss adjustment expenses, net 16,498,188 16,219,907 14,937,263
--------------------------------------------
Net losses incured $242,991,597 $246,047,029 $229,802,552
Surrenders, maturities, interest and
other benefits and settlement expenses 23,086,359 21,264,297 20,590,885
--------------------------------------------
Total benefits and settlement expenses $266,077,956 $267,311,326 $250,393,437
============================================
</TABLE>
36 Alfa Corporation 1997
<PAGE>
Alfa Corporation
Notes to Consolidated Financial Statements
(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, 1997, the Company does not believe there to be a significant
concentration of credit risk related to its reinsurance program.
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, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------
(in thousands)
<S> <C> <C> <C>
Revenues
Life $ 73,224 $ 70,284 $ 63,517
Property and casualty 356,834 321,284 294,363
Noninsurance operations and corporate 3,952 4,768 4,883
-------------------------------------
$ 434,010 $ 396,336 $362,763
=====================================
Net Income
Life $ 15,177 $ 16,761 $ 13,723
Property and casualty 38,156 15,205 8,428
Noninsurance operations and corporate (539) 223 167
-------------------------------------
$ 52,794 $ 32,189 $ 22,318
=====================================
Assets
Life $ 607,266 $ 533,435 $490,926
Property and casualty 463,171 396,054 379,347
Noninsurance operations and corporate 99,629 89,841 95,160
-------------------------------------
$1,170,066 $1,019,330 $965,433
=====================================
</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 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,
80,000 options on April 18, 1996 exercisable at $12.25/share and 75,000 options
on February 18, 1997 exersisable at $12.00/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, 1997, there had been 3,800 options
exercised, 884,188 options were exercisable and 55,400 had been cancelled
leaving 957,000 options available for grant under the plan.
Alfa Corporation 1997 37
<PAGE>
Alfa Corporation
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 1997, 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 Options Granted
February 18, 1997 April 18, 1996 March 27, 1995
<S> <C> <C> <C>
Risk-free interest rate 6.27% 6.58% 7.05%
Expected life (in years) 10 10 10
Expected volatility 0.49 0.47 0.62
Expected future dividend yield 3.3% 2.9% 2.9%
Option exercise price $12.00 $12.25 $11.50
======== ======== ========
Fair value at date of grant $405,534 $486,898 $507,138
======== ======== ========
</TABLE>
Using the fair value shown above, the pro forma net income and earnings per
share as if FAS 123 had been applied is as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1997 1996 1995
-----------------------------------------------
<S> <C> <C> <C>
Net income, as reported $52,793,633 $32,189,215 $22,317,951
===============================================
Earnings per share, as reported
(Basic and Diluted) $ 1.29 $ 0.79 $ 0.55
===============================================
Pro forma net income $52,502,188 $32,005,055 $22,233,660
===============================================
Pro forma earnings per share
(Basic and Diluted) $ 1.29 $ 0.78 $ 0.55
===============================================
</TABLE>
The information shown below is for options outstanding at December 31, 1997,
1996 and 1995:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------ ------------------------------ -----------------------------
Number Weighted Average Number Weighted Average Number Weighted Average
of Options Exercise Price of Options Exercise Price of Options Exercise Price
------------------------------ ------------------------------ -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding
Beginning of year 975,000 $ 11.23 911,200 $ 11.14 845,732 $ 11.12
Add (deduct):
Granted 75,000 $ 12.00 80,000 $ 12.25 80,000 $ 11.50
Exercised (3,000) $(11.75) (800) $(11.75) 0 0
Cancelled (7,800) $(11.75) (15,400) $(11.75) (14,532) $(11.75)
------------------------------------------------------------------------------------------
End of Period 1,039,200 $ 11.28 975,000 $ 11.23 911,200 $ 11.14
==========================================================================================
