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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For Quarter Ended September 30, 2002

Commission File Number 0-11773

ALFA CORPORATION
(Exact name of registrant as specified in its charter)

2108 East South Boulevard, Montgomery, Alabama 36116
(Mail: P. O Box 11000, Montgomery, Alabama 36191-0001)
(Address and Zip Code of Principal Executive Offices)

None
Former name, former address and former fiscal year if changed since last report

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the close of the period covered by this report.

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ALFA CORPORATION

INDEX

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ALFA CORPORATION
CONSOLIDATED BALANCE SHEETS

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

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ALFA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

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

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ALFA CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

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

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ALFA CORPORATION
CONSOLIDATEDSTATEMENTS OF CASH FLOWS
(Unaudited)

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

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ALFA CORPORATION
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
September 30, 2002

1.      Significant Accounting Policies

         In the opinion of the Company, the accompanying consolidated unaudited financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly its financial position, results of operations and cash flows. The accompanying financial statements have been prepared on the basis of accounting principles generally accepted in the United States of America. A summary of the more significant accounting policies related to the Company’s business is set forth in the notes to its audited consolidated financial statements for the fiscal year ended December 31, 2001. The results of operations for the nine-month and three-month periods ended September 30, 2002 are not necessarily indicative of the results to be expected for the full year. For purposes of this report, the Company has defined operating income as income excluding net realized investment gains, net of related tax effects. Certain reclassifications have been made to conform previous classifications to September 30, 2002 classifications and descriptions.

2.      Pooling Agreement

         Effective August 1, 1987, the Company entered into a property and casualty insurance Pooling Agreement (the “Pooling Agreement”) with Alfa Mutual Insurance Company (Mutual), and other members of the Mutual Group (See Note 3). On January 1, 2001, Alfa Specialty Insurance Corporation (Specialty), a subsidiary of Mutual, also became a participant in the Pooling Agreement. The Mutual Group is a direct writer primarily of personal lines of property and casualty insurance in Alabama. The Company’s subsidiaries similarly are direct writers in Georgia and Mississippi. Both the Mutual Group and the Company write preferred risk automobile, homeowner, farmowner and mobile home insurance, fire and allied lines, standard risk automobile and homeowner insurance, and a limited amount of commercial insurance, including church and businessowner insurance. Specialty is a direct writer primarily of nonstandard risk automobile insurance. Under the terms of the Pooling Agreement, the Company cedes to Mutual all of its property and casualty business. Substantially all of the Mutual Group’s direct property and casualty business (together with the property and casualty business ceded by the Company) is included in the pool. Mutual currently retrocedes 65% of the pool to the Company and retains 35% within the Mutual Group. Effective January 1, 2001, Specialty’s property and casualty business likewise became included in the pool. On October 1, 1996, the Pooling Agreement was amended in conjunction with the restructuring of the Alfa Insurance Group’s catastrophe protection program. Effective November 1, 1996, the allocation of catastrophe costs among the members of the pool was changed to better reflect the economics of catastrophe finance. The amendment limited Alfa Corporation’s participation in any single catastrophic event or series of storms to its pool share (65%) of a lower catastrophe pool limit unless the loss exceeded an upper catastrophe pool limit. In cases where the upper catastrophe limit is exceeded on a

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(Note 2. Continued)

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

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

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

         The Company incurred $1.8 million in storm losses in the third quarter of 2002 resulting in a reduction in the Company’s net income of approximately $0.01 per diluted share, after reinsurance and taxes. Through the first nine months of 2002, storm losses of $7.0 million have been incurred, negatively impacting earnings by approximately $0.06 per diluted share. The Company also incurred $7.4 million in storm losses in the first quarter of 2001 which reduced the Company’s net income by approximately $0.06 per diluted share, after reinsurance and taxes. No catastrophe losses were incurred in the second or third quarters of 2001.

3.      Contingent Liabilities

         The property and casualty subsidiaries have entered into the reinsurance pooling agreement with Alfa Mutual Insurance Company and its affiliates as discussed in Note 2. Should any member of the affiliated group be unable to meet its obligation on a claim for a policy written by the Company’s property and casualty subsidiaries, the obligation to pay the claim would remain with the Company’s subsidiaries.

         The liability for estimated unpaid property and casualty losses and loss adjustment expenses is based upon an evaluation of reported losses and on estimates of incurred but not reported losses. Adjustments to the liability based upon subsequent developments are included in current operations.

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(Note 3. Continued)

