<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Fiscal Year Ended December 31, 1998 Commission File Number 0-11773
- --------------------------------------- -------
ALFA CORPORATION
----------------
(Exact name of registrant as specified in its charter)
Delaware 63-0838024
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
2108 East South Boulevard
P. O Box 11000, Montgomery, Alabama 36191-0001
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip-Code)
Registrant's Telephone Number including Area Code (334) 288-3900
--------------------
Securities registered pursuant to Section 12 (b) of the Act:
None
---------------------------------------
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $1.00 per share
---------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------------- -------------
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of February 28, 1999, was $337,529,032.
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, 1998
- ------------------ -----------------------------
Common Stock, $1.00 par value 40,879,911 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's annual report to security holders for the fiscal year
ended December 31, 1998, and proxy statement for the annual meeting of
stockholders to be held April 22, 1999, are incorporated by reference into Part
II and Part III.
<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 Insurance Companies
(the Mutual Group), which collectively own 50.7% of Alfa Corporation's common
stock, their largest single investment. Alfa Corporation and its subsidiaries
(the Company) together with the Mutual Group 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 83.5% of the Company's property and casualty premium
income and 73.7% of its total premium income for 1998 was derived from the
Company's participation with the Mutual Group in a Pooling Agreement. The
Company entered into a 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. 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 and reduces the Company's
earnings volatility.
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 the Department
determined that the implementation of the Pooling Agreement did not require the
Department's 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 Jerry A.
Newby, 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 underwriting ratios for the Pooled Business
excluding catastrophes as long as the Pooling Agreement remains in effect. See
"Property and Casualty Business" section regarding impact of catastrophes.
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.
I-2
<PAGE>
Alfa Corporation's operations include property and casualty insurance, life
insurance, noninsurance and corporate segments. Presented below is summarized
financial information for the Company's four business segments as of and for the
years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------
1998 1997 1996
---------------- --------------- ---------------
(in thousands, except share and per share data)
<S> <C> <C> <C>
Revenues
Life insurance premiums
and policy charges $ 46,099 $ 40,659 $ 38,248
=========== =========== ===========
Property and casualty
insurance premiums $ 345,740 $ 330,306 $ 298,939
=========== =========== ===========
Net investment
income $ 62,512 $ 57,529 $ 54,194
=========== =========== ===========
Total revenues $ 460,986 $ 434,010 $ 396,336
=========== =========== ===========
Net income
Insurance operations
Life insurance $ 15,645 $ 14,580 $ 14,952
Property and casualty
insurance 41,581 36,571 15,189
Noninsurance operations 2,192 2,628 3,339
Net realized
investment gains 2,858 2,182 1,825
Corporate (5,560) (3,167) (3,116)
----------- ----------- -----------
Net income $ 56,716 $ 52,794 $ 32,189
=========== =========== ===========
Net income per share
Basic $1.39 $1.29 $.79
=========== =========== ===========
Diluted $1.38 $1.29 $.79
=========== =========== ===========
Weighted average shares
outstanding-Basic 40,834,232 40,787,047 40,786,561
=========== =========== ===========
Diluted 41,148,258 40,930,894 40,843,548
=========== =========== ===========
</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 premiums and over 70%
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 Company is a direct writer and distributes its products
utilizing the employee/agent sales force of Mutual.
I-3
<PAGE>
The following table shows the Company's premium distribution by product in
property and casualty insurance for 1998:
Automobile 65.6%
Homeowner 18.6%
Farmowner 5.6%
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 (loss), GAAP basis loss,
expense and combined ratios, underwriting margin, net investment income and
operating income for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------
1998 1997 1996
--------- --------- ----------
<S> <C> <C> <C>
(in thousands)
Earned premiums
Personal lines $330,511 $315,650 $292,330
Commercial lines 12,354 11,772 11,231
Pools, associations
and fees 4,036 4,014 3,905
Reinsurance ceded (1,161) (1,130) (8,527)
-------- -------- --------
Total $345,740 $330,306 $298,939
======== ======== ========
Net underwriting income (loss) $ 33,183 $ 28,061 $ (2,235)
======== ======== ========
Loss ratio 62.8% 65.0% 73.8%
LAE ratio 5.0% 5.0% 5.3%
Expense ratio 22.6% 21.5% 21.6%
-------- -------- --------
GAAP basis combined ratio 90.4% 91.5% 100.7%
======== ======== ========
Underwriting margin 9.6% 8.5% (0.7%)
======== ======== ========
Net investment income $ 25,992 $ 23,935 $ 22,251
======== ======== ========
Operating income before tax $ 59,156 $ 51,955 $ 19,585
======== ======== ========
Operating income, net of tax $ 41,581 $ 36,571 $ 15,189
======== ======== ========
</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
I-4
<PAGE>
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 Alfa Group had approximately
$45 million in gross catastrophe losses during 1998 due to Hurricane Georges in
September 1998 and due to the impact of tornadoes, hail and other severe weather
which occurred in April and June 1998. The effect of claims from these events
impacted second quarter underwriting results by $6.5 million pre-tax, or $0.10
per share, net of taxes, based upon the intercompany pooling arrangement and
Alfa group-wide reinsurance protection. The Company had no significant storm
related losses in 1997. Group wide catastrophe losses in 1996 were $27 million,
and the Company's share was $11.4 million.
The Company's business is concentrated geographically in Alabama, Georgia
and Mississippi. Accordingly, unusually severe storms or other disasters in
these contiguous states might have a more significant effect on the Company than
on a more geographically diversified insurance company. 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
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, 1998, Life had in excess of $11.0 billion of life
insurance in force. As of December 31, for each year indicated the Company had
insurance in force as follows:
1998 1997 1996
----------- ----------- ----------
(in thousands)
Ordinary Life $10,955,347 $10,201,001 $9,126,335
Credit Life $ 6,990 $ 8,296 $ 11,016
Group Life $ 37,712 $ 37,103 $ 325,704
I-5
<PAGE>
The following table sets forth life insurance premiums and policy charges, by
type of policy, net investment income, benefits and expenses and life insurance
operating income for the years ended December 31, 1998, 1997 and 1996:
Years Ended December 31,
--------------------------
1998 1997 1996
------- -------- -------
(in thousands)
Premiums and Policy Charges
Universal life policy charges $12,381 $11,296 $10,075
Universal life policy charges- COLI 2,133 1,858 -
Interest sensitive life policy charges 9,727 9,306 8,589
Traditional life insurance premiums 21,494 19,958 18,931
Group life insurance premiums 364 (1,759) 653
------- ------- -------
Total $46,099 $40,659 $38,248
======= ======= =======
Net investment income $34,890 $31,646 $29,254
======= ======= =======
Benefits and expenses $52,980 $45,041 $39,610
======= ======= =======
Operating income before tax $21,988 $20,750 $21,830
======= ======= =======
Operating income, net of tax $15,645 $14,580 $14,952
======= ======= =======
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 reinsurer
who reinsures the risk, thereby decreasing the income of Life.
Life performs various underwriting procedures and blood testing for AIDS
and other diseases before issuance of insurance.
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 $363.4 million to over $1.0 billion at
the end of 1998, a compound annual growth rate of 11.6%. During that same
period investment income has more than doubled, growing from $26.2 million to
over $62.5 million. At year-end, the value of unrealized gains in Alfa's
portfolio was $57.6 million, net of tax. The portfolio was invested 71.6% in
fixed income securities, 9.5% in equities, 5.0% in short-term marketable
securities, and 13.9% in other investments, which include consumer loans, leases
and partnerships and less than 0.1% in real estate and mortgage loans.
I-6
<PAGE>
The rating of the Company's portfolio of fixed maturities using the
Standard & Poor's rating categories is as follows at December 31, 1998 and 1997:
December 31,
-------------
1998 1997
---- ----
AAA to A- 89.2% 87.1%
BBB+ to BBB- 9.8 12.3
BB+ and below (below investment grade) 1.0 0.6
----- -----
100.0% 100.0%
===== =====
For more information about the Company's investments, see the investment
section of Management's Discussion and Analysis of Financial Condition and
Results of Operations on pages 15 through 17 of the Company's annual report to
security holders for the fiscal year ended December 31, 1998, 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.
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 filed 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.
I-7
<PAGE>
Life Reserves: The life insurance policy reserves reflected in the
Company'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 33 of the
Company's annual report to security holders for the year ended December 31,
1998, incorporated herein by reference).
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>
1998 1997 1996
-----------------------------------------------------------------------------------
Property and Property and Property and
Casualty Life Casualty Life Casualty Life
------------- ------------ ------------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, $132,086,208 $ 2,243,041 $117,672,492 $ 3,095,914 $108,303,253 $2,065,462
Less Reinsurance
recoverables
on unpaid losses (960,376) (123,474) (745,156) (801,496) (2,293,048) (717,018)
------------ ----------- ------------ ----------- ------------ ----------
Net balance at
January 1, 131,125,832 2,119,567 116,927,336 2,294,418 106,010,205 1,348,444
------------ ----------- ------------ ----------- ------------ ----------
Incurred related to:
Current year 253,369,653 15,160,885 240,327,428 11,600,573 241,879,860 8,717,628
Prior years (18,725,403) (17,517) (8,928,409) ( 7,995) (4,702,409) 151,950
------------ ----------- ------------ ----------- ------------ ----------
Total incurred 234,644,250 15,143,368 231,399,019 11,592,578 237,177,451 8,869,578
------------ ----------- ------------ ----------- ------------ ----------
Paid related to:
Current year 175,544,000 14,010,044 164,640,000 10,605,018 172,087,000 7,363,636
Prior years 52,955,344 793,382 52,560,523 1,162,411 54,173,320 559,968
------------ ----------- ------------ ----------- ------------ ----------
Total paid 228,499,344 14,803,426 217,200,523 11,767,429 226,260,320 7,923,604
------------ ----------- ------------ ----------- ------------ ----------
Net balance at
December 31, 137,270,738 2,459,509 131,125,832 2,119,567 116,927,336 2,294,418
Plus reinsurance
recoverables
on unpaid losses 759,568 353,195 960,376 123,474 745,156 801,496
------------ ----------- ------------ ----------- ------------ ----------
Balance at
December 31, $138,030,306 $ 2,812,704 $132,086,208 $ 2,243,041 $117,672,492 $3,095,914
============ =========== ============ =========== ============ ==========
</TABLE>
Other Business
- --------------
The Company operates five other subsidiaries which are not considered to be
significant by SEC Regulations for purposes of separate disclosure. These
subsidiaries are Alfa Financial Corporation (Financial), 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.
I-8
<PAGE>
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, 1998, the delinquency ratio on the loan portfolio was 2.04%, or
$1.0 million. Loans charged off in 1998 totaled $562,173 or 1.1% of the average
outstanding loan portfolio. At December 31, 1998, the Company maintained an
allowance for loan losses of $584,178 or approximately 1.2% of the outstanding
loan balance.
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 16,190,538 shares, or 39.61%, and Alfa Mutual Fire Insurance
Company owns 4,515,286 shares, or 11.05%, 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.
I-9
<PAGE>
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.
Regulation:
- -----------
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.
Additionally, 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, 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. Rates of property and casualty insurance are subject to
regulation and approval of regulatory authorities. Life insurance rates are
generally not subject to prior regulatory approval.
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 1999 without prior approval of regulatory
authorities is approximately $53.2 million based on December 31, 1998 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 "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.
I-10
<PAGE>
Year 2000:
- ----------
The Company initially started the identification of year 2000 issues in 1994 and
began its internal programming modifications in 1995. These phases along with
the testing have continued during the last three years. The Company believes it
has substantially completed the identification and programming steps and at
December 31, 1998 is approximately 90% complete with actual application and
scenario testing, whereby dates are manipulated and results are compared for
accuracy. Such testing and completion of internal programming is currently
scheduled to be completed in the second quarter of 1999. A summary of mission
critical systems is shown below indicating the status of the Company's
remediation and testing efforts at December 31, 1998. In 1998, the Company
addressed the issues related to year 2000 in regards to material relationships
with third parties, vendors, suppliers, etc. and has identified such providers,
surveying their efforts and requesting written assurances that year 2000 issues
have been addressed. Of the vendor operating system software identified during
this process, approximately 90% of the programs have been labeled as "year 2000
compliant" by the vendors. In the event that such software fails despite written
assurances and internal testing, the Company expects to work closely with the
vendors to find a remedy in a timely fashion. Also, the Company is continuing to
review all significant non-information technology systems for year 2000
compliance. The most significant such system, the telephone system, has already
been determined to be year 2000 compliant. These efforts as well as the final
phase, follow-up on any unresolved year 2000 issues, are expected to be
completed during the first half of 1999.
The Company has not utilized any year 2000 solution providers in addressing
compliance of its mainframe systems. To date, the issues have been addressed
with internal resources. However, the Company has contracted with external
consultants to assist in the review and updating of its personal computer
systems and associated hardware and software. Due to the longevity of the
process, the number of employees and resources devoted to the efforts and the
time spent, it is not practicable to determine precisely the total costs
attributable to the year 2000 issue. These costs have been expensed as incurred
throughout the process. However, the Company estimates that to date,
approximately $1.7 million has been spent on year 2000 efforts, with almost
$900,000 expensed in 1998. Future costs, including $500,000 for the external
consultant costs of the personal computer systems reviews and $400,000 for
payment processing software, are currently anticipated to total $1.2 million,
for a total estimated cost of year 2000 efforts of $2.9 million. The Company
has absorbed the costs into its operations with no significant adverse impact on
its financial condition or results of operations. The resources utilized have
caused some normal operational enhancements and systems development to be
deferred or delayed. However, any systems maintenance or statutory required
updates have not been affected.
To the extent the year 2000 issues are not corrected timely and
successfully, the Company's ability to process its business and pay its claims
timely could be impacted. Such an event could have material adverse
consequences on future financial condition and results of operations. The
Company has begun the process of developing a contingency plan should an adverse
year 2000 issue occur. As part of the contingency plan, the Company expects to
address its ability to conduct business in environments experiencing both
limited and extensive adverse conditions resulting from the year 2000 issue.
The Company expects to have such a plan in place by the end of the third quarter
of 1999.
I-11
<PAGE>
SUMMARY OF MISSION CRITICAL SYSTEMS
<TABLE>
<CAPTION>
Remediation/ System Goal
Mission Critical Systems Research Programming Testing Date
- ---------------------------------------------------------------------------------------
Accounting Completed Completed Completed N/A
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Agent Compensation Completed Completed Started 4/30/99
- ---------------------------------------------------------------------------------------
Claims Completed Completed Completed N/A
- ---------------------------------------------------------------------------------------
Investment Management Completed Completed Completed N/A
- ---------------------------------------------------------------------------------------
Life Policy Administration Completed Completed Started 4/30/99
- ---------------------------------------------------------------------------------------
Loan Processing Completed Completed Started 4/30/99
- ---------------------------------------------------------------------------------------
Payment Processing Completed Completed Started 4/30/99
- ---------------------------------------------------------------------------------------
Payroll Processing Completed Completed Completed N/A
- ---------------------------------------------------------------------------------------
Personal Computers - Field Completed Completed Completed N/A
- ---------------------------------------------------------------------------------------
Personal Computer - Based Field Programs Completed Completed Started 4/30/99
- ---------------------------------------------------------------------------------------
Personal Computers - Home Office Completed Started Started 6/25/99
- ---------------------------------------------------------------------------------------
Postal Software Completed Completed Completed N/A
- ---------------------------------------------------------------------------------------
Property/Casualty Policy Administration Completed Completed Completed N/A
- ---------------------------------------------------------------------------------------
</TABLE>
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, 1998, the Company was represented by 471 agents in
Alabama who are employees of Mutual. The Company's property and casualty
subsidiaries had 104 independent exclusive agents in Georgia and Mississippi at
December 31, 1998.
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.
I-12
<PAGE>
Item 3. Legal Proceedings.
