##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

Commission File Number: 0-11773



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ALFA CORPORATION

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                    
|-------------------------------------------------------------- |  | -----------------------------------
|Delaware                                                       |  | 63-0838024                         
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S Employer Identification No.)
|                                                               | 
|2108 East South BoulevardP.O. Box 11000, Montgomery, Alabama   |  | 36191-0001                         
|(Address of principal executive offices)                       |  | (Zip Code)                         

(334) 288-3900

(Registrants Telephone Number including Area Code)



---

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 by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2
of the Exchange Act. (Check one):

Large accelerated filer ̈Accelerated filer  x            Non-accelerated filer ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ̈No  x

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.



|                                        |  |                             
|--------------------------------------- |  | ----------------------------
|Class                                   |  | Outstanding at July 31, 2006
|Common Stock, $1.00 par value per share |  | 80,314,585 shares           



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##### Table of Contents

ALFA CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2006

INDEX



|                               |  |          |  |                                                                                                       |  |         
|------------------------------ |  | -------- |  | ----------------------------------------------------------------------------------------------------- |  | --------
|                               |  |          |  |                                                                                                       |  | Page No.
|PART I - FINANCIAL INFORMATION |  |         
|                               |  |          | 
|                               |  | Item 1.  |  | Financial Statements (unaudited)                                                                      |  |         
|                               |  |          | 
|                               |  |          |  | Consolidated Condensed Balance Sheets  June 30, 2006 and December 31, 2005                           |  | 3       
|                               |  |          | 
|                               |  |          |  | Consolidated Condensed Statements of Income, Six Months and Three Months ended June 30, 2006 and 2005 |  | 4       
|                               |  |          | 
|                               |  |          |  | Consolidated Condensed Statements of Cash Flows, Six Months ended June 30, 2006 and 2005              |  | 5       
|                               |  |          | 
|                               |  |          |  | Notes to Consolidated Condensed Financial Statements                                                  |  | 6       
|                               |  |          | 
|                               |  |          |  | Report of Independent Registered Public Accounting Firm                                               |  | 20      
|                               |  |          | 
|                               |  | Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                 |  | 21      
|                               |  |          | 
|                               |  | Item 3.  |  | Quantitative and Qualitative Disclosures about Market Risk                                            |  | 50      
|                               |  |          | 
|                               |  | Item 4.  |  | Controls and Procedures                                                                               |  | 50      
|                               | 
|PART II - OTHER INFORMATION    |  |         
|                               |  |          | 
|                               |  | Item 1.  |  | Legal Proceedings                                                                                     |  | 51      
|                               |  |          | 
|                               |  | Item 1A. |  | Risk Factors                                                                                          |  | 51      
|                               |  |          | 
|                               |  | Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds                                           |  | 51      
|                               |  |          | 
|                               |  | Item 3.  |  | Defaults Upon Senior Securities                                                                       |  | 51      
|                               |  |          | 
|                               |  | Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                   |  | 52      
|                               |  |          | 
|                               |  | Item 5.  |  | Other Information                                                                                     |  | 52      
|                               |  |          | 
|                               |  | Item 6.  |  | Exhibits                                                                                              |  | 52      
|                               | 
|SIGNATURES                     |  | 53      
|                               | 
|EXHIBIT INDEX                  |  | 54      



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

ALFA CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS



|                                                                                                                                                                                                                                                                                                                                                                                                |  |              |               |   |                      |   |               |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------------- | - | -------------------- | - | ------------- | -
|                                                                                                                                                                                                                                                                                                                                                                                                |  | June 30,2006 |               |   | December 31,2005 (1) |  
|                                                                                                                                                                                                                                                                                                                                                                                                |  | (Unaudited)  |               |   |                      |  
|Assets                                                                                                                                                                                                                                                                                                                                                                                          |  |              |               |   |                      |   |               |  
|Investments:                                                                                                                                                                                                                                                                                                                                                                                    |  |              |               |   |                      |   |               |  
|Fixed Maturities Held for Investment, at amortized cost(fair value $82,106 in 2006 and $93,578 in 2005)                                                                                                                                                                                                                                                                                         |  | $            | 78,525        |   |                      | $ | 88,330        |  
|Fixed Maturities Available for Sale, at fair value(amortized cost $1,450,244,708 in 2006 and $1,394,823,078 in 2005)                                                                                                                                                                                                                                                                            |  |              | 1,434,502,184 |   |                      |   | 1,419,708,095 |  
|Equity Securities Available for Sale, at fair value(cost $105,310,910 in 2006 and $96,668,040 in 2005)                                                                                                                                                                                                                                                                                          |  |              | 110,639,970   |   |                      |   | 107,020,104   |  
|Policy Loans                                                                                                                                                                                                                                                                                                                                                                                    |  |              | 63,370,356    |   |                      |   | 62,101,204    |  
|Collateral Loans                                                                                                                                                                                                                                                                                                                                                                                |  |              | 129,945,844   |   |                      |   | 124,667,449   |  
|Commercial Leases                                                                                                                                                                                                                                                                                                                                                                               |  |              | 1,758,334     |   |                      |   | 2,515,084     |  
|Other Long-Term Investments                                                                                                                                                                                                                                                                                                                                                                     |  |              | 86,157,287    |   |                      |   | 61,961,072    |  
|Other Long-Term Investments in Affiliates                                                                                                                                                                                                                                                                                                                                                       |  |              | 129,918,602   |   |                      |   | 138,457,224   |  
|Short-Term Investments                                                                                                                                                                                                                                                                                                                                                                          |  |              | 85,512,290    |   |                      |   | 84,861,880    |  
|                                                                                                                                                                                                                                                                                                                                                                                                |  |              |               |   |                      |   |               |  
|Total Investments                                                                                                                                                                                                                                                                                                                                                                               |  |              | 2,041,883,392 |   |                      |   | 2,001,380,442 |  
|Cash                                                                                                                                                                                                                                                                                                                                                                                            |  |              | 31,296,647    |   |                      |   | 37,228,639    |  
|Accrued Investment Income                                                                                                                                                                                                                                                                                                                                                                       |  |              | 17,362,196    |   |                      |   | 16,858,408    |  
|Accounts Receivable                                                                                                                                                                                                                                                                                                                                                                             |  |              | 88,188,127    |   |                      |   | 72,622,465    |  
|Reinsurance Balances Receivable                                                                                                                                                                                                                                                                                                                                                                 |  |              | 6,375,002     |   |                      |   | 6,648,204     |  
|Deferred Policy Acquisition Costs                                                                                                                                                                                                                                                                                                                                                               |  |              | 221,649,127   |   |                      |   | 204,253,919   |  
|Goodwill                                                                                                                                                                                                                                                                                                                                                                                        |  |              | 13,924,306    |   |                      |   | 13,924,306    |  
|Other Intangible Assets(net of accumulated amortization of $1,025,100 in 2006 and $683,400 in 2005)                                                                                                                                                                                                                                                                                             |  |              | 8,082,900     |   |                      |   | 8,424,600     |  
|Other Assets                                                                                                                                                                                                                                                                                                                                                                                    |  |              | 21,983,684    |   |                      |   | 20,478,836    |  
|                                                                                                                                                                                                                                                                                                                                                                                                |  |              |               |   |                      |   |               |  
|Total Assets                                                                                                                                                                                                                                                                                                                                                                                    |  | $            | 2,450,745,381 |   |                      | $ | 2,381,819,819 |  
|                                                                                                                                                                                                                                                                                                                                                                                                |  |              |               |   |                      |   |               |  
|Liabilities and Stockholders Equity                                                                                                                                                                                                                                                                                                                                                            |  |              |               |   |                      |   |               |  
|Policy Liabilities and Accruals - Property Casualty Insurance                                                                                                                                                                                                                                                                                                                                   |  | $            | 162,696,323   |   |                      | $ | 159,639,886   |  
|Policy Liabilities and Accruals - Life Insurance Interest-Sensitive Products                                                                                                                                                                                                                                                                                                                    |  |              | 631,593,992   |   |                      |   | 600,994,074   |  
|Policy Liabilities and Accruals - Life Insurance Other Products                                                                                                                                                                                                                                                                                                                                 |  |              | 201,989,039   |   |                      |   | 197,140,294   |  
|Unearned Premiums                                                                                                                                                                                                                                                                                                                                                                               |  |              | 244,001,163   |   |                      |   | 220,456,047   |  
|Dividends to Policyholders                                                                                                                                                                                                                                                                                                                                                                      |  |              | 11,566,567    |   |                      |   | 11,662,085    |  
|Premium Deposit and Retirement Deposit Funds                                                                                                                                                                                                                                                                                                                                                    |  |              | 5,353,533     |   |                      |   | 5,741,071     |  
|Deferred Income Taxes                                                                                                                                                                                                                                                                                                                                                                           |  |              | 14,781,872    |   |                      |   | 29,118,958    |  
|Other Liabilities                                                                                                                                                                                                                                                                                                                                                                               |  |              | 82,503,896    |   |                      |   | 74,147,175    |  
|Due to Affiliates                                                                                                                                                                                                                                                                                                                                                                               |  |              | 16,313,672    |   |                      |   | 22,249,975    |  
|Commercial Paper                                                                                                                                                                                                                                                                                                                                                                                |  |              | 215,762,599   |   |                      |   | 213,790,443   |  
|Notes Payable                                                                                                                                                                                                                                                                                                                                                                                   |  |              | 70,000,000    |   |                      |   | 70,000,000    |  
|Notes Payable to Affiliates                                                                                                                                                                                                                                                                                                                                                                     |  |              | 32,395,419    |   |                      |   | 20,887,635    |  
|                                                                                                                                                                                                                                                                                                                                                                                                |  |              |               |   |                      |   |               |  
|Total Liabilities                                                                                                                                                                                                                                                                                                                                                                               |  |              | 1,688,958,075 |   |                      |   | 1,625,827,643 |  
|                                                                                                                                                                                                                                                                                                                                                                                                |  |              |               |   |                      |   |               |  
|Commitments and Contingencies                                                                                                                                                                                                                                                                                                                                                                   |  |              |               |   |                      |   |               |  
|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: 83,783,024                                                                                                                                                                                                                                                                                                                                                                              |  |              |               |   |                      |   |               |  
|Outstanding: 80,273,355 in 2006 and 80,284,018 in 2005                                                                                                                                                                                                                                                                                                                                          |  |              | 83,783,024    |   |                      |   | 83,783,024    |  
|Capital in Excess of Par Value                                                                                                                                                                                                                                                                                                                                                                  |  |              | 25,204,499    |   |                      |   | 21,171,462    |  
|Accumulated Other Comprehensive Income (unrealized gains (losses) on securities available for sale, net of tax, of ($4,066,294) in 2006 and
$22,105,684 in 2005; unrealized gains (losses) on interest rate swap contract, net of tax, of $308,116 in 2006 and ($11,265) in 2005; unrealized (losses) on other long-term investments, net of tax, of ($827,752) in 2006 and ($394,560) in
2005) |  |              | (4,585,930    | ) |                      |   | 21,699,859    |  
|Retained Earnings                                                                                                                                                                                                                                                                                                                                                                               |  |              | 696,282,867   |   |                      |   | 667,535,056   |  
|Treasury Stock, at cost(shares, 3,509,669 in 2006 and 3,499,006 in 2005)                                                                                                                                                                                                                                                                                                                        |  |              | (38,897,154   | ) |                      |   | (38,197,225   | )
|                                                                                                                                                                                                                                                                                                                                                                                                |  |              |               |   |                      |   |               |  
|Total Stockholders Equity                                                                                                                                                                                                                                                                                                                                                                      |  |              | 761,787,306   |   |                      |   | 755,992,176   |  
|                                                                                                                                                                                                                                                                                                                                                                                                |  |              |               |   |                      |   |               |  
|Total Liabilities and Stockholders Equity                                                                                                                                                                                                                                                                                                                                                      |  | $            | 2,450,745,381 |   |                      | $ | 2,381,819,819 |  
|                                                                                                                                                                                                                                                                                                                                                                                                |  |              |               |   |                      |   |               |  

See accompanying Notes to Consolidated Condensed Financial Statements.



|(1) | Derived from audited financial statements included in the Companys 2005 Form 10-K.
|--- | -----------------------------------------------------------------------------------



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##### Table of Contents

ALFA CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)



|                                                  |  |                           |             |                             |   |             |  |      |             |  |   |            
|------------------------------------------------- |  | ------------------------- | ----------- | --------------------------- | - | ----------- |  | ---- | ----------- |  | - | -----------
|                                                  |  | Six Months Ended June 30, |             | Three Months Ended June 30,
|                                                  |  | 2006                      |             | 2005                        |   | 2006        |  | 2005
|Revenues                                          |  |                           |             |                             |   |             |  |      |             |  |   |            
|Premiums - Property Casualty Insurance            |  | $                         | 298,250,971 |                             | $ | 270,950,049 |  | $    | 150,835,039 |  | $ | 138,169,019
|Premiums - Life Insurance                         |  |                           | 22,839,703  |                             |   | 20,303,738  |  |      | 11,093,850  |  |   | 9,212,787  
|Policy Charges - Life Insurance                   |  |                           | 18,757,220  |                             |   | 18,023,169  |  |      | 8,924,542   |  |   | 8,693,743  
|Net Investment Income                             |  |                           | 40,800,741  |                             |   | 45,894,589  |  |      | 16,825,077  |  |   | 22,914,262 
|Realized Investment Gains                         |  |                           | 1,787,952   |                             |   | 2,997,583   |  |      | 1,661,239   |  |   | 1,880,357  
|Other Income                                      |  |                           | 13,404,208  |                             |   | 11,935,287  |  |      | 6,034,463   |  |   | 4,846,210  
|                                                  |  |                           |             |                             |   |             |  |      |             |  |   |            
|Total Revenues                                    |  |                           | 395,840,795 |                             |   | 370,104,415 |  |      | 195,374,210 |  |   | 185,716,378
|                                                  |  |                           |             |                             |   |             |  |      |             |  |   |            
|Benefits, Losses and Expenses                     |  |                           |             |                             |   |             |  |      |             |  |   |            
|Benefits, Claims, Losses and Settlement Expenses  |  |                           | 228,131,475 |                             |   | 213,258,810 |  |      | 109,311,786 |  |   | 101,530,231
|Dividends to Policyholders                        |  |                           | 2,085,958   |                             |   | 2,021,825   |  |      | 970,959     |  |   | 944,351    
|Amortization of Deferred Policy Acquisition Costs |  |                           | 61,250,061  |                             |   | 53,529,672  |  |      | 30,525,438  |  |   | 27,693,546 
|Other Operating Expenses                          |  |                           | 41,765,883  |                             |   | 32,514,038  |  |      | 19,728,392  |  |   | 15,217,483 
|                                                  |  |                           |             |                             |   |             |  |      |             |  |   |            
|Total Benefits, Losses and Expenses               |  |                           | 333,233,377 |                             |   | 301,324,345 |  |      | 160,536,575 |  |   | 145,385,611
|                                                  |  |                           |             |                             |   |             |  |      |             |  |   |            
|Income Before Provision for Income Taxes          |  |                           | 62,607,418  |                             |   | 68,780,070  |  |      | 34,837,635  |  |   | 40,330,767 
|Provision for Income Taxes                        |  |                           | 16,961,528  |                             |   | 18,654,565  |  |      | 9,329,187   |  |   | 11,775,606 
|                                                  |  |                           |             |                             |   |             |  |      |             |  |   |            
|Net Income                                        |  | $                         | 45,645,890  |                             | $ | 50,125,505  |  | $    | 25,508,448  |  | $ | 28,555,161 
|                                                  |  |                           |             |                             |   |             |  |      |             |  |   |            
|Net Income Per Share                              |  |                           |             |                             |   |             |  |      |             |  |   |            
|- Basic                                           |  | $                         | 0.57        |                             | $ | 0.63        |  | $    | 0.32        |  | $ | 0.36       
|                                                  |  |                           |             |                             |   |             |  |      |             |  |   |            
|- Diluted                                         |  | $                         | 0.56        |                             | $ | 0.62        |  | $    | 0.31        |  | $ | 0.35       
|                                                  |  |                           |             |                             |   |             |  |      |             |  |   |            
|Weighted Average Shares Outstanding               |  |                           |             |                             |   |             |  |      |             |  |   |            
|- Basic                                           |  |                           | 80,315,256  |                             |   | 80,124,054  |  |      | 80,325,375  |  |   | 80,082,617 
|                                                  |  |                           |             |                             |   |             |  |      |             |  |   |            
|- Diluted                                         |  |                           | 81,131,983  |                             |   | 80,609,351  |  |      | 81,179,210  |  |   | 80,538,612 
|                                                  |  |                           |             |                             |   |             |  |      |             |  |   |            

See accompanying Notes to Consolidated Condensed Financial Statements.



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##### Table of Contents

ALFA CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                   |  |                           |              |   |      |   |              |  
|------------------------------------------------------------------ |  | ------------------------- | ------------ | - | ---- | - | ------------ | -
|                                                                   |  | Six Months Ended June 30, |             
|                                                                   |  | 2006                      |              |   | 2005 |  
|Cash Flows From Operating Activities:                              |  |                           |              |   |      |   |              |  
|Net Income                                                         |  | $                         | 45,645,890   |   |      | $ | 50,125,505   |  
|Adjustments to Reconcile Net Income to Net Cash                    |  |                           |              |   |      |   |              |  
|Provided by Operating Activities:                                  |  |                           |              |   |      |   |              |  
|Policy Acquisition Costs Deferred                                  |  |                           | (73,259,309  | ) |      |   | (65,493,793  | )
|Amortization of Deferred Policy Acquisition Costs                  |  |                           | 61,250,061   |   |      |   | 53,529,672   |  
|Depreciation and Amortization                                      |  |                           | 3,605,953    |   |      |   | 2,642,358    |  
|Stock-Based Compensation                                           |  |                           | 2,662,185    |   |      |   | 243,063      |  
|Excess Tax Benefits from Stock-Based Compensation                  |  |                           | (136,924     | ) |      |   |             |  
|Provision for Deferred Taxes                                       |  |                           | (183,199     | ) |      |   | 873,782      |  
|Interest Credited on Policyholders Funds                          |  |                           | 14,130,577   |   |      |   | 14,094,323   |  
|Net Realized Investment Gains                                      |  |                           | (1,787,952   | ) |      |   | (2,997,583   | )
|(Earnings) losses in Equity-Method Investments                     |  |                           | 1,303,775    |   |      |   | (3,135,176   | )
|Other                                                              |  |                           | 6,082,205    |   |      |   | 1,292,365    |  
|Changes in Operating Assets and Liabilities:                       |  |                           |              |   |      |   |              |  
|Accrued Investment Income                                          |  |                           | (503,788     | ) |      |   | 263,709      |  
|Accounts Receivable                                                |  |                           | (16,092,720  | ) |      |   | (19,765,859  | )
|Reinsurance Balances Receivable                                    |  |                           | 273,202      |   |      |   | 2,767,582    |  
|Other Assets                                                       |  |                           | (3,480,403   | ) |      |   | (4,182,830   | )
|Policy Reserves                                                    |  |                           | 10,051,507   |   |      |   | (3,784,366   | )
|Unearned Premiums                                                  |  |                           | 23,545,116   |   |      |   | 33,645,842   |  
|Amounts Held for Others                                            |  |                           | (483,056     | ) |      |   | (121,528     | )
|Other Liabilities                                                  |  |                           | (1,889,582   | ) |      |   | (7,694,512   | )
|Due to/from Affiliates                                             |  |                           | (4,043,659   | ) |      |   | (9,105,813   | )
|                                                                   |  |                           |              |   |      |   |              |  
|Net Cash Provided by Operating Activities                          |  |                           | 66,689,879   |   |      |   | 43,196,741   |  
|                                                                   |  |                           |              |   |      |   |              |  
|Cash Flows from Investing Activities:                              |  |                           |              |   |      |   |              |  
|Maturities and Redemptions of Fixed Maturities Held for Investment |  |                           | 9,742        |   |      |   | 13,198       |  
|Maturities and Redemptions of Fixed Maturities Available for Sale  |  |                           | 136,755,241  |   |      |   | 196,093,297  |  
|Maturities and Redemptions of Other Investments                    |  |                           | 12,626,705   |   |      |   | 2,075,937    |  
|Sales of Fixed Maturities Available for Sale                       |  |                           | 76,913,250   |   |      |   | 64,089,036   |  
|Sales of Equity Securities                                         |  |                           | 72,584,465   |   |      |   | 57,760,453   |  
|Sales of Other Investments                                         |  |                           | 865,687      |   |      |   | 644,855      |  
|Distributions from Equity-Method Investments                       |  |                           | 76,813       |   |      |   | 1,663,619    |  
|Purchases of Fixed Maturities Available for Sale                   |  |                           | (268,060,737 | ) |      |   | (311,498,070 | )
|Purchases of Equity Securities                                     |  |                           | (77,448,508  | ) |      |   | (64,225,666  | )
|Purchases of Other Investments                                     |  |                           | (24,712,141  | ) |      |   | (21,436,843  | )
|Origination of Consumer Loans Receivable                           |  |                           | (44,392,647  | ) |      |   | (34,193,659  | )
|Principal Payments on Consumer Loans Receivable                    |  |                           | 33,417,863   |   |      |   | 27,721,868   |  
|Origination of Commercial Leases Receivable                        |  |                           |             |   |      |   | (17,668,067  | )
|Principal Payments on Commercial Leases Receivable                 |  |                           |             |   |      |   | 18,434,250   |  
|Net Change in Short-term Investments                               |  |                           | (650,410     | ) |      |   | 10,604,536   |  
|Net Change in Receivable/Payable on Securities                     |  |                           | (1,221,933   | ) |      |   | 7,859,786    |  
|Purchase of Subsidiary, Net of Cash Acquired                       |  |                           |             |   |      |   | (12,702,438  | )
|                                                                   |  |                           |              |   |      |   |              |  
|Net Cash Used in Investing Activities                              |  |                           | (83,236,610  | ) |      |   | (74,763,908  | )
|                                                                   |  |                           |              |   |      |   |              |  
|Cash Flows From Financing Activities:                              |  |                           |              |   |      |   |              |  
|Change in Commercial Paper                                         |  |                           | 1,972,156    |   |      |   | 19,606,116   |  
|Change in Notes Payable to Affiliates                              |  |                           | 11,507,784   |   |      |   | 8,986,152    |  
|Stockholder Dividends Paid                                         |  |                           | (16,898,079  | ) |      |   | (15,049,425  | )
|Purchases of Treasury Stock                                        |  |                           | (1,340,359   | ) |      |   | (2,960,751   | )
|Proceeds from Exercise of Stock Options                            |  |                           | 656,447      |   |      |   | 613,958      |  
|Excess Tax Benefits from Stock-Based Compensation                  |  |                           | 136,924      |   |      |   |             |  
|Deposits of Policyholders Funds                                   |  |                           | 46,541,774   |   |      |   | 44,855,869   |  
|Withdrawal of Policyholders Funds                                 |  |                           | (31,961,908  | ) |      |   | (27,046,873  | )
|                                                                   |  |                           |              |   |      |   |              |  
|Net Cash Provided by Financing Activities                          |  |                           | 10,614,739   |   |      |   | 29,005,046   |  
|                                                                   |  |                           |              |   |      |   |              |  
|Net Change in Cash                                                 |  |                           | (5,931,992   | ) |      |   | (2,562,121   | )
|Cash - Beginning of Period                                         |  |                           | 37,228,639   |   |      |   | 20,052,493   |  
|                                                                   |  |                           |              |   |      |   |              |  
|Cash - End of Period                                               |  | $                         | 31,296,647   |   |      | $ | 17,490,372   |  
|                                                                   |  |                           |              |   |      |   |              |  

See accompanying Notes to Consolidated Condensed Financial Statements.



5



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##### Table of Contents

ALFA CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

June 30, 2006

1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES

In the opinion of the Company, the accompanying consolidated condensed financial statements contain all adjustments (consisting
primarily of normal recurring accruals, except as explained in the notes to its audited consolidated financial statements for the fiscal year ended December 31, 2005) 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. Generally accepted accounting principles differ in certain respects from the statutory
accounting practices prescribed or permitted by insurance regulatory authorities. Prescribed statutory accounting practices include state laws, regulations, and general administrative rules, as well as a variety of publications of the National
Association of Insurance Commissioners (NAIC). Permitted statutory accounting practices encompass all accounting practices that are not prescribed. Such practices differ from state-to-state, may differ from company-to-company within a state, and may
change in the future. Currently the Companys statutory net income and surplus are the same under the State of Alabama and NAIC accounting practices. 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, 2005. The results of operations for the six-month and three-month periods ended June 30, 2006 are not necessarily indicative
of the results to be expected for the full year.

The Companys annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and all related amendments to those reports are made available on its website at www.alfains.com by first selecting Invest in Alfa and then selecting Financial Reports. Also available on the website is the Companys
Code of Ethics titled Principles of Business Conduct which can be accessed under such title.

