
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                                                                         EXHIBIT 13
                                                      SELECTED FINANCIAL DATA

Consolidated Summary of Operations & Related Data
(Dollars in Thousands Except Per Share Amounts)
Years Ended December 31,                                         1998              1997             1996               1995     
                                                            ---------------------------------------------------------------
<S>                                                         <C>               <C>               <C>              <C> 
Premiums - Property and Casualty Insurance                  $   345,740       $   330,306       $  298,939       $  272,989     
Premiums and policy charges - Life Insurance                     46,099            40,659           38,248           35,100     
Net investment income                                            62,512            57,529           54,194           50,923     
Net realized investment gains                                     4,397             3,356            2,808            1,106     
Other income                                                      2,238             2,160            2,148            2,645     
                                                            ---------------------------------------------------------------
     Total revenues                                             460,986           434,010          396,336          362,763     
Benefits and expenses                                           377,721           357,210          350,482          331,771     
                                                            ---------------------------------------------------------------
Income before provision for                                                                                                     
     income taxes                                                83,265            76,800           45,854           30,993     
Provision for income taxes                                       26,549            24,006           13,665            8,675     
Cumulative effect of changes in accounting principles                                                                           
                                                            ---------------------------------------------------------------
     Net income                                             $    56,716       $    52,794       $   32,189       $   22,318     
                                                            ===============================================================
Balance sheet data at December 31:                                                                                              
     Invested assets                                        $ 1,084,064       $ 1,027,660       $  886,017       $  841,123     
     Total assets                                           $ 1,246,659       $ 1,170,066       $1,019,330       $  965,433     
     Future policy benefits, losses and                                                                                        
     claims, unearned premiums                              $   653,893       $   596,057       $  535,824       $  487,659     
     Total liabilities                                      $   823,037       $   787,135       $  696,018       $  656,823     
     Stockholders' equity                                   $   423,622       $   382,931       $  323,312       $  308,610     
                                                                                                                                
Per share data /1/:                                                                                                             
     Net income - Basic                                     $      1.39       $      1.29       $     0.79       $     0.55     
     Net income - Diluted                                   $      1.38       $      1.29       $     0.79       $     0.55     
     Cash dividends paid                                    $    0.4375       $    0.3975       $   0.3875       $    0.375     
     Annual dividend rate                                   $      0.45       $      0.40       $     0.39       $     0.38     
     Stockholders' equity                                   $     10.36       $      9.39       $     7.93       $     7.57     
     Closing sales price at December 31                     $        24 1/4   $        17 1/4   $       12 5/8   $       16 3/4 
     Price/earnings ratio                                          17.6x             13.4x            16.0x            30.6x    
     Weighted average shares outstanding - Basic                 40,834            40,787           40,786           40,786     
     Weighted average shares outstanding - Diluted               41,148            40,931           40,843           40,811     
                                                                                                                                
Return on average equity                                           14.1%             15.0%             10.2%            7.9%     
Return on average invested assets                                  6.94%             7.12%             7.60%           7.74%     
Life insurance in force                                     $11,000,049       $10,246,400       $ 9,463,055      $8,642,907     
Number of agents                                                    575               574               587             585     
</TABLE> 


1 Per share amounts have been restated where appropriate to reflect 2-for-1
stock split in June 1993.
2 Reflects effects of fresh start tax benefits of approximately $570,000, or
$.03 per share in 1990.

                                                                 1
<PAGE>
 
                                              SELECTED FINANCIAL DATA
<TABLE> 
<CAPTION> 

Consolidated Summary of Operations & Related Data
(Dollars in Thousands Except Per Share Amounts)
Years Ended December 31,                                            1994            1993            1992            1991      
                                                              ----------------------------------------------------------
<S>                                                           <C>             <C>             <C>             <C> 
Premiums - Property and Casualty Insurance                    $  214,326      $  189,057      $  173,075      $  164,573      
Premiums and policy charges - Life Insurance                      32,805          30,856          29,365          27,872      
Net investment income                                             45,554          44,902          39,425          34,785      
Net realized investment gains                                        572           4,890           4,232           3,790      
Other income                                                       3,057           2,918           2,340           1,919      
                                                              ----------------------------------------------------------
     Total revenues                                              296,313         272,624         248,437         232,939      
Benefits and expenses                                            248,481         209,309         194,859         192,144      
                                                              ----------------------------------------------------------
Income before provision for                                                                                                   
     income taxes                                                 47,832          63,315          53,578          40,795      
Provision for income taxes                                        14,965          20,999          16,660          12,354      
Cumulative effect of changes in accounting principles                              2,645                                      
                                                              ----------------------------------------------------------
     Net income                                               $   32,867      $   44,960      $   36,918      $   28,441      
                                                              ==========================================================
Balance sheet data at December 31:                                                                                            
     Invested assets                                          $  718,074      $  653,819      $  574,718      $  511,931      
     Total assets                                             $  847,870      $  766,077      $  665,247      $  595,801      
     Future policy benefits, losses and                                                                                       
     claims, unearned premiums                                $  429,930      $  365,148      $  334,454      $  295,443      
     Total liabilities                                        $  592,885      $  505,091      $  440,669      $  402,526      
     Stockholders' equity                                     $  254,985      $  260,986      $  224,578      $  193,275      
                                                                                                                              
Per share data /1/:                                                                                                           
     Net income - Basic                                       $     0.81      $     1.10      $     0.91      $     0.70      
     Net income - Diluted                                     $     0.81      $     1.10      $     0.91      $     0.70      
     Cash dividends paid                                      $   0.3425      $     0.28      $   0.2425      $    0.215      
     Annual dividend rate                                     $     0.36      $     0.29      $     0.25      $     0.22      
     Stockholders' equity                                     $     6.25      $     6.40      $     5.51      $     4.74      
     Closing sales price at December 31                       $       11      $       11 1/2  $       11 7/8  $        5 1/4  
     Price/earnings ratio                                           13.7x           10.4x           13.1x            7.5x   
     Weighted average shares outstanding - Basic                  40,786          40,786          40,786          40,786      
     Weighted average shares outstanding - Diluted                40,810          40,814          40,786          40,786      
                                                                                                                              
Return on average equity                                            12.7%           18.5%           17.7%           15.8%      
Return on average invested assets                                   7.78%           8.03%           8.28%           8.66%      
Life insurance in force                                       $7,867,808      $7,064,335      $6,295,626      $5,578,661      
Number of agents                                                     562             562             529             504        
</TABLE> 

<TABLE> 
<CAPTION> 
Consolidated Summary of Operations & Related Data              
(Dollars in Thousands Except Per Share Amounts)                
Years Ended December 31,                                            1990                1989               1988      
                                                               ----------------------------------------------------
<S>                                                            <C>                  <C>                  <C> 
Premiums - Property and Casualty Insurance                     $  149,840           $  134,737           $  125,938  
Premiums and policy charges - Life Insurance                       25,608               23,848               22,349  
Net investment income                                              32,224               30,048               26,224  
Net realized investment gains                                       2,842                2,882                2,005  
Other income                                                        1,861                1,172                1,402  
                                                               ----------------------------------------------------
     Total revenues                                               212,375              192,687              177,918  
Benefits and expenses                                             180,611              159,912              144,229  
                                                               ----------------------------------------------------
Income before provision for                                                                                          
     income taxes                                                  31,764               32,775               33,689  
Provision for income taxes                                          8,877 /2/            9,919               10,842  
Cumulative effect of changes in accounting principles                                                                
                                                               ----------------------------------------------------
     Net income                                                $   22,887 /2/       $   22,856           $   22,847  
                                                               ====================================================
Balance sheet data at December 31:                                                                                   
     Invested assets                                           $  437,725           $  410,266           $  363,401  
     Total assets                                              $  515,681           $  482,383           $  432,312  
     Future policy benefits, losses and                                                                              
     claims, unearned premiums                                 $  257,907           $  223,925           $  192,113  
     Total liabilities                                         $  347,861           $  319,598           $  288,094  
     Stockholders' equity                                      $  167,820           $  162,785           $  144,218  
                                                                                                                     