-----------------
Certain legal proceedings involving policyholders and agents are in process
at December 31, 1998. Costs for these and similar legal proceedings including
accruals for outstanding cases were $5.2 million in 1998, $3.6 million in 1997
and $2.7 million in 1996. 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.
Approximately 80 legal proceedings against Alfa Life Insurance Corporation
involving policyholders and agents are in process at December 31, 1998. Of the
80 proceedings, 50 were filed in 1998, 13 were filed 1997, 12 were filed in
1996, and 5 were filed in 1995. Of the 50 legal proceedings filed in 1998, two
plaintiff law firms accounted for 47 of the filings. Currently, three of the
proceedings against Alfa Life Insurance Corporation have gone to trial. In two
of the proceedings, the jury awarded the plaintiffs compensatory and punitive
damages against Alfa Life Insurance Corporation. The first jury verdict has been
appealed and the second verdict will be appealed to the Alabama Supreme Court.
In the third proceeding, the jury returned a verdict for Alfa Life Insurance
Corporation. Based upon information presently available, applicable law and
defenses available to the Company, management does not consider material losses
which might arise from a particular lawsuit beyond amounts accrued in the
financial statements 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.
Item 4. Submission of Matters to Vote of Security Holders. Not applicable.
-------------------------------------------------
I-13
<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 22, 1999.
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>
Jerry A. Newby 51 Director; Chairman of the Board and President, since 1998; 1986
President of its Subsidiaries and associated
companies; President Alabama Farmers Federation,
and farmer.
C. Lee Ellis 47 Executive Vice President, Operations and Treasurer of 1983
Alfa Corporation and its subsidiaries since February 1999
Prior to 1999, Executive Vice President, Investments.
Ken Wallis 57 Director; Executive Vice President, Operations 1993
of Alfa Corporation and its subsidiaries, Assistant
to the President and Vice President, Treasurer. Retired
in March 1999.
Al Dees 52 Executive Vice President, Marketing 1993
Prior to 1993, Vice President, Georgia and
Mississippi Marketing.
Donald Price 47 Senior Vice President, Finance and 1984
Chief Financial Officer.
Marcia Martin 61 Senior Vice President, Personnel 1976
Al Scott 43 Senior Vice President, Secretary and General Counsel 1997
Prior to 1997, Assistant General Counsel
John Holley 43 Vice President, Finance, Director Financial Relations 1986
Chief Accounting Officer.
Terry McCollum 62 Senior Vice President, Claims 1979
</TABLE>
I-14
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Bill Harper, Jr. 54 Senior Vice President, Life Operations of Alfa Life 1986
Insurance Corporation, Vice President of Alfa
Financial Corporation since 1978.
Wyman Cabaniss 47 Senior Vice President, Underwriting 1998
Prior to 1998, Vice President, Underwriting
Stephen G. Rutledge 40 Senior Vice President, Investments since 1999. 1984
Prior to that time, Vice President, Investments
Cheryl Price 45 Vice President, Finance, Alfa Property and 1991
Casualty Companies.
</TABLE>
I-15
<PAGE>
Part II
-------
Item 5. Market for the Company's Common Stock and Related Security Holder
-----------------------------------------------------------------
Matters.
- --------
The "Stockholder Information" section on page 36 of Exhibit 13 representing
the Inside Back Cover of the Company's annual report to security holders for the
fiscal year ended December 31, 1998, is incorporated herein by reference.
Item 6. Selected Financial Data.
------------------------
The "Selected Financial Data" section on pages 1 and 2 of Exhibit 13
representing pages 6 and 7 of the Company's annual report to security holders
for the year ended December 31, 1998, 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 3 through 11 of
Exhibit 13 representing pages 12 through 20 of the Company's annual report to
security holders for the fiscal year ended December 31, 1998, is incorporated
herein by reference.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
-----------------------------------------------------------
The "Quantitative and Qualitative Disclosures about Market Risk" section on
pages 7 and 8 of Exhibit 13 representing pages 16 and 17 of the Company's annual
report to security holders for the fiscal year ended December 31, 1998, is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
--------------------------------------------
The Financial Statements on pages 12 through 35 of Exhibit 13 representing
pages 21 through 44 of the Company's annual report to security holders for the
fiscal year ended December 31, 1998, 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 22, 1999 which is incorporated herein by
reference.
Item 11. Executive Compensation.
----------------------
The information set forth under the caption "Executive Compensation" on
Page 5 of the Proxy Statement for the annual meeting of stockholders to be held
April 22, 1999, 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 22, 1999, 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 5 of the Proxy Statement for the annual meeting of stockholders to be held
April 22, 1999, 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 pages 12 through
--------------------
35 of Exhibit 13 representing pages 21 through 44 of the Company's annual
report to security holders for the year ended December 31, 1998)
Report of Independent Auditors for 1998 and 1997.
Consolidated Balance Sheets as of
December 31, 1998 and 1997.
Consolidated Statements of Income for the three years ended
December 31, 1998, 1997 and 1996.
Consolidated Statements of Comprehensive Income for the three years
ended December 31, 1998, 1997 and 1996.
Consolidated Statements of Stockholders' Equity for the three years
ended December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the three years ended
December 31, 1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
Selected Quarterly Financial Data.
2. Financial Statement Schedules.
-----------------------------
Included in Part IV of this report
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report on Financial Statement Schedules
of Independent Auditors IV-3
Schedule I - Summary of Investments Other Than Investments
in Related Parties for the year ended December 31, 1998 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, 1998,
1997 and 1996 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, 1998. 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
Exhibit (27) Financial Data Schedule
(b) Reports on Form 8-K.
-------------------
None
IV-2
<PAGE>
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES
-------------------------------------------------------------
The Board of Directors
Alfa Corporation:
Under date of February 9, 1999, we reported on the consolidated balance sheets
of Alfa Corporation and subsidiaries (the "Company") as of December 31, 1998 and
1997, and the related consolidated statements of income, comprehensive income,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1998, as contained in the 1998 annual report to
stockholders. Those consolidated financial statements and our report thereon
are incorporated by reference in the annual report on Form 10-K for the year
1998. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related financial statement schedules
as listed in item 14. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
/s/ KPMG PEAT MARWICK LLP
Birmingham, Alabama
February 9, 1999
IV-3
<PAGE>
ALFA CORPORATION AND SUBSIDIARIES
SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN
INVESTMENTS IN RELATED PARTIES
December 31, 1998
---------------
<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 $ 50,171,484 $ 56,357,985 $ 56,357,985
States, municipalities and
political subdivisions 163,555,285 171,790,838 171,790,838
Public utilities 23,616,916 24,001,365 24,001,365
All other corporate bonds 209,382,205 217,453,175 217,453,175
Mortgage-backed securities 292,829,171 302,595,150 302,505,360
Redeemable preferred stocks 3,500,000 3,708,750 3,708,750
------------ -------------- --------------
Total fixed maturities 743,055,061 775,907,263 775,817,473
------------ -------------- --------------
Equity securities:
Common stocks:
Public utilities 3,761,765 5,291,801 5,291,801
Banks, trusts and insurance
companies 5,331,432 23,152,710 23,152,710
Industrial, miscellaneous and all other 30,288,959 73,390,954 73,390,954
Nonredeemable preferred stocks 1,450,994 1,220,000 1,220,000
------------ -------------- --------------
Total equity securities 40,833,150 103,055,465 103,055,465
------------ -------------- --------------
Mortgage loans on real estate 404,432 404,432 404,432
Real estate 1,482,647 1,482,647 1,482,647
Policy loans 38,645,185 38,645,185 38,645,185
Other long-term investments 110,022,016 111,217,901 110,022,016
Short-term investments 54,637,029 54,637,029 54,637,029
------------ -------------- --------------
Total investments $989,079,520 $1,085,349,922 $1,084,064,247
============ ============== ==============
</TABLE>
See accompanying independent auditors report
IV-4
<PAGE>
ALFA CORPORATION (PARENT COMPANY)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
BALANCE SHEETS
December 31, 1998 and 1997
---------
<TABLE>
<CAPTION>
1998 1997
------------ ------------
ASSETS
<S> <C> <C>
Cash $ 310,617 $ 41,334
Short-term investments 867,393 1,995,321
Investment in subsidiaries 459,187,150 416,815,803
Note receivable from subsidiaries 30,089,539 60,646,539
Accounts receivable and other assets 162,916 233,939
------------ ------------
Total assets $490,617,615 $479,732,936
============ ============
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Liabilities:
<S> <C> <C>
Commercial paper $ 57,259,519 $ 89,521,729
Notes payable 4,600,000 4,600,000
Other liabilities 5,135,111 2,679,013
------------ ------------
Total liabilities 66,994,630 96,800,742
------------ ------------
Stockholders' Equity:
Common stock, $1 par value, shares
authorized - 110,000,000;
issued - 41,891,512
outstanding - 1998 - 40,887,911;
1997 - 40,797,712 41,891,512 41,891,512
Capital in excess of par value 22,355,934 21,301,198
Accumulated other comprehensive income 57,577,202 56,929,966
Retained earnings 306,268,833 267,420,813
Treasury stock, at cost,
1998 - 1,003,601;
1997 - 1,093,800 shares (4,470,496) (4,611,295)
------------ ------------
Total stockholders' equity 423,622,985 382,932,194
------------ ------------
Total liabilities and
stockholders' equity $490,617,615 $479,732,936
============ ============
See accompanying independent auditors report
IV-5
</TABLE>
<PAGE>
ALFA CORPORATION (PARENT COMPANY)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
STATEMENTS OF INCOME
for the years ended December 31, 1998, 1997 and 1996
-------------
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Dividends from subsidiaries $20,602,953 $18,956,247 $18,671,103
Interest from subsidiaries 2,047,057 2,208,548 2,642,730
Other interest 53,192 21,777 12,911
----------- ----------- -----------
Total revenues 22,703,202 21,186,572 21,326,744
Expenses:
Other expenses 7,608,341 5,310,031 5,667,475
----------- ----------- -----------
Income before equity in
undistributed income
of subsidiaries 15,094,861 15,876,541 15,659,269
Equity in undistributed income
of subsidiaries 41,620,830 36,917,092 16,529,946
----------- ----------- -----------
Net income $56,715,691 $52,793,633 $32,189,215
=========== =========== ===========
</TABLE>
See accompanying independent auditors report
IV-6
<PAGE>
ALFA CORPORATION (PARENT COMPANY)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 56,715,691 $ 52,793,633 $ 32,189,215
------------ ------------ ------------
Adjustments to reconcile net
income to net cash provided by
operating activities:
Undistributed earnings of
subsidiaries (41,620,830) (36,917,092) (16,529,946)
Decrease (increase) in other assets
and accounts receivable 71,023 (15,885) 65,220
Increase (decrease) in other
liabilities 2,456,098 (64,890) 417,666
------------ ------------ ------------
Total adjustments (39,093,709) (36,997,867) (16,047,060)
------------ ------------ ------------
Net cash provided by
operating activities 17,621,982 15,795,766 16,142,155
------------ ------------ ------------
Cash flows from investing activities:
Decrease (increase) in note receivable from subsidiaries 30,557,000 (14,288,000) 8,086,461
Net decrease (increase) in short-term investments 1,127,928 (1,621,263) 63,032
Other 212,396 343,449 (110,149)
------------ ------------ ------------
Net cash provided by (used in) investing activities 31,897,324 (15,565,814) 8,039,344
------------ ------------ ------------
Cash flows from financing activities:
Increase (decrease) in commercial paper (32,262,210) 15,940,767 (8,368,654)
Purchase of treasury stock (419,471)
Proceeds from exercise of stock options 1,299,329 35,250 9,400
Dividends to stockholders (17,867,671) (16,212,717) (15,802,434)
------------ ------------ ------------
Net cash (used in) financing activities (49,250,023) (236,700) (24,161,688)
------------ ------------ ------------
Net increase (decrease) in cash 269,283 (6,748) 19,811
Cash, beginning of year 41,334 48,082 28,271
------------ ------------ ------------
Cash, end of year $ 310,617 $ 41,334 $ 48,082
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 4,082,710 $ 4,132,679 $ 4,415,649
============ ============ ============
Income taxes $ 20,487,000 $ 20,529,974 $ 5,418,000
============ ============ ============
See accompanying independent auditors report
IV-7
<PAGE>
ALFA CORPORATION
SCHEDULE III - SUPPLEMENTAL INSURANCE INFORMATION
for the years ended December 31, 1998, 1997 and 1996
</TABLE>
<TABLE>
<CAPTION>
Other
Future Policy Policy
Deferred Benefits, Claims Premiums
Policy Losses, And And Net
Acquisition Claims And Unearned Benefits Policy Investment
Segment Costs Loss Expenses Premium Payable Charges Income
- ------- ----------- ------------- ---------- ------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
1998
- ----
Life Insurance $ 97,616,878 $410,398,102 $ 0 $ 0 $ 46,098,666 $34,890,182
Property & casualty
insurance 16,524,992 138,030,306 105,464,480 0 345,739,616 25,992,335
Noninsurance and
corporate 0 0 0 0 0 1,629,141
------------ ------------ ----------- ------ ------------ -----------
Total $114,141,870 $548,428,408 $105,464,480 $ 0 $391,838,282 $62,511,658
============ ============ ============ ====== ============ ===========
1997
- ----
Life Insurance $ 90,130,439 $366,301,110 $ 0 $ 0 $ 40,659,098 $31,646,118
Property & casualty
insurance 15,725,146 132,086,208 97,669,270 0 330,305,948 23,935,303
Noninsurance and
corporate 0 0 0 0 0 1,947,248
------------ ------------ ----------- ------ ------------ -----------
Total $105,855,585 $498,387,318 $97,669,270 $ 0 $370,965,046 $57,528,669
============ ============ =========== ====== ============ ===========
1996
- ----
Life Insurance $ 84,711,419 $325,206,008 $ 0 $ 0 $ 38,247,600 $29,253,591
Property & casualty
insurance 15,382,660 117,672,492 92,945,366 0 298,938,818 22,250,871
Noninsurance and
corporate 0 0 0 0 0 2,689,872
------------ ------------ ------------ ------ ------------ -----------
Total $100,094,079 $442,878,500 $ 92,945,366 $ 0 $337,186,418 $54,194,334
============ ============ ============ ====== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
Benefits Amortization
Claims, Of Deferred
Losses And Policy Other
Settlement Acquisition Operating Premiums
Expenses Costs Expenses Written
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1998
- ----
Life Insurance $ 40,629,378 $ 6,021,001 $ 9,114,135 $ 0
Property & casualty
insurance 234,971,258 51,800,042 25,960,651 350,684,046
Noninsurance and
corporate 2,300,000 0 3,688,097 0
------------ ----------- ----------- ------------
Total $277,900,636 $57,821,043 $38,762,883 $350,684,046
============ =========== =========== ============
1997
- ----
Life Insurance $ 33,407,772 $ 6,514,175 $ 7,209,933 $ 0
Property & casualty
insurance 232,670,184 49,483,552 21,544,277 332,192,026
Noninsurance and
corporate 0 0 3,215,022 0
------------ ----------- ----------- ------------
Total $266,077,956 $55,997,727 $31,969,232 $332,192,026
============ =========== =========== ============
1996
- ----
Life Insurance $ 30,589,901 $ 6,061,063 $ 6,750,449 $ 0
Property & casualty
insurance 236,721,425 45,050,788 19,653,730 311,251,916
Noninsurance and
corporate 0 0 2,599,112 0
------------ ----------- ----------- ------------
Total $267,311,326 $51,111,851 $29,003,291 $311,251,916
============ =========== =========== ============
</TABLE>
See accompanying independent auditors report
IV-8
<PAGE>
IV-8
ALFA CORPORATION AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
for years ended December 31, 1998, 1997 and 1996
<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>
1998
- ----
Life insurance in force $12,296,742,073 $1,296,693,235 $ 0 $11,000,048,838 0%
=============== ============== ============ =============== ===
Premiums and policy charges:
Life Insurance $ 49,413,822 $ 3,389,040 $ 0 $ 46,024,782 0%
Accident and health insurance 73,884 0 0 73,884 0%
Property and liability insurance 57,290,195 57,380,699* 345,830,120* 345,739,616 100%
--------------- -------------- ------------ --------------- ---
$ 106,777,901 $ 60,769,739 $345,830,120 $ 391,838,282 88%
=============== ============== ============ =============== ===
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%
=============== ============== ============ =============== ===
</TABLE>
*These amounts are subject to the pooling agreement.