Consolidation

The accompanying consolidated financial statements include, after intercompany eliminations, Alfa Corporation and its wholly-owned subsidiaries:



| |  |  | Alfa Insurance Corporation (AIC)
| | - |  | --------------------------------



| |  |  | Alfa General Insurance Corporation (AGI)
| | - |  | ----------------------------------------



| |  |  | Alfa Vision Insurance Corporation (AVIC)
| | - |  | ----------------------------------------



| |  |  | Alfa Life Insurance Corporation (Life)
| | - |  | --------------------------------------



| |  |  | Alfa Financial Corporation (Financial)
| | - |  | --------------------------------------



| |  |  | The Vision Insurance Group, LLC (Vision)
| | - |  | ----------------------------------------



| |  |  | Alfa Agency Mississippi, Inc. (AAM)
| | - |  | -----------------------------------



| |  |  | Alfa Agency Georgia, Inc. (AAG)
| | - |  | -------------------------------



| |  |  | Alfa Benefits Corporation (ABC)
| | - |  | -------------------------------

Affiliates

Alfa Corporation is affiliated with Alfa Mutual Insurance Company (Mutual), Alfa Mutual Fire Insurance Company (Fire) and Alfa Mutual General Insurance Company
(collectively, the Mutual Group). The Mutual Group owns 55.0% of Alfa Corporations common stock, their largest single investment. Alfa Specialty Insurance Corporation is a wholly-owned subsidiary of Mutual. Alfa Corporation and its
subsidiaries (the Company) together with the Mutual Group comprise the Alfa Group (Alfa). Alfa Virginia Mutual Insurance Company (Virginia Mutual) currently cedes 80% of its direct business to Fire under an affiliate agreement signed in August 2001.

Use of Estimates in the Preparation of the Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates and assumptions are particularly
important in determining the reserves for future policy benefits, losses and loss adjustment expenses and deferred policy acquisition costs. Actual results could differ from those estimates.



6



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##### Table of Contents

Reclassifications

Certain amounts in prior periods have been reclassified to conform to the presentation adopted in the current fiscal year. Such reclassification did not impact earnings.

2. COMMITMENTS AND CONTINGENCIES

Contingencies

Certain legal proceedings are in process at June 30, 2006. Costs for these and similar legal proceedings, including accruals for outstanding cases, totaled approximately $839 thousand and $1.2 million for the
first six months of 2006 and 2005, respectively. 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 unspecified amounts of
compensatory damages, mental anguish damages, and punitive damages.

Approximately 16 legal proceedings against the Companys life subsidiary were in
process at June 30, 2006. Of the 16 proceedings, seven were filed in 2004, five were filed in 2003, three were filed in 1999, and one was filed in 1996.

In addition, one purported class action lawsuit is pending against both Alfa Builders, Inc. and Fire. Additionally, three purported class action lawsuits are pending against the property casualty 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 four purported class action cases. In the event a class is certified in any of these purported class
actions, reserves may need to be adjusted.

Management believes adequate accruals have been established in these known cases. However, it should be noted
that in Mississippi and 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, management is
unaware of any contingent liabilities arising from other threatened litigation that should be reserved or disclosed.

Commitments

Guarantees: The Companys property casualty subsidiaries entered into an agreement with Fire in 2000 with respect to a loan guarantee on Fires part, on
behalf of EastChase Land Company, LLC to Whitney Bank. Fires guarantee amount to Whitney Bank is $1,000,000. In the unlikely event of a guarantee call, the Companys property casualty subsidiaries would be liable to reimburse Fire a
maximum of $200,000. Similarly, in 2003, the Companys property casualty subsidiaries entered into a second agreement with Fire which agreed to guarantee, on behalf of Alfa Ventures II, LLC, the lesser of $25,000,000 or 50% of the total
obligations of The Shoppes at EastChase, LLC and EastChase Plaza, LLC with Columbus Bank & Trust Company (CB&T). This second guarantee is known as the bucket guarantee, and supercedes all previous CB&T guarantees for
each of these EastChase entities. In the unlikely event of a guarantee call, the Companys property casualty subsidiaries would be liable to reimburse Fire a maximum of $1,393,232. During 2004, the Companys property casualty subsidiaries
entered into a third agreement with Fire in which Fire agreed to a guarantee, on behalf of EastChase Office, LLC. This guarantee was restructured during the second quarter of 2006, relieving the property casualty subsidiaries of any liability in the
unlikely event of a guarantee call.

Unfunded Commitments: The Company periodically invests in affordable housing tax credit partnerships. At
June 30, 2006, the Company had legal and binding commitments to fund partnerships of this type in the amount of approximately $35.5 million. These commitments are included in other liabilities in the consolidated balance sheet.

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, 2006, the cash
outlay by the Company representing the



7



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##### Table of Contents

potential full 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 2006 with the Companys finance subsidiary. Other commercial commitments of the Company shown below
include commercial paper outstanding, scheduled fundings of partnerships, potential performance payouts related to Vision and funding of a policy administration system project of the life subsidiary.



|                               |  |                                            |             |                  |   |             |  |           |            |               |   |            |  |   |          
|------------------------------ |  | ------------------------------------------ | ----------- | ---------------- | - | ----------- |  | --------- | ---------- | ------------- | - | ---------- |  | - | ---------
|                               |  | Amount of Commitment Expiration Per Period
|                               |  | Total AmountsCommitted                     |             | Less than 1 year |   | 1-3 years   |  | 4-5 years |            | After 5 years
|Lines of credit                |  | $                                          | 42,987,635  |                  | $ | 22,100,000  |  | $         | 20,887,635 |               | $ |           |  | $ |         
|Standby letters of credit      |  |                                            | 37,000      |                  |   | 37,000      |  |           |           |               |   |           |  |   |         
|Guarantees                     |  |                                            | 1,593,232   |                  |   | 200,000     |  |           |            |               |   |           |  |   | 1,393,232
|Standby repurchase obligations |  |                                            |            |                  |   |            |  |           |           |               |   |           |  |   |         
|Other commercial commitments   |  |                                            | 277,631,868 |                  |   | 236,363,315 |  |           | 11,901,810 |               |   | 21,500,503 |  |   | 7,866,240
|                               |  |                                            |             |                  |   |             |  |           |            |               |   |            |  |   |          
|Total commercial commitments   |  | $                                          | 322,249,735 |                  | $ | 258,700,315 |  | $         | 32,789,445 |               | $ | 21,500,503 |  | $ | 9,259,472
|                               |  |                                            |             |                  |   |             |  |           |            |               |   |            |  |   |          

Certain commercial commitments in the table above include items that may, in the future, require recognition
within the financial statements of the Company. Events leading to the call of a guarantee, the failure of the policy administration system being developed for use by the life insurance operations to perform properly and achievement of specific
metrics by Vision are examples of situations that would impact the financial position and results of the Company.

Contractual Obligations: The
Company has contractual obligations in the form of long-term debt, benefit obligations to policyholders and leases. These leases have primarily been originated by its insurance subsidiaries and Vision. Operating leases supporting the corporate
operations are the responsibility of 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. The Companys contractual obligations at June 30, 2006 are summarized below:



|                                                                |  |                        |               |                  |   |             |  |           |             |               |   |             |  |   |              
|--------------------------------------------------------------- |  | ---------------------- | ------------- | ---------------- | - | ----------- |  | --------- | ----------- | ------------- | - | ----------- |  | - | -------------
|                                                                |  | Payments Due by Period
|                                                                |  | Total                  |               | Less than 1 year |   | 1-3 years   |  | 4-5 years |             | After 5 years
|Operating leases                                                |  | $                      | 3,488,979     |                  | $ | 1,181,226   |  | $         | 1,649,144   |               | $ | 658,609     |  | $ |             
|Capital lease obligations                                       |  |                        | 83,239        |                  |   | 83,239      |  |           |            |               |   |            |  |   |             
|Unconditional purchase obligations                              |  |                        |              |                  |   |            |  |           |            |               |   |            |  |   |             
|Notes payable to affiliates                                     |  |                        | 32,395,419    |                  |   | 32,395,419  |  |           |            |               |   |            |  |   |             
|Long-term debt (1)                                              |  |                        | 70,000,000    |                  |   |            |  |           |            |               |   |            |  |   | 70,000,000   
|Interest on long-term debt (1)                                  |  |                        | 42,381,759    |                  |   | 3,878,000   |  |           | 7,766,625   |               |   | 7,756,000   |  |   | 22,981,134   
|Property casualty loss and loss adjustment expense reserves (2) |  |                        | 172,542,610   |                  |   | 132,857,810 |  |           | 36,233,948  |               |   | 3,450,852   |  |   |             
|Future life insurance obligations (3)                           |  |                        | 1,927,667,592 |                  |   | 65,486,592  |  |           | 193,622,000 |               |   | 137,243,000 |  |   | 1,531,316,000
|Other long-term obligations                                     |  |                        |              |                  |   |            |  |           |            |               |   |            |  |   |             
|                                                                |  |                        |               |                  |   |             |  |           |             |               |   |             |  |   |              
|Total contractual obligations                                   |  | $                      | 2,248,559,598 |                  | $ | 235,882,286 |  | $         | 239,271,717 |               | $ | 149,108,461 |  | $ | 1,624,297,134
|                                                                |  |                        |               |                  |   |             |  |           |             |               |   |             |  |   |              



|1) | Long-term debt is assumed to be settled at its contractual maturity. Interest on long-term debt is calculated using interest rates in effect at June 30, 2006 for variable
rate debt. For additional information refer to Note 8, Commercial Paper and Notes Payable, in the Notes to Consolidated Financial Statements of Form 10-K for the fiscal year ended December 31, 2005.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | The anticipated payout of property casualty loss and loss adjustment expense reserves are based upon historical payout patterns. Both the timing and amount of these payments may
vary from the payments indicated.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



8



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|(3) | Future life insurance obligations consist primarily of estimated future contingent benefit payments on policies inforce at December 31, 2005 adjusted for outstanding claim
reserves at June 30, 2006. These estimated payments are computed using assumptions for future mortality, morbidity and persistency. The actual amount and timing of such payments may differ significantly from the estimated
amounts. Management believes that assets, future premiums and investment income will be sufficient to fund all future life insurance obligations.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

3. COMPREHENSIVE INCOME

The components of the Companys comprehensive income for the six-month and three-month
periods ended June 30, 2006 and 2005 are as follows:



|                                                                |  |                           |             |   |                             |   |            |      |  |   |             |   |  |   |            |  
|--------------------------------------------------------------- |  | ------------------------- | ----------- | - | --------------------------- | - | ---------- | ---- |  | - | ----------- | - |  | - | ---------- | -
|                                                                |  | Six Months Ended June 30, |             |   | Three Months Ended June 30, |  
|                                                                |  | 2006                      |             |   | 2005                        |   |            | 2006 |  |   | 2005        |  
|                                                                |  | (Unaudited)               |            
|Net Income                                                      |  | $                         | 45,645,890  |   |                             | $ | 50,125,505 |      |  | $ | 25,508,448  |   |  | $ | 28,555,161 |  
|Other Comprehensive Income (Loss), net of tax:                  |  |                           |             |   |                             |   |            |      |  |   |             |   |  |   |            |  
|Change in Fair Value of Securities Available for Sale           |  |                           | (25,009,809 | ) |                             |   | 1,841,558  |      |  |   | (14,547,926 | ) |  |   | 13,981,306 |  
|Unrealized Gain (Loss) on Interest Rate Swap Contract           |  |                           | 319,381     |   |                             |   | 677,996    |      |  |   | 107,293     |   |  |   | (110,724   | )
|Unrealized (Loss) on Other Long-term Investments                |  |                           | (433,192    | ) |                             |   | (8,864     | )    |  |   | (210,401    | ) |  |   | (125,848   | )
|Less: Reclassification Adjustment for Realized Investment Gains |  |                           | 1,162,169   |   |                             |   | 1,948,429  |      |  |   | 1,079,806   |   |  |   | 1,222,231  |  
|                                                                |  |                           |             |   |                             |   |            |      |  |   |             |   |  |   |            |  
|Total Other Comprehensive Income (Loss)                         |  |                           | (26,285,789 | ) |                             |   | 562,261    |      |  |   | (15,730,840 | ) |  |   | 12,522,503 |  
|                                                                |  |                           |             |   |                             |   |            |      |  |   |             |   |  |   |            |  
|Total Comprehensive Income                                      |  | $                         | 19,360,101  |   |                             | $ | 50,687,766 |      |  | $ | 9,777,608   |   |  | $ | 41,077,664 |  
|                                                                |  |                           |             |   |                             |   |            |      |  |   |             |   |  |   |            |  

4. SEGMENT INFORMATION

The Company reports operating segments based on the Companys legal entities, which are organized by line of business:



| |  |  | Property casualty insurance
| | - |  | ---------------------------



| |  |  | Life insurance
| | - |  | --------------



| |  |  | Noninsurance
| | - |  | ------------



| |  |  | Consumer financing
| | - |  | ------------------



| |  |  | Commercial leasing
| | - |  | ------------------



| |  |  | Agency operations
| | - |  | -----------------



| |  |  | Employee benefits administration
| | - |  | --------------------------------



| |  |  | Corporate and eliminations
| | - |  | --------------------------

All investing activities are allocated to the
segments based on the actual assets, investments, and cash flows of each segment.



9



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##### Table of Contents

Summarized revenue data for each of the Companys business segments are as follows:



|                                                        |  |                           |             |   |                             |   |             |      |  |   |             |   |  |   |             |  
|------------------------------------------------------- |  | ------------------------- | ----------- | - | --------------------------- | - | ----------- | ---- |  | - | ----------- | - |  | - | ----------- | -
|                                                        |  | Six Months Ended June 30, |             |   | Three Months Ended June 30, |  
|                                                        |  | 2006                      |             |   | 2005                        |   |             | 2006 |  |   | 2005        |  
|Revenues:                                               |  |                           |             |   |                             |   |             |      |  |   |             |   |  |   |             |  
|Property Casualty Insurance                             |  |                           |             |   |                             |   |             |      |  |   |             |   |  |   |             |  
|Earned premiums                                         |  |                           |             |   |                             |   |             |      |  |   |             |   |  |   |             |  
|Automobile premiums                                     |  | $                         | 187,479,785 |   |                             | $ | 166,852,466 |      |  | $ | 94,980,520  |   |  | $ | 85,398,039  |  
|Homeowner premiums                                      |  |                           | 102,849,411 |   |                             |   | 96,496,129  |      |  |   | 51,340,673  |   |  |   | 48,197,930  |  
|Other premiums                                          |  |                           | 7,921,775   |   |                             |   | 7,601,454   |      |  |   | 4,513,846   |   |  |   | 4,573,050   |  
|                                                        |  |                           |             |   |                             |   |             |      |  |   |             |   |  |   |             |  
|Total earned premiums                                   |  |                           | 298,250,971 |   |                             |   | 270,950,049 |      |  |   | 150,835,039 |   |  |   | 138,169,019 |  
|Net investment income                                   |  |                           | 18,546,759  |   |                             |   | 18,237,697  |      |  |   | 8,867,842   |   |  |   | 8,926,934   |  
|Other income                                            |  |                           | 6,833,440   |   |                             |   | 4,222,479   |      |  |   | 3,419,490   |   |  |   | 2,326,386   |  
|Realized investment gains (losses)                      |  |                           | (1,560,511  | ) |                             |   | 324,675     |      |  |   | (500,593    | ) |  |   | (6,828      | )
|                                                        |  |                           |             |   |                             |   |             |      |  |   |             |   |  |   |             |  
|Total Property Casualty Insurance                       |  |                           | 322,070,659 |   |                             |   | 293,734,900 |      |  |   | 162,621,778 |   |  |   | 149,415,511 |  
|                                                        |  |                           |             |   |                             |   |             |      |  |   |             |   |  |   |             |  
|Life Insurance                                          |  |                           |             |   |                             |   |             |      |  |   |             |   |  |   |             |  
|Premiums and policy charges                             |  |                           |             |   |                             |   |             |      |  |   |             |   |  |   |             |  
|Universal life policy charges                           |  |                           | 10,795,310  |   |                             |   | 10,280,218  |      |  |   | 5,403,257   |   |  |   | 5,198,238   |  
|Universal life policy charges - COLI                    |  |                           | 2,478,163   |   |                             |   | 2,262,323   |      |  |   | 778,924     |   |  |   | 703,401     |  
|Interest sensitive life policy charges                  |  |                           | 5,483,747   |   |                             |   | 5,480,628   |      |  |   | 2,742,361   |   |  |   | 2,792,104   |  
|Traditional life insurance premiums                     |  |                           | 22,348,689  |   |                             |   | 19,786,986  |      |  |   | 11,093,850  |   |  |   | 9,212,787   |  
|Group life insurance premiums                           |  |                           | 491,014     |   |                             |   | 516,752     |      |  |   |            |   |  |   |            |  
|                                                        |  |                           |             |   |                             |   |             |      |  |   |             |   |  |   |             |  
|Total premiums and policy charges                       |  |                           | 41,596,923  |   |                             |   | 38,326,907  |      |  |   | 20,018,392  |   |  |   | 17,906,530  |  
|Net investment income                                   |  |                           | 27,306,352  |   |                             |   | 25,288,738  |      |  |   | 13,716,251  |   |  |   | 13,061,799  |  
|Realized investment gains                               |  |                           | 3,390,543   |   |                             |   | 2,670,158   |      |  |   | 2,203,912   |   |  |   | 1,884,435   |  
|                                                        |  |                           |             |   |                             |   |             |      |  |   |             |   |  |   |             |  
|Total Life Insurance                                    |  |                           | 72,293,818  |   |                             |   | 66,285,803  |      |  |   | 35,938,555  |   |  |   | 32,852,764  |  
|                                                        |  |                           |             |   |                             |   |             |      |  |   |             |   |  |   |             |  
|Noninsurance                                            |  |                           |             |   |                             |   |             |      |  |   |             |   |  |   |             |  
|Net investment income                                   |  |                           |             |   |                             |   |             |      |  |   |             |   |  |   |             |  
|Equity interest in MidCountry Financial, net of expense |  |                           | 802,532     |   |                             |   | 906,632     |      |  |   | 288,213     |   |  |   | 83,522      |  
|Loan income (loss), net of expense                      |  |                           | (3,318,216  | ) |                             |   | 2,088,624   |      |  |   | (4,472,718  | ) |  |   | 1,131,235   |  
|Other investment income (loss)                          |  |                           | 4,875       |   |                             |   | 1,204,337   |      |  |   | (157,210    | ) |  |   | 647,705     |  
|                                                        |  |                           |             |   |                             |   |             |      |  |   |             |   |  |   |             |  
|Total net investment income (loss)                      |  |                           | (2,510,809  | ) |                             |   | 4,199,593   |      |  |   | (4,341,715  | ) |  |   | 1,862,462   |  
|                                                        |  |                           |             |   |                             |   |             |      |  |   |             |   |  |   |             |  
|Other income                                            |  |                           |             |   |                             |   |             |      |  |   |             |   |  |   |             |  
|Fee/commission income                                   |  |                           | 18,727,540  |   |                             |   | 11,834,200  |      |  |   | 7,917,296   |   |  |   | 5,459,175   |  
|Other income                                            |  |                           | 662,268     |   |                             |   | 759,200     |      |  |   | 317,580     |   |  |   | 319,382     |  
|                                                        |  |                           |             |   |                             |   |             |      |  |   |             |   |  |   |             |  
|Total other income                                      |  |                           | 19,389,808  |   |                             |   | 12,593,400  |      |  |   | 8,234,876   |   |  |   | 5,778,557   |  
|                                                        |  |                           |             |   |                             |   |             |      |  |   |             |   |  |   |             |  
|Realized investment gains (losses)                      |  |                           | (42,080     | ) |                             |   | 2,750       |      |  |   | (42,080     | ) |  |   | 2,750       |  
|                                                        |  |                           |             |   |                             |   |             |      |  |   |             |   |  |   |             |  
|Total Noninsurance                                      |  |                           | 16,836,919  |   |                             |   | 16,795,743  |      |  |   | 3,851,081   |   |  |   | 7,643,769   |  
|                                                        |  |                           |             |   |                             |   |             |      |  |   |             |   |  |   |             |  
|Corporate and Eliminations                              |  |                           |             |   |                             |   |             |      |  |   |             |   |  |   |             |  
|Net investment income (loss)                            |  |                           | (2,541,561  | ) |                             |   | (1,831,439  | )    |  |   | (1,417,301  | ) |  |   | (936,933    | )
|Other income (loss)                                     |  |                           | (12,819,040 | ) |                             |   | (4,880,592  | )    |  |   | (5,619,903  | ) |  |   | (3,258,733  | )
|                                                        |  |                           |             |   |                             |   |             |      |  |   |             |   |  |   |             |  
|Total Corporate and Eliminations                        |  |                           | (15,360,601 | ) |                             |   | (6,712,031  | )    |  |   | (7,037,204  | ) |  |   | (4,195,666  | )
|                                                        |  |                           |             |   |                             |   |             |      |  |   |             |   |  |   |             |  
|Total revenues                                          |  | $                         | 395,840,795 |   |                             | $ | 370,104,415 |      |  | $ | 195,374,210 |   |  | $ | 185,716,378 |  
|                                                        |  |                           |             |   |                             |   |             |      |  |   |             |   |  |   |             |  

Segment profit or loss for the property casualty segment is measured by underwriting profits and losses as well as
by operating income. Segment profit or loss for the life insurance segment, the noninsurance segment and the corporate segment is measured by operating income. Management believes operating income serves as a meaningful tool for assessing the
profitability of the Companys ongoing operations. Operating income, a non-GAAP financial measure, is defined by the Company as net income excluding net realized investment gains and losses, net of applicable taxes. Realized investment gains
and losses are



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somewhat controllable by the Company through the timing of decisions to sell securities. Therefore, realized investment gains and losses are not indicative
of future operating performance. Segment information for the previous period has been restated to reflect the change in composition of reportable operating segments.

Summarized financial performance data for each of the Companys reportable segments are as follows:



|                                               |  |                           |            |   |                             |   |            |      |  |   |            |   |  |   |            |  
|---------------------------------------------- |  | ------------------------- | ---------- | - | --------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                               |  | Six Months Ended June 30, |            |   | Three Months Ended June 30, |  
|                                               |  | 2006                      |            |   | 2005                        |   |            | 2006 |  |   | 2005       |  
|Operating Income, net of tax:                  |  |                           |            |   |                             |   |            |      |  |   |            |   |  |   |            |  
|Property Casualty Insurance                    |  |                           |            |   |                             |   |            |      |  |   |            |   |  |   |            |  
|Net underwriting income                        |  | $                         | 27,144,546 |   |                             | $ | 29,797,863 |      |  | $ | 20,241,158 |   |  | $ | 22,002,456 |  
|Net investment income                          |  |                           | 18,546,759 |   |                             |   | 18,237,697 |      |  |   | 8,867,842  |   |  |   | 8,926,933  |  
|Other income                                   |  |                           | 6,833,440  |   |                             |   | 4,222,479  |      |  |   | 3,419,490  |   |  |   | 2,326,386  |  
|                                               |  |                           |            |   |                             |   |            |      |  |   |            |   |  |   |            |  
|Pretax operating income                        |  |                           | 52,524,745 |   |                             |   | 52,258,039 |      |  |   | 32,528,490 |   |  |   | 33,255,775 |  
|Income tax expense                             |  |                           | 13,924,706 |   |                             |   | 12,719,360 |      |  |   | 8,790,856  |   |  |   | 9,215,906  |  
|                                               |  |                           |            |   |                             |   |            |      |  |   |            |   |  |   |            |  
|Operating income, net of tax                   |  |                           | 38,600,039 |   |                             |   | 39,538,679 |      |  |   | 23,737,634 |   |  |   | 24,039,869 |  
|Realized investment gains (losses), net of tax |  |                           | (1,014,332 | ) |                             |   | 211,038    |      |  |   | (325,385   | ) |  |   | (4,440     | )
|                                               |  |                           |            |   |                             |   |            |      |  |   |            |   |  |   |            |  
|Net income                                     |  |                           | 37,585,707 |   |                             |   | 39,749,717 |      |  |   | 23,412,249 |   |  |   | 24,035,429 |  
|                                               |  |                           |            |   |                             |   |            |      |  |   |            |   |  |   |            |  
|Life Insurance                                 |  |                           |            |   |                             |   |            |      |  |   |            |   |  |   |            |  
|Pretax operating income                        |  |                           | 13,896,952 |   |                             |   | 14,723,864 |      |  |   | 6,783,319  |   |  |   | 7,001,604  |  
|Income tax expense                             |  |                           | 4,308,174  |   |                             |   | 4,588,136  |      |  |   | 2,073,702  |   |  |   | 1,977,844  |  
|                                               |  |                           |            |   |                             |   |            |      |  |   |            |   |  |   |            |  
|Operating income, net of tax                   |  |                           | 9,588,778  |   |                             |   | 10,135,728 |      |  |   | 4,709,617  |   |  |   | 5,023,760  |  
|Realized investment gains, net of tax          |  |                           | 2,203,853  |   |                             |   | 1,735,603  |      |  |   | 1,432,543  |   |  |   | 1,224,884  |  
|                                               |  |                           |            |   |                             |   |            |      |  |   |            |   |  |   |            |  
|Net income                                     |  |                           | 11,792,631 |   |                             |   | 11,871,331 |      |  |   | 6,142,160  |   |  |   | 6,248,644  |  
|                                               |  |                           |            |   |                             |   |            |      |  |   |            |   |  |   |            |  
|Noninsurance                                   |  |                           |            |   |                             |   |            |      |  |   |            |   |  |   |            |  
|Pretax operating income (loss)                 |  |                           | (2,679,931 | ) |                             |   | 1,584,400  |      |  |   | (4,269,860 | ) |  |   | 328,157    |  
|Income tax (benefit) expense                   |  |                           | (874,662   | ) |                             |   | 501,108    |      |  |   | (1,464,042 | ) |  |   | 126,927    |  
|                                               |  |                           |            |   |                             |   |            |      |  |   |            |   |  |   |            |  
|Operating income (loss), net of tax            |  |                           | (1,805,269 | ) |                             |   | 1,083,292  |      |  |   | (2,805,818 | ) |  |   | 201,230    |  
|Realized investment gains (losses), net of tax |  |                           | (27,352    | ) |                             |   | 1,788      |      |  |   | (27,352    | ) |  |   | 1,788      |  
|                                               |  |                           |            |   |                             |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss)                              |  |                           | (1,832,621 | ) |                             |   | 1,085,080  |      |  |   | (2,833,170 | ) |  |   | 203,018    |  
|                                               |  |                           |            |   |                             |   |            |      |  |   |            |   |  |   |            |  
|Corporate and Eliminations                     |  |                           |            |   |                             |   |            |      |  |   |            |   |  |   |            |  
|Pretax operating (loss)                        |  |                           | (2,922,300 | ) |                             |   | (2,783,817 | )    |  |   | (1,865,554 | ) |  |   | (2,135,124 | )
|Income tax (benefit)                           |  |                           | (1,022,473 | ) |                             |   | (203,194   | )    |  |   | (652,763   | ) |  |   | (203,194   | )
|                                               |  |                           |            |   |                             |   |            |      |  |   |            |   |  |   |            |  
|Operating (loss), net of tax                   |  |                           | (1,899,827 | ) |                             |   | (2,580,623 | )    |  |   | (1,212,791 | ) |  |   | (1,931,930 | )
|Realized investment gains (losses), net of tax |  |                           |           |   |                             |   |           |      |  |   |           |   |  |   |           |  
|                                               |  |                           |            |   |                             |   |            |      |  |   |            |   |  |   |            |  
|Net (loss)                                     |  |                           | (1,899,827 | ) |                             |   | (2,580,623 | )    |  |   | (1,212,791 | ) |  |   | (1,931,930 | )
|                                               |  |                           |            |   |                             |   |            |      |  |   |            |   |  |   |            |  
|Total net income                               |  | $                         | 45,645,890 |   |                             | $ | 50,125,505 |      |  | $ | 25,508,448 |   |  | $ | 28,555,161 |  
|                                               |  |                           |            |   |                             |   |            |      |  |   |            |   |  |   |            |  



