##### Table of Contents

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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 June 30, 2002





Commission File Number 0-11773





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ALFA CORPORATION


(Exact name of registrant as specified in its charter)





Delaware

063-0838024(State of Other Jurisdiction of Incorporation or Organization)

(IRS Employer 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 June 30, 2002Common Stock, $1.00 par value

78,923,773 shares





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##### Table of Contents




ALFA CORPORATION





INDEX





Page No.Part I.

Financial Information (Consolidated Unaudited)Item1.

Financial StatementsBalance SheetsJune 30, 2002 and December 31, 2001

3Statements of Income, Six Months and Three Months ended June 30, 2002 and 2001

4Statements of Comprehensive Income, Six Months and Three Months ended June 30, 2002 and 2001

5Statements of Cash Flows, Six Months ended June 30, 2002 and 2001

6Notes to Financial Statements

7Independent Auditors Review Report

14Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

15Item 3.

Market Risk Disclosures

26Part II.

Other InformationItem 1.

Legal Proceedings

27Item 6.

Exhibits and Reports on Form 8-K

28




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##### Table of Contents




ALFA CORPORATION





CONSOLIDATED BALANCE SHEETS





June 30, 2002


December 31, 2001(Unaudited)ASSETSInvestments:Fixed Maturities Held for Investment, at amortized cost (fair value $413,309 in 2002 and $477,422 in 2001)

$
379,496


$
441,740Fixed Maturities Available for Sale, at fair value (amortized cost $1,070,033,212 in 2002 and $932,488,619 in
2001)


1,115,644,847



960,415,249Equity Securities, at fair value (cost $54,072,981 in 2002 and $46,889,245 in 2001)


63,152,394



74,664,030Mortgage Loans on Real Estate


53,500



109,556Investment Real Estate (net of accumulated depreciation of $1,521,345 in 2002 and $1,444,946 in 2001)



2,653,865



2,712,165Policy Loans


51,167,571



49,945,528Collateral Loans


103,016,217



88,561,085Other Long-term Investments


166,652,726



164,056,234Short-term Investments


77,875,012



150,255,275Total Investments


1,580,595,628



1,491,160,862Cash


2,897,695



10,224,827Accrued Investment Income


15,982,625



14,140,097Accounts Receivable


16,854,591



19,843,577Reinsurance Balances Receivable


2,111,800



3,166,591Due from Affiliates


2,824,714



2,670,993Deferred Policy Acquisition Costs


156,639,323



149,820,302Other Assets


13,488,172



6,577,215Total Assets

$
1,791,394,548


$
1,697,604,464LIABILITIESPolicy Liabilities and AccrualsProperty and Casualty Insurance

$
149,781,555


$
140,174,162Policy Liabilities and AccrualsLife Insurance


599,722,477



558,043,631Unearned Premiums


150,510,747



138,384,495Dividends to Policyholders


10,260,899



10,195,930Premium Deposit and Retirement Deposit Funds


6,054,340



5,472,522Deferred Income Taxes


39,089,921



41,312,681Other Liabilities


82,732,804



76,295,259Due to Affiliates


16,031,128



16,146,574Commercial Paper


98,526,786



165,415,905Notes Payable


70,000,000



Notes Payable to Affiliates


34,822,898



37,051,467Total Liabilities


1,257,533,555



1,188,492,626Commitments and ContingenciesStockholders EquityPreferred Stock, $1 par value Shares authorized: 1,000,000 Issued: NoneCommon Stock, $1 par value Shares authorized: 110,000,000 Issued: 83,783,024, Outstanding: 200278,923,773;
200178,359,356


83,783,024



41,891,512Capital in Excess of Par Value






26,436,168Accumulated Other Comprehensive Income


30,290,261



33,996,936Retained Earnings


458,609,440



446,032,558Treasury Stock: at cost (20024,859,251 shares; 20015,423,668 shares)


(38,821,732
)


(39,245,336
)Total Stockholders Equity


533,860,993



509,111,838Total Liabilities and Stockholders Equity

$
1,791,394,548


$
1,697,604,464





The accompanying notes are an integral part of these consolidated financial
statements.




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##### Table of Contents




ALFA CORPORATION





CONSOLIDATED STATEMENTS OF INCOME


(Unaudited)





Six Months Ended June
30,


Three Months Ended June
30,2002

2001


2002

2001RevenuesPremiumsProperty and Casualty Insurance

$
209,411,645

$
195,227,850


$
106,020,678

$
98,322,672Premiums and Policy ChargesLife Insurance


31,662,826


28,652,937



15,552,797


13,653,961Net Investment Income


43,995,886


39,576,356



21,883,051


20,413,633Realized Investment Gains (Losses)


1,209,549


1,151,135



303,324


104,851Other Income


1,135,393


1,448,140



928,307


629,396Total Revenues


287,415,299


266,056,418



144,688,157


133,124,513Benefits and ExpensesBenefits & Settlement Expenses


170,200,308


154,843,981



88,007,273


75,016,990Dividends to Policyholders


1,885,785


1,904,250



897,831


903,510Amortization of Deferred Policy Acquisition Costs


38,573,426


36,713,343



20,056,070


18,471,126Other Operating Expenses


29,957,604


27,761,170



14,092,139


14,126,539Total Expenses


240,617,123


221,222,744



123,053,313


108,518,165Income Before Provision for Income Taxes


46,798,176


44,833,674



21,634,844


24,606,348Provision for Income Taxes


12,798,690


12,827,157



6,103,504


7,192,289Net Income Before Cumulative Effect of Change in Accounting Principle, Net of Tax Benefit


33,999,486


32,006,517



15,531,340


17,414,059Cumulative Effect of Change in Accounting Principle, Net of Income Tax Benefit of $139,344 in 2001


0


(258,781
)


0


0Net Income

$
33,999,486

$
31,747,736


$
15,531,340

$
17,414,059Operating Income

$
33,213,279

$
31,258,279


$
15,334,179

$
17,345,906Earnings Per Share:Operating IncomeBasic

$
0.42

$
0.40


$
0.19

$
0.22Diluted

$
0.42

$
0.40


$
0.19

$
0.22Net Income Before Cumulative Effect of Change in Accounting Principle, Net of Tax BenefitBasic

$
0.43

$
0.41


$
0.20

$
0.22Diluted

$
0.43

$
0.41


$
0.20

$
0.22Cumulative Effect of Change in Accounting Principle, Net of Tax BenefitBasic

$
0.00

$
0.00


$
0.00

$
0.00Diluted

$
0.00

$
0.00


$
0.00

$
0.00Net IncomeBasic

$
0.43

$
0.41


$
0.20

$
0.22Diluted

$
0.43

$
0.40


$
0.20

$
0.22Average Shares OutstandingBasic


78,607,284


78,320,404



78,771,794


78,332,642Diluted


79,432,866


78,902,268



79,605,279


78,961,380





The accompanying notes are an integral part of these consolidated financial
statements.




