<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 2000 Commission File Number 0-11773
ALFA CORPORATION
----------------
(Exact name of registrant as specified in its charter)
Delaware 063-0838024
- --------------------------------------------------------------------------------
(State of Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
2108 East South Boulevard, Montgomery, Alabama 36116
(Mail: P. O. Box 11000, Montgomery, Alabama 36191-0001)
- -----------------------------------------------------------
(Address and Zip Code of Principal Executive Offices)
Registrant's Telephone Number
Including Area Code (334) 288-3900
--------------
None
- --------------------------
Former name, former address and former fiscal year if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the close of the period covered by this report.
Class Outstanding March 31, 2000
- ----------------------------- --------------------------
Common Stock, $1.00 par value 39,190,494 shares
<PAGE>
ALFA CORPORATION
INDEX
Page No.
Part I. Financial Information --------
(Condensed Consolidated Unaudited)
Item 1. Financial Statements
Balance Sheets-March 31, 2000 and
December 31, 1999 3
Statements of Income, Three Months
ended March 31, 2000 and 1999 4
Statements of Comprehensive Income, Three Months
ended March 31, 2000 and 1999 5
Statements of Cash Flows, Three Months
ended March 31, 2000 and 1999 6
Notes to Financial Statements 7
Independent Auditors' Report 11
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3.
Market Risk Disclosures 21
Part II. Other Information
Item 6.
Exhibits and Reports on Form 8-K 22
2
<PAGE>
<TABLE>
<CAPTION>
ALFA CORPORATION
CONSOLIDATED CONDENSED
BALANCE SHEETS
March 31, December 31,
2000 1999
-------------------------------
(Unaudited)
<S> <C> <C>
Assets
Investments:
Fixed Maturities Held for Investment, at amortized cost
(market value $1,029,249 in 2000 and $1,079,667 in 1999) $ 981,854 $ 1,030,931
Fixed Maturities Available for Sale, at market value
(amortized cost $904,500,454 in 2000 and $847,589,381 in 1999) 874,651,154 812,871,523
Equity Securities, at market (cost $55,459,134
in 2000 and $53,053,370 in 1999) 121,019,290 113,175,338
Mortgage Loans on Real Estate 291,170 305,079
Investment Real Estate (net of accumulated
depreciation of $1,243,964 in 2000 and
$1,198,489 in 1999) 1,958,930 2,004,405
Policy Loans 43,746,572 42,820,247
Other Long-term Investments 157,168,731 129,629,607
Short-term Investments 33,485,613 53,376,923
----------------------------------------------------------------------------------------------------------------
Total Investments 1,233,303,314 1,155,214,053
Cash 5,994,850 6,649,914
Accrued Investment Income 14,363,448 12,828,094
Accounts Receivable 11,382,921 12,977,124
Reinsurance Balances Receivable 2,850,550 2,152,839
Due from Affiliates 6,004,130 2,199,863
Deferred Policy Acquisition Costs 140,950,326 136,016,688
Other Assets 6,772,553 7,308,110
----------------------------------------------------------------------------------------------------------------
Total Assets $1,421,622,092 $1,335,346,685
================================================================================================================
Liabilities
Policy Liabilities and Accruals - Property and Casualty Insurance $ 143,670,494 $ 143,148,690
Policy Liabilities and Accruals - Life Insurance 482,475,276 458,830,168
Unearned Premiums 119,207,296 114,802,464
Dividends to Policyholders 9,719,762 9,723,114
Premium Deposit and Retirement Deposit Funds 5,558,240 5,758,230
Deferred Income Taxes 29,118,354 24,360,697
Other Liabilities 63,721,896 52,698,161
Due to Affiliates 14,320,624 13,921,769
Commercial Paper 119,779,407 90,289,198
Notes Payable 104,925 105,162
Notes Payable to Affiliates 14,274,023 13,041,571
----------------------------------------------------------------------------------------------------------------
Total Liabilities 1,001,950,297 926,679,224
----------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 3)
Stockholders' Equity
Preferred Stock, $1 par value
Shares authorized: 1,000,000
Issued: None
Common Stock, $1 par value
Shares authorized: 110,000,000
Issued: 41,891,512
Outstanding: 2000 - 39,190,494; 1999 - 39,542,294 41,891,512 41,891,512
Capital in Excess of Par Value 22,835,968 22,820,889
Accumulated Other Comprehensive Income 25,972,595 20,407,812
Retained Earnings 363,125,691 351,923,507
Treasury Stock: at cost (2000-2,701,018 shares; 1999-2,349,218 shares) (34,153,971) (28,376,259)
----------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 419,671,795 408,667,461
----------------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $1,421,622,092 $1,335,346,685
================================================================================================================
The accompanying notes are an integral part of these consolidated condensed unaudited financial statements.