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Segment assets and the segment asset reconciliation are as follows:



|                            |  |               |                |   |                   |   |                |  
|--------------------------- |  | ------------- | -------------- | - | ----------------- | - | -------------- | -
|                            |  | June 30, 2006 |                |   | December 31, 2005 |  
|Segment Assets:             |  |               |                |   |                   |   |                |  
|Property Casualty Insurance |  | $             | 936,764,603    |   |                   | $ | 883,472,822    |  
|Life Insurance              |  |               | 1,198,596,699  |   |                   |   | 1,172,492,120  |  
|Noninsurance                |  |               | 318,282,985    |   |                   |   | 329,131,287    |  
|Corporate and Eliminations  |  |               | (2,898,906     | ) |                   |   | (3,276,410     | )
|                            |  |               |                |   |                   |   |                |  
|Total Assets                |  | $             | 2,450,745,381  |   |                   | $ | 2,381,819,819  |  
|                            |  |               |                |   |                   |   |                |  
|Assets:                     |  |               |                |   |                   |   |                |  
|Allocated to segments       |  | $             | 3,513,359,365  |   |                   | $ | 3,402,766,965  |  
|Eliminations                |  |               | (1,062,613,984 | ) |                   |   | (1,020,947,146 | )
|                            |  |               |                |   |                   |   |                |  
|Total assets                |  | $             | 2,450,745,381  |   |                   | $ | 2,381,819,819  |  
|                            |  |               |                |   |                   |   |                |  

The following summary reconciles significant segment items to the Companys consolidated condensed financial
statements:



|                                       |  |                           |             |   |                             |   |             |      |  |   |             |   |  |   |             |  
|-------------------------------------- |  | ------------------------- | ----------- | - | --------------------------- | - | ----------- | ---- |  | - | ----------- | - |  | - | ----------- | -
|                                       |  | Six Months Ended June 30, |             |   | Three Months Ended June 30, |  
|                                       |  | 2006                      |             |   | 2005                        |   |             | 2006 |  |   | 2005        |  
|Revenues:                              |  |                           |             |   |                             |   |             |      |  |   |             |   |  |   |             |  
|Premiums - Property Casualty Insurance |  | $                         | 298,250,971 |   |                             | $ | 270,950,049 |      |  | $ | 150,835,039 |   |  | $ | 138,169,019 |  
|Premiums - Life Insurance              |  |                           | 22,839,703  |   |                             |   | 20,303,738  |      |  |   | 11,093,850  |   |  |   | 9,212,787   |  
|Policy charges - Life Insurance        |  |                           | 18,757,220  |   |                             |   | 18,023,169  |      |  |   | 8,924,542   |   |  |   | 8,693,743   |  
|Net investment income                  |  |                           | 40,800,741  |   |                             |   | 45,894,589  |      |  |   | 16,825,077  |   |  |   | 22,914,262  |  
|Net realized investment gains          |  |                           | 1,787,952   |   |                             |   | 2,997,583   |      |  |   | 1,661,239   |   |  |   | 1,880,357   |  
|Other income                           |  |                           | 13,404,208  |   |                             |   | 11,935,287  |      |  |   | 6,034,463   |   |  |   | 4,846,210   |  
|                                       |  |                           |             |   |                             |   |             |      |  |   |             |   |  |   |             |  
|Total revenues                         |  | $                         | 395,840,795 |   |                             | $ | 370,104,415 |      |  | $ | 195,374,210 |   |  | $ | 185,716,378 |  
|                                       |  |                           |             |   |                             |   |             |      |  |   |             |   |  |   |             |  
|Income before income taxes:            |  |                           |             |   |                             |   |             |      |  |   |             |   |  |   |             |  
|Underwriting profit                    |  | $                         | 13,735,146  |   |                             | $ | 19,232,989  |      |  | $ | 13,308,226  |   |  | $ | 15,942,258  |  
|Other income                           |  |                           | 13,404,208  |   |                             |   | 11,935,287  |      |  |   | 6,034,463   |   |  |   | 4,846,210   |  
|Other expense                          |  |                           | (7,120,629  | ) |                             |   | (11,280,378 | )    |  |   | (2,991,370  | ) |  |   | (5,252,320  | )
|Net investment income                  |  |                           | 40,800,741  |   |                             |   | 45,894,589  |      |  |   | 16,825,077  |   |  |   | 22,914,262  |  
|Net realized investment gains          |  |                           | 1,787,952   |   |                             |   | 2,997,583   |      |  |   | 1,661,239   |   |  |   | 1,880,357   |  
|                                       |  |                           |             |   |                             |   |             |      |  |   |             |   |  |   |             |  
|Income before income taxes             |  | $                         | 62,607,418  |   |                             | $ | 68,780,070  |      |  | $ | 34,837,635  |   |  | $ | 40,330,767  |  
|                                       |  |                           |             |   |                             |   |             |      |  |   |             |   |  |   |             |  
|Income taxes:                          |  |                           |             |   |                             |   |             |      |  |   |             |   |  |   |             |  
|Allocated to segments                  |  | $                         | 16,335,745  |   |                             | $ | 17,605,411  |      |  | $ | 8,747,754   |   |  | $ | 11,117,481  |  
|Allocated to realized investment gains |  |                           | 625,783     |   |                             |   | 1,049,154   |      |  |   | 581,433     |   |  |   | 658,125     |  
|                                       |  |                           |             |   |                             |   |             |      |  |   |             |   |  |   |             |  
|Total income tax                       |  | $                         | 16,961,528  |   |                             | $ | 18,654,565  |      |  | $ | 9,329,187   |   |  | $ | 11,775,606  |  
|                                       |  |                           |             |   |                             |   |             |      |  |   |             |   |  |   |             |  



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5. STOCK-BASED COMPENSATION

On October 25, 1993, the Company established a Stock Incentive Plan (the 1993 Plan). The 1993 Plan was subsequently amended on April 26, 2001. On April 28, 2005, the Companys stockholders approved the 2005 Amended and
Restated Stock Incentive Plan (the 2005 Plan). This Plan amends and restates the 1993 Plan. The 2005 Plan permits the grant of a variety of equity-based incentives based upon the Companys common stock, par value $1.00 per share. These include
stock options, which may be either incentive stock options as that term is defined in Section 422 of the Internal Revenue Code of 1986, as amended or nonqualified options. The 2005 Plan also permits awards of Stock
Appreciation Rights, Restricted Shares, Restricted Share Units and Performance Shares. A maximum of 3,800,000 shares of stock may be issued under the 2005 Plan. At June 30, 2006, 3,192,820 shares were available for grant.

It is the Companys policy to issue treasury shares upon exercise of options or release of awards. The Company currently has a stock repurchase program to
repurchase its outstanding common stock in the open market or in negotiated transactions in such quantities and at such times and prices as management may decide. At June 30, 2006, 3,493,669 treasury shares were available for issuance.

Adoption of New Standard

Effective January 1,
2006, the Company adopted Statement of Financial Accounting Standard (SFAS) No. 123 (revised 2004), Share-Based Payment, using the modified prospective transition method. Under this method, share-based compensation expense is recognized
using the fair-value based method for all awards granted on or after the date of adoption. Compensation expense for unvested stock options and awards that were outstanding on December 31, 2005 will be recognized over the requisite service
period based on the grant-date fair value of those options and awards as previously calculated under the pro forma disclosures under SFAS No. 123, Accounting for Stock-Based Compensation.The Company determined the fair value of these
awards using the Black-Scholes-Merton option pricing model. Under SFAS No. 123(R), an estimate is made for the number of awards that are expected to vest and this forfeiture rate is applied to determine the amount of compensation cost to be
recognized. The forfeiture rate must be evaluated at each reporting period to determine if any changes should be made which could impact the amount of compensation costs that will be ultimately recognized. In addition, the non-substantive vesting
period approach is used for attributing stock compensation to individual periods for awards to retirement eligible employees, which requires recognition of compensation expense immediately for such grants or over the period from the grant date to
the date retirement eligibility is achieved. This change will not affect the overall amount of compensation expense to be recognized but will impact the timing of expense recognition. The effects on the amount the Company recorded in the six-month
and three-month periods ended June 30, 2006 were approximately $972,000 and $188,000, respectively. In accordance with the modified prospective transition method, results for prior periods have not been restated.

Prior to adoption and consistent with the provisions of SFAS No. 123, the Company used the intrinsic value based method to account for stock options issued under
the 1993 Plan and provided pro forma disclosures as if the fair value based method had been applied. The Company accounted for the 2005 Plan under SFAS No. 123 using the recognition and measurement principles of the fair value method.

Share-Based Compensation Expense

As a result of
adopting SFAS No. 123(R), Alfas total share-based compensation for the six months ended June 30, 2006 was $3,863,503, of which $2,926,118 related to stock options and $937,385 related to restricted stock awards. Based on the
Management and Operating Agreement with Mutual (refer to Note 3  Related Party Transactions in the Notes to Consolidated Financial Statements included in the Companys annual report for 2005 on Form 10-K), the Companys share
of compensation expense during the six months ended June 30, 2006 related to stock options was $1,432,107, restricted share awards was $398,957 and tax benefits of $640,872. Compensation cost for share-based payment arrangements reduced the
Companys net earnings by $1,190,192 and diluted earnings per share by $0.015 for the first half of 2006. For the six months ended June 30, 2005, share-based compensation was $243,063, principally related to restricted awards and dividend
equivalents on options granted in prior years and tax benefits of $85,072.



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##### Table of Contents

Alfas total share-based compensation for the three months ended June 30, 2006 was $1,068,970, of which
$804,903 related to stock options and $264,067 related to restricted stock awards. The Companys share of compensation expense for the three months ended June 30, 2006 related to stock options was $481,193, restricted share awards was
$150,947, and tax benefits of $221,249. For the three months ended June 30, 2006, compensation cost for share-based payment arrangements reduced net earnings by $410,891 and diluted earnings per share by $0.005. For the three months ended
June 30, 2005, share-based compensation was $134,191, principally related to restricted awards and dividend equivalents on options granted in prior years and tax benefits of $46,967.

The tax benefits associated with tax deductions that exceed the amount of compensation expense recognized in the financial statements were $136,924 and $40,702 for the
six-month and three-month periods ended June 30, 2006. This reduced cash flows from operating activities and increased cash flows for financing activities compared to amounts that would have been reported if the standard had not been adopted.

The following table shows total share-based compensation expense included in the Consolidated Condensed Statements of Income:



|                                                       |  |                          |            |   |                            |   |         |      |  |   |          |   |  |   |         |  
|------------------------------------------------------ |  | ------------------------ | ---------- | - | -------------------------- | - | ------- | ---- |  | - | -------- | - |  | - | ------- | -
|                                                       |  | Six Months EndedJune 30, |            |   | Three Months EndedJune 30, |  
|                                                       |  | 2006                     |            |   | 2005                       |   |         | 2006 |  |   | 2005     |  
|Net Investment Income                                  |  | $                        | 21,222     |   |                            | $ |        |      |  | $ | 11,834   |   |  | $ |        |  
|Benefits, Claims, Losses and Settlement Expenses       |  |                          | 83,721     |   |                            |   |        |      |  |   | 44,732   |   |  |   |        |  
|Other Operating Expenses                               |  |                          | 2,557,242  |   |                            |   | 243,063 |      |  |   | 624,663  |   |  |   | 134,191 |  
|Less: Deferred Policy Acquisition Costs                |  |                          | (1,251,953 | ) |                            |   |        |      |  |   | (163,833 | ) |  |   |        |  
|Add: Amortization of Deferred Policy Acquisition Costs |  |                          | 420,832    |   |                            |   |        |      |  |   | 114,744  |   |  |   |        |  
|                                                       |  |                          |            |   |                            |   |         |      |  |   |          |   |  |   |         |  
|                                                       |  |                          | 1,831,064  |   |                            |   | 243,063 |      |  |   | 632,140  |   |  |   | 134,191 |  
|Income tax benefits                                    |  |                          | (640,872   | ) |                            |   | (85,072 | )    |  |   | (221,249 | ) |  |   | (46,967 | )
|                                                       |  |                          |            |   |                            |   |         |      |  |   |          |   |  |   |         |  
|Total share-based compensation expense                 |  | $                        | 1,190,192  |   |                            | $ | 157,991 |      |  | $ | 410,891  |   |  | $ | 87,224  |  
|                                                       |  |                          |            |   |                            |   |         |      |  |   |          |   |  |   |         |  

Pro forma Compensation Expense

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provision of SFAS No. 123 to all awards of share-based employee compensation
in 2005.



|                                |  |                                                                                                                   |            |  |                                 |   |            |  |          |  
|------------------------------- |  | ----------------------------------------------------------------------------------------------------------------- | ---------- |  | ------------------------------- | - | ---------- |  | -------- | -
|                                |  | Six Months EndedJune 30, 2005                                                                                     |            |  | Three Months EndedJune 30, 2005 |  
|Net income, as reported         |  | $                                                                                                                 | 50,125,505 |  |                                 | $ | 28,555,161 | 
|Add:                            |  | Total share-based compensation expense included in reported net income, net of tax effect                         |            |  | 157,991                         |   |            |  | 87,224   |  
|Less:                           |  | Total share-based compensation expense determined under fair value based method for all awards, net of tax effect |            |  | (1,149,122                      | ) |            |  | (633,152 | )
|                                |  |                                                                                                                   |            |  |                                 |   |            |  |          |  
|Pro forma net income            |  | $                                                                                                                 | 49,134,374 |  |                                 | $ | 28,009,233 | 
|                                |  |                                                                                                                   |            |  |                                 |   |            |  |          |  
|Earnings per share, as reported |  |                                                                                                                   |            |  |                                 |   |            | 
|- Basic                         |  | $                                                                                                                 | 0.63       |  |                                 | $ | 0.36       | 
|- Diluted                       |  | $                                                                                                                 | 0.62       |  |                                 | $ | 0.35       | 
|Pro forma earnings per share    |  |                                                                                                                   |            |  |                                 |   |            | 
|- Basic                         |  | $                                                                                                                 | 0.61       |  |                                 | $ | 0.35       | 
|- Diluted                       |  | $                                                                                                                 | 0.61       |  |                                 | $ | 0.35       | 



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Stock Options

Under
the 1993 and 2005 Plans, options ratably become exercisable annually over three years and expire ten years from the date of the award. Compensation cost for options with graded vesting is recognized using the straight-line method over the three year
vesting period for non-retirement eligible employees. Compensation cost for options is recognized immediately for grants to retirement eligible employees or over the period from the grant date to the date retirement eligibility is achieved.

Summarized information for stock option grants for the six months ended June 30, 2006 is as follows:



|                             |  |                  |   |  |                                |        |   |                                                     |      |                          |   |           
|---------------------------- |  | ---------------- | - |  | ------------------------------ | ------ | - | --------------------------------------------------- | ---- | ------------------------ | - | ----------
|                             |  | Number ofOptions |   |  | Weighted-AverageExercise Price |        |   | Weighted-AverageRemainingContractual Term(in years) |      | AggregateIntrinsic Value
|Outstanding, January 1, 2006 |  | 3,108,654        |   |  | $                              | 11.58  |   |                                                     |      |                          |   |           
|Add (deduct):                |  |                  |   |  |                                |        |   |                                                     |      |                          |   |           
|Granted                      |  | 452,000          |   |  | $                              | 16.11  |   |                                                     |      |                          |   |           
|Exercised                    |  | (63,666          | ) |  | $                              | (10.35 | ) |                                                     |      |                          |   |           
|Forfeited                    |  | (3,465           | ) |  | $                              | (13.25 | ) |                                                     |      |                          |   |           
|Expired                      |  | (6,102           | ) |  | $                              | (9.67  | ) |                                                     |      |                          |   |           
|                             |  |                  |   |  |                                |        |   |                                                     |      |                          |   |           
|Outstanding, June 30, 2006   |  | 3,487,421        |   |  | $                              | 12.19  |   |                                                     | 6.12 |                          | $ | 15,237,928
|                             |  |                  |   |  |                                |        |   |                                                     |      |                          |   |           
|Exercisable, June 30, 2006   |  | 2,534,998        |   |  | $                              | 11.16  |   |                                                     | 5.08 |                          | $ | 13,690,187
|                             |  |                  |   |  |                                |        |   |                                                     |      |                          |   |           

The weighted-average grant-date fair value of equity options granted during the six months ended June 30,
2006 and 2005 was $5.97 and $6.09, respectively.

The total intrinsic value of options exercised during the six months ended June 30, 2006 and 2005,
was $391,213 and $686,652, respectively. Intrinsic value is measured using the fair market value at the date of exercise (for shares exercised) or at June 30, 2006 (for outstanding options), less the applicable exercise price. Cash received
from option exercises totaled $656,447 and $613,958 during the six months ended June 30, 2006 and 2005, respectively. The tax benefit realized from stock options exercised during the same periods was $136,924 and $166,058, respectively, based
on deductions from earnings of $391,213 and $474,452, respectively.

At June 30, 2006, there was $3,028,334 of unrecognized compensation expense
related to nonvested stock options granted that are expected to be charged to expense over a weighted-average period of 1.11 years. This expense will be allocated according to Alfas Management and Operating Agreement.

The following table summarizes information about stock options outstanding and exercisable at June 30, 2006:



|                         |  |                     |  |                                                     |  |                                |       |                  |           |                                |   |      
|------------------------ |  | ------------------- |  | --------------------------------------------------- |  | ------------------------------ | ----- | ---------------- | --------- | ------------------------------ | - | -----
|                         |  | Options Outstanding |  | Options Exercisable                                
|Range of Exercise Prices |  | Number ofOptions    |  | Weighted-AverageRemainingContractual Term(in years) |  | Weighted-AverageExercise Price |       | Number ofOptions |           | Weighted-AverageExercise Price
|$  5.85 - $11.65         |  | 1,501,588           |  | 4.01                                                |  | $                              | 9.42  |                  | 1,501,588 |                                | $ | 9.42 
|$13.25 - $14.43          |  | 1,531,833           |  | 7.14                                                |  | $                              | 13.74 |                  | 1,033,410 |                                | $ | 13.68
|$15.59 - $16.54          |  | 454,000             |  | 9.68                                                |  | $                              | 16.11 |                  |          |                                | $ |     
|                         |  |                     |  |                                                     |  |                                |       |                  |           |                                |   |      
|$  5.85 - $16.54         |  | 3,487,421           |  | 6.12                                                |  | $                              | 12.19 |                  | 2,534,998 |                                | $ | 11.16
|                         |  |                     |  |                                                     |  |                                |       |                  |           |                                |   |      



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The fair value of each option grant is estimated on the date of grant using the Black-Scholes-Merton option-pricing model
based on the following assumptions and range of assumptions:



|                         |  |                           |  |      
|------------------------ |  | ------------------------- |  | -----
|                         |  | Six Months Ended June 30,
|                         |  | 2006                      |  | 2005 
|Risk-free interest rate  |  | 4.57% - 4.96%             |  | 4.38%
|Expected life (in years) |  | 7.5                       |  | 7.5  
|Expected volatility      |  | 38% -39%                  |  | 46%  
|Expected dividend yield  |  | 2.4% -2.8%                |  | 2.4% 



| |  |  | Risk-free interest rate for the expected term of the stock option is based on the U.S. Treasury note yield rate in effect on the date of the grant with a maturity
approximating the expected term.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Expected life or termof the stock options granted is derived from historical analysis and represents the period of time that share options are expected to be outstanding.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Expected volatilityis based on historical volatility of the Companys shares over a period equal to the expected life of each option grant.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Expected dividend yieldis the expected dividend to be paid on the underlying share.
| | - |  | -----------------------------------------------------------------------------------

Restricted Shares

Beginning in 2005, the Company awarded two types of service-based nonvested restricted shares to
certain officers: restricted shares and career shares. Restricted shares vest and are issuable on the third anniversary after the date of grant. Prior to issuance, the Company will vote the shares and dividends paid will be credited as additional
shares of restricted stock that vest along with the original grant. Career shares are awards of restricted stock to certain officers based on specified target levels of ownership of Company common stock by those officers. These shares vest on the
third anniversary after the date of grant, but are not negotiable by the recipients until the recipients terminate employment with the Company. The Company will vote these shares until they are issued to the recipients and dividends paid will be
credited as additional shares of restricted stock and held by the Company until such shares are issued.

Summarized information for nonvested restricted
shares awards for the six months ended June 30, 2006 is as follows:



|                             |  |                 |   |  |                                       |      
|---------------------------- |  | --------------- | - |  | ------------------------------------- | -----
|                             |  | Number ofShares |   |  | Weighted-AverageGrant-Date Fair Value
|Outstanding, January 1, 2006 |  | 77,765          |   |  | $                                     | 14.61
|Add (deduct):                |  |                 |   |  |                                       |      
|Granted                      |  | 75,414          |   |  | $                                     | 16.11
|Vested                       |  | (12,271         | ) |  | $                                     | 14.63
|Forfeited                    |  |                |   |  | $                                     |     
|                             |  |                 |   |  |                                       |      
|Outstanding, June 30, 2006   |  | 140,908         |   |  | $                                     | 15.41
|                             |  |                 |   |  |                                       |      

Nonvested restricted shares are measured at fair value on the date of grant. Compensation cost for restricted
share awards with cliff vesting is recognized using the straight-line method over the three-year vesting period for non-retirement eligible employees. Compensation cost for restricted share awards is recognized immediately for grants to retirement
eligible employees or over the period from the grant date to the date retirement eligibility is achieved.

The total fair value of shares vested during the
six months ended June 30, 2006 and 2005, was $198,797 and $0, respectively. During the six months ended June 30, 2006, 12,271.4447 shares were released with 12,271 shares issued from treasury shares and fractional shares paid in cash.



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At June 30, 2006, there was $830,628 of unrecognized compensation expense related to restricted shares awards that
are expected to be charged to expense over a weighted-average period of 1.93 years. This expense will be allocated according to Alfas Management and Operating Agreement.

6. OTHER LONG-TERM INVESTMENTS AND OTHER LONG-TERM INVESTMENTS IN AFFILIATES

Included in the Companys
Other Long-term Investments and Other Long-Term Investments in Affiliates are investments in partnerships of $70,620,699 and $22,491,282 at June 30, 2006, respectively. At December 31, 2005, investments in
partnerships included in these categories were $48,044,290 and $21,583,991, respectively.

7. SUPPLEMENTAL DISCLOSURE FOR STATEMENTS OF CASH FLOWS

The following table presents the Companys noncash investing and financing activities and required supplemental disclosures to the Statements of
Cash Flows for the six months ended June 30, 2006 and June 30, 2005:



|                                                   |  |                           |            |      |   |           
|-------------------------------------------------- |  | ------------------------- | ---------- | ---- | - | ----------
|                                                   |  | Six Months Ended June 30,
|                                                   |  | 2006                      |            | 2005
|Issuance of restricted stock                       |  | $                         | 102,913    |      | $ |          
|Business combinations:                             |  |                           |            |      |   |           
|Treasury stock issued                              |  | $                         |           |      | $ | 5,000,000 
|Contingent consideration                           |  | $                         |           |      | $ | 4,348,088 
|Supplemental Disclosures of Cash Flow Information: |  |                           |            |      |   |           
|Cash Paid During the Period for:                   |  |                           |            |      |   |           
|Interest                                           |  | $                         | 7,692,432  |      | $ | 5,152,679 
|Income Taxes                                       |  | $                         | 17,343,095 |      | $ | 20,224,904

8. FINANCIAL ACCOUNTING DEVELOPMENTS

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-based Compensation. SFAS 123(R) supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS
123(R) requires all share-based payments to employees and non-employees, including grants of stock options, to be recognized in the income statement based on fair value at grant date. Pro forma disclosure is no longer an alternative.

