<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, 1999 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 29, 2000, was $316,161,459.
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, 1999
- ------------------- -----------------------------
Common Stock, $1.00 par value 39,542,294 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's annual report to security holders for the fiscal year
ended December 31, 1999, and proxy statement for the annual meeting of
stockholders to be held April 27, 2000, 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), Alfa
Realty, Inc. (Realty) and Alfa Benefits Corporation (ABC), which are engaged in
consumer financing, leasing, real estate investments, residential and commercial
construction, real estate sales and benefit services for the Alfa Group.
Alfa Corporation is affiliated with the Alfa Mutual Insurance Companies
(the Mutual Group), which collectively own 50.9% 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 83.2% of the Company's property and casualty premium
income and 73.3% of its total premium income for 1999 was derived from the
Company's participation with the Mutual Group in a Pooling Agreement. Effective
August 1, 1987, the Company property and casualty subsidiaries 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. 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 limited 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 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.
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<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.
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<PAGE>
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 noninsurance 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 of the Company's
annual report to security holders for the year ended December 31, 1999 as
included in Exhibit 13. Presented below is summarized financial information for
the Company's four business segments as of and for the years ended December 31,
1999, 1998 and 1997:
Years Ended December 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
(in thousands, except share and per share data)
Premiums and other revenues
Property and casualty
insurance ..................... $ 388,495 $ 374,416 $ 356,834
Life insurance ................. 88,883 82,859 73,224
Noninsurance operations ........ 7,917 6,012 6,362
Corporate ...................... (2,752) (1,804) (1,819)
--------- --------- ---------
Premiums and revenues
before eliminations ........... $ 482,543 $ 461,483 $ 434,601
Eliminations ................... (282) (497) (591)
--------- --------- ---------
Total premiums and
other revenues ............... $ 482,261 $ 460,986 $ 434,010
========= ========= =========
Net income
Insurance operations
Property and casualty
insurance ................ $ 49,492 $ 41,581 $ 36,571
Life insurance .............. 11,597 15,645 14,580
--------- --------- ---------
Total income ................... $ 61,089 $ 57,226 $ 51,151
Noninsurance operations ........ 3,092 2,192 2,628
Net realized
investment gains ............ 3,289 2,858 2,182
Corporate expenses ............. (2,913) (5,560) (3,167)
--------- --------- ---------
Net income .................. $ 64,557 $ 56,716 $ 52,794
========= ========= =========
Net income per share
Basic ..................... $ 1.61 $ 1.39 $ 1.29
========= ========= =========
Diluted ................... $ 1.60 $ 1.38 $ 1.29
========= ========= ==========
Weighted average shares
outstanding-Basic ........... 39,980,880 40,834,232 40,787,047
========= ========= ==========
-Diluted ................ 40,235,690 41,148,258 40,930,894
========= ========= ==========
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<PAGE>
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.
The following table shows the Company's premium distribution by product in
property and casualty insurance for 1999:
Automobile 64.9%
Homeowner 19.4%
Farmowner 5.5%
Commercial 4.8%
Manufactured Home 3.3%
Other 2.1%
------
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, 1999, 1998 and 1997:
Years Ended December 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
(in thousands)
Earned premiums
Personal lines ................ $ 341,248 $ 330,511 $ 315,650
Commercial lines .............. 13,044 12,354 11,772
Pools, associations
and fees ..................... 3,908 4,036 4,014
Reinsurance ceded ............. (1,230) (1,161) (1,130)
--------- --------- ---------
Total ....................... $ 356,970 $ 345,740 $ 330,306
========= ========= =========
Net underwriting income ........ $ 41,040 $ 33,183 $ 28,061
========= ========= =========
Loss ratio ..................... 60.2% 62.8% 65.0%
LAE ratio ...................... 4.8% 5.0% 5.0%
Expense ratio .................. 23.5% 22.6% 21.5%
--------- --------- ---------
GAAP basis combined ratio ...... 88.5% 90.4% 91.5%
========= ========= =========
Underwriting margin ............ 11.5% 9.6% 8.5%
========= ========= =========
Net investment income .......... $ 27,601 $ 25,992 $ 23,935
========= ========= =========
Operating income before tax .... $ 70,064 $ 59,156 $ 51,955
========= ========= =========
Operating income, net of tax ... $ 49,492 $ 41,581 $ 36,571
========= ========= =========
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
I-4
<PAGE>
weather. In the wake of Hurricanes Opal and Erin, Alfa initiated intense studies
of its catastrophe management strategy. Effective November 1, 1996, Alfa
restructured the catastrophe program and amended the intercompany pooling
agreement to allocate catastrophe losses among the members of the pool in a
fashion that more equitably reflects the realities of catastrophe finance. As a
result, Alfa Corporation's share of the Alfa Group's storm-related losses has
been substantially reduced, thus providing much greater earnings stability and
growth potential. The lower exposure also means a substantial reduction in
reinsurance costs. No catastrophe losses were incurred in either 1999 or 1997.
Alfa Group pooled catastrophe losses for 1998 totaled $45 million. The Company's
share of such losses totaled $6.5 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, 1999, Life had in excess of $12.0 billion of life
insurance in force. As of December 31, for each year indicated the Company had
insurance in force as follows:
1999 1998 1997
----------- ----------- -----------
(in thousands)
Ordinary life ............ $11,970,328 $10,955,347 $10,201,001
Credit life .............. $ 6,853 $ 6,990 $ 8,296
Group life ............... $ 38,354 $ 37,712 $ 37,103
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, 1999, 1998 and 1997:
Years Ended December 31,
------------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
Premiums and policy charges
Universal life policy charges ............... $ 13,607 $ 12,381 $ 11,296
Universal life policy charges- COLI ......... 2,234 2,133 1,858
Interest sensitive life policy charges ...... 9,518 9,727 9,306
Traditional life insurance premiums ......... 22,678 21,494 19,958
Group life insurance premiums ............... 323 364 (1,759)
-------- -------- --------
Total ..................................... $ 48,360 $ 46,099 $ 40,659
======== ======== ========
Net investment income ........................ $ 37,873 $ 34,890 $ 31,646
======== ======== ========
Benefits and expenses ........................ $ 64,286 $ 52,980 $ 45,041
======== ======== ========
Operating income before tax .................. $ 15,200 $ 21,988 $ 20,750
======== ======== ========
Operating income, net of tax ................. $ 11,597 $ 15,645 $ 14,580
======== ======== ========
A discussion of the Company's operating results shown above is included on
page 5 of Exhibit 13 representing page 14 of the Company's annual report to
security holders for the year ended December 31, 1999.
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. Such investments include 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 $410.3 million to over $1.1 billion at
the end of 1999, a compound annual growth rate of 10.9%. During that same period
investment income has more than doubled, growing from $30.0 million to over
$67.8 million. At year-end, the value of unrealized gains in Alfa's portfolio
was $20.4 million, net of tax. The portfolio was invested 70.5% in fixed income
securities, 9.8% in equities, 4.6% in short-term marketable securities, and
15.1% 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, 1999 and 1998:
December 31,
----------------
1999 1998
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AAA to A- ...................................... 89.8% 89.2
BBB+ to BBB- ................................... 9.2% 9.8
BB+ and below (below investment grade) ......... 1.0% 1.0
----- -----
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 18 of the Company's annual report to
security holders for the fiscal year ended December 31, 1999, 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,
whose 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.
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<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
Adjustment 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, 1999, 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>
1999 1998 1997
--------------------------- --------------------------- ---------------------------
Property and Property and Property and
Casualty Life Casualty Life Casualty Life
------------- ------------ ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, $138,030,306 $ 2,812,704 $132,086,208 $ 2,243,041 $117,672,492 $ 3,095,914
Less reinsurance
recoverables
on unpaid losses (759,568) (353,195) (960,376) (123,474) (745,156) (801,496)
------------ ----------- ------------ ----------- ------------ -----------
Net balance at
January 1, 137,270,738 2,459,509 131,125,832 2,119,567 116,927,336 2,294,418
------------ ----------- ------------ ----------- ------------ -----------
Incurred related to:
Current year 249,992,384 14,512,337 253,369,653 15,160,885 240,327,428 11,600,573
Prior years (17,849,537) (298,357) (18,725,403) (17,517) (8,928,409) ( 7,995)
------------ ----------- ------------ ----------- ------------ -----------
Total incurred 232,142,847 14,213,980 234,644,250 15,143,368 231,399,019 11,592,578
------------ ----------- ------------ ----------- ------------ -----------
Paid related to:
Current year 169,943,000 12,957,553 175,544,000 14,010,044 164,640,000 10,605,018
Prior years 58,150,889 720,526 52,955,344 793,382 52,560,523 1,162,411
------------ ----------- ------------ ----------- ------------ -----------
Total paid 228,093,889 13,678,079 228,499,344 14,803,426 217,200,523 11,767,429
------------ ----------- ------------ ----------- ------------ -----------
Net balance at
December 31, 141,319,696 2,995,410 137,270,738 2,459,509 131,125,832 2,119,567
Plus reinsurance
recoverables
on unpaid losses 1,828,994 295,000 759,568 353,195 960,376 123,474
------------ ----------- ------------ ----------- ------------ -----------
Balance at
December 31, $143,148,690 $ 3,290,410 $138,030,306 $ 2,812,704 $132,086,208 $ 2,243,041
============ =========== ============ =========== ============ ===========
</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.
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<PAGE>
Other Business
- --------------
The Company operates six 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, Alfa Agency Mississippi, Inc, and Alfa
Benefits Corporation, a provider of benefit services for the Alfa Group.
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, 1999, the delinquency ratio on the loan portfolio was 1.76%, or
$1.0 million. Loans charged off in 1999 totaled $465,535 or 0.9% of the average
outstanding loan portfolio. At December 31, 1999, the Company maintained an
allowance for loan losses of $637,965 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, Autauga and Elmore County, Alabama, areas.
Alfa Agency Mississippi Inc. places substandard insurance risks with third
party insurers for a commission.
Alfa Benefits Corporation serves as a recordkeeper by handling employee
benefits for the Alfa Group.
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 16,144,638 shares, or 40.83%, and Alfa Mutual Fire Insurance
Company owns 3,972,986 shares, or 10.05%, of the Company's Outstanding Common
Stock.
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<PAGE>
Competition
- -----------
Both the life and property and casualty insurance businesses are highly
competitive. There are numerous insurance companies in the Company's area of
operation and throughout the United States. Many of the companies which are in
direct competition with the Company have been in business for a much longer
period of time, have a larger volume of business, offer a more diversified line
of insurance coverage, and have greater financial resources than the Company. In
its life and property and casualty insurance businesses, the Company competes
with other insurers in the sale of insurance products to consumers and the
recruitment and retention of qualified agents. The Company believes that the
main competitive factors in its business are price, name recognition and
service. The Company believes that it competes effectively in these areas in
Alabama. In Georgia and Mississippi, however, the Company's name is not as well
recognized, but such recognition is improving.
Financial Ratings:
- ------------------
The Company's property and casualty subsidiaries have the highest A.M. Best
rating of A++ and life has an A+ rating. The Company's commercial paper program
is rated A-1+ by Standard and Poor's and P-1 by Moody's, both the highest
ratings for commercial paper.
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 2000 without prior approval of regulatory authorities
is approximately $62.0 million based on December 31, 1999 financial condition
and results of operations.
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<PAGE>
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") 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.
Year 2000:
- ----------
To resolve any year 2000 issues, the Company identified all of its mission
critical systems, which are accounting, agent compensation, claims, investment
management, life policy administration, loan processing, payment processing,
payroll processing, field and home office personal computers and any related
programs, postal software, and property/casualty policy administration. Over the
last six years, each of these mission critical systems underwent intensive
analysis, including research, remediation and programming, and system testing.
All phases were completed prior to the close of 1999. The Company also addressed
year 2000 issues related to material relationships with third party vendors and
suppliers and obtained assurances that such issues were addressed.
Due to the length of the process, the number of employees and resources
devoted to the efforts and the time spent, it is not practicable to know the
exact amount of costs attributable to the year 2000 issue. However, the Company
estimates that it spent approximately $3.1 million during the course of the last
six years and approximately $1.3 million in 1999. These costs were expensed as
incurred throughout the process and absorbed into the Company's operations with
no significant adverse impact on its financial condition or operating results.
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.
I-11
<PAGE>
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, 1999, the Company was represented by 477 agents in
Alabama who are employees of Mutual. The Company's property and casualty
subsidiaries had 123 independent exclusive agents in Georgia and Mississippi at
December 31, 1999.
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 are in process at December 31, 1999. Costs for
these and similar legal proceedings, including accruals for outstanding cases,
totaled $6.5 million in 1999, $5.2 million 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 24 legal
proceedings against Alfa Life Insurance Corporation are in process at December
31, 1999. Of the 24 proceedings, 15 were filed in 1999, two were filed in 1998,
six were filed in 1997, and one was filed in 1996. Two of the legal proceedings
were filed as purported class action lawsuits, but, at present, no class has
been certified. In 1999, Life was able to eliminate 60 cases filed by two
plaintiff's law firms, either through dismissal or settlement. Included in those
60 cases are two proceedings in which the jury awarded the plaintiffs
compensatory and punitive damages against Life. Both verdicts were on appeal to
the Alabama Supreme Court when they were settled. One purported class action
lawsuit has been filed against Alfa Financial Corporation, and one purported
class action lawsuit has been filed against Alfa Builders and Alfa Mutual Fire
Insurance Company. Additionally, five purported class action lawsuits have been
filed 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 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.