See accompanying independent auditors report
IV-9
<PAGE>
ALFA CORPORATION AND SUBSIDIARIES
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<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>
1998 Reserve for Loan losses $584,178 $588,780 $588,780 $584,178
========== ========== ============== ========== ==========
1997 Reserve for Loan losses $633,479 $642,023 $691,324 $584,178
========== ========== ============== ========== ==========
</TABLE>
See accompanying independent auditors report
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/ Jerry A. Newby
-------------------------
Jerry A. Newby
President
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Chairman of the Board
/s/ Jerry A. Newby Director and Principal 3/30/99
- ------------------------- Executive Officer ------------
(Jerry A. Newby) (Date)
Senior Vice President,
/s/ Donald Price Finance, (Principal 3/30/99
- ------------------------- Financial Officer) ------------
(Donald Price) (Date)
/s/ John D. Holley Vice President, Finance 3/30/99
- ------------------------- (Principal Accounting ------------
(John D. Holley) Officer) (Date)
/s/ Hal F. Lee 3/30/99
- -------------------------- Director ------------
(Hal F. Lee) (Date)
/s/ James E. Mobley 3/30/99
- -------------------------- Director ------------
(James E. Mobley) (Date)
/s/ James A. Tolar, Jr. 3/30/99
- -------------------------- Director ------------
(James A. Tolar, Jr.) (Date)
/s/ John W. Morris 3/30/99
- ------------------------- Director ------------
(John W. Morris) (Date)
<PAGE>
/s/ Milborn N. Chesser 3/30/99
- ------------------------- Director ------------
(Milborn N. Chesser) (Date)
/s/ James I. Harrison, Jr. 3/30/99
- -------------------------- Director ------------
(James I. Harrison, Jr.) (Date)
/s/ Young J. Boozer 3/30/99
- -------------------------- Director ------------
(Young J. Boozer) (Date)
/s/ John R. Thomas 3/30/99
- -------------------------- Director ------------
(John R. Thomas) (Date)
/s/ B. Phil Richardson 3/30/99
- -------------------------- Director ------------
(B. Phil Richardson) (Date)
/s/ Boyd E. Christenberry 3/30/99
- -------------------------- Director ------------
(Boyd E. Christenberry) (Date)
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 13
SELECTED FINANCIAL DATA
Consolidated Summary of Operations & Related Data
(Dollars in Thousands Except Per Share Amounts)
Years Ended December 31, 1998 1997 1996 1995
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums - Property and Casualty Insurance $ 345,740 $ 330,306 $ 298,939 $ 272,989
Premiums and policy charges - Life Insurance 46,099 40,659 38,248 35,100
Net investment income 62,512 57,529 54,194 50,923
Net realized investment gains 4,397 3,356 2,808 1,106
Other income 2,238 2,160 2,148 2,645
---------------------------------------------------------------
Total revenues 460,986 434,010 396,336 362,763
Benefits and expenses 377,721 357,210 350,482 331,771
---------------------------------------------------------------
Income before provision for
income taxes 83,265 76,800 45,854 30,993
Provision for income taxes 26,549 24,006 13,665 8,675
Cumulative effect of changes in accounting principles
---------------------------------------------------------------
Net income $ 56,716 $ 52,794 $ 32,189 $ 22,318
===============================================================
Balance sheet data at December 31:
Invested assets $ 1,084,064 $ 1,027,660 $ 886,017 $ 841,123
Total assets $ 1,246,659 $ 1,170,066 $1,019,330 $ 965,433
Future policy benefits, losses and
claims, unearned premiums $ 653,893 $ 596,057 $ 535,824 $ 487,659
Total liabilities $ 823,037 $ 787,135 $ 696,018 $ 656,823
Stockholders' equity $ 423,622 $ 382,931 $ 323,312 $ 308,610
Per share data /1/:
Net income - Basic $ 1.39 $ 1.29 $ 0.79 $ 0.55
Net income - Diluted $ 1.38 $ 1.29 $ 0.79 $ 0.55
Cash dividends paid $ 0.4375 $ 0.3975 $ 0.3875 $ 0.375
Annual dividend rate $ 0.45 $ 0.40 $ 0.39 $ 0.38
Stockholders' equity $ 10.36 $ 9.39 $ 7.93 $ 7.57
Closing sales price at December 31 $ 24 1/4 $ 17 1/4 $ 12 5/8 $ 16 3/4
Price/earnings ratio 17.6x 13.4x 16.0x 30.6x
Weighted average shares outstanding - Basic 40,834 40,787 40,786 40,786
Weighted average shares outstanding - Diluted 41,148 40,931 40,843 40,811
Return on average equity 14.1% 15.0% 10.2% 7.9%
Return on average invested assets 6.94% 7.12% 7.60% 7.74%
Life insurance in force $11,000,049 $10,246,400 $ 9,463,055 $8,642,907
Number of agents 575 574 587 585
</TABLE>
1 Per share amounts have been restated where appropriate to reflect 2-for-1
stock split in June 1993.
2 Reflects effects of fresh start tax benefits of approximately $570,000, or
$.03 per share in 1990.
1
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Consolidated Summary of Operations & Related Data
(Dollars in Thousands Except Per Share Amounts)
Years Ended December 31, 1994 1993 1992 1991
----------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums - Property and Casualty Insurance $ 214,326 $ 189,057 $ 173,075 $ 164,573
Premiums and policy charges - Life Insurance 32,805 30,856 29,365 27,872
Net investment income 45,554 44,902 39,425 34,785
Net realized investment gains 572 4,890 4,232 3,790
Other income 3,057 2,918 2,340 1,919
----------------------------------------------------------
Total revenues 296,313 272,624 248,437 232,939
Benefits and expenses 248,481 209,309 194,859 192,144
----------------------------------------------------------
Income before provision for
income taxes 47,832 63,315 53,578 40,795
Provision for income taxes 14,965 20,999 16,660 12,354
Cumulative effect of changes in accounting principles 2,645
----------------------------------------------------------
Net income $ 32,867 $ 44,960 $ 36,918 $ 28,441
==========================================================
Balance sheet data at December 31:
Invested assets $ 718,074 $ 653,819 $ 574,718 $ 511,931
Total assets $ 847,870 $ 766,077 $ 665,247 $ 595,801
Future policy benefits, losses and
claims, unearned premiums $ 429,930 $ 365,148 $ 334,454 $ 295,443
Total liabilities $ 592,885 $ 505,091 $ 440,669 $ 402,526
Stockholders' equity $ 254,985 $ 260,986 $ 224,578 $ 193,275
Per share data /1/:
Net income - Basic $ 0.81 $ 1.10 $ 0.91 $ 0.70
Net income - Diluted $ 0.81 $ 1.10 $ 0.91 $ 0.70
Cash dividends paid $ 0.3425 $ 0.28 $ 0.2425 $ 0.215
Annual dividend rate $ 0.36 $ 0.29 $ 0.25 $ 0.22
Stockholders' equity $ 6.25 $ 6.40 $ 5.51 $ 4.74
Closing sales price at December 31 $ 11 $ 11 1/2 $ 11 7/8 $ 5 1/4
Price/earnings ratio 13.7x 10.4x 13.1x 7.5x
Weighted average shares outstanding - Basic 40,786 40,786 40,786 40,786
Weighted average shares outstanding - Diluted 40,810 40,814 40,786 40,786
Return on average equity 12.7% 18.5% 17.7% 15.8%
Return on average invested assets 7.78% 8.03% 8.28% 8.66%
Life insurance in force $7,867,808 $7,064,335 $6,295,626 $5,578,661
Number of agents 562 562 529 504
</TABLE>
<TABLE>
<CAPTION>
Consolidated Summary of Operations & Related Data
(Dollars in Thousands Except Per Share Amounts)
Years Ended December 31, 1990 1989 1988
----------------------------------------------------
<S> <C> <C> <C>
Premiums - Property and Casualty Insurance $ 149,840 $ 134,737 $ 125,938
Premiums and policy charges - Life Insurance 25,608 23,848 22,349
Net investment income 32,224 30,048 26,224
Net realized investment gains 2,842 2,882 2,005
Other income 1,861 1,172 1,402
----------------------------------------------------
Total revenues 212,375 192,687 177,918
Benefits and expenses 180,611 159,912 144,229
----------------------------------------------------
Income before provision for
income taxes 31,764 32,775 33,689
Provision for income taxes 8,877 /2/ 9,919 10,842
Cumulative effect of changes in accounting principles
----------------------------------------------------
Net income $ 22,887 /2/ $ 22,856 $ 22,847
====================================================
Balance sheet data at December 31:
Invested assets $ 437,725 $ 410,266 $ 363,401
Total assets $ 515,681 $ 482,383 $ 432,312
Future policy benefits, losses and
claims, unearned premiums $ 257,907 $ 223,925 $ 192,113
Total liabilities $ 347,861 $ 319,598 $ 288,094
Stockholders' equity $ 167,820 $ 162,785 $ 144,218
Per share data /1/:
Net income - Basic $ 0.55 /2/ $ 0.55 $ 0.58
Net income - Diluted $ 0.55 /2/ $ 0.55 $ 0.58
Cash dividends paid $ 0.195 $ 0.1725 $ 0.145
Annual dividend rate $ 0.20 $ 0.18 $ 0.15
Stockholders' equity $ 4.11 $ 3.89 $ 3.44
Closing sales price at December 31 $ 4 5/8 $ 5 5/8 $ 5
Price/earnings ratio 8.4x 10.3x 8.6x
Weighted average shares outstanding - Basic 41,611 41,882 39,265
Weighted average shares outstanding - Diluted 41,611 41,882 39,265
Return on average equity 13.8%/2/ 14.9% 20.4%
Return on average invested assets 9.00% 9.43% 9.91%
Life insurance in force $4,947,574 $4,318,605 $3,661,747
Number of agents 500 486 454
</TABLE>
2
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth consolidated summarized income statement
information for the years ended December 31, 1998, 1997 and 1996:
Years Ended December 31,
---------------------------------------
1998 1997 1996
---------------------------------------
(in thousands, except share
and per share data)
Revenues
Life insurance premiums
and policy charges $ 46,099 $ 40,659 $ 38,248
=======================================
Property and casualty
insurance premiums $ 345,740 $ 330,306 $ 298,939
=======================================
Net investment income $ 62,512 $ 57,529 $ 54,194
=======================================
Total revenues $ 460,986 $ 434,010 $ 396,336
=======================================
Net income
Insurance operations
Life insurance $ 15,645 $ 14,580 $ 14,952
Property and casualty
insurance 41,581 36,571 15,189
Noninsurance operations 2,192 2,628 3,339
Net realized
investment gains 2,858 2,182 1,825
Corporate (5,560) (3,167) (3,116)
---------------------------------------
Net income $ 56,716 $ 52,794 $ 32,189
=======================================
Net income per share
Basic $ 1.39 $ 1.29 $ .79
=======================================
Diluted $ 1.38 $ 1.29 $ .79
=======================================
Weighted average shares
outstanding
Basic 40,834,232 40,787,047 40,786,561
=======================================
Diluted 41,148,258 40,930,894 40,843,548
=======================================
Life insurance premiums and policy charges increased $5.4 million, or 13.4% in
1998, and $2.4 million, or 6.3% in 1997. These rates of growth have been
impacted by changes in group life business, which is discussed below in the Life
Insurance Operations section of this discussion. Excluding group premiums, the
growth rates in life insurance premiums and policy charges were 7.5% and 7.9% in
1998 and 1997, respectively, and are due to production of new business.
Property and casualty insurance premiums increased $15.4 million, or 4.7% in
1998 and $31.3 million, or 10.5% in 1997 due primarily to increased 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. Net investment income grew 8.7% in 1998 and 6.2% in 1997 due to an
increase in invested assets resulting from positive cash flows.
The improved property and casualty operating results in both years are due
primarily to significantly improved property and casualty loss ratios,
particularly in the automobile line of business, the company's largest line.
Such improvement is the result of underwriting initiatives which began in late
1996 and early 1997. 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. Life insurance operating income increased 7.3% in 1998 due to
increased business, improved persistency and increased investment income. The
growth in 1998 was offset somewhat by an increase in death claims. Increased
mortality expense also caused the 2.5% decline in operating income in 1997.
Noninsurance operating income decreased 16.6% in 1998 and 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. Corporate
expenses increased $2.4 million in 1998 due primarily to increased legal
expenses and related costs.
In all years presented, favorable securities market conditions resulted in a
significant increase in realized investment gains.
Net income improved 7.4% in 1998 compared to 1997 and increased 64.0% in 1997
compared to 1996.
PROPERTY AND CASUALTY INSURANCE OPERATIONS
The following table sets forth the components of property and casualty
insurance earned premiums, net underwriting income (loss), GAAP basis loss,
expense and combined ratios, underwriting margin, net investment income and
operating income for the years ended December 31, 1998, 1997 and 1996:
Years Ended December 31,
--------------------------------
1998 1997 1996
--------------------------------
(in thousands)
Earned premiums
Personal lines $330,511 $315,650 $292,330
Commercial lines 12,354 11,772 11,231
Pools, associations
and fees 4,036 4,014 3,905
Reinsurance ceded (1,161) (1,130) (8,527)
-------------------------------
Total $345,740 $330,306 $298,939
===============================
Net underwriting
income (loss) $ 33,183 $ 28,061 $ (2,235)
===============================
Loss Ratio 62.8% 65.0% 73.8%
LAE Ratio 5.0% 5.0% 5.3%
Expense Ratio 22.6% 21.5% 21.6%
-------------------------------
GAAP basis combined ratio 90.4% 91.5% 100.7%
===============================
Underwriting margin 9.6% 8.5% (0.7%)
===============================
Net investment income $ 25,992 $ 23,935 $ 22,251
===============================
Operating income before
tax $ 59,156 $ 51,955 $ 19,585
===============================
Operating income,
net of tax $ 41,581 $ 36,571 $ 15,189
===============================
3
<PAGE>
1998 Compared to 1997
Earned premiums increased 4.7% in 1998 due to the impact of prior year rate
changes, new business and a low lapse ratio of 3.98%. Operating results in 1998
increased 13.7% to $41.6 million due primarily to the growth in underwriting
income. The underwriting margin of 9.6% in 1998 is the result of a 62.8% loss
ratio (60.9% excluding storm losses) and a 27.6% expense ratio compared to a
loss ratio of 65.0% and an expense ratio of 26.5% in 1997. The loss ratio
improvement is due primarily to an improved loss ratio in the automobile line of
business which accounts for over 65% of property casualty premiums.
The Alfa Group had approximately $45 million in gross catastrophe losses
during 1998 due to Hurricane Georges in September 1998 and due to the impact of
tornadoes, hail and other severe weather which occurred in April and June 1998.
The effect of claims from these events impacted second quarter underwriting
results by $6.5 million pre-tax, or $0.10 per share, net of taxes, based upon
the intercompany pooling arrangement and Alfa group-wide reinsurance protection.
The company had no significant storm related losses in 1997.
The expense ratio deteriorated by 1.1% of premium in 1998. Although the
majority of general expenses have remained relatively stable due to a continued
focus on controlling costs, the company has incurred significantly increased
costs related to technology expenditures of approximately $4.2 million in 1998.
Such costs include approximately $900,000 related to Year 2000 efforts. The
technology projects are ongoing in 1999 and such costs are likely to continue.
Invested assets grew 8.3% in 1998 and investment income increased 8.6% as a
result of the positive cash flows produced by increased underwriting results.
