-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UBzJQE6ctUMR08dSWDi1PHXRyCax9w8tLCNrBLp8gY00sZYBJXAc7HIWs1inHHMz FBqdxbyVR5DwZhXIlk0YtQ== 0000931763-99-001716.txt : 19990518 0000931763-99-001716.hdr.sgml : 19990518 ACCESSION NUMBER: 0000931763-99-001716 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALFA CORP CENTRAL INDEX KEY: 0000743532 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 630838024 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-11773 FILM NUMBER: 99627360 BUSINESS ADDRESS: STREET 1: 2108 E SOUTH BLVD STREET 2: PO BOX 11000 CITY: MONTGOMERY STATE: AL ZIP: 36191-0001 BUSINESS PHONE: 3342883900 MAIL ADDRESS: STREET 1: P O BOX 11000 CITY: MONTGOMERY STATE: AL ZIP: 36191-0001 FORMER COMPANY: FORMER CONFORMED NAME: FEDERATED GUARANTY CORP DATE OF NAME CHANGE: 19870505 10-Q 1 FIRST QUARTER 1999 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended March 31, 1999 Commission File Number 0-11773 ALFA CORPORATION ---------------- (Exact name of registrant as specified in its charter) Delaware 063-0838024 - -------------------------------------------------------------------------------- (State of Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 2108 East South Boulevard, Montgomery, Alabama 36116 (Mail: P. O Box 11000, Montgomery, Alabama 36191-0001) - ---------------------------------------------------------- (Address and Zip Code of Principal Executive Offices) Registrant's Telephone Number Including Area Code (334)288-3900 ------------- None - ---------------------------------- Former name, former address and former fiscal year if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------- -------- Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the close of the period covered by this report. Class Outstanding March 31, 1999 - ----------------------------- -------------------------- Common Stock, $1.00 par value 40,296,311 shares ALFA CORPORATION INDEX Part I. Financial Information Page No. (Condensed Consolidated Unaudited) -------- Item 1. Financial Statements Balance Sheets - March 31, 1999 and December 31, 1998 3 Statements of Income, Three Months ended March 31, 1999 and 1998 4 Statements of Comprehensive Income, Three Months ended March 31, 1999 and 1998 5 Statements of Cash Flows, Three Months ended March 31, 1999 and 1998 6 Notes to Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Market Risk Disclosures 21 Part II. Other Information 22 Item 6. Exhibits and Reports on Form 8-K 22 2 ALFA CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, December 31, 1999 1998 --------- ------------ Assets (Unaudited) Investments: Fixed Maturities Held for Investment, at amortized cost (market value $1,447,774 in 1999 and $1,560,903 in 1998) $ 1,366,061 $ 1,471,113 Fixed Maturities Available for Sale, at market value (amortized cost $783,461,346 in 1999 and $741,583,948 in 1998) 800,597,285 774,346,360 Equity Securities, at market (cost $55,693,137 in 1999 and $40,833,150 in 1998) 114,011,689 103,055,465 Mortgage Loans on Real Estate 372,978 404,432 Investment Real Estate (net of accumulated depreciation of $1,131,251 in 1999 and $1,587,634 in 1998) 1,281,357 1,482,647 Policy Loans 39,829,450 38,645,185 Other Long-term Investments 114,457,332 110,022,016 Short-term Investments 58,454,657 54,637,029 -------------- -------------- Total Investments 1,130,370,809 1,084,064,247 Cash 4,627,996 5,948,409 Accrued Investment Income 12,231,844 11,394,940 Accounts Receivable 10,781,795 23,378,825 Reinsurance Balances Receivable 1,511,124 1,121,089 Due from Affiliates 5,727,213 1,677,667 Deferred Policy Acquisition Costs 118,469,012 114,141,870 Other Assets 4,521,052 4,932,090 -------------- -------------- Total Assets $1,288,240,845 $1,246,659,137 ============== ============== Liabilities Policy Liabilities and Accruals $ 574,144,992 $ 548,428,408 Unearned Premiums 108,226,470 105,464,480 Dividends to Policyholders 9,399,711 9,337,982 Premium Deposit and Retirement Deposit Funds 6,141,645 6,217,463 Deferred Income Taxes 35,996,675 41,788,715 Other Liabilities 63,474,830 44,677,579 Due to Affiliates 318,113 Commercial Paper 68,173,524 57,259,518 Notes Payable 105,702 106,765 Notes Payable to Affiliates 9,160,705 9,438,129 -------------- -------------- Total Liabilities 874,824,254 823,037,152 -------------- -------------- Commitments and Contingencies (Note 3) Stockholders' Equity Preferred Stock, $1 par value Shares authorized: 1,000,000 Issued: None Common Stock, $1 par value Shares authorized: 110,000,000 Issued: 41,891,512 Outstanding: 1999 - 40,296,311; 1998 - 40,879,911 41,891,512 41,891,512 Capital in Excess of Par Value 22,599,952 22,355,934 Accumulated Other Comprehensive Income: 46,213,422 57,577,202 Retained Earnings 317,818,117 306,268,833 Treasury Stock: at cost (1999-1,595,201 shares; 1998-1,011,601 shares) (15,106,412) (4,471,496) -------------- -------------- Total Stockholders' Equity 413,416,591 423,621,985 -------------- -------------- Total Liabilities and Stockholders' Equity $1,288,240,845 $1,246,659,137 ============== ==============
The accompanying notes are an integral part of these consolidated condensed unaudited financial statements. 3 ALFA CORPORATION CONSOLIDATED CONDENSED UNAUDITED STATEMENTS OF INCOME Three Months Ended March 31, -------------------------- 1999 1998 ------------ ------------- Revenues Premiums - Property and Casualty Insurance $ 87,704,624 $ 84,711,832 Premiums and Policy Charges - Life Insurance 12,672,446 12,324,677 Net Investment Income 16,394,194 15,518,593 Realized Investment Gains 5,479,084 2,578,668 Other Income 573,508 619,219 ------------ ------------ Total Revenues 122,823,856 115,752,989 ------------ ------------ Benefits and Expenses Benefits & Settlement Expenses 69,825,805 68,900,453 Dividends to Policyholders 924,151 901,577 Amortization of Deferred Policy Acquisition Costs 14,832,838 14,355,607 Other Operating Expenses 13,646,096 8,185,752 ------------ ------------ Total Expenses 99,228,890 92,343,389 ------------ ------------ Income Before Provision for Income Taxes 23,594,966 23,409,600 Provision for Income Taxes 7,314,389 7,349,358 ------------ ------------ Net Income $ 16,280,577 $ 16,060,242 ============ ============ Net Income Per Share - Basic and Diluted $ 0.40 $ 0.39 ============ ============ Operating Income $ 12,719,172 $ 14,384,108 Operating Income Per Share - Basic and Diluted $ 0.31 $ 0.35 ============ ============ Average Shares Outstanding - Basic 40,734,802 40,796,961 Average Shares Outstanding - Diluted 41,052,769 41,054,230 ============ ============ The accompanying notes are an integral part of these consolidated condensed unaudited financial statements. 