Per share data /1/:                                                                                                  
     Net income - Basic                                        $     0.55 /2/       $     0.55           $     0.58  
     Net income - Diluted                                      $     0.55 /2/       $     0.55           $     0.58  
     Cash dividends paid                                       $    0.195           $   0.1725           $    0.145  
     Annual dividend rate                                      $     0.20           $     0.18           $     0.15  
     Stockholders' equity                                      $     4.11           $     3.89           $     3.44  
     Closing sales price at December 31                        $        4 5/8       $        5 5/8       $        5  
     Price/earnings ratio                                             8.4x                10.3x                 8.6x 
     Weighted average shares outstanding - Basic                   41,611               41,882               39,265  
     Weighted average shares outstanding - Diluted                 41,611               41,882               39,265  
                                                                                                                     
Return on average equity                                             13.8%/2/             14.9%                20.4%  
Return on average invested assets                                    9.00%                9.43%                9.91%  
Life insurance in force                                        $4,947,574           $4,318,605           $3,661,747  
Number of agents                                                      500                  486                  454   
</TABLE> 


                                                    2
<PAGE>
 
RESULTS OF OPERATIONS

  The following table sets forth consolidated summarized income statement
information for the years ended December 31, 1998, 1997 and 1996:


                                      Years Ended December 31,
                            ---------------------------------------
                                 1998          1997          1996
                            ---------------------------------------
                                  (in thousands, except share
                                      and per share data)
Revenues
 Life insurance premiums
  and policy charges        $    46,099    $    40,659  $    38,248
                            =======================================
 Property and casualty
  insurance premiums        $   345,740    $   330,306  $   298,939
                            =======================================
 Net investment income      $    62,512    $    57,529  $    54,194
                            =======================================
 Total revenues             $   460,986    $   434,010  $   396,336
                            =======================================
Net income
 Insurance operations
  Life insurance            $    15,645    $    14,580  $    14,952
  Property and casualty
  insurance                      41,581         36,571       15,189
 Noninsurance operations          2,192          2,628        3,339
 Net realized
  investment gains                2,858          2,182        1,825
 Corporate                       (5,560)        (3,167)      (3,116)
                            ---------------------------------------
  Net income                $    56,716    $    52,794  $    32,189
                            =======================================
 
  Net income per share
   Basic                    $      1.39    $      1.29  $       .79
                            =======================================
   Diluted                  $      1.38    $      1.29  $       .79
                            =======================================
Weighted average shares
 outstanding
  Basic                      40,834,232     40,787,047   40,786,561
                            ======================================= 
  Diluted                    41,148,258     40,930,894   40,843,548
                            ======================================= 

  Life insurance premiums and policy charges increased $5.4 million, or 13.4% in
1998, and $2.4 million, or 6.3% in 1997. These rates of growth have been
impacted by changes in group life business, which is discussed below in the Life
Insurance Operations section of this discussion. Excluding group premiums, the
growth rates in life insurance premiums and policy charges were 7.5% and 7.9% in
1998 and 1997, respectively, and are due to production of new business.
Property and casualty insurance premiums increased $15.4 million, or 4.7% in
1998 and $31.3 million, or 10.5% in 1997 due primarily to increased production,
rate increases and a low lapse ratio.  In addition, premium growth was
positively impacted in 1997 by a significant reduction in reinsurance premiums
paid.  Net investment income grew 8.7% in 1998 and 6.2% in 1997 due to an
increase in invested assets resulting from positive cash flows.

  The improved property and casualty operating results in both years are due
primarily to significantly improved property and casualty loss ratios,
particularly in the automobile line of business, the company's largest line.
Such improvement is the result of underwriting initiatives which began in late
1996 and early 1997. The results for 1996 include the effects of significant
first quarter storms, which resulted in a net loss for the first quarter of 1996
of $58 thousand. Life insurance operating income increased 7.3% in 1998 due to
increased business, improved persistency and increased investment income. The
growth in 1998 was offset somewhat by an increase in death claims. Increased
mortality expense also caused the 2.5% decline in operating income in 1997.

  Noninsurance operating income decreased 16.6% in 1998 and 21.3% in 1997 due to
declines in profits of the consumer finance and real estate subsidiaries, offset
partially by improvement in earnings of the construction subsidiary. Corporate
expenses increased $2.4 million in 1998 due primarily to increased legal
expenses and related costs.

  In all years presented, favorable securities market conditions resulted in a
significant increase in realized investment gains.

  Net income improved 7.4% in 1998 compared to 1997 and increased 64.0% in 1997
compared to 1996.

PROPERTY AND CASUALTY INSURANCE OPERATIONS

  The following table sets forth the components of property and casualty
insurance earned premiums, net underwriting income (loss), GAAP basis loss,
expense and combined ratios, underwriting margin, net investment income and
operating income for the years ended December 31, 1998, 1997 and 1996:
 
                                 Years Ended December 31,
                             --------------------------------
                                1998       1997        1996
                             --------------------------------
                                       (in thousands)

Earned premiums
  Personal lines              $330,511   $315,650    $292,330
  Commercial lines              12,354     11,772      11,231
  Pools, associations
    and fees                     4,036      4,014       3,905
  Reinsurance ceded             (1,161)    (1,130)     (8,527)
                              -------------------------------
      Total                   $345,740   $330,306    $298,939
                              =============================== 
Net underwriting
  income (loss)               $ 33,183   $ 28,061    $ (2,235)
                              =============================== 
Loss Ratio                        62.8%      65.0%       73.8%
LAE Ratio                          5.0%       5.0%        5.3%
Expense Ratio                     22.6%      21.5%       21.6%
                              -------------------------------
GAAP basis combined ratio         90.4%      91.5%      100.7%
                              =============================== 
Underwriting margin                9.6%       8.5%       (0.7%)
                              =============================== 
Net investment income         $ 25,992   $ 23,935    $ 22,251
                              =============================== 
Operating income before
 tax                          $ 59,156   $ 51,955    $ 19,585
                              =============================== 
Operating income,
 net of tax                   $ 41,581   $ 36,571    $ 15,189
                              ===============================

                                       3
<PAGE>
 
1998 Compared to 1997

  Earned premiums increased 4.7% in 1998 due to the impact of prior year rate
changes, new business and a low lapse ratio of 3.98%.  Operating results in 1998
increased 13.7% to $41.6 million due primarily to the growth in underwriting
income.  The underwriting margin of 9.6% in 1998 is the result of a 62.8% loss
ratio (60.9% excluding storm losses) and a 27.6% expense ratio compared to a
loss ratio of 65.0% and an expense ratio of 26.5% in 1997.  The loss ratio
improvement is due primarily to an improved loss ratio in the automobile line of
business which accounts for over 65% of property casualty premiums.

  The Alfa Group had approximately $45 million in gross catastrophe losses
during 1998 due to Hurricane Georges in September 1998 and due to the impact of
tornadoes, hail and other severe weather which occurred in April and June 1998.
The effect of claims from these events impacted second quarter underwriting
results by $6.5 million pre-tax, or $0.10 per share, net of taxes, based upon
the intercompany pooling arrangement and Alfa group-wide reinsurance protection.
The company had no significant storm related losses in 1997.

  The expense ratio deteriorated by 1.1% of premium in 1998.  Although the
majority of general expenses have remained relatively stable due to a continued
focus on controlling costs, the company has incurred significantly increased
costs related to technology expenditures of approximately $4.2 million in 1998.
Such costs include approximately $900,000 related to Year 2000 efforts. The
technology projects are ongoing in 1999 and such costs are likely to continue.