SFAS 123(R) originally required adoption no later than July 1, 2005. In April 2005, the Securities and Exchange Commission (SEC) issued a release that amends the
compliance dates for SFAS 123(R). The Company began applying SFAS 123(R) as of January 1, 2006.

SFAS 123(R) permits public companies to adopt its
requirement using one of two methods:



| |  |  | A modified prospective method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all
share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A modified retrospective method which includes the requirements of the modified prospective method described above, but also permits entities to restate, based on the
amounts previously recognized under SFAS 123 for purposes of pro forma disclosures, either (a) all prior periods presented or (b) prior interim periods of the year of adoption.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Company has adopted SFAS 123(R) using the modified prospective method.



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As permitted by SFAS 123, the Company previously accounted for share-based payments to employees using the intrinsic
value method described in APB Opinion No. 25 and, as such, generally recognized no compensation cost for employee stock options. Accordingly, the adoption of SFAS 123(R)s fair value method has impacted the Companys results of
operations, although it has and will continue to have no impact on the Companys overall financial position. The Company shares compensation cost with Mutual based on the Management and Operating Agreement (refer to Note 3  Related
Party Transactions in the Notes to Consolidated Financial Statements included in the Companys annual report for 2005 on Form 10-K). For more information on the impact of this statement, refer to Note 5  Stock-Based
Compensation in Notes to Consolidated Condensed Financial Statements in this Form 10-Q.

In June 2005, the FASB ratified the consensus on EITF Issue
No. 04-5, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights. This Issue affects accounting by general partners
evaluating whether to consolidate limited partnerships. The EITF agreed on a framework for evaluating whether a general partner or a group of general partners controls a limited partnership and therefore should consolidate. The presumption of
general-partner control would be overcome only when the limited partners have either kick-out rights or participating rights. This guidance was effective after June 29, 2005 for all new limited partnerships formed and
for existing limited partnership agreements for which the partnership agreements are modified. For general partners in all other limited partnerships, the guidance in this Issue was effective no later than the beginning of the first reporting period
in fiscal years beginning after December 31, 2005, and application of either one of two transition methods described in the Issue would be acceptable. During the fourth quarter of 2005, two limited partnerships in which the Companys life
subsidiary has been a general partner with one percent ownership interests were modified to become general partnerships. Consequently, the Company expects EITF Issue No. 04-5 to continue to have no significant impact on the Companys
financial position and results of operations.

In addition, the FASB issued FASB Staff Position (FSP) SOP 78-9-1, Interaction of AICPA Statement of
Position 78-9 and EITF Issue No. 04-5 in June 2005. The guidance in this FSP was effective after June 29, 2005 for general partners of all new partnerships formed and for existing partnerships for which the partnership agreements are
modified. For general partners in all other partnerships, the guidance in this FSP was effective no later than the beginning of the first reporting period in fiscal years beginning after December 15, 2005, and the application of either
transition method as described in the FSP was permitted.

In August 2005, the FASB issued FSP Financial Accounting Standard (FAS) 123(R)-1,
Classification and Measurement of Freestanding Financial Instruments Originally Issued in Exchange for Employee Services under FASB Statement No. 123(R).This staff position defers the requirement under SFAS No. 123(R) that a
freestanding financial instrument become subject to the recognition and measurement requirements of other applicable generally accepted accounting principles when the rights conveyed by the instrument to the holder are no longer dependent on the
holder being an employee of the entity. This staff position has not had a significant impact on the Companys financial position or results of operations since the adoption of SFAS No. 123(R).

During the fourth quarter of 2005, the FASB also issued three other staff positions applicable at the time the Company adopted SFAS No. 123(R). They were FSP FAS
123(R)-2, Practical Accommodation to the Application of Grant Date As Defined in FASB Statement No. 123(R);FSP FAS 123(R)-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards; and FSP FAS
123(R)-4, Classification of Options and Similar Instruments Issued As Employee Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent Event. These staff positions have not had a significant impact on the
Companys financial position or results of operations since the adoption of SFAS No. 123(R).

In September 2005, the American Institute of
Certified Public Accountants issued Statement of Position 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts. This statement provides guidance on
accounting for deferred acquisition costs on an internal replacement, defined as a modification in product benefits, rights, coverages, or features that occurs by the exchange of an existing contract for a new contract, or by amendment, endorsement,
or rider to an existing contract, or by the election of a benefit, right, coverage, or feature within an existing contract. The guidance in this pronouncement is effective for fiscal years beginning after December 15, 2006. The Company plans to
adopt this statement for internal replacements



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##### Table of Contents

beginning January 1, 2007. The Company is currently preparing for the adoption of this statement and continuing to assess the impact this statement will
have on its financial position or results of operations at the time of adoption.

In February 2006, the FASB issued SFAS No. 155, Accounting for
Certain Hybrid Financial Instruments, an Amendment of FASB Statements No. 133 and 140, which eliminates the exception from applying SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, to interests on
securitized financial assets so similar instruments are accounted for similarly regardless of the form. This Statement also allows the election of fair value measurement at acquisition, at issuance, or when a previously recognized financial
instrument is subject to a remeasurement event, on an instrument-by-instrument basis, in cases in which a derivative would otherwise have to bifurcate. SFAS No. 155 is effective for all financial instruments acquired or issued in an
entitys first fiscal year beginning after September 15, 2006. The Company does not anticipate that this statement will have a significant impact on its financial position or results of operations at the time it is adopted.

The FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets, an Amendment of Statement No. 140, in March 2006. This statement will
require entities to recognize a servicing asset or liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in certain situations. It also requires all separately recognized servicing assets
and servicing liabilities to be initially measured at fair value and allows a choice of either the amortization or fair value measurement method for subsequent measurement. SFAS No. 156 is effective for annual periods beginning after
September 15, 2006. The Company does not anticipate that this statement will have a significant impact on its financial position or results of operations at the time it is adopted.

The FASB ratified the consensus on EITF Issue No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net
Presentation), in June 2006. This consensus requires disclosure of the accounting policy employed by the Company for any tax assessed by a governmental authority that is directly related to a revenue-producing transaction. The Company does not
anticipate that EITF Issue No. 06-3, which is effective for the Company on January 1, 2007, will have a significant impact on its financial position or results of operations at the time it is adopted.

In July 2006, the FASB released FASB Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.
FIN 48 prescribes a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition of income tax assets and liabilities, classification of current and
deferred income tax assets and liabilities, accounting for interest and penalties, accounting for income taxes in interim periods, financial disclosures, and transition. This interpretation is effective for fiscal years beginning after
December 15, 2006. The Company is currently evaluating the impact this interpretation may have on its financial position or results of operations at the time it is adopted.

9. LOAN PORTFOLIO

During the second quarter of 2006, the Company detected irregularities in certain loan
transactions. Through an investigation of the irregularities it was determined that fraudulent loan transactions had been initiated by one of the Companys agents. It was determined through a portfolio review that the acts were limited to this
single employee. The fraudulent activities have been evaluated by the Company and it has been determined that the effect in any prior reporting period is deemed to be immaterial. The financial impact recorded during the second quarter of 2006 was a
reduction of net income of $3,568,260 and basic and diluted earnings per share of $0.04. The second quarter adjustment is not material to any prior period and will not be material to the financial statements for the current year.



19



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##### Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and
Shareholders

Alfa Corporation:

We have reviewed the accompanying consolidated condensed balance sheet of Alfa Corporation (the Company) and subsidiaries as of June 30, 2006, the related consolidated condensed statements of income for the three months and six
months ended June 30, 2006 and 2005, and the related consolidated condensed statements of cash flows for the six months ended June 30, 2006 and 2005. These consolidated condensed financial statements are the responsibility of the
Companys management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A
review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance
with the standards of the Public Company Accounting Oversight Board (United States), 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 U.S. generally accepted accounting principles.

As discussed in note 5 to the consolidated condensed financial statements,
the Company adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment,effective January 1, 2006.

KPMG LLP

Birmingham, Alabama

August 9, 2006



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##### Table of Contents

|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

Managements Discussion and Analysis of Financial Condition and Results of Operations addresses the financial condition of Alfa Corporation and its subsidiaries (the Company) as of June 30, 2006, compared
with December 31, 2005 and the results of operations for the six-month and threemonth periods ended June 30, 2006 and June 30, 2005. The following discussion should be read in conjunction with the Consolidated Condensed
Financial Statements and Notes to Consolidated Condensed Financial Statements that are included in this Form 10-Q and the Consolidated Financial Statements and Notes to Consolidated Financial Statements in the annual report to stockholders for the
year ended December 31, 2005 on Form 10-K.

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, including this report on Form 10-Q. If any of these assumptions or opinions proves 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.

OVERVIEW

Alfa Corporation is a financial services holding company
headquartered in Alabama that offers primarily personal lines of property casualty insurance, life insurance and financial services products through its wholly-owned subsidiaries:



| |  |  | Alfa Insurance Corporation (AIC)
| | - |  | --------------------------------



| |  |  | Alfa General Insurance Corporation (AGI)
| | - |  | ----------------------------------------



| |  |  | Alfa Vision Insurance Corporation (AVIC)
| | - |  | ----------------------------------------



| |  |  | Alfa Life Insurance Corporation (Life)
| | - |  | --------------------------------------



| |  |  | Alfa Financial Corporation (Financial)
| | - |  | --------------------------------------



| |  |  | The Vision Insurance Group, LLC (Vision)
| | - |  | ----------------------------------------



| |  |  | Alfa Agency Mississippi, Inc. (AAM)
| | - |  | -----------------------------------



| |  |  | Alfa Agency Georgia, Inc. (AAG)
| | - |  | -------------------------------



| |  |  | Alfa Benefits Corporation (ABC)
| | - |  | -------------------------------

Alfa Corporation is affiliated with Alfa
Mutual Insurance Company, Alfa Mutual Fire Insurance Company (Fire) and Alfa Mutual General Insurance Company (collectively, the Mutual Group). The Mutual Group owns 55.0% of Alfa Corporations common stock, their largest single investment.
Alfa Specialty Insurance Corporation is a wholly-owned subsidiary of Mutual. Alfa Corporation and its subsidiaries (the Company) together with the Mutual Group comprise the Alfa Group (Alfa). Alfa Virginia Mutual Insurance Company (Virginia Mutual)
currently cedes 80% of its direct business to Fire under an affiliate agreement signed in August 2001.

The Companys revenue consists mainly of
premiums earned, policy charges, net investment income and fee income. Benefit and settlement expenses consist primarily of claims paid and claims in process and pending and include an estimate of amounts incurred but not yet reported along with
loss adjustment expenses. Other operating expenses consist primarily of compensation expenses, and other overhead business expenses, net of deferred policy acquisition costs.

The Company reports operating segments based on the Companys legal entities, which are organized by line of business:



| |  |  | Property casualty insurance
| | - |  | ---------------------------



| |  |  | Life insurance
| | - |  | --------------



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##### Table of Contents

| |  |  | Noninsurance
| | - |  | ------------



| |  |  | Consumer financing
| | - |  | ------------------



| |  |  | Commercial leasing
| | - |  | ------------------



| |  |  | Agency operations
| | - |  | -----------------



| |  |  | Employee benefits administration
| | - |  | --------------------------------



| |  |  | Corporate and eliminations
| | - |  | --------------------------

In the first six months of 2006, property
casualty insurance operations accounted for 81.4% of revenues and 82.4% of net income. Life insurance operations generated 18.2% of revenues and 25.8% of net income. Noninsurance operations, combined with corporate operations and eliminations,
generated 0.4% of revenues and resulted in a net loss of $3.7 million or 8.2% of net income.

On January 1, 2006, the Company adopted Statement of
Financial Accounting Standard (SFAS) No. 123 (revised 2004), Share-Based Payment. SFAS No. 123(R) requires all share-based payments to employees and non-employees, including grants of stock options, to be recognized as compensation
expense based on fair value at date of grant. Prior to January 1, 2006, the Company accounted for stock options to employees using the intrinsic value method described in APB Opinion No. 25 and, as such, recognized no compensation cost for
employee stock options granted at market value on the date of grant. The Company adopted SFAS No. 123(R) using the modified prospective method, therefore no prior period results have been restated. The valuation model used to value stock
options under SFAS No. 123(R) is the Black-Scholes-Merton model, which is the same valuation model that was used prior to January 1, 2006 for pro forma disclosures under SFAS No. 123. Under SFAS No. 123(R) an estimate must be
made of the number of awards that are expected to vest and this forfeiture rate is applied to determine the amount of compensation cost to be recognized. The forfeiture rate must be evaluated at each reporting period to determine if any changes
should be made which could impact the amount of compensation cost that will be ultimately recognized. In addition, the amount of compensation cost to be recognized is based on non-substantive vesting periods attributable to retirement eligible
employees. Alfas total fair-value-based compensation expense associated with stock options that were not vested at January 1, 2006 was $3.6 million and the weighted average period over which this expense will be recognized is 0.74 years.
The Company shares compensation cost with Alfa Mutual Insurance Company (Mutual) based on Alfas Management and Operating Agreement (refer to Note 3  Related Party Transactions in the Notes to Consolidated Financial Statements
included in the Companys annual report for 2005 on Form 10-K).

Future results of operations will depend in part on the Companys ability to
predict and control benefit and settlement expenses through underwriting criteria, product design and negotiation of favorable vendor contracts. The Company must also seek timely and accurate rate changes from insurance regulators in order to meet
strategic business objectives. Selection of insurable risks, proper collateralization of loans and leases and continued staff development also impact the operating results of the Company. The Companys inability to mitigate any or all risks
mentioned above or other factors may adversely affect its profitability.

In evaluating the performance of the Companys segments, management believes
operating income serves as a meaningful tool for assessing the profitability of the Companys ongoing operations. Operating income, a non-GAAP financial measure, is defined by the Company as net income excluding net realized investment gains
and losses, net of applicable taxes. Realized investment gains and losses are somewhat controllable by the Company through the timing of decisions to sell securities. Therefore, realized investment gains and losses are not indicative of future
operating performance.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires the Companys management to make significant estimates and
assumptions based on information available at the time the financial statements are prepared. In addition, management must ascertain the appropriateness and timing of any changes in these estimates and assumptions. Certain accounting estimates are
particularly sensitive because of their significance to the Companys financial statements and because of the possibility that subsequent events and available information may differ markedly from managements judgments at the time
financial statements are prepared. For the Company, the areas most subject to significant management judgments include reserves for property casualty losses and loss adjustment expenses, reserves for future policy benefits, deferred policy
acquisition costs, valuation of investments, and reserves for pending litigation. The application of these critical accounting estimates impacts the values at which 72% of the Companys assets and 59% of



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the Companys liabilities are reported at June 30, 2006 and therefore have a direct effect on net earnings and stockholders equity. The
Companys Summary of Significant Accounting Policies is presented in the Notes to Consolidated Financial Statements in the Companys annual report for 2005 on Form 10-K.

Management has discussed the Companys critical accounting policies and estimates, together with any changes therein, with the Audit Committee of the Companys
Board of Directors. The Companys Audit Committee has also reviewed the disclosures contained herein.

Reserves for Property Casualty Losses and
Loss Adjustment Expenses

Losses and loss adjustment expenses payable are managements best estimates at a given point in time of what the Company
expects to pay claimants, based on known facts, circumstances, historical trends, emergence patterns and settlement patterns. Reserves for reported losses are established on a case-by-case basis with the amounts determined by claims adjusters based
on the Companys reserving practices, which take into account the type of risk, the circumstances surrounding each claim and policy provisions relating to types of loss. Loss and loss adjustment expense reserves for incurred claims that have
not yet been reported (IBNR) are estimated based primarily on historical emergence patterns with consideration given to many variables including statistical information, inflation, legal developments, storm loss estimates, and economic conditions.

The Companys internal actuarial staff conducts annual reviews of projected loss development information by line of business to assist management in
making estimates of reserves for ultimate losses and loss adjustment expenses payable. Several factors are considered in estimating ultimate liabilities including consistency in relative case reserve adequacy, consistency in claims settlement
practices, recent legal developments, historical data, actuarial projections, accounting projections, exposure growth, current business conditions, catastrophe developments, and late reported claims. In addition, reasonableness is established in the
context of claim severity, loss ratio and trend factors, all of which are implicit in the liability estimates. On an interim basis, the Companys internal actuarial staff reviews the direct emergence for each line of business compared to the
expected emergence implied by the most recent annual review. If the emergence is not within acceptable bounds, the opinion on reserve adequacy is revised and reserve amounts are adjusted. Otherwise, IBNR reserves are adjusted as changes in exposure
indicate that additional reserves are needed until the next annual review is completed. The following methodologies are used to develop a range of probable outcomes for estimated loss and loss adjustment expense reserves during the annual review,
with the Catastrophes methods used during both annual and interim reviews:



| |  |  | Normal Loss Reserves
| | - |  | --------------------



| |  |  | Reported Loss Development
| | - |  | -------------------------



| |  |  | Paid Loss Development
| | - |  | ---------------------



| |  |  | Bornhuetter-Ferguson Methods (paid and reported)
| | - |  | ------------------------------------------------



| |  |  | Cape Cod Method (paid and reported)
| | - |  | -----------------------------------



| |  |  | Counts and Averages
| | - |  | -------------------



| |  |  | Calendar Year Methods
| | - |  | ---------------------



| |  |  | Judgmental Methods
| | - |  | ------------------



| |  |  | Thomas Mack
| | - |  | -----------



| |  |  | Loss Adjustment Expenses Reserves
| | - |  | ---------------------------------



| |  |  | Reported Loss Development
| | - |  | -------------------------



| |  |  | Paid Loss Development
| | - |  | ---------------------



| |  |  | Bornhuetter-Ferguson Methods (paid and reported)
| | - |  | ------------------------------------------------



| |  |  | Cape Cod Method (paid and reported)
| | - |  | -----------------------------------



| |  |  | Ratio Methods
| | - |  | -------------



| |  |  | Calendar Year Methods
| | - |  | ---------------------



| |  |  | Judgmental Methods
| | - |  | ------------------



| |  |  | Accrual Methods
| | - |  | ---------------



| |  |  | Catastrophes
| | - |  | ------------



| |  |  | Regression Fit on Incremental Payments
| | - |  | --------------------------------------



| |  |  | Regression on Reported Claim Counts
| | - |  | -----------------------------------



| |  |  | Leakage Method
| | - |  | --------------



| |  |  | Comparison to Past Catastrophe Development
| | - |  | ------------------------------------------

The annual actuarial reviews
are presented to management with a point estimate established within the range of probable outcomes for evaluating the adequacy of reserves and determination of the appropriate reserve value to be included in the financial statements. Management
establishes reserves slightly above



23



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##### Table of Contents

mid-point to include an estimated provision for uncertainty and to minimize the necessity for changing historical estimates. Although management uses many
internal and external resources, as well as multiple established methodologies to calculate reserves, there is no method for determining the exact ultimate liability.

Management establishes reserves for loss adjustment expenses that are not attributable to a specific claim. These reserves are referred to as Defense and Cost Containment (DCC) and Adjusting and Other Expenses (AO).
DCC and AO reserves are recorded to establish the liability for settling and defending claims that have been incurred, but have not yet been completely settled.

For AO, historical ratios of AO to paid losses are developed, and then applied to the current outstanding reserves. The method uses a traditional assumption that 50% of the expenses are realized when the claim is open, and the other 50% are
incurred when the claim is closed. The method also assumes that the underlying claims process and mix of business do not change materially over time.

An
important assumption underlying the reserve estimation methods for the property casualty lines is that the loss cost trends implicitly built into the loss and LAE patterns will continue into the future. Some of the factors that could influence
assumptions arise from a variety of sources including tort law changes, development of new medical procedures, social inflation, and other inflationary changes in costs beyond assumed levels. Inflation changes have much less impact on short-tail
personal lines reserves and more impact on long-tail commercial lines. The Company does not have any significant long-tailed lines of business, so the actuarial assumptions and methodologies are consistent across all lines of business, regardless of
the expected payout patterns. This is further evidenced by the fact that approximately 90% of ultimate losses for a given accident year are reported in the first year and by the end of the second year more than 99% are reported.

Reserves for Policyholder Benefits

Benefit reserves for traditional
life products are determined according to the provisions of SFAS No. 60, Accounting and Reporting by Insurance Enterprises. The methodology used requires that the present value of future benefits to be paid to or on behalf of
policyholders less the present value of future net premiums (that portion of the gross premium required to provide for all future benefits and expenses) be determined. Such determination uses assumptions, including provision for adverse deviation,
for expected investment yields, mortality, terminations and maintenance expenses applicable at the time the insurance contracts are issued. These assumptions determine the level and the sufficiency of reserves. The Company annually tests the
validity of these assumptions.

Benefit reserves for universal life products are determined according to the provisions of SFAS No. 97, Accounting
and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments. This standard directs that, for policies with an explicit account balance, the benefit reserve is the
account balance without reduction for any applicable surrender charge. Benefit reserves for the Companys annuity products, like those for universal life products, are determined using the requirements of SFAS No. 97.

In accordance with the provisions of SFAS No. 60 and the AICPA Audit and Accounting Guide, credit insurance reserves are held as unearned premium reserves
calculated using the rule of 78 method. Reserves for supplementary contracts with life contingencies are determined using the 1971 Individual Annuity Mortality Table and interest rates that vary depending on date of issue. Likewise,
reserves for accidental death benefits are determined predominately by using the 1959 Accidental Death Benefit Mortality Table and an interest rate of 3%. Reserves for disability benefits, both active and disabled lives, are calculated primarily
from the 1952 Disability Study and a rate of 2.5%. A small portion of the Companys disabled life reserves are calculated based on the 1970 Intercompany Group Disability Study and a rate of 3%.

Reserves for all other benefits are computed in accordance with presently accepted actuarial standards. Management believes that reserve amounts reflected in the
Companys balance sheet related to life products:



| |  |  | are consistently applied and fairly stated in accordance with sound actuarial principles;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | are based on actuarial assumptions which are in accordance with contract provisions;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | make a good and sufficient provision for all unmatured obligations of the Company guaranteed under the terms of its contracts;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



24



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##### Table of Contents

| |  |  | are computed on the basis of assumptions consistent with those used in computing the corresponding items of the preceding year end; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | include provision for all actuarial reserves and related items that ought to be established.
| | - |  | --------------------------------------------------------------------------------------------

Valuation of Investments

Unrealized investment gains or losses on investments carried at fair value, net of
applicable income taxes, are reflected directly in stockholders equity as a component of accumulated other comprehensive income (loss) and, accordingly, have no effect on net income. Fair values for fixed maturities are based on quoted market
prices. The cost of investment securities sold is determined by using the first-in, first-out methodology. In some instances, the Company may use the specific identification method. The Company monitors its investment portfolio and conducts
quarterly reviews of investments that have experienced a decline in fair value below cost to evaluate whether the decline is other than temporary. Such evaluations involve judgment and consider the magnitude and reasons for a decline and the
prospects for the fair value to recover in the near term. Declines resulting from broad market conditions or industry related events, and for which the Company has the intent to hold the investment for a period of time believed to be sufficient to
allow a market recovery or to maturity, are considered to be temporary. Future adverse investment market conditions, or poor operating results of underlying investments, could result in an impairment charge in the future. Where a decline in fair
value of an investment below its cost is deemed to be other than temporary, a charge is reflected in income for the difference between the cost or amortized cost and the estimated net realizable value. As a result, writedowns of $1.8 million were
recorded in the first six months of 2006 on equity securities with no writedowns on fixed maturities. During the same period in 2005, writedowns of $612 thousand and $671 thousand were recorded on equity securities and fixed maturities,
respectively.

Policy Acquisition Costs

Policy
acquisition costs, such as commissions, premium taxes and certain other underwriting and marketing expenses that vary with and are directly related to the production of business have been deferred.

Life Insurance Products: Traditional life insurance acquisition costs are being amortized over the premium payment period of the related policies using
assumptions consistent with those used in computing policy benefit reserves. Acquisition costs for universal life type policies are being amortized over a thirty-year period in relation to the present value of estimated gross profits that are
determined based upon surrender charges and investment, mortality and expense margins. Investment income is considered, if necessary, in the determination of the recoverability of deferred policy acquisition costs.

Property Casualty Products: Acquisition costs for property casualty insurance are amortized over the period in which the related premiums are earned. Future
changes in estimates, such as the relative time certain employees spend in initial policy bookings, may require adjustment to the amounts deferred. Changes in underwriting and policy issuance processes may also give rise to changes in these deferred
costs.

Reserves for Litigation

The Company is subject
to lawsuits in the normal course of business related to its insurance and noninsurance products. At the time a lawsuit becomes known, management evaluates the merits of the case and determines the need for establishing estimated reserves for
potential settlements or judgments as well as reserves for potential costs of defending the Company against the allegations of the complaint. These reserves may be adjusted as the case develops. Periodically, and at least quarterly, management
assesses all pending cases as a basis for evaluating reserve levels. At that point, any necessary adjustments are made to applicable reserves as determined by management and are included in current operating results. Reserves may be adjusted based
upon outside counsels advice regarding the law and facts of the case, any revisions in the law applicable to the case, the results of depositions and/or other forms of discovery, general developments as the case progresses such as a favorable
or an adverse trial court ruling, whether a verdict is rendered for or against the Company, whether management believes an appeal will be successful, or other factors that may affect the anticipated outcome of the case. Management believes adequate
reserves have been established in known cases. However, due to the uncertainty of future events, there can be no assurance that actual outcomes will not differ from the assessments made by management.