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 27, 2000.
The following is a list of names 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 52 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 48 Executive Vice President, Operations and Treasurer of 1983
Alfa Corporation and its subsidiaries since 1999
Prior to 1999, Executive Vice President, Investments.
Al Dees 53 Executive Vice President, Marketing 1993
Donald Price 48 Senior Vice President, Finance and 1984
Chief Financial Officer.
Marcia Martin 62 Senior Vice President, Human Resources 1976
Al Scott 44 Senior Vice President, Secretary and General Counsel 1997
Prior to 1997, Assistant General Counsel
John Holley 44 Vice President, Finance, Director Financial Relations 1986
Chief Accounting Officer.
Terry McCollum 63 Senior Vice President, Claims 1979
</TABLE>
I-14
<PAGE>
<TABLE>
<S> <C> <C> <C>
Bill Harper, Jr. 55 Senior Vice President, Life Operations of Alfa Life 1986
Insurance Corporation, Vice President of Alfa
Financial Corporation since 1978.
Wyman Cabaniss 48 Senior Vice President, Underwriting 1998
Prior to 1998, Vice President, Underwriting
Stephen G. Rutledge 41 Senior Vice President, Investments since 1999. 1984
Prior to that time, Vice President, Investments
Cheryl Price 46 Vice President, Finance, Alfa Property and 1991
Casualty Companies.
John Jung 53 Senior Vice President, 1999
Chief Information Officer since October 1999.
From 1997 to October 1999, Senior Vice President
And Chief Information Officer of California Casualty;
prior to that time, Vice President of Chubb Group.
James R. Azar 63 Senior Vice President, Planning 1979
</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, 1999, 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, 1999, 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, 1999, 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 through 9 of Exhibit 13 representing pages 16 through 18 of the
Company's annual report to security holders for the fiscal year ended December
31, 1999, 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, 1999, 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 27, 2000 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 27, 2000, 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 27, 2000, 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 27, 2000, 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, 1999)
Report of Independent Auditors for 1999 and 1998.
Consolidated Balance Sheets as of December 31, 1999 and 1998.
Consolidated Statements of Income for the three years ended
December 31, 1999, 1998 and 1997.
Consolidated Statements of Comprehensive Income for the three years
ended December 31, 1999, 1998 and 1997.
Consolidated Statements of Stockholders' Equity for the three years
ended December 31, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the three years ended
December 31, 1999, 1998 and 1997.
Notes to Consolidated Financial Statements.
Selected Quarterly Financial Data.
2. Financial Statement Schedules.
-----------------------------
Included in Part IV of this report Page
----
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,
1999 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, 1999,
1998 and 1997 IV-9
Schedule V - Valuation and Qualifying Accounts IV-10
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, 1999. 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:
We have audited and reported separately on the financial statements of Alfa
Corporation as of December 31, 1999 and 1998, and for each of the years in the
three-year period ended December 31, 1999. Our report and the financial
statements of Alfa Corporation are incorporated by reference in the Form 10-K.
Our audits were made for the purpose of forming an opinion on the basic
financial statements of Alfa Corporation taken as a whole. The supplementary
information included in financial statement Schedules I through IV is presented
for purposes of additional analysis and is not a required part of the basic
financial statements. Such information has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
/s/ KPMG LLP
Birmingham, Alabama
February 3, 2000
IV-3
<PAGE>
ALFA CORPORATION AND SUBSIDIARIES
SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN
INVESTMENTS IN RELATED PARTIES
December 31, 1999
<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 $ 32,046,316 $ 33,384,552 $ 33,384,552
States, municipalities and
political subdivisions 229,813,755 221,031,930 221,031,930
Public utilities 15,394,177 14,683,056 14,683,056
All other corporate bonds 247,522,125 233,662,738 233,662,738
Mortgage-backed securities 320,343,939 307,636,414 307,587,678
Redeemable preferred stocks 3,500,000 3,552,500 3,552,500
-------------- -------------- --------------
Total fixed maturities 848,620,312 813,951,190 813,902,454
-------------- -------------- --------------
Equity securities:
Common stocks:
Public utilities 5,045,378 5,940,695 5,940,695
Banks, trusts and insurance
companies 5,032,635 16,913,000 16,913,000
Industrial, miscellaneous and all other 40,125,357 87,513,143 87,513,143
Nonredeemable preferred stocks 2,850,000 2,808,500 2,808,500
-------------- -------------- --------------
Total equity securities 53,053,370 113,175,338 113,175,338
-------------- -------------- --------------
Mortgage loans on real estate 305,079 305,079 305,079
Real estate 2,004,405 2,004,405 2,004,405
Policy loans 42,820,247 42,820,247 42,820,247
Other long-term investments 129,629,607 130,909,734 129,629,607
Short-term investments 53,376,923 53,376,923 53,376,923
-------------- -------------- --------------
Total investments $1,129,809,943 $1,156,542,916 $1,155,214,053
============== ============== ==============
</TABLE>
See accompanying independent auditor's report
IV-4
<PAGE>
ALFA CORPORATION (PARENT COMPANY)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
BALANCE SHEETS
December 31, 1999 and 1998
-----------
1999 1998
------------ ------------
ASSETS
Cash $ 139,577 $ 310,617
Short-term investments 37,948 867,393
Investment in subsidiaries 473,225,808 459,187,150
Note receivable from subsidiaries 34,046,539 30,089,539
Accounts receivable and other assets 222,458 162,916
------------ ------------
Total assets $507,672,330 $490,617,615
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Commercial paper $ 90,289,199 $ 57,259,519
Notes payable 4,600,000 4,600,000
Other liabilities 4,114,670 5,135,111
------------ ------------
Total liabilities 99,003,869 66,994,630
------------ ------------
Stockholders' Equity:
Common stock, $1 par value, shares
authorized - 110,000,000;
issued - 41,891,512
outstanding - 1999 - 39,550,294;
1998 - 40,887,911 41,891,512 41,891,512
Capital in excess of par value 22,820,889 22,355,934
Accumulated other comprehensive income 20,407,812 57,577,202
Retained earnings 351,923,507 306,268,833
Treasury stock,
at cost, 1999 - 2,341,218;
1998 - 1,003,601 shares (28,375,259) (4,470,496)
------------ ------------
Total stockholders' equity 408,668,461 423,622,985
------------ ------------
Total liabilities and
stockholders' equity $507,672,330 $490,617,615
============ ============
See accompanying independent auditor's report
IV-5
<PAGE>
ALFA CORPORATION (PARENT COMPANY)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
STATEMENTS OF INCOME
for the years ended December 31, 1999, 1998 and 1997
-------------
1999 1998 1997
----------- ----------- -----------
Revenues:
Dividends from subsidiaries $21,700,542 $20,602,953 $18,956,247
Interest from subsidiaries 1,822,047 2,047,057 2,208,548
Other interest 32,473 53,192 21,777
----------- ----------- -----------
Total revenues 23,555,062 22,703,202 21,186,572
Expenses:
Other expenses 4,666,369 7,608,341 5,310,031
----------- ----------- -----------
Income before equity in
undistributed income
of subsidiaries 18,888,693 15,094,861 15,876,541
Equity in undistributed income
of subsidiaries 45,668,769 41,620,830 36,917,092
----------- ----------- -----------
Net income $64,557,462 $56,715,691 $52,793,633
=========== =========== ===========
See accompanying independent auditor's report
IV-6
<PAGE>
ALFA CORPORATION (PARENT COMPANY)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 64,557,462 $ 56,715,691 $ 52,793,633
------------ ------------ ------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed earnings of
subsidiaries (45,668,769) (41,620,830) (36,917,092)
Decrease (increase) in other assets
and accounts receivable (59,542) 71,023 (15,885)
Increase (decrease) in other
liabilities (913,261) 2,456,098 (64,890)
------------ ------------ ------------
Total adjustments (46,641,572) (39,093,709) (36,997,867)
------------ ------------ ------------
Net cash provided by operating activities 17,915,890 17,621,982 15,795,766
------------ ------------ ------------
Cash flows from investing activities:
Decrease (increase) in note receivable from subsidiaries (3,957,000) 30,557,000 (14,288,000)
Net decrease (increase) in short-term investments 829,445 1,127,928 (1,621,263)
(Increase) in investment in subsidiaries (5,400,000)
Other (139,279) 212,396 343,449
------------ ------------ ------------
Net cash provided by (used in) investing activities (8,666,834) 31,897,324 (15,565,814)
------------ ------------ ------------
Cash flows from financing activities:
Increase (decrease) in commercial paper 33,029,680 (32,262,210) 15,940,767
Purchase of treasury stock (24,157,205) (419,471)
Proceeds from exercise of stock options 610,217 1,299,329 35,250
Dividends to stockholders (18,902,788) (17,867,671) (16,212,717)
------------ ------------ ------------
Net cash (used in) financing activities (9,420,096) (49,250,023) (236,700)
------------ ------------ ------------
Net increase (decrease) in cash (171,040) 269,283 (6,748)
Cash, beginning of year 310,617 41,334 48,082
------------ ------------ ------------
Cash, end of year $ 139,577 $ 310,617 $ 41,334
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 3,624,586 $ 4,082,710 $ 4,132,679
============ ============ ============
Income taxes $ 23,552,000 $ 20,487,000 $ 20,529,974
============ ============ ============
</TABLE>
See accompanying independent auditor's report
IV-7
<PAGE>
ALFA CORPORATION
SCHEDULE III - SUPPLEMENTAL INSURANCE INFORMATION
for the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Other
Future Policy Policy
Deferred Benefits, Claims Premiums
Policy Losses, And And
Acquisition Claims And Unearned Benefits Policy
Segment Costs Loss Expenses Premium Payable Charges
- -------- ------------ ------------- ------------- --------- ------------
<S> <C> <C> <C> <C> <C>
1999
- -------
Life Insurance $117,549,248 $458,830,168 $ 0 $0 $ 48,359,640
Property &
casualty
insurance 18,557,440 143,148,690 114,802,464 0 356,970,311
Noninsurance
and corporate 0 0 0 0 0
------------ ------------ ------------ -- ------------
Total $136,016,688 $601,978,858 $114,802,464 $0 $405,329,951
============ ============ ============ == ============
1998
- ----
Life Insurance $ 97,616,878 $410,398,102 $ 0 $0 $ 46,098,666
Property &
casualty
insurance 16,524,992 138,030,306 105,464,480 0 345,739,616
Noninsurance
and corporate 0 0 0 0 0
------------ ------------ ------------ -- ------------
Total $114,141,870 $548,428,408 $105,464,480 $0 $391,838,282
============ ============ ============ == ============
1997
- ----
Life Insurance $ 90,130,439 $366,301,110 $ 0 $0 $ 40,659,098
Property &
casualty
insurance 15,725,146 132,086,208 97,669,270 0 330,305,948
Noninsurance
and corporate 0 0 0 0 0
------------ ------------ ------------ -- ------------
Total $105,855,585 $498,387,318 $ 97,669,270 $0 $370,965,046
============ ============ ============ == ============
</TABLE>
<TABLE>
<CAPTION>
Benefits Amortization
Claims, Of Deferred
Net Losses And Policy Other
Investment Settlement Acquisition Operating Premiums
Segment Income Expenses Costs Expenses Written
- -------- -------- ------------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
1999
- -------
Life Insurance $37,873,099 $ 51,143,122 $ 6,747,130 $ 9,949,006 $ 0
Property &
casualty
insurance 27,600,849 232,122,875 53,455,392 30,443,472 363,585,872
Noninsurance
and corporate 2,333,082 (1,550,000) 0 4,679,431 0
----------- ------------ ----------- ----------- ------------
Total $67,807,030 $281,715,997 $60,202,522 $45,071,909 $363,585,872
=========== ============ =========== =========== ============
1998
- ----
Life Insurance $34,890,182 $ 40,629,378 $ 6,021,001 $ 9,114,135 $ 0
Property &
casualty
insurance 25,992,335 234,971,258 51,800,042 25,960,651 350,684,046
Noninsurance
and corporate 1,629,141 2,300,000 0 3,688,097 0
----------- ------------ ----------- ----------- ------------
Total $62,511,658 $277,900,636 $57,821,043 $38,762,883 $350,684,046
=========== ============ =========== =========== ============
1997
- ----
Life Insurance $31,646,118 $ 33,407,772 $ 6,514,175 $ 7,209,933 $ 0
Property &
casualty
insurance 23,935,303 232,670,184 49,483,552 21,544,277 332,192,026
Noninsurance
and corporate 1,947,248 0 0 3,215,022 0
----------- ------------ ----------- ----------- ------------
Total $57,528,669 $266,077,956 $55,997,727 $31,969,232 $332,192,026
=========== ============ =========== =========== ============
</TABLE>
See accompanying independent auditor's report
IV-8
<PAGE>
ALFA CORPORATION AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
for years ended December 31, 1999, 1998 and 1997
<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>
1999
- ----
Life insurance in force $13,384,835,865 $1,369,300,363 $ 0 $12,015,535,502 0%
=============== ============== ============ =============== ===
Premiums and policy
charges:
Life insurance $ 51,942,189 $ 3,657,594 $ 0 48,284,595 0%
Accident and health
insurance 75,045 0 0 75,045 0%
Property and liability
insurance 60,196,005 60,302,447* 357,076,753* 356,970,311 100%
--------------- -------------- ------------ --------------- ---
$ 112,213,239 $ 63,960,041 $357,076,753 $ 405,329,951 88%
=============== ============== ============ =============== ===
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%
=============== ============== ============ =============== ===
</TABLE>
* These amounts are subject to the pooling agreement.