Exercisable, end of period 884,188 $ 11.15 814,988 $ 11.10 527,608 $ 11.09
==========================================================================================
Range of exercise prices $9.40 to $12.25 $9.40 to $12.25 $9.40 to $11.75
=============== =============== ===============
Weighted average
remaining contractual life 6.4 years 7.2 years 8.0 years
========= ========= =========
Actual compensation cost
recognized during period $103,680 $237,398 $376,676
======== ======== ========
</TABLE>
38 Alfa Corporation 1997
<PAGE>
Alfa Corporation
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, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1997. 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 1997 and 1996 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Birmingham, Alabama
February 5, 1998
Alfa Corporation 1997 39
<PAGE>
Alfa Corporation
Quarterly Financial Information--Unaudited
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------------------------------------------------
March 31 June 30 September 30 December 31
------------------------------------------------------------------------------------------------------
1997 1996 1997 1996 1997 1996 1997 1996
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Premiums and
Policy Charges $90,484,238 $82,960,219 $92,240,084 $82,728,834 $93,919,207 $84,460,691 $94,321,517 $87,036,674
Net Investment
Income $13,999,062 $13,467,463 $13,917,544 $13,006,480 $14,515,423 $13,959,538 $15,096,640 $13,760,853
Net Income (Loss) $13,054,247 ($57,616) $13,692,673 $10,796,264 $13,653,270 $12,284,206 $12,393,443 $ 9,166,361
Average Shares
Outstanding - Basic 40,786,712 40,786,105 40,786,712 40,786,712 40,786,712 40,786,712 40,788,042 40,786,712
- Diluted 40,841,571 40,889,298 40,866,226 40,845,083 40,958,386 40,815,026 41,021,963 40,821,790
Net Income (Loss)
Per Share*- Basic
and Diluted $0.32 ($0.001) $0.34 $0.26 $0.33 $0.30 $0.30 $ 0.22
</TABLE>
- ------------
* The sum of the quarters may not equal the annual earnings per share due to
the rounding effects on a quarterly basis.
40 Alfa Corporation 1997
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Consolidated Summary of Operations & Related Data
(Dollars in Thousands Except Per Share Amounts)
Years Ended December 31, 1997 1996 1995 1994
--------------------------------------------------------------
Premiums and policy charges $ 370,965 $ 337,186 $ 308,089 $ 247,131
Net investment income 57,529 54,194 50,923 45,554
Net realized investment gains 3,356 2,808 1,106 572
Other income 2,160 2,148 2,645 3,057
--------------------------------------------------------------
Total revenues 434,010 396,336 362,763 296,313
Benefits and expenses 357,210 350,482 331,771 248,481
--------------------------------------------------------------
Income before provision for
income taxes 76,800 45,854 30,993 47,832
Provision for income taxes 24,006 13,665 8,675 14,965
Cumulative Effect of Changes in Accounting Principles
--------------------------------------------------------------
Net income $ 52,794 $ 32,189 $ 22,318 $ 32,867
==============================================================
Balance sheet data at December 31:
Invested assets $ 1,027,660 $ 886,017 $ 841,123 $ 718,074
Total assets $ 1,170,066 $ 1,019,330 $ 965,433 $ 847,870
Future policy benefits, losses and
claims, unearned premiums $ 596,057 $ 535,824 $ 487,659 $ 429,930
Total liabilities $ 787,135 $ 696,018 $ 656,823 $ 592,885
Stockholders' equity $ 382,931 $ 323,312 $ 308,610 $ 254,985
Per share data /1/:
Net income - Basic & Diluted $ 1.29 $ 0.79 $ 0.55 $ 0.81
Cash dividends paid $ 0.3975 $ 0.3875 $ 0.375 $ 0.3425
Annual dividend rate $ 0.40 $ 0.39 $ 0.38 $ 0.36
Stockholders' equity $ 9.39 $ 7.93 $ 7.57 $ 6.25
Closing sales price at December 31 $ 17 1/4 $ 12 5/8 $ 16 3/4 $ 11
Price/earnings ratio 13.3x 16.0x 30.6x 13.6x
Weighted average shares outstanding - Basic 40,787 40,786 40,786 40,786
Weighted average shares outstanding - Diluted 40,931 40,843 40,811 40,810
Return on average equity 15.0% 10.2% 7.9% 12.7%
Return on average invested assets 7.12% 7.60% 7.74% 7.78%
Life insurance in force $10,246,400 $ 9,463,055 $ 8,642,907 $ 7,867,808
Number of agents 574 587 585 562
/1/Per share amounts have been restated where appropriate to reflect 2-for-1 stock splits in June 1993 and June 1987.