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##### Table of Contents




ALFA CORPORATION





CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


(Unaudited)





Six Months EndedJune 30,


Three Months EndedJune 30,2002


2001


2002


2001Net Income

$
33,999,486


$
31,747,736


$
15,531,340


$
17,414,059Other Comprehensive (Loss) Income, net of tax:Change in Fair Value of Securities Available for Sale


(1,902,438
)


(1,554,933
)


4,857,707



(4,510,864
)Unrealized (Losses) on Interest Rate Swap Contracts


(1,018,030
)


0



(1,018,030
)


0Less: Reclassification Adjustment for Realized Investment Gains (Losses)


786,207



748,238



197,161



68,153Total Other Comprehensive (Loss) Income


(3,706,675
)


(2,303,171
)


3,642,516



(4,579,017
)Total Comprehensive Income

$
30,292,811


$
29,444,565


$
19,173,856


$
12,835,042














The accompanying notes are an integral part of these consolidated financial statements.




5




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##### Table of Contents




ALFA CORPORATION





CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





Six Months Ended June 30,2002


2001Cash Flows From Operating Activities:Net Income

$
33,999,486


$
31,747,736Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:Policy Acquisition Costs Deferred


(43,406,546
)


(43,375,345
)Amortization of Deferred Policy Acquisition Costs


38,573,426



36,713,343Depreciation and Amortization


(454,842
)


201,602Provision for Deferred Taxes


2,086,701



1,873,379Interest Credited on Policyholders Funds


12,449,491



11,110,206Net Realized Investment Gains


(1,209,551
)


(1,151,136
)Other


(6,999,852
)


(1,087,602
)Changes in Operating Assets and Liabilities:Accrued Investment Income


(1,842,528
)


(1,529,539
)Accounts Receivable


2,988,986



(3,106,831
)Reinsurance Balances Receivable


1,054,791



(328,743
)Due from Affiliates


(269,167
)


(703,880
)Other Assets


(6,910,957
)


573,546Liability for Policy Reserves


19,604,570



2,222,933Liability for Unearned Premiums


12,126,252



14,991,528Amounts Held for Others


646,787



(142,351
)Other Liabilities


(4,885,832
)


10,360,593Net Cash Provided by Operating Activities


57,551,215



58,369,439Cash Flows from Investing Activities:Maturities and Redemptions of Fixed Maturities Held for Investment


68,612



102,220Maturities and Redemptions of Fixed Maturities Available for Sale


66,915,269



38,358,056Maturities and Redemptions of Other Investments


359,339



23,277,254Sales of Fixed Maturities Available for Sale


10,877,496



19,222,710Sales of Equity Securities


27,558,549



37,835,782Sales of Other Investments


1,293,973



565,480Purchases of Fixed Maturities Available for Sale


(216,262,983
)


(87,665,016
)Purchases of Equity Securities


(32,394,625
)


(38,634,948
)Purchases of Other Investments


(21,507,373
)


(57,405,703
)Net Change in Short-term Investments


72,380,263



(7,919,618
)Net Change in Receivable/Payable on Securities


12,114,011



(14,289,892
)Net Cash Used in Investing Activities


(78,597,469
)


(86,553,675
)Cash Flows From Financing Activities:(Decrease) Increase in Commercial Paper


(66,889,119
)


19,185,977Increase (Decrease) in Notes Payable


70,000,000



(103,806
)(Decrease) Increase in Notes Payable to Affiliates


(2,228,569
)


4,925,993Stockholder Dividends Paid


(11,612,276
)


(10,795,977
)Purchases of Treasury Stock


(755,513
)


(1,527,821
)Proceeds from Exercise of Stock Options


5,730,933



1,730,269Deposits of Policyholders Funds


43,758,593



40,542,399Withdrawal of Policyholders Funds


(24,284,927
)


(23,934,544
)Net Cash Provided by Financing Activities


13,719,122



30,022,490Net Change in Cash


(7,327,132
)


1,838,254CashBeginning of Period


10,224,827



4,475,672CashEnd of Period

$
2,897,695


$
6,313,926Supplemental Disclosures of Cash Flow Information:Cash Paid During the Period for:Interest

$
2,216,194


$
4,364,304Income Taxes

$
10,865,862


$
10,681,000





The accompanying notes are an integral part of these consolidated financial
statements.




6




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##### Table of Contents




ALFA CORPORATION





NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS


June 30, 2002





1.    Significant Accounting Policies





In the opinion of the Company, the accompanying consolidated 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 accounting principles generally accepted in the United States of America. 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, 2001. The results of operations for the six-month and three-month periods ended June 30, 2002 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, net of related tax effects. Certain reclassifications
have been made to conform previous classifications to June 30, 2002 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 (See Note 3). On January 1, 2001, Alfa Specialty Insurance Corporation
(Specialty), a subsidiary of Mutual, also became a participant in the Pooling Agreement. 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. Specialty is a direct writer primarily of nonstandard risk automobile 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. Effective January 1, 2001, Specialtys property and casualty business likewise became included in the pool. 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 storms to its pool share (65%) of a lower catastrophe pool limit unless the loss exceeded an upper catastrophe pool limit. In cases where the upper
catastrophe limit is exceeded on a




7




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##### Table of Contents




(Note 2. Continued)





100% basis, the Companys share in the loss would be based upon its amount of surplus relative to other members of the group. Lower and upper catastrophe pool limits are adjusted periodically due
to increases in insured property risks. The limits and participation levels since inception of the program are summarized below:





Lower Catastrophe Pool
Limit

Upper Catastrophe Pool
Limit

Coinsurance Allocation of
Catastrophes Exceeding Upper Catastrophe Pool Limit(millions)

(millions)November 1, 1996

$
10.0

$
249.0

13
%July 1, 1999


11.0


284.0

13
%January 1, 2001


11.4


284.0

14
%January 1, 2002


11.6


289.0

16
%





The Companys participation in the Pooling Agreement may be
changed or terminated without the consent or approval of the Companys shareholders. The Pooling Agreement may be terminated by any party thereto upon 90 days notice.





The following table sets forth the premiums and losses ceded to and assumed from the pool for the six-month and three-month periods ended June 30, 2002 and 2001:





Six Months Ended June 30,

Three Months Ended June 30,2002

2001

2002

2001(in thousands)Premiums ceded to pool

$
38,348

$
34,613

$
19,501

$
17,606Premiums assumed from pool

$
210,268

$
195,992

$
106,456

$
98,745Losses ceded to pool

$
28,387

$
27,782

$
15,147

$
13,825Losses assumed from pool

$
131,633

$
122,005

$
68,921

$
58,607





The Company incurred $5.2 million in storm losses in the second
quarter of 2002 resulting in a reduction in the Companys net income of approximately $0.04 per diluted share, after reinsurance and taxes. No catastrophe losses were incurred in the first quarter of 2002. The Company also incurred $7.4
million in storm losses in the first quarter of 2001 which reduced the Companys net income by approximately $0.06 per diluted share, after reinsurance and taxes. No catastrophe losses were incurred in the second quarter of 2001.