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, 1998,
the Company's property and casualty subsidiaries' Adjusted Capital calculated in
accordance with NAIC Risk-Based Capital (RBC) guidelines was $195.1 million
compared to the Authorized Control Level (Required) RBC of $18.9 million.
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 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.
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's
ongoing expense focus has positively impacted results, however, increased
technology expenditures that are ongoing 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 was 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 approximated the
growth rate in investment income.
LIFE INSURANCE OPERATIONS
The following table sets forth life insurance premiums and policy charges, by
type of policy, net investment income, benefits and expenses and life insurance
operating income for the years ended December 31, 1998, 1997 and 1996:
Years Ended December 31,
------------------------
1998 1997 1996
------------------------
(in thousands)
Premiums and policy charges
Universal life
policy charges $12,381 $11,296 $10,075
Universal life
policy charges - COLI 2,133 1,858 -
Interest sensitive life
policy charges 9,727 9,306 8,589
Traditional life
insurance premiums 21,494 19,958 18,931
Group life
insurance premiums 364 (1,759) 653
--------------------------
Total $46,099 $40,659 $38,248
==========================
Net investment income $34,890 $31,646 $29,254
==========================
Benefits and expenses $52,980 $45,041 $39,610
==========================
Operating income before tax $21,988 $20,750 $21,830
==========================
Operating income, net of tax $15,645 $14,580 $14,952
==========================
1998 Compared to 1997
The Company's life insurance premiums and policy charges increased 13.4 % in
1998 . Premiums and policy charges were significantly impacted by the change in
1997 in group life insurance, which is provided by Alfa Mutual Insurance
Company, (Mutual), an affiliate, to its employees. In 1997, Mutual began
utilizing corporate
4
<PAGE>
owned life insurance (COLI) using Alfa Life's universal life product. The result
has been additional policy charges of $2.1 million in 1998 and $1.9 million in
1997. The growth rate was also significantly impacted by a net reduction in 1997
of traditional group premium of $1.8 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 1998 or 1997.
Both the Company and the other members of the Alfa Group believe the new program
will be mutually beneficial to results in the future.
Excluding the impact on premiums from such business, the premium growth rate
for 1998 was 7.5%. New business premium increased 10.3% for 1998 primarily from
sales of universal life policies and term business. The persistency rate
remained high at 92.1%.
Life insurance operating income increased approximately 7.3% in 1998. Death
claims increased 30.1% in 1998 and mortality was 109% of expected compared to
91% in 1997. However, investment income increased 10.3% while invested assets
grew by 8.5% due to positive cash flows. General expenses remained relatively
flat, although premium taxes increased $235,249 due to both the increase in
premiums and an increase in the premium tax rate. The rate has increased in
1998 from 1.8% to 2.1% and will increase to 2.3% in 1999 and thereafter.
At December 31, 1998 the life subsidiary's Adjusted Capital calculated in
accordance with NAIC Risk-Based Capital (RBC) guidelines was $149.1 million
compared to the Authorized Control Level (Required) RBC amount of $18.0 million.
The Risk-Based Capital analysis serves as the benchmark for the regulation of
life insurance enterprises' solvency by state insurance regulators.
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.
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.
NONINSURANCE OPERATIONS
1998 Compared to 1997
Noninsurance earnings declined 16.6% in 1998 due primarily to a decrease of
19.1% or approximately $450,000 in net income in the consumer finance
subsidiary. The loan portfolio remained relatively unchanged at $56.0 million
but the overall portfolio yield rate declined 73 basis points, resulting in a
13.3% decrease in interest income. Net leasing revenue also decreased 5.3%.
The real estate subsidiary's earnings were down approximately $21,000 or 26.9%
in 1998 due to a decrease in both commercial and residential sales activity.
Partially offsetting these declines was a 25.4%, or $40,749 increase in
construction income.
1997 Compared to 1996
Noninsurance earnings declined 16.6% 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.
CORPORATE
In 1998, the Company incurred approximately $2.3 million in legal expenses and
related costs at the corporate level, which is the primary reason for the
increase in corporate expense for the year. Interest expense on short term
corporate debt is the only other primary corporate expense, which totaled
approximately $1.8 million
5
<PAGE>
for each year presented. At December 31, 1998, corporate debt was $31.8 million
at an average rate of 5.5%. The remaining corporate expenses represent general
operating expenses. Total corporate expense was $5.6 million in 1998, $3.2
million in 1997 and $3.1 million in 1996.
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, 1998, 1997 and 1996:
Years Ended December 31,
------------------------
1998 1997 1996
------------------------
Increase in cash
flow from operations 8.1% 35.9% 14.0%
Increase in invested assets 5.5% 16.0% 5.3%
Investment yield rate 6.9% 7.1% 7.6%
Increase in net investment
income 8.7% 6.2% 6.4%
The 8.1% increase in positive cash flow from operations in 1998 and the 35.9%
increase in 1997 is due primarily to improved operating results in the Company's
property and casualty subsidiaries, which had underwriting income of $33.2
million in 1998 and $28.1 million in 1997 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 $12 million in additional cash flow
in 1998 and $10 million in 1997. As a result of these positive cash flows,
invested assets grew 5.6% in 1998 and 12.5% in 1997 (based on amortized cost,
which excludes the impact of SFAS 115), and net investment income increased 8.7%
in 1998 and 6.2% in 1997. The overall yield rate, calculated using amortized
cost, declined in 1998 and 1997 as maturing investments were 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 in 1995 of Hurricane Opal, which occurred in October, 1995.
The overall increase in positive cash flow in 1996 increased invested assets
7.4% excluding the market value impact of SFAS115. Net investment income
increased 6.4% in 1996.
The Company had realized investment gains of approximately $4.4 million in
1998, $3.4 million in 1997 and $2.8 million in 1996. These gains are from sales
of equity securities, gains in the Company's put option and 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, 1998 and 1997:
December 31,
-------------
1998 1997
-------------
Fixed maturities
Taxables
Mortgage backed (CMOs) 27.9% 30.2%
Corporate bonds 30.2 29.6
-------------
Total taxable 58.1 59.8
Tax exempts 13.5 11.6
-------------
Total fixed maturities 71.6 71.4
-------------
Equity securities 9.5 11.3
Mortgage loans - .1
Real estate .1 .2
Policy loans 3.6 3.4
Other long term investments 10.2 11.2
Short term investments 5.0 2.4
-------------
100.0% 100.0%
=============
The majority of the Company's investment portfolio consists of fixed maturities
which are diverse as to both industry and geographic concentration. In 1998, the
overall mix of investments remained relatively stable with changes due to market
fluctuations in equities and a reduction in CMO's related to increased paydowns
being invested in corporate and tax exempt bonds and in short term investments.
Long term investments decreased due primarily to a reduction in loan receivable
from Alfa Mutual Insurance Company, an affiliate.
The rating of the Company's portfolio of fixed maturities using the Standard &
Poor's rating categories is as follows at December 31, 1998 and 1997:
December 31,
-------------
1998 1997
-------------
AAA to A- 89.2% 87.1%
BBB+ to BBB- 9.8 12.3
BB+ and below (below investment grade) 1.0 0.6
-------------
100.0% 100.0%
=============
At December 31, 1998, approximately 0.28% 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, 1998, approximately 39.0% 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
Company's portfolio of mortgage-backed securities, the impact of prepayment risk
on the Company's financial position is not believed to be significant. These
risks are discussed in more detail below in the Market Risk Disclosures section.
At December 31, 1998 the Company's total portfolio of fixed
6
<PAGE>
maturities had gross unrealized gains of $39.9 million and gross unrealized
losses of $7.1 million. Securities are priced by nationally recognized pricing
services or by broker/dealers securities firms. Only 0.28% were priced by the
Company.
During 1998, the Company sold approximately $59.8 million in fixed maturities
available for sale. These sales resulted in gross realized gains of $653,398 and
gross realized losses of $167,174. 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.
The Company monitors its level of investments in high yield fixed maturities
and its level of equity investments in companies that issue high yield debt
securities. Management believes the level of such investments is not
significant to the Company's financial condition. At December 31, 1998 and
1997, the Company had unrealized gains of approximately $4.8 and $5.5 million,
respectively, in such investments. During 1998 and 1997, the Company had no
disposals of high yield debt securities.
In 1998 the Company wrote down one bond issue totaling $1,357,464 and seven
equity securities totaling $1,762,105 whose declines in value were deemed to be
other than temporary. Similarly, 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. At December 31, 1998 and 1997,
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, 1998, the
delinquency ratio on the loan portfolio was 2.04%, or $1.0 million. Loans
charged off in 1998 totaled $562,173 or 1.1% of the average outstanding loan
portfolio. At December 31, 1998, the Company maintained an allowance for loan
losses of $584,178 or approximately 1.2% of the outstanding loan balance. Long
term investments also include assets leased under operating leases, partnership
investments and certain other investments.
MARKET RISK DISCLOSURES
The Company's investments and certain of its debt liabilities are financial
instruments which are subject to market risk, or the risk of potential loss in
fair value, future earnings or cash flow as a result of changes in equity
prices, interest rates, foreign exchange rates and commodity prices. The
primary market risks to the Company are equity price risk associated with
investments in equity securities and interest rate risk associated with
investments in fixed maturities. The Company's exposure to commodity risk or
foreign exchange risk is immaterial.
The estimated fair value of the Company's investment portfolio at December 31,
1998 was $1.085 billion, 71.6% of which was invested in fixed maturities, 9.5%
in equity securities, 5.3% in mortgage and collateral loans, 5.0% in short term
investments and 8.7% in other long term investments.
EQUITY PRICE RISK
The company invests in equity securities which have historically, over long
periods of time, produced higher returns relative to fixed income investments.
The Company seeks to invest at reasonable prices in companies with solid
business plans and capable management. The Company intends to hold these
investments over the long term. This focus on long term total investment
returns may result in variability in the level of unrealized investment gains
and losses from one period to the next. The changes in the estimated fair value
of the equity portfolio are presented as a component of shareholders' equity in
accumulated other comprehensive income, net of taxes.
At December 31, 1998, the Company's equity portfolio was concentrated in terms
of the number of issuers and industries. At December 31, 1998, the Company's
top ten equity holdings represented $52.6 million or 49% of the equity
portfolio. Investments in the financial industry represented 38.6% of the
equity portfolio at December 31, 1998. Such concentration can lead to higher
levels of short-term price volatility. Due to its long-term investment focus,
the Company is not as concerned with short-term volatility as long as its
subsidiaries' ability to write business is not impaired.
The table below summarizes the Company's equity price risk and shows the
effect of a hypothetical 20% increase and a 20% decrease in market prices as of
December 31, 1998. The selected hypothetical changes do not indicate what could
be the potential best or worse case scenarios:
<TABLE>
<CAPTION>
Estimated Estimated Hypothetical
Fair Value of Fair Value After Percentage Increase
Equity Securities Hypothetical Hypothetical (Decrease) in
at 12/31/98 Price Change Change in Prices Stockholders' Equity
- ------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
$103,055 20% increase $123,666 3.2%
20%decrease $ 82,444 (3.2%)
</TABLE>
INTEREST RATE RISK
The Company's fixed maturity investments and borrowings are subject to
interest rate risk. Increases and decreases in interest rates typically result
in decreases and increases in the fair value of these financial instruments.
The Company's fixed income portfolio is invested predominantly in high quality
corporate, mortgage-backed, government and municipal bonds. The fixed income
portfolio has an average effective duration of 5.07 years and an average quality
rating of AA. The changes in the fair market value of the fixed maturity
portfolio are presented as a component of shareholders' equity in accumulated
other comprehensive income, net of taxes.
The Company works to manage the impact of interest rate fluctuations on its
fixed income portfolio. The effective duration of the portfolio is managed to
diversify its distribution. This duration distribution, as well as the
portfolio's relatively short duration, serves to moderate the impact of large
swings in interest rates on the fixed income portfolio.
7
<PAGE>
The table below summarizes the Company's interest rate risk and shows the
effect of a hypothetical change in interest rates as of December 31, 1998. The
selected hypothetical changes do not indicate what would be the potential best
or worst case scenarios:
<TABLE>
<CAPTION>
Estimated Estimated Hypothetical
Estimated Change In Fair Value After Percentage Increase
Fair Value at Interest Rate Hypothetical Change (Decrease) in
(Dollars in Thousands) December 31, 1998 (bp=basis points) in Interest Rate Shareholder's Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FIXED MATURITY
INVESTMENTS
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Securities and $ 56,358 200 bp decrease $ 61,551 0.8%
obligations of U.S. 100 bp decrease 57,585 0.2
government corporations and 100 bp increase 51,087 (0.8)
agencies 200 bp increase 48,200 (1.3)
- ------------------------------------------------------------------------------------------------------------------------------------
Tax-exempt obligations of states, $142,896 200 bp decrease $161,190 2.8%
municipalities and political 100 bp decrease 151,958 1.4
subdivisions 100 bp increase 134,041 (1.4)
200 bp increase 125,558 (2.7)
- ------------------------------------------------------------------------------------------------------------------------------------
Mortgaged backed securities $302,595 200 bp decrease $316,716 2.2%
100 bp decrease 309,122 1.0
100 bp increase 291,258 (1.7)
200 bp increase 276,784 (4.0)
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate, taxable municipal $274,058 200 bp decrease $308,537 5.3%
and other debt securities 100 bp decrease 288,760 2.3
100 bp increase 252,394 (3.3)
200 bp increase 235,938 (5.8)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $775,907 200 bp decrease $847,994 11.1%
100 bp decrease 807,425 4.8
100 bp increase 728,780 (7.2)
200 bp increase 686,480 (13.7)
====================================================================================================================================
MORTGAGE AND $ 57,597 200 bp decrease $ 60,285 *
COLLATERAL LOANS 100 bp decrease 58,839 *
100 bp increase 55,439 *
200 bp increase 52,684 *
====================================================================================================================================
SHORT TERM $ 54,637 200 bp decrease $ 59,671 *
INVESTMENTS 100 bp decrease 55,826 *
100 bp increase 49,527 *
200 bp increase 46,728 *
====================================================================================================================================
LIABILITIES
- ------------------------------------------------------------------------------------------------------------------------------------
5.95% Commercial Paper $ 57,260 200 bp decrease $ 62,536 *
100 bp decrease 58,507 *
100 bp increase 51,904 *
200 bp increase 48,972 *
- ------------------------------------------------------------------------------------------------------------------------------------
Short Term Notes Payable $ 9,545 200 bp decrease $ 10,424 *
100 bp decrease 9,753 *
100 bp increase 8,652 *
200 bp increase 8,163 *
====================================================================================================================================
*Changes in estimated fair value have no impact on shareholders' equity.
</TABLE>
8
<PAGE>
INCOME TAXES
The effective tax rate was 31.9% in 1998, 31.3% in 1997 and 29.8% in 1996.
The increase in income tax expense in 1998 over 1997 and in 1997 compared to
1996 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, 75,000 options on February 18, 1997 and 452,500 options on March 23, 1998.
The options ratably become exercisable annually over three years, and may not be
exercised after ten years after the date of award. At December 31, 1998 there
had been 115,999 options exercised, 847,923 options were exercisable and 65,501
had been cancelled leaving 514,601 options available for grant under the plan.
In October 1989, the Company's Board of Directors approved a stock repurchase
program authorizing the repurchase of up to 2,000,000 shares of its outstanding
common stock in the open market or in negotiated transactions in such quantities
and at such times and prices as management may decide. During 1998, the Company
repurchased 22,000 shares at a cost of $419,471. At December 31, 1998, the
Company had repurchased 1,119,600 shares at a cost of $5,050,241. The Company
has reissued 115,999 treasury shares as a result of option exercises.