4 ALFA CORPORATION CONSOLIDATED CONDENSED UNAUDITED STATEMENTS OF COMPREHENSIVE INCOME Three Months Ended March 31, -------------------------- 1999 1998 ------------ ------------- Net Income $ 16,280,577 $ 16,060,242 Other Comprehensive Income, net of tax: Unrealized Investment Gain (Loss) on Securities Available for Sale (7,802,375) 10,240,843 Less: Realized Investment Gains 3,561,405 1,676,134 ------------ ------------ Total Other Comprehensive Income (Loss) (11,363,780) 8,564,709 ------------ ------------ Total Comprehensive Income $ 4,916,797 $ 24,624,951 ============ ============ The accompanying notes are an integral part of these consolidated condensed unaudited financial statements. 5 ALFA CORPORATION CONSOLIDATED CONDENSED UNAUDITED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, -------------------------- 1999 1998 ----------- ----------- Cash Flows From Operating Activities: Net Income $ 16,280,577 $ 16,060,242 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Policy Acquisition Costs Deferred (17,878,373) (16,752,518) Amortization of Deferred Policy Acquisition Costs 14,832,838 14,355,607 Depreciation and Amortization 258,994 864,956 Provision for Deferred Taxes 1,674,316 466,376 Interest on Policyholders' Funds 4,382,338 3,702,501 Net Realized Investment Gains (5,479,084) (2,578,668) Other (736,055) 4,037 Changes in Operating Assets and Liabilities: (Increase) in Accrued Investment Income (836,904) (216,276) Decrease in Accounts Receivable 320,481 842,184 (Increase) in Reinsurance Balances Receivable (390,035) (228,829) (Increase) in Amounts Due From Affiliates (4,049,546) (5,754,575) (Decrease) in Amounts Due to Affiliates (318,113) -- Decrease in Other Assets 411,038 304,182 Increase in Liability for Policy Reserves 4,535,383 3,684,050 Increase in Liability for Unearned Premiums 2,761,990 3,220,618 (Decrease) in Amounts Held for Others (14,089) (137,019) Increase in Other Liabilities 13,934,897 8,458,335 ------------ ------------ Net Cash Provided by Operating Activities 29,690,653 26,295,203 ------------ ------------ Cash Flows From Investing Activities: Maturities and Redemptions of Fixed Maturities Held for Investment 105,241 147,739 Maturities and Redemptions of Fixed Maturities Available for Sale 26,092,317 11,936,077 Maturities and Redemptions of Other Investments 29,703,968 45,336,811 Sales of Fixed Maturities Available for Sale 493,750 16,049,438 Sales of Other Investments 22,585,569 17,690,248 Purchase of Fixed Maturities Available for Sale (67,510,352) (50,155,594) Purchase of Other Investments (68,163,701) (45,572,794) Net (Increase) in Short-term Investments (15,064,547) (9,303,150) Net Decrease in Receivable/Payable on Securities 28,576,030 503,815 ------------ ------------ Net Cash (Used in) Investing Activities (43,181,725) (13,367,410) ------------ ------------ Cash Flows From Financing Activities: Increase (Decrease) in Commercial Paper 10,914,006 (26,071,799) (Decrease) in Notes Payable (1,063) (1,870,296) (Decrease) in Notes Payable to Affiliates (277,424) (118,860) Stockholder Dividends Paid (4,602,255) (4,079,832) Purchase of Treasury Stock (10,746,066) -- Proceeds from Exercise of Stock Options 267,900 239,700 Deposits of Policyholders' Funds 26,909,937 25,690,284 Withdrawal of Policyholders' Funds (10,294,376) (9,401,838) ------------ ------------ Net Cash Provided by (Used in) Financing Activities 12,170,659 (15,612,641) ------------ ------------ Net (Decrease) in Cash (1,320,413) (2,684,848) Cash - Beginning of Period 5,948,409 5,820,597 ------------ ------------ Cash - End of Period $ 4,627,996 $ 3,135,749 ============ ============ Supplemental Disclosures of Cash Flow Information Cash Paid as of March 31 for: Interest $ 728,113 $ 1,283,292 Income Taxes $ 0 $ 0
The accompanying notes are an integral part of these consolidated condensed unaudited financial statements 6 ALFA CORPORATION NOTES TO CONSOLIDATED CONDENSED UNAUDITED FINANCIAL STATEMENTS March 31, 1999 1. Significant Accounting Policies ------------------------------- In the opinion of the Company, the accompanying consolidated condensed unaudited financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly its financial position, results of operations and cash flows. The accompanying financial statements have been prepared on the basis of generally accepted accounting principles. A summary of the more significant accounting policies related to the Company's business is set forth in the notes to its audited consolidated financial statements for the fiscal year ended December 31, 1998. The results of operations for the three month period ended March 31, 1999 are not necessarily indicative of the results to be expected for the full year. For purposes of this report, the Company has defined operating income as income excluding net realized investment gains. Certain reclassifications have been made to conform previous classifications to March 31, 1999 classifications and descriptions. 