25



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##### Table of Contents

RESULTS OF OPERATIONS

As a result of the Companys ongoing operating controls and procedures, evidence was discovered during the second quarter of 2006 suggesting irregularities in certain loan transactions within Financial. Management initiated an internal
investigation with the assistance of special legal counsel, as well as an outside forensic accountant. The Chairman of the Audit Committee and the Companys independent registered public accounting firm were notified.

As a result of the investigation, the results of operations for the three months ended June 30, 2006, include the write off of loans totaling $5,489,630 in
Financials loan portfolio. This write off had an impact on net income of $3,568,260 or $0.04 per diluted share for the current quarter. It was determined that the fraudulent transactions were limited to the acts of a single agent. Of the $6.2
million loan portfolio originated by this agent, it has been determined that $5.5 million were fraudulently originated. Although there is the potential for insurance recovery and recoveries from civil actions, the amounts and timing of such
recoveries cannot be estimated at this time.



26



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##### Table of Contents

The following table sets forth consolidated summarized income statement information for the six-month and three-month
periods ended June 30, 2006 and 2005:



|                                           |  |                                                 |            |   |                             |   |            |          |  |      |      |  |   |            |   |  |          |            |   |  |       |   
|------------------------------------------ |  | ----------------------------------------------- | ---------- | - | --------------------------- | - | ---------- | -------- |  | ---- | ---- |  | - | ---------- | - |  | -------- | ---------- | - |  | ----- | --
|                                           |  | Six Months Ended June 30,                       |            |   | Three Months Ended June 30, |  
|                                           |  | 2006                                            |            |   | 2005                        |   |            | % Change |  |      | 2006 |  |   | 2005       |   |  | % Change |           
|                                           |  | (in thousands, except share and per share data) |           
|Revenues                                   |  |                                                 |            |   |                             |   |            |          |  |      |      |  |   |            |   |  |          |            |   |  |       |   
|Property casualty insurance premium        |  | $                                               | 298,251    |   |                             | $ | 270,950    |          |  | 10   | %    |  | $ | 150,835    |   |  | $        | 138,169    |   |  | 9     | % 
|Life insurance premiums and policy charges |  |                                                 | 41,597     |   |                             |   | 38,327     |          |  | 9    | %    |  |   | 20,018     |   |  |          | 17,906     |   |  | 12    | % 
|                                           |  |                                                 |            |   |                             |   |            |          |  |      |      |  |   |            |   |  |          |            |   |  |       |   
|Total premiums and policy charges          |  | $                                               | 339,848    |   |                             | $ | 309,277    |          |  | 10   | %    |  | $ | 170,853    |   |  | $        | 156,075    |   |  | 9     | % 
|                                           |  |                                                 |            |   |                             |   |            |          |  |      |      |  |   |            |   |  |          |            |   |  |       |   
|Net investment income                      |  | $                                               | 40,801     |   |                             | $ | 45,895     |          |  | (11  | )%   |  | $ | 16,825     |   |  | $        | 22,914     |   |  | (27   | )%
|                                           |  |                                                 |            |   |                             |   |            |          |  |      |      |  |   |            |   |  |          |            |   |  |       |   
|Other income                               |  | $                                               | 13,404     |   |                             | $ | 11,935     |          |  | 12   | %    |  | $ | 6,034      |   |  | $        | 4,846      |   |  | 25    | % 
|                                           |  |                                                 |            |   |                             |   |            |          |  |      |      |  |   |            |   |  |          |            |   |  |       |   
|Total revenues                             |  | $                                               | 395,841    |   |                             | $ | 370,104    |          |  | 7    | %    |  | $ | 195,374    |   |  | $        | 185,716    |   |  | 5     | % 
|                                           |  |                                                 |            |   |                             |   |            |          |  |      |      |  |   |            |   |  |          |            |   |  |       |   
|Net income                                 |  |                                                 |            |   |                             |   |            |          |  |      |      |  |   |            |   |  |          |            |   |  |       |   
|Insurance operations                       |  |                                                 |            |   |                             |   |            |          |  |      |      |  |   |            |   |  |          |            |   |  |       |   
|Property casualty insurance                |  | $                                               | 38,600     |   |                             | $ | 39,539     |          |  | (2   | )%   |  | $ | 23,738     |   |  | $        | 24,039     |   |  | (1    | )%
|Life insurance                             |  |                                                 | 9,589      |   |                             |   | 10,136     |          |  | (5   | )%   |  |   | 4,709      |   |  |          | 5,024      |   |  | (6    | )%
|                                           |  |                                                 |            |   |                             |   |            |          |  |      |      |  |   |            |   |  |          |            |   |  |       |   
|Total insurance operations                 |  | $                                               | 48,189     |   |                             | $ | 49,675     |          |  | (3   | )%   |  | $ | 28,447     |   |  | $        | 29,063     |   |  | (2    | )%
|Noninsurance operations                    |  |                                                 | (1,805     | ) |                             |   | 1,084      |          |  | (267 | )%   |  |   | (2,806     | ) |  |          | 200        |   |  | (1503 | )%
|Realized investment gains, net of tax      |  |                                                 | 1,162      |   |                             |   | 1,948      |          |  | (40  | )%   |  |   | 1,080      |   |  |          | 1,222      |   |  | (12   | )%
|Corporate                                  |  |                                                 | (1,900     | ) |                             |   | (2,581     | )        |  | (26  | )%   |  |   | (1,213     | ) |  |          | (1,930     | ) |  | (37   | )%
|                                           |  |                                                 |            |   |                             |   |            |          |  |      |      |  |   |            |   |  |          |            |   |  |       |   
|Net income                                 |  | $                                               | 45,646     |   |                             | $ | 50,126     |          |  | (9   | )%   |  | $ | 25,508     |   |  | $        | 28,555     |   |  | (11   | )%
|                                           |  |                                                 |            |   |                             |   |            |          |  |      |      |  |   |            |   |  |          |            |   |  |       |   
|Net income per share                       |  |                                                 |            |   |                             |   |            |          |  |      |      |  |   |            |   |  |          |            |   |  |       |   
|- Basic                                    |  | $                                               | 0.57       |   |                             | $ | 0.63       |          |  | (9   | )%   |  | $ | 0.32       |   |  | $        | 0.36       |   |  | (11   | )%
|                                           |  |                                                 |            |   |                             |   |            |          |  |      |      |  |   |            |   |  |          |            |   |  |       |   
|- Diluted                                  |  | $                                               | 0.56       |   |                             | $ | 0.62       |          |  | (10  | )%   |  | $ | 0.31       |   |  | $        | 0.35       |   |  | (11   | )%
|                                           |  |                                                 |            |   |                             |   |            |          |  |      |      |  |   |            |   |  |          |            |   |  |       |   
|Weighted average shares outstanding        |  |                                                 |            |   |                             |   |            |          |  |      |      |  |   |            |   |  |          |            |   |  |       |   
|- Basic                                    |  |                                                 | 80,315,256 |   |                             |   | 80,124,054 |          |  |      |      |  |   | 80,325,375 |   |  |          | 80,082,617 |   |  |       |   
|                                           |  |                                                 |            |   |                             |   |            |          |  |      |      |  |   |            |   |  |          |            |   |  |       |   
|- Diluted                                  |  |                                                 | 81,131,983 |   |                             |   | 80,609,351 |          |  |      |      |  |   | 81,179,210 |   |  |          | 80,538,612 |   |  |       |   
|                                           |  |                                                 |            |   |                             |   |            |          |  |      |      |  |   |            |   |  |          |            |   |  |       |   

Consolidated results of operations have been impacted by the following events in 2005 and 2006:



| |  |  | Effective January 1, 2005, the property casualty insurance Pooling Agreement (refer to Note 2  Pooling Agreementin the Notes to Consolidated Financial Statements
included in the Companys annual report for 2005 on Form 10-K) was modified as follows:
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | AVIC, which writes nonstandard automobile business in nine states, was added as a participant to the pool.
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | Fires quota share reinsurance agreement with Virginia Mutual was retroceded to the pool.
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | On January 3, 2005, the Company completed the purchase of Vision, a full-service managing general agency that writes nonstandard automobile insurance policies in nine states,
and provides all underwriting, claims, actuarial and financial services on behalf of its contracted carriers, which includes AVIC.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During the fourth quarter of 2005, a new property casualty policy administration system was implemented for the automobile line of business.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On December 31, 2005, the Company completed the sale of a substantial portion of its commercial lease portfolio and other assets, net of related liabilities, to OFC Servicing
Corporation, a wholly-owned subsidiary of MidCountry Financial Corporation (MidCountry).
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



27



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##### Table of Contents

| |  |  | On January 1, 2006, the Company adopted SFAS No. 123(R).
| | - |  | --------------------------------------------------------



| |  |  | Effective January 1, 2006, a new life policy administration system was implemented with three new product offerings:
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | return of premium level term life
| | - |  | ---------------------------------



| |  |  | single premium non-qualified annuity
| | - |  | ------------------------------------



| |  |  | flexible premium non-qualified annuity
| | - |  | --------------------------------------



| |  |  | During the second quarter of 2006, management became aware of fraudulent activity occurring within Financial. The misconduct was determined to be limited to the acts of a single
person. As a result, the Company has provided for a charge of $5.5 million on a pre-tax basis and $3.6 million on an after tax basis or a $0.04 impact of earnings per share in the second quarter to write-off these fraudulently originated loans.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Revenues

Total premiums and policy
charges increased $30.6 million, or 10% for the first six months of 2006 and increased $14.8 million, or 9% during the second quarter.

Property
Casualty Insurance: Property casualty insurance premiums for the first six months of 2006 increased $27.3 million, or 10%, with AVIC contributing $18.0 million and AIC and AGI contributing $9.3 million of the increase. For the three months ended
June 30, 2006, property casualty insurance premiums increased $12.7 million, or 9%, with AVIC contributing $8.6 million and AIC and AGI contributing $4.1 million of the increase. AVICs increase for the six-month and three-month periods
ended June 30, 2006 is a result of all nine states being active for the first six months of 2006 and overall production increases. The growth from AIC and AGI is related to increases in personal lines. The personal lines increase was
attributable to homeowner and manufactured home premiums increasing $5.3 million, or 7.4%, automobile premiums increasing $3.2 million, or 2.1% and farmowner premiums increasing $712 thousand, or 5.6%. The following table shows total Alfa Group
growth in policies inforce and written premiums, comparing the first six months of 2006 and 2005:



|                            |  |                        |    |  |                      |  
|--------------------------- |  | ---------------------- | -- |  | -------------------- | -
|                            |  | Six-Month Comparison   |   
|                            |  | PoliciesInforceGrowth2 |    |  | WrittenPremiumGrowth |  
|Property Casualty Insurance |  |                        |    |  |                      |  
|Personal Lines              |  |                        |    |  |                      |  
|Automobile                  |  | 5.1                    | %  |  | 13.8                 | %
|Homeowner1                  |  | 0.6                    | %  |  | 5.7                  | %
|Farmowner                   |  | (2.7                   | )% |  | 8.5                  | %
|Other                       |  | 0.3                    | %  |  | 2.7                  | %
|                            |  |                        |    |  |                      |  
|Total Personal Lines        |  | 3.3                    | %  |  | 10.9                 | %
|                            |  |                        |    |  |                      |  
|Commercial Lines            |  | (0.8                   | )% |  | 2.3                  | %
|                            |  |                        |    |  |                      |  
|Total Property Casualty     |  | 3.3                    | %  |  | 10.6                 | %
|                            |  |                        |    |  |                      |  



|1 | Homeowner includes Homeowner and Manufactured Home
|- | --------------------------------------------------



|2 | For 2006, policies inforce represent policies and units inforce due to the implementation of
a new policy administration system for the automobile line of business.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

The property casualty subsidiaries of the Company are participants
in the Pooling Agreement with the Mutual Group. The Companys share of the pool was 65% during both 2006 and 2005, therefore pooling did not impact premium growth. The Company cautions the reader that the values shown above are before pooling
and do not include reinsurance assumed or reinsurance ceded amounts. Refer to Note 2  Pooling Agreement in the Notes to Consolidated Financial Statements included in the Companys annual report for 2005 on Form 10-K for additional
detail of the Pooling Agreement.

The growth in the automobile line is primarily attributable to AVICs addition to the Group in 2005. Internal growth
in written premium for this line was 3.4% with the impact of three rate decreases across preferred, standard, and nonstandard auto lines in Alabama and Mississippi. The homeowner line written



28



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##### Table of Contents

premium growth was impacted by three rate increases across both preferred and standard lines while policies inforce grew slightly. The farmowner line written
premium growth was impacted by a rate increase with a decline in policies inforce.

Life Insurance: Life insurance premiums and policy charges
increased $3.3 million, or 9%, for the first six months of 2006 and $2.1 million, or 12%, for the three months ended June 30, 2006.

Life insurance
premiums increased $2.5 million or, 12% for the first six months of 2006 and $1.9 million or, 20% for the three months ended June 30, 2006 primarily as a result of an increase in term life premiums of $2.3 million and an increase of 7.5% in
term life policies inforce year to date and an increase in term life premiums of $1.2 million for the quarter ended June 30, 2006. The introduction of the return of premium level term life product contributed $1.3 million of the $2.5 million
increase in life insurance premiums during the first six months of 2006 and $800 thousand of the $1.9 million increase for the three months ended June 30, 2006.

Life insurance policy charges increased $734 thousand during the first six months of 2006 and $231 thousand for the three months ended June 30, 2006. The year to date increase of $734 thousand is primarily due to
an increase in universal life policy charges resulting from increases in fund balances that the charges are assessed against along with a slight increase of 0.7% in the number of universal life policies inforce. The persistency ratio for life
business was 91.2% and 91.0% at June 30, 2006 and 2005, respectively. Persistency, a non-GAAP financial measure, represents the ratio of the annualized premium of policies inforce at June 30, 2006 and 2005 as a percentage of the annualized
premium paid at June 30, 2006 and 2005, respectively. The following table shows the growth in policies inforce and inforce annualized premium, comparing the first six months of 2006 and 2005:



|                        |  |                       |    |  |                                |   
|----------------------- |  | --------------------- | -- |  | ------------------------------ | --
|                        |  | Six-Month Comparison  |   
|                        |  | PoliciesInforceGrowth |    |  | InforceAnnualizedPremiumGrowth |   
|Life Insurance          |  |                       |    |  |                                |   
|Universal Life          |  | 0.7                   | %  |  | 2.0                            | % 
|Universal Life - COLI   |  | 8.0                   | %  |  | 3.9                            | % 
|Interest Sensitive Life |  | 1.9                   | %  |  | 1.5                            | % 
|Traditional Life        |  | 0.8                   | %  |  | 12.1                           | % 
|Group Life              |  | (0.5                  | )% |  | (3.2                           | )%
|Annuities               |  | 100.0                 | %  |  | 100.0                          | % 
|                        |  |                       |    |  |                                |   
|Total Life              |  | 1.1                   | %  |  | 6.1                            | % 
|                        |  |                       |    |  |                                |   

Policies inforce grew for all lines overall, except group life that showed a slight decrease in inforce policies.
Group life represents only 0.9% of total inforce policies at June 30, 2006. The slight increase in traditional life was the result of a decline in the direct mail product offering of term insurance. Inforce annualized premium continues good
growth at 6.1%, with the largest increase in traditional life at 12.1%.

Net investment income decreased $5.1 million, or 11% for the six months ended
June 30, 2006 and $6.1 million, or 27% for the three months ended June 30, 2006 due to the $5.5 million increase in loan losses as a result of collateral loans written off during the second quarter of 2006, increased interest costs on
commercial paper and notes payable, declines in partnership income offset by increases in interest income on fixed maturities, dividend income on equity securities and interest income on collateral loans and short-term investments. Positive cash
flows resulted in an increase in invested assets of 2% in the six months since December 31, 2005.

Other income increased $1.5 million, or 12% and
$1.2 million, or 25% for the six and three months ended June 30, 2006, respectively, due to the increased production in AVIC.



29



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##### Table of Contents

Net Income

Operating
income for the property casualty subsidiaries decreased by $939 thousand, or 2%, for the six months ended June 30, 2006 and $301 thousand, or 1%, for the three months ended June 30, 2006. For the six months ended June 30, 2006, AVIC
and Virginia Mutual operating income increased $663 thousand as a result of the increased production in AVIC, 2.8% improvement in Virginia Mutuals loss ratio and a 5.0% improvement in AVICs expense ratio offset by a 1.5% increase in
AVICs loss ratio. AIC and AGI operating income decreased $1.6 million as a result of increases in the loss adjustment expense (LAE) ratio of 0.6% and the expense ratio of 3.2% and decreases in net investment income of $484 thousand offset by
premium growth of 3.7% and a decline in the loss ratio of 3.3%. For the three months ended June 30, 2006, AVIC and Virginia Mutual operating income increased $607 thousand as a result of AVIC production increases, improvement in Virginia
Mutuals loss ratio offset by a slight increase in AVICs loss and LAE ratios. AIC and AGI operating income decreased $908 thousand as a result of increases in the LAE ratio of 0.3% and the expense ratio of 3.2% and decreases in net
investment income of $411 thousand offset by premium growth of 3.2% and a decline in the loss ratio of 2.1%.

Life insurance operating income decreased
$547 thousand, or 5%, for the six months ended June 30, 2006 as a result of an increase in the mortality ratio to 101% of expected for the six month period ended June 30, 2006, compared to 87% of expected for the comparable period in 2005,
an increase of $1.3 million in operating expenses, offset by premiums and policy charges growth of 9%, and net investment income growth of 8%. For the three months ended June 30, 2006, operating income decreased $315 thousand, or 6% as a result
of an increase in the mortality ratio to 106% of expected for the quarter compared to 85% of expected for the same three-month period ended June 30, an increase of $322 thousand in operating expenses, offset by revenue growth of $2.8 million.
Mortality, a non-GAAP financial measure, represents the ratio of actual to expected death claims. Therefore, for reporting periods in 2006, the Company experienced less favorable financial results when compared to the same periods in 2005 due to the
higher mortality ratio.

Noninsurance operating income decreased $2.9 million to an operating loss of $1.8 million for the six months ended June 30,
2006. Agency operations increased operating income by $1.1 million, loan operations decreased operating income by $3.8 million, commercial leasing operations remained constant and ABC decreased operating income by $179 thousand. For the three months
ended June 30, 2006 compared to the same period in 2005, Noninsurance operating income decreased $3 million to an operating loss of $2.8 million. Agency operations increased operating income by $538 thousand, loan operations decreased operating
income by $3.6 million, commercial leasing operations decreased operating income by $47 thousand and ABC increased operating income by $69 thousand.

Corporate expenses decreased by $681 thousand for the six months ended June 30, 2006 and $717 thousand for the three months ended June 30, 2006. Current year results were impacted by increased costs on the Companys
short-term borrowings offset by other expense reductions such as legal costs, amortization of deferred acquisition costs and income taxes.

Realized
investment gains, net of tax, declined $786 thousand, or 40%, for the six months ended June 30, 2006 as a result of lower gains on equity securities and increased losses on tax credit partnerships. On a pretax basis, writedowns increased from
$1.3 million in the six first months of 2005 to $1.8 million in 2006. For the three months ended June 30, 2006, realized investment gains, net of tax, declined $142 thousand, or 12% as a result of increased losses on tax credit partnerships
offset by higher gains on equity securities. On a pretax basis, writedowns increased from $1.1 million in the three months ended June 30, 2005 to $1.8 million in the same period in 2006.



30



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##### Table of Contents

PROPERTY AND CASUALTY INSURANCE OPERATIONS

The following table sets forth summarized financial information for the Companys property casualty insurance subsidiaries, AIC, AGI and AVIC, for the six-month and three-month periods ended June 30, 2006
and 2005:



|                                               |  |                           |         |   |                             |   |         |          |  |      |      |  |   |         |   |  |          |         |   |  |      |   
|---------------------------------------------- |  | ------------------------- | ------- | - | --------------------------- | - | ------- | -------- |  | ---- | ---- |  | - | ------- | - |  | -------- | ------- | - |  | ---- | --
|                                               |  | Six Months Ended June 30, |         |   | Three Months Ended June 30, |  
|                                               |  | 2006                      |         |   | 2005                        |   |         | % Change |  |      | 2006 |  |   | 2005    |   |  | % Change |        
|                                               |  | (in thousands)            |        
|Earned premiums                                |  |                           |         |   |                             |   |         |          |  |      |      |  |   |         |   |  |          |         |   |  |      |   
|Personal lines                                 |  | $                         | 280,151 |   |                             | $ | 253,155 |          |  | 11   | %    |  | $ | 141,937 |   |  | $        | 129,043 |   |  | 10   | % 
|Commercial lines                               |  |                           | 8,211   |   |                             |   | 8,412   |          |  | (2   | )%   |  |   | 3,922   |   |  |          | 4,226   |   |  | (7   | )%
|Reinsurance ceded                              |  |                           | (1,949  | ) |                             |   | (1,660  | )        |  | 17   | %    |  |   | (1,097  | ) |  |          | (814    | ) |  | 35   | % 
|Reinsurance assumed                            |  |                           | 11,838  |   |                             |   | 11,043  |          |  | 7    | %    |  |   | 6,073   |   |  |          | 5,714   |   |  | 6    | % 
|                                               |  |                           |         |   |                             |   |         |          |  |      |      |  |   |         |   |  |          |         |   |  |      |   
|Total earned premiums                          |  | $                         | 298,251 |   |                             | $ | 270,950 |          |  | 10   | %    |  | $ | 150,835 |   |  | $        | 138,169 |   |  | 9    | % 
|                                               |  |                           |         |   |                             |   |         |          |  |      |      |  |   |         |   |  |          |         |   |  |      |   
|Net underwriting income                        |  | $                         | 27,145  |   |                             | $ | 29,798  |          |  | (9   | )%   |  | $ | 20,241  |   |  | $        | 22,002  |   |  | (8   | )%
|                                               |  |                           |         |   |                             |   |         |          |  |      |      |  |   |         |   |  |          |         |   |  |      |   
|Loss ratio                                     |  |                           | 58.2    | % |                             |   | 61.1    | %        |  |      |      |  |   | 54.2    | % |  |          | 56.0    | % |  |      |   
|LAE ratio                                      |  |                           | 4.9     | % |                             |   | 3.9     | %        |  |      |      |  |   | 5.0     | % |  |          | 4.3     | % |  |      |   
|Expense ratio                                  |  |                           | 27.8    | % |                             |   | 24.1    | %        |  |      |      |  |   | 27.4    | % |  |          | 23.7    | % |  |      |   
|GAAP basis combined ratio                      |  |                           | 90.9    | % |                             |   | 89.1    | %        |  |      |      |  |   | 86.6    | % |  |          | 84.0    | % |  |      |   
|Underwriting margin                            |  |                           | 9.1     | % |                             |   | 10.9    | %        |  |      |      |  |   | 13.4    | % |  |          | 16.0    | % |  |      |   
|Net investment income                          |  | $                         | 18,547  |   |                             | $ | 18,238  |          |  | 2    | %    |  | $ | 8,868   |   |  | $        | 8,927   |   |  | (1   | )%
|                                               |  |                           |         |   |                             |   |         |          |  |      |      |  |   |         |   |  |          |         |   |  |      |   
|Other income and fees                          |  | $                         | 6,833   |   |                             | $ | 4,222   |          |  | 62   | %    |  | $ | 3,420   |   |  | $        | 2,326   |   |  | 47   | % 
|                                               |  |                           |         |   |                             |   |         |          |  |      |      |  |   |         |   |  |          |         |   |  |      |   
|Pretax operating income                        |  | $                         | 52,525  |   |                             | $ | 52,258  |          |  | 1    | %    |  | $ | 32,529  |   |  | $        | 33,255  |   |  | (2   | )%
|                                               |  |                           |         |   |                             |   |         |          |  |      |      |  |   |         |   |  |          |         |   |  |      |   
|Operating income, net of tax                   |  | $                         | 38,600  |   |                             | $ | 39,539  |          |  | (2   | )%   |  | $ | 23,738  |   |  | $        | 24,039  |   |  | (1   | )%
|                                               |  |                           |         |   |                             |   |         |          |  |      |      |  |   |         |   |  |          |         |   |  |      |   
|Realized investment gains (losses), net of tax |  | $                         | (1,014  | ) |                             | $ | 211     |          |  | (581 | )%   |  | $ | (325    | ) |  | $        | (4      | ) |  | 8025 | % 
|                                               |  |                           |         |   |                             |   |         |          |  |      |      |  |   |         |   |  |          |         |   |  |      |   
|Net income                                     |  | $                         | 37,586  |   |                             | $ | 39,750  |          |  | (5   | )%   |  | $ | 23,413  |   |  | $        | 24,035  |   |  | (3   | )%
|                                               |  |                           |         |   |                             |   |         |          |  |      |      |  |   |         |   |  |          |         |   |  |      |   

Results of operations for this segment have been impacted by the following events in 2005 and 2006:



| |  |  | Effective January 1, 2005, the property casualty insurance Pooling Agreement (refer to Note 2  Pooling Agreement in the Notes to Consolidated Financial Statements
included in the Companys annual report for 2005 on Form 10-K) was modified as follows:
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | AVIC, which writes nonstandard automobile business in nine states, was added as a participant to the pool.
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | Fires quota share reinsurance agreement with Virginia Mutual was retroceded to the pool.
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | On January 3, 2005, the Company completed the purchase of Vision, a full-service managing general agency that writes nonstandard automobile insurance policies in nine states,
and provides all underwriting, claims, actuarial and financial services on behalf of its contracted carriers, which includes AVIC.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During the fourth quarter of 2005, a new property casualty policy administration system was implemented for the automobile line of business.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On January 1, 2006, the Company adopted SFAS No. 123(R).
| | - |  | --------------------------------------------------------

Property casualty insurance premiums increased $27.3 million, or 10%, for the six months ending June 30, 2006 with AVIC contributing $18.0 million and AIC and AGI contributing $9.3 million of the increase.