See accompanying independent auditor's report
IV-9
<PAGE>
ALFA CORPORATION AND SUBSIDIARIES
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Additions
Balance ---------------------------------- Balance
at beginning Charged to costs Charged to at end
Description of period and expenses other accounts Deductions of period
- ----------- ------------- ---------------- ---------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1999 Reserve for loan losses $584,178 $789,753 $735,966 $637,965
======== ======== ======== ========
1998 Reserve for loan losses $584,178 $588,780 $588,780 $584,178
======== ======== ======== ========
</TABLE>
See accompanying independent auditor's 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
Director and Principal
/s/ Jerry A. Newby Executive Officer 3/24/00
- ------------------------- ------------
(Jerry A. Newby) (Date)
Executive Vice President, Operations,
Treasurer, Director
/s/ C. Lee Ellis (Principal Operations Officer) 3/24/00
- ------------------------- ------------
(C. Lee Ellis) (Date)
Senior Vice President,
Finance, (Principal
/s/ Donald Price Financial Officer) 3/24/00
- ------------------------- ------------
(Donald Price) (Date)
Vice President, Finance
/s/ John D. Holley (Principal Accounting Officer) 3/24/00
- ------------------------- ------------
(John D. Holley) (Date)
/s/ Hal F. Lee Director 3/24/00
- ------------------------- ------------
(Hal F. Lee) (Date)
/s/ James A. Tolar, Jr. Director 3/24/00
- ------------------------- ------------
(James A. Tolar, Jr.) (Date)
/s/ Steve Dunn Director 3/24/00
- ------------------------- ------------
(Steve Dunn) (Date)
/s/ Dean Wysner Director 3/24/00
- ------------------------- ------------
(Dean Wysner) (Date)
<PAGE>
/s/ Russell R. Wiggins Director 3/24/00
- ------------------------- ------------
(Russell R. Wiggins) (Date)
/s/ James I. Harrison, Jr. Director 3/24/00
- ------------------------- ------------
(James I. Harrison, Jr.) (Date)
/s/ John R. Thomas Director 3/24/00
- ------------------------- ------------
(John R. Thomas) (Date)
/s/ B. Phil Richardson Director 3/24/00
- ------------------------- ------------
(B. Phil Richardson) (Date)
/s/ Boyd E. Christenberry Director 3/24/00
- ------------------------- ------------
(Boyd E. Christenberry) (Date)
<PAGE>
6 SELECTED FINANCIAL DATA
Consolidated Summary of Operations & Related Data
(Dollars in Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997 1996
------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums - Property and Casualty Insurance $ 356,970 $ 345,740 $ 330,306 $ 298,939
Premiums and policy charges - Life Insurance 48,360 46,099 40,659 38,248
Net investment income 67,807 62,512 57,529 54,194
Net realized investment gains 5,060 4,397 3,356 2,808
Other income 4,064 2,238 2,160 2,148
------------------------------------------------------------
Total revenues 482,261 460,986 434,010 396,336
------------------------------------------------------------
Benefits and expenses 390,184 377,721 357,210 350,482
Income before provision for income taxes 92,077 83,265 76,800 45,854
Provision for income taxes 27,520 26,549 24,006 13,665
Cumulative effect of changes in accounting principles
------------------------------------------------------------
Net income $ 64,557 $ 56,716 $ 52,794 $ 32,189
============================================================
Balance sheet data at December 31:
Invested assets $ 1,155,214 $ 1,084,064 $ 1,027,660 $ 886,017
Total assets $ 1,335,347 $ 1,246,659 $ 1,170,066 $1,019,330
Future policy benefits, losses and
claims, unearned premiums $ 723,031 $ 653,893 $ 596,057 $ 535,824
Total liabilities $ 926,679 $ 823,037 $ 787,135 $ 696,018
Stockholders' equity $ 408,668 $ 423,622 $ 382,931 $ 323,312
Per share data /1/:
Net income - Basic $ 1.61 $ 1.39 $ 1.29 $ 0.79
Net income - Diluted $ 1.60 $ 1.38 $ 1.29 $ 0.79
Cash dividends paid $ 0.4725 $ 0.4375 $ 0.3975 $ 0.3875
Annual dividend rate $ 0.48 $ 0.45 $ 0.40 $ 0.39
Stockholders' equity $ 10.33 $ 10.36 $ 9.39 $ 7.93
Closing sales price at December 31 $ 16 5/16 $ 24 1/4 $ 17 1/4 $ 12 5/8
Price/earnings ratio 10.2x 17.6x 13.4x 16.0x
Weighted average shares outstanding - Basic 39,981 40,834 40,787 40,786
Weighted average shares outstanding - Diluted 40,236 41,148 40,931 40,843
Return on average equity 15.5% 14.1% 15.0% 10.2%
Return on average invested assets 6.72% 6.94% 7.12% 7.60%
Life insurance in force $12,015,536 $11,000,049 $10,246,400 $9,463,055
Number of agents 600 575 574 587
</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.
ALFA CORPORATION 1999
<PAGE>
SELECTED FINANCIAL DATA 7
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 272,989 $ 214,326 $ 189,057 $ 173,075 $ 164,573 $ 149,840 $ 134,737
35,100 32,805 30,856 29,365 27,872 25,608 23,848
50,923 45,554 44,902 39,425 34,785 32,224 30,048
1,106 572 4,890 4,232 3,790 2,842 2,882
2,645 3,057 2,918 2,340 1,919 1,861 1,172
- --------------------------------------------------------------------------------------------------------------
362,763 296,313 272,624 248,437 232,939 212,375 192,687
331,771 248,481 209,309 194,859 192,144 180,611 159,912
- --------------------------------------------------------------------------------------------------------------
30,993 47,832 63,315 53,578 40,795 31,764 32,775
8,675 14,965 20,999 16,660 12,354 8,877 /2/ 9,919
2,645
- --------------------------------------------------------------------------------------------------------------
$ 22,318 $ 32,867 $ 44,960 $ 36,918 $ 28,441 $ 22,887 /2/ $ 22,856
==============================================================================================================
$ 841,123 $ 718,074 $ 653,819 $ 574,718 $ 511,931 $ 437,725 $ 410,266
$ 965,433 $ 847,870 $ 766,077 $ 665,247 $ 595,801 $ 515,681 $ 482,383
$ 487,659 $ 429,930 $ 365,148 $ 334,454 $ 295,443 $ 257,907 $ 223,925
$ 656,823 $ 592,885 $ 505,091 $ 440,669 $ 402,526 $ 347,861 $ 319,598
$ 308,610 $ 254,985 $ 260,986 $ 224,578 $ 193,275 $ 167,820 $ 162,785
$ 0.55 $ 0.81 $ 1.10 $ 0.91 $ 0.70 $ 0.55 /2/ $ 0.55
$ 0.55 $ 0.81 $ 1.10 $ 0.91 $ 0.70 $ 0.55 /2/ $ 0.55
$ 0.375 $ 0.3425 $ 0.28 $ 0.2425 $ 0.215 $ 0.195 $ 0.1725
$ 0.38 $ 0.36 $ 0.29 $ 0.25 $ 0.22 $ 0.20 $ 0.18
$ 7.57 $ 6.25 $ 6.40 $ 5.51 $ 4.74 $ 4.11 $ 3.89
$ 16 3/4 $ 11 $ 11 1/2 $ 11 7/8 $ 5 1/4 $ 4 5/8 $ 5 5/8
30.6x 13.7x 10.4x 13.1x 7.5x 8.4x 10.3x
40,786 40,786 40,786 40,786 40,786 41,611 41,882
40,811 40,810 40,814 40,786 40,786 41,611 41,882
7.9% 12.7% 18.5% 17.7% 15.8% 13.8% /2/ 14.9%
7.74% 7.78% 8.03% 8.28% 8.66% 9.00% 9.43%
$8,642,907 $7,867,808 $7,064,335 $6,295,626 $5,578,661 $4,947,574 $4,318,605
585 562 562 529 504 500 486
</TABLE>
ALFA CORPORATION 1999
<PAGE>
12 MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
The following table sets forth consolidated summarized income statement
information for the years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------
1999 1998 1997
-------------------------------------------------
(in thousands, except share
and per share data)
<S> <C> <C> <C>
Revenues
Property and casualty
insurance premiums $ 356,970 $ 345,740 $ 330,306
Life insurance premiums
and policy charges 48,360 46,099 40,659
-------------------------------------------------
Total premiums $ 405,330 $ 391,839 $ 370,965
=================================================
Net investment income $ 67,807 $ 62,512 $ 57,529
=================================================
Total revenues $ 482,261 $ 460,986 $ 434,010
=================================================
Net income
Insurance operations
Property and casualty
insurance $ 49,492 $ 41,581 $ 36,571
Life insurance 11,597 15,645 14,580
-------------------------------------------------
Total income $ 61,089 $ 57,226 $ 51,151
Noninsurance operations 3,092 2,192 2,628
Net realized
investment gains 3,289 2,858 2,182
Corporate (2,913) (5,560) (3,167)
-------------------------------------------------
Net income $ 64,557 $ 56,716 $ 52,794
=================================================
Net income per share
Basic $ 1.61 $ 1.39 $ 1.29
=================================================
Diluted $ 1.60 $ 1.38 $ 1.29
=================================================
Weighted average shares
outstanding - Basic 39,980,880 40,834,232 40,787,047
=================================================
Diluted 40,235,690 41,148,258 40,930,894
=================================================
</TABLE>
Total premiums and policy charges increased $13.5 million, or 3.4% in 1999 and
$20.9 million, or 5.6% in 1998. Property and casualty premiums grew $11.2
million, or 3.2% in 1999 and $15.4 million, or 4.7% in 1998. The growth was a
result of increased production and an improved lapse ratio. The growth rate was
offset in 1999 by rate decreases taken in late 1998. Life insurance premiums
and policy charges increased $2.3 million, or 4.9% in 1999, and $5.4 million, or
13.4% in 1998. The rate of growth in 1998 was impacted by changes in group life
business. Excluding group premiums, the growth rates in life insurance premiums
and policy charges were 5.1% and 7.5% in 1999 and 1998, respectively, and are
due to production of new business and improved persistency. Net investment
income grew 8.5% in 1999 and 8.7% in 1998 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 prior to 1998 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. Life insurance operating income decreased
25.9% in 1999 due to significantly higher legal costs and related increased
policyholder benefits. The decline in 1999 was offset somewhat by a decrease in
death claims. Increased business, improved persistency and increased investment
income led to a 7.3% improvement in 1998.
Noninsurance operating income increased 41.1% in 1999 due to improved results
in the consumer finance and construction subsidiaries. Also, investment income
from a newly formed noninsurance subsidiary, Alfa Benefits Corporation,
resulted in growth in noninsurance operating income due to early positive cash
flows. In 1998, declines in profits of the consumer finance and real estate
subsidiaries resulted in a 16.6% decline in noninsurance earnings. Corporate
expenses decreased $2.6 million in 1999 due primarily to the transfer of certain
legal costs from the corporate level to the life insurance subsidiary, which
adversely affected life earnings in 1999. In 1998, corporate expense increased
$2.4 million due to similar 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 16.4% on a per diluted share basis in 1999 compared to
1998 and increased 6.9% on a similar basis in 1998 compared to 1997.
ALFA CORPORATION 1999
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS 13
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 years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1999 1998 1997
---------------------------------------
<S> <C> <C> <C>
(in thousands)
Earned premiums
Personal lines $ 341,248 $ 330,511 $ 315,650
Commercial lines 13,044 12,354 11,772
Pools, associations
and fees 3,908 4,036 4,014
Reinsurance ceded (1,230) (1,161) (1,130)
---------------------------------------
Total $ 356,970 $ 345,740 $ 330,306
=======================================
Net underwriting
income $ 41,040 $ 33,183 $ 28,061
=======================================
Loss Ratio 60.2% 62.8% 65.0%
LAE Ratio 4.8% 5.0% 5.0%
Expense Ratio 23.5% 22.6% 21.5%
---------------------------------------
GAAP basis combined ratio 88.5% 90.4% 91.5%
=======================================
Underwriting margin 11.5% 9.6% 8.5%
=======================================
Net investment income $ 27,601 $ 25,992 $ 23,935
=======================================
Operating income before
tax $ 70,064 $ 59,156 $ 51,955
=======================================
Operating income,
net of tax $ 49,492 $ 41,581 $ 36,571
=======================================
</TABLE>
1999 Compared to 1998
Property and casualty premiums increased $11.2 million, or 3.2% in 1999, due
to an increase in sales production of new business and due to an improvement in
the lapse ratio from 3.98% to 3.88%. The growth rate fell from the growth rate
in 1998 due primarily to the impact in 1999 of a December 1998 automobile rate
decrease of 2.2%. Automobile business accounts for 64.2% of property and
casualty written premium.