2. Pooling Agreement ----------------- Effective August 1, 1987, the Company entered into a property and casualty insurance Pooling Agreement (the "Pooling Agreement") with Alfa Mutual Insurance Company (Mutual), and other members of the Mutual Group. The Mutual Group is a direct writer primarily of personal lines of property and casualty insurance in Alabama. The Company's subsidiaries similarly are direct writers in Georgia and Mississippi. Both the Mutual Group and the Company write preferred risk automobile, homeowner, farmowner and mobile home insurance, fire and allied lines, standard risk automobile and homeowner insurance, and a limited amount of commercial insurance, including church, and businessowner insurance. Under the terms of the Pooling Agreement, the Company cedes to Mutual all of its property and casualty business. All of the Mutual Group's direct property and casualty business (together with the property and casualty business ceded by the Company) is included in the pool. Until September 30, 1994, Mutual retroceded 50% of the pooled premiums, losses, loss adjustment expenses and other underwriting expenses to the Company while retaining 50% of these amounts itself. On October 1, 1994, the Company increased its participation in the Pooling Agreement. Mutual currently retrocedes 65% of the pool to the Company and retains 35% within the Mutual Group. On October 1, 1996, the Pooling Agreement was amended in conjunction with the restructuring of the Alfa Insurance Group's catastrophe protection program. Effective November 1, 1996, the allocation of catastrophe costs among the members of the pool was changed to better reflect the economics of catastrophe finance. The amendment limits Alfa Corporation's participation in any single catastrophic event or series of disasters to its pool share (65%) of $10 million unless the loss exceeds $249 million on a 100% basis in which case the Company's share in the loss would be based upon its amount of surplus relative to the other members of the group. Currently, the Company's share of losses exceeding $249 million would be 13%. The change allows the catastrophe reinsurance buying decision to be made on a group basis which will benefit each member of the group. The Company's participation in the Pooling Agreement may be changed or terminated without the consent or approval of the Company's shareholders, and the Pooling Agreement may be terminated by any party thereto upon 90 days notice. 7 (Note 2. Continued) The following table sets forth the premiums and losses ceded to and assumed from the pool for the three month periods ended March 31, 1999 and 1998: Three Months Ended March 31, ---------------------------- 1999 1998 ---------------------------- (in thousands) Premiums ceded to pool $14,424 $13,851 Premiums assumed from pool $88,011 $85,003 Losses ceded to pool $10,211 $ 9,941 Losses assumed from pool $54,620 $53,431 The Alfa Group incurred no pooled catastrophe losses in the first three months of 1999 or 1998. 3. Contingent Liabilities ---------------------- The property and casualty subsidiaries have entered into the reinsurance pooling agreement with Alfa Mutual Insurance Company and its affiliates as discussed in Note 2. Should any member of the affiliated group be unable to meet its obligation on a claim for a policy written by the Company's property and casualty subsidiaries, the obligation to pay the claim would remain with the Company's subsidiaries. The liability for estimated unpaid property and casualty losses and loss adjustment expenses is based upon an evaluation of reported losses and on estimates of incurred but not reported losses. Adjustments to the liability based upon subsequent developments are included in current operations. Year 2000 is a critical data management issue which could have substantial consequences for companies worldwide because of the use of only two digits in the date field that may cause many computer applications to fail completely or create erroneous results by the year 2000 unless corrective measures are taken. Over the past five years, the Company has devoted a significant amount of time and resources to the issue of year 2000 as it relates to the Company's operating systems and information technology applications as well as its non- operations applications. The Company has identified its mission critical systems and many other year 2000 issues. At March 31, 1999, the Company believes it has substantially completed the identification and programming remediation steps required to make its mission critical systems and other systems year 2000 compliant. In addition, the Company estimates it is approximately 95% complete with actual application and scenario remediation and believes it will be 100% complete with all year 2000 remediation efforts during the second quarter of 1999. To date the Company has incurred total costs of $2.2 million related to year 2000 efforts, of which $500,000 was incurred during the first quarter of 1999. To the extent the year 2000 issues are not corrected timely and successfully, the Company's ability to process its business and pay its claims timely could be impacted. Such an event could have material adverse consequences on future financial conditions and results of operations. The Company has begun the process of developing a contingency plan should an adverse year 2000 issue occur. As part of the contingency plan, the Company expects to address its ability to conduct business in environments experiencing both limited and extensive adverse conditions resulting from the year 2000 issue. It expects to have such a plan in place by the end of the third quarter of 1999. 8 Certain legal proceedings involving policyholders and agents are in process at March 31, 1999. Costs for these and similar legal proceedings including accruals for outstanding cases were $1.8 million in the first quarter 1999 and $567,000 in the similar period in 1998. Such costs totaled $5.2 million in 1998, $3.6 million in 1997 and $2.7 million in 1996. These proceedings involve alleged breaches of contract, torts, including bad faith and fraud claims and miscellaneous other causes of action. These lawsuits involve claims for punitive damages. The likelihood or extent of a punitive damage award in any one of these cases is not possible to predict. Approximately 86 legal proceedings against Alfa Life Insurance Corporation involving policyholders and agents are in process at March 31, 1999. Of the 86 proceedings, 12 were filed in the first quarter of 1999, 50 were filed in 1998, 9 were filed in 1997, 11 were filed in 1996, and 4 were filed in 1995. Of the 50 legal proceedings filed in 1998, two plaintiff's law firms accounted for 47 of the filings. These same two firms accounted for 8 of the 12 filings in the first quarter of 1999. Currently, three of the proceedings against Alfa Life Insurance Corporation have gone to trial. In two of the proceedings, the jury awarded the plaintiffs compensatory and punitive damages against Alfa Life Insurance Corporation. The first jury verdict has been appealed and the second verdict will be appealed to the Alabama Supreme Court. In the third