31



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##### Table of Contents

Virginia Mutual earned premium remained relatively flat at $10.7 million and $10.8 million for the six month periods ended June 30, 2006 and 2005,
respectively. For the quarter ending June 30, 2006, property casualty premiums increased $12.7 million, or 9%, with AVIC contributing $8.6 million and AIC and AGI contributing $4.1 million of the increase. Virginia Mutual earned premium for the
three months ending June 30, 2006 and 2005 remained relatively flat at $5.4 million and $5.5 million, respectively.

AVIC contributed $54.8 million of
written premium and $36.7 million of earned premium to the pool for the first six months of 2006 compared to $24.4 million of written premium and $8.9 million of earned premium for the same period in 2005. AVICs increase is a result of all
nine states being active during 2006 and overall production increases. Virginia Mutual, through the quota share agreement, contributed $14.4 million of written premium and $16.5 million of earned premium to the pool for the first six months of 2006
compared to $31.5 million of written premium for the same period in 2005, of which $16.9 million was related to unearned premium existing at December 31, 2004 with $14.6 million written during the first six months of 2005. In addition, Virginia
Mutual contributed $16.6 million of earned premium to the pool for the same period in 2005. The Companys pooled share of AVIC and Virginia Mutual premium is reported as $22.7 million of personal lines earned premiums and $11.8 million of
reinsurance assumed earned premiums in the table above for 2006 and $5.6 million of personal lines and $10.9 million of reinsurance assumed premiums for 2005.

For the three months ended June 30, 2006, AVIC contributed $20.4 million of written premium and $20.1 million of earned premium to the pool compared to $12.5 million of written premium and $6.8 million of earned premium for the same
period in 2005. Virginia Mutual contributed $7.6 million of written premium and $8.3 million of earned premium for the three months ended June 30, 2006 compared to $8.0 million of written premium and $8.4 million of earned premium for the same
period in 2005. The Companys pooled share of AVIC and Virginia Mutual premium for the three months ended June 30, 2006 is reported as $12.4 million of personal lines earned premiums and $6.0 of reinsurance assumed earned premium in the
table above and $4.3 million of personal lines and $5.6 million of reinsurance assumed premiums for the same period in 2005.

AIC and AGI contributed $9.3
million of earned premium growth during the first six months of 2006 and $4.1 million during the three months ended June 30, 2006. The growth from AIC and AGI is related to increases in personal lines for both policies inforce and written
premiums. During the first six months of 2006, earned premium for homeowner and manufactured home increased $5.3 million, automobile increased $3.2 million and farmowner increased $712 thousand.

The loss ratio for the six months ended June 30, 2006 related to AVIC business (including 0.3% of storm losses) was 63.5% and Virginia Mutual was 41.5%, which
represents 6.6% of the overall loss ratio of 58.2%. For the comparable period in 2005, the loss ratio for AVIC was 62.0% and Virginia Mutual was 44.3%, which represents 3.1% of the overall loss ratio of 61.1%. Also included in the loss ratio are
4.6% of catastrophe losses for 2006 and 4.3% for 2005. Alfa had six events totaling $78.0 million in gross catastrophe losses through June 30, 2006 compared to five events totaling $47.5 million in gross catastrophe losses during the same
period in 2005 due to the impact of tornadoes and other severe weather. Based upon the pooling agreement and the catastrophe protection program, the effect of claims from these events, on a pretax basis, was $13.8 million in 2006 compared to $11.6
million in 2005. On an after tax basis, underwriting results were impacted by $0.11 and $0.09 per share in 2006 and 2005, respectively. The Company reached the lower limit of the catastrophe protection program incurring storm losses of $3.9 million
during the second quarter of 2006, an after tax impact of $0.03 per share. The Company reached the lower limit in the first quarter of 2005.

The loss
ratio for the three months ended June 30, 2006 related to AVIC business (including 0.6% of second quarter storm losses) was 63.7% and Virginia Mutual was 36.2%, which represents 6.8% of the overall quarterly loss ratio of 54.2%. For the
comparable period in 2005, the loss ratio for AVIC was 61.2% and Virginia Mutual was 50.5%, which represents 4.0% of the overall quarterly loss ratio of 56.0%.

The loss ratio for AIC and AGI declined from 61.7% as of June 30, 2005 to 58.4% as of June 30, 2006. The overall loss ratio declined 2.9% from 61.1% in 2005 to 58.2% in 2006. For the quarter ending June 30, 2006, the loss
ratio for AIC and AGI was 54.0% a decrease of 2.1% over the comparable period in 2005. The overall quarterly loss ratio declined 1.8% from 56.0% in 2005 to 54.2% in 2006. Also included in the loss ratio for the current quarter are 2.6% of
catastrophe losses for 2006. There are no catastrophe losses in the second quarter of 2005 since the Company reached the lower limit in the first quarter of 2005. For additional information on the pooling agreement and catastrophe protection
program, refer to Note 2 



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##### Table of Contents

Pooling Agreement in the Notes to Consolidated Financial Statements included in the Companys annual report for 2005 on Form 10-K.

The LAE ratio has been impacted by AVIC and Virginia Mutual by 0.9% and 0.2% in the first six months of 2006 and 2005, respectively. Technology costs have impacted the
LAE ratio by 0.1% in 2006. For the three months ended June 30, 2006 and 2005, the LAE ratio has been impacted by AVIC and Virginia Mutual by 1.0% and 0.4%, respectively. Technology costs have impacted the LAE ratio by 0.1% for the three months
ended June 30, 2006.

For the six months ended June 30, 2006, the expense ratio has been impacted 3.2% by AVICs expense structure, 1.3% by
Virginia Mutual, 0.5% with the adoption of SFAS No. 123(R) and 0.7% due to technology costs. For the same period in 2005, the expense ratio was impacted 1.0% by AVIC and 1.4% by Virginia Mutual. For the three months ended June 30, 2006,
the expense ratio has been impacted 3.4% by AVICs expense structure, 1.3% by Virginia Mutual, 0.3% with the adoption of SFAS No. 123(R) and 0.8% due to technology costs. For the same three-month period in 2005, the expense ratio was
impacted 1.4% by AVIC and 1.4% by Virginia Mutual.

The overall higher expense structures of AVIC and Virginia Mutual, along with the impact of SFAS
No. 123(R) and technology costs offset by a decline of 2.9% in the overall loss ratio produced an underwriting margin of 9.1% in 2006, compared with 10.9% in 2005. Underwriting margin, a non-GAAP financial measure, represents the percentage of
each premium dollar earned which remains after losses, loss adjustment expenses and other operating expenses. For the quarter ending June 30, 2006, the underwriting margin was 13.4% compared to 16.0% for the same period in 2005. This decrease
of 2.6% was due to the overall higher expense structure for AVIC and Virginia Mutual, impact of SFAS No. 123(R) and increased technology costs offset by a decline in the overall quarterly loss ratio of 1.8%.

Other income and fees increased $2.6 million and $1.1 million for the six and three months ended June 30, 2006, respectively, due to the increased production of
AVIC.

Net investment income increased only 2% for the six months ended June 30, 2006, as a result of lower partnership income and a decline in
interest income on fixed maturities offset by increases in dividend income and short-term investments. For the three months ended June 30, 2006 compared to the same period in 2005, net investment income declined slightly due to lower
partnership income and a decline in interest income on fixed maturities offset by increases in dividend income and short-term investments.

For the six
months ended June 30, 2006, pretax operating income increased $267 thousand and operating income, net of tax, decreased $939 thousand as a result of the increase in the effective tax rate to 26.5% from 24.3%. The tax rate for 2005 was impacted
by the Companys release of a reserve for tax exposure items while 2006 was impacted by a change in the Companys tax allocation agreement. For the quarter ended June 30, 2006, pretax operating income decreased $726 thousand while
operating income, net of tax, decreased $301 thousand with a slight decrease in the effective tax rate from 27.7% to 27.0%.

Realized investment losses,
net of tax, increased $1.2 million, or 581%, for the six months ended June 30, 2006 as a result of lower gains on equity securities and increased losses on tax credit partnerships. On a pretax basis, writedowns increased from $311 thousand in
the six first months of 2005 to $333 thousand in 2006. For the three months ended June 30, 2006, realized investment losses, net of tax, increased $321 thousand as a result of increased losses on tax credit partnerships and lower gains on
equity securities and fixed maturities. On a pretax basis, writedowns decreased from $311 thousand in the three months ended June 30, 2005 to $299 thousand in the same period in 2006.



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##### Table of Contents

LIFE INSURANCE OPERATIONS

The following table sets forth summarized financial information for the Companys life insurance subsidiary, Life, for the six-month and three-month periods ended June 30, 2006 and 2005:



|                                                  |  |                           |        |      |                             |          |  |    |      |  |      |        |          |   |        |  |    |   
|------------------------------------------------- |  | ------------------------- | ------ | ---- | --------------------------- | -------- |  | -- | ---- |  | ---- | ------ | -------- | - | ------ |  | -- | --
|                                                  |  | Six Months Ended June 30, |        |      | Three Months Ended June 30, |         
|                                                  |  | 2006                      |        | 2005 |                             | % Change |  |    | 2006 |  | 2005 |        | % Change |  
|                                                  |  | (in thousands)            |       
|Premiums and policy charges                       |  |                           |        |      |                             |          |  |    |      |  |      |        |          |   |        |  |    |   
|Universal life policy charges                     |  | $                         | 10,795 |      | $                           | 10,280   |  | 5  | %    |  | $    | 5,403  |          | $ | 5,198  |  | 4  | % 
|Universal life policy charges - COLI              |  |                           | 2,478  |      |                             | 2,262    |  | 10 | %    |  |      | 779    |          |   | 703    |  | 11 | % 
|Interest sensitive life policy charges            |  |                           | 5,484  |      |                             | 5,481    |  | 0  | %    |  |      | 2,742  |          |   | 2,792  |  | (2 | )%
|Traditional life insurance premiums               |  |                           | 22,349 |      |                             | 19,787   |  | 13 | %    |  |      | 11,094 |          |   | 9,213  |  | 20 | % 
|Group life insurance premiums                     |  |                           | 491    |      |                             | 517      |  | (5 | )%   |  |      |       |          |   |       |  | 0  | % 
|                                                  |  |                           |        |      |                             |          |  |    |      |  |      |        |          |   |        |  |    |   
|Total premiums and policy charges                 |  | $                         | 41,597 |      | $                           | 38,327   |  | 9  | %    |  | $    | 20,018 |          | $ | 17,906 |  | 12 | % 
|                                                  |  |                           |        |      |                             |          |  |    |      |  |      |        |          |   |        |  |    |   
|Net investment income                             |  | $                         | 27,306 |      | $                           | 25,289   |  | 8  | %    |  | $    | 13,716 |          | $ | 13,062 |  | 5  | % 
|                                                  |  |                           |        |      |                             |          |  |    |      |  |      |        |          |   |        |  |    |   
|Benefits and expenses                             |  | $                         | 49,112 |      | $                           | 43,725   |  | 12 | %    |  | $    | 24,001 |          | $ | 21,273 |  | 13 | % 
|                                                  |  |                           |        |      |                             |          |  |    |      |  |      |        |          |   |        |  |    |   
|Amortization of deferred policy acquisition costs |  | $                         | 5,894  |      | $                           | 5,167    |  | 14 | %    |  | $    | 2,950  |          | $ | 2,693  |  | 10 | % 
|                                                  |  |                           |        |      |                             |          |  |    |      |  |      |        |          |   |        |  |    |   
|Pretax operating income                           |  | $                         | 13,897 |      | $                           | 14,724   |  | (6 | )%   |  | $    | 6,783  |          | $ | 7,002  |  | (3 | )%
|                                                  |  |                           |        |      |                             |          |  |    |      |  |      |        |          |   |        |  |    |   
|Operating income, net of tax                      |  | $                         | 9,589  |      | $                           | 10,136   |  | (5 | )%   |  | $    | 4,709  |          | $ | 5,024  |  | (6 | )%
|                                                  |  |                           |        |      |                             |          |  |    |      |  |      |        |          |   |        |  |    |   
|Realized investment gains, net of tax             |  | $                         | 2,204  |      | $                           | 1,736    |  | 27 | %    |  | $    | 1,433  |          | $ | 1,225  |  | 17 | % 
|                                                  |  |                           |        |      |                             |          |  |    |      |  |      |        |          |   |        |  |    |   
|Net income                                        |  | $                         | 11,793 |      | $                           | 11,872   |  | (1 | )%   |  | $    | 6,142  |          | $ | 6,249  |  | (2 | )%
|                                                  |  |                           |        |      |                             |          |  |    |      |  |      |        |          |   |        |  |    |   

Results of operations for this segment have been impacted by the following events in 2006:



| |  |  | On January 1, 2006, the Company adopted SFAS No. 123(R).
| | - |  | --------------------------------------------------------



| |  |  | Effective January 1, 2006, a new life policy administration system was implemented with three new product offerings:
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | return of premium level term life
| | - |  | ---------------------------------



| |  |  | single premium non-qualified annuity
| | - |  | ------------------------------------



| |  |  | flexible premium non-qualified annuity
| | - |  | --------------------------------------

Lifes premiums and policy
charges increased $3.3 million, or 9%, for the six months ended June 30, 2006 and $2.1 million or 12% for the three months ended June 30, 2006.

Life insurance premiums increased $2.5 million or, 12% for the first six months of 2006 and $1.9 million or, 20% for the second quarter of 2006. This growth is attributable to increases in term life insurance premiums of $2.3 million for
the six months ended June 30, 2006 and $1.2 million for the quarter ended June 30, 2006. In addition, term life policies inforce on a year to date basis have increased 7.5%. During January 2006, Life began offering a return of premium
level term life product which contributed $1.3 million of the $2.5 million increase in life insurance premiums for the six months ended June 30, 2006 and $800 thousand of the $1.9 million increase for the three months ended June 30, 2006.

Life insurance policy charges increased $734 thousand during the first six months of 2006 and $231 thousand for the three months ended June 30, 2006
primarily due to an increase in universal life policy charges. This growth is attributable to increases in fund balances which the charges are assessed against along with a slight increase of 0.7% in the number of universal life policies inforce.



34



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##### Table of Contents

On a statutory accounting basis, issued annualized new business premium increased by 34% to $10.2 million with a total
volume of $2 billion of insurance being issued for the six months ended June 30, 2006. The new product offerings for 2006 contributed as follows: return of premium level term  4,471 policies issued, $3.2 million of issued annualized new
business premium and volume of $811 million of insurance issued; annuities  39 policies issued and $817 thousand of issued annualized new business premium. The new product offerings for the three months ended June 30, 2006 contributed as
follows: return of premium level term  1,690 policies issued, $1.2 million of issued annualized new business premium and volume of $308 million of insurance issued; annuities  8 policies issued and $117 thousand of issued annualized new
business premium.

Total life insurance inforce as of June 30, 2006 increased $1.4 billion, with term insurance increasing $1.3 billion, or 13%
compared to the same period in 2005. Annualized premiums for inforce business increased 6.1%, or $7.6 million, with term insurance increasing 15% or $4.9 million. Policies inforce increased 1.1% for the six months ending June 30, 2006 compared
to the same period in 2005. The persistency ratio for life business was 91.2% at June 30, 2006, compared to 91.0% at June 30, 2005.

The
mortality ratio increased to 101% of expected in the first six months of 2006 from 87% of expected in the first six months of 2005 and for the quarter ended June 30, 2006, increased to 106% of expected from 85% of expected for the same period
in 2005. The result was an increase of $4.0 million in benefits and claims expense for the six months ended June 30, 2006 and $2.4 million in the three months ended June 30, 2006. Operating expenses have increased $1.3 million for the six
months ended June 30, 2006 with SFAS No. 123(R) adding $148 thousand, the new policy administration system adding $529 thousand and legal costs adding $352 thousand due to a reduction of $500 thousand in legal reserves in 2005. Operating
expenses for the three months ended June 30, 2006 have increased $322 thousand with SFAS No. 123(R) adding $32 thousand and the new policy administration system adding $286 thousand. Amortization of deferred policy acquisition costs have
increased both for the six and three months ended June 30, 2006 as a result of growth in deferred costs related to new business production increases.

Invested assets increased 1.4% since December 31, 2005, while net investment income increased 8%. Interest income on fixed maturities increased 6% and 4% during the six-month and three-month periods ending June 30, 2006,
respectively. Realized investment gains, net of tax, increased $468 thousand, or 27%, for the six months ended June 30, 2006 as a result of increased gains on equity securities and fixed maturities. On a pretax basis, writedowns increased from
$972 thousand in the first six months of 2005 to $1.5 million in 2006. For the three months ended June 30, 2006, realized investment gains, net of tax, increased $208 thousand as a result of decreased losses on tax credit partnerships and
higher gains on equity securities. On a pretax basis, writedowns increased from $830 thousand in the three months ended June 30, 2005 to $1.5 million in the same period in 2006.

NONINSURANCE OPERATIONS

The following discussion relates to the Companys noninsurance subsidiaries, Financial,
Vision, AAM, AAG and ABC.

Results of operations for this segment have been impacted by the following events in 2005 and 2006:



| |  |  | On January 3, 2005, the Company completed the purchase of Vision, a full-service managing general agency that currently writes nonstandard automobile insurance policies in nine
states. In addition, during 2005, Vision wrote a limited amount of homeowner business through other carriers as a general agency. Vision is headquartered in Brentwood, Tennessee and provides all underwriting, claims, actuarial and financial services
on behalf of its contracted carriers, which includes AVIC.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On December 31, 2005, the Company completed the sale of a substantial portion of its commercial lease portfolio and other assets, net of related liabilities, to OFC Servicing
Corporation, a wholly-owned subsidiary of MidCountry Financial Corporation (MidCountry).
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On January 1, 2006, the Company adopted SFAS No. 123(R).
| | - |  | --------------------------------------------------------



| |  |  | During the second quarter of 2006, management became aware of fraudulent activity occurring within Financial. The misconduct was determined to be limited to the acts of a single
person. As a result, the Company has provided for a charge of $5.5 million on a pre-tax basis and $3.6 million on an after tax basis or a $0.04 impact of earnings per share in the second quarter to write-off these fraudulently originated loans.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Noninsurance operating income decreased $2.9 million to an operating loss of $1.8 million for the six months ended
June 30, 2006 compared to operating income of $1.1 million in 2005. For the three months ended June 30, 2006, Noninsurance operating income decreased $3 million to an operating loss of $2.8 million compared to operating income of $200
thousand for the same period of 2005. Included in operating expenses for this segment is $55 thousand of SFAS No. 123(R) expense for the six months ended June 30, 2006 and $26 thousand for the three months ended June 30, 2006.

Agency operations for the six months ended June 30, 2006 produced an increase in net income of $1.1 million, with all of the increase attributable to
increased production by Vision for AVIC. For the three months ended June 30, 2006, agency operations increased net income by $538 thousand.

During
June 2006, loans were written off totaling $5.5 million as a result of fraudulent activity by one agent. Despite the increases in loan losses, the loan operations in Financial continue to grow with a 10.5% increase in the loan portfolio, an increase
in the loan portfolio yield to 7.66% from 7.16%, and a delinquency ratio of 1.36%. Interest rate increases during the year reduced margins slightly. Equity in net earnings (after internal capital charge) of MidCountry decreased $104 thousand, or
11.5% for the year. MidCountry had an increase in equity earnings of $166 thousand offset by internal capital costs increase of $270 thousand. These components of Financial produced a net loss of $2.1 million for 2006 compared to net income of $1.7
million in 2005. For the quarter ended June 30, 2006, Financial produced a net loss of $3 million compared to net income of $608 thousand for the same period in 2005.

Commercial lease operations in Financial produced a net loss of $1.1 million for the first six months of 2006 as a result of servicing fee expense and legal expenses. For the three months ended June 30, 2006, the
commercial lease operations produced a net loss of $593 thousand. The results for the same periods in 2005 are comparable to 2006.

ABC had operating
income of $193 thousand for the first six months of 2006, compared to operating income of $372 thousand for the same period in 2005. The decrease of $179 thousand is a result of increased benefit expenses offset by increases in net investment
income. For the three months ended June 30, 2006, ABC had operating income of $214 thousand compared to $145 thousand for the same period in 2005.

CORPORATE OPERATIONS

The following discussion relates to the Companys corporate operations and intercompany eliminations between the
Company and its subsidiaries.

Corporate expenses, including the impact of eliminations, decreased $681 thousand during the first six months of 2006 and
$717 thousand during the three months ended June 30, 2006 due primarily to an increase in borrowing costs offset by the reversal of an elimination of profits generated by transactions between the property casualty segment and Vision from 2005,
a change in the Companys tax allocation agreement and decreases in legal costs. Unfavorable increases in short-term interest rates on the commercial paper borrowings attributable to corporate functions led the Companys interest expense
to rise by $964 thousand for the six months ended June 30, 2006 and $544 thousand for the three months ended June 30, 2006. The weighted average rate increased over two hundred basis points from 3.16% at June 30, 2005 to 5.19% at
June 30, 2006. Included in operating expenses for this segment is $66 thousand of SFAS No. 123(R) expense for the six months ended June 30, 2006 and $25 thousand for the three months ended June 30, 2006.



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##### Table of Contents

INVESTMENTS

The
Company has historically produced positive cash flow from operations which has resulted in increasing amounts of funds available for investment and, consequently, higher investment income. Investment income is also affected by investment yields.
Information about cash flows, invested assets and yields are presented below for the six months ended June 30, 2006 and 2005:



|                                                           |  |                          |    |  |       |   
|---------------------------------------------------------- |  | ------------------------ | -- |  | ----- | --
|                                                           |  | Six Months EndedJune 30, |   
|                                                           |  | 2006                     |    |  | 2005  |   
|Increase (decrease) in cash flow from operations           |  | 54.4                     | %  |  | (24.6 | )%
|Increase in invested assets since January 1, 2006 and 2005 |  | 2.0                      | %  |  | 3.3   | % 
|Investment yield rate                                      |  | 5.5                      | %  |  | 5.9   | % 
|Increase (decrease) in net investment income               |  | (11.1                    | )% |  | 3.3   | % 

As a result of the overall positive cash flows from operations, invested assets grew 2.0% since December 31,
2005 while net investment income decreased 11.1%. The increase in cash flow from operations in the first six months of 2006 was due primarily to increases in policy liabilities. Property casualty underwriting income of $27.1 million in the first six
months of 2006 and $29.8 million in the first six months of 2005 positively impacted cash flow from operations. The premium collection from the COLI plan in the life insurance subsidiary provided positive cash flow in the first quarter of both
periods. A net decrease in cash resulted from decreased borrowings primarily resulting from positive cash flows and payments received as consideration for receivables from affiliates. During the first half of 2006, the Company also increased its
investment in fixed maturity securities by approximately $55.4 million. The Companys decrease in net investment income resulted primarily from the write off of loans totaling $5.5 million in Financials loan portfolio, increased borrowing
costs, reduced income from an equity-method investment in MidCountry and lower partnership earnings. These items were partially offset by increased earnings on fixed maturities, equity securities and short-term investments.

The overall yield rate, calculated using amortized cost, declined in the first half of 2006 to 5.5%. The Company had net realized investment gains before income taxes of
$1.8 million in the first six months of 2006 compared to realized investment gains of $3.0 million during the same period in 2005. These gains are primarily from sales of equity securities offset by writedowns of equity securities of $1.8 million.
Such realized gains on sales of equity securities 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, 2006 and December 31, 2005:



|                                          |  |               |   |  |                   |  
|----------------------------------------- |  | ------------- | - |  | ----------------- | -
|                                          |  | June 30, 2006 |   |  | December 31, 2005 |  
|Fixed maturities                          |  |               |   |  |                   |  
|Taxable                                   |  |               |   |  |                   |  
|Mortgage-backed (CMOs)                   |  | 33.2          | % |  | 31.3              | %
|Corporate bonds                           |  | 21.6          |   |  | 23.5              |  
|                                          |  |               |   |  |                   |  
|Total taxable                             |  | 54.8          |   |  | 54.8              |  
|Tax exempts                               |  | 15.4          |   |  | 16.1              |  
|                                          |  |               |   |  |                   |  
|Total fixed maturities                    |  | 70.2          |   |  | 70.9              |  
|Equity securities                         |  | 5.4           |   |  | 5.4               |  
|Policy loans                              |  | 3.1           |   |  | 3.1               |  
|Collateral loans                          |  | 6.4           |   |  | 6.2               |  
|Commercial leases                         |  | 0.1           |   |  | 0.1               |  
|Other long-term investments               |  | 4.2           |   |  | 3.1               |  
|Other long-term investments in affiliates |  | 6.4           |   |  | 7.0               |  
|Short-term investments                    |  | 4.2           |   |  | 4.2               |  
|                                          |  |               |   |  |                   |  
|Total                                     |  | 100.0         | % |  | 100.0             | %
|                                          |  |               |   |  |                   |  

The majority of the Companys investment portfolio consists of fixed maturities that are diverse as to both
industry and geographic concentration. In the first six months of 2006, the overall mix of investments shifted due to additional investments in partnerships yielding tax credits.