Operating income increased $7.9 million, or 19.0% to $49.5 million due
primarily to the third consecutive year of increased underwriting income. The
underwriting margin of 11.5% in 1999 is due to an improved loss ratio of 60.2%,
primarily a result of favorable weather, but also from continued favorable
automobile loss ratios, which had improved throughout 1998 and over the past
few years and leveled off in 1999. Due to favorable weather, there were no
catastrophe losses in 1999 as compared to 1998 when there was $6.5 million, or
1.9% of premium, in such losses. The LAE ratio also improved slightly in 1999
while the expense ratio increased from 22.6% to 23.5% due to increased
technology expenses, which are likely to continue and non-recurring legal and
administrative expenses from the first quarter related to the retirement of two
executives.
Net investment income grew almost $1.6 million, or 6.2% to $27.6 million
because of increased positive cash flows produced by the underwriting results,
which increased invested assets 3.0%.
Operating income in 1999 was also positively impacted by $1.4 million from a
settlement with a software vendor.
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, 1999,
the Company's property and casualty subsidiaries' Adjusted Capital calculated in
accordance with NAIC Risk-Based Capital (RBC) guidelines was $226.9 million
compared to the Authorized Control Level (Required) RBC of $19.3 million.
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 accounted for over 65% of property casualty premiums in 1998.
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 inter-company 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.
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.
ALFA CORPORATION 1999
<PAGE>
14 MANAGEMENT'S DISCUSSION AND ANALYSIS
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, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1999 1998 1997
-----------------------------------------
<S> <C> <C> <C>
(in thousands)
Premiums and policy charges
Universal life
policy charges $13,607 $12,381 $11,296
Universal life
policy charges - COLI 2,234 2,133 1,858
Interest sensitive life
policy charges 9,518 9,727 9,306
Traditional life
insurance premiums 22,678 21,494 19,958
Group life
insurance premiums 323 364 (1,759)
-----------------------------------------
Total $48,360 $46,099 $40,659
=========================================
Net investment income $37,873 $34,890 $31,646
=========================================
Benefits and expenses $64,286 $52,980 $45,041
=========================================
Operating income before tax $15,200 $21,988 $20,750
=========================================
Operating income, net of tax $11,597 $15,645 $14,580
=========================================
</TABLE>
1999 Compared to 1998
Life insurance premiums and policy charges increased $2.3 million, or 4.9% in
1999. Universal life accounted for $1.3 million of the increase and traditional
premiums were up $1.2 million, or 5.5% due to increased term product production.
Total new business increased 5.6% and persistency improved from 92.1% to 92.8%.
Life insurance operating income decreased $4.0 million, or 25.9% due to
significantly higher legal costs and related increased policyholder benefits.
Benefits and expenses increased $11.3 million, or 21.3% in 1999, including $5.5
million of legal expenses transferred from the life company's corporate parent
level. In addition, such expenses include other legal costs, policy reserve
increases and related policy charge adjustments of approximately $3.6 million on
certain whole life policies sold more than ten years ago and certain interest
sensitive policies sold since 1989 which were adjusted after thoroughly
evaluating and assessing those policies. General expenses increased $1.6
million or 10.3% in 1999. Amortization of deferred acquisition costs has grown
in line with new business as costs for medical exam fees, commissions and other
deferrable expenses from continued production over the past several years is
being amortized. In addition, increases in premium tax rates over the past
three years have increased to their current ultimate level of 2.3%, which
accounted for $300,000 of the expense increase. Partially offsetting these
expense increases was a decline in death claims of $929,000, or 6.1%. The
mortality ratio improved to 94% in 1999 from 109% in 1998.
In spite of the expense increases and the decline in earnings, positive cash
flow continued to increase invested assets 6.6% and investment income increased
8.5%.
At December 31, 1999, the life subsidiary's Adjusted Capital calculated in
accordance with NAIC Risk-Based Capital (RBC) guidelines was $149.0 million
compared to the Authorized Control Level (Required) RBC amount of $19.3
million. The Risk Based Capital analysis serves as the benchmark for the
regulation of life insurance enterprises' solvency by state insurance
regulators.
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 owned life insurance (COLI) using Alfa Life's universal life product.
The result was 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.
ALFA CORPORATION 1999
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS 15
NONINSURANCE OPERATIONS
1999 Compared to 1998
Earnings from noninsurance operations increased $900,000, or 41.1% in 1999.
Both residential and commercial construction sales improved the building
company's operating income 176.7% or $354,000. In addition, operating income
increased $249,000 in the consumer finance subsidiary. A new compensation
structure encouraged growth in new loans and produced a 5.3% increase in the
loan portfolio to $59.0 million. However, the overall portfolio yield rate
declined 38 basis points, resulting in only a 2.6% increase in interest income.
Also offsetting the growth was a 53.2% decline in leasing revenue due to
outsourcing by the Alfa Group of a significant amount of service center
equipment leases to an outside vendor. Noninsurance earnings in 1999 were also
increased by $342,000 from investment earnings in Alfa Benefits Corporation,
which is a new subsidiary formed in 1999 that consolidated the benefit services
of the Alfa Group, which will control the Group's employee benefits and related
payments and perform the recordkeeping and accounting functions. The increases
in noninsurance operating income were offset partially by a $50,000 decline in
the real estate subsidiary related to certain nonrecurring legal costs in 1999.
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.
CORPORATE
1999 Compared to 1998
Corporate expense declined $2.6 million, or 47.6 % in 1999 due to a transfer
of $5.5 million in legal expenses and reserves to the life insurance subsidiary.
Excluding the impact of such costs, the other primary corporate expense is
interest expense on short term corporate debt, which increased approximately
$1.0 million in 1999. Corporate debt increased from $31.8 million at the end of
1998 to $55.3 million at December 31, 1999 with an average rate of 6.0%. The
increase was used to fund increases in the Company's stock repurchase program.
The remaining general corporate operating expenses remained relatively stable.
1998 Compared to 1997
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 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, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1999 1998 1997
-------------------------------------
<S> <C> <C> <C>
Increase in cash
flow from operations 15.9% 8.1% 35.9%
Increase in invested assets 6.6% 5.5% 16.0%
Investment yield rate 6.7% 6.9% 7.1%
Increase in net investment
income 8.5% 8.7% 6.2%
</TABLE>
The increases in positive cash flow from operations in each of the years
presented is due primarily to improved operating results in the Company's
property and casualty subsidiaries, which had underwriting income of $41.0
million in 1999, $33.2 million in 1998 and $28.1 million in 1997 due to lower
loss ratios and an absence of storm losses in 1999 and 1997. In addition, the
COLI plan in the life insurance subsidiary provided approximately $13 million in
additional cash flow in 1999, $12 million in 1998 and $10 million in 1997. As a
result of these positive cash flows, invested assets based on amortized cost
(which excludes the impact of SFAS 115) grew 13.2% in 1999, 5.6% in 1998 and
12.5% in 1997 and net investment income increased 8.5% in 1999, 8.7% in 1998 and
6.2% in 1997. The overall yield rate, calculated using amortized cost, declined
in 1999 and 1998 as maturing investments were reinvested at lower rates due to a
decline in interest rates generally.
The Company had realized investment gains of approximately $5.1 million in
1999, $4.4 million in 1998 and $3.4 million in 1997. 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.
ALFA CORPORATION 1999
<PAGE>
16 MANAGEMENT'S DISCUSSION AND ANALYSIS
The composition of the Company's investment portfolio is as follows at
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
December 31,
----------------------------
1999 1998
----------------------------
<S> <C> <C>
Fixed maturities
Taxables
Mortgage backed (CMOs) 26.6% 27.9%
Corporate bonds 28.2 30.2
----------------------------
Total taxable 54.8 58.1
Tax exempts 15.7 13.5
----------------------------
Total fixed maturities 70.5 71.6
----------------------------
Equity securities 9.8 9.5
Mortgage loans - -
Real estate .2 .1
Policy loans 3.7 3.6
Other long term investments 11.2 10.2
Short term investments 4.6 5.0
----------------------------
100.0% 100.0%
============================
</TABLE>
The majority of the Company's investment portfolio consists of fixed maturities
which are diverse as to both industry and geographic concentration. In 1999, the
overall mix of investments remained relatively stable with changes due to market
fluctuations in equities and fixed maturities. Long term investments increased
due primarily to an increase in loans and partnerships.
The rating of the Company's portfolio of fixed maturities using the Standard &
Poor's rating categories is as follows at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998
-----------------------
<S> <C> <C>
AAA to A- 89.8% 89.2%
BBB+ to BBB- 9.2 9.8
BB+ and below (below investment grade) 1.0 1.0
-----------------------
100.0% 100.0%
=======================
</TABLE>
At December 31, 1999, all securities in the fixed maturity portfolio were
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, 1999, approximately 37.8% 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, 1999 the Company's total portfolio of fixed
maturities had gross unrealized gains of $9.0 million and gross unrealized
losses of $43.7 million. All securities are priced by nationally recognized
pricing services or by broker/dealers securities firms.
During 1999, the Company sold approximately $9.4 million in fixed maturities
available for sale. These sales resulted in gross realized gains of $12,779 and
gross realized losses of $812,408. 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.
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, 1999 and
1998, the Company had unrealized gains of approximately $5.3 and $4.8 million,
respectively, in such investments. During 1999 and 1998, the Company had no
disposals of high yield debt securities.
In 1999, the Company wrote down eight equity securities totaling
$2,939,085 whose declines in value were deemed to be other than temporary.
Similarly, 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. At December 31, 1999 and 1998, there were no
nonperforming bonds in the portfolio.
The Company's investment in other long term investments contains additional
investments in loans originated by the consumer finance subsidiary. These loans
are collateralized by automobiles and other property. At December 31, 1999, the
delinquency ratio on the loan portfolio was 1.76%, or $1.0 million. Loans
charged off in 1999 totaled $465,535 or 1.1% of the average outstanding loan
portfolio. At December 31, 1999, the Company maintained an allowance for loan
losses of $637,965 or approximately 1.2% of the outstanding loan balance. Other
significant long term investments 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.
On the following page is a table which shows the potential effects of interest
rate risk. The table is followed by a more detailed discussion of the Company's
interest rate risk and equity price risk.
ALFA CORPORATION 1999
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS 17
The estimated fair value of the Company's investment portfolio at December 31,
1999 was $1.157 billion, 70.5% of which was invested in fixed maturities, 9.8%
in equity securities, 5.2% in mortgage and collateral loans, 4.6% in short term
investments and 9.9% in other long term investments.
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, 1999. 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, 1999 (bp=basis points) in Interest Rate Shareholder's Equity
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FIXED MATURITY
INVESTMENTS
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Securities and $ 33,385 200 bp decrease $ 38,863 0.9%
obligations of U.S. 100 bp decrease 35,968 0.4
government corporations and 100 bp increase 31,008 (0.4)
agencies 200 bp increase 28,834 (0.7)
- ------------------------------------------------------------------------------------------------------------------------------
Tax-exempt obligations of states, $181,253 200 bp decrease $207,535 6.4%
municipalities and political 100 bp decrease 194,068 3.1
subdivisions 100 bp increase 169,109 (3.0)
200 bp increase 157,763 (5.7)
- ------------------------------------------------------------------------------------------------------------------------------
Mortgaged backed securities $307,636 200 bp decrease $334,124 4.2%
100 bp decrease 323,203 2.5
100 bp increase 290,870 (2.7)
200 bp increase 267,244 (6.4)
- ------------------------------------------------------------------------------------------------------------------------------
Corporate, taxable municipal $291,677 200 bp decrease $334,291 6.8%
and other debt securities 100 bp decrease 312,211 3.3
100 bp increase 272,776 (3.0)
200 bp increase 255,626 (5.7)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $813,951 200 bp decrease $914,813 16.0%
100 bp decrease 865,450 8.2
100 bp increase 763,763 (8.0)
200 bp increase 709,467 (16.6)
==============================================================================================================================
MORTGAGE AND $ 60,563 200 bp decrease $ 65,778 *
COLLATERAL LOANS 100 bp decrease 63,628 *
100 bp increase 57,263 *
200 bp increase 52,611 *
==============================================================================================================================
SHORT TERM $ 53,377 200 bp decrease $ 62,136 *
INVESTMENTS 100 bp decrease 57,508 *
100 bp increase 49,576 *
200 bp increase 46,102 *
==============================================================================================================================
LIABILITIES
- ------------------------------------------------------------------------------------------------------------------------------
6.00% to 6.13% Commercial Paper $ 90,289 200 bp decrease $105,106 *
100 bp decrease 97,278 *
100 bp increase 83,861 *
200 bp increase 77,983 *
- ------------------------------------------------------------------------------------------------------------------------------
Short Term Notes Payable $ 13,147 200 bp decrease $ 15,304 *
100 bp decrease 14,164 *
100 bp increase 12,211 *
200 bp increase 11,355 *
==============================================================================================================================
</TABLE>
*Changes in estimated fair value have no impact on shareholders' equity.