</TABLE>
6
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Consolidated Summary of Operations & Related Data
(Dollars in Thousands Except Per Share Amounts)
Years Ended December 31, 1993 1992 1991 1990
---------------------------------------------------------------
Premiums and policy charges $ 219,913 $ 202,440 $ 192,445 $ 175,448
Net investment income 44,902 39,425 34,785 32,224
Net realized investment gains 4,890 4,232 3,790 2,842
Other income 2,918 2,340 1,919 1,861
---------------------------------------------------------------
Total revenues 272,624 248,437 232,939 212,375
Benefits and expenses 209,309 194,859 192,144 180,611
---------------------------------------------------------------
Income before provision for
income taxes 63,315 53,578 40,795 31,764
Provision for income taxes 20,999 16,660 12,354 8,877/2/
Cumulative Effect of Changes in Accounting Principles 2,645
---------------------------------------------------------------
Net income $ 44,960 $ 36,918 $ 28,441 $ 22,887/2/
Balance sheet data at December 31: ===============================================================
Invested assets $ 653,819 $ 574,718 $ 511,931 $ 437,725
Total assets $ 766,077 $ 665,247 $ 595,801 $ 515,681
Future policy benefits, losses and
claims, unearned premiums $ 365,148 $ 334,454 $ 295,443 $ 257,907
Total liabilities $ 505,091 $ 440,669 $ 402,526 $ 347,861
Stockholders' equity $ 260,986 $ 224,578 $ 193,275 $ 167,820
Per share data /1/:
Net income - Basic & Diluted $ 1.10 $ 0.91 $ 0.70 $ 0.55/2/
Cash dividends paid $ 0.28 $ 0.2425 $ 0.215 $ 0.195
Annual dividend rate $ 0.29 $ 0.25 $ 0.22 $ 0.20
Stockholders' equity $ 6.40 $ 5.51 $ 4.74 $ 4.03
Closing sales price at December 31 $ 11 1/2 $ 11 7/8 $ 5 1/4 $ 4 5/8
Price/earnings ratio 10.4x 13.1x 7.6x 8.4x
Weighted average shares outstanding - Basic 40,786 40,786 40,786 41,611
Weighted average shares outstanding - Diluted 40,814 40,786 40,786 41,611
Return on average equity 18.5% 17.7% 15.8% 13.8%/2/
Return on average invested assets 8.03% 8.28% 8.66% 9.00%
Life insurance in force $ 7,064,335 $ 6,295,626 $ 5,578,661 $ 4,947,574
Number of agents 562 529 504 500
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Consolidated Summary of Operations & Related Data
(Dollars in Thousands Except Per Share Amounts)
Years Ended December 31, 1989/3/ 1988 1987
----------------------------------------------
Premiums and policy charges $ 158,585 $ 148,287 $ 75,277
Net investment income 30,048 26,224 19,288
Net realized investment gains 2,882 2,005 1,316
Other income 1,172 1,402 1,086
----------------------------------------------
Total revenues 192,687 177,918 96,967
Benefits and expenses 159,912 144,229 75,414
---------------------------------------------
Income before provision for
income taxes 32,775 33,689 21,553
Provision for income taxes 9,919 10,842 7,495
Cumulative Effect of Changes in Accounting Principles
---------------------------------------------
Net income $ 22,856 $ 22,847 $ 14,058
=============================================
Balance sheet data at December 31:
Invested assets $ 410,266 $ 363,401 $ 277,684
Total assets $ 482,383 $ 432,312 $ 338,692
Future policy benefits, losses and
claims, unearned premiums $ 223,925 $ 192,113 $ 158,242
Total liabilities $ 319,598 $ 288,094 $ 258,576
Stockholders' equity $ 162,785 $ 144,218 $ 80,116
Per share data/1/:
Net income - Basic & Diluted $ 0.55 $ 0.58 $ 0.42
Cash dividends paid $ 0.1725 $ 0.145 $ 0.1275
Annual dividend rate $ 0.18 $ 0.15 $ 0.13
Stockholders' equity $ 3.89 $ 3.67 $ 2.38
Closing sales price at December 31 $ 5 5/8 $ 5 $ 7 1/4
Price/earnings ratio 10.3x 17.4x
Weighted average shares outstanding - Basic 41,882 39,265 33,692
Weighted average shares outstanding - Diluted 41,882 39,265 33,692
Return on average equity 14.9% 20.4% 18.6%
Return on average invested assets 9.43% 9.91% 9.92%
Life insurance in force $ 4,318,605 $ 3,661,747 $ 3,131,656
Number of agents 486 454 475
/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/ Amounts for 1989 and prior have been restated to reflect adoption in 1989 of
FASB statement No. 97.