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.




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##### Table of Contents




(Note 3. Continued)





Certain legal proceedings are in process at June 30, 2002. Costs for these and similar legal proceedings, including accruals for outstanding cases, totaled $3.0 million in
the first six months of 2002, $930,000 in 2001, and $3.0 million in 2000. 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 17 legal proceedings against Alfa Life Insurance Corporation (Life) were in process at June 30, 2002. Of the 17 proceedings, five were filed in 2002, three were filed in 2001, one was filed in
2000, six were filed in 1999, one was filed in 1997, and one was filed in 1996. In a case tried in January 2001, in Barbour County, Alabama, the jury returned a verdict for the plaintiff against Life for $500,000 in compensatory damages and
$5,000,000 in punitive damages. After Life filed post-trial motions, the trial court reduced the punitive damage award to $1,500,000. Life has appealed the award to the Alabama Supreme Court. In a case tried in December 2001, in Bullock County,
Alabama, the jury returned a verdict for the plaintiffs against Life for $300,000 in compensatory damages and $3,000,000 in punitive damages. After Life filed post-trial motions, the trial court reduced the punitive damage award to $900,000. Life
has appealed the award to the Alabama Supreme Court. Two of the 17 pending legal proceedings against Life have been certified as class actions by the trial court in each case. After the trial court certified the first class action against Life, Life
appealed the class certification order to the Alabama Supreme Court. In November 2001, the Alabama Supreme Court reversed the trial court, decertified the class, and remanded the case to the trial court for further proceedings. The trial court has
again certified the class and Life has appealed the certification to the Alabama Supreme Court. The recent trial court order certifying the second class action has been appealed to the Alabama Supreme Court. In addition, one purported class action
lawsuit is pending against both Alfa Builders, Inc. and Alfa Mutual Fire Insurance Company. Additionally, five purported class action lawsuits are pending against the property and casualty mutual companies involving a number of issues and
allegations which could affect the Company because of a pooling agreement between the companies. No class has been certified in any of these six purported class action cases. In addition, Alfa Insurance Corporation and Alfa General Insurance
Corporation were recently served with a purported class action in the State of Georgia, alleging the two corporations improperly refused to evaluate and refused to pay diminution in value respecting automobile first-party physical damage claims. It
should be noted that in Alabama, where the Company has substantial business, the likelihood of a judgment 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.





Based upon
information presently available, contingent liabilities arising from any other threatened litigation are not presently considered by management to be material.





The Company periodically invests in partnerships that invest in affordable housing tax credits. At June 30, 2002, the Company had committed to fund a partnership of this type in the amount of
approximately $8.0 million.




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##### Table of Contents

4.    Segment Information





The following table sets forth the components of property and casualty insurance earned premiums, net underwriting income, GAAP basis loss, expense and combined ratios, underwriting margin, net
investment income and operating income for the six-month and three-month periods ended June 30, 2002 and 2001:





Six Months Ended June 30,


Three Months Ended June 30,2002


2001


% Change


2002


2001


% Change(in thousands)Earned premiumsPersonal lines

$
200,696


$
186,930


7
%

$
101,682


$
94,162


8
%Commercial lines


7,299



6,909


6
%


3,634



3,503


4
%Pools, associations and fees


2,273



2,153


6
%


1,140



1,080


6
%Reinsurance ceded


(856
)


(764
)

(12
)%


(435
)


(422
)

(3
)%Total

$
209,412


$
195,228


7
%

$
106,021


$
98,323


8
%Net underwriting income

$
15,566


$
14,821


5
%

$
5,676


$
9,980


(43
)%Loss ratio


63.0
%


62.1
%





65.3
%


58.8
%LAE ratio


4.5
%


4.0
%





4.1
%


4.2
%Expense ratio


25.1
%


26.3
%





25.2
%


26.8
%GAAP basis combined ratio


92.6
%


92.4
%





94.6
%


89.8
%Underwriting margin


7.4
%


7.6
%





5.4
%


10.2
%Net investment income

$
16,123


$
14,258


13
%

$
8,376


$
7,331


14
%Pre-tax operating income

$
31,676


$
29,215


8
%

$
14,283


$
17,382


(18
)%Operating income, net of tax

$
24,065


$
21,610


11
%

$
10,856


$
12,497


(13
)%




10




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##### Table of Contents




(Note 4. Continued)





The following table sets forth life insurance premiums and policy charges, by type of policy, net investment income, benefits and expenses and life insurance operating
income for the six-month and three-months periods ended June 30, 2002 and 2001:





Six Months Ended June 30,


Three Months Ended June 30,2002

2001

% Change


2002

2001

% Change(in thousands)Premiums and policy chargesUniversal life policy charges

$
8,684

$
7,938

9
%

$
4,382

$
3,992

10
%Universal life policy charges  COLI


1,997


1,732

15
%


577


475

21
%Interest sensitive life policy charges


5,359


5,052

6
%


2,574


2,545

1
%Traditional life insurance premiums


14,911


13,732

9
%


7,649


6,642

15
%Group life insurance premiums


712


199

258
%


371


0

NMTotal

$
31,663

$
28,653

11
%

$
15,553

$
13,654

14
%Net investment income

$
23,156

$
22,906

1
%

$
11,674

$
11,636

0
%Benefits and expenses

$
37,994

$
32,920

15
%

$
18,605

$
16,193

15
%Pre-tax operating income

$
12,533

$
14,616

(14
)%

$
6,494

$
7,091

(8
)%Operating income, net of tax

$
8,634

$
10,431

(17
)%

$
4,275

$
5,078

(16
)%





5.    Acquisition of Commercial Lease Portfolio





During the first quarter of 2000, the Company signed a definitive agreement and completed the transaction to acquire the
leasing portfolio and assets of OFC Capital (OFC), an Atlanta-based business unit of First Liberty Bank, that provides financing for commercial equipment leases. The transaction involved a cash purchase price of approximately $23.1 million, which is
primarily for the portfolio of leases. OFC operates as a business unit of Alfa Financial Corporation, a subsidiary of the Company. OFCs operations for the six-month period ended June 30, 2002 resulted in income of approximately $214,000
including a loss of approximately $96,000 in the second quarter primarily due to increased reserves associated with the lease portfolio purchased in November 2001 from the Manufacturing and Machine Tool Finance Division of Textron Financial
Corporation.





6.    Note Payable and Interest Rate Swap Contract





The Company uses variable-rate debt to partially fund its consumer loan and commercial lease portfolios. In particular, it has issued
variable-rate long-term debt and commercial paper. These debt obligations expose the Company to variability in interest payments due to changes in interest rates. If interest rates increase, interest expense increases. Conversely, if interest rates
decrease, interest expense also decreases.