ALFA CORPORATION 1999
<PAGE>
18 MANAGEMENT'S DISCUSSION AND ANALYSIS
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 6.25 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.
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, 1999, the Company's equity portfolio was concentrated in terms
of the number of issuers and industries. At December 31, 1999, the Company's
top ten equity holdings represented $59.2 million or 52.7% of the equity
portfolio. Investments in the financial industry represented 20.7% of the
equity portfolio at December 31, 1999. 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, 1999. 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 12/31/99 Price Change Change in Prices Stockholders' Equity
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
(dollars in thousands)
$113,175 20% increase $135,810 3.6%
20% decrease $ 90,540 (3.6%)
</TABLE>
INCOME TAXES
The effective tax rate was 29.9% in 1999, 31.9% in 1998 and 31.3% in 1997.
The increase in income tax expense in 1999 over 1998 and in 1998 compared to
1997 is due primarily to the increase in income before provision for income
taxes in both years. The fluctuation in the effective rate is due 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
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
ALFA CORPORATION 1999
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS 19
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, 452,500 options on March 23, 1998,
167,500 options on April 22, 1999, and 8,000 options on October 25, 1999. 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, 1999, there
had been 167,782 options exercised, 993,695 options were exercisable and 73,067
had been cancelled leaving 346,667 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. In March 1999, the Board
increased the number of shares authorized for repurchase by 2,000,000. During
1999, the Company repurchased 1,389,400 shares at a cost of $24,157,205. At
December 31, 1999, the Company had repurchased 2,509,000 shares at a cost of
$29,207,446. The Company has reissued 167,782 treasury shares as a result of
option exercises.
Total borrowings increased $36.6 million in 1999 to $103.4 million. The
majority of the short term debt is commercial paper issued by the Company. At
December 31, 1999 the Company had approximately $90.3 million in commercial
paper at rates ranging from 6.0% to 6.13% with maturities ranging from January
10, 2000 to January 31, 2000. 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 $100 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 $13.0 million in short-term debt outstanding to
affiliates at December 31, 1999 with interest equal to commercial paper rates
payable monthly and $105,162 outstanding in other short-term debt at a rate of
7.0%.
Cash surrenders paid to policyholders on a statutory basis totaled $13.7
million in 1999 and $12.2 million in 1998. This level of surrenders is within
the Company's pricing expectations. Historical persistency rates indicate a
normal pattern of surrender activity in 1999, 1998 and 1997. 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, 1999 the total amount of cash that would be required to fund all
amounts subject to surrender was approximately $371.6 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
To resolve any year 2000 issues, the Company identified all of its mission
critical systems, which are accounting, agent compensation, claims, investment
management, life policy administration, loan processing, payment processing,
payroll processing, field and home office personal computers and any related
programs, postal software, and property/casualty policy administration. Over
the last six years, each of these mission critical systems underwent intensive
analysis, including research, remediation and programming, and system testing.
All phases were completed prior to the close of 1999. The Company also addressed
year 2000 issues related to material relationships with third party vendors and
suppliers and obtained assurances that such issues were addressed.
ALFA CORPORATION 1999
<PAGE>
20 MANAGEMENT'S DISCUSSION AND ANALYSIS
Due to the length of the process, the number of employees and resources
devoted to the efforts and the time spent, it is not practicable to know the
exact amount of costs attributable to the year 2000 issue. However, the Company
estimates that it spent approximately $3.1 million during the course of the last
six years and approximately $1.3 million in 1999. These costs were expensed as
incurred throughout the process and absorbed into the Company's operations with
no significant adverse impact on its financial condition or operating results.
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 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, 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.
ALFA CORPORATION 1999
<PAGE>
CONSOLIDATED BALANCE SHEETS 21
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1999 1998
-------------------------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed Maturities held for investment, at amortized cost
(market value $1,079,667 in 1999 and $1,560,903 in 1998) $ 1,030,931 $ 1,471,113
Fixed Maturities available for sale, at market value
(amortized cost $847,589,381 in 1999 and $741,583,948 in 1998) 812,871,523 774,346,360
Equity Securities available for sale, at market value (cost $53,053,370 in 1999
and $40,833,150 in 1998) 113,175,338 103,055,465
Mortgage Loans on Real Estate 305,079 404,432
Investment Real Estate (net of accumulated depreciation
of $1,198,489 in 1999 and $1,587,634 in 1998) 2,004,405 1,482,647
Policy Loans 42,820,247 38,645,185
Other Long-term Investments 129,629,607 110,022,016
Short-term Investments 53,376,923 54,637,029
-------------------------------------------
Total Investments 1,155,214,053 1,084,064,247
Cash 6,649,914 5,948,409
Accrued Investment Income 12,828,094 11,394,940
Accounts Receivable 12,977,124 23,378,825
Reinsurance Balances Receivable 2,152,839 1,121,089
Due from Affiliates 2,199,863 1,677,667
Deferred Policy Acquisition Costs 136,016,688 114,141,870
Other Assets 7,308,110 4,932,090
-------------------------------------------
Total Assets $1,335,346,685 $1,246,659,137
===========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy Liabilities and Accruals $ 601,978,858 $ 548,428,408
Unearned Premiums 114,802,464 105,464,480
Dividends to Policyholders 9,723,114 9,337,982
Premium Deposit and Retirement Deposit Funds 5,758,230 6,217,463
Deferred Income Taxes 24,360,697 41,788,715
Other Liabilities 52,698,161 44,677,579
Due to Affiliates 13,921,769 318,113
Commercial Paper 90,289,198 57,259,518
Notes Payable 105,162 106,765
Notes Payable to Affiliates 13,041,571 9,438,129
-------------------------------------------
Total Liabilities 926,679,224 823,037,152
-------------------------------------------
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: 1999 - 39,542,294; 1998 - 40,879,911 41,891,512 41,891,512
Capital in Excess of Par Value 22,820,889 22,355,934
Accumulated Other Comprehensive Income 20,407,812 57,577,202
Retained Earnings 351,923,507 306,268,833
Treasury Stock: at Cost (shares, 1999 - 2,349,218; 1998 - 1,011,601) (28,376,259) (4,471,496)
-------------------------------------------
Total Stockholders' Equity 408,667,461 423,621,985
-------------------------------------------
Total Liabilities and Stockholders' Equity $1,335,346,685 $1,246,659,137
===========================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
ALFA CORPORATION 1999
<PAGE>
22 CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------
1999 1998 1997
---------------------------------------------
<S> <C> <C> <C>
Revenues
Premiums - Property and Casualty Insurance $356,970,311 $345,739,616 $330,305,948
Premiums and Policy Charges - Life Insurance 48,359,640 46,098,666 40,659,098
Net Investment Income 67,807,030 62,511,658 57,528,669
Realized Investment Gains 5,060,396 4,397,533 3,356,231
Other Income 4,063,970 2,238,096 2,159,683
---------------------------------------------
Total Revenues 482,261,347 460,985,569 434,009,629
---------------------------------------------
Benefits and Expenses
Benefits & Settlement Expenses 281,715,997 277,900,636 266,077,956
Dividends to Policyholders 3,193,463 3,236,089 3,165,092
Amortization of Deferred Policy Acquisition Costs 60,202,522 57,821,043 55,997,727
Other Operating Expenses 45,071,909 38,762,883 31,969,232
---------------------------------------------
Total Expenses 390,183,891 377,720,651 357,210,007
---------------------------------------------
Income Before Provision for Income Taxes 92,077,456 83,264,918 76,799,622
Provision for Income Taxes 27,519,994 26,549,227 24,005,989
---------------------------------------------
Net Income $ 64,557,462 $ 56,715,691 $ 52,793,633
=============================================
Net Income Per Share - Basic $1.61 $1.39 $1.29
=============================================
Net Income Per Share - Diluted $1.60 $1.38 $1.29
=============================================
Weighted Average Shares Outstanding - Basic 39,980,880 40,834,232 40,787,047
=============================================
Weighted Average Shares Outstanding - Diluted 40,235,690 41,148,258 40,930,894
=============================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
ALFA CORPORATION 1999
<PAGE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 23
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------
1999 1998 1997
---------------------------------------
<S> <C> <C> <C>
Net Income $ 64,557,462 $56,715,691 $52,793,633
Other Comprehensive Income, net of tax:
Unrealized Investment (Losses)/Gains on Securities Available for Sale (33,880,133) 3,505,632 25,184,769
Less: Reclassification Adjustment for Realized Investment Gains 3,289,257 2,858,396 2,181,550
---------------------------------------
Total Other Comprehensive (Loss)/Income (37,169,390) 647,236 23,003,219
---------------------------------------
Total Comprehensive Income $ 27,388,072 $57,362,927 $75,796,852
=======================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
ALFA CORPORATION 1999
<PAGE>
24 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
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, 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
($.4375 per share) (17,867,671) (17,867,671)
Purchase of Treasury Stock
(22,000 shares) (419,471) (419,471)
Exercise of Stock Options 1,054,736 560,270 1,615,006
--------------------------------------------------------------------------------
Balance, December 31, 1998 41,891,512 22,355,934 57,577,202 306,268,833 (4,471,496) 423,621,985
Comprehensive Income
Net Income 64,557,462 64,557,462
Other Comprehensive Income, net of tax
Change in Net Unrealized Investment
Gains (Losses) (37,169,390) (37,169,390)
Dividends to Stockholders
($.4725 per share) (18,902,788) (18,902,788)
Purchase of Treasury Stock
(1,389,400 shares) (24,157,205) (24,157,205)
Exercise of Stock Options 464,955 252,442 717,397
--------------------------------------------------------------------------------
Balance, December 31, 1999 $41,891,512 $22,820,889 $ 20,407,812 $351,923,507 ($28,376,259) $408,667,461
================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
ALFA CORPORATION 1999
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS 25
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------------
1999 1998 1997
---------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 64,557,462 $ 56,715,691 $ 52,793,633
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Policy Acquisition Costs Deferred (71,159,530) (66,613,244) (63,576,796)
Amortization of Deferred Policy Acquisition Costs 60,202,522 57,821,043 55,997,727
Depreciation and Amortization 1,805,614 2,973,249 4,488,679
Provision for Deferred Taxes 2,374,322 3,240,151 1,411,344
Interest on Policyholders' Funds 18,356,050 16,127,589 14,127,507
Net Realized Investment Gains (5,060,396) (4,397,533) (3,356,231)
Other 2,223,658 2,296,826 2,306,276
Changes in Operating Assets and Liabilities:
(Increase) in Accrued Investment Income (1,433,154) (280,568) (1,082,097)
(Increase) Decrease in Accounts Receivable (1,636,992) 12,929 (1,616,291)
(Increase) Decrease in Reinsurance Balances Receivable (1,031,750) 10,922 557,643
(Increase) Decrease in Amounts Due from Affiliates (522,196) 827,490 204,335
Increase in Amounts Due to Affiliates 13,603,656 318,113
(Increase) Decrease in Other Assets (2,376,020) (425,730) 357,942
Increase in Liability for Policy Reserves 13,673,665 10,869,716 17,694,934
Increase in Liability for Unearned Premiums 9,337,984 7,795,210 4,723,904
(Decrease) Increase in Amounts Held for Others (74,101) 42,657 (401,572)
Increase in Other Liabilities 8,252,520 8,556,929 4,075,892
----------------------------------------------------
Net Cash Provided by Operating Activities 111,093,314 95,891,440 88,706,829
----------------------------------------------------
Cash Flows from Investing Activities:
Maturities and Redemptions of Fixed Maturities Held for Investment 449,765 536,451 810,279
Maturities and Redemptions of Fixed Maturities Available for Sale 106,439,215 78,974,370 46,658,709
Maturities and Redemptions of Other Investments 155,933,514 129,559,926 105,534,625
Sales of Fixed Maturities Available for Sale 9,392,842 59,787,112 26,157,682
Sales of Other Investments 66,265,802 71,659,811 47,218,250
Purchase of Fixed Maturities Available for Sale (218,821,947) (179,855,611) (193,675,998)
Purchase of Other Investments (257,043,582) (185,735,095) (154,426,039)
Net (Increase) Decrease in Short-term Investments (9,561,593) (18,433,677) 15,050,033
Net Decrease (Increase) in Receivable/Payable on Securities 22,628,454 (22,071,686) (2,180,776)
----------------------------------------------------
Net Cash (Used in) Investing Activities (124,317,530) (65,578,399) (108,853,235)
----------------------------------------------------
Cash Flows from Financing Activities:
Increase (Decrease) in Commercial Paper 33,029,680 (32,262,211) 15,940,766
(Decrease) in Notes Payable (1,603) (1,871,259) (231,934)
Increase (Decrease) in Notes Payable to Affiliates 3,603,442 (694,059) (696,438)
Stockholder Dividends Paid (18,902,788) (17,867,671) (16,212,717)
Purchase of Treasury Stock (24,157,205) (419,471)
Proceeds from Exercise of Stock Options 610,217 1,299,329 35,250
Deposits of Policyholders' Funds 59,732,767 58,049,561 55,798,414
Withdrawal of Policyholders' Funds (39,988,789) (36,419,448) (33,090,461)
----------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 13,925,721 (30,185,229) 21,542,880
----------------------------------------------------
Net Increase in Cash 701,505 127,812 1,396,474
Cash - Beginning of Period 5,948,409 5,820,597 4,424,123
----------------------------------------------------
Cash - End of Period $ 6,649,914 $ 5,948,409 $ 5,820,597
====================================================
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Year for:
Interest $ 3,933,097 $ 4,539,523 $ 4,978,901
Income Taxes $ 25,799,500 $ 22,397,000 $ 24,642,566
</TABLE>
The accompanying notes are an integral part of these financial statements.