</TABLE>
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
The following table sets forth consolidated summarized income statement
information for the years ended December 31, 1997, 1996 and 1995:
Years Ended December 31,
---------------------------------------------
1997 1996 1995
(in thousands, except share
and per share data)
Revenues
Premiums and
policy charges $ 370,965 $ 337,186 $ 308,089
==============================================
Net investment income $ 57,529 $ 54,194 $ 50,923
==============================================
Total revenues $ 434,010 $ 396,336 $ 362,763
==============================================
Net income
Insurance operations $ 51,151 $ 30,141 $ 21,432
Noninsurance operations 2,628 3,339 3,668
Net realized
investment gains 2,182 1,825 719
Corporate expenses (3,167) (3,116) (3,500)
----------------------------------------------
Net income $ 52,794 $ 32,189 $ 22,318
==============================================
(Basic and Diluted)
Net income per share $1.29 $.79 $.55
==============================================
Weighted average shares
outstanding-Basic 40,787,047 40,786,561 40,785,912
==============================================
Diluted 40,930,894 40,843,548 40,810,979
==============================================
Premiums and policy charges increased 10.0% in 1997, 9.4% in 1996 and
24.7% in 1995. The growth in 1997 and 1996 is due primarily to increased
property casualty business from production, rate increases and a low lapse
ratio. In addition, premium growth was positively impacted in 1997 by a
significant reduction in reinsurance premiums paid. The majority of the growth
in 1995 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 6.2% in 1997, 6.4% in 1996 and 11.8% in
1995 due to an increase in invested assets resulting from positive cash flows.
Net income improved 64.0% in 1997 compared to 1996 and increased 44.2%
in 1996 compared to 1995. The improved 1997 operating results have been in the
property casualty business, primarily from significantly improved loss ratios.
Such improvement was the result of initiatives which began in late 1996 and
early 1997, but also is due to the absence of significant storm activity in
1997. The results in both 1996 and 1995 include the effects of significant
catastrophic storms. 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 for the first quarter of 1996 of $58 thousand.
Comparatively, the effects of Opal and other storms in 1995 were much more
significant than those in 1996, and therefore 1996 did have significant earnings
improvement. Life insurance operating income decreased 2.5% in 1997 due to
increased mortality rates after increasing 13.2% in 1996 due to a decline in
death claims. In all years presented, favorable securities market conditions
resulted in a significant increase in realized investment gains.
Noninsurance operating income decreased 21.3% in 1997 due to declines
in profits of the consumer finance and real estate subsidiaries, offset
partially by improvement in earnings of the construction subsidiary.
Noninsurance operating income decreased 9.0% in 1996 as a result of decreased
profits in the construction and real estate subsidiaries.
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, 1997, 1996 and 1995:
Years Ended December 31,
-----------------------------------------
1997 1996 1995
-----------------------------------------
(in thousands)
Earned premiums
Personal lines $315,650 $292,330 $270,109
Commercial lines 11,772 11,231 10,606
Pools, associations
and fees 4,014 3,905 3,709
Reinsurance ceded (1,130) (8,527) (11,435)
-----------------------------------------
Total $330,306 $298,939 $272,989
==========================================
Net underwriting
income (loss) $ 28,061 $ (2,235) $(12,198)
==========================================
Underwriting margin 8.5% (0.7%) (4.5%)
==========================================
Operating income $ 36,464 $ 15,143 $ 8,182
==========================================
1997 Compared to 1996
Earned premiums increased 10.5% in 1997 due to new business, rate
increases, a low lapse ratio of 4.0% and a reduction in reinsurance premiums
expense. As a result of the Company's new catastrophe protection program, the
exposure to losses from significant weather events has been lessened for Alfa
Corporation, reducing the need for and amount of reinsurance protection, thereby
reducing such expenses.