As part of its funding efforts, the Company issued a $70 million
long-term obligation with a life of fifteen years in the second quarter of 2002. Management believes it is prudent to limit the variability of a portion of its interest payments. It is the Companys objective to hedge 100 percent of its
variable-rate long-term interest payments over the first five years of the life of the debt obligation.




11




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(Note 6. Continued)





To meet this objective, management entered into an interest rate swap to manage fluctuations in cash flows resulting from interest rate risk. The interest rate swap changes
the variable-rate cash flow exposure of the variable-rate long term debt obligation to fixed-rate cash flows by entering into a receivable-variable, pay-fixed interest rate swap. Under the interest rate swap, the Company receives variable interest
payments and makes fixed interest rate payments, thereby creating fixed-rate long-term debt.





The Company does not
enter into derivative instruments for any purpose other than cash flow hedging purposes. That is, the Company does not speculate using derivative instruments in the normal course of business.





The Company assesses interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected
future cash flows and by evaluating hedging opportunities.





The Company maintains risk management control systems
to monitor interest rate cash flow risk attributable to both the Companys outstanding or forecasted debt obligations as well as the Companys offsetting hedge position. The risk management control systems involve the use of analytical
techniques, including cash flow sensitivity analysis, to estimate the expected impact of changes in interest rates on the Companys future cash flows.





Interest expense for the six months ended June 30, 2002 includes no gains or losses from the interest rate swap. Changes in fair value of the interest rate swap designated as a hedging instrument of
the variability of cash flows associated with floating-rate, long-term debt obligation are reported in accumulated other comprehensive income. The interest rate swap involves a LIBOR for LIBOR exchange and meets the criteria for short-cut
accounting. Therefore, the interest rate swap has no ineffectiveness, thereby eliminating the reclassification of this amount to interest expense in subsequent periods.





7.    Financial Accounting Developments





The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (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 are included in either earnings or other comprehensive income depending on the intended use of the
derivative instrument. This standard, as amended by SFAS No. 137, became effective for the Company January 1, 2001. During, 2001, the Company recorded approximately $229,000, net of tax, as the effect upon adoption of this standard.





The FASB also issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities (a replacement of SFAS No. 125) in September 2000. This standard became effective April 1, 2001. At this time, the Company does not anticipate this standard having a significant impact on the Companys financial position or
income.




12




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##### Table of Contents




(Note 7. Continued)





The FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, in June 2001. These standards became
effective July 1, 2001 and January 1, 2002, respectively. Based on current information available and the fact that the Company has not engaged in material transactions covered by these standards, the Company does not anticipate these standards
having a significant impact on the Companys financial position or income.





In June 2001, the FASB issued
SFAS No. 143, Accounting for Asset Retirement Obligations. Subsequently, in August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. While SFAS No. 143 has not yet become
effective, SFAS No. 144 became effective for the Company on January 1, 2002. At this time, the Company does not anticipate either of these standards having a significant impact on the Companys financial position or income.





The FASB also issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13,
and Technical Corrections, in April 2002. At this time, the Company does not anticipate this standard having a significant impact on the Companys financial position or income.





8.    Stock Split





On April
25, 2002, the Companys Board of Directors approved a two-for-one stock split to be effected as a 100% stock dividend. The new shares were issued on June 17, 2002 to stockholders of record on June 3, 2002. Financial statements presented for
2002 within this filing reflect the impact of the stock split. Financial statements for prior periods reflect the impact of the stock split only in share and per share disclosures.




13




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##### Table of Contents




INDEPENDENT AUDITORS REVIEW REPORT





To the Stockholders and Board
of Directors


Alfa Corporation:





We have reviewed the consolidated balance sheet of Alfa Corporation and subsidiaries as of June 30, 2002, and the related consolidated statements of income and comprehensive income for the three-month
and six-month periods ended June 30, 2002 and 2001, and the consolidated statements of cash flows for the six-month periods ended June 30, 2002 and 2001. These consolidated financial statements are the responsibility of the Companys
management.





We conducted our review in accordance with standards established by the American Institute of
Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially
less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.





Based on our review, we are not aware of any material modifications that
should be made to the consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.





We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the accompanying consolidated balance sheet of Alfa
Corporation and subsidiaries as of December 31, 2001, and the related consolidated statements of income, stockholders equity, cash flows and comprehensive income for the year then ended (not presented herein); and in our report dated February
8, 2002, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2001, is fairly stated in all material respects, in
relation to the consolidated balance sheet from which it has been derived.





KPMG LLP





August 9, 2002


Birmingham, Alabama




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##### Table of Contents




MANAGEMENTS DISCUSSION AND ANALYSIS





RESULTS OF OPERATIONS





The following table sets forth consolidated summarized income statement information for the six-month and three-month periods ended June
30, 2002 and 2001:





Six Months Ended June 30,


Three Months Ended June 30,2002


2001


% Change


2002


2001


% Change(in thousands, except share and per share data)RevenuesProperty and casualty insurance premiums

$
209,412


$
195,228


7
%

$
106,021


$
98,323


8
%Life insurance premiums and policy charges


31,663



28,653


11
%


15,553



13,654


14
%Total premiums and policy charges

$
241,075


$
223,881


8
%

$
121,574


$
111,977


9
%Net investment income

$
43,996


$
39,576


11
%

$
21,883


$
20,414


7
%Total Revenues

$
287,415


$
266,056


8
%

$
144,688


$
133,125


9
%Net incomeProperty and casualty insurance

$
24,065


$
21,610


11
%

$
10,856


$
12,497


(13
)%Life insurance


8,634



10,431


(17
%)


4,275



5,078


(16
)%Total insurance operations


32,699



32,041


2
%


15,131



17,575


(14
)%Noninsurance operations


1,972



1,347


46
%


853



535


59
%Net realized investment gains


786



748


5
%


197



68


190
%Corporate expenses


(1,458
)


(2,129
)

(31
)%


(650
)


(764
)

(15
)%Cumulative effect of change in accounting principle


0



(259
)

(100
)%


0



0


0
%Net income

$
33,999


$
31,748


7
%

$
15,531


$
17,414


(11
)%Net income per shareBasic

$
0.43


$
0.41


7
%

$
0.20


$
0.22


(11
)%Diluted

$
0.43


$
0.40


6
%

$
0.20


$
0.22


(12
)%Weighted average shares outstandingBasic


78,607,284



78,320,404






78,771,794



78,332,642Diluted


79,432,866



78,902,268






79,605,279



78,961,380





Total premiums and policy charges increased 8% in the first six
months of 2002 as a result of increased production in both property casualty and life business and continued good persistency. Net investment income




15




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##### Table of Contents

increased 11% in the first six months of 2002 while invested assets have grown 6.0% in the six months since December 31, 2001.