</TABLE>
3
<PAGE>
ALFA CORPORATION
CONSOLIDATED CONDENSED UNAUDITED
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
2000 1999
--------------------------
<S> <C> <C>
Revenues
Premiums - Property and Casualty Insurance $ 91,596,668 $87,704,624
Premiums and Policy Charges - Life Insurance 13,890,228 12,672,446
Net Investment Income 17,131,830 16,394,194
Realized Investment Gains 865,964 5,479,084
Other Income 802,116 573,508
------------------------------------------------------------------------------------------------------------
Total Revenues 124,286,806 122,823,856
------------------------------------------------------------------------------------------------------------
Benefits and Expenses
Benefits & Settlement Expenses 74,124,217 69,825,805
Dividends to Policyholders 972,234 924,151
Amortization of Deferred Policy
Acquisition Costs 15,252,711 14,832,838
Other Operating Expenses 10,874,941 13,646,096
-----------------------------------------------------------------------------------------------------------
Total Expenses 101,224,103 99,228,890
-----------------------------------------------------------------------------------------------------------
Income Before Provision for Income Taxes 23,062,703 23,594,966
Provision for Income Taxes 6,712,528 7,314,389
-----------------------------------------------------------------------------------------------------------
Net Income $ 16,350,175 $16,280,577
===========================================================================================================
Net Income Per Share - Basic $ 0.41 $ 0.40
Net Income Per Share - Diluted $ 0.41 $ 0.40
===========================================================================================================
Operating Income $ 15,787,298 $12,719,172
Operating Income Per Share - Basic $ 0.40 $ 0.31
Operating Income Per Share - Diluted $ 0.40 $ 0.31
===========================================================================================================
Average Shares Outstanding - Basic 39,438,331 40,734,802
Average Shares Outstanding - Diluted 39,640,043 41,052,769
===========================================================================================================
The accompanying notes are an integral part of these consolidated condensed unaudited financial
statements.
</TABLE>
4
<PAGE>
ALFA CORPORATION
CONSOLIDATED CONDENSED UNAUDITED
STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
2000 1999
-------------------------
<S> <C> <C>
Net Income $16,350,175 $16,280,577
Other Comprehensive Income (Loss), net of tax:
Unrealized Investment Gains (Losses) on Securities Available for Sale 6,127,660 (7,802,375)
Less: Realized Investment Gains 562,877 3,561,405
-------------------------
Total Other Comprehensive Income (Loss) 5,564,783 (11,363,780)
-------------------------
Total Comprehensive Income $21,914,958 $ 4,916,797
=========================
The accompanying notes are an integral part of these consolidated condensed unaudited financial
statements.
</TABLE>
5
<PAGE>
ALFA CORPORATION
CONSOLIDATED CONDENSED UNAUDITED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------
2000 1999
-----------------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income $ 16,350,175 $ 16,280,577
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Policy Acquisition Costs Deferred (20,081,864) (17,878,373)
Amortization of Deferred Policy Acquisition Costs 15,252,711 14,832,838
Depreciation and Amortization 225,506 258,994
Provision for Deferred Taxes 615,785 1,674,316
Interest on Policyholders' Funds 4,780,015 4,382,338
Net Realized Investment Gains (865,964) (5,479,084)
Other (295,798) (736,055)
Changes in Operating Assets and Liabilities:
(Increase) in Accrued Investment Income (1,535,354) (836,904)
Decrease in Accounts Receivable 2,356,347 320,481
(Increase) in Reinsurance Balances Receivable (697,711) (390,035)
(Increase) in Amounts Due From Affiliates (3,804,267) (4,049,546)
Increase (Decrease) in Amounts Due to Affiliates 398,855 (318,113)
Decrease in Other Assets 535,557 411,038
Increase in Liability for Policy Reserves 3,087,464 4,535,383
Increase in Liability for Unearned Premiums 4,404,832 2,761,990
(Decrease) in Amounts Held for Others (203,342) (14,089)
Increase in Other Liabilities 9,284,587 13,934,897
-----------------------------
Net Cash Provided by Operating Activities 29,807,534 29,690,653
-----------------------------
Cash Flows From Investing Activities:
Maturities and Redemptions of Fixed Maturities Held for Investment 46,694 105,241
Maturities and Redemptions of Fixed Maturities Available for Sale 14,147,206 26,092,317
Maturities and Redemptions of Other Investments 52,129,870 29,703,968
Sales of Fixed Maturities Available for Sale 6,105,046 493,750
Sales of Other Investments 9,430,860 22,585,569
Purchase of Fixed Maturities Available for Sale (60,649,985) (67,510,352)
Purchase of Other Investments (109,915,269) (68,163,701)
Net Decrease (Increase) in Short-term Investments 19,585,124 (15,064,547)
Net Decrease in Receivable/Payable on Securities 2,070,185 28,576,030
-----------------------------
Net Cash (Used in) Investing Activities (67,050,269) (43,181,725)
-----------------------------
Cash Flows From Financing Activities:
Increase in Commercial Paper 29,490,209 10,914,006
(Decrease) in Notes Payable (237) (1,063)
Increase (Decrease) in Notes Payable to Affiliates 1,232,452 (277,424)
Stockholder Dividends Paid (4,742,927) (4,602,255)
Purchase of Treasury Stock (5,786,486) (10,746,066)
Proceeds from Exercise of Stock Options 21,150 267,900
Deposits of Policyholders' Funds 27,684,375 26,909,937
Withdrawal of Policyholders' Funds (11,310,865) (10,294,376)
-----------------------------
Net Cash Provided by Financing Activities 36,587,671 12,170,659
-----------------------------
Net Decrease in Cash (655,064) (1,320,413)
Cash - Beginning of Period 6,649,914 5,948,409
-----------------------------
Cash - End of Period $ 5,994,850 $ 4,627,996
=============================
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Year for:
Interest $ 2,264,876 $ 728,113
Income Taxes $ 0 $ 0
The accompanying notes are an integral part of these consolidated condensed unaudited financial statements.