  Invested assets grew 8.3% in 1998 and investment income increased 8.6% as a
result of the positive cash flows produced by increased underwriting results.

  Risk-Based Capital measures were adopted by the property and casualty industry
during 1994.  These measures serve as a benchmark for the regulation of an
organization's solvency by state insurance regulators.  At December 31, 1998,
the Company's property and casualty subsidiaries' Adjusted Capital calculated in
accordance with NAIC Risk-Based Capital (RBC) guidelines was $195.1  million
compared to the Authorized Control Level (Required) RBC of $18.9  million.

1997 Compared to 1996

  Earned premiums increased 10.5% in 1997 due to new business, rate increases, a
low lapse ratio of 4.0% and a reduction in reinsurance premiums expense.  As a
result of the Company's catastrophe protection program, the exposure to losses
from significant weather events has been lessened for Alfa Corporation, reducing
the need for and amount of reinsurance protection, thereby reducing such
expenses.

  Operating income more than doubled in 1997 as a result of significantly
improved underwriting results.  The underwriting margin of 8.5% is due primarily
to the improvement in the loss ratio from 73.8% in 1996 to 65.0% in 1997.  The
improvement is a result of both a reduction in significant storm related claims
and from underwriting initiatives implemented during the last two years,
including tightened underwriting standards, new underwriting guidelines and
other measures.

  The expense ratio was 26.5% in 1997 compared to 26.9% in 1996.  The Company's
ongoing expense focus has positively impacted results, however, increased
technology expenditures that are ongoing partially offset the expense
improvement.

  Invested assets grew 18.0% and investment income grew 7.6% in 1997 as  result
of positive cash flows in the property casualty subsidiaries.  A significant
factor in the growth in assets was the growth in market values of fixed
maturities and equity securities and from short term borrowed funds held at
December 31, 1997. Excluding these items, growth in assets approximated the
growth rate in investment income.

LIFE INSURANCE OPERATIONS

  The following table sets forth life insurance premiums and policy charges, by
type of policy, net investment income, benefits and expenses and life insurance
operating income for the years ended December 31, 1998, 1997 and 1996:

                                Years Ended December 31,
                                ------------------------
                                1998      1997      1996
                                ------------------------
                                      (in thousands)

Premiums and policy charges
  Universal life
    policy  charges             $12,381  $11,296   $10,075
  Universal life
    policy charges - COLI         2,133    1,858         -
  Interest sensitive life
    policy charges                9,727    9,306     8,589
  Traditional life
    insurance premiums           21,494   19,958    18,931
  Group life
    insurance premiums              364   (1,759)      653
                                --------------------------
  Total                         $46,099  $40,659   $38,248
                                ========================== 
Net investment income           $34,890  $31,646   $29,254
                                ========================== 
Benefits and expenses           $52,980  $45,041   $39,610
                                ========================== 
Operating income before tax     $21,988  $20,750   $21,830
                                ==========================
Operating income, net of tax    $15,645  $14,580   $14,952
                                ==========================

1998 Compared to 1997

  The Company's life insurance premiums and policy charges increased 13.4 % in
1998 . Premiums and policy charges were significantly impacted by the change in
1997 in group life insurance, which is provided by Alfa Mutual Insurance
Company, (Mutual), an affiliate, to its employees.  In 1997, Mutual began
utilizing corporate 

                                       4
<PAGE>
 
owned life insurance (COLI) using Alfa Life's universal life product. The result
has been additional policy charges of $2.1 million in 1998 and $1.9 million in
1997. The growth rate was also significantly impacted by a net reduction in 1997
of traditional group premium of $1.8 million, including an experience refund of
premium reserves held by Life. Although these changes affected premium revenue
growth rates, they did not have a material impact on earnings in 1998 or 1997.
Both the Company and the other members of the Alfa Group believe the new program
will be mutually beneficial to results in the future.

  Excluding the impact on premiums from such business, the premium growth rate
for 1998 was 7.5%.  New business premium increased 10.3% for 1998 primarily from
sales of universal life policies and term business.  The persistency rate
remained high at 92.1%.

  Life insurance operating income increased approximately 7.3% in 1998.  Death
claims increased 30.1% in 1998 and mortality was 109% of expected compared to
91% in 1997. However, investment income increased 10.3% while invested assets
grew by 8.5% due to positive cash flows. General expenses remained relatively
flat, although premium taxes increased $235,249 due to both the increase in
premiums and an increase in the premium tax rate.  The rate has increased in
1998 from 1.8% to 2.1% and will increase to 2.3% in 1999 and thereafter.

  At December 31, 1998 the life subsidiary's Adjusted Capital calculated in
accordance with NAIC Risk-Based Capital (RBC) guidelines was $149.1 million
compared to the Authorized Control Level (Required) RBC amount of $18.0 million.
The Risk-Based Capital analysis serves as the benchmark for the regulation of
life insurance enterprises' solvency by state insurance regulators.

1997 Compared to 1996

  In 1997, life insurance premiums and policy charges increased 6.3% and
operating income decreased 2.5%.  New premium production increased 6.7% and
persistency remained high at 91.8%.  The Company's Universal Life product
continued to be the leading policy in new sales.  Universal Life policy charges
increased 12.1% in 1997.  Policy charges on interest sensitive life increased
8.3% and traditional life insurance premiums increased 5.4%.  Term products were
the leading traditional product.  First year term premiums increased 6.8% and
renewal business increased 12.8% due to good persistency.

  Also, premiums and policy charges were impacted by a change in group life
insurance, which is provided by Alfa Mutual Insurance Company, (Mutual), an
affiliate, to its employees.  In 1997, Mutual began utilizing corporate owned
life insurance (COLI) using Alfa Life's universal life product.  The result was
an increase in policy charges of $1.9 million and a reduction in group premium
for 1997 of $2.4 million, including an experience  refund of premium reserves
held by Life.  Although these changes affected premium revenue growth rates,
they did not have a material impact on earnings in 1997.

  The primary factor in the decline in operating income was the mortality
experience.  Although the mortality ratio was favorable at 91% of expected in
1997, it increased from a more favorable 85% of expected in 1996 during which
time total death claims increased $2.7 million or 30.7%.  The Company's life
insurance subsidiary incurred $1.5 million in additional expense in 1997 related
to lawsuits.  Premium taxes increased due to both the increase in premiums and
an increase in the premium tax rate in 1997.  The rate is scheduled to increase
again in 1998 from 1.8% to 2.1% and to 2.3% in 1999 and thereafter.  Otherwise,
expense levels remained relatively flat.  Investment income grew 8.2% in 1997
due to increased positive cash flows which increased invested assets 15.2%,
largely due to the new COLI plan.  The investment yield rate was  lower in 1997,
due to falling interest rates and due to investments in certain tax credits
which lower investment income, but also lower income taxes, and have an overall
positive impact on net income.

NONINSURANCE OPERATIONS

1998 Compared to 1997

  Noninsurance earnings declined 16.6% in 1998 due primarily to a decrease of
19.1% or approximately $450,000 in net income in the consumer finance
subsidiary.  The loan portfolio remained relatively unchanged at $56.0 million
but the overall portfolio yield rate declined 73 basis points, resulting in a
13.3% decrease in interest income.  Net leasing revenue also decreased 5.3%.
The real estate subsidiary's earnings were down approximately $21,000 or 26.9%
in 1998 due to a decrease in both commercial and residential sales activity.
Partially offsetting these declines was a 25.4%, or $40,749 increase in
construction income.

1997 Compared to 1996

  Noninsurance earnings declined 16.6% in 1997 due primarily to a decrease of
22.2% or approximately $680,000 in net income in the consumer finance
subsidiary.  An 8.6% decrease in the loan portfolio to $56.2 million combined
with a decline in the overall portfolio yield rate of 30 basis points resulted
in a 16.8% decrease in interest income.  Additionally, net leasing revenue
decreased 13.8%.   The real estate sales subsidiary's earnings were down
$74,292, or 49.0% in 1997 due to a reduction in both commercial and residential
sales activity.  Partially offsetting these declines was a 43.9%, or $44,592
increase in construction income.