proceeding, the jury returned a verdict for Alfa Life Insurance Corporation. To date, no material losses from this type litigation have occurred. However, it should be noted that in Alabama, where the company has substantial business, the frequency and severity of large punitive damage awards by juries, bearing little or no relation to actual damages, continues to exist, creating the potential for unpredictable material adverse judgments in any given suit. In the first quarter of 1999, Alfa Life Insurance Corporation paid $500,000 in settlement of one particular lawsuit. In addition, Alfa Life Insurance Corporation has reserved $2,000,000 to adjust the values on a certain group of policies ($350,000 of this amount was reserved prior to the first quarter of 1999). Two purported class action lawsuits have been filed against Alfa Life Insurance Corporation, but they have not been certified at present. One of those lawsuits was filed during the first quarter of 1999. Prior to the first quarter 1999, two purported class action lawsuits had also been filed against Alfa Financial Corporation, but they have not been certified at present. Also prior to the first quarter 1999, seven purported class action lawsuits had been filed against the property and casualty mutual companies involving a number of issues and allegations, but none have been certified. These lawsuits could affect Alfa Corporation because of a pooling agreement between the companies. Because no class has been certified in any of the class action cases mentioned above, no amounts have been reserved for them other than the anticipated expenses for attorney's fees and costs. Future developments in these class actions and/or class certification could create the need for significant reserves and expenses in future statements. 9 4. Accounting for Costs of Internal Use Software --------------------------------------------- In March 1998, SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use was issued. This SOP provides guidance for determining whether costs of software developed or obtained for internal use should be capitalized or expensed as incurred. In the past, the Company has expensed all such costs when incurred. The company is currently involved in certain technology projects that involve costs which should be capitalized under SOP 98-1. In the first quarter of 1999, such costs totaled $331,145 or $0.01 per share which has been capitalized. 5. 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 than an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The accounting for changes in the fair value of a derivative will be included in either earnings or other comprehensive income depending on the intended use of the derivative instrument. The Company is currently evaluating this standard, which is effective January 1, 2000. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS - --------------------- The following table sets forth consolidated summarized income statement information for the three months ended March 31, 1999 and 1998:
Three Months Ended March 31, ----------------------------------------- 1999 1998 % Change ----------------------------------------- (in thousands except share and per share data) Revenues Property and casualty insurance premiums $ 87,705 $ 84,712 4 % Life insurance premiums and policy charges 12,672 12,325 3 % ----------------------------------------- Total premiums and policy charges $ 100,377 $ 97,037 3 % ========================================= Net investment income $ 16,394 $ 15,519 6 % ========================================= Total revenues $ 122,824 $ 115,753 6 % ========================================= Net Income Property and casualty insurance $ 9,516 $ 11,192 (15)% Life insurance 2,418 3,521 (31)% ----------------------------------------- Total insurance operations 11,934 14,713 (19)% Noninsurance operations 822 670 23 % Net realized investment gains 3,561 1,676 112 % Corporate expenses (36) (999) 96 % ----------------------------------------- Net income $ 16,281 $ 16,060 1% ========================================= Net income per share - Basic $ 0.40 $ 0.39 1% ========================================= Net income per share - Diluted $ 0.40 $ 0.39 1% ========================================= Weighted average shares outstanding - Basic 40,734,802 40,796,961 (0%) ========================================= Weighted average shares outstanding - Diluted 41,052,769 41,054,230 (0%) =========================================
Total premiums and policy charges increased 3% in the first three months of 1999. Growth in new sales and continued good persistency has been partially offset by the impact of rate changes, particularly a 2.2% decrease in automobile rates in December 1998. Net investment income increased 6% over the first three months of 1999 while invested assets have grown 4.3% in the three months since December 31, 1998 resulting from positive cash flows. 11 The Company's net income increased 1% in the first three months of 1999 due to a significant increase in realized investment gains. Offsetting these gains were declines in operating income of 15% in the property casualty subsidiaries and 31% in life operations due to higher legal, technology and administrative costs in the period. Noninsurance operating income increased 23 % in the first three months of 1999, due primarily to an increase in income in the consumer finance subsidiary and in the construction subsidiary. PROPERTY AND CASUALTY INSURANCE OPERATIONS - ------------------------------------------ The following table sets forth the components of property and casualty insurance earned premiums, net underwriting income, GAAP basis loss, expense and combined ratios, underwriting margin, net investment income and operating income for the three months ended March 31, 1999 and 1998: Three Months Ended March 31, ---------------------------------- 1999 1998 % Change ---------------------------------- (in thousands) Earned Premiums Personal lines $83,894 $80,964 3.6 % Commercial lines 3,126 3,018 3.6 % Pools, associations and fees 991 1,021 (3.0)% Reinsurance ceded (306) (291) 5.2 % -------------------------------- Total $87,705 $84,712 3.5 % ================================ Net underwriting income $ 6,529 $ 9,491 (31.2)% ================================ Loss ratio 61.8% 63.0% LAE ratio 5.5% 4.7% Expense ratio 25.2% 21.1% -------------------------------- GAAP basis combined ratio 92.6% 88.8% ================================ Underwriting margin 7.4% 11.2% ================================ Net investment income $ 6,509 $ 6,329 2.8 % ================================ Pre-tax operating income $12,969 $15,870 (18.3)% ================================ Operating income, net of tax $ 9,516 $11,192 (15.0)% ================================ Earned premiums increased 3.5% in the first three months of 1999. Growth from new business was modest and premium growth is being impacted in 1999 by a 2.2% December 1998 rate decrease in automobile insurance, the company's primary line of business. 