</TABLE>
6
<PAGE>
ALFA CORPORATION
NOTES TO CONSOLIDATED CONDENSED UNAUDITED FINANCIAL STATEMENTS
March 31, 2000
1. Significant Accounting Policies
-------------------------------
In the opinion of the Company, the accompanying consolidated condensed
unaudited financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly its financial position,
results of operations and cash flows. The accompanying financial statements
have been prepared on the basis of generally accepted accounting principles. A
summary of the more significant accounting policies related to the Company's
business is set forth in the notes to its audited consolidated financial
statements for the fiscal year ended December 31, 1999. The results of
operations for the three month period ended March 31, 2000 are not necessarily
indicative of the results to be expected for the full year. For purposes of
this report, the Company has defined operating income as income excluding net
realized investment gains. Certain reclassifications have been made to conform
previous classifications to March 31, 2000 classifications and descriptions.
2. Pooling Agreement
-----------------
Effective August 1, 1987, the Company entered into a property and casualty
insurance Pooling Agreement (the "Pooling Agreement") with Alfa Mutual Insurance
Company (Mutual), and other members of the Mutual Group. The Mutual Group is a
direct writer primarily of personal lines of property and casualty insurance in
Alabama. The Company's subsidiaries similarly are direct writers in Georgia and
Mississippi. Both the Mutual Group and the Company write preferred risk
automobile, homeowner, farmowner and mobile home insurance, fire and allied
lines, standard risk automobile and homeowner insurance, and a limited amount of
commercial insurance, including church, and businessowner insurance. Under the
terms of the Pooling Agreement, the Company cedes to Mutual all of its property
and casualty business. All of the Mutual Group's direct property and casualty
business (together with the property and casualty business ceded by the
Company) is included in the pool. Until September 30, 1994, Mutual retroceded
50% of the pooled premiums, losses, loss adjustment expenses and other
underwriting expenses to the Company while retaining 50% of these amounts
itself. On October 1, 1994, the Company increased its participation in the
Pooling Agreement. Mutual currently retrocedes 65% of the pool to the Company
and retains 35% within the Mutual Group. On October 1, 1996, the Pooling
Agreement was amended in conjunction with the restructuring of the Alfa
Insurance Group's catastrophe protection program. Effective November 1, 1996,
the allocation of catastrophe costs among the members of the pool was changed to
better reflect the economics of catastrophe finance. The amendment limits Alfa
Corporation's participation in any single catastrophic event or series of
disasters to its pool share (65%) of $10 million unless the loss exceeds $249
million on a 100% basis in which case the Company's share in the loss would be
based upon its amount of surplus relative to the other members of the group.
Currently, the Company's share of losses exceeding $249 million would be 13%.
Effective July 1, 1999, due to increases in insured property risks, an amendment
was made increasing Alfa Corporation's participation limits from its pool share
of the $10 million level to $11 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.
7
<PAGE>
(Note 2. Continued)
The following table sets forth the premiums and losses ceded to and assumed
from the pool for the three month periods ended March 31, 2000 and 1999:
Three Months Ended March 31,
----------------------------
2000 1999
------- -------
(in thousands)
Premiums ceded to pool $15,538 $14,424
Premiums assumed from pool $91,925 $88,011
Losses ceded to pool $10,869 $10,211
Losses assumed from pool $58,696 $54,620
The Company incurred $2.5 million in storm losses in the first three months
of 2000. No storm losses were incurred during the same period of 1999.
3. Contingent Liabilities
----------------------
The property and casualty subsidiaries have entered into the reinsurance
pooling agreement with Alfa Mutual Insurance Company and its affiliates as
discussed in Note 2. Should any member of the affiliated group be unable to meet
its obligation on a claim for a policy written by the Company's property and
casualty subsidiaries, the obligation to pay the claim would remain with the
Company's subsidiaries.
The liability for estimated unpaid property and casualty losses and loss
adjustment expenses is based upon an evaluation of reported losses and on
estimates of incurred but not reported losses. Adjustments to the liability
based upon subsequent developments are included in current operations.
Thus far, in 2000, the Company has experienced no interruption in its
ability to process its business and pay its claims on a timely basis and
believes all its mission critical systems are year 2000 compliant. The Company
developed a contingency plan to allow it to conduct its business should either
limited or extensive adverse conditions have occurred from year 2000 issues and
will continue to be able to utilize such a plan should any unforeseen
circumstances arise. The resources utilized to address year 2000 issues caused
some normal operational enhancements and systems development to be deferred or
delayed. However, any systems maintenance or statutory required updates were
performed on a timely basis.