CORPORATE

  In 1998, the Company incurred approximately $2.3 million in legal expenses and
related costs at the corporate level, which is the primary reason for the
increase in corporate expense for the year. Interest expense on short term
corporate debt is the only other primary corporate expense, which totaled
approximately $1.8 million

                                       5
<PAGE>
 
for each year presented.  At December 31, 1998, corporate debt was $31.8 million
at an average rate of 5.5%.  The remaining corporate expenses represent  general
operating expenses.  Total corporate expense was $5.6 million in 1998, $3.2
million in 1997 and $3.1 million in 1996.

INVESTMENTS

  The Company has historically produced positive cash flow from operations which
has resulted in increasing amounts of funds available for investment and,
consequently, higher investment income.  Investment income is also affected by
investment yield rates.  Information about cash flows, invested assets and yield
rates is presented below for the years ended December 31, 1998, 1997 and 1996:
  
                             Years Ended December 31,
                             ------------------------
                                1998   1997   1996
                             ------------------------
Increase in cash
  flow from operations          8.1%  35.9%  14.0%
Increase in invested assets     5.5%  16.0%   5.3%
Investment yield rate           6.9%   7.1%   7.6%
Increase in net investment
  income                        8.7%   6.2%   6.4%

  The 8.1%  increase in positive cash flow from operations in 1998 and the 35.9%
increase in 1997 is due primarily to improved operating results in the Company's
property and casualty subsidiaries, which had underwriting income of $33.2
million in 1998 and $28.1 million in 1997 due to lower loss ratios and an
absence of storm losses in 1997.  In addition, the new COLI plan in the life
insurance subsidiary provided approximately $12 million in additional cash flow
in 1998 and $10 million in 1997.  As a result of these positive cash flows,
invested assets grew 5.6% in 1998 and 12.5% in 1997 (based on amortized cost,
which excludes the impact of SFAS 115), and net investment income increased 8.7%
in 1998 and 6.2% in 1997.  The overall yield rate, calculated using amortized
cost, declined in 1998 and 1997 as maturing investments were reinvested at lower
rates due to a decline in interest rates generally.

  Positive cash flow from operations increased 14.0% in 1996 due entirely to the
impact on cash flows in 1995 of Hurricane Opal, which occurred in October, 1995.
The overall increase in positive cash flow in 1996 increased invested assets
7.4% excluding the market value impact of SFAS115.  Net investment income
increased 6.4% in 1996.

  The Company had realized investment gains of approximately $4.4 million in
1998, $3.4 million in 1997 and $2.8 million in 1996.  These gains are from sales
of equity securities, gains in the Company's put option and covered call option
writing program and gains from sales of fixed maturities available for sale.

  The composition of the Company's investment portfolio is as follows at
December 31, 1998 and 1997:

                                  December 31,
                                 -------------
                                  1998   1997
                                 -------------
Fixed maturities
  Taxables
    Mortgage backed (CMOs)        27.9%  30.2%
    Corporate bonds               30.2   29.6
                                -------------
      Total taxable               58.1   59.8
  Tax exempts                     13.5   11.6
                                -------------
      Total fixed maturities      71.6   71.4
                                -------------
Equity securities                  9.5   11.3
Mortgage loans                       -     .1
Real estate                         .1     .2
Policy loans                       3.6    3.4
Other long term investments       10.2   11.2
Short term investments             5.0    2.4
                                -------------
                                 100.0% 100.0%
                                =============


The majority of the Company's investment portfolio consists of fixed maturities
which are diverse as to both industry and geographic concentration. In 1998, the
overall mix of investments remained relatively stable with changes due to market
fluctuations in equities and a reduction in CMO's related to increased paydowns
being invested in corporate and tax exempt bonds and in short term investments.
Long term investments decreased due primarily to a reduction in loan receivable
from Alfa Mutual Insurance Company, an affiliate.

  The rating of the Company's portfolio of fixed maturities using the Standard &
Poor's rating categories is as follows at December 31, 1998 and 1997:
 
                                           December 31,
                                          -------------
                                          1998     1997
                                          -------------
AAA to A-                                   89.2%  87.1%
BBB+ to BBB-                                 9.8   12.3
BB+ and below (below investment grade)       1.0    0.6
                                          -------------
                                           100.0% 100.0%
                                          =============


  At December 31, 1998, approximately 0.28% of the fixed maturity portfolio was
not rated by an outside rating service. The Company considers bonds with a
quality rating of BB+ and below to be below investment grade or high yield bonds
(also called junk bonds).

  At December 31, 1998, approximately 39.0% of fixed maturities were mortgage
backed securities.  Such securities are comprised of Collateral Mortgage
Obligations (CMO's) and pass through securities.  Based on reviews of the
Company's portfolio of mortgage-backed securities, the impact of prepayment risk
on the Company's financial position is not believed to be significant. These
risks are discussed in more detail below in the Market Risk Disclosures section.
At December 31, 1998 the Company's total portfolio of fixed 

                                       6
<PAGE>
 
maturities had gross unrealized gains of $39.9 million and gross unrealized
losses of $7.1 million. Securities are priced by nationally recognized pricing
services or by broker/dealers securities firms. Only 0.28% were priced by the
Company.

  During 1998, the Company sold approximately $59.8 million in fixed maturities
available for sale. These sales resulted in gross realized gains of $653,398 and
gross realized losses of $167,174.   During 1997, the Company sold approximately
$26.2 million in fixed maturities available for sale.  These sales resulted in
gross realized gains of $714,990 and gross realized losses of $61,526.

  The Company monitors its level of investments in high yield fixed maturities
and its level of equity investments in companies that issue high yield debt
securities.  Management believes the level of such investments is not
significant to the Company's financial condition.  At December 31, 1998 and
1997, the Company had unrealized gains of approximately $4.8 and $5.5 million,
respectively, in such investments.   During 1998 and 1997, the Company had no
disposals of high yield debt securities.

  In 1998 the Company wrote down one bond issue totaling $1,357,464 and seven
equity securities totaling $1,762,105 whose declines in value were deemed to be
other than temporary. Similarly, in 1997 the Company wrote down two bond issues
totaling $497,493 and four equity securities totaling $429,347 whose declines in
value were deemed to be other than temporary.  At December 31, 1998 and 1997,
there were no nonperforming bonds in the portfolio.

  The Company's investment in other long term investments consists primarily of
loans originated by the consumer finance subsidiary.   These loans are
collateralized by automobiles and other property.  At December 31, 1998, the
delinquency ratio on the loan portfolio was 2.04%, or $1.0 million.  Loans
charged off in 1998 totaled $562,173 or 1.1% of the average outstanding loan
portfolio. At December 31, 1998, the Company maintained an allowance for loan
losses of $584,178 or approximately 1.2% of the outstanding loan balance.  Long
term investments also include assets leased under operating leases, partnership
investments and certain other investments.


MARKET RISK DISCLOSURES

  The Company's investments and certain of its debt liabilities are financial
instruments which are subject to market risk, or the risk of potential loss in
fair value, future earnings or cash flow as a result of changes in equity
prices, interest rates, foreign exchange rates and commodity prices.  The
primary market risks to the Company are equity price risk associated with
investments in equity securities and interest rate risk associated with
investments in fixed maturities.  The Company's exposure to commodity risk or
foreign exchange risk is immaterial.

  The estimated fair value of the Company's investment portfolio at December 31,
1998 was $1.085 billion, 71.6% of which was invested in fixed maturities, 9.5%
in equity securities, 5.3% in mortgage and collateral loans, 5.0% in short term
investments and 8.7% in other long term investments.