15
<PAGE>
Operating income more than doubled in 1997 as a result of significantly
improved underwriting results. The underwriting margin of 8.5% is due primarily
to the improvement in the loss ratio from 73.8% in 1996 to 65.0% in 1997. The
improvement is a result of both a reduction in significant storm related claims
and from underwriting initiatives implemented during the last two years,
including tightened underwriting standards, new underwriting guidelines and
other measures.
The expense ratio was 26.5% in 1997 compared to 26.9% in 1996. The
Company has an ongoing expense focus that has positively impacted results,
however, increased technology expenditures that are ongoing have partially
offset the expense improvement.
Invested assets grew 18.0% and investment income grew 7.6% in 1997 as
result of positive cash flows in the property casualty subsidiaries. A
significant factor in the growth in assets is the growth in market values of
fixed maturities and equity securities and from short term borrowed funds held
at December 31, 1997. Excluding these items, growth in assets approximates the
growth rate in 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, 1997,
the Company's property and casualty subsidiaries' Adjusted Capital calculated in
accordance with NAIC Risk-Based Capital (RBC) guidelines was $171.7 million
compared to the Authorized Control Level (Required) RBC of $16.0 million.
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 premiums
paid 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 on 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 other members of the Alfa Group intensified their
studies of catastrophe financing alternatives in response to Hurricane Opal in
1995. As a result of such studies, the overall catastrophe financing program for
the group was restructured. An amendment to the intercompany pooling agreement
(see Note 2 to the Consolidated Financial Statements) changed the allocation of
catastrophe costs among the members of the pool to better reflect the economics
of catastrophe finance. The impact will be a reduction in the volatility of the
Company's 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 $0.10 per share. Another effect is the reduction of
expenditures for reinsurance protection as the exposure is reduced.
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 deterioration in the
automobile line of business. Rate increases made in August, 1996, which had a
modest impact in 1996, had a greater impact in 1997 as the business renewed. In
addition, in 1996 the Company started an extensive risk review program and
tightened underwriting guidelines and took other measures to improve the loss
ratio.
The expense ratio improved in 1996 due primarily to 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.
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, 1997, 1996 and 1995:
Years Ended December 31,
-----------------------------------
1997 1996 1995
-----------------------------------
(in thousands)
Premiums and policy charges
Universal life
policy charges $11,296 $10,075 $ 8,789
Universal life
policy charges - COLI 1,858 - -
Interest sensitive life
policy charges 9,306 8,589 7,991
Traditional life
insurance premiums 19,958 18,931 17,700
Group life
insurance premiums (1,759) 653 620
-----------------------------------
Total $40,659 $38,248 $35,100
===================================
Operating income $14,580 $14,952 $13,205
===================================
16
<PAGE>
1997 Compared to 1996
In 1997, life insurance premiums and policy charges increased 6.3% and
operating income decreased 2.5%. New premium production increased 6.7% and
persistency remained high at 91.8%. The Company's Universal Life product
continued to be the leading policy in new sales. Universal Life policy charges
increased 12.1% in 1997. Policy charges on interest sensitive life increased
8.3% and traditional life insurance premiums increased 5.4%. Term products were
the leading traditional product. First year term premiums increased 6.8% and
renewal business increased 12.8% due to good persistency.
Also, premiums and policy charges were impacted by a change 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 policy charges of $1.9 million and a reduction in group premium
for 1997 of $2.4 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 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.
The primary factor in the decline in operating income was the mortality
experience. Although the mortality ratio was favorable at 91% of expected in
1997, it increased from a more favorable 85% of expected in 1996 during which
time total death claims increased $2.7 million or 30.7%. The Company's life
insurance subsidiary incurred $1.5 million in additional expense in 1997 related
to lawsuits. Premium taxes increased due to both the increase in premiums and an
increase in the premium tax rate in 1997. The rate is scheduled to increase
again in 1998 from 1.8% to 2.1% and to 2.3% in 1999 and thereafter. Otherwise,
expense levels remained relatively flat.
Investment income grew 8.2% in 1997 due to increased positive cash flows
which increased invested assets 15.2%, largely due to the new COLI plan. The
investment yield rate was lower in 1997, due to falling interest rates and due
to investments in certain tax credits which lower investment income, but also
lower income taxes, and have an overall positive impact on net income.