Certain legal proceedings are in process at March 31, 2000. Costs for
these and similar legal proceedings, including accruals for outstanding cases,
totaled approximately $203,000 in the first quarter of 2000, $6.5 million in
1999, $5.2 million in 1998 and $3.6 million in 1997. These proceedings involve
alleged breaches of contract, torts, including bad faith and fraud claims, and
miscellaneous other causes of action. These lawsuits involve claims for mental
anguish and punitive damages. Approximately 16 legal proceedings against Alfa
Life Insurance Corporation are in process at March 31, 2000. Of the 16
proceedings, 12 were filed in 1999, 1 was filed in 1998, 2 were filed in 1997
and 1 was filed in 1996. Three of the legal proceedings were filed as purported
class action lawsuits, but at present, no class has been certified. In
addition, one purported class action lawsuit is pending against Alfa Financial
Corporation, and one purported class action lawsuit is pending against Alfa
Builders and Alfa Mutual Fire Insurance Company. Additionally, eight purported
class action lawsuits are pending against the property and casualty mutual
companies involving a number of issues and allegations, which could affect Alfa
Corporation because of a pooling agreement between the companies. No
8
<PAGE>
(Note 3. Continued)
class has been certified in any of these purported class action cases. It should
be noted that in Alabama, where the company has substantial business, the
likelihood of a judgement in any given suit, including a large mental anguish
and/or punitive damage award by a jury, bearing little or no relation to actual
damages, continues to exist, creating the potential for unpredictable material
adverse financial results.
4. Segment Information
-------------------
The following table sets forth the components of property and casualty
insurance earned premiums, net underwriting income, GAAP basis loss, expense and
combined ratios, underwriting margin, net investment income and operating income
for the three months ended March 31, 2000 and 1999:
Three Months Ended
March 31,
-------------------------------
2000 1999 % Change
-------------------------------
(in thousands)
Earned Premiums
Personal lines $87,607 $83,894 4%
Commercial lines 3,325 3,126 6%
Pools, associations and fees 993 991 0%
Reinsurance ceded (328) (306) 7%
-------------------------------
Total $91,597 $87,705 4%
===============================
Net underwriting income $ 9,443 $ 6,529 45%
===============================
Loss ratio 62.8% 61.8%
LAE ratio 4.9% 5.5%
Expense ratio 22.0% 25.2%
--------------------
GAAP basis combined ratio 89.7% 92.6%
====================
Underwriting margin 10.3% 7.4%
====================
Net investment income $ 6,984 $ 6,509 7%
===============================
Pre-tax operating income $16,497 $12,969 27%
===============================
Operating income, net of tax $11,946 $ 9,516 26%
===============================
9
<PAGE>
(Note 4. Continued)
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 three months ended March 31, 2000 and 1999:
Three Months Ended
March 31,
---------------------------
2000 1999 % Change
---------------------------
(in thousands)
Premiums and policy charges
Universal life policy charges $ 3,593 $ 3,224 11%
Universal life policy charges - COLI 1,184 1,156 2%
Interest sensitive life policy charges 2,502 2,487 1%
Traditional life insurance premiums 6,409 5,596 15%
Group life insurance premiums 202 209 (3%)
---------------------------
Total $13,890 $12,672 10%
===========================
Net investment income $ 9,956 $ 9,096 9%
===========================
Benefits and expenses $15,843 $16,758 (5%)
===========================
Pretax operating income $ 6,186 $ 3,323 86%
===========================
Operating income, net of tax $ 4,487 $ 2,418 86%
===========================
5. Acquisition of Commercial Lease Portfolio
-----------------------------------------
During the first quarter of 2000, the Company signed a definitive agreement
and completed the transaction to acquire the leasing portfolio and assets of OFC
Capital, an Atlanta-based business unit of First Liberty Bank, that provides
financing for commercial equipment leases. The transaction involved a cash
purchase price of approximately $23.1 million, which is primarily for the
portfolio of leases. OFC will operate as a business unit of Alfa Financial
Corporation, a subsidiary of the Company.
6. 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, as
amended by SFAS No. 137, is effective for the Company January 1, 2001.
10
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
Alfa Corporation:
We have reviewed the consolidated condensed balance sheet of Alfa Corporation
and subsidiaries as of March 31, 2000, and the related consolidated condensed
statements of income, comprehensive income and cash flows for the three-month
periods ended March 31, 2000 and 1999. These consolidated condensed financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated condensed financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the accompanying consolidated balance sheet of Alfa Corporation and
subsidiaries as of December 31, 1999, and the related consolidated statements of
income, stockholders' equity, cash flows and comprehensive income for the year
then ended (not presented herein); and in our report dated February 3, 2000, we
expressed an unqualified opinion on those consolidated financial statements.