Operating income increased by 11% in the property casualty subsidiaries due primarily to a reduction in storm losses during the
first six months of 2002. The 17% decrease in operating income in the life subsidiary is largely due to increases made in legal reserves of $2.2 million. Noninsurance operations were up 46% due to earnings growth from the finance, construction and
benefit services subsidiaries. An improved interest rate spread led to an increase in operating income of approximately $219,000 in the finance subsidiary. Construction income increased $166,000 due to higher levels of commercial construction
activity. Operating earnings of Alfa Benefits Corporation increased approximately $342,000 due to a reduction in benefit liabilities during the second quarter.





The Companys net income was slightly impacted by an increase in realized investment gains. Corporate expenses decreased in the first half of 2002 due to significantly lower borrowing costs
resulting from a decline in interest rates.





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 six-month and three-month periods ended June 30, 2002 and 2001:





Six Months Ended June 30,


Three Months Ended June 30,2002


2001


% Change


2002


2001


% Change(in thousands)Earned premiumsPersonal lines

$
200,696


$
186,930


7
%

$
101,682


$
94,162


8
%Commercial lines


7,299



6,909


6
%


3,634



3,503


4
%Pools, associations and fees


2,273



2,153


6
%


1,140



1,080


6
%Reinsurance ceded


(856
)


(764
)

(12
)%


(435
)


(422
)

(3
)%Total

$
209,412


$
195,228


7
%

$
106,021


$
98,323


8
%Net underwriting income

$
15,566


$
14,821


5
%

$
5,676


$
9,980


(43
)%Loss ratio


63.0
%


62.1
%





65.3
%


58.8
%LAE ratio


4.5
%


4.0
%





4.1
%


4.2
%Expense ratio


25.1
%


26.3
%





25.2
%


26.8
%GAAP basis combined ratio


92.6
%


92.4
%





94.6
%


89.8
%Underwriting margin


7.4
%


7.6
%





5.4
%


10.2
%Net investment income

$
16,123


$
14,258


13
%

$
8,376


$
7,331


14
%Pre-tax operating income

$
31,676


$
29,215


8
%

$
14,283


$
17,382


(18
)%Operating income, net of tax

$
24,065


$
21,610


11
%

$
10,856


$
12,497


(13
)%




16




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##### Table of Contents




Earned premiums increased 8% in the second quarter and 7% for the first six
months of 2002 due to greater automobile and homeowner production and the positive impact of homeowner rate increases which took effect in November 2001. Continued good persistency in the automobile and homeowner lines also contributed to premium
increases.





The overall loss ratio increased to 63.0% for the first two quarters of 2002 as the ratio climbed to
65.3% for the second quarter following $5.2 million in storm losses. Approximately $7.4 million of storm losses were incurred in the first quarter of 2001. No storm losses were recorded in the second quarter of 2001. Loss adjustment expenses in the
first six months of 2002 were 4.5% of earned premiums compared to 4.0% in the same period of 2001 when a reduction in loss adjustment expense reserves was recorded following a review of reserve levels. The increase in business resulting from the
mandatory insurance law becoming effective in Alabama in June 2000 has not resulted in the emergence of additional claims cost at the anticipated levels. Consequently, reserves were adjusted in the first quarter of 2001 to a more normal level.
Another factor in the relatively stable underwriting margin was a decrease in the expense ratio from 2001 levels despite additional expenses related to the Companys implementation of new financial reporting systems.





Net investment income increased 13% in the first six months of 2002 in the property casualty subsidiaries due to continued positive cash
flow from profitable underwriting results which increased invested assets 10.4% since June 30, 2001.





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 six-month and three-month periods ended June 30, 2002 and 2001:





Six Months Ended June 30,


Three Months Ended June 30,2002

2001

% Change


2002

2001

% Change(in thousands)Premiums and policy chargesUniversal life policy charges

$
8,684

$
7,938

9
%

$
4,382

$
3,992

10
%Universal life policy chargesCOLI


1,997


1,732

15
%


577


475

21
%Interest sensitive life policy charges


5,359


5,052

6
%


2,574


2,545

1
%Traditional life insurance premiums


14,911


13,732

9
%


7,649


6,642

15
%Group life insurance premiums


712


199

258
%


371


0

NMTotal

$
31,663

$
28,653

11
%

$
15,553

$
13,654

14
%Net investment income

$
23,156

$
22,906

1
%

$
11,674

$
11,636

0
%Benefits and expenses

$
37,994

$
32,920

15
%

$
18,605

$
16,193

15
%Pre-tax operating income

$
12,533

$
14,616

(14
)%

$
6,494

$
7,091

(8
)%Operating income, net of tax

$
8,634

$
10,431

(17
)%

$
4,275

$
5,078

(16
)%





The Companys life insurance premiums and policy charges
increased 11% in the first six months of 2002 due to new business and good persistency. First year collected premiums increased over 15% in the first six




17




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##### Table of Contents

months of 2002 due to continued sales growth of term products introduced over the last two years. Total new annualized premium increased 5.0% in
the first half of 2002 and 8.7% in all of 2001.





Life insurance operating income decreased approximately 17% in
the first six months of 2002. This decrease was primarily the result of expenses related to increases in legal reserves of $2.2 million. The mortality ratio of actual to expected death claims decreased to 86% in the first six months of 2002 from
107% in the first two quarters of 2001. Despite the decline in earnings, positive cash flows resulted in a 9.0% increase in invested assets while investment income increased approximately 1%.





NONINSURANCE OPERATIONS





Noninsurance operations
were up 46% due primarily to improved operating results in the finance, construction and benefit services subsidiaries. More favorable interest rate spreads contributed to an increase in net income of approximately $219,000 from the finance
subsidiary. Operating income from the construction subsidiary increased by approximately $166,000 in the first half of 2002 due to higher levels of commercial construction activity. While income from the Companys subsidiary covering certain
employee benefits increased by over $342,000 to approximately $477,000, earnings from the real estate subsidiary was down $112,000 in the first six months of 2002 from the same period in 2001 due largely to tighter profit margins.





CORPORATE





Corporate expenses decreased 31%, or approximately $671,000, due primarily to lower interest expense related to the Companys commercial paper borrowing. Favorable trends in short-term interest rates allowed the Companys
interest expense to decline significantly from levels experienced in the first half of 2001.