EQUITY PRICE RISK

  The company invests in equity securities which have historically, over long
periods of time, produced higher returns relative to fixed income investments.
The Company seeks to invest at reasonable prices in companies with solid
business plans and capable management.  The Company intends to hold these
investments over the long term.  This focus on long term total investment
returns may result in variability in the level of unrealized investment gains
and losses from one period to the next.  The changes in the estimated fair value
of the equity portfolio are presented as a component of shareholders' equity in
accumulated other comprehensive income, net of taxes.

  At December 31, 1998, the Company's equity portfolio was concentrated in terms
of the number of issuers and industries.  At December 31, 1998, the Company's
top ten equity holdings represented $52.6 million or 49% of the equity
portfolio.  Investments in the financial industry represented 38.6% of the
equity portfolio at December 31, 1998.  Such concentration can lead to higher
levels of short-term price volatility.  Due to its long-term investment focus,
the Company is not as concerned with short-term volatility as long as its
subsidiaries' ability to write business is not impaired.

  The table below summarizes the Company's equity price risk and shows the
effect of a hypothetical 20% increase and a 20% decrease in market prices as of
December 31, 1998.  The selected hypothetical changes do not indicate what could
be the potential best or worse case scenarios:

<TABLE> 
<CAPTION> 

   Estimated                                    Estimated           Hypothetical
 Fair Value of                                Fair Value After   Percentage Increase
Equity Securities         Hypothetical         Hypothetical        (Decrease) in
  at 12/31/98             Price Change       Change in Prices   Stockholders' Equity
------------------------------------------------------------------------------------
                            (dollars in thousands)
<S>                  <C>                     <C>               <C>
 $103,055                 20% increase           $123,666               3.2%
                          20%decrease            $ 82,444              (3.2%)
 
</TABLE>

INTEREST RATE RISK

  The Company's fixed maturity investments and borrowings are subject to
interest rate risk. Increases and decreases in interest rates typically result
in decreases and increases in the fair value of these financial instruments.

  The Company's fixed income portfolio is invested predominantly in high quality
corporate, mortgage-backed, government and municipal bonds.  The fixed income
portfolio has an average effective duration of 5.07 years and an average quality
rating of AA.  The changes in the fair market value of the fixed maturity
portfolio are presented as a component of shareholders' equity in accumulated
other comprehensive income, net of taxes.

  The Company works to manage the impact of interest rate fluctuations on its
fixed income portfolio.  The effective duration of the portfolio is managed to
diversify its distribution.  This duration distribution, as well as the
portfolio's relatively short duration, serves to moderate the impact of large
swings in interest rates on the fixed income portfolio.

                                       7
<PAGE>
 
  The table below summarizes the Company's interest rate risk and shows the
effect of a hypothetical change in interest rates as of December 31, 1998. The
selected hypothetical changes do not indicate what would be the potential best
or worst case scenarios:
<TABLE>
<CAPTION>
 
                                                                      Estimated              Estimated              Hypothetical
                                                   Estimated          Change In           Fair Value After       Percentage Increase
                                                 Fair Value at      Interest Rate        Hypothetical Change       (Decrease) in
(Dollars in Thousands)                         December 31, 1998   (bp=basis points)      in Interest Rate      Shareholder's Equity

------------------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>                  <C>                   <C>                   <C>
FIXED MATURITY
INVESTMENTS
------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Securities and                       $ 56,358         200 bp decrease            $ 61,551                    0.8%
obligations of U.S.                                                 100 bp decrease              57,585                    0.2
government corporations and                                         100 bp increase              51,087                   (0.8)
agencies                                                            200 bp increase              48,200                   (1.3)
------------------------------------------------------------------------------------------------------------------------------------
Tax-exempt obligations of states,                   $142,896        200 bp decrease            $161,190                    2.8%
municipalities and political                                        100 bp decrease             151,958                    1.4
subdivisions                                                        100 bp increase             134,041                   (1.4)
                                                                    200 bp increase             125,558                   (2.7)
------------------------------------------------------------------------------------------------------------------------------------
Mortgaged backed securities                         $302,595        200 bp decrease            $316,716                    2.2%
                                                                    100 bp decrease             309,122                    1.0
                                                                    100 bp increase             291,258                   (1.7)
                                                                    200 bp increase             276,784                   (4.0)
------------------------------------------------------------------------------------------------------------------------------------
Corporate, taxable municipal                        $274,058        200 bp decrease            $308,537                    5.3%
and other debt securities                                           100 bp decrease             288,760                    2.3
                                                                    100 bp increase             252,394                   (3.3)
                                                                    200 bp increase             235,938                   (5.8)
------------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES                              $775,907        200 bp decrease            $847,994                   11.1%
                                                                    100 bp decrease             807,425                    4.8
                                                                    100 bp increase             728,780                   (7.2)
                                                                    200 bp increase             686,480                  (13.7)
====================================================================================================================================
MORTGAGE AND                                        $ 57,597        200 bp decrease            $ 60,285                    *
COLLATERAL LOANS                                                    100 bp decrease              58,839                    *
                                                                    100 bp increase              55,439                    *
                                                                    200 bp increase              52,684                    *
====================================================================================================================================
SHORT TERM                                          $ 54,637        200 bp decrease            $ 59,671                    *
INVESTMENTS                                                         100 bp decrease              55,826                    *
                                                                    100 bp increase              49,527                    *
                                                                    200 bp increase              46,728                    *
====================================================================================================================================
LIABILITIES                                                                                                                
------------------------------------------------------------------------------------------------------------------------------------
5.95% Commercial Paper                              $ 57,260        200 bp decrease            $ 62,536                    *
                                                                    100 bp decrease              58,507                    *
                                                                    100 bp increase              51,904                    *
                                                                    200 bp increase              48,972                    *
------------------------------------------------------------------------------------------------------------------------------------
Short Term Notes Payable                            $  9,545        200 bp decrease            $ 10,424                    *
                                                                    100 bp decrease               9,753                    *
                                                                    100 bp increase               8,652                    *
                                                                    200 bp increase               8,163                    *
====================================================================================================================================
*Changes in estimated fair value have no impact on shareholders' equity.
</TABLE>

                                       8
<PAGE>
 
INCOME TAXES

  The effective tax rate was 31.9% in 1998, 31.3% in 1997 and 29.8% in 1996.
The increase in income tax expense in 1998 over 1997 and in 1997 compared to
1996 is due primarily to the increase in income before provision for income
taxes in both years.  The increase in the effective rate is due to the  relative
mix of taxable versus tax-exempt income.  The effective rate has also been
impacted by the Company's investment in certain tax credits which has lowered
income tax expense.

IMPACT OF INFLATION

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

LIQUIDITY AND CAPITAL  RESOURCES

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

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

  On October 25, 1993, the Company established a Stock Option Plan, pursuant to
which a maximum aggregate of 2,000,000 shares of common stock have been reserved
for grant of options to key personnel. The plan expires on October 24, 2003.
The Company granted 783,400 such options on October 25, 1993, 80,000 options on
March 28, 1994, 80,000 options on March 27, 1995, 80,000 options on April 18,
1996, 75,000 options on February 18, 1997 and 452,500 options on March 23, 1998.
The options ratably become exercisable annually over three years, and may not be
exercised after ten years after the date of award.  At December 31, 1998 there
had been 115,999 options exercised, 847,923 options were exercisable and 65,501
had been cancelled leaving 514,601 options available for grant under the plan.

  In October 1989, the Company's Board of Directors approved a stock repurchase
program authorizing the repurchase of up to 2,000,000 shares  of its outstanding
common stock in the open market or in negotiated transactions in such quantities
and at such times and prices as management may decide. During 1998, the Company
repurchased 22,000 shares at a cost of $419,471.  At December 31, 1998, the
Company had repurchased 1,119,600 shares at a cost of $5,050,241.  The Company
has reissued 115,999 treasury shares as a result of option exercises.