At December 31, 1997 the life subsidiary's Adjusted Capital calculated in
accordance with NAIC Risk-Based Capital (RBC) guidelines was $146.1 million
compared to the Authorized Control Level (Required) RBC amount of $14.9 million.
The Risk-Based Capital analysis serves as the benchmark for the regulation of
life insurance enterprises' solvency by state insurance regulators.
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%. Total Universal Life Policy charges
increased 14.6% in 1996.
The primary factor in the growth in operating income was the mortality
experience. Not only did the already favorable mortality ratio improve from 86%
of expected 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.
NONINSURANCE OPERATIONS
1997 Compared to 1996
Noninsurance earnings declined 21.3% in 1997 due primarily to a decrease
of 22.2% or approximately $680,000 in net income in the consumer finance
subsidiary. An 8.6% decrease in the loan portfolio to $56.2 million combined
with a decline in the overall portfolio yield rate of 30 basis points resulted
in a 16.8% decrease in interest income. Additionally, net leasing revenue
decreased 13.8%. The real estate sales subsidiary's earnings were down $74,292,
or 49.0% in 1997 due to a reduction in both commercial and residential sales
activity. Partially offsetting these declines was a 43.9%, or $44,592 increase
in construction income.
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 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 decreased 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. In addition to the improvement from interest income, a decline
in expenses, primarily legal expense, also improved net income.
CORPORATE
Interest expense on short term corporate debt is the primary corporate
expense for each year presented. Interest expense totaled $1.8 million in 1997,
$1.8 million in 1996 and $2.0 million in 1995. The decrease in interest expense
17
<PAGE>
in 1996 is due to a decrease in interest rates on the outstanding debt. At
December 31, 1997, corporate debt was $33.5 million at an average rate of 5.9%.
The remaining corporate expenses represent general operating expenses. These
expenses raised total corporate expense to $3.2 million in 1997, $3.1 million in
1996, and $3.5 million in 1995.
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
investment yield rates. Information about cash flows, invested assets and yield
rates is presented below for the years ended December 31, 1997, 1996 and 1995:
Years Ended December 31,
-----------------------------------
1997 1996 1995
-----------------------------------
Increase (decrease) in
cash flow from operations 35.9% 14.0% (2.8%)
Increase in invested assets 16.0% 5.3% 17.1%
Investment yield rate 7.1% 7.6% 7.7%
Increase in net
investment income 6.2% 6.4% 11.8%
The 35.9% 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 over $30 million in underwriting income
due to lower loss ratios and an absence of storm losses in 1997. In addition,
the new COLI plan in the life insurance subsidiary provided approximately $10
million in additional cash flow. As a result of these positive cash flows,
invested assets grew 12.5% (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.
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, was
relatively flat compared to 1995. Positive cash flow decreased 2.8% in 1995 due
primarily to the effects of Hurricane Opal.
The Company had realized investment gains of approximately $3.4 million
in 1997, $2.8 million in 1996 and $1.1 million in 1995. These gains are from
sales of equity securities, gains in the Company's covered call option writing
program and gains from sales of fixed maturities available for sale.
The composition of the Company's investment portfolio is as follows at
December 31, 1997 and 1996:
December 31,
-------------------------------------
1997 1996
-------------------------------------
Fixed maturities
Taxables
Mortgage backed (CMOs) 30.2% 30.2%
Corporate bonds 29.6 29.1
-------------------------------------
Total taxable 59.8 59.3
Tax exempts 11.6 9.9
-------------------------------------
Total fixed maturities 71.4 69.2
-------------------------------------
Equity securities 11.3 10.8
Mortgage loans .1 .1
Real estate .2 .2
Policy loans 3.4 3.6
Other long term investments 11.2 11.6
Short term investments 2.4 4.5
-------------------------------------
100.0% 100.0%
=====================================
The majority of the Company's investment portfolio consists of fixed
maturities which are diverse as to both industry and geographic concentration.
In 1997 and 1996, the Company increased its investments in tax-exempt and
mortgage backed securities and in 1997 decreased 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 8.6%.