12 Operating results continued to be profitable with a 7.4% underwriting margin, favorably impacted by improved loss ratios, primarily automobile loss ratios, which improved throughout 1998 and were 61% in the first quarter of 1999. However, overall operating results declined 15.0% in the three month period of 1999 compared to the highly profitable first quarter of 1998, due to increased operating expenses. Continued technology expenses of approximately $1.1 million reflect the Company's stated commitment to upgrade its systems for future growth and improved efficiencies. Additionally, legal expenses in the quarter and administrative expenses related to the retirement of two executives also impacted expense ratios, which increased from 21.1% to 25.2% in the comparative three month periods. The Company incurred no catastrophe losses in either period due to favorable weather. Net investment income increased 2.8% in the first three months of 1999 in the property casualty subsidiaries due to continued positive cash flow from profitable underwriting results which increased invested assets 8.2% since March 31, 1998. LIFE INSURANCE OPERATIONS - ------------------------- The following table sets forth life insurance premiums and policy charges, by type of policy, net investment income, benefits and expenses and life insurance operating income for the three months ended March 31, 1999 and 1998: Three Months Ended March 31, -------------------------------- 1999 1998 % Change -------------------------------- (in thousands) Premiums and policy charges Universal life policy charges $ 3,224 $ 3,006 7 % Universal life policy charges - COLI 1,156 1,105 5 % Interest sensitive life policy charges 2,487 2,423 3 % Traditional life insurance premiums 5,596 5,542 1 % Group life insurance premiums 209 249 (16)% ------------------------------ Total $12,672 $12,325 3 % ============================== Net investment income $ 9,096 $ 8,561 6 % ============================== Benefits and expenses $16,758 $14,357 17 % ============================== Pretax operating income $ 3,323 $ 4,863 (32)% ============================== Operating income, net of tax $ 2,418 $ 3,521 (31)% ============================== The Company's life insurance premiums and policy charges increased 3% in the first three months of 1999 due to new business and good persistency. First year collected premiums have increased over 20% in the first quarter of 1999 due to increased new sales of term products and from increased sales of universal life policies which also have been positively impacted by a term conversion program in 1998. Total new annualized premium increased 14.5% in the first quarter of 1999 and 10.3% in all of 1998. 13 Life insurance operating income decreased approximately 31% in the first three months of 1999. The primary factor that caused the decline in first quarter earnings was a $2.2 million impact of legal expenses and policy reserve increases related to certain whole life policies sold more than 10 years ago. After thoroughly assessing those policies, the Company made a decision to adjust the values of those policies and the reserves related to those policies. The impact is included in the 17% increase in benefits and expenses. Partially offsetting this increase was a decline in death claims of approximately $645,000 or 14.8%. The mortality ratio of actual to expected death claims improved from 110% in the first three months of 1998 to 85% in the first quarter of 1999. In spite of the decline in earnings, positive cash flows resulted in a 7.8% increase in invested assets which increased investment income approximately 6%. NONINSURANCE OPERATIONS - ----------------------- Noninsurance earnings increased 23% in the first three months of 1999 due to an increase of 13% or approximately $82,000 in net income in the consumer finance subsidiary, and a 310% increase or approximately $72,000 in net income in the construction subsidiary due to an increase in both commercial and residential sales activity. The loan portfolio remained relatively unchanged at $55.9 million and the overall portfolio yield rate decreased 16 basis points. However, loan and leasing income increased 8.7% as a result of decreased borrowings and lower interest rates. The real estate sales subsidiary's earnings were relatively flat. CORPORATE - --------- Interest expense on corporate debt is the primary corporate expense incurred. Interest expense in the first three months of 1999 was approximately $443,000 compared to approximately $464,000 for the similar period in 1998. The decrease in interest expense is due to the decrease in the average balance outstanding and the decrease in interest rates. The remainder of the corporate expense represents general operating expenses which may fluctuate from time to time. The decrease in other corporate expenses in the first three months is due to the allocation of $1,500,000 of certain legal expenses and revenues to its subsidiaries. 14 INVESTMENTS - ----------- The Company has historically produced positive cash flow from operations which has resulted in increasing amounts of funds available for investment and, consequently, higher investment income. Investment income is also affected by yield rates. Information about cash flows, invested assets and yield rates is presented below for the three months ended March 31, 1999 and 1998:
Three Months Ended March 31, ------------------ 1999 1998 ------------------ Increase in cash flow from operations since March 31, 1998 and 1997 12.9% 39.9% Increase in invested assets since January 1, 1999 and 1998 4.3% 2.7% Investment yield rate (annualized) 7.0% 7.0% Increase in net investment income since March 31, 1998 and 1997 5.6% 11.0%
The 12.9% increase in positive cash flow from operations is due primarily to continued profitable operating results in the Company's property and casualty subsidiaries, which had $6.5 million in underwriting income in the first quarter of 1999. The premium from the COLI plan in the life insurance subsidiary is collected in February and has provided positive cash flow in the first quarter of both periods. As a result of the overall positive cash flows, invested assets grew 4.3% since January 1, 1999 and 7.8% since March 31, 1998 (based on amortized cost, which excludes the impact of SFAS 115), and net investment income increased 5.6%. The overall yield rate, calculated using amortized cost, has remained flat. The Company had net realized investment gains of approximately $5.5 million in the first three months of 1999 and $2.6 million in the similar period in 1998. These net gains are primarily from sales of equity securities. Such realized gains are the result of market conditions and therefore can fluctuate from period to period. The composition of the Company's investment portfolio is as follows at March 31, 1999 and December 31, 1998: March 31, December 31, ----------------------------- 1999 1998 ----------------------------- Fixed maturities Taxable Mortgage backed (CMO's) 28.0% 27.9% Corporate bonds 28.6 30.2 ---------------------------- Total taxable 56.6 58.1 Tax exempts 14.3 13.5 ---------------------------- Total fixed maturities 70.9 71.6 ---------------------------- Equity securities 10.1 9.5 Mortgage loans - - Real estate 0.1 0.1 Policy loans 3.5 3.6 Other long term investments 10.2 10.2 Short term investments 5.2 5.0 ---------------------------- 100.0% 100.0% ============================ 15 The majority of the Company's investment portfolio consists of fixed maturities which are diverse as to both industry and geographic concentration. Since year-end, the overall mix of investments has remained relatively stable with changes due to market value fluctuations in equities and fixed maturities. The rating of the Company's portfolio of fixed maturities using the Standard & Poor's rating categories is as follows at March 31, 1999 and December 31, 1998: March 31, December 31, 1999 1998 ---------------------------- RATING ------ AAA to A- 89.9% 89.2% BBB+ to BBB- 8.9 9.8 BB+ and Below (Below investment grade) 1.2 1.0 ---------------------------- 100.0% 100.0% ---------------------------- One hundred percent of the fixed maturity portfolio was rated by an outside rating service. No securities were rated by Company management. The Company considers bonds with a quality rating of BB+ and below to be below investment grade or high yield bonds (also called junk bonds). At March 31, 1999, approximately 39.5% of fixed maturities were mortgage-backed securities. Such securities are comprised of Collateralized Mortgage Obligations (CMO's) and pass through securities. Based on reviews of the Company's portfolio of mortgage-backed securities, the impact of prepayment risk on the Company's financial position is not believed to be significant. At March 31, 1999 the Company's total portfolio of fixed maturities had gross unrealized gains of $29,773,130 and gross unrealized losses of $12,555,478. Securities are priced by nationally recognized pricing services or by broker/dealer securities firms. No securities were priced by the Company. During the first three months of 1999, the Company sold approximately $494,000 in fixed maturities available for sale. These sales resulted in gross realized losses of $128,828. During the first three months of 1998 the Company sold approximately $16.0 million in fixed maturities available for sale. These sales resulted in gross realized losses of $11,428. The Company monitors its level of investments in high yield fixed maturities and equity investments held in issuers of high yield debt securities. Management believes the level of such investments is not significant to the Company's financial condition. At March 31, 1999, the Company had unrealized gains of approximately $874,000 in such investments. In the first three months of 1999, the Company wrote down two equity securities totaling $179,922, whose declines in value were deemed to be other than temporary. At March 31, 1999 there were no nonperforming bonds in the portfolio. The Company's investment in other long term investments consists primarily of loans originated by the consumer finance subsidiary. These loans are collateralized by automobiles and other property. At March 31, 1999 the delinquency ratio on the portfolio was 1.55%, down from 2.04% at December 31, 1998. No loans 16 were charged off in the first quarter of 1999. At March 31, 1999, the Company maintained an allowance for loan losses of $584,178 or approximately 1.2% of the outstanding loan balance. Long term investments also include assets leased under operating leases, partnership investments and certain other investments. INCOME TAXES - ------------ The slight decrease in income tax expense in the first three months of 1999 is the result of the decrease in operating income before provision for income taxes, which declined $2.7 million due primarily to the impact of increased operating expenses. The effective tax rate in the first three months of 1999 was 31.0% compared to 31.9% for the full year 1998 and 31.4% for the first three months of 1998. IMPACT OF INFLATION - ------------------- Inflation increases consumers' needs for both life and property and casualty insurance coverage. Inflation increases claims incurred by property and casualty insurers as property repairs, replacements and medical expenses increase. Such cost increases reduce profit margins to the extent that rate increases are not maintained on an adequate and timely basis. Since inflation has remained relatively low in recent years, financial results have not been significantly impacted by inflation. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Alfa Corporation receives funds from its subsidiaries consisting of dividends, payments for funding federal income taxes, and reimbursement of expenses incurred at the corporate level for the subsidiaries. These funds are used for paying dividends to stockholders, corporate interest and expenses, federal income taxes, and for funding additional investments in its subsidiaries' operations. Alfa Corporation's subsidiaries require cash in order to fund policy acquisition costs, claims, other policy benefits, interest expense, general operating expenses, and dividends to Alfa Corporation. The major sources of the Company's liquidity are operations and cash provided by maturing or liquidated investments. A significant portion of the Company's investment portfolio consists of readily marketable securities which can be sold for cash. Based on a review of the Company's matching of asset and liability maturities and on the interest sensitivity of the majority of policies in force, management believes the ultimate exposure to loss from interest rate fluctuations is not significant. On October 25, 1993, the Company established a Stock Option Plan, pursuant to which a maximum aggregate of 2,000,000 shares of common stock have been reserved for grant to key personnel. The plan expires on October 24, 2003. The Company granted 783,400 such options on October 25, 1993, 80,000 options on March 28, 1994, 80,000 options on March 27, 1995, 80,000 options on April 18, 1996, 75,000 options on February 18, 1997 and 452,500 options on March 23, 1998. The options ratably become exercisable annually over three years, and may not be exercised after ten years after the date of award. At March 31, 1999, there had been 138,799 options exercised, 997,739 options were exercisable and 72,268 had been canceled leaving 521,368 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 17 Board increased the number of shares authorized for repurchase by 2,000,000. During the first three months of 1999 the Company repurchased 606,400 shares at a cost of $10,746,066. At March 31, 1999 the total repurchased was 1,726,000 shares at a cost of $15,796,307. The Company has reissued 138,799 treasury shares as a result of option exercises. Total borrowings increased $10.6 million in the first three months of 1999 to $77.4 million. At March 31, 1999 the Company had approximately $68.2 million in commercial paper at rates ranging from 4.92% to 4.93% with maturities ranging from April 6, 1999 to April 23, 1999. The Company intends to continue to use the commercial paper program to fund the consumer loan portfolio and other corporate short term needs. Backup lines of credit are in place up to $100 million. The Company has an A-1+, P-1 commercial paper rating from Standard & Poor's and Moody's Investors Service. The commercial paper is guaranteed by an affiliate, Alfa Mutual Insurance Company. In addition, the Company had $9.2 million in short-term debt outstanding to affiliates at March 31,1999 with interest equal to commercial paper rates payable monthly and $105,702 outstanding in other short-term debt at a rate of 7.0%. Cash surrenders paid to policyholders on a statutory basis totaled $3.3 million in the first three months of 1999 and $2.9 million for the first three months of 1998. This level of surrenders is within the Company's pricing expectations. Historical persistency rates indicate a normal pattern of surrender activity. The structure of the surrender charges is such that persistency is encouraged. The majority of the policies in force have surrender charges which grade downward over a 12 to 15 year period. In addition, the majority of the in-force business is interest sensitive type policies which generally have lower rates of surrender. At March 31, 1999 the total amount of cash that would be required to fund all amounts subject to surrender was approximately $307.0 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. 18 YEAR 2000 - --------- The Company initially started the identification of year 2000 issues in 1993 and 1994 and began its internal programming modifications in 1995. These phases along with the testing have continued during the last three years. The Company believes it has substantially completed the identification and programming steps and at March 31, 1999 is approximately 95% complete with actual application and scenario testing, whereby dates are manipulated and results are compared for accuracy. Such testing and completion of internal programming is currently scheduled to be completed in the third quarter of 1999. A summary of mission critical systems follows this section. In addition, the Company has addressed the issues related to year 2000 in regards to material relationships with third parties, vendors, suppliers, etc. and has identified such providers, surveying their efforts and requesting written assurances that year 2000 issues have been addressed. Of the vendor operating system software identified during this process, approximately 90% of the programs have been labeled as "year 2000 compliant" by the vendors. In the event that such software fails despite written assurances and internal testing, the Company expects to work closely with the vendors to find a remedy in a timely fashion. Also, the Company is continuing to review all significant non-information technology systems for year 2000 compliance. The most significant such system, the telephone system, has already been determined to be year 2000 compliant. These efforts as well as the final phase, follow-up on any unresolved year 2000 issues, are expected to be completed during the first half of 1999. The Company has not utilized any year 2000 solution providers in addressing compliance of its mainframe systems. To date, the issues have been addressed with internal resources. However, the Company has contracted with external consultants to assist in the review and updating of its personal computer systems and associated hardware and software. Due to the longevity of the process, the number of employees and resources devoted to the efforts and the time spent, it is not practicable to determine precisely the total costs attributable to the year 2000 issue. These costs have been expensed as incurred throughout the process. However, the Company estimates that to date, approximately $2.2 million has been spent on year 2000 