Total borrowings decreased $34.8 million in 1998 to $66.8 million. The
majority of the short term debt is commercial paper issued by the Company. At
December 31, 1998 the Company had approximately $57.3 million in commercial
paper at a rate of 5.95% with maturities ranging from January 4, 1999 to January
5, 1999. The Company intends to continue to use the commercial paper program to
fund the consumer loan portfolio and other corporate short term needs. Backup
lines of credit are in place up to $80 million. The backup lines agreements
contain usual and customary covenants requiring the Company to meet certain
operating levels. The Company has maintained full compliance with all such
covenants. The Company has an A-1+, P-1 commercial paper rating from Standard &
Poor's and Moody's Investors Service. The commercial paper is guaranteed by an
affiliate, Alfa Mutual Insurance Company. In addition, the Company had $9.4
million in short-term debt outstanding to affiliates at December 31, 1998 with
interest equal to commercial paper rates payable monthly and $106,765
outstanding in other short-term debt at a rate of 7.0%.
Cash surrenders paid to policyholders on a statutory basis totaled $12.2
million in 1998 and $10.9 million in 1997. This level of surrenders is within
the Company's pricing expectations. Historical persistency rates indicate a
normal pattern of surrender activity in 1998, 1997 and 1996. 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, 1998 the total amount of cash that would be required to fund all
amounts subject to surrender was approximately $288.9 million.
On November 6, 1998, the Company, along with affiliates Alfa Mutual Insurance
Company and Alfa Mutual Fire Insurance Company, announced the signing of a
Letter of Intent to enter into a strategic alliance with Vesta Insurance Group,
Inc. In February 1999 the Company announced that the Letter of Intent had
expired and that the parties did not execute a definitive agreement.
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
9
<PAGE>
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 intercompany pooling arrangement and
group-wide catastrophe protection program, which began November 1, 1996, reduced
the earnings volatility caused by such catastrophe exposures.
Increasing public interest in the availability and affordability of insurance
has prompted legislative, regulatory and judicial activity in several states.
This includes efforts to contain insurance prices, restrict underwriting
practices and risk classifications, mandate rate reductions and refunds,
eliminate or reduce exemptions from antitrust laws and generally expand
regulation. Because of Alabama's low automobile rates as compared to rates in
most other states, the Company does not expect the type of punitive legislation
and initiatives found in some states to be a factor in its primary market in the
immediate future.
YEAR 2000
The Company initially started the identification of year 2000 issues in 1994
and began its internal programming modifications in 1995. These phases along
with the testing have continued during the last three years. The Company
believes it has substantially completed the identification and programming steps
and at December 31, 1998 is approximately 90% complete with actual application
and scenario testing, whereby dates are manipulated and results are compared for
accuracy. Such testing and completion of internal programming is currently
scheduled to be completed in the second quarter of 1999. A summary of mission
critical systems is shown below indicating the status of the Company's
remediation and testing efforts at December 31, 1998. In 1998, the Company also
addressed the issues related to year 2000 in regards to material relationships
with third parties, vendors, suppliers, etc. and has identified such providers,
surveying their efforts and requesting written assurances that year 2000 issues
have been addressed. Of the vendor operating system software identified during
this process, approximately 90% of the programs have been labeled as "year 2000
compliant" by the vendors. In the event that such software fails despite
written assurances and internal testing, the Company expects to work closely
with the vendors to find a remedy in a timely fashion. Also, the Company is
continuing to review all significant non-information technology systems for year
2000 compliance. The most significant such system, the telephone system, has
already been determined to be year 2000 compliant. These efforts as well as the
final phase, follow-up on any unresolved year 2000 issues, are expected to be
completed during the first half of 1999.
The Company has not utilized any year 2000 solution providers in addressing
compliance of its mainframe systems. To date, the issues have been addressed
with internal resources. However, the Company has contracted with external
consultants to assist in the review and updating of its personal computer
systems and associated hardware and software. Due to the longevity of the
process, the number of employees and resources devoted to the efforts and the
time spent, it is not practicable to determine precisely the total costs
attributable to the year 2000 issue. These costs have been expensed as incurred
throughout the process. However, the Company estimates that to date,
approximately $1.7 million has been spent on year 2000 efforts, with almost
$900,000 expensed in 1998. Future costs, including $500,000 for the external
consultant costs of the
SUMMARY OF MISSION CRITICAL SYSTEMS
<TABLE>
<CAPTION>
Remediation/ System Goal
Mission Critical Systems Research Programming Testing Date
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accounting Completed Completed Completed N/A
- ---------------------------------------------------------------------------------------
Agent Compensation Completed Completed Started 4/30/99
- ---------------------------------------------------------------------------------------
Claims Completed Completed Completed N/A
- ---------------------------------------------------------------------------------------
Investment Management Completed Completed Completed N/A
- ---------------------------------------------------------------------------------------
Life Policy Administration Completed Completed Started 4/30/99
- ---------------------------------------------------------------------------------------
Loan Processing Completed Completed Started 4/30/99
- ---------------------------------------------------------------------------------------
Payment Processing Completed Completed Started 4/30/99
- ---------------------------------------------------------------------------------------
Payroll Processing Completed Completed Completed N/A
- ---------------------------------------------------------------------------------------
Personal Computers - Field Completed Completed Completed N/A
- ---------------------------------------------------------------------------------------
Personal Computer - Based Field Programs Completed Completed Started 4/30/99
- ---------------------------------------------------------------------------------------
Personal Computers - Home Office Completed Started Started 6/25/99
- ---------------------------------------------------------------------------------------
Postal Software Completed Completed Completed N/A
- ---------------------------------------------------------------------------------------
Property/Casualty Policy Administration Completed Completed Completed N/A
- ---------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
personal computer systems reviews and $400,000 for payment processing software,
are currently anticipated to total $1.2 million, for a total estimated cost of
year 2000 efforts of $2.9 million. The Company has absorbed the costs into its
operations with no significant adverse impact on its financial condition or
results of operations. The resources utilized have caused some normal
operational enhancements and systems development to be deferred or delayed.
However, any systems maintenance or statutory required updates have not been
affected.
To the extent the year 2000 issues are not corrected timely and successfully,
the Company's ability to process its business and pay its claims timely could be
impacted. Such an event could have material adverse consequences on future
financial condition and results of operations. The Company has begun the
process of developing a contingency plan should an adverse year 2000 issue
occur. As part of the contingency plan, the Company expects to address its
ability to conduct business in environments experiencing both limited and
extensive adverse conditions resulting from the year 2000 issue. The Company
expects to have such a plan in place by the end of the third quarter of 1999.
FINANCIAL ACCOUNTING DEVELOPMENTS
The Financial Accounting Standards Board (FASB) issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities in June 1998. This
Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in investment
securities and other contracts, and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. The accounting for changes
in the fair value of a derivative will be included in either earnings or other
comprehensive income depending on the intended use of the derivative instrument.
The Company is currently evaluating this standard, which is effective January 1,
2000.
The Accounting Standards Executive Committee issued Statement of Position
(SOP) 97-3, Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments, in December 1997. This SOP provides guidance for determining when
an entity should recognize a liability for guaranty fund and other insurance-
related assessments. It also provides guidance on how to measure the liability.
This SOP is effective for 1999. The Company's present accounting method for
guaranty fund and other insurance related assessments substantially conforms to
the requirements of this SOP.
In March 1998, SOP 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use was issued. This SOP provides guidance
for determining whether costs of software developed or obtained for internal use
should be capitalized or expensed as incurred. In the past, the Company has
expensed all such costs when incurred. This SOP is effective beginning in 1999.
The Company is currently involved in certain technology projects, the costs of
which will be impacted by this SOP. The Company is currently evaluating the
impact and will provide disclosure about such capitalized and/or expensed costs
in the first quarter of 1999.
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 1995. 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 and uncertainties 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 and may cause actual future results to differ materially
from those contemplated, projected, estimated or budgeted in such forward-
looking statements.
11
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------------------
1998 1997
-------------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed Maturities held for investment, at amortized cost
(market value $1,560,903 in 1998 and $2,154,921 in 1997) $ 1,471,113 $ 2,011,449
Fixed Maturities available for sale, at market value
(amortized cost $741,583,948 in 1998 and $699,018,965 in 1997) 774,346,360 731,550,744
Equity Securities available for sale, at market value (cost $40,833,150 in 1998
and $55,893,931 in 1997) 103,055,465 116,133,472
Mortgage Loans on Real Estate 404,432 566,783
Investment Real Estate (net of accumulated depreciation
of $1,587,634 in 1998 and $1,514,117 in 1997) 1,482,647 1,718,175
Policy Loans 38,645,185 34,900,547
Other Long-term Investments 110,022,016 115,727,331
Short-term Investments 54,637,029 25,051,026
-------------------------------
Total Investments 1,084,064,247 1,027,659,527
Cash 5,948,409 5,820,597
Accrued Investment Income 11,394,940 11,114,372
Accounts Receivable 23,378,825 11,472,193
Reinsurance Balances Receivable 1,121,089 1,132,011
Due from Affiliates 1,677,667 2,505,157
Deferred Policy Acquisition Costs 114,141,870 105,855,585
Other Assets 4,932,090 4,506,360
-------------------------------
Total Assets $1,246,659,137 $1,170,065,802
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy Liabilities and Accruals $ 548,428,408 $ 498,387,318
Unearned Premiums 105,464,480 97,669,270
Dividends to Policyholders 9,337,982 9,024,751
Premium Deposit and Retirement Deposit Funds 6,217,463 6,488,037
Deferred Income Taxes 41,788,715 38,812,842
Other Liabilities 44,677,579 35,120,449
Due to Affiliates 318,113
Commercial Paper 57,259,518 89,521,729
Notes Payable 106,765 1,978,024
Notes Payable to Affiliates 9,438,129 10,132,188
-------------------------------
Total Liabilities 823,037,152 787,134,608
-------------------------------
Commitments and Contingencies (Notes 1, 3, 9 and 12)
Stockholders' Equity:
Preferred Stock, $1 par value
Shares Authorized: 1,000,000
Issued: None
Common Stock, $1 par value
Shares Authorized: 110,000,000
Issued: 41,891,512
Outstanding: 1998 - 40,879,911; 1997 - 40,789,712 41,891,512 41,891,512
Capital in Excess of Par Value 22,355,934 21,301,198
Accumulated Other Comprehensive Income 57,577,202 56,929,966
Retained Earnings 306,268,833 267,420,813
Treasury Stock: at Cost (shares, 1998 - 1,011,601; 1997 - 1,101,800) (4,471,496) (4,612,295)
-------------------------------
Total Stockholders' Equity 423,621,985 382,931,194
-------------------------------
Total Liabilities and Stockholders' Equity $1,246,659,137 $1,170,065,802
===============================
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31,
----------------------------------------
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
Revenues
Premiums - Property and Casualty Insurance $345,739,616 $330,305,948 $298,938,818
Premiums and Policy Charges - Life Insurance 46,098,666 40,659,098 38,247,600
Net Investment Income 62,511,658 57,528,669 54,194,334
Realized Investment Gains 4,397,533 3,356,231 2,807,588
Other Income 2,238,096 2,159,683 2,147,688
----------------------------------------
Total Revenues 460,985,569 434,009,629 396,336,028
----------------------------------------
Benefits and Expenses
Benefits & Settlement Expenses 277,900,636 266,077,956 267,311,326
Dividends to Policyholders 3,236,089 3,165,092 3,055,700
Amortization of Deferred Policy Acquisition Costs 57,821,043 55,997,727 51,111,851
Other Operating Expenses 38,762,883 31,969,232 29,003,291
----------------------------------------
Total Expenses 377,720,651 357,210,007 350,482,168
----------------------------------------
Income Before Provision for Income Taxes 83,264,918 76,799,622 45,853,860
Provision for Income Taxes 26,549,227 24,005,989 13,664,645
----------------------------------------
Net Income $ 56,715,691 $ 52,793,633 $ 32,189,215
========================================
Net Income Per Share - Basic $1.39 $1.29 $0.79
========================================
Net Income Per Share - Diluted $1.38 $1.29 $0.79
========================================
Weighted Average Shares Outstanding - Basic 40,834,232 40,787,047 40,786,561
========================================
Weighted Average Shares Outstanding - Diluted 41,148,258 40,930,894 40,843,458
========================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
Net Income $56,715,691 $52,793,633 $32,189,215
Other Comprehensive Income, net of tax:
Unrealized Investment Gains on Securities Available for Sale 3,505,632 25,184,769 130,816
Less: Reclassification Adjustment for Realized Investment Gains 2,858,396 2,181,550 1,824,932
-------------------------------------
Total Other Comprehensive Income (Loss) 647,236 23,003,219 (1,694,116)
-------------------------------------
Total Comprehensive Income $57,362,927 $75,796,852 $30,495,099
=====================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Capital in Other
Common Excess of Comprehensive Retained Treasury
Stock Par Value Income (Loss) Earnings Stock Total
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $41,891,512 $ 21,276,023 $35,620,863 $214,453,116 ($4,631,770) $308,609,744
Comprehensive Income
Net Income 32,189,215 32,189,215
Other Comprehensive Income, net of tax
Change in Net Unrealized Investment Gains(Losses) (1,694,116) (1,694,116)
Dividends to Stockholders
($.3875 per share) (15,802,434) (15,802,434)
Exercise of Stock Options 5,300 4,100 9,400
------------------------------------------------------------------------------------
Balance, December 31, 1996 41,891,512 21,281,323 33,926,747 230,839,897 (4,627,670) 323,311,809
Comprehensive Income
Net Income 52,793,633 52,793,633
Other Comprehensive Income, net of tax
Change in Net Unrealized Investment Gains(Losses) 23,003,219 23,003,219
Dividends to Stockholders
($.3975 per share) (16,212,717) (16,212,717)
Exercise of Stock Options 19,875 15,375 35,250
------------------------------------------------------------------------------------
Balance, December 31, 1997 41,891,512 21,301,198 56,929,966 267,420,813 (4,612,295) 382,931,194
Comprehensive Income
Net Income 56,715,691 56,715,691
Other Comprehensive Income, net of tax
Change in Net Unrealized Investment Gains(Losses) 647,236 647,236
Dividends to Stockholders
($.4375 per share) (17,867,671) (17,867,671)
Purchase of Treasury Stock
(22,000 shares) (419,471) (419,471)
Exercise of Stock Options 1,054,736 560,270 1,615,006
------------------------------------------------------------------------------------
Balance, December 31, 1998 $41,891,512 $ 22,355,934 $57,577,202 $306,268,833 ($4,471,496) $423,621,985
====================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
15
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
---------------------------------------------
1998 1997 1996
---------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 56,715,691 $ 52,793,633 $ 32,189,215
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Policy Acquisition Costs Deferred (66,613,244) (63,576,796) (59,234,604)
Amortization of Deferred Policy Acquisition Costs 57,821,043 55,997,727 51,111,851
Depreciation and Amortization 2,973,249 4,488,679 4,447,490
Provision for Deferred Taxes 3,555,828 1,411,344 1,859,058
Interest on Policyholders' Funds 16,127,589 14,127,507 12,273,381
Net Realized Investment Gains (4,397,533) (3,356,231) (2,807,588)
Other 1,981,149 2,306,276 2,460,366
Changes in Operating Assets and Liabilities:
(Increase) in Accrued Investment Income (280,568) (1,082,097) (691,295)
Decrease (Increase) in Accounts Receivable 12,929 (1,616,291) 4,077,468
Decrease in Reinsurance Balances Receivable 10,922 557,643 3,745,010
Decrease (Increase) in Amounts Due from Affiliates 827,490 204,335 (1,302,763)
Increase (Decrease) in Amounts Due to Affiliates 318,113 (6,135,599)
(Increase) Decrease in Other Assets (425,730) 357,942 (102,851)
Increase in Liability for Policy Reserves 10,869,716 17,694,934 14,161,376
Increase in Liability for Unearned Premiums 7,795,210 4,723,904 7,639,172
Increase (Decrease) in Amounts Held for Others 42,657 (401,572) (810,343)
Increase in Other Liabilities 8,556,929 4,075,892 2,394,885
--------------------------------------------
Net Cash Provided by Operating Activities 95,891,440 88,706,829 65,274,229
--------------------------------------------
Cash Flows from Investing Activities:
Maturities and Redemptions of Fixed Maturities Held for
Investment 536,451 810,279 912,250
Maturities and Redemptions of Fixed Maturities Available for
Sale 78,974,370 46,658,709 37,623,173
Maturities and Redemptions of Other Investments 129,559,926 105,534,625 86,205,777
Sales of Fixed Maturities Available for Sale 59,787,112 26,157,682 85,651,625
Sales of Other Investments 71,659,811 47,218,250 54,618,422
Purchase of Fixed Maturities Available for Sale (179,855,611) (193,675,998) (175,124,345)
Purchase of Other Investments (185,735,095) (154,426,039) (135,251,325)
Net (Increase) Decrease in Short-term Investments (18,433,677) 15,050,033 (12,482,017)
Net (Increase) Decrease in Receivable/Payable on Securities (22,071,686) (2,180,776) 7,304,553
--------------------------------------------
Net Cash (Used in) Investing Activities (65,578,399) (108,853,235) (50,541,887)
--------------------------------------------
Cash Flows from Financing Activities:
(Decrease) Increase in Commercial Paper (32,262,211) 15,940,766 (8,368,653)
(Decrease) in Notes Payable (1,871,259) (231,934) (113,404)
(Decrease) in Notes Payable to Affiliates (694,059) (696,438) (88,336)
Stockholder Dividends Paid (17,867,671) (16,212,717) (15,802,434)
Purchase of Treasury Stock (419,471)
Proceeds from Exercise of Stock Options 1,299,329 35,250 9,400
Deposits of Policyholders' Funds 58,049,561 55,798,414 40,369,961
Withdrawal of Policyholders' Funds (36,419,448) (33,090,461) (27,641,038)
--------------------------------------------
Net Cash (Used in) Provided by Financing Activities (30,185,229) 21,542,880 (11,634,504)
--------------------------------------------
Net Increase in Cash 127,812 1,396,474 3,097,838
Cash - Beginning of Period 5,820,597 4,424,123 1,326,285
--------------------------------------------
Cash - End of Period $ 5,948,409 $ 5,820,597 $ 4,424,123
============================================
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Year for:
Interest $ 4,539,523 $ 4,978,901 $ 4,976,921
Income Taxes $ 22,397,000 $ 24,642,566 $ 10,536,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements are prepared on the basis
of generally accepted accounting principles. Such principles differ from
statutory reporting practices prescribed by the National Association of
Insurance Commissioners (NAIC) and state regulatory authorities.