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##### Table of Contents

The rating of the Companys portfolio of fixed maturities using the Standard & Poors rating
categories is as follows at June 30, 2006 and December 31, 2005:



|                                       |  |               |   |  |                   |  
|-------------------------------------- |  | ------------- | - |  | ----------------- | -
|                                       |  | June 30, 2006 |   |  | December 31, 2005 |  
|AAA to A-                              |  | 92.2          | % |  | 90.8              | %
|BBB+ to BBB-                           |  | 6.1           |   |  | 7.3               |  
|BB+ and below (below investment grade) |  | 1.7           |   |  | 1.9               |  
|                                       |  |               |   |  |                   |  
|                                       |  | 100.0         | % |  | 100.0             | %
|                                       |  |               |   |  |                   |  

At June 30, 2006, all securities in the fixed maturity portfolio were rated by an outside rating service. The
Company considers bonds with a quality rating of BB+ and below to be below investment grade or high yield bonds (also called junk bonds).

At June 30,
2006, 47.3% of fixed maturities were mortgage-backed securities. Such securities are comprised of Collateral Mortgage Obligations (CMOs) and pass through securities. Based on reviews of the Companys portfolio of mortgage-backed
securities, the impact of prepayment risk on the Companys financial position and results from operations is not believed to be significant. For further information on market risks, reference is made to Managements Discussion and Analysis
of Results of Operations in the Companys annual report on Form 10-K for the year ended December 31, 2005. At June 30, 2006, the Companys total portfolio of fixed maturities had gross unrealized gains of $20.8 million and gross
unrealized losses of $36.6 million. All securities are priced by nationally recognized pricing services or by broker/dealers securities firms. During the first six months of 2006, the Company sold $76.9 million in fixed maturities available for
sale. These sales resulted in gross realized gains of $1.1 million and gross realized losses of $582 thousand. During the same period in 2005, the Company sold $64.1 million in fixed maturities available for sale. These sales resulted in gross
realized gains of $155 thousand and gross realized losses of $1.6 million.

The Company monitors its level of investments in high yield fixed maturities
and its level of equity investments in companies that issue high yield debt securities. Management believes the level of such investments is not significant to the Companys financial condition. At June 30, 2006, the Company had unrealized
gains in such investments of $952 thousand compared to $134 thousand at December 31, 2005. The Company recognized a net gain of $420 thousand on the disposal of high yield debt securities in the first six months of 2006. No such disposals
occurred during the same period of 2005.

It is the Companys policy to write down securities for which declines in value have been deemed to be other
than temporary. The amount written down represents the difference between the cost or amortized cost and the fair value at the time of determining the security was impaired. Quarterly reviews are conducted by the Company to ascertain which
securities, if any, have become impaired in value. Investments in securities entail general market risk as well as company specific risk. During the first six months of 2006, the Company wrote down six equity securities totaling $1.8 million for
which declines in value were deemed to be other than temporary. During the first six months of 2005, the Company wrote down three bond issues totaling $671 thousand and four equity securities totaling $612 thousand for which the decline in value was
deemed to be other than temporary. There were no non-performing bonds included in the portfolio at either June 30, 2006 or December 31, 2005.

The Companys investment in collateral loans and commercial leases consists primarily of consumer loans and commercial leases originated by the finance subsidiary. The majority of the commercial lease portfolio was sold in the fourth
quarter of 2005. Automobiles, equipment and other property collateralize the Companys loans and leases. At June 30, 2006, the delinquency ratio on the loan portfolio was 1.36% or $1.6 million. Loans charged off in the first six months of
2006 totaled $6.0 million, including $5.5 million charged off in the second quarter of 2006 following the investigation of a single agents misconduct. At June 30, 2006, the Company maintained an allowance for loan losses of $1.6 million
or 1.2% of the outstanding loan balance. In addition, at June 30, 2006, the Company maintained an allowance for lease losses of $1.2 million or 42.6% of the outstanding lease balance. Leases charged off during the second quarter of 2006 totaled
$328 thousand. Other significant long-term investments include assets leased under operating leases, partnership investments and other equity-method investments.



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##### Table of Contents

The Company periodically invests in affordable housing tax credit partnerships. At June 30, 2006, the Company had
legal and binding commitments to fund partnerships of this type in the amount of $35.5 million. The Companys carrying value of such investments was $65.7 million at June 30, 2006.

The Companys finance subsidiary has invested $49.6 million in MidCountry, a financial services holding company. Financial accounts for earnings from MidCountry
using the equity method of accounting. Pretax operating income was $803 thousand in the first six months of 2006 compared to $907 thousand for the same period in 2005.

INCOME TAXES

The effective tax rate in the first six months of 2006 was 27.1% compared to 28.2% for the full year
2005 and 27.1% for the first six months of 2005. The decrease from the 2005 full year effective rate is due to a 2005 year end adjustment for taxes relating to ABC. Based on information available at June 30, 2006, the Company currently
anticipates the effective tax rate recorded in the financial statements for the six-month period ending June 30, 2006 to remain at 27.1% for all of 2006.

IMPACT OF INFLATION

Inflation increases consumers needs for both life and property casualty insurance coverage. Inflation increases
claims incurred by property casualty insurers as property repairs, replacements and medical expenses increase. Such cost increases reduce profit margins to the extent that rate increases are not maintained on an adequate and timely basis. Since
inflation has remained relatively low in recent years, financial results have not been significantly impacted by inflation.

LIQUIDITY AND CAPITAL
RESOURCES

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

The Companys subsidiaries require cash in order to fund policy acquisition costs, claims, other policy benefits, interest expense,
general operating expenses, and dividends to the Company. The major sources of the subsidiaries 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 that 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 inforce, management believes the
ultimate exposure to loss from interest rate fluctuations is not significant.

Primary Source of Liquidity

Net cash provided by operating activities for the first six months approximated $67 million and $43 million in the first six months of 2006 and 2005, 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 that 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 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.

Contractual Obligations and Commitments

In evaluating current and potential financial performance of any corporation, investors often wish to view the contractual obligations and commitments of the entity. The Company has contractual obligations in the form
of long-term debt, benefit obligations to policyholders and leases. These leases have primarily been originated by its insurance subsidiaries and Vision. Operating leases supporting the corporate operations are the responsibility of Mutual. 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.



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##### Table of Contents

The Companys contractual obligations at June 30, 2006 are summarized below:



|                                                                |  |                        |               |                  |   |             |  |           |             |               |   |             |  |   |              
|--------------------------------------------------------------- |  | ---------------------- | ------------- | ---------------- | - | ----------- |  | --------- | ----------- | ------------- | - | ----------- |  | - | -------------
|                                                                |  | Payments Due by Period
|                                                                |  | Total                  |               | Less than 1 year |   | 1-3 years   |  | 4-5 years |             | After 5 years
|Operating leases                                                |  | $                      | 3,488,979     |                  | $ | 1,181,226   |  | $         | 1,649,144   |               | $ | 658,609     |  | $ |             
|Capital lease obligations                                       |  |                        | 83,239        |                  |   | 83,239      |  |           |            |               |   |            |  |   |             
|Unconditional purchase obligations                              |  |                        |              |                  |   |            |  |           |            |               |   |            |  |   |             
|Notes payable to affiliates                                     |  |                        | 32,395,419    |                  |   | 32,395,419  |  |           |            |               |   |            |  |   |             
|Long-term debt (1)                                              |  |                        | 70,000,000    |                  |   |            |  |           |            |               |   |            |  |   | 70,000,000   
|Interest on long-term debt (1)                                  |  |                        | 42,381,759    |                  |   | 3,878,000   |  |           | 7,766,625   |               |   | 7,756,000   |  |   | 22,981,134   
|Property casualty loss and loss adjustment expense reserves (2) |  |                        | 172,542,610   |                  |   | 132,857,810 |  |           | 36,233,948  |               |   | 3,450,852   |  |   |             
|Future life insurance obligations (3)                           |  |                        | 1,927,667,592 |                  |   | 65,486,592  |  |           | 193,622,000 |               |   | 137,243,000 |  |   | 1,531,316,000
|Other long-term obligations                                     |  |                        |              |                  |   |            |  |           |            |               |   |            |  |   |             
|                                                                |  |                        |               |                  |   |             |  |           |             |               |   |             |  |   |              
|Total contractual obligations                                   |  | $                      | 2,248,559,598 |                  | $ | 235,882,286 |  | $         | 239,271,717 |               | $ | 149,108,461 |  | $ | 1,624,297,134
|                                                                |  |                        |               |                  |   |             |  |           |             |               |   |             |  |   |              



|(1) | Long-term debt is assumed to be settled at its contractual maturity. Interest on long-term debt is calculated using interest rates in effect at June 30, 2006 for variable
rate debt. For additional information refer to Note 8, Commercial Paper and Notes Payable, in the Notes to Consolidated Financial Statements of Form 10-K for the fiscal year ended December 31, 2005.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | The anticipated payout of property casualty loss and loss adjustment expense reserves are based upon historical payout patterns. Both the timing and amount of these payments may
vary from the payments indicated.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Future life insurance obligations consist primarily of estimated future contingent benefit payments on policies inforce at December 31, 2005 adjusted for outstanding claim
reserves at June 30, 2006. These estimated payments are computed using assumptions for future mortality, morbidity and persistency. The actual amount and timing of such payments may differ significantly from the estimated
amounts. Management believes that assets, future premiums and investment income will be sufficient to fund all future life insurance obligations.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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, 2006, the cash outlay by the Company representing the potential
full 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 2006 with the Companys finance subsidiary. Other commercial commitments of the Company shown below include commercial paper outstanding, scheduled fundings of partnerships, potential performance payouts
related to Vision and funding of a policy administration system project of the life subsidiary.



|                               |  |                                            |             |                  |   |             |  |           |            |               |   |            |  |   |          
|------------------------------ |  | ------------------------------------------ | ----------- | ---------------- | - | ----------- |  | --------- | ---------- | ------------- | - | ---------- |  | - | ---------
|                               |  | Amount of Commitment Expiration Per Period
|                               |  | Total AmountsCommitted                     |             | Less than 1 year |   | 1-3 years   |  | 4-5 years |            | After 5 years
|Lines of credit                |  | $                                          | 42,987,635  |                  | $ | 22,100,000  |  | $         | 20,887,635 |               | $ |           |  | $ |         
|Standby letters of credit      |  |                                            | 37,000      |                  |   | 37,000      |  |           |           |               |   |           |  |   |         
|Guarantees                     |  |                                            | 1,593,232   |                  |   | 200,000     |  |           |            |               |   |           |  |   | 1,393,232
|Standby repurchase obligations |  |                                            |            |                  |   |            |  |           |           |               |   |           |  |   |         
|Other commercial commitments   |  |                                            | 277,631,868 |                  |   | 236,363,315 |  |           | 11,901,810 |               |   | 21,500,503 |  |   | 7,866,240
|                               |  |                                            |             |                  |   |             |  |           |            |               |   |            |  |   |          
|Total commercial commitments   |  | $                                          | 322,249,735 |                  | $ | 258,700,315 |  | $         | 32,789,445 |               | $ | 21,500,503 |  | $ | 9,259,472
|                               |  |                                            |             |                  |   |             |  |           |            |               |   |            |  |   |          

Certain commercial commitments in the table above include items that may, in the future, require recognition
within the financial statements of the Company. Events leading to the call of a guarantee, the failure of the policy administration system being developed for use by the life insurance operations to perform properly and achievement of specific
metrics by Vision are examples of situations that would impact the financial position and results of the Company.



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##### Table of Contents

Credit Risk

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, the primary source of funding portfolio growth, could reduce the interest rate spread if the Company
failed to adequately adjust interest rates charged to customers.

Debt

Total borrowings increased $13.5 million in the first six months of 2006 to $318.2 million. The majority of the short-term debt is commercial paper issued by the Company. At June 30, 2006, the Company had $215.8
million in commercial paper at rates ranging from 5.05% to 5.30% with maturities ranging from July 5, 2006 to July 17, 2006. The Company intends to continue to use the commercial paper program as a major source to fund the consumer loan
portfolio and other corporate short-term needs. Backup lines of credit are in place up to $300 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,
Mutual and Fire. In addition, the Company had $32.4 million in short-term debt outstanding to affiliates at June 30, 2006 with interest payable monthly at rates established using the existing commercial paper rate and renewable for multiples of
30-day periods at the commercial paper rate then applicable.

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 on June 1, 2017 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 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%.

Company Stock

On October 25, 1993, the Company established a Stock Incentive Plan (the 1993 Plan). The 1993 Plan was subsequently
amended on April 26, 2001. On April 28, 2005, the Companys stockholders approved the 2005 Amended and Restated Stock Incentive Plan (the 2005 Plan). This Plan amends and restates the 1993 Plan. The 2005 Plan permits the grant of a
variety of equity-based incentives based upon the Companys common stock, par value $1.00 per share. These include stock options, which may be either incentive stock options as that term is defined in Section 422 of the
Internal Revenue Code of 1986, as amended or nonqualified options. The 2005 Plan also permits awards of Stock Appreciation Rights, Restricted Shares, Restricted Share Units and Performance Shares. A maximum of 3,800,000 shares of stock
may be issued under the 2005 Plan. During the first two quarters of 2006, the Company granted 74,000 awards of restricted stock to certain officers and issued 452,000 nonqualified options under the 2005 Plan. At June 30, 2006, 3,192,820 shares
were available for grant.

In October 1989, the Companys Board of Directors approved a stock repurchase program authorizing the repurchase of up to
4,000,000 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. The Board increased the number of shares authorized for repurchase by
4,000,000 in both March 1999 and September 2001, bringing the total number of shares authorized for repurchase to 12,000,000. Repurchases of 86,400 shares totaling $1,340,359 were made during the second quarter of 2006 (refer to Part II,
Item 2Unregistered Sales of Equity Securities and Use of Proceeds of this Form 10-Q). At June 30, 2006, the total repurchased was 8,353,023 shares at a cost of $66,723,743. The Company has reissued 2,926,552 treasury shares as a
result of option exercises and sold 1,607,767 shares through funding its dividend reinvestment plan. In January 2005, the Company issued 325,035 non-registered shares to fund a portion of the acquisition of Vision.



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##### Table of Contents

Reserves for Policyholder Benefits

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
$10.6 million and $8.5 million in the first six months of 2006 and 2005, respectively. This level of surrenders is within the Companys pricing expectations. Historical persistency rates indicate a normal pattern of surrender activity in both
periods. The structure of the surrender charges is such that persistency is encouraged. The majority of the policies inforce have surrender charges which grade downward over a 12 to 15 year period. At June 30, 2006, the total amount of cash
that would be required to fund all amounts subject to surrender was $680.1 million.

Reserves for Property Casualty Losses and Loss Adjustment Expenses

Losses and loss adjustment expenses payable are managements best estimates at a given point in time of what the Company expects to pay claimants,
based on known facts, circumstances, historical trends, emergence patterns and settlement patterns. Reserves for reported losses are established on a case-by-case basis with the amounts determined by claims adjusters based on the Companys
reserving practices, which take into account the type of risk, the circumstances surrounding each claim and policy provisions relating to types of loss. Loss and loss adjustment expense reserves for incurred claims that have not yet been reported
(IBNR) are estimated based primarily on historical emergence patterns with consideration given to many variables including statistical information, inflation, legal developments, storm loss estimates, and economic conditions.

On an interim basis, the Companys internal actuarial staff reviews the direct emergence for each line of business compared to the expected emergence implied by the
most recent annual review. If the emergence is not within acceptable bounds, the opinion on reserve adequacy is revised and reserve amounts are adjusted. Otherwise, IBNR reserves are adjusted as changes in exposure indicate that additional reserves
are needed until the next annual review is completed.

Management establishes reserves for loss adjustment expenses that are not attributable to a specific
claim. These reserves are referred to as Defense and Cost Containment (DCC) and Adjusting and Other Expenses (AO). DCC and AO reserves are recorded to establish the liability for settling and defending claims that have been incurred, but have not
yet been completely settled.

For AO, historical ratios of AO to paid losses are developed, and then applied to the current outstanding reserves. The
method uses a traditional assumption that 50% of the expenses are realized when the claim is open, and the other 50% are incurred when the claim is closed. The method also assumes that the underlying claims process and mix of business do not change
materially over time.



42



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The following table presents the loss and loss adjustment expenses payable by line of business at June 30, 2006 and
December 31, 2005:



|                                                       |  |                   |             |      |   |            |  |       |            |  |   |             |  
|------------------------------------------------------ |  | ----------------- | ----------- | ---- | - | ---------- |  | ----- | ---------- |  | - | ----------- | -
|                                                       |  | June 30, 2006     |            
|                                                       |  | Case              |             | IBNR |   | LAE        |  | Total |           
|Line of Business:                                      |  |                   |             |      |   |            |  |       |            |  |   |             |  
|Auto (1)                                               |  | $                 | 75,146,281  |      |   | 34,127,142 |  |       | 17,999,009 |  | $ | 127,272,432 |  
|Homeowner Group (2)                                    |  |                   | 19,568,330  |      |   | 10,937,935 |  |       | 6,172,821  |  |   | 36,679,086  |  
|Other (3)                                              |  |                   | 1,443,060   |      |   | 1,080,525  |  |       | 728,243    |  |   | 3,251,828   |  
|Assumed reinsurance - affiliate (4)                    |  |                   | 4,469,046   |      |   | 645,599    |  |       | 15,452     |  |   | 5,130,097   |  
|Assumed reinsurance - other (5)                        |  |                   | 23,167      |      |   | 186,000    |  |       |           |  |   | 209,167     |  
|                                                       |  |                   |             |      |   |            |  |       |            |  |   |             |  
|                                                       |  | $                 | 100,649,884 |      | $ | 46,977,201 |  | $     | 24,915,525 |  | $ | 172,542,610 |  
|                                                       |  |                   |             |      |   |            |  |       |            |  |   |             |  
|Less: salvage and subrogation recoverable              |  |                   |             |      |   |            |  |       |            |  |   | (9,846,287  | )
|                                                       |  |                   |             |      |   |            |  |       |            |  |   |             |  
|Reserve for unpaid losses and loss adjustment expenses |  |                   |             |      |   |            |  |       |            |  | $ | 162,696,323 |  
|                                                       |  |                   |             |      |   |            |  |       |            |  |   |             |  
|                                                       | 
|                                                       |  | December 31, 2005 |            
|                                                       |  | Case              |             | IBNR |   | LAE        |  | Total |           
|Line of Business:                                      |  |                   |             |      |   |            |  |       |            |  |   |             |  
|Auto (1)                                               |  | $                 | 72,696,266  |      | $ | 33,312,321 |  | $     | 17,017,008 |  | $ | 123,025,595 |  
|Homeowner Group (2)                                    |  |                   | 21,007,595  |      |   | 10,757,285 |  |       | 6,101,717  |  |   | 37,866,597  |  
|Other (3)                                              |  |                   | 1,830,965   |      |   | 1,080,200  |  |       | 792,566    |  |   | 3,703,731   |  
|Assumed reinsurance - affiliate (4)                    |  |                   | 3,926,228   |      |   | 555,929    |  |       | 195,547    |  |   | 4,677,704   |  
|Assumed reinsurance - other (5)                        |  |                   | 26,546      |      |   | 186,000    |  |       |           |  |   | 212,546     |  
|                                                       |  |                   |             |      |   |            |  |       |            |  |   |             |  
|                                                       |  | $                 | 99,487,600  |      | $ | 45,891,735 |  | $     | 24,106,838 |  | $ | 169,486,173 |  
|                                                       |  |                   |             |      |   |            |  |       |            |  |   |             |  
|Less: salvage and subrogation recoverable              |  |                   |             |      |   |            |  |       |            |  |   | (9,846,287  | )
|                                                       |  |                   |             |      |   |            |  |       |            |  |   |             |  
|Reserve for unpaid losses and loss adjustment expenses |  |                   |             |      |   |            |  |       |            |  | $ | 159,639,886 |  
|                                                       |  |                   |             |      |   |            |  |       |            |  |   |             |  



|(1) | Auto represents the Companys pooled share of preferred, standard, nonstandard and commercial auto as well as assumed nonstandard business in Texas.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Homeowner Group represents the Companys pooled share of the following lines of business: preferred and standard homeowner, manufactured home, farmowner and limited amount
of commercial insurance including portfolio, church and businessowner.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Other includes the Companys pooled share of various general liability, fire/allied lines and other lines of business.
|--- | ----------------------------------------------------------------------------------------------------------------------



|(4) | Assumed reinsurance - affiliate represents the Companys pooled share of Fires quota share reinsurance agreement with Virginia Mutual.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------



|(5) | Assumed reinsurance - other represents the Companys pooled share of business from various underwriting pools and associations.
|--- | -------------------------------------------------------------------------------------------------------------------------------

Refer to Note 2  Pooling Agreement in the Notes to Consolidated Financial Statements included in the Companys annual report for 2005 on Form 10-K for a
detailed discussion of the Companys Pooling Agreement.

Total losses and loss adjustment expenses payable increased $3.1 million, or 1.9% from
December 31, 2005 to June 30, 2006. The reserve increase is primarily attributable to exposure level changes at the product level. The current year development of the prior years ultimate liability does not reflect any changes in the
Companys fundamental claims reserving practices or actuarial assumptions.



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The risks and uncertainties inherent in the estimates include, but are not limited to, actual settlement experience being
different from historical data and trends, changes in business and economic conditions, court decisions creating unanticipated liabilities, ongoing interpretation of policy provisions by the courts, inconsistent decisions in lawsuits regarding
coverage and additional information discovered before settlement of claims. The Companys results of operations and financial condition could be impacted, perhaps significantly, in the future if the ultimate payments required to settle
claims vary from the liability currently recorded.

Activity in the liability for unpaid losses and loss adjustment
expenses is summarized below:



|                                               |  |                           |             |   |      |   |             |  
|---------------------------------------------- |  | ------------------------- | ----------- | - | ---- | - | ----------- | -
|                                               |  | Six Months Ended June 30, |            
|                                               |  | 2006                      |             |   | 2005 |  
|Balance at January 1,                          |  | $                         | 159,639,886 |   |      | $ | 154,107,730 |  
|less reinsurance recoverables on unpaid losses |  |                           | (2,103,540  | ) |      |   | (3,251,046  | )
|                                               |  |                           |             |   |      |   |             |  
|Net balance on January 1,                      |  |                           | 157,536,346 |   |      |   | 150,856,684 |  
|                                               |  |                           |             |   |      |   |             |  
|Incurred related to:                           |  |                           |             |   |      |   |             |  
|Current year                                   |  |                           | 187,877,463 |   |      |   | 175,658,591 |  
|Prior years                                    |  |                           | 11,555      |   |      |   | (478,181    | )
|                                               |  |                           |             |   |      |   |             |  
|Total incurred                                 |  |                           | 187,889,018 |   |      |   | 175,180,410 |  
|                                               |  |                           |             |   |      |   |             |  
|Paid related to:                               |  |                           |             |   |      |   |             |  
|Current year                                   |  |                           | 118,452,239 |   |      |   | 109,025,751 |  
|Prior years                                    |  |                           | 66,297,701  |   |      |   | 75,084,620  |  
|                                               |  |                           |             |   |      |   |             |  
|Total paid                                     |  |                           | 184,749,940 |   |      |   | 184,110,371 |  
|                                               |  |                           |             |   |      |   |             |  
|Net balance at June 30,                        |  |                           | 160,675,424 |   |      |   | 141,926,723 |  
|plus reinsurance recoverables on unpaid losses |  |                           | 2,020,899   |   |      |   | 1,638,449   |  
|                                               |  |                           |             |   |      |   |             |  
|Balance at June 30,                            |  | $                         | 162,696,323 |   |      | $ | 143,565,172 |  
|                                               |  |                           |             |   |      |   |             |  

There was no change in actuarial assumptions or methodology associated with the development of prior accident
years. The current and prior periods unfavorable and favorable development is the result of normal fluctuations and uncertainty associated with loss reserve development.

Managements best estimate for the Companys share of pooled losses and loss adjustment expense reserves at June 30, 2006 is $172.5 million and at December 31, 2005 is $169.5 million as shown in
the table above. At interim periods, point estimates are not established but rather the Companys internal actuarial staff reviews the direct emergence for each line of business compared to the expected emergence implied by the most recent
annual review. At December 31, 2005, the total direct Alfa Group loss and loss adjustment expense reserves was $314.2 million with an actuarial point estimate of $303.7 million that was within a projected range of $252.5 million to $348.1
million. The values presented are gross of salvage and subrogation recoverable, and before reinsurance, and include catastrophe reserves. Therefore, the Company cautions the reader that these values cannot be compared to other loss and loss
adjustment expenses payable tables included elsewhere within this Form 10-Q and the Companys annual report for 2005 on Form 10-K. Reserve ranges provide a quantification of the variability in the reserve projections, which is often referred to
as the standard deviation or error term, while the point estimates establish a mean, or expected value for the ultimate reserve. Managements best estimate of loss and loss adjustment expense reserves considers the actuarial point estimate and
expected variation to establish an appropriate position within the range. Management establishes reserves slightly above mid-point to include an estimated provision for uncertainty and to minimize the necessity for changing historical estimates.
Although management uses many internal and external resources, as well as multiple established methodologies to calculate reserves, there is no method for determining the exact ultimate liability.