KPMG LLP
May 11, 2000
Birmingham, Alabama
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
- ---------------------
The following table sets forth consolidated summarized income statement
information for the three months ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------------------------
2000 1999 % Change
----------------------------------------------
<S> <C> <C> <C>
(in thousands except share and per share data)
Revenues
Property and casualty insurance premiums $ 91,597 $ 87,705 4%
Life insurance premiums and policy charges 13,890 12,672 10%
--------------------------------------------
Total premiums and policy charges $105,487 $100,377 5%
============================================
Net investment income $ 17,132 $ 16,394 4%
============================================
Total revenues $124,287 $122,824 1%
============================================
Net Income
Property and casualty insurance $ 11,946 $ 9,516 26%
Life insurance 4,487 2,418 86%
---------------------------------------------
Total insurance operations 16,433 11,934 38%
Noninsurance operations 581 822 (29%)
Net realized investment gains 563 3,561 (84%)
Corporate expenses (1,227) (36) (3308%)
---------------------------------------------
Net income $ 16,350 $ 16,281 0%
============================================
Net income per share - Basic $ 0.41 $ 0.40 4%
============================================
Net income per share - Diluted $ 0.41 $ 0.40 4%
============================================
Weighted average shares outstanding - Basic 39,438,331 40,734,802
========== ==========
Weighted average shares outstanding - Diluted 39,640,043 41,052,769
========== ==========
</TABLE>
Total premiums and policy charges increased 5% in the first three months of
2000 as a result of increased production in both property casualty and life
business and continued good persistency. Net investment income increased 4% in
the first three months of 2000 while invested assets have grown 6.8% in the
three months since December 31, 1999 resulting from positive cash flows.
Operating income increased by 26% in the property casualty subsidiaries due
primarily to a continuation of increased underwriting profits. The 86% increase
in income in the life subsidiary is due to both improved
12
<PAGE>
operating results for the quarter and to a reduction in expenses incurred
related to a significant level of non-recurring legal, technology and
administrative costs in the first three months of 1999. Noninsurance operations
were down 29% due primarily to a reduction in fees related to premium financing.
Such fees have been reduced in the finance subsidiary and reclassed to the
Group's property casualty subsidiaries. The overall impact of this reclass is
insignificant to the Company's earnings. The decline in the finance subsidiary's
earnings were partially offset by favorable results from the construction
subsidiary which produced increased earnings from improved performances in both
the residential and commercial sectors.
The Company's net income was negatively impacted by a significant decrease
in realized investment gains. Corporate expenses increased in the first quarter
of 2000 due to increased interest expense on corporate-related debt used to fund
the Company's stock repurchase program and were impacted by a shift in certain
legal reserves at the corporate level in the first quarter of 1999.
PROPERTY AND CASUALTY INSURANCE OPERATIONS
- ------------------------------------------
The following table sets forth the components of property and casualty
insurance earned premiums, net underwriting income, GAAP basis loss, expense and
combined ratios, underwriting margin, net investment income and operating income
for the three months ended March 31, 2000 and 1999:
Three Months Ended
March 31,
------------------------------
2000 1999 % Change
------------------------------
(in thousands)
Earned Premiums
Personal lines $87,607 $83,894 4%
Commercial lines 3,325 3,126 6%
Pools, associations and fees 993 991 0%
Reinsurance ceded (328) (306) 7%
------------------------------
Total $91,597 $87,705 4%
==============================
Net underwriting income $ 9,443 $ 6,529 45%
==============================
Loss ratio 62.8% 61.8%
LAE ratio 4.9% 5.5%
Expense ratio 22.0% 25.2%
--------------------
GAAP basis combined ratio 89.7% 92.6%
====================
Underwriting margin 10.3% 7.4%
====================
Net investment income $ 6,984 $ 6,509 7%
==============================
Pre-tax operating income $16,497 $12,969 27%
==============================
Operating income, net of tax $11,946 $ 9,516 26%
==============================
13
<PAGE>
Earned premiums increased 4.4% in the first three months of 2000 due to
increased production in the automobile line and improved homeowner premiums from
continued production and good persistency.
The Company's underwriting results continued to be favorable due in part to
a continued good loss ratio in the automobile line of 59% compared to 61% in
the first three months of 1999. The overall loss ratio increased slightly to
62.8% due to $2.5 million of storm losses in the first quarter of 2000. No
storm losses were incurred in the same period of 1999. The other factor in the
improved underwriting results was a reduction in expenses from 1999 levels which
had been impacted by increased costs related to technology, litigation and
administrative expenses associated with the retirement of two executives.
Net investment income increased 7.3% in the first three months of 2000 in
the property casualty subsidiaries due to continued positive cash flow from
profitable underwriting results which increased invested assets 5.7% since March
31, 1999.
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 three months ended March 31, 2000 and 1999:
Three Months Ended
March 31,
----------------------------
2000 1999 % Change
----------------------------
(in thousands)
Premiums and policy charges
Universal life policy charges $ 3,593 $ 3,224 11%
Universal life policy charges - COLI 1,184 1,156 2%
Interest sensitive life policy charges 2,502 2,487 1%
Traditional life insurance premiums 6,409 5,596 15%
Group life insurance premiums 202 209 (3%)
----------------------------
Total $13,890 $12,672 10%
============================
Net investment income $ 9,956 $ 9,096 9%
============================
Benefits and expenses $15,843 $16,758 (5%)
============================
Pretax operating income $ 6,186 $ 3,323 86%
============================
Operating income, net of tax $ 4,487 $ 2,418 86%
============================
The Company's life insurance premiums and policy charges increased 10% in
the first three months of 2000 due to new business and good persistency. First
year collected premiums have increased over 19% in the first quarter of 2000 due
to a continuation of increases in sales of term products and from increased
sales of universal life policies following the introduction of a new universal
life product in January 2000. Total new annualized premium increased 14.3% in
the first quarter of 2000 and 5.6% in all of 1999.