         Certain legal proceedings are in process at September 30, 2002. Costs for these and similar legal proceedings, including accruals for outstanding cases, totaled $3.4 million in the first nine months of 2002, $930,000 in 2001, and $3.0 million in 2000. These proceedings involve alleged breaches of contract, torts, including bad faith and fraud claims, and miscellaneous other causes of action. These lawsuits involve claims for mental anguish and punitive damages. Approximately 17 legal proceedings against Alfa Life Insurance Corporation (Life) were in process at September 30, 2002. Of the 17 proceedings, eight were filed in 2002, two were filed in 2001, one was filed in 2000, four were filed in 1999, one was filed in 1997, and one was filed in 1996. In a case tried in January 2001, in Barbour County, Alabama, the jury returned a verdict for the plaintiff against Life for $500,000 in compensatory damages and $5,000,000 in punitive damages. After Life filed post-trial motions, the trial court reduced the punitive damage award to $1,500,000. Life has appealed the award to the Alabama Supreme Court. In a case tried in December 2001, in Bullock County, Alabama, the jury returned a verdict for the plaintiffs against Life for $300,000 in compensatory damages and $3,000,000 in punitive damages. After Life filed post-trial motions, the trial court reduced the punitive damage award to $900,000. Life has appealed the award to the Alabama Supreme Court. Two of the 17 pending legal proceedings against Life have been certified as class actions by the trial court in each case. After the trial court certified the first class action against Life, Life appealed the class certification order to the Alabama Supreme Court. In November 2001, the Alabama Supreme Court reversed the trial court, decertified the class, and remanded the case to the trial court for further proceedings. The trial court has again certified the class and Life has appealed the certification to the Alabama Supreme Court. The trial court order certifying the second class action has also been appealed to the Alabama Supreme Court. In addition, one purported class action lawsuit is pending against both Alfa Builders, Inc. and Alfa Mutual Fire Insurance Company. Additionally, five purported class action lawsuits are pending against the property and casualty mutual companies involving a number of issues and allegations which could affect the Company because of a pooling agreement between the companies. No class has been certified in any of these six purported class action cases. In addition, Alfa Insurance Corporation and Alfa General Insurance Corporation have been served with a purported class action in the State of Georgia, alleging the two corporations improperly refused to evaluate and refused to pay diminution in value respecting automobile first-party physical damage claims. It should be noted that in Alabama, where the Company has substantial business, the likelihood of a judgment in any given suit, including a large mental anguish and/or punitive damage award by a jury, bearing little or no relation to actual damages, continues to exist, creating the potential for unpredictable material adverse financial results.

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

         The Company periodically invests in partnerships that invest in affordable housing tax credits. At September 30, 2002, the Company had committed to fund a partnership of this type in the amount of approximately $4.6 million.

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4.      Segment Information

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

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(Note 4. Continued)

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

5.      Acquisition of Commercial Lease Portfolio

         During the first quarter of 2000, the Company signed a definitive agreement and completed the transaction to acquire the leasing portfolio and assets of OFC Capital (OFC), an Atlanta-based business unit of First Liberty Bank, that provides financing for commercial equipment leases. The transaction involved a cash purchase price of approximately $23.1 million, which was primarily for the portfolio of leases. OFC operates as a business unit of Alfa Financial Corporation, a subsidiary of the Company. OFC’s operations for the nine-month period ended September 30, 2002 resulted in income of approximately $368,000 including earnings of approximately $154,000 in the third quarter.

6.      Note Payable and Interest Rate Swap Contract

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

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(Note 6. Continued)

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

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

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

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

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

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

7.      Financial Accounting Developments

         The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities” in June 1998. This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in investment securities and other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The accounting for changes in the fair value of a derivative are included in either earnings or other comprehensive income depending on the intended use of the derivative instrument. This standard, as amended by SFAS No. 137, became effective for the Company January 1, 2001. During, 2001, the Company recorded approximately $229,000, net of tax, as the effect upon adoption of this standard.

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(Note 7. Continued)

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

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

         In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” Subsequently, in August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” These standards became effective for fiscal years beginning after June 15, 2002 and December 15, 2001, respectively. At this time, the Company does not anticipate either of these standards having a significant impact on the Company’s financial position or income.

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

         In August 2002, The FASB also issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” The Company does not anticipate this standard having a significant impact on the Company’s financial position or income.

         In October 2002, the FASB issued SFAS No. 147, “Acquisitions of Certain Financial Institutions.” The Company does not anticipate this standard having a significant impact on the Company’s financial position or income.

8.      Stock Split

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

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INDEPENDENT AUDITORS’ REVIEW REPORT

To the Stockholders and Board of Directors
Alfa Corporation:

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

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

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

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

KPMG LLP
November 13, 2002
Birmingham, Alabama

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MANAGEMENT’S DISCUSSION AND ANALYSIS

RESULTS OF OPERATIONS

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

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

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increased 6% in the first nine months of 2002 while invested assets have grown 9.8% in the nine months since December 31, 2001.

         Operating income increased by 2% in the property casualty subsidiaries due primarily to a reduction in storm losses during the first nine months of 2002. The nonstorm loss ratio increased during the third quarter and combined with $1.8 million in storm losses to produce a loss ratio of 66.2% The 12% decrease in operating income in the life subsidiary is largely due to increases made in legal reserves of $2.2 million. Noninsurance operations were up 27% due to earnings growth from the finance and construction subsidiaries. An improved interest rate spread and gains on assets previously held under leases led to an increase in operating income of approximately $445,000 in the finance subsidiary. Construction income increased $186,000 due to higher levels of commercial construction activity.

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

PROPERTY AND CASUALTY INSURANCE OPERATIONS

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

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

         The overall loss ratio increased to 64.1% for the first three quarters of 2002 as the ratio climbed to 66.2% for the third quarter following $1.8 million in storm losses. Approximately $7.4 million of storm losses were incurred in the first quarter of 2001. No storm losses were recorded in the second or third quarters of 2001. Loss adjustment expenses in the first nine months of 2002 were 4.2% of earned premiums compared to 4.0% in the same period of 2001 when a reduction in loss adjustment expense reserves was recorded following a review of reserve levels. The increase in business resulting from the mandatory insurance law becoming effective in Alabama in June 2000 has not resulted in the emergence of additional claims cost at the anticipated levels. Consequently, reserves were adjusted in the first quarter of 2001 to a more normal level. Another factor in the relatively stable underwriting margin was a decrease in the expense ratio from 2001 levels despite additional expenses related to the Company’s implementation of new financial reporting systems.

         Net investment income decreased 1% in the first nine months of 2002 in the property casualty subsidiaries due to declines in partnership income. Invested assets increased 10.1% since September 30, 2001.

LIFE INSURANCE OPERATIONS

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