The accompanying consolidated financial statements include, after 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
$354 million of premiums and policy charges representing 90% of such amounts in
1998 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. Investment income is
considered, if necessary, in the determination of the recoverability of deferred
policy acquisition costs.
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.
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Note 1. continued)
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. Investment income on mortgage-
backed securities includes amortization and accretion of premiums and discounts
using a method that approximates a level yield, taking into consideration
assumed prepayment patterns.
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. Long
term investments include installment loans, carried at unpaid principal balance,
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 put option and a covered call option writing program.
Premiums received from options written are carried at market value as a
liability with net unrealized gains or losses reflected as accumulated other
comprehensive income within stockholders' equity. Realized gains and losses on
call options written are recognized in net income upon settlement of the option
contract. The put option contract premium, if exercised, lowers the purchase
price of the stock, however, if the contract is not exercised a realized gain is
recognized in net income upon expiration. The option program is used only in
certain circumstances to hedge against volatility in equity securities. The
Company had $1,067,313 in options outstanding at December 31, 1998.
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.
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
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. The weighted
average diluted shares outstanding include potentially diluted shares which
total 314,206 in 1998, 143,847 shares in 1997 and 56,897 shares in 1996, all
of which are 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 1997 and 1996 amounts in order to
conform to 1998 classifications and descriptions.
18
<PAGE>
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. Substantially 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. 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 storms 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 and reduces the Company's earnings volatility. Alfa Group
pooled catastrophe losses for 1998 totaled $45 million. The Company's share of
such losses totaled $6.5 million. No catastrophe losses were incurred in 1997.
Group wide catastrophe losses in 1996 were $27 million, and the Company's share
was $11.4 million. The Company's participation in the Pooling Agreement may be
changed or terminated without the consent or approval of the Company's
shareholders, and the Pooling Agreement may be terminated by any party thereto
upon 90 days notice.
As a result of the Pooling Agreement, the Company had a payable of $318,113
and a receivable of $1,255,157 from the Mutual Group at December 31, 1998 and
December 31, 1997, respectively, for cash transactions originating in December
and settled the following month. Approximately 83.5% of the Company's property
and casualty premium income and 73.7% of its total premium income for 1998 was
derived from the Company's participation in the Pooling Agreement.
3. RELATED PARTY TRANSACTIONS
Mutual owns 39.61% and Alfa Mutual Fire (Fire) owns 11.05% of the Company's
common stock. The Board of Directors of the Company consists of eleven members,
six of whom serve as Directors of Mutual, Fire and Alfa Mutual General (General)
(collectively, the Mutual Group) and two of whom at December 31, 1998 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 $9,058,798 in 1998, $8,234,938 in 1997 and
$8,027,769 in 1996.
In 1998 the Company repurchased 11,000 shares of its common stock at a cost of
$209,917 from Mutual under its stock repurchase program. (See Note 10.)
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 $32.1 million in 1998, $27.7 million in 1997 and
$27.1 million in 1996. 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 premium paid to Life was
approximately $1.7 million in 1996. 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 $13.9
million in 1998 and $13.2 million in 1997. Policy charges recorded from such
premiums totaled approximately $2.1 million in 1998 and $1.9 million in 1997.
Policy reserves and insurance in force on the COLI plan at December 31, 1998
were approximately $24.2 million and $344.3 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 $364,125 in 1998 and $345,434 in 1997. Policy reserves and
insurance in force on this plan at December 31, 1998 were approximately $57,000
and $37.7 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 $71,000 in 1998, $62,000 in 1997 and
$62,000 in 1996.
19
<PAGE>
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 $1,799,823 in 1998, $2,010,969 in 1997 and $2,138,167 in 1996
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 $438,129 and $932,188 at December 31, 1998 and
1997 respectively. Interest paid by Financial to the Mutual Group was $44,365
in 1998, $109,576 in 1997 and $206,117 in 1996. 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. The balance outstanding on these lines of credit
included in notes payable to affiliates was $9,000,000 and $9,200,000 at
December 31, 1998 and 1997, respectively. Interest paid by the Company and
Financial to the Federation and its subsidiary was $516,610 in 1998, $489,125 in
1997 and $521,938 in 1996. 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, 1998 and 1997, the amount loaned to the
partnership under the line of credit was $345,000 and $425,000, respectively.
Interest paid to Financial was $27,560 in 1998 and $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%. In February 1998 Mutual repaid the
$20 million loan balance that was outstanding as of December 31, 1997. Interest
paid in 1998 to Financial was $237,984. 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 $934,687 in 1998, $1,943,560 in 1997 and $5,273,906 in 1996 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 $128,878 in 1998,
$185,029 in 1997 and $98,780 in 1996 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 1998. The Company has also entered into an investment partnership
with the Mutual Group. The amount invested in the partnership was $15.4 million
and $9 million at December 31, 1998 and 1997, respectively. The Company had
committed to fund up to $8.2 million additional investment in the partnership at
December 31, 1998. 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 $660,482 and $638,059 at
December 31, 1998 and 1997, respectively.
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVESTMENTS
Net investment income is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------
<S> <C> <C> <C>
Fixed maturities:
Held for investment $ 158,978 $ 223,979 $ 317,070
Available for sale 53,200,860 48,732,496 43,886,976
---------------------------------------
Total fixed maturities 53,359,838 48,956,475 44,204,046
Equity securities 2,053,964 2,393,257 2,849,287
Mortgage loans on real estate 41,061 62,814 79,693
Investment real estate 306,690 401,937 429,386
Policy loans 2,690,979 2,594,516 2,246,242
Other long-term investments 13,206,934 13,073,001 15,044,988
Short-term investments 1,971,630 1,501,606 1,388,853
---------------------------------------
Total investment income 73,631,096 68,983,606 66,242,495
Investment expenses, including interest expense 11,119,438 11,454,937 12,048,161
---------------------------------------
Net investment income $62,511,658 $57,528,669 $54,194,334
=======================================
</TABLE>
Net realized investment gains (losses) are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
Fixed maturities:
Held for investment $ (5,247) $ 418 $ 2,190
Available for sale (305,896) 935,666 (4,132,690)
-----------------------------------------
Total fixed maturities (311,143) 936,084 (4,130,500)
Equity securities 3,195,243 1,294,462 6,388,549
Other investments 1,513,433 1,125,685 549,539
-----------------------------------------
Net realized investment gains $4,397,533 $3,356,231 $ 2,807,588
=========================================
</TABLE>
Changes in net unrealized investment gains and losses on fixed maturities and
equity securities are as follows:
<TABLE>
<CAPTION>
Increase (Decrease)
--------------------------------------------
1998 1997 1996
--------------------------------------------
<S> <C> <C> <C>
Fixed maturities:
Held for investment $ (53,682) $ (37,252) $ (88,525)
===========================================
Available for sale, net of tax $(178,934) $ 7,961,902 $(7,738,814)
===========================================
Equity securities, net of tax $ 826,170 $15,041,317 $ 6,044,698
===========================================
</TABLE>
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1998 and 1997, gross unrealized gains for equity securities
amounted to $64,367,603 and $61,415,534, respectively, while gross unrealized
losses amounted to $2,607,950 and $1,140,159, respectively, and applicable
deferred income taxes aggregated $21,425,412 and $20,767,304, respectively.
The Company's fixed maturity portfolio is predominantly comprised of
investment grade securities. At December 31, 1998, approximately $7.3 million in
fixed maturities (1.0% 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.
The amortized cost and estimated market value of investments in fixed
maturity securities are as follows:
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------------------------------------------------------
<S> <C> <C> <C> <C>
Held for investment:
Mortgage-backed securities $ 1,471,113 $ 89,790 - $ 1,560,903
============================================================
Available for sale:
U.S. Treasury securities & obligations of U.S.
Government corporations and agencies $ 50,171,484 $ 6,186,501 - $ 56,357,985
Obligations of states & political subdivisions 163,555,285 8,476,382 $ (240,829) 171,790,838
Corporate securities 232,999,121 14,549,263 (6,093,844) 241,454,540
Mortgage-backed securities 291,358,058 10,412,497 (736,308) 301,034,247
Other debt securities 3,500,000 208,750 - 3,708,750
------------------------------------------------------------
Totals $741,583,948 $39,833,393 $(7,070,981) $774,346,360
============================================================
December 31, 1997
------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------------------------------------------------------
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
============================================================
</TABLE>
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and estimated market value of fixed maturities available
for sale at December 31, 1998 by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
December 31, 1998
--------------------------
ESTIMATED
AMORTIZED MARKET
COST VALUE
--------------------------
Available for sale:
Due in one year or less $ 17,470,584 $ 17,694,081
Due after one year through five years 66,013,000 70,082,622
Due after five years through ten years 136,934,985 147,314,671
Due after ten years 229,807,321 238,220,739
--------------------------
450,225,890 473,312,113
Mortgage-backed securities 291,358,058 301,034,247
--------------------------
$741,583,948 $774,346,360
==========================
Proceeds from sales of fixed maturities available for sale were $59,787,112
in 1998, $26,157,682 in 1997 and $85,651,625 in 1996. Gross gains of $653,398 in
1998, $714,990 in 1997 and $572,686 in 1996 and gross losses of $167,174 in
1998, $61,526 in 1997 and $3,616,504 in 1996 were realized on those sales. In
addition, the Company recorded a loss of approximately $3,120,000 in 1998,
$927,000 in 1997 and $2,450,000 in 1996 for securities whose valuation was
deemed to be an other than temporary decline. At December 31, 1998 the Company's
mortgage-backed securities were comprised of CMO's and passthrough securities.
The valuation of such securities is subject to significant fluctuations due to
changes in interest rates. The Company has a history of positive cash flow and
has the ability to hold such investments to maturity. Management performs
periodic assessments of the portfolio to monitor interest rate fluctuations.
As of December 31, 1998 and 1997, the Company's mortgage loan portfolio
totaled approximately $404,000 and $567,000, respectively, and the collateral
loan portfolio, included in "Other long-term investments", totaled $56.0 million
and $56.2 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. At December 31, 1998, the Company had charged off loans totaling
$562,173 and had an allowance of $584,178. The Company has estimated the market
value of the collateral loan portfolio to be approximately $57.2 million and
$57.4 million at December 31, 1998 and 1997, respectively. The estimated market
value was determined by discounting the estimated future cash flows from the
loan portfolio at 6.75% for 1998 and 7.25% for 1997, 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, 1998. The Company's policy loans earn interest at rates
ranging from 5.0% to 8.0% at December 31, 1998. 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, 1998, the Company had $1,931,632 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. The cost and fair value of the
financial instruments as of December 31 are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------
1998 1997
-------------------------------------------------------------
Cost Fair Value Cost Fair Value
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Investments:
Fixed maturities held for investment $ 1,471,113 $ 1,560,903 $ 2,011,449 $ 2,154,921
Fixed maturities available for sale $741,583,948 $774,346,360 $699,018,965 $731,550,744
Equity securities $ 40,833,150 $103,055,465 $ 55,893,931 $116,133,472
Short-term investments $ 54,637,029 $ 54,637,029 $ 25,051,026 $ 25,051,026
Mortgage and Collateral loans $ 56,401,043 $ 57,596,928 $ 56,771,659 $ 57,927,394
Liabilities:
Commercial paper $ 57,259,518 $ 57,259,518 $ 89,521,729 $ 89,521,729
Notes payable $ 9,544,894 $ 9,544,894 $ 12,110,212 $ 12,110,212
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. FUTURE POLICY BENEFITS, LOSSES AND LOSS EXPENSES
The composition of the liability for future policy benefits, losses and loss
adjustment expenses and the more significant assumptions used in its calculation
are as follows:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
BASIS OF ASSUMPTION
LIABILITY -------------------------------------------------
INSURANCE ----------------------------- YEARS INTEREST MORTALITY WITH-
IN FORCE 12/31/98 12/31/97 OF ISSUE RATE AND MORBIDITY DRAWALS
---------------------------------------------------------------------------------------------------------------
Ordinary $ 4,893,967,153 $116,061,999 $110,509,770 1955 5% 1955-60 Basic Select Company
life to and Ultimate Mortality experience
1978 Tables
1979 7% Modified 1965-70 Basic Company
and graded Select and Ultimate experience
1980 to 5% Mortality Tables
1981 9% Modified 1965-70 Basic Company
to graded Select and Ultimate experience
1993 to 7% Mortality Tables
1994 6% Modified 1965-70 Basic Company
to Select and Ultimate experience
1998 Mortality Tables
Interest 2,005,157,621 159,815,209 145,702,965 1984 6.25% to Modified 1965-70 Basic Company
sensitive to 6.5%* Select and Ultimate experience
life 1998 Mortality Tables
Universal 4,056,221,952 118,870,406 94,840,006 1987 5.5% to Modified 1965-70 Basic Company
life to 6.5%* Select and Ultimate experience
1998 Mortality Tables
Annuities w/o 12,271,943 12,376,502 1974 5.25% to -- --
life contingencies to 6%*
1998
Group credit 6,990,205 212,555 262,993 1992 3.0% 1958 CET --
life to
1998
Group life 37,711,907 56,806 55,689 1998 4.5% 1960CSG --
-----------------------------------------------
$11,000,048,838 $407,288,918 $363,747,925
===============
Accident & 296,480 310,144 5% 1972 intercompany 200% N&W III
health reports
Losses and loss 140,843,010 134,329,249
adjustment expenses ----------------------------
$548,428,408 $498,387,318
============================
</TABLE>
*Rates are adjustable annually on policyholders' anniversary dates.