14
<PAGE>
Life insurance operating income increased approximately 86% in the first
three months of 2000. This increase was the result of continuing increases in
production, good persistency and a reduction in legal expenses and policy
reserves related to the Company's decision in the first quarter of 1999 to
adjust the values and related reserves of certain whole life policies sold more
than 10 years ago. Partially offsetting these expense reductions was an
increase in death claims of approximately $1.1 million. The mortality ratio of
actual to expected death claims increased to 110% in the first three months of
2000 from 85% in the first quarter of 1999. As a result of the increase in
earnings, positive cash flows resulted in a 5.1% increase in invested assets
which increased investment income approximately 9%.
NONINSURANCE OPERATIONS
- -----------------------
Noninsurance operations were down 29% due primarily to a reduction in fees
associated with premium financing. These fees have been reduced in the finance
subsidiary and reclassed to the Group's property casualty subsidiaries. The
overall impact of this reclass is insignificant to the Company's earnings.
Partially offsetting the finance subsidiary's decline in earnings were favorable
results from the construction subsidiary which increased net income 123% to
approximately $212,000. The real estate sales subsidiary had a net loss of
approximately $11,000 due primarily to increased legal expenses in the first
quarter.
CORPORATE
- ---------
Interest expense on corporate debt is the primary corporate expense
incurred. Interest expense in the first three months of 2000 was approximately
$945,000 compared to approximately $443,000 for the similar period in 1999. The
increase in interest expense is due to the increase in the average balance
outstanding and the increase in interest rates. Increased corporate borrowings
have been used to repurchase shares of the Company's stock and to cover general
operating expenses which may fluctuate from time to time. The increase in other
corporate expenses in the first three months is due to the allocation of
$1,500,000 of certain legal expenses to its subsidiaries in 1999.
15
<PAGE>
INVESTMENTS
- -----------
The Company has historically produced positive cash flow from operations
which has resulted in increasing amounts of funds available for investment and,
consequently, higher investment income. Investment income is also affected by
yield rates. Information about cash flows, invested assets and yield rates is
presented below for the three months ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
2000 1999
------------------
<S> <C> <C>
Increase in invested assets since January 1, 2000 and 1999 6.8% 4.3%
Investment yield rate (annualized) 6.6% 6.8%
Increase in net investment income since March 31, 1999 and 1998 4.5% 5.6%
</TABLE>
The marginal increase in positive cash flow from operations is due
primarily to continued profitable operating results in the Company's property
and casualty subsidiaries, which had $9.4 million in underwriting income in the
first quarter of 2000. The premium from the COLI plan in the life insurance
subsidiary is collected in February and has provided positive cash flow in the
first quarter of both periods. Increases in cash resulting from increased
commercial paper borrowings were primarily used to purchase the lease portfolio
of OFC Capital, a division of the finance subsidiary, and to fund the Company's
stock repurchase program. As a result of the overall positive cash flows from
operations, invested assets grew 6.8% since January 1, 2000 and 9.1% since March
31, 1999 (based on amortized cost, which excludes the impact of SFAS 115), and
net investment income increased 4.5%. The overall yield rate, calculated using
amortized cost, has declined slightly to 6.6%. The Company had net realized
investment gains of approximately $900,000 in the first three months of 2000 and
$5.5 million in the similar period in 1999. These net gains are primarily from
sales of equity securities. Such realized gains are the result of market
conditions and therefore can fluctuate from period to period.
The composition of the Company's investment portfolio is as follows at
March 31, 2000 and December 31, 1999:
March 31, December 31,
2000 1999
-------------------------
Fixed maturities
Taxable
Mortgage backed (CMO's) 25.8% 26.6%
Corporate bonds 30.1 28.2
-------------------------
Total taxable 55.9 54.8
Tax exempts 15.2 15.7
-------------------------
Total fixed maturities 71.1 70.5
-------------------------
Equity securities 9.8 9.8
Mortgage loans - -
Real estate 0.2 0.2
Policy loans 3.5 3.7
Other long term investments 12.7 11.2
Short term investments 2.7 4.6
-------------------------
100.0% 100.0%
=========================
16
<PAGE>
The majority of the Company's investment portfolio consists of fixed
maturities which are diverse as to both industry and geographic concentration.
Since year-end, the overall mix of investments has remained relatively stable
with changes due to a shift from short term investments to fixed maturities and
to market value fluctuations in fixed maturities.