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##### Table of Contents

The potential impact of loss reserve variability on net income is quantifiable using the annual range end points and
carried reserve amounts listed above. For example, if ultimate losses and loss adjustment expenses for the Alfa Group reach the high point of $348.1 million, the reserve increase of $33.9 million is an after-tax decrease of $22.0 million on net
income. Likewise, should losses and loss adjustment expenses decline to the low end of $252.5 million, the $61.7 million reserve decrease would add $40.1 million of after-tax net income for the Alfa Group.

An important assumption underlying the reserve estimation methods for the property casualty lines is that the loss cost trends implicitly built into the loss and LAE
patterns will continue into the future. Some of the factors that could influence assumptions arise from a variety of sources including tort law changes, development of new medical procedures, social inflation, and other inflationary changes in costs
beyond assumed levels. Inflation changes have much less impact on short-tail personal lines reserves and more impact on long-tail commercial lines. The Company does not have any significant long-tailed lines of business, so the actuarial assumptions
and methodologies are consistent across all lines of business, regardless of the expected payout patterns. This is further evidenced by the fact that approximately 90% of ultimate losses for a given accident year are reported in the first year and
by the end of the second year more than 99% are reported.

Reinsurance

Property Casualty - Ceded

The property casualty subsidiaries of the Company follow the customary industry practice
of reinsuring a portion of their exposures and paying to the reinsurers a portion of the premiums received. Insurance is ceded principally to reduce net liability on individual risks or for individual loss occurrences, including catastrophic losses.
Although reinsurance does not legally discharge the individual subsidiary from primary liability for the full amount of limits applicable under their policies, it does make the assuming reinsurer liable to the extent of the reinsurance ceded. 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
reinsurance insolvencies. None of the reinsurance receivable amounts have been deemed to be uncollectible at June 30, 2006.

Each subsidiary is party
to working cover reinsurance treaties for property casualty lines. Under the property per risk excess of loss treaty, each subsidiary is responsible for the first $600,000 of each covered loss, and the reinsurers are responsible for 100% of the
excess over $600,000 of covered loss with a maximum recovery of $1.4 million. The rates for this reinsurance are negotiated annually. The subsidiaries also make use of facultative reinsurance for unique risk situations.

The Companys subsidiaries participate in a catastrophe protection program through the Pooling Agreement. Under this program, the Company participates in only its
pooled share of a lower catastrophe pool limit unless the losses exceed an upper catastrophe pool limit. In cases where the upper catastrophe limit is exceeded on a 100% basis, the Companys share in the loss would be based upon its amount of
statutory surplus relative to other members of the group as of the most recently filed annual statement. Lower and upper catastrophe pool limits are adjusted periodically due to increases in insured property risks. Refer to Note 2  Pooling
Agreement, Catastrophe Protection Program section in the Notes to Consolidated Financial Statements included in the Companys annual report for 2005 on Form 10-K for further details.



45



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##### Table of Contents

The following table details the impact of reinsurance ceded for the six-month and three-month periods ended June 30,
2006 and 2005:



|                               |  |                           |            |   |                             |   |            |      |  |   |            |   |  |   |          |  
|------------------------------ |  | ------------------------- | ---------- | - | --------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | -------- | -
|                               |  | Six months Ended June 30, |            |   | Three months Ended June 30, |  
|                               |  | 2006                      |            |   | 2005                        |   |            | 2006 |  |   | 2005       |  
|Income Statement:              |  |                           |            |   |                             |   |            |      |  |   |            |   |  |   |          |  
|Working Cover - Nonaffiliates: |  |                           |            |   |                             |   |            |      |  |   |            |   |  |   |          |  
|Earned Premium                 |  | $                         | (1,681,189 | ) |                             | $ | (1,591,701 | )    |  | $ | (865,890   | ) |  | $ | (776,550 | )
|Losses Incurred                |  |                           | (130,083   | ) |                             |   | (701,910   | )    |  |   | (254,399   | ) |  |   | (692,952 | )
|Commission Expense             |  |                           | (169,818   | ) |                             |   | (161,104   | )    |  |   | (86,285    | ) |  |   | (83,914  | )
|                               |  |                           |            |   |                             |   |            |      |  |   |            |   |  |   |          |  
|Net Profit (Loss)              |  |                           | (1,381,288 | ) |                             |   | (728,687   | )    |  |   | (525,206   | ) |  |   | 316      |  
|                               |  |                           |            |   |                             |   |            |      |  |   |            |   |  |   |          |  
|Catastrophe - Affiliates:      |  |                           |            |   |                             |   |            |      |  |   |            |   |  |   |          |  
|Earned Premium                 |  |                           | (267,942   | ) |                             |   | (67,866    | )    |  |   | (230,688   | ) |  |   | (37,941  | )
|Losses Incurred                |  |                           |           |   |                             |   |           |      |  |   |           |   |  |   |         |  
|Commission Expense             |  |                           |           |   |                             |   |           |      |  |   |           |   |  |   |         |  
|                               |  |                           |            |   |                             |   |            |      |  |   |            |   |  |   |          |  
|Net (Loss)                     |  |                           | (267,942   | ) |                             |   | (67,866    | )    |  |   | (230,688   | ) |  |   | (37,941  | )
|                               |  |                           |            |   |                             |   |            |      |  |   |            |   |  |   |          |  
|Total:                         |  |                           |            |   |                             |   |            |      |  |   |            |   |  |   |          |  
|Earned Premium                 |  |                           | (1,949,131 | ) |                             |   | (1,659,567 | )    |  |   | (1,096,578 | ) |  |   | (814,491 | )
|Losses Incurred                |  |                           | (130,083   | ) |                             |   | (701,910   | )    |  |   | (254,399   | ) |  |   | (692,952 | )
|Commission Expense             |  |                           | (169,818   | ) |                             |   | (161,104   | )    |  |   | (86,285    | ) |  |   | (83,914  | )
|                               |  |                           |            |   |                             |   |            |      |  |   |            |   |  |   |          |  
|Net Profit (Loss)              |  | $                         | (1,649,230 | ) |                             | $ | (796,553   | )    |  | $ | (755,894   | ) |  | $ | (37,625  | )
|                               |  |                           |            |   |                             |   |            |      |  |   |            |   |  |   |          |  



|                             |  |               |            |   |                   |   |            |  
|---------------------------- |  | ------------- | ---------- | - | ----------------- | - | ---------- | -
|                             |  |              
|                             |  | June 30, 2006 |            |   | December 31, 2005 |  
|Balance Sheet:               |  |               |            |   |                   |   |            |  
|Receivables on Unpaid Losses |  | $             | 2,020,899  |   |                   | $ | 2,103,540  |  
|Unearned Premium             |  | $             | (1,505,808 | ) |                   | $ | (1,408,823 | )
|Premiums Payable             |  | $             | 1,516,939  |   |                   | $ | 1,277,628  |  

The fluctuation in working cover losses incurred is due to normal reserving activities as additional information
is obtained regarding a claim along with claim settlements made during the year. The increase in catastrophe earned premium in 2006 is the result of renegotiation of the catastrophe program.

The Companys subsidiaries are participants in an intercompany Pooling Agreement with the Mutual Group in which each participant cedes premiums, losses and
underwriting expenses on all of their direct property casualty business to Mutual, and Mutual in turn retrocedes to each participant a specified portion of premiums, losses and underwriting expenses based on each participants pooling
percentage. Refer to Note 2  Pooling Agreement and Note 13  Reinsurance in the Notes to Consolidated Financial Statements included in the Companys annual report for 2005 on Form 10-K for further information.

Life - Ceded

The Companys life insurance
subsidiary reinsures portions of its risks with other insurers under yearly renewable term agreements and coinsurance agreements. Generally, Life will not retain more than $500,000 of individual life insurance on a single risk with the exception of
COLI and group policies where the retention is limited to $100,000 per individual. The amount retained on an individual life will vary depending upon age and mortality prospects of the risk. At June 30, 2006, Life had total insurance inforce of
$22.1 billion of which $2.6 billion was ceded to other insurers. In addition, reserve credits of $8.0 million have been taken as a result of the ceding of these inforce amounts to other insurers. Although reinsurance does not legally discharge the
subsidiary from primary liability for the full amount of a policy claim, it does make the assuming reinsurer liable to the extent of the reinsurance ceded. 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 reinsurance insolvencies. None of the reinsurance receivable amounts have been deemed to
be uncollectible at June 30, 2006.



46



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##### Table of Contents

The following table details the impact of nonaffiliated reinsurance ceded for the six-month and three-month periods ended
June 30, 2006 and 2005:



|                  |  |                           |            |   |                             |   |            |      |  |   |            |   |  |   |            |  
|----------------- |  | ------------------------- | ---------- | - | --------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                  |  | Six months Ended June 30, |            |   | Three months Ended June 30, |  
|                  |  | 2006                      |            |   | 2005                        |   |            | 2006 |  |   | 2005       |  
|Income Statement: |  |                           |            |   |                             |   |            |      |  |   |            |   |  |   |            |  
|Premiums Paid     |  | $                         | (3,120,417 | ) |                             | $ | (3,000,036 | )    |  | $ | (1,538,190 | ) |  | $ | (1,839,704 | )
|Losses Incurred   |  |                           | (6,064,653 | ) |                             |   | (1,505,633 | )    |  |   | (2,844,371 | ) |  |   | (815,917   | )
|                  |  |                           |            |   |                             |   |            |      |  |   |            |   |  |   |            |  
|Net (Loss)        |  | $                         | 2,944,236  |   |                             | $ | (1,494,403 | )    |  | $ | 1,306,180  |   |  | $ | (1,023,787 | )
|                  |  |                           |            |   |                             |   |            |      |  |   |            |   |  |   |            |  



|                             |  |              |           |                  |   |          
|---------------------------- |  | ------------ | --------- | ---------------- | - | ---------
|                             |  | June 30,2006 |           | December 31,2005
|Balance Sheet:               |  |              |           |                  |   |          
|Receivables on Unpaid Losses |  | $            | 3,006,482 |                  | $ | 3,256,456
|Policy Reserve Credits       |  |              | 7,996,836 |                  |   | 7,996,836
|Premiums Payable             |  |              | 811,702   |                  |   | 1,024,188

The increase in losses incurred is the result of growth in claims reported with reinsurance ceded coverage as well
as increases in the dollar amounts of such claims.

Effective July 1, 2006, Life entered into a new reinsurance ceded agreement covering all inforce
business for claims resulting from accidents. This agreement is applicable for all retained claim amounts with Life retaining the first $7.5 million of claims.

Property Casualty  Assumed

The Company participates in a small number of involuntary pools and underwriting associations on a direct
basis and receives a proportional share through the intercompany Pooling Agreement. In addition, the Company receives a proportional share of Fires quota share reinsurance treaty with Virginia Mutual through the intercompany Pooling Agreement.
AVIC directly participates in a reinsurance program in the state of Texas assuming non-standard automobile business which is retroceded to the pool.

Geographic Concentration

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s financial condition and operating results than on a more geographically diversified insurance company. However, the
Companys catastrophe protection program, which began November 1, 1996, reduced the potential adverse impact and earnings volatility caused by such catastrophe exposures.

Legal Environment

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, 2006. 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 unspecified amounts of compensatory damages, mental anguish damages 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 Mississippi and 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.



47



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##### Table of Contents

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 has helped to curb some of the excessive litigation experienced in the late 1990s.

FINANCIAL ACCOUNTING DEVELOPMENTS

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment, which is a revision of SFAS No. 123, Accounting for Stock-based Compensation. SFAS 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95,
Statement of Cash Flows. Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) requires all share-based payments to employees and non-employees, including grants of stock options, to be
recognized in the income statement based on fair value at grant date. Pro forma disclosure is no longer an alternative.

SFAS 123(R) originally required
adoption no later than July 1, 2005. In April 2005, the Securities and Exchange Commission (SEC) issued a release that amends the compliance dates for SFAS 123(R). The Company began applying SFAS 123(R) as of January 1, 2006.

SFAS 123(R) permits public companies to adopt its requirement using one of two methods:



| |  |  | A modified prospective method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all
share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A modified retrospective method which includes the requirements of the modified prospective method described above, but also permits entities to restate, based on the
amounts previously recognized under SFAS 123 for purposes of pro forma disclosures, either (a) all prior periods presented or (b) prior interim periods of the year of adoption.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Company has adopted SFAS 123(R) using the modified prospective method.

As permitted by SFAS 123, the Company previously accounted for share-based payments to employees using the intrinsic value method described in APB Opinion No. 25 and, as such, generally recognized no compensation cost for employee
stock options. Accordingly, the adoption of SFAS 123(R)s fair value method has impacted the Companys results of operations, although it has and will continue to have no impact on the Companys overall financial position. The Company
shares compensation cost with Mutual based on the Management and Operating Agreement (refer to Note 3  Related Party Transactions in the Notes to Consolidated Financial Statements included in the Companys annual report for 2005 on
Form 10-K). For more information on the impact of this statement, refer to Note 5  Stock-Based Compensation in Notes to Consolidated Condensed Financial Statements in this Form 10-Q.

In June 2005, the FASB ratified the consensus on EITF Issue No. 04-5, Determining Whether a General Partner, or the General Partners as a Group, Controls a
Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights. This Issue affects accounting by general partners evaluating whether to consolidate limited partnerships. The EITF agreed on a framework for evaluating whether
a general partner or a group of general partners controls a limited partnership and therefore should consolidate. The presumption of general-partner control would be overcome only when the limited partners have either kick-out rights or
participating rights. This guidance was effective after June 29, 2005 for all new limited partnerships formed and for existing limited partnership agreements for which the partnership agreements are modified. For general partners in
all other limited partnerships, the guidance in this Issue was effective no later than the beginning of the first reporting period in fiscal years beginning after December 31, 2005, and application of either one of two transition methods
described in the Issue would be acceptable. During the fourth quarter of 2005, two limited partnerships in which the Companys life subsidiary has been a general partner with one percent ownership interests were modified to become



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general partnerships. Consequently, the Company expects EITF Issue No. 04-5 to continue to have no significant impact on the Companys financial
position and results of operations.

In addition, the FASB issued FASB Staff Position (FSP) SOP 78-9-1, Interaction of AICPA Statement of Position 78-9
and EITF Issue No. 04-5 in June 2005. The guidance in this FSP was effective after June 29, 2005 for general partners of all new partnerships formed and for existing partnerships for which the partnership agreements are modified. For
general partners in all other partnerships, the guidance in this FSP was effective no later than the beginning of the first reporting period in fiscal years beginning after December 15, 2005, and the application of either transition method as
described in the FSP was permitted.

In August 2005, the FASB issued FSP Financial Accounting Standard (FAS) 123(R)-1, Classification and Measurement of
Freestanding Financial Instruments Originally Issued in Exchange for Employee Services under FASB Statement No. 123(R).This staff position defers the requirement under SFAS No. 123(R) that a freestanding financial instrument become
subject to the recognition and measurement requirements of other applicable generally accepted accounting principles when the rights conveyed by the instrument to the holder are no longer dependent on the holder being an employee of the entity. This
staff position has not had a significant impact on the Companys financial position or results of operations since the adoption of SFAS No. 123(R).

During the fourth quarter of 2005, the FASB also issued three other staff positions applicable at the time the Company adopted SFAS No. 123(R). They were FSP FAS 123(R)-2, Practical Accommodation to the Application of Grant Date As
Defined in FASB Statement No. 123(R);FSP FAS 123(R)-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards; and FSP FAS 123(R)-4, Classification of Options and Similar Instruments Issued As
Employee Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent Event. These staff positions have not had a significant impact on the Companys financial position or results of operations since the adoption of SFAS
No. 123(R).

In September 2005, the American Institute of Certified Public Accountants issued Statement of Position 05-1, Accounting by Insurance
Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts. This statement provides guidance on accounting for deferred acquisition costs on an internal replacement, defined as a modification
in product benefits, rights, coverages, or features that occurs by the exchange of an existing contract for a new contract, or by amendment, endorsement, or rider to an existing contract, or by the election of a benefit, right, coverage, or feature
within an existing contract. The guidance in this pronouncement is effective for fiscal years beginning after December 15, 2006. The Company plans to adopt this statement for internal replacements beginning January 1, 2007. The Company is
currently preparing for the adoption of this statement and continuing to assess the impact this statement will have on its financial position or results of operations at the time of adoption.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments, an Amendment of FASB Statements No. 133 and 140,
which eliminates the exception from applying SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, to interests on securitized financial assets so similar instruments are accounted for similarly regardless of the
form. This Statement also allows the election of fair value measurement at acquisition, at issuance, or when a previously recognized financial instrument is subject to a remeasurement event, on an instrument-by-instrument basis, in cases in which a
derivative would otherwise have to bifurcate. SFAS No. 155 is effective for all financial instruments acquired or issued in an entitys first fiscal year beginning after September 15, 2006. The Company does not anticipate that this
statement will have a significant impact on its financial position or results of operations at the time it is adopted.

The FASB issued SFAS No. 156,
Accounting for Servicing of Financial Assets, an Amendment of Statement No. 140, in March 2006. This statement will require entities to recognize a servicing asset or liability each time it undertakes an obligation to service a financial
asset by entering into a servicing contract in certain situations. It also requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value and allows a choice of either the amortization or fair
value measurement method for subsequent measurement. SFAS No. 156 is effective for annual periods beginning after September 15, 2006. The Company does not anticipate that this statement will have a significant impact on its financial
position or results of operations at the time it is adopted.



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##### Table of Contents

The FASB ratified the consensus on EITF Issue No. 06-3, How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation), in June 2006. This consensus requires disclosure of the accounting policy employed by the Company for any tax assessed by a
governmental authority that is directly related to a revenue-producing transaction. The Company does not anticipate that EITF Issue No. 06-3, which is effective for the Company on January 1, 2007, will have a significant impact on its
financial position or results of operations at the time it is adopted.

In July 2006, the FASB released FASB Interpretation No. (FIN) 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109. FIN 48 prescribes a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. It also provides guidance on
derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties, accounting for income taxes in interim periods, financial disclosures, and
transition. This interpretation is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact this interpretation may have on its financial position or results of operations at the time it is
adopted.



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

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 is 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 the Companys annual report on Form 10-K for the year ended December 31, 2005.



|Item 4. | Controls and Procedures
|------- | -----------------------

The Company has evaluated the
disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. The evaluation was performed under the supervision and with
the participation of the Companys Disclosure Committee and Management, including the Chief Executive Officer and the Chief Financial Officer. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded
that the Companys disclosure controls and procedures are effective.

There were no significant changes in the Companys internal controls over
financial reporting identified in connection with the foregoing evaluation that occurred during the Companys last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Companys internal control
over financial reporting.

The Company became aware of irregularities related to certain loan values in Financial subsequent to the quarter ending
June 30, 2006. These irregularities have been reported and disclosed in Item 2, Managements Discussion and Analysis of Financial Condition and Results of Operations of the Companys Form 10-Q for the period ending June 30,
2006. The internal control environment of Financial is being evaluated and the Company anticipates making changes in the Companys internal controls over financial reporting during the quarter to end September 30, 2006.



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##### Table of Contents

PART II. OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

The Company and its subsidiaries are
defendants in legal proceedings arising in the normal course of business. Management believes adequate accruals have been established in these known cases. However, it should be noted that in Mississippi and 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, management is unaware of any contingent liabilities arising
from other threatened litigation that should be reserved or disclosed.

For a more detailed discussion of legal proceedings of the Company, refer to Note
2Commitments and Contingencies in the Notes to Consolidated Condensed Financial Statements of this Form 10-Q.



|Item 1A. | Risk Factors
|-------- | ------------

There has been no material change in the risk
factors previously disclosed under Item 1A. of the Companys annual report for 2005 on Form 10-K.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASES



|                                     |  |                                |  |                             |       |                                                                            |        |                                                                            |          
|------------------------------------ |  | ------------------------------ |  | --------------------------- | ----- | -------------------------------------------------------------------------- | ------ | -------------------------------------------------------------------------- | ---------
|Period                               |  | Total Numberof SharesPurchased |  | Average PricePaid per Share |       | Total Numberof SharesPurchased asPart of PubliclyAnnouncedPlans orPrograms |        | MaximumNumber ofShares thatMay Yet BePurchasedUnder the Plansor Programs
1
|January 1, 2006 - January 31, 2006   |  |                               |  | $                           |      |                                                                            |       |                                                                            | 3,733,377
|February 1, 2006 - February 28, 2006 |  |                               |  | $                           |      |                                                                            |       |                                                                            | 3,733,377
|March 1, 2006 - March 31, 2006       |  |                               |  | $                           |      |                                                                            |       |                                                                            | 3,733,377
|April 1, 2006 - April 30, 2006       |  |                               |  | $                           |      |                                                                            |       |                                                                            | 3,733,377
|May 1, 2006 - May 31, 2006           |  | 22,000                         |  | $                           | 15.53 |                                                                            | 22,000 |                                                                            | 3,711,377
|June 1, 2006 - June 30, 2006         |  | 64,400                         |  | $                           | 15.51 |                                                                            | 64,400 |                                                                            | 3,646,977
|                                     |  |                                |  |                             |       |                                                                            |        |                                                                            |          
|Total                                |  | 86,400                         |  | $                           | 15.51 |                                                                            | 86,400 |                                                                            |          
|                                     |  |                                |  |                             |       |                                                                            |        |                                                                            |          



|1 | In October 1989, the Companys Board of Directors approved a stock repurchase program
authorizing the repurchase of up to 4,000,000 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. The Board increased the number of shares
authorized for repurchase by 4,000,000 in both March 1999 and September 2001, bringing the total number of shares authorized for repurchase to 12,000,000.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

None



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|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------

The
Annual Meeting of Stockholders was held on April 25 2006. The election of 11 members to the board of directors was submitted to the stockholders. All proposed nominees were approved by the stockholders. Following is a summary of each vote cast
for or withheld including a separate tabulation with respect to each nominee for office.



|                                                  |  |            |  |          
|------------------------------------------------- |  | ---------- |  | ---------
|                                                  |  | Votes     
|                                                  |  | For        |  | Withheld 
|Election of 11 members to the board of directors: |  |            |  |          
|Jerry A. Newby                                    |  | 67,604,631 |  | 2,587,823
|Hal F. Lee                                        |  | 66,909,226 |  | 3,283,228
|Russell R. Wiggins                                |  | 66,908,246 |  | 3,284,208
|Dean Wysner                                       |  | 66,920,625 |  | 3,271,829
|Jacob C. Harper                                   |  | 66,908,545 |  | 3,283,910
|Steve Dunn                                        |  | 66,908,531 |  | 3,283,924
|B. Phil Richardson                                |  | 68,187,045 |  | 2,005,409
|Boyd E. Christenberry                             |  | 68,680,586 |  | 1,511,868
|John Russell Thomas                               |  | 69,517,949 |  | 674,505  
|Larry E. Newman                                   |  | 69,518,224 |  | 674,231  
|C. Lee Ellis                                      |  | 67,541,070 |  | 2,651,384



|Item 5. | Other Information
|------- | -----------------

None



|Item 6. | Exhibits
|------- | --------



|     |  |                                                                                                                                                                                                 
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1 |  | Third Amended and Restated Credit Agreement                                                                                                                                                     
|     | 
|10.2 |  | First Amendment to Third Amended and Restated Credit Agreement                                                                                                                                  
|     | 
|10.3 |  | Second Amendment to Third Amended and Restated Credit Agreement                                                                                                                                 
|     | 
|10.4 |  | Third Amendment to Third Amended and Restated Credit Agreement                                                                                                                                  
|     | 
|10.5 |  | Amended and Restated Tax Allocation Agreement of Alfa Corporation                                                                                                                               
|     | 
|11   |  | Statement of Computation of Per Share Earnings                                                                                                                                                  
|     | 
|15   |  | Letter Regarding Unaudited Interim Financial Information                                                                                                                                        
|     | 
|21   |  | Subsidiaries of the Registrant                                                                                                                                                                  
|     | 
|31.1 |  | Certification of Alfa Corporations Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                           
|     | 
|31.2 |  | Certification of the Alfa Corporations Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                       
|     | 
|32   |  | Certification of Alfa Corporations Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 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 CORPORATION                                                                                
|                      |  | 
|Dated: August 9, 2006 |  |  |  | /s/ Jerry A. Newby                                                                              
|                      |  |  |  | Jerry A. Newby President (Chief Executive Officer)                                              
|                      |  | 
|Dated: August 9, 2006 |  |  |  | /s/ Stephen G. Rutledge                                                                         
|                      |  |  |  | Stephen G. Rutledge Senior Vice President
(Chief Financial Officer and Chief Investment Officer)



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EXHIBIT INDEX



|              |  |                                                                                                                                                                                                 
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibit                                                                                                                                                                          
|10.1          |  | Third Amended and Restated Credit Agreement                                                                                                                                                     
|              | 
|10.2          |  | First Amendment to Third Amended and Restated Credit Agreement                                                                                                                                  
|              | 
|10.3          |  | Second Amendment to Third Amended and Restated Credit Agreement                                                                                                                                 
|              | 
|10.4          |  | Third Amendment to Third Amended and Restated Credit Agreement                                                                                                                                  
|              | 
|10.5          |  | Amended and Restated Tax Allocation Agreement of Alfa Corporation                                                                                                                               
|              | 
|11            |  | Statement of Computation of Per Share Earnings                                                                                                                                                  
|              | 
|15            |  | Letter Regarding Unaudited Interim Financial Information                                                                                                                                        
|              | 
|21            |  | Subsidiaries of the Registrant                                                                                                                                                                  
|              | 
|31.1          |  | Certification of Alfa Corporations Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                           
|              | 
|31.2          |  | Certification of the Alfa Corporations Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                       
|              | 
|32            |  | Certification of Alfa Corporations Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002



54