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Participating policies represent approximately 3% of the ordinary life
insurance in force and 5% of life insurance premium income. The amount of
dividends paid to policyholders is fixed by the Board of Directors and allocated
to participating policyholders. 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>
1998 1997 1996
-----------------------------------------------------------------------------------
Property and Property and Property and
Casualty Life Casualty Life Casualty Life
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, $132,086,208 $ 2,243,041 $117,672,492 $ 3,095,914 $108,303,253 $2,065,462
Less Reinsurance recoverables
on unpaid losses (960,376) (123,474) (745,156) (801,496) (2,293,048) (717,018)
------------------------------------------------------------------------------------
Net balance at January 1, 131,125,832 2,119,567 116,927,336 2,294,418 106,010,205 1,348,444
------------------------------------------------------------------------------------
Incurred related to:
Current year 253,369,653 15,160,885 240,327,428 11,600,573 241,879,860 8,717,628
Prior years (18,725,403) (17,517) (8,928,409) ( 7,995) (4,702,409) 151,950
------------------------------------------------------------------------------------
Total incurred 234,644,250 15,143,368 231,399,019 11,592,578 237,177,451 8,869,578
------------------------------------------------------------------------------------
Paid related to:
Current year 175,544,000 14,010,044 164,640,000 10,605,018 172,087,000 7,363,636
Prior years 52,955,344 793,382 52,560,523 1,162,411 54,173,320 559,968
------------------------------------------------------------------------------------
Total paid 228,499,344 14,803,426 217,200,523 11,767,429 226,260,320 7,923,604
------------------------------------------------------------------------------------
Net balance at December 31, 137,270,738 2,459,509 131,125,832 2,119,567 116,927,336 2,294,418
Plus reinsurance recoverables
on unpaid losses 759,568 353,195 960,376 123,474 745,156 801,496
------------------------------------------------------------------------------------
Balance at December 31, $138,030,306 $ 2,812,704 $132,086,208 $ 2,243,041 $117,672,492 $3,095,914
====================================================================================
</TABLE>
The liability for estimated unpaid losses and loss adjustment expenses is
based on a detail 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.
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INCOME TAXES
Below is a comparative analysis of the provisions for income tax appearing in
the statements of income:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
Current $23,309,076 $22,594,645 $11,805,587
Deferred 3,240,151 1,411,344 1,859,058
-------------------------------------
Total $26,549,227 $24,005,989 $13,664,645
=====================================
</TABLE>
Reconciliations of the differences between income taxes computed at Federal
statutory tax rates and provisions for income taxes are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
Income taxes computed
at Federal statutory tax rate $29,142,721 $26,879,868 $16,048,851
Dividends received deduction
and tax exempt interest (2,663,414) (2,011,505) (2,237,859)
Other, net 69,920 (862,374) (146,347)
-------------------------------------
Total $26,549,227 $24,005,989 $13,664,645
=====================================
</TABLE>
Income taxes are recorded in the Statements of Income and also directly in
certain stockholders' equity accounts. Income tax expense (benefit) for the
years ended December 31 was recorded in the financial statements as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
Statement of Income $ 26,549,227 $ 24,005,989 $13,664,645
--------------------------------------
Statements of Comprehensive Income:
Unrealized holding gains (losses)
arising during the year 348,512 12,386,349 (912,216)
--------------------------------------
Statements of Stockholders' Equity
Capital in excess of par value:
Exercise of stock options (315,677) -- --
--------------------------------------
Total income taxes $ 26,582,062 $ 36,392,338 $12,752,429
======================================
The net deferred tax liabilities consist of the following:
1998 1997
-------------------------
<S> <C> <C>
Deferred Tax Assets:
Reserve computational method
differences $ 19,613,782 $ 20,282,436
Unearned premium reserve 7,382,514 6,836,849
Other 2,638,791 2,945,886
-------------------------
Total deferred tax asset $ 29,635,087 $ 30,065,171
=========================
Deferred Tax Liabilities:
Unrealized gains $ 32,246,758 $ 32,447,809
Deferred acquisition costs 37,413,238 34,949,539
Other 1,763,806 1,480,665
--------------------------
Total deferred tax liability $ 71,423,802 $ 68,878,013
--------------------------
Net deferred tax liability $(41,788,715) $(38,812,842)
==========================
</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.
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. NOTES PAYABLE AND COMMERCIAL PAPER
Short term debt at December 31, 1998 was $66.8 million. Of this amount, the
Company had approximately $57.3 million in commercial paper at a rate of 5.95%
with maturities ranging from January 4, 1999 to January 5, 1999. 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 $80 million. The
backup lines agreements contain usual and customary covenants requiring the
Company to meet certain operating levels. The Company has maintained full
compliance with all such covenants. The commercial paper is guaranteed by Alfa
Mutual Insurance Company, an affiliate. In addition, the Company had $9.4
million in short-term debt outstanding to affiliates with interest equal to
commercial paper rates payable monthly and $106,765 outstanding in other short-
term debt at a rate of 7.0%. Due to the short term nature of the Company's
borrowings, their fair values approximate their carrying values.
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.
Year 2000 is a critical data management issue which could have substantial
consequences for companies worldwide because of the use of only two digits in
the date field that may cause many computer applications to fail completely or
create erroneous results by the year 2000 unless corrective measures are taken.
Over the past five years, the Company has devoted a significant amount of time
and resources to the issue of year 2000 as it relates to the Company's operating
systems and information technology applications as well as its non-operations
applications. The Company has identified its mission critical systems and many
other year 2000 issues. At December 31, 1998, the Company believes it has
substantially completed the identification and programming remediation steps
required to make its mission critical systems and other systems year 2000
compliant. In addition, the Company estimates it is approximately 90% complete
with actual application and scenario remediation and believes it will be 100%
complete with all year 2000 remediation efforts during the second quarter of
1999. To date the Company has incurred total costs of $1.7 million related to
year 2000 efforts, of which $900,000 was incurred during 1998. To the extent
the year 2000 issues are not corrected timely and successfully, the Company's
ability to process its business and pay its claims timely could be impacted.
Such an event could have material adverse consequences on future financial
conditions and results of operations. The Company has begun the process of
developing a contingency plan should an adverse year 2000 issue occur. As part
of the contingency plan, the Company expects to address its ability to conduct
business in environments experiencing both limited and extensive adverse
conditions resulting from the year 2000 issue. It expects to have such a plan
in place by the end of the third quarter of 1999.
Certain legal proceedings involving policyholders and agents are in process
at December 31, 1998. Costs for these and similar legal proceedings including
accruals for outstanding cases were $5.2 million in 1998, $3.6 million in 1997
and $2.7 million in 1996. 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.
Approximately 80 legal proceedings against Alfa Life Insurance Corporation
involving policyholders and agents are in process at December 31, 1998. Of the
80 proceedings, 50 were filed in 1998, 13 were filed 1997, 12 were filed in
1996, and 5 were filed in 1995. Of the 50 legal proceedings filed in 1998, two
plaintiff law firms accounted for 47 of the filings. Currently, three of the
proceedings against Alfa Life Insurance Corporation have gone to trial. In two
of the proceedings, the jury awarded the plaintiffs compensatory and punitive
damages against Alfa Life Insurance Corporation. The first jury verdict has been
appealed and the second verdict will be appealed to the Alabama Supreme Court.
In the third proceeding, the jury returned a verdict for Alfa Life Insurance
Corporation. Based upon information presently available, applicable law and
defenses available to the Company, management does not consider material losses
which might arise from a particular lawsuit beyond amounts accrued in the
financial statements 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.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1998,
the Company had repurchased a total of 1,119,600 shares at a cost of $5,050,241
and due to the exercise of stock options had reissued 115,999 shares at a cost
of $579,745 under this program, which decreased the total number of shares
outstanding to 40,879,911 shares.
The amounts of statutory stockholders' equity and net income for the Company's
life and property casualty insurance subsidiaries are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
Statutory net income:
Life insurance subsidiary $ 5,932,027 $ 7,650,641 $ 11,857,726
========================================
Property and casualty subsidiaries $ 40,275,880 $ 37,062,691 $ 11,534,172
========================================
Statutory stockholders' equity:
Life insurance subsidiary $129,364,457 $126,716,550 $110,983,883
========================================
Property and casualty subsidiaries $195,111,399 $171,727,913 $137,543,765
========================================
</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 $53.2 million without prior regulatory approval in 1999 based on
December 31, 1998 financial condition and results of operations.
At December 31, 1998 the life subsidiary's Adjusted Capital calculated in
accordance with NAIC Risk-Based Capital guidelines was $149.1 million compared
to the Authorized Control Level amount of $18.0 million and the property and
casualty subsidiaries' Adjusted Capital was $195.1 million compared to the
Authorized Control Level amount of $18.9 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, 1998, 1997 and 1996 was approximately $2,371,000,
$2,694,000 and $2,961,000, respectively. The cost and net book value of major
classes of leased property at December 31, 1998 was:
<TABLE>
<CAPTION>
NET BOOK
COST VALUE
- ----------------------------------------------------------
<S> <C> <C>
Transportation equipment $ 8,484,600 $ 6,001,162
Furniture and equipment 21,523,491 4,612,591
Buildings 3,016,998 1,429,364
- ----------------------------------------------------------
Total $33,025,089 $12,043,117
==========================================================
</TABLE>
At December 31, 1998, the aggregate minimum rental payments to be received
under leases having initial or remaining lease terms in excess of one year are
approximately $1,029,508 in 1999, $514,221 in 2000, $337,904 in 2001, $67,072 in
2002, $25,709 in 2003 and $113,548 thereafter.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
$1,296,693,235 of its life insurance in force with other insurance companies and
has taken reserve credits for approximately $3,834,275 on account of such
reinsurance at December 31, 1998. 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, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
Direct premiums earned $106,777,901 $ 97,856,550 $ 89,273,157
Premiums ceded to nonaffiliates (3,498,933) (3,472,978) (10,705,073)
Premiums ceded to pooling agreement (57,270,806) (53,789,256) (47,904,965)
Premiums assumed from pooling
agreement 345,740,009 330,325,696 306,461,981
Premiums assumed from nonaffiliates 90,111 45,034 61,318
-------------------------------------------
Net premiums earned $391,838,282 $370,965,046 $337,186,418
===========================================
Direct losses $ 60,651,925 $ 51,875,909 $ 46,804,925
Losses ceded to nonaffiliates (3,585,157) (1,693,990) (4,355,459)
Losses ceded to pooling
agreement (43,112,799) (38,051,264) (37,521,843)
Losses assumed from
pooling agreement 218,297,442 214,317,668 224,835,694
Losses assumed from
nonaffiliates 349,500 45,086 63,805
Loss adjustment expenses, net 17,186,707 16,498,188 16,219,907
-------------------------------------------
Net losses incurred 249,787,618 242,991,597 246,047,029
-------------------------------------------
Surrender, maturities, interest
and other benefits and
settlement expenses 28,113,018 23,086,359 21,264,297
-------------------------------------------
Total benefits and
settlement expenses $277,900,636 $266,077,956 $267,311,326
===========================================
</TABLE>
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could result in
losses to the Company; therefore allowances are established if amounts are
determined to be uncollectible. The Company evaluates the financial condition
of its reinsurers and monitors concentration of credit risk arising from similar
geographic regions, activities, or economic characteristics of the reinsurance
to minimize exposure to significant losses from reinsurer insolvencies. At
December 31, 1998, the Company does not believe there to be a significant
concentration of credit risk related to its reinsurance program.
29
<PAGE>
13. SEGMENT INFORMATION
The Company reports operating segments based on the Company's legal entities,
which are organized by line of business, with property and casualty insurance as
one segment, life insurance as one segment, non-insurance businesses composed of
consumer financing, leasing, residential and commercial construction and real
estate sales as one segment, and corporate operations as one segment. All
investing activities are allocated to the segments based on the actual assets,
investments and cash flows of each segment.
Segment profit or loss for the property and casualty operating segment is
measured by underwriting profits and losses as well as by total net profit.
Segment profit or loss for the life insurance segment, the non-insurance segment
and the corporate segment is measured by total net profit. Segment expenses
are borne by the segment which directly incurred such expense or are allocated
based on the Management and Operating Agreement discussed in Note 3.
The following is a summary of segment profit (loss):
<TABLE>
<CAPTION>
Year-Ended December 31, 1998
-------------------------------------------------------------------------------------
Property &
Casualty Life Non
Insurance Insurance Insurance Corporate Eliminations Total
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Premiums $345,739,616 $ 21,857,061 $367,596,677
Policy charges 24,241,605 24,241,605
Segment expenses 260,756,365 52,979,602 $ (497,076) 313,238,891
Amortization of deferred
acquisition expense 51,800,042 6,021,001 57,821,043
--------------------------------------------------------------------------------------
Underwriting profit (loss) 33,183,209 (12,901,937) 497,076 20,778,348
Net investment income (interest expense) 25,992,335 34,890,182 $3,904,579 $ (1,803,906) (471,532) 62,511,658
Other income 156,142 2,107,498 (25,544) 2,238,096
Other expense 175,544 2,622,871 3,862,302 6,660,717
--------------------------------------------------------------------------------------
Segment operating profit (loss) before tax 59,156,142 21,988,245 3,389,206 (5,666,208) - 78,867,385
Income tax provision (benefit) 17,574,545 6,343,610 1,197,531 (105,595) 25,010,090
--------------------------------------------------------------------------------------
Segment operating profit (loss) 41,581,597 15,644,635 2,191,675 (5,560,613) - 53,857,295
Net realized gains after tax 1,642,812 1,215,585 2,858,396
--------------------------------------------------------------------------------------
Segment net profit (loss) $ 43,224,409 $ 16,860,220 $ 2,191,675 $ (5,560,613) - $ 56,715,691
======================================================================================
Segment Assets $500,092,351 $668,475,611 $83,330,509 $490,617,615 $(495,856,949) $1,246,659,137
======================================================================================
Year-Ended December 31, 1997
-------------------------------------------------------------------------------------
Property &
Casualty Life Non
Insurance Insurance Insurance Corporate Eliminations Total
-------------------------------------------------------------------------------------
Premiums $330,305,948 $ 18,199,289 $ 348,505,237
Policy charges 22,459,809 22,459,809
Segment expenses 252,761,183 45,041,130 $ (591,328) 297,210,985
Amortization of deferred acquisition
expense 49,483,552 6,514,175 55,997,727
--------------------------------------------------------------------------------------
Underwriting profit (loss) 28,061,213 (10,896,207) 591,328 17,756,334
Net investment income (interest
expense) 23,935,303 31,646,118 $ 4,348,658 $ (1,818,921) (582,489) 57,528,669
Other income 155,333 2,013,189 (8,839) 2,159,683
Other expense 196,945 2,387,448 1,416,902 4,001,295
--------------------------------------------------------------------------------------
Segment operating profit (loss)
before tax 51,954,904 20,749,911 3,974,399 (3,235,823) - 73,443,391
Income tax provision (benefit) 15,383,538 6,170,000 1,346,390 (68,620) 22,831,308
--------------------------------------------------------------------------------------
Segment operating profit (loss) 36,571,366 14,579,911 2,628,009 (3,167,203) - 50,612,083
Net realized gains after tax 1,584,437 597,113 2,181,550
--------------------------------------------------------------------------------------
Segment net profit (loss) $ 38,155,803 $ 15,177,024 $ 2,628,009 $ (3,167,203) - $ 52,793,633
======================================================================================
Segment Assets $463,170,593 $607,265,984 $112,565,246 $ 479,732,936 $(492,668,957) $1,170,065,802
======================================================================================
</TABLE>
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Year-Ended December 31, 1996
------------------------------------------------------------------------------------------
Property &
Casualty Life Non
Insurance Insurance Insurance Corporate Eliminations Total
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Premiums $298,938,818 $ 19,583,718 $ 318,522,536
Policy charges 18,663,882 18,663,882
Segment expenses 256,123,101 39,609,791 $ (671,861) 295,061,031
Amortization of deferred acquisition
expense 45,050,788 6,061,063 51,111,851
-------------------------------------------------------------------------------------------
Underwriting profit (loss) (2,235,071) (7,423,254) 671,861 (8,986,464)
Net investment income (interest
expense) 22,250,871 29,253,591 $ 5,160,206 $ (1,805,528) (664,806) 54,194,334
Other income 69,095 (17) 2,085,665 (7,055) 2,147,688
Other expense 499,554 2,442,310 1,367,422 4,309,286
-------------------------------------------------------------------------------------------
Segment operating profit (loss)
before tax 19,585,341 21,830,320 4,803,561 (3,172,950) - 43,046,272
Income tax provision (benefit) 4,396,648 6,877,901 1,464,697 (57,256) 12,681,989
-------------------------------------------------------------------------------------------
Segment operating profit (loss) 15,188,693 14,952,419 3,338,864 (3,115,694) - 30,364,283
Net realized gains after tax 16,151 1,808,782 1,824,932
-------------------------------------------------------------------------------------------
Segment net profit (loss) $ 15,204,844 $ 16,761,201 $ 3,338,864 $ (3,115,694) - $ 32,189,215
===========================================================================================
Segment Assets $396,053,628 $533,435,384 $ 98,379,435 $ 404,408,916 $(412,947,208) $1,019,330,155
===========================================================================================
</TABLE>
The following summary reconciles significant segment items to the Company's
consolidated financial statements:
<TABLE>
<CAPTION>
For the years ended December 31,
------------------------------------------------
1998 1997 1996
------------------------------------------------
<S> <C> <C> <C>
Revenues:
Premiums - Property & Casualty Insurance $ 345,739,616 $ 330,305,948 $ 298,938,818
Premiums & policy charges - Life Insurance 46,098,666 40,659,098 38,247,600
Net investment income 62,511,658 57,528,669 54,194,334
Net realized investment gains 4,397,533 3,356,231 2,807,588
Other income 2,238,096 2,159,683 2,147,688
------------------------------------------------
Total revenues $ 460,985,569 $ 434,009,629 $ 396,336,028
================================================
Income before income taxes:
Underwriting profit (loss) $ 20,778,348 $ 17,756,334 $ (8,986,464)
Other income 2,238,096 2,159,683 2,147,688
Other expense (6,660,717) (4,001,295) (4,309,286)
Net investment income 62,511,658 57,528,669 54,194,334
Net realized investment gains 4,397,533 3,356,231 2,807,588
------------------------------------------------
Income before income taxes $ 83,264,918 $ 76,799,622 $ 45,853,860
================================================
Income taxes:
Allocated to segments $ 25,010,090 $ 22,831,308 $ 12,681,989
Allocated to realized gains 1,539,137 1,174,681 982,656
------------------------------------------------
Total income tax $ 26,549,227 $ 24,005,989 $ 13,664,645
================================================
Assets:
Allocated to segments $1,742,516,086 $1,662,734,759 $1,432,277,363
Eliminations (495,856,949) (492,668,957) (412,947,208)
------------------------------------------------
Total assets $1,246,659,137 $1,170,065,802 $1,019,330,155
================================================
</TABLE>
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. ACCOUNTING FOR STOCK-BASED COMPENSATION
Consistent with the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" (FAS123), the Company uses the intrinsic value based method to
account for its stock options and provides pro forma disclosures as if the fair
value based method had been applied. 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. Under the plan, options ratably become
exercisable annually over three years, and may not be exercised after ten years
after the date of the award. The following tables and information summarize the
stock option activity of the Company's plan and provides the proforma
disclosures of net income and earnings per share under the fair value based
method of accounting.