  Total borrowings decreased $34.8 million in 1998 to $66.8 million.  The
majority of the short term debt is commercial paper issued by the Company. At
December 31, 1998 the Company had approximately $57.3 million in commercial
paper at a rate of 5.95% with maturities ranging from January 4, 1999 to January
5, 1999.  The Company intends to continue to use the commercial paper program to
fund the consumer loan portfolio and other corporate short term needs.  Backup
lines of credit are in place up to $80 million.  The backup lines agreements
contain usual and customary covenants requiring the Company to meet certain
operating levels.  The Company has maintained full compliance with all such
covenants. The Company has an A-1+,  P-1 commercial paper rating from Standard &
Poor's and Moody's Investors Service.  The commercial paper is guaranteed by an
affiliate, Alfa Mutual Insurance Company.  In addition, the Company had $9.4
million in short-term debt outstanding to affiliates at December 31, 1998 with
interest equal to commercial paper rates payable monthly and $106,765
outstanding in other short-term debt at a rate of 7.0%.

  Cash surrenders paid to policyholders on a statutory basis totaled $12.2
million in 1998 and $10.9 million in 1997.  This level of surrenders is within
the Company's pricing expectations. Historical persistency rates indicate a
normal pattern of surrender activity in 1998, 1997 and 1996.   The structure of
the surrender charges is such that persistency is encouraged.  The majority of
the policies in force have surrender charges  which grade downward over a 12 to
15 year period.  In addition, the majority of the in-force business is interest
sensitive type policies which generally have lower rates of surrender.  At
December 31, 1998 the total amount of cash that would be required to fund all
amounts subject to surrender was approximately $288.9 million.

  On November 6, 1998, the Company, along with affiliates Alfa Mutual Insurance
Company and Alfa Mutual Fire Insurance Company, announced the signing of a
Letter of Intent to enter into a strategic alliance with Vesta Insurance Group,
Inc.  In February 1999 the Company announced that the Letter of Intent had
expired and that the parties did not execute a definitive agreement.

  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 

                                       9
<PAGE>
 
more significant effect on the Company than on a more geographically diversified
insurance company. Unusually severe storms, other natural disasters and other
events could have an adverse impact on the Company's financial condition and
operating results. However, the Company's intercompany pooling arrangement and
group-wide catastrophe protection program, which began November 1, 1996, reduced
the earnings volatility caused by such catastrophe exposures.

  Increasing public interest in the availability and affordability of insurance
has prompted legislative, regulatory and judicial activity in several states.
This  includes efforts to contain insurance prices, restrict underwriting
practices and risk classifications, mandate rate reductions and refunds,
eliminate or reduce exemptions from antitrust laws and generally expand
regulation.  Because of Alabama's low automobile rates as compared to rates in
most other states, the Company does not expect the type of punitive legislation
and initiatives found in some states to be a factor in its primary market in the
immediate future.

YEAR 2000

  The Company initially started the identification of year 2000 issues in 1994
and began its internal programming modifications in 1995.  These phases along
with the testing have continued during the last three years.  The Company
believes it has substantially completed the identification and programming steps
and at December 31, 1998 is approximately 90% complete with actual application
and scenario testing, whereby dates are manipulated and results are compared for
accuracy.  Such testing and completion of internal programming is currently
scheduled to be completed in the second quarter of 1999.  A summary of mission
critical systems is shown below indicating the status of the Company's
remediation and testing efforts at December 31, 1998. In 1998, the Company also
addressed the issues related to year 2000 in regards to material relationships
with third parties, vendors, suppliers, etc. and has identified such providers,
surveying their efforts and requesting written assurances that year 2000 issues
have been addressed.  Of the vendor operating system software identified during
this process, approximately 90% of the programs have been labeled as "year 2000
compliant" by the vendors.  In the event that such software fails despite
written assurances and internal testing, the Company expects to work closely
with the vendors to find a remedy in a timely fashion.  Also, the Company is
continuing to review all significant non-information technology systems for year
2000 compliance.  The most significant such system, the telephone system, has
already been determined to be year 2000 compliant.  These efforts as well as the
final phase, follow-up on any unresolved year 2000 issues, are expected to be
completed during the first half of 1999.

  The Company has not utilized any year 2000 solution providers in addressing
compliance of its mainframe systems.  To date, the issues have been addressed
with internal resources.  However, the Company has contracted with external
consultants to assist in the review and updating of its personal computer
systems and associated hardware and software.  Due to the longevity of the
process, the number of employees and resources devoted to the efforts and the
time spent, it is not practicable to determine precisely the total costs
attributable to the year 2000 issue.  These costs have been expensed as incurred
throughout the process.  However, the Company estimates that to date,
approximately $1.7 million has been spent on year 2000 efforts, with almost
$900,000 expensed in 1998.  Future costs, including $500,000 for the external
consultant costs of the 
 
                      SUMMARY OF MISSION CRITICAL SYSTEMS

<TABLE>
<CAPTION>
                                                       Remediation/   System     Goal
Mission Critical Systems                    Research   Programming    Testing    Date
---------------------------------------------------------------------------------------
<S>                                         <C>        <C>           <C>        <C>
Accounting                                  Completed   Completed    Completed    N/A
---------------------------------------------------------------------------------------
Agent Compensation                          Completed   Completed     Started   4/30/99
---------------------------------------------------------------------------------------
Claims                                      Completed   Completed    Completed    N/A
---------------------------------------------------------------------------------------
Investment Management                       Completed   Completed    Completed    N/A
---------------------------------------------------------------------------------------
Life Policy Administration                  Completed   Completed     Started   4/30/99
---------------------------------------------------------------------------------------
Loan Processing                             Completed   Completed     Started   4/30/99
---------------------------------------------------------------------------------------
Payment Processing                          Completed   Completed     Started   4/30/99
---------------------------------------------------------------------------------------
Payroll Processing                          Completed   Completed    Completed    N/A
---------------------------------------------------------------------------------------
Personal Computers - Field                  Completed   Completed    Completed    N/A
---------------------------------------------------------------------------------------
Personal Computer - Based Field Programs    Completed   Completed     Started   4/30/99
---------------------------------------------------------------------------------------
Personal Computers - Home Office            Completed    Started      Started   6/25/99
---------------------------------------------------------------------------------------
Postal Software                             Completed   Completed    Completed    N/A
---------------------------------------------------------------------------------------
Property/Casualty Policy Administration     Completed   Completed    Completed    N/A
---------------------------------------------------------------------------------------
</TABLE>

                                       10
<PAGE>
 
personal computer systems reviews and $400,000 for payment processing software,
are currently anticipated to total $1.2 million, for a total estimated cost of
year 2000 efforts of $2.9 million. The Company has absorbed the costs into its
operations with no significant adverse impact on its financial condition or
results of operations. The resources utilized have caused some normal
operational enhancements and systems development to be deferred or delayed.
However, any systems maintenance or statutory required updates have not been
affected.

  To the extent the year 2000 issues are not corrected timely and successfully,
the Company's ability to process its business and pay its claims timely could be
impacted.  Such an event could have material adverse consequences on future
financial condition and results of operations.  The Company has begun the
process of developing a contingency plan should an adverse year 2000 issue
occur.  As part of the contingency plan, the Company expects to address its
ability to conduct business in environments experiencing both limited and
extensive adverse conditions resulting from the year 2000 issue.  The Company
expects to have such a plan in place by the end of the third quarter of 1999.

FINANCIAL ACCOUNTING DEVELOPMENTS

  The Financial Accounting Standards Board (FASB) issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities in June 1998.  This
Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in investment
securities and other contracts, and for hedging activities.  It requires that an
entity recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value.  The accounting for changes
in the fair value of a derivative will be included in either earnings or other
comprehensive income depending on the intended use of the derivative instrument.
The Company is currently evaluating this standard, which is effective January 1,
2000.