The rating of the Company's portfolio of fixed maturities using the
Standard & Poor's rating categories is as follows at December 31, 1997 and
1996:
December 31,
----------------------
1997 1996
----------------------
AAA to A- 87.1% 87.7%
BBB+ to BBB- 12.3 11.6
BB+ and below (below investment grade) 0.6 0.7
----------------------
100.0% 100.0%
======================
Approximately 0.29% 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 December 31, 1997, approximately 42.2% of fixed maturities were
mortgage backed securities. Such securities are comprised of Collateral Mortgage
Obligations (CMO's) and pass through securities. Based on reviews of the
18
<PAGE>
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 December 31, 1997, the Company's total portfolio of fixed
maturities had gross unrealized gains of $35.8 million and gross unrealized
losses of $3.1 million. Securities are priced by nationally recognized pricing
services or by broker/dealers securities firms. Only 0.29% were priced by the
Company.
During 1997, the Company sold approximately $26.2 million in fixed
maturities available for sale. These sales resulted in gross realized gains of
$714,990 and gross realized losses of $61,526. 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.
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 December 31, 1997 and 1996, the Company had
unrealized gains of approximately $5.5 million and $822 thousand, respectively,
in such investments.
During 1997, the Company had no disposals of high yield debt securities.
However, in 1996 a net loss of $1,250 was recognized on a disposal. In 1997 the
Company wrote down two bond issues totaling $497,493 and four equity securities
totaling $429,347 whose declines in value were deemed to be other than
temporary. Similarly, in 1996 the Company wrote down one bond issue totaling
$420,345 and four equity securities totaling $2.0 million. At December 31, 1997
and 1996, 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 December 31, 1997, the
delinquency ratio on the loan portfolio was 2.19%, or $1.1 million. Loans
charged off in 1997 totaled $416,267 or 0.8% of the average outstanding loan
portfolio. At December 31, 1997, 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 effective tax rate was 31.3% in 1997, 29.8% in 1996, and 28.0% in 1995.
The increase in income tax expense in 1997 over 1996 and in 1996 compared to
1995 is due primarily to the increase in income before provision for income
taxes in both years. The increase in the effective rate is due to 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.
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 of options 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 and 75,000 options on February 18, 1997. 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, 1997, there had been 3,800
options exercised, 884,188 options were exercisable and 55,400 had been
cancelled leaving 957,000 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 common stock in the open market or in negotiated transactions in
19
<PAGE>
such quantities and at such times and prices as management may decide. At
December 31, 1997, the Company had repurchased 1,097,600 shares at a cost of
$4,630,770. The Company has reissued 3,800 treasury shares as a result of option
exercises.
Total borrowings increased $15 million in 1997 to $101.6 million. During
the first quarter of 1995, the Company began issuing commercial paper which
replaced the majority of the short term debt. At December 31, 1997, the Company
had approximately $89.5 million in commercial paper at rates ranging from 5.92%
to 5.95% with maturities ranging from January 27, 1998 to February 6, 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 $90 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 $10.1 million in short-term debt outstanding to
affiliates at December 31, 1997 with interest equal to commercial paper rates
payable monthly and $2.0 million outstanding in other short-term debt at a rate
of 3.6%.
Cash surrenders paid to policyholders on a statutory basis totaled $10.9
million in 1997 and $10.2 million in 1996. This level of surrenders is within
the Company's pricing expectations. Historical persistency rates indicate a
normal pattern of surrender activity in 1997, 1996 and 1995. The structure of
the surrender charges is such that persistency is encouraged. The majority of
the policies in force have surrender charges which grade downward over a 12 to
15 year period. In addition, the majority of the in-force business is interest
sensitive type policies which generally have lower rates of surrender. At
December 31, 1997, the total amount of cash that would be required to fund all
amounts subject to surrender was approximately $285.3 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.
FINANCIAL ACCOUNTING DEVELOPMENTS
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 dividends to stockholders. The
primary additional component will be unrealized gains and losses. SFAS 130 will
require comprehensive income and its components to be prominently displayed in
the financial statements. SFAS 130 is effective for fiscal years beginning after
December 15, 1997. Alfa Corporation will adopt SFAS 130 in the first quarter of
1998.
The FASB also issued SFAS No. 131 "Disclosures About Segments of An
Enterprise and Related Information" (SFAS 131) in June 1997. This standard
requires public companies to disclose segment information using an approach
based on how management operates the Company's business. Management believes the
effect of SFAS 131 on the disclosures by Alfa Corporation will not be
significant. SFAS 131 is effective for years beginning after December 15, 1997.