The rating of the Company's portfolio of fixed maturities using the
Standard & Poor's rating categories is as follows at March 31, 2000 and December
31, 1999:
March 31, December 31,
2000 1999
------------------------
RATING
------
AAA to A- 91.2% 89.8%
BBB+ to BBB- 8.1 9.2
BB+ and Below (Below investment grade) 0.7 1.0
------------------------
100.0% 100.0%
------------------------
One hundred percent of the fixed maturity portfolio was rated by an outside
rating service. No securities were rated by Company management. The Company
considers bonds with a quality rating of BB+ and below to be below investment
grade or high yield bonds (also called junk bonds).
At March 31, 2000, approximately 36.3% of fixed maturities were mortgage-
backed securities. Such securities are comprised of Collateralized Mortgage
Obligations (CMO's) and pass through securities. Based on reviews of the
Company's portfolio of mortgage-backed securities, the impact of prepayment
risk on the Company's financial position is not believed to be significant. At
March 31, 2000 the Company's total portfolio of fixed maturities had gross
unrealized gains of $10,310,544 and gross unrealized losses of $40,112,449.
Securities are priced by nationally recognized pricing services or by
broker/dealer securities firms. No securities were priced by the Company.
During the first three months of 2000, the Company sold approximately $6.1
million in fixed maturities available for sale. These sales resulted in gross
realized losses of $346,816. During the first three months of 1999 the Company
sold approximately $494,000 in fixed maturities available for sale. These sales
resulted in gross realized losses of $128,828.
The Company monitors its level of investments in high yield fixed
maturities and equity investments held in issuers of high yield debt securities.
Management believes the level of such investments is not significant to the
Company's financial condition. At March 31, 2000, the Company had unrealized
gains of approximately $4.6 million in such investments.
In the first three months of 2000, the Company did not write down any equity
securities. At March 31, 2000 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 and the lease portfolio
purchased during the first quarter of 2000. These loans and leases are
collateralized by automobiles, equipment and other property. At March 31, 2000
the delinquency
17
<PAGE>
ratio on the portfolio was 1.60%, down from 1.79% at December 31, 1999. Credit
losses of $177,000 were incurred in the first quarter of 2000 including an
increase of approximately $19,000 in general reserves attributable to growth of
the consumer loan portfolio. At March 31, 2000, the Company maintained an
allowance for loan losses of $657,241 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.
INCOME TAXES
- ------------
The effective tax rate in the first three months of 2000 was 29.1% compared
to 29.9% for the full year 1999 and 31.0% for the first three months of 1999.
The decrease in the effective tax rate in the first three months of 2000 is due
primarily to the relative mix of taxable versus tax-exempt income. The
effective rate has also been impacted by increased tax preference credits on
certain investments.
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
- --------------------------------
The Company 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.
The Company's subsidiaries require cash in order to fund policy acquisition
costs, claims, other policy benefits, interest expense, general operating
expenses, and dividends to the Company. 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.
18
<PAGE>
On October 25, 1993, the Company established a Stock Inventive 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 table summarizes the stock option activity of the Company's plan.
<TABLE>
<CAPTION>
Cumulative through March 31, 2000
----------------------------------------------
Options Options Options
Cancelled Exercised Exercisable
----------------------------------------------
<S> <C> <C> <C> <C>
Options Authorized 2,000,000
---------
Options Granted During
October 1993 783,400 59,000 140,650 583,750
March 1994 80,000 7,500 72,500
March 1995 80,000 7,500 72,500
April 1996 80,000 1,667 4,999 73,334
February 1997 75,000 4,000 8,833 62,167
March 1998 452,500 10,500 100 294,955
April 1999 167,500
October 1999 8,000
--------- --------------------------------------
Less: Total Options Granted 1,726,400 75,167 169,582 1,159,206
======================================
Add: Options Cancelled 75,167
---------
Available for Grant under
Plan at March 31, 2000 348,767
=========
</TABLE>
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. In March
1999, the Board increased the number of shares authorized for repurchase by
2,000,000. During the first three months of 2000 the Company repurchased
353,600 shares at a cost of $5,786,486. At March 31, 2000 the total
repurchased was 2,862,600 shares at a cost of $34,993,933. The Company has
reissued 169,582 treasury shares as a result of option exercises.
Total borrowings increased $30.7 million in the first three months of 2000
to $134.2 million. At March 31, 2000 the Company had approximately $119.8
million in commercial paper at rates ranging from 5.92% to 6.17% with maturities
ranging from April 3, 2000 to April 20, 2000. The Company intends to continue
to use the commercial paper program to fund the consumer loan portfolio,
commercial lease portfolio and other corporate short term needs. Backup lines
of credit are in place up to $135 million. The Company has an A-1+, P-1
commercial paper rating from Standard & Poor's and Moody's Investors Service.
The commercial paper is guaranteed by an affiliate, Alfa Mutual Insurance
Company. In addition, the Company had $14.3 million in short-term debt
outstanding to affiliates at March 31, 2000 with interest equal to commercial
paper rates payable monthly and $104,925 outstanding in other short-term debt at
a rate of 7.0%.