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 six months ended June 30, 2002 and 2001:





Six Months Ended June 30,2002


2001Increase in invested assets since January 1, 2002 and 2001

6.0
%

5.0
%Investment yield rate (annualized)

6.7
%

6.8
%Increase in net investment income since June 30, 2001 and 2000

11.2
%

14.1
%





The positive cash flow from operations is due primarily to the
improved operating results in the Companys property and casualty subsidiaries, which had $15.6 million in underwriting income in the first two quarters of 2002 which was somewhat offset by the decline in profitability of the Companys
life subsidiary, which had $8.6 million in operating income in the same period. The premium from the COLI plan in the life insurance subsidiary is collected in February and provided positive cash flow in the first quarter of both periods. Net
increases in cash resulting from increased borrowings were primarily used to support growth in the loan and lease portfolios of the finance subsidiary. As a result of the overall positive cash flows from operations, invested assets grew 6.0% since
January 1, 2002 and 11.0% since June 30, 2001 (based on amortized cost, which excludes the impact of SFAS 115), and net investment income increased 11.2%. In addition to the increased investment income created by positive cash flow from operations,
the Company also had improved




18




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##### Table of Contents

investment income results from its finance subsidiary of approximately $219,000 from its consumer loan and commercial lease portfolios. The
overall yield rate, calculated using amortized cost, remained relatively unchanged at 6.7%. The Company had net realized investment gains of approximately $1.2 million in the first six months of both 2002 and 2001, respectively. 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 June 30, 2002 and December 31, 2001:





June 30, 2002


December 31, 2001Fixed maturitiesTaxableMortgage backed (CMOs)

25.0
%

22.9
%Corporate bonds

30.7


27.6Total taxable

55.7


50.5Tax exempts

14.9


14.0Total fixed maturities

70.6


64.5Equity securities

4.0


5.0Real estate

0.2


0.2Policy loans

3.2


3.3Collateral loans

6.5


5.9Other long term investments

10.6


11.0Short term investments

4.9


10.1100.0
%

100.0
%





The majority of the Companys investment portfolio consists of
fixed maturities which are diverse as to both industry and geographic concentration. Since year-end, the overall mix of investments has remained relatively stable with changes due to a shift from short term investments to fixed maturities and to
market value fluctuations in fixed maturities.





The rating of the Companys portfolio of fixed maturities
using the Standard & Poors rating categories is as follows at June 30, 2002 and December 31, 2001:





Rating

June 30, 2002


December 31, 2001AAA to A-

90.5
%

88.8
%BBB+ to BBB-

9.2


10.8BB+ and Below (Below investment grade)

0.3


0.4100.0
%

100.0
%





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 June 30, 2002, approximately 35.4% 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 June 30, 2002, the Companys total portfolio of fixed




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##### Table of Contents

maturities had gross unrealized gains of $54,080,113 and gross unrealized losses of $ 8,434,665. Securities are priced by nationally recognized
pricing services or by broker/dealer securities firms. No securities were priced by the Company.





During the first
six months of 2002, the Company sold approximately $10.9 million in fixed maturities available for sale. These sales resulted in gross realized gains of $363,597 and gross realized losses of $3,976,523. During the same period in 2001, the Company
sold approximately $21.0 million in fixed maturities available for sale. These sales resulted in gross realized gains of $115,669 and gross realized losses of $548,624.





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 June 30, 2002, the Company had unrealized gains of approximately $2.8 million in such investments. During the first six months of 2002, the Company recognized
a net loss of $3,435,342 on disposals of high yield debt securities. No such disposals occurred in the same period of 2001.





In the first six months of 2002, the Company wrote down four equities totaling $634,141, whose declines in value were deemed to be other than temporary and were recorded as a reduction in realized investment gains.





The Companys investment in other long term investments consists primarily of consumer loans and commercial leases
originated by the finance subsidiary. These loans and leases are collateralized by automobiles, equipment and other property. At June 30, 2002, the delinquency ratio on the loan portfolio was 1.35%, down from 1.78% at December 31, 2001. The
delinquency ratio on the lease portfolio at June 30, 2002 was 4.84%, up from 4.37% at December 31, 2001. Credit losses of approximately $500,000 were incurred in the first six months of 2002 including an increase of approximately $116,000 in general
reserves attributable to growth of the consumer loan portfolio. Leases charged off in the first two quarters of 2002 were approximately $300,000. At June 30, 2002, the Company maintained an allowance for loan losses of $1,096,110 or approximately
1.2% of the outstanding loan balance. In addition, at June 30, 2002, the Company maintained an allowance for lease losses of $1,895,142 or approximately 2.6% of the outstanding lease balance. Other significant long term investments include assets
leased under operating leases, partnership investments and certain other investments.





INCOME TAXES





The effective tax rate in the first six months of 2002 was 27.1% compared to 28.7% for the full year 2001 and 28.6% for the first six
months of 2001. The decrease in the effective tax rate in the first six months of 2002 is due primarily to credits arising from an amended income tax return. The effective rate has also been impacted by increased tax preference credits on certain
investments. Based on information available at June 30, 2002, the Company currently anticipates the effective tax rate for all of 2002 to be approximately 27.2%.





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.




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##### Table of Contents




LIQUIDITY AND CAPITAL RESOURCES





The Company receives funds from its subsidiaries consisting of dividends, payments for funding federal income taxes, and reimbursement of expenses incurred at the corporate
level for the subsidiaries. These funds are used for paying dividends to stockholders, corporate interest and expenses, federal income taxes, and for funding additional investments in its subsidiaries operations.





The Companys subsidiaries require cash in order to fund policy acquisition costs, claims, other policy benefits, interest expense,
general operating expenses, and dividends to the Company. The major sources of the Companys liquidity are operations and cash provided by maturing or liquidated investments. A significant portion of the Companys investment portfolio
consists of readily marketable securities which can be sold for cash. Based on a review of the Companys matching of asset and liability maturities and on the interest sensitivity of the majority of policies in force, management believes the
ultimate exposure to loss from interest rate fluctuations is not significant.





Net cash provided by operating
activities for the first six months of 2002 and 2001 approximated $57.6 million and $58.4 million, respectively. Such net positive cash flows provide the foundation of the Companys assets/liability management program and are the primary
drivers of the Companys liquidity. As previously discussed, the Company also maintains a diversified portfolio of fixed maturity and equity securities which provide a secondary source of liquidity should net cash flows from operating
activities prove inadequate to fund current operating needs. Management believes that such an eventuality is unlikely given the Companys product mix (primarily short-duration personal lines property and casualty products), its ability to
adjust premium rates (subject to regulatory oversight) to reflect emerging loss and expense trends and its catastrophe reinsurance program, amongst other factors.