<TABLE>
<CAPTION>
Historical Summary of Option Grants
- ---------------------------------------------------------------------------------------------------------------------
Market Cumulative through December 31, 1998
Value at -------------------------------------------------
Exercise Date of Options Options Options
Price Grant Cancelled Exercised Exercisable
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options Authorized 2,000,000
---------
Options Granted During
October 1993 565,400 $ 11.75 $ 11.75 57,800 100,500 407,100
October 1993 218,000 $ 9.40 $ 11.75 8,000 210,000
March 1994 80,000 $ 11.50 $ 11.50 2,500 77,500
March 1995 80,000 $ 11.50 $ 11.50 2,500 77,500
April 1996 80,000 $ 12.25 $ 12.25 834 1,666 51,661
February 1997 75,000 $ 12.00 $ 12.00 1,667 833 24,162
March 1998 309,500 $ 17.75 $ 17.75 5,200
March 1998 143,000 $ 14.20 $ 17.75
--------- ---------------------------------------------
Less: Total Options Issued 1,550,900 65,501 115,999 847,923
Add: Options Cancelled 65,501 =============================================
---------
Available for Grant under
Plan at December 31, 1998 514,601
=========
</TABLE>
To determine the fair value of the options granted during 1998, 1997 and 1996
the Company has used the Black- Scholes model for valuations. The significant
assumptions used to estimate the total and per share fair value of such options
at the date of grant are as follows:
<TABLE>
<CAPTION>
452,500 75,000 80,000
Options Granted Options Granted Options Granted
March 23, 1998 February 18, 1997 April 18, 1996
------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rate 5.57% 6.27% 6.58%
Expected life (in years) 10 10 10
Expected volatility 0.51 0.49 0.47
Expected future dividend yield 2.3% 3.3% 2.9%
Weighted average option exercise price $ 16.63 $ 12.00 $ 12.25
===================================================
Fair value at date of grant $4,325,035 $405,534 $486,898
===================================================
Fair value per share $ 9.56 $ 5.41 $ 6.09
===================================================
</TABLE>
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The proforma net income and earnings per share, as if compensation expense had
been recorded for the fair value at the date of grant, is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1998 1997 1996
--------------------------------------
<S> <C> <C> <C>
Net income, as reported $56,715,691 $52,793,633 $32,189,215
======================================
Earnings per share, as reported - Basic $ 1.39 $ 1.29 $ 0.79
======================================
- Diluted $ 1.38 $ 1.29 $ 0.79
======================================
Proforma net income $55,886,063 $52,502,188 $32,005,055
======================================
Proforma earnings per share - Basic $ 1.37 $ 1.29 $ 0.78
======================================
- Diluted $ 1.36 $ 1.29 $ 0.78
======================================
Dilution - Basic $ 0.02 - $ 0.01
======================================
- Diluted $ 0.02 - $ 0.01
======================================
</TABLE>
The information shown below reflects activity for options outstanding at
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------------------
Weighted- Weighted- Weighted-
average average average
Number Exercise Number Exercise Number Exercise
of Options Price of Options Price of Options Price
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding
Beginning of year 1,039,200 $ 11.28 975,000 $ 11.23 911,200 $ 11.14
Add (deduct):
Granted 452,500 $ 16.63 75,000 $ 12.00 80,000 $ 12.25
Exercised (112,199) ($11.58) (3,000) ($11.75) (800) ($11.75)
Cancelled (10,101) ($14.92) (7,800) ($11.75) (15,400) ($11.75)
-----------------------------------------------------------------------
End of Period 1,369,400 $ 12.99 1,039,200 $ 11.28 975,000 $ 11.23
=======================================================================
Exercisable, end of period 847,923 $ 11.16 884,188 $ 11.15 814,988 $ 11.10
=======================================================================
Range of exercise prices $9.40 to $ 17.75 $9.40 to $ 12.25 $9.40 to $ 12.25
=======================================================================
Weighted average remaining
contractual life 6.7 years 6.4 years 7.2 years
=======================================================================
Compensation cost recognized
during period $306,408 $103,680 $237,398
=======================================================================
</TABLE>
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. FINANCIAL ACCOUNTING DEVELOPMENTS
The Financial Accounting Standards Board (FASB) issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities in June 1998. This
Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in investment
securities and other contracts, and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. The accounting for changes in
the fair value of a derivative will be included in either earnings or other
comprehensive income depending on the intended use of the derivative instrument.
The Company is currently evaluating this standard, which is effective January 1,
2000.
The Accounting Standards Executive Committee issued Statement of Position
(SOP) 97-3, Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments, in December 1997. This SOP provides guidance for determining when
an entity should recognize a liability for guaranty fund and other insurance-
related assessments. It also provides guidance on how to measure the liability.
This SOP is effective for 1999. The Company's accounting method for guaranty
fund and other insurance related assessments substantially conforms to the
requirements of this SOP.
In March 1998, SOP 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use was issued. This SOP provides guidance
for determining whether costs of software developed or obtained for internal use
should be capitalized or expensed as incurred. In the past, the Company has
expensed all such costs when incurred. This SOP is effective beginning in 1999.
The Company is currently involved in certain technology projects, the costs of
which will be impacted by this SOP. The Company is currently evaluating the
impact and will provide disclosure about such capitalized and/or expensed costs
in the first quarter of 1999.
34
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
Alfa Corporation
Montgomery, Alabama
We have audited the accompanying consolidated balance sheets of Alfa
Corporation and subsidiaries (the Company) as of December 31, 1998 and 1997, and
the related consolidated statements of income, comprehensive income,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1998. 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 1998 and 1997 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Birmingham, Alabama
February 9, 1999
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL INFORMATION -- UNAUDITED
Quarter Ended
-------------------------------------------------------------------------------------------------------
March 31 June 30 September 30 December 31
-------------------------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997 1998 1997
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Premiums and
Policy Charges $97,036,509 $90,484,238 $97,049,291 $92,240,084 $98,732,729 $93,919,207 $99,019,753 $94,321,517
Net Investment Income $15,518,593 $13,999,062 $15,307,378 $13,917,544 $16,243,369 $14,515,423 $15,442,318 $15,096,640
Net Income $16,060,242 $13,054,247 $11,881,575 $13,692,673 $15,124,058 $13,653,270 $13,649,816 $12,393,443
Average Shares Outstanding
- Basic 40,796,961 40,786,712 40,830,127 40,786,712 40,852,332 40,786,712 40,822,140 40,788,042
- Diluted 41,054,230 40,841,571 41,149,299 40,866,226 41,209,050 40,958,386 41,187,366 41,021,963
Net Income Per Share*
- Basic and Diluted $0.39 $0.32 $0.29 $0.34 $0.37 $0.33 $0.33 $ 0.30
</TABLE>
*The sum of the quarters may not equal the annual earnings per share due to the
rounding effects on a quarterly basis.
35
<PAGE>
STOCKHOLDER INFORMATION
Executive Offices
2108 East South Boulevard
Montgomery, Alabama 36116-2015
Telephone: (334)288-3900
FAX: (334)288-0905 or (334)613-4709
Website: www.alfains.com
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 and General Counsel Alfa
Corporation P.O. Box 11000 Montgomery, Alabama 36191-0001
Common Stock
The common stock of Alfa Corporation is traded on the NASDAQ National Market
System under the symbol ALFA. Alfa Corporation has approximately 3,100
stockholders of record. Newspaper listings of NASDAQ stocks list Alfa
Corporation as AlfaCp.
Stock Price and Dividend Information
- ------------------------------------------------------------------------------
1998 High Low Dividends
Per Share
- ------------------------------------------------------------------------------
First Quarter $18 1/2 $16 $.10
Second Quarter 21 1/2 16 3/4 .1125
Third Quarter 23 18 .1125
Fourth Quarter 24 3/8 17 1/2 .1125
- ------------------------------------------------------------------------------
1997 High Low Dividends
Per Share
- ------------------------------------------------------------------------------
First Quarter $13 1/4 $11 1/2 $.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
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 dividends will continue to be paid in the future,
provided that operations of the Company continue to be profitable.
NASDAQ Registered Market Makers
Fox-Pitt, Kelton, Inc.
Goldman, Sachs & Co.
Herzog, Heine, Geduld, Inc.
J.C. Bradford & Co.
Knight Securities L.P.
Mayer & Schweitzer, Inc.
The Robinson-Humphrey Company, Inc.
Sandler O'Neil & Partners
Sherwood Securities Corporation
Spear, Leads & Kellogg
Sterne, Agee & Leach, Inc.
Stock Transfer Agent
The Bank of New York (800)524-4458
Shareholder Services Department
P.O. Box 11258
Church Street Station
New York, New York 10286-1258
- ---------------------------------------
E-mail: [email protected]
Website: http://stock.bankofny.com
Stockholders should also use the following addresses:
To transfer stock ownership-
The Bank of New York
Receive and Deliver Department
P.O. Box 11002
Church Street Station
New York, New York 10286-1002
To replace lost certificates-
The Bank of New York
Lost Securities Department
P.O. Box 11281
Church Street Station
New York, New York 10286-1281
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
Company's Executive Office address or contact The Bank of New York, Dividend
Reinvestment Department, P.O. Box 1958, Newark, New Jersey 07101-9774.
Debt Ratings
Standard Moody's
& Poor's Investors Service
--------------------------------------------
Alfa Corporation--
Commercial Paper A-1+ P-1
Independent Accountants
KPMG PEAT MARWICK LLP
Financial Center
Suite 1200
Birmingham, Alabama 35203
For Financial Information Please Contact:
Donald Price
Senior Vice President, Finance
and Chief Financial Officer
Additional Information Please Contact:
John D. Holley
Vice President, Finance
Annual Meeting
The Annual Meeting of Alfa Corporation stockholders will be held at 10:00 a.m.,
Thursday, April 22, 1999, in the auditorium of the Company's executive offices
in Montgomery.
- ------------------------------------------------------------------------------
36
<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 February 9, 1999, relating to the consolidated
balance sheets of Alfa Corporation and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of income, comprehensive income,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998, and all related schedules, which reports appear
or are incorporated by reference in the December 31, 1998 annual report on Form
10-K of Alfa Corporation.
/s/ KPMG PEAT MARWICK LLP
Birmingham, Alabama
March 30, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1998 OCT-01-1998
<PERIOD-END> DEC-31-1998 DEC-31-1998
<DEBT-HELD-FOR-SALE> 774,346,360 0
<DEBT-CARRYING-VALUE> 1,471,113 0
<DEBT-MARKET-VALUE> 1,560,903 0
<EQUITIES> 103,055,465 0
<MORTGAGE> 404,432 0
<REAL-ESTATE> 1,482,647 0
<TOTAL-INVEST> 1,084,064,247 0
<CASH> 5,948,409 0
<RECOVER-REINSURE> 1,121,089 0
<DEFERRED-ACQUISITION> 114,141,870 0
<TOTAL-ASSETS> 1,246,659,137 0
<POLICY-LOSSES> 548,428,408 0
<UNEARNED-PREMIUMS> 105,464,480 0
<POLICY-OTHER> 9,337,982 0
<POLICY-HOLDER-FUNDS> 6,217,463 0
<NOTES-PAYABLE> 66,804,412 0
0 0
0 0
<COMMON> 41,891,512 0
<OTHER-SE> 381,730,473 0
<TOTAL-LIABILITY-AND-EQUITY> 1,246,659,137 0
391,838,282 99,019,753
<INVESTMENT-INCOME> 62,511,658 15,442,318
<INVESTMENT-GAINS> 4,397,533 498,759
<OTHER-INCOME> 2,238,096 585,816
<BENEFITS> 281,136,725 66,734,513
<UNDERWRITING-AMORTIZATION> 57,821,043 14,172,299
<UNDERWRITING-OTHER> 38,762,883 14,056,876
<INCOME-PRETAX> 83,264,918 20,582,876
<INCOME-TAX> 26,549,227 6,933,142
<INCOME-CONTINUING> 56,715,691 13,649,816
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 56,715,691 13,649,816
<EPS-PRIMARY> 1.39 0.33
<EPS-DILUTED> 1.38 0.33
<RESERVE-OPEN> 134,329,249 0
<PROVISION-CURRENT> 268,530,538 0
<PROVISION-PRIOR> (18,742,920) 0
<PAYMENTS-CURRENT> 189,554,044 0
<PAYMENTS-PRIOR> 53,748,726 0
<RESERVE-CLOSE> 140,843,010 0
<CUMULATIVE-DEFICIENCY> 0 0
</TABLE>