ALFA CORPORATION 1999
<PAGE>
26 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), Alfa
Agency Mississippi, Inc., and Alfa Benefits Corporation (ABC). 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, real estate sales
and benefit services for the Alfa Group. 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 $365 million of premiums and policy charges
representing 90% of such amounts in 1999 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 is 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 fair value. The unrealized gains or losses on these securities are
reflected as accumulated other comprehensive income within stockholders'
equity, net of taxes. Furthermore, deferred acquisition costs are adjusted to
reflect the effect that would have been recognized had the unrealized holding
gains and losses been realized. This adjustment to deferred acquisition costs
results in a corresponding adjustment to comprehensive income. 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.
ALFA CORPORATION 1999
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 27
(Note 1, continued)
Equity securities (common and non-redeemable preferred stocks) are carried at
fair 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 fair value as a liability
with net unrealized gains or losses reflected as accumulated other comprehensive
income within stockholders' equity, net of taxes. 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 $914,049 in options outstanding at December 31, 1999.
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 adjustment 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 254,810 shares in 1999, 314,206 shares in 1998 and 143,847 shares in 1997,
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 1998 and 1997 amounts in order to
conform to 1999 classifications and descriptions.
ALFA CORPORATION 1999
<PAGE>
28 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%. 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. No catastrophe losses were incurred in either 1999 or 1997.
Alfa Group pooled catastrophe losses for 1998 totaled $45 million. The Company's
share of such losses totaled $6.5 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 receivable of $824,156
from and a payable of $318,113 to the Mutual Group at December 31, 1999 and
December 31, 1998, respectively, for cash transactions originating in December
and settled the following month. Approximately 83.2% of the Company's property
and casualty premium income and 73.3% of its total premium income for 1999 was
derived from the Company's participation in the Pooling Agreement.
3. RELATED PARTY TRANSACTIONS
Mutual owns 40.8% and Alfa Mutual Fire (Fire) owns 10.1% 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, 1999 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 $9,572,845 in 1999, $9,058,798 in 1998 and
$8,234,938 in 1997.
The Company repurchased 564,400 shares and 11,000 shares of its common stock
at a cost of $9,820,192 and $209,917 in 1999 and 1998, respectively, from the
Mutual Group 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 $33.0 million in 1999, $32.1 million in 1998 and
$27.7 million in 1997. 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 $14.8
million in 1999, $13.9 million in 1998 and $13.2 million in 1997. Policy
charges recorded from such premiums totaled approximately $2.2 million in 1999,
$2.1 million in 1998 and $1.9 million in 1997. Policy reserves and insurance in
force on the COLI plan at December 31, 1999 were approximately $37.9 million and
$383.7 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 $322,921 in 1999, $364,125
in 1998 and $345,434 in 1997. Policy reserves and insurance in force on this
plan at December 31, 1999 were approximately $69,000 and $38.4 million,
respectively.
ALFA CORPORATION 1999
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 29
(Note 3, continued)
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 $155,000 in 1999, $71,000 in 1998 and
$62,000 in 1997.
During 1999, the Company formed a new subsidiary, Alfa Benefits Corporation
(ABC), in an effort to improve the controls over employee benefits and related
payments, to simplify and consolidate the accounting and recordkeeping function,
and to improve operating efficiencies. As a result, the accrued benefit
liabilities held by the various Alfa property and casualty entities and their
related assets were transferred to ABC. At December 31, 1999, the amount of
such transfers totaled $13.7 million.
The Company's consumer finance and leasing subsidiary (Financial) leases
equipment, automobiles, furniture and other property to the Mutual Group. The
Mutual Group paid $1,440,274 in 1999, $1,799,823 in 1998 and $2,010,969 in 1997
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 $4,441,571 and $438,129 at December 31, 1999 and
1998, respectively. Interest paid by Financial to the Mutual Group was $52,789
in 1999, $44,365 in 1998 and $109,576 in 1997. 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 $8,600,000 and $9,000,000 at
December 31, 1999 and 1998, respectively. Interest paid by the Company and
Financial to the Federation and its subsidiary was $449,484 in 1999, $516,610 in
1998 and $489,125 in 1997. 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, 1999 and 1998, the amount loaned to the
partnership under the line of credit was $10,000 and $345,000, respectively.
Interest paid to Financial was $17,031 in 1999 and $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%. At December 31, 1999, the
outstanding balance on this line of credit was $1,000,000. No balance was
unpaid at December 31, 1998. Interest paid in 1999 and 1998 to Financial was
$123,196 and $237,984, respectively. 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 $5,048,774 in 1999, $934,687 in 1998 and $1,943,560 in 1997 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 $27,630 in 1999,
$128,878 in 1998 and $185,029 in 1997 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. No such transactions occurred in 1998 or 1999. The
Company is a partner in Alfa Investors Partnership with the Mutual Group. The
amount invested in the partnership was $15.9 million and $15.4 million at
December 31, 1999 and 1998, respectively. The Company had committed to fund up
to $4.7 million additional investment in the partnership at December 31, 1999.
The Company received a distribution from the partnership in the form of common
stock valued at $1,151,614 in 1999. 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 $705,471
and $660,482 at December 31, 1999 and 1998, respectively.
ALFA CORPORATION 1999
<PAGE>
30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVESTMENTS
Net investment income is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------
<S> <C> <C> <C>
Fixed maturities:
Held for investment $ 110,826 $ 158,978 $ 223,979
Available for sale 56,947,170 53,200,860 48,732,496
--------------------------------------------
Total fixed maturities 57,057,996 53,359,838 48,956,475
Equity securities 2,045,809 2,053,964 2,393,257
Mortgage loans on real estate 40,021 41,061 62,814
Investment real estate 260,864 306,690 401,937
Policy loans 3,099,769 2,690,979 2,594,516
Other long-term investments 13,455,674 13,206,934 13,073,001
Short-term investments 2,875,953 1,971,630 1,501,606
--------------------------------------------
Total investment income 78,836,086 73,631,096 68,983,606
Investment expenses, including interest expense (11,029,056) (11,119,438) (11,454,937)
--------------------------------------------
Net investment income $ 67,807,030 $ 62,511,658 $ 57,528,669
============================================
</TABLE>
Net realized investment gains (losses) are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------
<S> <C> <C> <C>
Fixed maturities:
Held for investment $ 8,757 $ (5,247) $ 418
Available for sale (1,753,508) (305,896) 935,666
--------------------------------------------
Total fixed maturities (1,744,751) (311,143) 936,084
Equity securities 8,078,661 3,195,243 1,294,462
Other investments (1,273,514) 1,513,433 1,125,685
--------------------------------------------
Net realized investment gains $ 5,060,396 $ 4,397,533 $ 3,356,231
============================================
</TABLE>
Changes in net unrealized investment gains and losses on fixed maturities and
equity securities, including options, are as follows:
<TABLE>
<CAPTION>
Increase (Decrease)
--------------------------------------------
1999 1998 1997
--------------------------------------------
<S> <C> <C> <C>
Fixed maturities:
Held for investment $ (41,054) $ (53,682) $ (37,252)
==========================================
Available for sale, net of tax $(36,765,599) $ (178,934) $ 7,961,902
==========================================
Equity securities, net of tax $ (403,791) $ 826,170 $ 15,041,317
==========================================
</TABLE>
ALFA CORPORATION 1999
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 31
(Note 4, continued)
Unrealized investment gains and losses are based on fair values which were
determined using nationally recognized pricing services, broker/dealers
securities firms and market makers.
At December 31, 1999 and 1998, gross unrealized gains for equity securities
amounted to $63,167,810 and $64,367,603, respectively, while gross unrealized
losses amounted to $2,029,540 and $2,607,950, respectively, and applicable
deferred income taxes aggregated $21,419,933 and $21,425,412, respectively.
The Company's fixed maturity portfolio is predominantly comprised of
investment grade securities. At December 31, 1999, approximately $8.2 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 fair value of investments in fixed maturity
securities are as follows:
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------------------------------------------------
<S> <C> <C> <C> <C>
Held for investment:
Mortgage-backed securities $ 1,030,931 $ 50,984 $ (2,248) $ 1,079,667
==========================================================
Available for sale:
U.S. Treasury securities & obligations
of U.S. Government corporations and agencies $ 32,046,316 $ 1,542,061 $ (203,825) $ 33,384,552
Obligations of states & political subdivisions 229,813,755 2,200,328 (10,982,153) 221,031,930
Corporate securities 262,916,302 3,335,546 (17,906,054) 248,345,794
Mortgage-backed securities 319,313,008 1,884,566 (14,640,827) 306,556,747
Other debt securities 3,500,000 52,500 - 3,552,500
----------------------------------------------------------
Totals $ 847,589,381 $ 9,015,001 $(43,732,859) $812,871,523
==========================================================
December 31, 1998
----------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
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
==========================================================
</TABLE>
ALFA CORPORATION 1999
<PAGE>
32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Note 4, continued)
The amortized cost and estimated fair value of fixed maturities available for
sale at December 31, 1999 by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
December 31, 1999
---------------------------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR
COST VALUE
---------------------------------------
<S> <C> <C>
Available for sale:
Due in one year or less $ 17,511,457 $ 17,676,978
Due after one year through five years 61,128,907 62,054,585
Due after five years through ten years 130,784,938 130,681,539
Due after ten years 318,851,071 295,901,674
---------------------------------------
528,276,373 506,314,776
Mortgage-backed securities 319,313,008 306,556,747
---------------------------------------
$847,589,381 $812,871,523
=======================================
</TABLE>
Proceeds from sales of fixed maturities available for sale were $9,392,842 in
1999, $59,787,112 in 1998 and $26,157,682 in 1997. Gross gains of $12,779 in
1999, $653,398 in 1998 and $714,990 in 1997 and gross losses of $812,408 in
1999, $167,174 in 1998 and $61,526 in 1997 were realized on those sales. In
addition, the Company recorded a loss of approximately $2,939,000 in 1999,
$3,120,000 in 1998 and $927,000 in 1997 for securities whose valuation was
deemed to be an other than temporary decline. At December 31, 1999 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, 1999 and 1998, the Company's mortgage loan portfolio
totaled approximately $305,000 and $404,000, respectively, and the collateral
loan portfolio, included in "Other long-term investments", totaled $59.0 million
and $56.0 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, 1999, the Company had charged off loans totaling
$465,535 and had an allowance of $637,965. The Company has estimated the fair
value of the collateral loan portfolio to be approximately $60.3 million and
$57.2 million at December 31, 1999 and 1998, respectively. The estimated fair
value was determined by discounting the estimated future cash flows from the
loan portfolio at 7.75% for 1999 and 6.75% for 1998, 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, 1999. The Company's policy loans earn interest at rates
primarily ranging from 5.0% to 8.0% at December 31, 1999. 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, 1999, the Company had $1,843,442 in investments on deposit
with regulatory agencies in order to meet statutory requirements.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
Information about specific valuation techniques and related fair value detail
is provided in Note 1 - Summary of Significant Accounting Policies, Note 4 -
Investments and Note 8 - Notes Payable and Commercial Paper. The cost and
estimated fair value of the financial instruments as of December 31 are
summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------------
Cost Est. Fair Value Cost Est.Fair Value
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investments:
Fixed maturities held for investment $ 1,030,931 $ 1,079,667 $ 1,471,113 $ 1,560,903
Fixed maturities available for sale $ 847,589,381 $ 812,871,523 $ 741,583,948 $ 774,346,360
Equity securities $ 53,053,370 $ 113,175,338 $ 40,833,150 $ 103,055,465
Short-term investments $ 53,376,923 $ 53,376,923 $ 54,637,029 $ 54,637,029
Mortgage and Collateral loans $ 59,283,301 $ 60,563,428 $ 56,401,043 $ 57,596,928
Liabilities:
Commercial paper $ 90,289,198 $ 90,289,198 $ 57,259,518 $ 57,259,518
Notes payable $ 13,146,733 $ 13,146,733 $ 9,544,894 $ 9,544,894
</TABLE>
ALFA CORPORATION 1999
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 33
6. FUTURE POLICY BENEFITS, LOSSES AND LOSS ADJUSTMENT EXPENSES
The composition of the liability for future policy benefits, losses and loss
adjustment expenses and the more significant assumptions used in its caculation
are as follows:
<TABLE>
<CAPTION>
BASIS OF ASSUMPTION
LIABILITY -------------------------------------------------
INSURANCE -------------------------- YEARS INTEREST MORTALITY WITH-
IN FORCE 12/31/99 12/31/98 OF ISSUE RATE AND MORBIDITY DRAWALS
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ordinary $ 5,546,566,302 $124,912,629 $116,061,999 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
1999 Mortality Tables
Interest 2,086,801,666 173,642,421 159,815,209 1984 6.25%* Modified 1965-70 Basic Company
sensitive to Select and Ultimate experience
life 1999 Mortality Tables
Universal 4,336,959,910 144,468,900 118,870,406 1987 6.25%* Modified 1965-70 Basic Company
life to Select and Ultimate experience
1999 Mortality Tables
Annuities w/o 11,970,939 12,271,943 1974 to 5.25% to -- --
life contingencies 1999 5.75%*
Group credit 6,853,269 202,306 212,555 1992 to 3.0% 1958 CET --
life 1999
Group life 38,354,355 68,539 56,806 1999 4.5% 1960 CSG --
-------------------------------------------
$12,015,535,502 $455,265,734 $407,288,918
===============
Accident & 274,024 296,480 5% 1972 intercompany 200% N&W III
health reports
Losses and loss
adjustment expenses 146,439,100 140,843,010
--------------------------
$601,978,858 $548,428,408
==========================
</TABLE>
*Rates are adjustable annually on policyholders' anniversary dates.