efforts, with approximately $500,000 expensed in the first three months of 1999. Future costs, including almost $300,000 for the external consultant costs of the personal computer systems reviews and $400,000 for payment processing software, are currently anticipated to total $1.0 million, for a total estimated cost of year 2000 efforts of $3.1 million. The Company has absorbed the costs into its operations with no significant adverse impact on its financial condition or results of operations. The resources utilized have caused some normal operational enhancements and systems development to be deferred or delayed. However, any systems maintenance or statutory required updates have not been affected. To the extent the year 2000 issues are not corrected timely and successfully, the Company's ability to process its business and pay its claims timely could be impacted. Such an event could have material adverse consequences on future financial condition and results of operations. The Company has begun the process of developing a contingency plan should an adverse year 2000 issue occur. As part of the contingency plan, the Company expects to address its ability to conduct business in environments experiencing both limited and extensive adverse conditions resulting from the year 2000 issue. It expects to have such a plan in place by the end of the third quarter of 1999. 19 SUMMARY OF MISSION CRITICAL SYSTEMS Remediation/ System Goal Mission Critical Systems Research Programming Testing Date - -------------------------------------------------------------------------------- Accounting Completed Completed Completed N/A - -------------------------------------------------------------------------------- Agent Compensation Completed Completed Completed N/A - -------------------------------------------------------------------------------- Claims Completed Completed Completed N/A - -------------------------------------------------------------------------------- Investment Management Completed Completed Completed N/A - -------------------------------------------------------------------------------- Life Policy Administration Completed Completed Completed N/A - -------------------------------------------------------------------------------- Loan Processing Completed Completed Started 7/31/99 - -------------------------------------------------------------------------------- Payment Processing Completed Completed Completed N/A - -------------------------------------------------------------------------------- Payroll Processing Completed Completed Completed N/A - -------------------------------------------------------------------------------- Personal Computers - Field Completed Completed Completed N/A - -------------------------------------------------------------------------------- Personal Computer - Based Field Programs Completed Completed Started 6/30/99 - -------------------------------------------------------------------------------- Personal Computers - Home Office Completed Started Started 6/25/99 - -------------------------------------------------------------------------------- Postal Software Completed Completed Completed N/A - -------------------------------------------------------------------------------- Property/Casualty Policy Administration Completed Completed Completed N/A - -------------------------------------------------------------------------------- 20 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 than an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The accounting for changes in the fair value of a derivative will be included in either earnings or other comprehensive income depending on the intended use of the derivative instrument. The Company is currently evaluating this standard, which is effective January 1, 2000. INFORMATION ABOUT FORWARD-LOOKING STATEMENTS Any statement contained in this report which is not a historical fact, or which might otherwise be considered an opinion or projection concerning the Company or its business, whether express or implied, is meant as and should be considered a forward-looking statement as that term is defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on assumptions and opinions concerning a variety of known and unknown risks, including but not necessarily limited to changes in market conditions, natural disasters and other catastrophic events, increased competition, changes in availability and cost of reinsurance, changes in governmental regulations, and general economic conditions, as well as other risks more completely described in the Company's filings with the Securities and Exchange Commission. If any of these assumptions or opinions prove incorrect, any forward-looking statements made on the basis of such assumptions or opinions may also prove materially incorrect in one or more respects. ITEM 3. MARKET RISK DISCLOSURES The Company's Annual Report filed on Form 10-K with the Securities and Exchange Commission includes quantitative and qualitative market risk disclosure information. Since December 31, 1998, there have been no significant changes in these disclosures. 21 PART II. OTHER INFORMATION Item 6. - ------- EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- None. 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ALFA CORPORATION Date 5/17/99 By: /s/ Jerry A. Newby ---------------- ------------------------------------- Jerry A. Newby President Date 5/17/99 By: /s/ Donald Price ---------------- ------------------------------------- Donald Price Senior Vice President, Finance (Chief Financial Officer) Date 5/17/99 By: /s/ John Holley ---------------- ------------------------------------- John Holley Vice President, Finance (Chief Accounting Officer) 23 EX-27 2 FINANCIAL DATA SCHEDULE
7 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 800,597,285 1,366,061 1,447,774 114,011,689 372,978 1,281,357 1,130,370,809 4,627,996 1,511,124 118,469,012 1,288,240,845 574,144,922 108,226,470 9,399,711 6,141,645 77,439,931 0 0 41,891,512 371,525,079 1,288,240,845 100,377,070 16,394,194 5,479,084 573,508 70,749,956 14,832,838 13,646,096 23,594,966 7,314,389 16,280,577 0 0 0 16,280,577 .40 .40 140,843,010 66,963,918 (4,713,489) 47,110,740 14,181,961 142,196,559 0
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