The Company has a limited number of contractual obligations in the form of operating leases and debt obligations. These leases have primarily been originated by its
commercial leasing and real estate sales subsidiaries. Operating leases supporting the corporate headquarters are the responsibility of Alfa Mutual Insurance Company (Mutual), an affiliate. In turn, the Company reimburses Mutual monthly for a
portion of these and other expenses based on a management and operating agreement. There are currently no plans to change the structure of this agreement. Included in the Companys contractual obligations is the repayment of a $70 million debt
obligation. This note, issued in the second quarter of 2002, is payable at the end of fifteen years. While the note carries a variable interest rate, the Company has entered into an interest rate swap contract to hedge interest rate variability and
fix the interest rate for the first five years of the debt obligation at 4.945%. The Companys contractual obligations at June 30, 2002 are summarized below:





Payments Due by PeriodTotal

Less than 1 year

1-3 years

4-5 years

After 5 yearsOperating Leases

$
36,585

$
21,417

$
15,168

$


$
Capital Lease Obligations














Unconditional Purchase Obligations














Long-Term Obligations


70,000,000











70,000,000Other Long-Term Obligations














Total Contractual Obligations

$
70,036,585

$
21,417

$
15,168

$


$
70,000,000





The Company maintains a variety of funding agreements in the form
of lines of credit with affiliated entities. The chart below depicts, at June 30, 2002, the cash outlay by the Company representing the potential full




21




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##### Table of Contents

repayment of lines of credit it has outstanding with others. Also included with the amounts shown as lines of credit are the
potential amounts the Company would have to supply to other affiliated entities if they made full use of their existing lines of credit during 2002 with the Companys finance subsidiary, Alfa Financial Corporation. Other commercial commitments
of the Company shown below include commercial paper outstanding, scheduled fundings of partnerships, and loans sold to members of the Alfa Mutual Group through which recourse against the finance subsidiary is available if repayment by the customer
fails to occur.





Amount of Commitment Expiration Per PeriodTotal Amounts Committed

Less than 1 year

1- 3 years

4-5 years

After 5 yearsLines of Credit

$
29,015,000

$
21,015,000

$
8,000,000

$


$
Standby Letters of Credit














Guarantees














Standby Repurchase Obligations














Other Commercial Commitments


140,726,393


134,797,881


4,446,384


1,482,128


Total Commercial Commitments

$
169,741,393

$
155,812,881

$
12,446,384

$
1,482,128

$






Assessment of credit risk is a critical factor in the
Companys consumer loan and commercial leasing subsidiary. All credit decisions are made by personnel trained to limit loss exposure from unfavorable risks. In attempting to manage risk, the Company regularly reviews delinquent accounts and
adjusts reserves for potential loan losses and potential lease losses. To the extent these reserves are inadequate at the time an account is written off, income would be negatively impacted. In addition, the Company monitors interest rates relative
to the portfolio duration.





Rising interest rates on commercial paper issued, a major source of funding portfolio
growth, could reduce the interest rate spread if the Company failed to adequately adjust interest rates charged to customers.





Total borrowings increased approximately $900,000 in the first six months of 2002 to $203.3 million. The majority of the short-term debt is commercial paper issued by the Company. At June 30, 2002, the Company had approximately $98.6
million in commercial paper at rates ranging from 1.82% to 1.86% with maturities ranging from July 16, 2002 to August 22, 2002. The Company intends to continue to use the commercial paper program as a major source to fund the consumer loan
portfolio, commercial lease portfolio and other corporate short-term needs. Backup lines of credit are in place up to $220 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 A-1+ and P-1 commercial paper ratings from Standard & Poors and Moodys Investors Service, respectively. The commercial paper is guaranteed by
two affiliates, Alfa Mutual Insurance Company and Alfa Mutual Fire Insurance Company. In addition, the Company had $34.8 million in short-term debt outstanding to affiliates at June 30, 2002.





Included in total borrowings is a variable rate note issued by the Company during the second quarter of 2002 in the amount of $70 million. This note is payable in its
entirety at the end of fifteen years with interest payments due monthly. The Company is using the proceeds of this note to partially fund the consumer loan and commercial lease portfolios of its finance subsidiary. The Company has entered into an
interest rate swap contract in order to achieve its objective of economically hedging 100 percent of its variable-rate long-term interest payments over the first five years of the note. Under the interest rate swap, the Company receives variable
interest payments and makes fixed interest rate payments, thereby fixing the rate on such debt at 4.945%.




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On October 25, 1993, the Company established a Stock Option Plan, pursuant to
which a maximum aggregate of 4,000,000 shares of common stock were reserved for grant to key personnel. On April 26, 2001, the plan was amended to increase the maximum aggregate number of shares available for grant to 6,400,000 shares. Under the
plan, options ratably become exercisable annually over three years and may not be exercised after ten years from the date of the award. During March 2002, the Company issued 423,000 options.





The Companys Board of Directors has approved stock repurchase programs authorizing the repurchase of up to 12,000,000 shares of its outstanding common stock in the
open market or in negotiated transactions in such quantities and at such times and prices as management may decide. During the first six months of 2002, the Company repurchased 62,356 shares at a cost of $755,513. At June 30, 2002, the total
repurchased was 6,508,456 shares at a cost of $42,408,240. The Company has reissued 1,441,330 treasury shares as a result of option exercises. In May 2002, the Company began selling treasury shares to its mutual affiliates as a means of meeting
provisions under their participation in the Companys dividend reinvestment plan. At June 30, 2002, the total sold was 223,875 shares at a cost of $421,165.





Due to the sensitivity of the products offered by the life subsidiary to interest rates fluctuations, the Company must assess the risk of surrenders exceeding expectations factored into its pricing
program. Internal actuaries are used to determine the need for modifying the Companys policies on surrender charges and assessing the Companys competitiveness with regard to rates offered.





Cash surrenders paid to policyholders on a statutory basis totaled $7.5 million in the first six months of 2002 and $8.2 million for the
first six months of 2001. 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 June 30, 2002, the total amount of cash that would be required to fund all amounts subject to surrender was approximately $478.1 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.





The Companys management uses estimates in determining loss reserves for inclusion in its financial statements. Periodic reviews are conducted with the assistance of
both internal and external actuaries to determine a range of reasonable loss reserves. In addition, the Companys current catastrophe protection program, which began November 1, 1996, was established to address the economics of catastrophe
finance. This plan limits the Companys exposure to catastrophes which might otherwise deplete the Companys surplus through the combination of shared catastrophe exposure within the Alfa Group and the purchase of reinsurance coverage from
external reinsurers.





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




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June 30, 2002, the Company does not believe there to be a significant concentration of credit risk related to its reinsurance program.





Lawsuits brought by policyholders or third-party claimants can create volatility in the Companys earnings.
The Company maintains in-house legal staff and, as needed, secures the services of external legal firms to present and protect its position. Certain legal proceedings are in process at June 30, 2002. 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. Costs for these and similar proceedings, including accruals for outstanding
cases, are included in the financial statements of the Company. Management periodically reviews reserves established to cover potential costs of litigation including legal fees and potential damage assessments and adjusts them based on their best
estimates. It should be noted that in Alabama, where the Company has substantial business, the likelihood of a judgment 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.





Increased 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. In 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. While this requirement will affect both the revenues and
losses incurred by the Company in the future, the full extent or impact is not possible to predict and the Company believes any impact on future results will not be significant.