ALFA CORPORATION 1999
<PAGE>
34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Note 6, continued)
Participating policies represent approximately 2% 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>
1999 1998 1997
---------------------------------------------------------------------------------------
Property and Property and Property and
Casualty Life Casualty Life Casualty Life
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, $138,030,306 $ 2,812,704 $132,086,208 $ 2,243,041 $117,672,492 $ 3,095,914
Less reinsurance recoverables
on unpaid losses (759,568) (353,195) (960,376) (123,474) (745,156) (801,496)
---------------------------------------------------------------------------------------
Net balance at January 1, 137,270,738 2,459,509 131,125,832 2,119,567 116,927,336 2,294,418
---------------------------------------------------------------------------------------
Incurred related to:
Current year 249,992,384 14,512,337 253,369,653 15,160,885 240,327,428 11,600,573
Prior years (17,849,537) (298,357) (18,725,403) (17,517) (8,928,409) (7,995)
---------------------------------------------------------------------------------------
Total incurred 232,142,847 14,213,980 234,644,250 15,143,368 231,399,019 11,592,578
---------------------------------------------------------------------------------------
Paid related to:
Current year 169,943,000 12,957,553 175,544,000 14,010,044 164,640,000 10,605,018
Prior years 58,150,889 720,526 52,955,344 793,382 52,560,523 1,162,411
---------------------------------------------------------------------------------------
Total paid 228,093,889 13,678,079 228,499,344 14,803,426 217,200,523 11,767,429
---------------------------------------------------------------------------------------
Net balance at December 31, 141,319,696 2,995,410 137,270,738 2,459,509 131,125,832 2,119,567
Plus reinsurance recoverables
on unpaid losses 1,828,994 295,000 759,568 353,195 960,376 123,474
---------------------------------------------------------------------------------------
Balance at December 31, $143,148,690 $ 3,290,410 $138,030,306 $ 2,812,704 $132,086,208 $ 2,243,041
=======================================================================================
</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.
ALFA CORPORATION 1999
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 35
7. INCOME TAXES
Below is a comparative analysis of the provisions for income tax appearing in
the statements of income:
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------------------------
<S> <C> <C> <C>
Current $25,145,672 $23,309,076 $22,594,645
Deferred 2,374,322 3,240,151 1,411,344
-----------------------------------------------------
Total $27,519,994 $26,549,227 $24,005,989
=====================================================
</TABLE>
Reconciliations of the differences between income taxes computed at Federal
statutory tax rates and provisions for income taxes are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Income taxes computed at Federal statutory tax rate $32,227,110 $29,142,721 $26,879,868
Dividends received deduction and tax exempt interest (3,031,670) (2,663,414) (2,011,505)
Tax Credits (1,812,000) (1,245,045) (964,820)
Other, net 136,554 1,314,965 102,446
------------------------------------------
Total $27,519,994 $26,549,227 $24,005,989
==========================================
</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>
1999 1998 1997
-------------------------------------------
<S> <C> <C> <C>
Statements of Income $ 27,519,994 $26,549,227 $24,005,989
Statements of Comprehensive Income:
Unrealized holding gains (losses)arising during the year (19,802,340) 348,512 12,386,349
Statements of Stockholders' Equity
Capital in excess of par value:
Exercise of stock options (107,180) (315,677) -
-------------------------------------------
Total income taxes $ 7,610,474 $26,582,062 $36,392,338
===========================================
</TABLE>
The net deferred tax liabilities consist of the following:
<TABLE>
<CAPTION>
1999 1998
-----------------------------
<S> <C> <C>
Deferred Tax Assets:
Reserve computational method differences $ 18,750,842 $19,613,782
Unearned premium reserve 8,036,172 7,382,514
Other 5,765,824 2,638,791
------------------------------
Total deferred tax asset $ 32,552,838 $29,635,087
------------------------------
Deferred Tax Liabilities:
Unrealized gains $ 10,886,205 $ 30,688,545
Deferred acquisition costs 42,356,015 37,413,238
Other 3,671,315 3,322,019
------------------------------
Total deferred tax liability $ 56,913,535 $ 71,423,802
------------------------------
Net deferred tax liability ($ 24,360,697) ($ 41,788,715)
==============================
</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.
ALFA CORPORATION 1999
<PAGE>
36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. NOTES PAYABLE AND COMMERCIAL PAPER
Short term debt at December 31, 1999 was $103.4 million. Of this amount, the
Company had approximately $90.3 million in commercial paper at rates ranging
from 6.00% to 6.13% with maturities ranging from January 10, 2000 to January 31,
2000. The Company intends to continue to use the commercial paper program to
fund its short term needs, however, backup lines of credit are in place up to
$100 million. The 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 $13.0 million in short-term debt outstanding to affiliates with
interest equal to commercial paper rates payable monthly and $105,162
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.
To resolve any year 2000 issues, the Company identified all of its mission
critical systems, which are accounting, agent compensation, claims, investment
management, life policy administration, loan processing, payment processing,
payroll processing, field and home office personal computers and any related
programs, postal software, and property/casualty policy administration. Over
the last six years, each of these mission critical systems underwent intensive
analysis, including research, remediation and programming, and system testing.
All phases were completed prior to the close of 1999. The Company also addressed
year 2000 issues related to material relationships with third party vendors and
suppliers, and obtained assurances that such issues were addressed. Due to the
length of the process, the number of employees and resources devoted to the
efforts and the time spent, it is not practicable to know the exact amount of
costs attributable to the year 2000 issue. However, the Company estimates that
it spent approximately $3.1 million during the course of the last six years and
approximately $1.3 million in 1999. These costs were expensed as incurred
throughout the process and absorbed into the Company's operations with no
significant adverse impact on its financial condition or operating results.
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 December 31, 1999. Costs for
these and similar legal proceedings, including accruals for outstanding cases,
totaled $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
24 legal proceedings against Alfa Life Insurance Corporation are in process at
December 31, 1999. Of the 24 proceedings, 15 were filed in 1999, two were filed
in 1998, six were filed in 1997, and one was filed in 1996. Two of the legal
proceedings were filed as purported class action lawsuits, but, at present, no
class has been certified. In 1999, Life was able to eliminate 60 cases filed by
two plaintiff's law firms, either through dismissal or settlement. Included in
those 60 cases are two proceedings in which the jury awarded the plainfiffs
compensatory and punitive damages against Life. Both verdicts were on appeal to
the Alabama Supreme Court when they were settled. One purported class action
lawsuit has been filed against Alfa Financial Corporation, and one purported
class action lawsuit has been filed against Alfa Builders and Alfa Mutual Fire
Insurance Company. Additionally, five purported class action lawsuits have been
filed 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 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.
ALFA CORPORATION 1999
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 37
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. In March 1999, the
Company's Board of Directors increased the number of shares authorized to be
repurchased to 4,000,000. At December 31, 1999, the Company had repurchased a
total of 2,509,000 shares at a cost of $29,207,446 and due to the exercise of
stock options had reissued 167,782 shares at a cost of $832,187 under this
program, which decreased the total number of shares outstanding to 39,542,294
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>
1999 1998 1997
---------------------------------------------
<S> <C> <C> <C>
Statutory net income:
Life insurance subsidiary $ 3,493,080 $ 5,932,027 $ 7,650,641
=============================================
Property and casualty subsidiaries $ 49,223,981 $ 40,275,880 $ 37,062,691
=============================================
Statutory stockholders' equity:
Life insurance subsidiary $ 127,713,380 $ 129,364,457 $ 126,716,550
=============================================
Property and casualty subsidiaries $ 226,875,024 $ 195,111,399 $ 171,727,913
=============================================
</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 $62.0 million without prior regulatory approval in 2000 based on
December 31, 1999 financial condition and results of operations.
At December 31, 1999 the life subsidiary's Adjusted Capital calculated in
accordance with NAIC Risk-Based Capital guidelines was $149.0 million, compared
to the Authorized Control Level amount of $19.3 million, and the property and
casualty subsidiaries' Adjusted Capital was $226.9 million, compared to the
Authorized Control Level amount of $19.3 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, 1999, 1998 and 1997 was approximately $1,949,000,
$2,371,000 and $2,694,000, respectively. The cost and net book value of major
classes of leased property at December 31, 1999 was:
<TABLE>
<CAPTION>
NET BOOK
COST VALUE
-----------------------------
<S> <C> <C>
Transportation equipment $ 9,329,233 $ 6,390,875
Furniture and equipment 11,837,544 5,479,790
Buildings 2,285,753 1,152,325
-----------------------------
Total $23,452,530 $13,022,990
=============================
</TABLE>
At December 31, 1999, the aggregate minimum rental payments to be received
under leases having initial or remaining lease terms in excess of one year are
approximately $1,822,160 in 2000, $1,080,994 in 2001, $493,617 in 2002, $158,411
in 2003, $122,159 in 2004 and $85,697 thereafter.
ALFA CORPORATION 1999
<PAGE>
38 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
$1,369,300,363 of its life insurance in force with other insurance companies and
has taken reserve credits for approximately $4,061,777 on account of such
reinsurance at December 31, 1999. 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, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Direct premiums earned $112,213,239 $106,777,901 $ 97,856,550
Premiums ceded to nonaffiliates (3,777,449) (3,498,933) (3,472,978)
Premiums ceded to pooling agreement (60,182,592) (57,270,806) (53,789,256)
Premiums assumed from pooling agreement 356,959,184 345,740,009 330,325,696
Premiums assumed from nonaffiliates 117,569 90,111 45,034
------------------------------------------
Net premiums earned $405,329,951 $391,838,282 $370,965,046
==========================================
Direct losses $ 58,297,585 $ 60,651,925 $ 51,875,909
Losses ceded to nonaffiliates (3,209,498) (3,585,157) (1,693,990)
Losses ceded to pooling agreement (41,519,900) (43,112,799) (38,051,264)
Losses assumed from pooling agreement 215,705,568 218,297,442 214,317,668
Losses assumed from nonaffiliates 68,706 349,500 45,086
Loss adjustment expenses, net 17,014,366 17,186,707 16,498,188
------------------------------------------
Net losses incurred 246,356,827 249,787,618 242,991,597
Surrender, maturities, interest and other benefits and
settlement expenses 35,359,170 28,113,018 23,086,359
------------------------------------------
Total benefits and settlement expenses $281,715,997 $277,900,636 $266,077,956
==========================================
</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, 1999, the Company does not believe there to be a significant
concentration of credit risk related to its reinsurance program.