  The Accounting Standards Executive Committee issued Statement of Position
(SOP) 97-3, Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments, in December 1997.  This SOP provides guidance for determining when
an entity should recognize a liability for guaranty fund and other insurance-
related assessments.  It also provides guidance on how to measure the liability.
This SOP is effective for 1999.  The Company's present accounting method for
guaranty fund and other insurance related assessments substantially conforms to
the requirements of this SOP.

  In March 1998, SOP 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use was issued.  This SOP provides guidance
for determining whether costs of software developed or obtained for internal use
should be capitalized or expensed as incurred.  In the past, the Company has
expensed all such costs when incurred.  This SOP is effective beginning in 1999.
The Company is currently involved in certain technology projects, the costs of
which will be impacted by this SOP.  The Company is currently evaluating the
impact and will provide disclosure about such capitalized and/or expensed costs
in the first quarter of 1999.

INFORMATION ABOUT FORWARD-LOOKING STATEMENTS

  Any statement contained in this report which is not a historical fact, or
which might otherwise be considered an opinion or projection concerning the
Company or its business, whether express or implied, is meant as and should be
considered a forward-looking statement as that term is defined in the Private
Securities Litigation Reform Act of 1995.  Forward-looking statements are based
on assumptions and opinions concerning a variety of known and unknown risks,
including but not necessarily limited to changes in market conditions, natural
disasters and other catastrophic events, increased competition, changes in
availability and cost of reinsurance, changes in governmental regulations, and
general economic conditions, as well as other risks and uncertainties more
completely described in the Company's filings with the Securities and Exchange
Commission, including this Annual Report on Form 10-K.  If any of these
assumptions or opinions prove incorrect, any forward-looking statements made on
the basis of such assumptions or opinions may also prove materially incorrect in
one or more respects and may cause actual future results to differ materially
from those contemplated, projected, estimated or budgeted in such forward-
looking statements.

                                       11
<PAGE>
 
<TABLE>
<CAPTION>
                                           CONSOLIDATED BALANCE SHEETS
                                                                                                  December 31,
                                                                                       -------------------------------
                                                                                            1998             1997
                                                                                       -------------------------------
<S>                                                                                    <C>              <C>
ASSETS
Investments:
    Fixed Maturities held for investment, at amortized cost
      (market value $1,560,903 in 1998 and $2,154,921 in 1997)                         $    1,471,113   $    2,011,449
    Fixed Maturities available for sale, at market value
      (amortized cost $741,583,948 in 1998 and $699,018,965 in 1997)                      774,346,360      731,550,744
    Equity Securities available for sale, at market value (cost $40,833,150 in 1998
      and $55,893,931 in 1997)                                                            103,055,465      116,133,472
    Mortgage Loans on Real Estate                                                             404,432          566,783
    Investment Real Estate (net of accumulated depreciation
      of $1,587,634 in 1998 and $1,514,117 in 1997)                                         1,482,647        1,718,175
    Policy Loans                                                                           38,645,185       34,900,547
    Other Long-term Investments                                                           110,022,016      115,727,331
    Short-term Investments                                                                 54,637,029       25,051,026
                                                                                       -------------------------------
      Total Investments                                                                 1,084,064,247    1,027,659,527
Cash                                                                                        5,948,409        5,820,597
Accrued Investment Income                                                                  11,394,940       11,114,372
Accounts Receivable                                                                        23,378,825       11,472,193
Reinsurance Balances Receivable                                                             1,121,089        1,132,011
Due from Affiliates                                                                         1,677,667        2,505,157
Deferred Policy Acquisition Costs                                                         114,141,870      105,855,585
Other Assets                                                                                4,932,090        4,506,360
                                                                                       -------------------------------
      Total Assets                                                                     $1,246,659,137   $1,170,065,802
                                                                                       =============================== 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy Liabilities and Accruals                                                        $  548,428,408   $  498,387,318
Unearned Premiums                                                                         105,464,480       97,669,270
Dividends to Policyholders                                                                  9,337,982        9,024,751
Premium Deposit and Retirement Deposit Funds                                                6,217,463        6,488,037
Deferred Income Taxes                                                                      41,788,715       38,812,842
Other Liabilities                                                                          44,677,579       35,120,449
Due to Affiliates                                                                             318,113
Commercial Paper                                                                           57,259,518       89,521,729
Notes Payable                                                                                 106,765        1,978,024
Notes Payable to Affiliates                                                                 9,438,129       10,132,188
                                                                                       -------------------------------
      Total Liabilities                                                                   823,037,152      787,134,608
                                                                                       -------------------------------
 
Commitments and Contingencies (Notes 1, 3, 9 and 12)
 
Stockholders' Equity:
  Preferred Stock, $1 par value
    Shares Authorized: 1,000,000
    Issued: None
  Common Stock, $1 par value
    Shares Authorized: 110,000,000
    Issued: 41,891,512
    Outstanding: 1998 - 40,879,911; 1997 - 40,789,712                                      41,891,512       41,891,512
  Capital in Excess of Par Value                                                           22,355,934       21,301,198
  Accumulated Other Comprehensive Income                                                   57,577,202       56,929,966
  Retained Earnings                                                                       306,268,833      267,420,813
  Treasury Stock: at Cost (shares, 1998 - 1,011,601; 1997 - 1,101,800)                     (4,471,496)      (4,612,295)
                                                                                       -------------------------------
      Total Stockholders' Equity                                                          423,621,985      382,931,194
                                                                                       -------------------------------
      Total Liabilities and Stockholders' Equity                                       $1,246,659,137   $1,170,065,802
                                                                                       ===============================
</TABLE>

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

                                       12
<PAGE>
 
<TABLE>
<CAPTION>

                                CONSOLIDATED STATEMENTS OF INCOME

                                                            For the Years Ended December 31,
                                                       ----------------------------------------
                                                           1998          1997         1996
                                                       ----------------------------------------
<S>                                                    <C>           <C>           <C>
Revenues
  Premiums - Property and Casualty Insurance           $345,739,616  $330,305,948  $298,938,818
  Premiums and Policy Charges - Life Insurance           46,098,666    40,659,098    38,247,600
  Net Investment Income                                  62,511,658    57,528,669    54,194,334
  Realized Investment Gains                               4,397,533     3,356,231     2,807,588
  Other Income                                            2,238,096     2,159,683     2,147,688
                                                       ----------------------------------------
      Total Revenues                                    460,985,569   434,009,629   396,336,028
                                                       ----------------------------------------
 
Benefits and Expenses
  Benefits & Settlement Expenses                        277,900,636   266,077,956   267,311,326
  Dividends to Policyholders                              3,236,089     3,165,092     3,055,700
  Amortization of Deferred Policy Acquisition Costs      57,821,043    55,997,727    51,111,851
  Other Operating Expenses                               38,762,883    31,969,232    29,003,291
                                                       ----------------------------------------
      Total Expenses                                    377,720,651   357,210,007   350,482,168
                                                       ----------------------------------------
 
Income Before Provision for Income Taxes                 83,264,918    76,799,622    45,853,860
Provision for Income Taxes                               26,549,227    24,005,989    13,664,645
                                                       ----------------------------------------
      Net Income                                       $ 56,715,691  $ 52,793,633  $ 32,189,215
                                                       ========================================

      Net Income Per Share  - Basic                           $1.39         $1.29         $0.79
                                                       ========================================

      Net Income Per Share - Diluted                          $1.38         $1.29         $0.79
                                                       ========================================
 
Weighted Average Shares Outstanding - Basic              40,834,232    40,787,047    40,786,561
                                                       ========================================
 
Weighted Average Shares Outstanding - Diluted            41,148,258    40,930,894    40,843,458
                                                       ========================================
</TABLE>

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

                                       13
<PAGE>
 
                CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
                                                                         For the Years Ended December 31,
                                                                      -------------------------------------
                                                                         1998         1997         1996
                                                                      -------------------------------------
<S>                                                                   <C>          <C>          <C>
Net Income                                                            $56,715,691  $52,793,633  $32,189,215
 
Other Comprehensive Income, net of tax:
  Unrealized Investment Gains on Securities Available for Sale          3,505,632   25,184,769      130,816
  Less:  Reclassification Adjustment for Realized Investment Gains      2,858,396    2,181,550    1,824,932
                                                                      -------------------------------------
 
    Total Other Comprehensive Income (Loss)                               647,236   23,003,219   (1,694,116)
                                                                      -------------------------------------
 
        Total Comprehensive Income                                    $57,362,927  $75,796,852  $30,495,099
                                                                      =====================================
 
</TABLE>
The accompanying notes are an integral part of these financial statements.