Alfa Corporation will adopt SFAS 131 in the first quarter of 1998.
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.
20
<PAGE>
EXECUTIVE OFFICES
2108 East South Boulevard
Montgomery Alabama 36116-2015
Telephone: (334) 288-3900 FAX: (334) 288-0905
FORM 10-K
The Company's Form 10-K, as filed with the Securities and
Exchange Commission, may be obtained by writing:
Al Scott, Secretary
Alfa Corporation
P.O. Box 11000
Montgomery Alabama 36191-0001
COMMON STOCK
The common stock of Alfa Corporation is traded on the NASDAQ
National Market System under the symbol ALEN. Alfa Corporation has
approximately 3. 100 stockholders of record. Newspaper listings of NASDAQ stocks
list Alfa Corporation as AlfaCp.
STOCK TRANSFER AGENT
AmSouth Bank
Corporate Securities Services
P.O. Box 11426
Birmingham. Alabama 35202 (205)560-7456
STOCK PRICE AND DIVIDEND INFORMATION
- --------------------------------------------------------------------------
DIVIDENDS
1997 HIGH LOW PER SHARE
- --------------------------------------------------------------------------
FIRST QUARTER $ 13 1/4 $ 11 1/4 $.0975
SECOND QUARTER 14 1/2 11 1/4 .10
THIRD QUARTER 16 1/4 13 1/4 .10
FOURTH QUARTER 18 1/8 15 3/8 .10
- --------------------------------------------------------------------------
DIVIDENDS
1996 HIGH LOW PER SHARE
- --------------------------------------------------------------------------
First Quarter $ 16 1/4 $ 12 1/2 $.095
Second Quarter 14 10 7/8 .0975
Third Quarter 13 1/4 10 1/4 .0975
Fourth Quarter 14 1/4 10 3/4 .0975
The Company has paid cash dividends annually since 1974 and quarterly since
September 1977. There are no restrictions on the Company's present or future
ability to pay dividends other than the usual statutory restrictions. There is a
present expectation that the dividends will continue to be paid in the future,
provided that operations of the Company continue to be profitable.
DIVIDEND REINVESTMENT PLAN
Alfa Corporation stockholders can reinvest their dividends in additional shares
of stock and also may purchase additional shares with optional cash payments.
Alfa Corporation pays all costs and brokerage fees related to the purchases
under the plan. For more information contact Investor Relations at the above
address or call AmSouth Bank at (205)560-7456.
DEBT RATINGS
Standard Moody's
& Poor's Investors Service
---------------------------
Alfa Corporation
Commercial Paper A-I+ P-1
INDEPENDENT ACCOUNTANTS
KPMG Peat Marwick LLP
Financial Center
Suite 1200
Birmingham, Alabama 35203
FOR FINANCIAL INFORMATION PLEASE CONTACT:
Donald Price
Senior Vice President, Finance
ADDITIONAL INFORMATION PLEASE CONTACT:
John D. Holley
Vice President and Controller
NASDAQ MARKET MAKERS
Goldman, Sachs & Co.
Herzog, Heine, Geduld, Inc.
J. C. Bradford & Co.
Mayer & Schweitzer, Inc.
The Robinson-Humphrey Company, Inc.
Ryan Beck & Co., Inc.
Sterne, Agee & Leach, Inc.
ANNUAL MEETING
The Annual Meeting of Alfa Corporation stockholders will be
held at 10:00 a.m., Thursday, April 16. 1998, in the auditorium
of the Company's executive offices in Montgomery.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Alfa Corporation:
We consent to incorporation by reference in the registration statements (No. 33-
77916 and 33-76460) on Form S-8 and (No.33-83134) on Form S-3 of Alfa
Corporation of our reports dated January 5, 1998, relating to the consolidated
balance sheets of Alfa Corporation and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of income, stockholders' equity
and cash flows for the years then ended, and all related schedules, which
reports appear in and are incorporated by reference in the December 31, 1997,
annual report on Form 10-K of Alfa Corporation.
Birmingham, Alabama
March 27, 1998
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<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 OCT-01-1997
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<BENEFITS> 269,243,048 66,265,771
<UNDERWRITING-AMORTIZATION> 55,997,727 14,288,105
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<INCOME-PRETAX> 76,799,622 17,853,223
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