CRITICAL ACCOUNTING POLICIES





The Companys
Summary of Significant Accounting Policies is presented in the notes to its audited consolidated financial statements for the fiscal year ended December 31, 2001. As the Company operates in the property and casualty and life insurance
industries, its accounting policies are well defined with industry-specific accounting literature governing the recognition of insurance-related revenues and expenses. The exercise of management judgment is, however, a critical aspect governing the
application of such accounting guidance. Management believes that the significant assumptions used in the determination of its insurance assets and liabilities are supported by actuarial studies conducted in accordance with generally accepted
actuarial standards and that the resulting insurance assets and liabilities fall within a reasonable range of actuarial estimates given current trends and the nature of the Companys coverages. Significant assumptions used in the determination
of actuarially determined assets and liabilities are also contained within the notes to its audited consolidated financial statements for the fiscal year ended December 31, 2001.





FINANCIAL ACCOUNTING DEVELOPMENTS





The Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standard (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




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earnings or other comprehensive income depending on the intended use of the derivative instrument. This standard, as amended by SFAS No. 137,
became effective for the Company January 1, 2001. At this time, the Company does not anticipate this standard having a significant impact on the Companys financial position or income as it does not use derivative instruments in the normal
course of business. On January 1, 2001, the Company recorded approximately $229,000, net of tax, as the effect upon adoption of this standard.





The FASB also issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (a replacement of SFAS No. 125) in September 2000. This
standard became effective April 1, 2001. At this time, the Company does not anticipate this standard having a significant impact on the Companys financial position or income.





The FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, in June 2001. These standards became
effective July 1, 2001 and January 1, 2002, respectively. Based on current information available and the fact that the Company has not engaged in material transactions covered by these standards, the Company does not anticipate these standards
having a significant impact on the Companys financial position or income.





In June 2001, the FASB issued
SFAS No. 143, Accounting for Asset Retirement Obligations. Subsequently, in August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. While SFAS No. 143 has not yet become
effective, SFAS No. 144 became effective for the Company on January 1, 2002. At this time, the Company does not anticipate either of these standards having a significant impact on the Companys financial position or income.





The FASB also issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13,
and Technical Corrections, in April 2002. At this time, the Company does not anticipate this standard having a significant impact on the Companys financial position or income.





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 expressed or implied, is meant as and should be
considered a forward-looking statement as that term is defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on assumptions and opinions concerning a variety of known and unknown risks, including but
not necessarily limited to changes in market conditions, natural disasters and other catastrophic events, increased competition, changes in availability and cost of reinsurance, changes in governmental regulations, technological changes, political
and legal contingencies and general economic conditions, as well as other risks and uncertainties more completely described in the Companys filings with the Securities and Exchange Commission. If any of these assumptions or opinions prove
incorrect, any forward-looking statements made on the basis of such assumptions or opinions may also prove materially incorrect in one or more respects and may cause actual future results to differ materially from those contemplated, projected,
estimated or budgeted in such forward-looking statements.




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Item 3.Market Risk Disclosures





The Companys objectives in managing its
investment portfolio are to maximize investment income and investment returns while minimizing overall credit risk. Investment strategies are developed based on many factors including underwriting results, overall tax position, regulatory
requirements, and fluctuations in interest rates. Investment decisions are made by management and approved by the Board of Directors. Market risk represents the potential for loss due to adverse changes in the fair value of securities. The market
risk related to the Companys fixed maturity portfolio are primarily interest rate risk and prepayment risk. The market risk related to the Companys equity portfolio is equity price risk. For further information, reference is made to
Managements Discussion and Analysis of Results of Operations in Alfa Corporations Annual Report on Form 10-K for the year ended December 31, 2001.




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PART II.    OTHER INFORMATION





Item 1.Legal Proceedings





Certain legal proceedings are in process at June 30, 2002.
Costs for these and similar legal proceedings, including accruals for outstanding cases, totaled $3.0 million in the first six months of 2002, $930,000 in 2001, and $3.0 million in 2000. 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 17 legal proceedings against Alfa Life Insurance Corporation (Life) were in process
at June 30, 2002. Of the 17 proceedings, five were filed in 2002, three were filed in 2001, one was filed in 2000, six were filed in 1999, one was filed in 1997, and one was filed in 1996. In a case tried in January 2001, in Barbour County, Alabama,
the jury returned a verdict for the plaintiff against Life for $500,000 in compensatory damages and $5,000,000 in punitive damages. After Life filed post-trial motions, the trial court reduced the punitive damage award to $1,500,000. Life has
appealed the award to the Alabama Supreme Court. In a case tried in December 2001, in Bullock County, Alabama, the jury returned a verdict for the plaintiffs against Life for $300,000 in compensatory damages and $3,000,000 in punitive damages. After
Life filed post-trial motions, the trial court reduced the punitive damage award to $900,000. Life has appealed the award to the Alabama Supreme Court. Two of the 17 pending legal proceedings against Life have been certified as class actions by the
trial court in each case. After the trial court certified the first class action against Life, Life appealed the class certification order to the Alabama Supreme Court. In November 2001, the Alabama Supreme Court reversed the trial court,
decertified the class, and remanded the case to the trial court for further proceedings. The trial court has again certified the class and Life has appealed the certification to the Alabama Supreme Court. The recent trial court order certifying the
second class action has been appealed to the Alabama Supreme Court. In addition, one purported class action lawsuit is pending against both Alfa Builders, Inc. and Alfa Mutual Fire Insurance Company. Additionally, five purported class action
lawsuits are pending against the property and casualty mutual companies involving a number of issues and allegations which could affect the Company because of a pooling agreement between the companies. No class has been certified in any of these six
purported class action cases. In addition, Alfa Insurance Corporation and Alfa General Insurance Corporation were recently served with a purported class action in the State of Georgia, alleging the two corporations improperly refused to evaluate and
refused to pay diminution in value respecting automobile first-party physical damage claims. It should be noted that in Alabama, where the Company has substantial business, the likelihood of a judgment 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.





Based upon information presently available, contingent liabilities arising from any other threatened litigation are not presently considered by management to be
material.




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Item 6.Exhibits and Reports on Form 8-K





(a)  Exhibits:





11Statement of Computation of Per Share Earnings





15Letter Regarding Unaudited Interim Financial Information





99Miscellaneous





99.1Certification of Chief Executive Officer





99.2Certification of Chief Financial Officer





(b)  Reports on Form 8-K:





There were no reports on Form 8-K filed during the quarter ended June 30, 2002.





Items other than those listed above are omitted because they are not required or are not applicable.




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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 CORPORATIONBy:

/s/    JERRY A.
NEWBYJerry A. Newby President (Chief Executive Officer)





Date 8/09/02





By:

/s/    STEPHEN G. RUTLEDGEStephen G. Rutledge Senior
Vice President (Chief Financial Officer and Chief Investment Officer)





Date 8/09/02




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