ALFA CORPORATION 1999
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 39
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 contruction 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, 1999
----------------------------------------------------------------------------------------
Property &
Casualty Life Non-
Insurance Insurance Insurance Corporate Eliminations Total
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Premiums $356,970,311 $ 23,001,655 $ 379,971,966
Policy charges 25,357,985 25,357,985
Segment expenses 262,475,291 64,285,591 ($282,508) 326,478,374
Amortization of deferred acquisition
expense 53,455,392 6,747,130 60,202,522
----------------------------------------------------------------------------------------
Underwriting profit (loss) 41,039,628 (22,673,081) 282,508 18,649,055
Net investment income (interest expense) 27,600,849 37,873,099 $ 5,333,324 ($2,752,097) (248,145) 67,807,030
Other income 1,514,504 2,583,829 (34,363) 4,063,970
Other expense 91,056 3,194,071 217,868 3,502,995
----------------------------------------------------------------------------------------
Segment operating profit (loss) before
tax 70,063,925 15,200,018 4,723,082 (2,969,965) - 87,017,060
Income tax provision (benefit) 20,571,618 3,603,127 1,631,510 (57,400) 25,748,855
----------------------------------------------------------------------------------------
Segment operating profit (loss) 49,492,307 11,596,891 3,091,572 (2,912,565) - 61,268,205
Net realized gains after tax 1,566,271 1,722,986 3,289,257
----------------------------------------------------------------------------------------
Segment net profit (loss) $ 51,058,578 $ 13,319,877 $ 3,091,572 ($2,912,565) - $ 64,557,462
========================================================================================
Segment Assets $520,291,478 $708,878,886 $120,253,999 $507,672,330 ($521,750,008) $1,335,346,685
========================================================================================
</TABLE>
<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
========================================================================================
</TABLE>
ALFA CORPORATION 1999
<PAGE>
40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Note 13, continued)
<TABLE>
<CAPTION>
Year Ended December 31, 1997
------------------------------------------------------------------------------------------
Property &
Casualty Life Non-
Insurance Insurance Insurance Corporate Eliminations Total
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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>
The following summary reconciles significant segment items to the Company's
consolidated financial statements:
<TABLE>
<CAPTION>
For the years ended December 31,
-----------------------------------------------------
1999 1998 1997
-----------------------------------------------------
Revenues:
<S> <C> <C> <C>
Premiums - Property & Casualty Insurance $ 356,970,311 $ 345,739,616 $ 330,305,948
Premiums & policy charges - Life Insurance 48,359,640 46,098,666 40,659,098
Net investment income 67,807,030 62,511,658 57,528,669
Net realized investment gains 5,060,396 4,397,533 3,356,231
Other income 4,063,970 2,238,096 2,159,683
-----------------------------------------------------
Total revenues $ 482,261,347 $ 460,985,569 $ 434,009,629
=====================================================
Income before income taxes:
Underwriting profit $ 18,649,055 $ 20,778,348 $ 17,756,334
Other income 4,063,970 2,238,096 2,159,683
Other expense (3,502,995) (6,660,717) (4,001,295)
Net investment income 67,807,030 62,511,658 57,528,669
Net realized investment gains 5,060,396 4,397,533 3,356,231
-----------------------------------------------------
Income before income taxes $ 92,077,456 $ 83,264,918 $ 76,799,622
=====================================================
Income taxes:
Allocated to segments $ 25,748,855 $ 25,010,090 $ 22,831,308
Allocated to realized gains 1,771,139 1,539,137 1,174,681
-----------------------------------------------------
Total income tax $ 27,519,994 $ 26,549,227 $ 24,005,989
=====================================================
Assets:
Allocated to segments $1,857,096,693 $1,742,516,086 $1,662,734,759
Eliminations (521,750,008) (495,856,949) (492,668,957)
-----------------------------------------------------
Total assets $1,335,346,685 $1,246,659,137 $1,170,065,802
=====================================================
</TABLE>
ALFA CORPORATION 1999
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 41
14. ACCOUNTING FOR STOCK-BASED COMPENSATION
Consistent with the provisions of Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation," 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, 1999
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 58,400 130,850 376,150
October 1993 218,000 $ 9.40 $11.75 8,000 210,000
March 1994 80,000 $11.50 $11.50 7,500 72,500
March 1995 80,000 $11.50 $11.50 7,500 72,500
April 1996 80,000 $12.25 $12.25 1,667 4,999 73,334
February 1997 75,000 $12.00 $12.00 4,000 8,833 41,161
March 1998 309,500 $17.75 $17.75 9,000 100 100,375
March 1998 143,000 $14.20 $17.75 47,675
April 1999 167,500 $16.44 $16.44
October 1999 8,000 $17.06 $17.06
----------- -------------------------------------
Less: Total Options Granted 1,726,400 73,067 167,782 993,695
Add: Options Cancelled 73,067 =====================================
-----------
Available for Grant under
Plan at December 31, 1999 346,667
===========
</TABLE>
To determine the fair value of the options granted during 1999, 1998 and 1997
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>
175,500 452,500 75,000
Options Granted Options Granted Options Granted
1999 1998 1997
---------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rate 5.24% 5.57% 6.27%
Expected life (in years) 10 10 10
Expected volatility 0.51 0.51 0.49
Expected future dividend yield 2.5% 2.3% 3.3%
Weighted average option exercise price $ 16.47 $ 16.63 $ 12.00
===================================================
Fair value at date of grant $1,466,035 $4,325,035 $405,534
===================================================
Fair value per option share $ 8.35 $ 9.56 $ 5.41
===================================================
</TABLE>
ALFA CORPORATION 1999
<PAGE>
42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Note 14, continued)
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,
--------------------------------------
1999 1998 1997
--------------------------------------
<S> <C> <C> <C>
Net income, as reported $64,557,462 $56,715,691 $52,793,633
======================================
Earnings per share, as reported - Basic $ 1.61 $ 1.39 $ 1.29
======================================
- Diluted $ 1.60 $ 1.38 $ 1.29
======================================
Proforma net income $63,326,872 $55,886,063 $52,502,188
======================================
Proforma earnings per share - Basic $ 1.58 $ 1.37 $ 1.29
======================================
- Diluted $ 1.57 $ 1.36 $ 1.29
======================================
Dilution - Basic $ 0.03 $ 0.02 --
======================================
- Diluted $ 0.03 $ 0.02 --
======================================
</TABLE>
The information shown below reflects activity for options outstanding at
December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
December 31,
1999 1998 1997
--------------------------------------------------------------------------
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 1,369,400 $ 12.99 1,039,200 $ 11.28 975,000 $ 11.23
Add (deduct):
Granted 175,500 $ 16.47 452,500 $ 16.63 75,000 $ 12.00
Exercised (51,783) ($11.78) (112,199) ($11.58) (3,000) ($11.75)
Cancelled (7,566) ($14.90) (10,101) ($14.92) (7,800) ($11.75)
--------------------------------------------------------------------------
End of Period 1,485,551 $ 13.43 1,369,400 $ 12.99 1,039,200 $ 11.28
==========================================================================
Exercisable, end of period 993,695 $ 11.99 847,923 $ 11.16 884,188 $ 11.15
==========================================================================
Range of exercise prices $9.40 to $17.75 $9.40 to $17.75 $9.40 to $12.25
==========================================================================
Weighted average remaining
contractual life 6.1 years 6.7 years 6.4 years
==========================================================================
Compensation cost recognized
during period $390,823 $306,408 $103,680
==========================================================================
</TABLE>
ALFA CORPORATION 1999
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 43
15. FINANCIAL ACCOUNTING DEVELOPMENTS
The Financial Accounting Standards Board 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.
ALFA CORPORATION 1999
<PAGE>
44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1999 and 1998, 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, 1999. 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 1999 and 1998 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
KPMG LLP
Birmingham, Alabam
February 3, 2000
QUARTERLY FINANCIAL INFORMATION-UNAUDITED
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------------------------------
March 31 June 30 September 30
-----------------------------------------------------------------------------------
1999 1998 1999 1998 1999 1998
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Premiums and
Policy Charges $100,377,070 $97,036,509 $100,994,559 $ 97,049,291 $102,148,099 $98,732,729
Net Investment Income $ 16,394,194 $15,518,593 $ 16,270,579 $15,307,378 $ 17,122,676 $16,243,369
Net Income $ 16,280,577 $16,060,242 $ 15,917,167 $11,881,575 $ 16,250,468 $15,124,058
Average Shares Outstanding
- Basic 40,734,802 40,796,961 39,927,689 40,830,127 39,673,839 40,852,332
- Diluted 41,052,769 41,054,230 40,152,132 41,149,299 39,927,066 41,209,050
Net Income Per Share*
- Basic $ 0.40 $ 0.39 $ 0.40 $ 0.29 $ 0.41 $ 0.37
- Diluted $ 0.40 $ 0.39 $ 0.40 $ 0.29 $ 0.41 $ 0.37
<CAPTION>
Quarter Ended
-------------------------
December 31
-------------------------
1999 1998
-------------------------
<S> <C> <C>
Premiums and
Policy Charges $101,810,223 $99,019,753
Net Investment Income $ 18,019,581 $15,442,318
Net Income $ 16,109,250 $13,649,816
Average Shares Outstanding
- Basic 39,603,022 40,822,140
- Diluted 39,828,954 41,187,366
Net Income Per Share*
- Basic $ 0.41 $ 0.33
- Diluted $ 0.40 $ 0.33
</TABLE>
*The sum of the quarters may not equal the annual earnings per share due to the
rounding effects on a quarterly basis.
ALFA CORPORATION 1999
<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
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, Senior Vice President
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 3,700
stockholders of record. Newspaper listings of NASDAQ stocks list Alfa
Corporation as AlfaCp.
<TABLE>
<CAPTION>
Stock Price and Dividend Information
- ------------------------------------------------------------------------
Dividends
1999 High Low Per Share
- ------------------------------------------------------------------------
<S> <C> <C> <C>
First Quarter $24 1/4 $16 1/8 $.1125
Second Quarter 20 16 .12
Third Quarter 20 1/2 16 1/4 .12
Fourth Quarter 18 3/8 15 .12
- ------------------------------------------------------------------------
Dividends
1998 High Low 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
</TABLE>
The Company has paid cash dividends annually since 1974 and quarterly since
September 1977. There are no restrictions on the Company's present or future
ability to pay dividends other than the usual statutory restrictions. There is a
present expectation that the dividends will continue to be paid in the future,
provided that operations of the Company continue to be profitable.
NASDAQ Registered Market Makers
Fox-Pitt, Kelton, Inc. The Robinson-Humphrey Company, Inc.
Goldman, Sachs & Co. Sandler O'Neill & Partners, L.P.
J. C. Bradford & Co. Sherwood Securities Corporation
Knight Securities L.P. Spear, Leads & Kellogg
Mayer & Schweitzer, Inc. Sterne, Agee & Leach, Inc.
Stock Transfer Agent The Bank of New York 1-800-524-4458
E-mail: [email protected]
Stock Transfer Website: http://stock.bankofny.com
Address Shareholder Inquiries To: Send Certificates For Transfer & Address
Changes To:
The Bank of New York The Bank of New York
Shareholder Relations Dept. - 11E Receive & Deliver Dept. - 11W
P.O. Box 11258 P.O. Box 11002
Church Street Station Church Street Station
New York, NY 10286 New York, NY 10286
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.
<TABLE>
<CAPTION>
Moody's
Ratings A.M. Standard Investors
Best & Poor's Service Weiss
-------------------------------------------------
<S> <C> <C> <C> <C>
Financial Strength
- - Property/Casualty A++ (Superior) AA A
- - Life A+ (Superior) AA A-
Commercial Paper A-1+ P-1
</TABLE>
Independent Accountants
KPMG 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 27, 2000, in the auditorium of the Company's
executive offices in Montgomery.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Alfa Corporation:
We consent to incorporation by reference in the registration statements
(No. 33-77916 and 33-76460) on Form S-8 and (No. 33-83134) on Form S-3 of Alfa
Corporation of our reports dated February 3, 2000, relating to the consolidated
balance sheets of Alfa Corporation and subsidiaries as of December 31, 1999 and
1998, 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, 1999, and all related schedules, which reports appear
or are incorporated by reference in the December 31, 1999 annual report on Form
10-K of Alfa Corporation.
/s/ KPMG LLP
Birmingham, Alabama
March 24, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JAN-01-1999 OCT-01-1999
<PERIOD-END> DEC-31-1999 DEC-31-1999
<DEBT-HELD-FOR-SALE> 812,871,523 0
<DEBT-CARRYING-VALUE> 1,030,931 0
<DEBT-MARKET-VALUE> 1,079,667 0
<EQUITIES> 113,175,338 0
<MORTGAGE> 305,079 0
<REAL-ESTATE> 2,004,405 0
<TOTAL-INVEST> 1,155,214,053 0
<CASH> 6,649,914 0
<RECOVER-REINSURE> 2,152,839 0
<DEFERRED-ACQUISITION> 136,016,688 0
<TOTAL-ASSETS> 1,335,346,685 0
<POLICY-LOSSES> 608,228,858 0
<UNEARNED-PREMIUMS> 114,802,464 0
<POLICY-OTHER> 9,723,114 0
<POLICY-HOLDER-FUNDS> 5,758,230 0
<NOTES-PAYABLE> 103,435,931 0
<COMMON> 41,891,512 0
0 0
0 0
<OTHER-SE> 366,775,949 0
<TOTAL-LIABILITY-AND-EQUITY> 1,335,346,685 0
405,329,951 101,810,223
<INVESTMENT-INCOME> 67,807,030 18,019,581
<INVESTMENT-GAINS> 5,060,396 902,412
<OTHER-INCOME> 4,063,970 669,168
<BENEFITS> 284,909,460 70,161,820
<UNDERWRITING-AMORTIZATION> 60,202,522 15,202,964
<UNDERWRITING-OTHER> 45,071,909 12,514,871
<INCOME-PRETAX> 92,077,456 23,521,729
<INCOME-TAX> 27,519,994 7,412,479
<INCOME-CONTINUING> 64,557,462 16,109,250
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 64,557,462 16,109,250
<EPS-BASIC> 1.61 .41
<EPS-DILUTED> 1.60 .40
<RESERVE-OPEN> 140,843,010 0
<PROVISION-CURRENT> 264,504,721 0
<PROVISION-PRIOR> (18,147,894) 0
<PAYMENTS-CURRENT> 182,900,553 0
<PAYMENTS-PRIOR> 58,871,415 0
<RESERVE-CLOSE> 146,439,100 0
<CUMULATIVE-DEFICIENCY> 0 0
</TABLE>