19
<PAGE>
Cash surrenders paid to policyholders on a statutory basis totaled $4.1
million in the first three months of 2000 and $3.3 million for the first three
months of 1999. This level of surrenders is within the Company's pricing
expectations. Historical persistency rates indicate a normal pattern of
surrender activity. The structure of the surrender charges is such that
persistency is encouraged. The majority of the policies in force have surrender
charges which grade downward over a 12 to 15 year period. In addition, the
majority of the in-force business is interest sensitive type policies which
generally have lower rates of surrender. At March 31, 2000 the total amount of
cash that would be required to fund all amounts subject to surrender was
approximately $376.3 million.
The Company's business is concentrated geographically in Alabama, Georgia
and Mississippi. Accordingly, unusually severe storms or other disasters in
these contiguous states might have a more significant effect on the Company than
on a more geographically diversified insurance company. Unusually severe
storms, other natural disasters and other events could have an adverse impact on
the Company's financial condition and operating results. However, the Company's
current catastrophe protection program, which began November 1, 1996, reduced
the earnings volatility caused by such catastrophe exposures.
Increasing public interest in the availability and affordability of
insurance has prompted legislative, regulatory and judicial activity in several
states. This includes efforts to contain insurance prices, restrict
underwriting practices and risk classifications, mandate rate reductions and
refunds, eliminate or reduce exemptions from antitrust laws and generally expand
regulation. Because of Alabama's low automobile rates as compared to rates in
most other states, the Company does not expect the type of punitive legislation
and initiatives found in some states to be a factor in its primary market in the
immediate future. During the second quarter of 1999, the Alabama legislature
passed a tort reform package that should help to curb some of the excessive
litigation experienced in recent years. In addition, a mandatory insurance bill
was passed to require motorists to obtain insurance coverage beginning in June
2000. Such a requirement could affect both the revenues and losses incurred by
the Company in the future. Although the full extent or impact is not possible
to predict, the Company believes any impact on future results will not be
significant.
YEAR 2000
- ---------
Thus far, in 2000, the Company has experienced no interruption in its
ability to process its business and pay its claims on a timely basis and
believes all its mission critical systems are year 2000 compliant. The Company
developed a contingency plan to allow it to conduct its business should either
limited or extensive adverse conditions have occurred from year 2000 issues and
will continue to be able to utilize such a plan should any unforeseen
circumstances arise. The resources utilized to address year 2000 issues caused
some normal operational enhancements and systems development to be deferred or
delayed. However, any systems maintenance or statutory required updates were
performed on a timely basis.
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
20
<PAGE>
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, as amended by SFAS No. 137, is effective for the Company
January 1, 2001.
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,
technological changes, political and legal contingencies 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. 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.
Item 3.
- -------
MARKET RISK DISCLOSURES
-----------------------
The Company's Annual Report filed on Form 10-K with the Securities and
Exchange Commission includes quantitative and qualitative market risk disclosure
information. Since December 31, 1999, there have been no significant changes in
these disclosures.
21
<PAGE>
PART II. OTHER INFORMATION
Item 6.
- -------
EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
None.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALFA CORPORATION
Date 5/11/00 By: /s/ Jerry A. Newby
------------------- --------------------------------
Jerry A. Newby
President
Date 5/11/00 By: /s/ Donald Price
------------------- --------------------------------
Donald Price
Senior Vice President, Finance
(Chief Financial Officer)
Date 5/11/00 By: /s/ John Holley
------------------- --------------------------------
John Holley
Vice President, Finance
(Chief Accounting Officer)
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<DEBT-HELD-FOR-SALE> 874,651,154
<DEBT-CARRYING-VALUE> 981,854
<DEBT-MARKET-VALUE> 1,029,249
<EQUITIES> 121,019,290
<MORTGAGE> 291,170
<REAL-ESTATE> 1,958,930
<TOTAL-INVEST> 1,233,303,314
<CASH> 5,994,850
<RECOVER-REINSURE> 2,850,550
<DEFERRED-ACQUISITION> 140,950,326
<TOTAL-ASSETS> 1,421,622,092
<POLICY-LOSSES> 626,145,770
<UNEARNED-PREMIUMS> 119,207,296
<POLICY-OTHER> 9,719,762
<POLICY-HOLDER-FUNDS> 5,558,240
<NOTES-PAYABLE> 134,158,355
0
0
<COMMON> 41,891,512
<OTHER-SE> 377,780,283
<TOTAL-LIABILITY-AND-EQUITY> 1,421,622,092
105,486,896
<INVESTMENT-INCOME> 17,131,830
<INVESTMENT-GAINS> 865,964
<OTHER-INCOME> 802,116
<BENEFITS> 75,096,451
<UNDERWRITING-AMORTIZATION> 15,252,711
<UNDERWRITING-OTHER> 10,874,941
<INCOME-PRETAX> 23,062,703
<INCOME-TAX> 6,712,528
<INCOME-CONTINUING> 16,350,175
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,350,175
<EPS-BASIC> .41
<EPS-DILUTED> .41
<RESERVE-OPEN> 146,439,100
<PROVISION-CURRENT> 70,941,859
<PROVISION-PRIOR> (4,699,524)
<PAYMENTS-CURRENT> 48,667,203
<PAYMENTS-PRIOR> 17,011,649
<RESERVE-CLOSE> 147,724,921
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