                                       14
<PAGE>
 
<TABLE>
<CAPTION>

                                          CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
                                                                          Accumulated
                                                            Capital in      Other
                                                 Common      Excess of   Comprehensive     Retained      Treasury
                                                 Stock       Par Value   Income (Loss)     Earnings        Stock         Total
                                              ------------------------------------------------------------------------------------
<S>                                           <C>          <C>             <C>           <C>            <C>           <C>
Balance, December 31, 1995                    $41,891,512   $ 21,276,023   $35,620,863   $214,453,116   ($4,631,770)  $308,609,744
 
Comprehensive Income
    Net Income                                                                             32,189,215                   32,189,215
    Other Comprehensive Income, net of tax
      Change in Net Unrealized Investment Gains(Losses)                     (1,694,116)                                 (1,694,116)
 
Dividends to Stockholders
($.3875 per share)                                                                        (15,802,434)                 (15,802,434)
 
Exercise of Stock Options                                          5,300                                      4,100          9,400
                                              ------------------------------------------------------------------------------------
Balance, December 31, 1996                     41,891,512     21,281,323    33,926,747    230,839,897    (4,627,670)   323,311,809
 
Comprehensive Income
    Net Income                                                                             52,793,633                   52,793,633
    Other Comprehensive Income, net of tax
      Change in Net Unrealized Investment Gains(Losses)                     23,003,219                                  23,003,219
 
Dividends to Stockholders
($.3975 per share)                                                                        (16,212,717)                 (16,212,717)
 
Exercise of Stock Options                                         19,875                                     15,375         35,250
                                              ------------------------------------------------------------------------------------
Balance, December 31, 1997                     41,891,512     21,301,198    56,929,966    267,420,813    (4,612,295)   382,931,194
 
Comprehensive Income
    Net Income                                                                             56,715,691                   56,715,691
    Other Comprehensive Income, net of tax
      Change in Net Unrealized Investment Gains(Losses)                        647,236                                     647,236
 
Dividends to Stockholders
($.4375 per share)                                                                        (17,867,671)                 (17,867,671)
 
Purchase of Treasury Stock
    (22,000 shares)                                                                                        (419,471)      (419,471)
 
Exercise of Stock Options                                      1,054,736                                    560,270      1,615,006
                                              ------------------------------------------------------------------------------------
Balance, December 31, 1998                    $41,891,512   $ 22,355,934   $57,577,202   $306,268,833   ($4,471,496)  $423,621,985
                                              ==================================================================================== 
</TABLE>

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

                                       15
<PAGE>
 
<TABLE>
<CAPTION>
                                       CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                                 For the Years Ended December 31,
                                                                           ---------------------------------------------
                                                                               1998            1997            1996
                                                                           ---------------------------------------------
<S>                                                                        <C>             <C>             <C>
Cash Flows from Operating Activities:                                    
  Net Income                                                               $  56,715,691   $  52,793,633   $ 32,189,215
 Adjustments to Reconcile Net Income to Net Cash                         
   Provided by Operating Activities:                                     
     Policy Acquisition Costs Deferred                                       (66,613,244)    (63,576,796)   (59,234,604)
     Amortization of Deferred Policy Acquisition Costs                        57,821,043      55,997,727     51,111,851
     Depreciation and Amortization                                             2,973,249       4,488,679      4,447,490
     Provision for Deferred Taxes                                              3,555,828       1,411,344      1,859,058
     Interest on Policyholders' Funds                                         16,127,589      14,127,507     12,273,381
     Net Realized Investment Gains                                            (4,397,533)     (3,356,231)    (2,807,588)
     Other                                                                     1,981,149       2,306,276      2,460,366
     Changes in Operating Assets and Liabilities:                        
       (Increase) in Accrued Investment Income                                  (280,568)     (1,082,097)      (691,295)
       Decrease (Increase) in Accounts Receivable                                 12,929      (1,616,291)     4,077,468
       Decrease in Reinsurance Balances Receivable                                10,922         557,643      3,745,010
       Decrease (Increase) in Amounts Due from Affiliates                        827,490         204,335     (1,302,763)
       Increase (Decrease) in Amounts Due to Affiliates                          318,113                     (6,135,599)
       (Increase) Decrease in Other Assets                                      (425,730)        357,942       (102,851)
       Increase in Liability for Policy Reserves                              10,869,716      17,694,934     14,161,376
       Increase in Liability for Unearned Premiums                             7,795,210       4,723,904      7,639,172
       Increase (Decrease) in Amounts Held for Others                             42,657        (401,572)      (810,343)
       Increase in Other Liabilities                                           8,556,929       4,075,892      2,394,885
                                                                           --------------------------------------------
       Net Cash Provided by Operating Activities                              95,891,440      88,706,829     65,274,229
                                                                           --------------------------------------------
                                                                         
Cash Flows from Investing Activities:                                    
  Maturities and Redemptions of Fixed Maturities Held for                
   Investment                                                                    536,451         810,279        912,250
  Maturities and Redemptions of Fixed Maturities Available for           
   Sale                                                                       78,974,370      46,658,709     37,623,173
  Maturities and Redemptions of Other Investments                            129,559,926     105,534,625     86,205,777
  Sales of Fixed Maturities Available for Sale                                59,787,112      26,157,682     85,651,625
  Sales of Other Investments                                                  71,659,811      47,218,250     54,618,422
  Purchase of Fixed Maturities Available for Sale                           (179,855,611)   (193,675,998)  (175,124,345)
  Purchase of Other Investments                                             (185,735,095)   (154,426,039)  (135,251,325)
  Net (Increase) Decrease in Short-term Investments                          (18,433,677)     15,050,033    (12,482,017)
  Net (Increase) Decrease in Receivable/Payable on Securities                (22,071,686)     (2,180,776)     7,304,553
                                                                           --------------------------------------------
    Net Cash (Used in) Investing Activities                                  (65,578,399)   (108,853,235)   (50,541,887)
                                                                           --------------------------------------------
                                                                         
Cash Flows from Financing Activities:                                    
  (Decrease) Increase  in Commercial Paper                                   (32,262,211)     15,940,766     (8,368,653)
  (Decrease) in Notes Payable                                                 (1,871,259)       (231,934)      (113,404)
  (Decrease) in Notes Payable to Affiliates                                     (694,059)       (696,438)       (88,336)
  Stockholder Dividends Paid                                                 (17,867,671)    (16,212,717)   (15,802,434)
  Purchase of Treasury Stock                                                    (419,471)
  Proceeds from Exercise of Stock Options                                      1,299,329          35,250          9,400
  Deposits of Policyholders' Funds                                            58,049,561      55,798,414     40,369,961
  Withdrawal of Policyholders' Funds                                         (36,419,448)    (33,090,461)   (27,641,038)
                                                                           --------------------------------------------
    Net Cash (Used in) Provided by Financing Activities                      (30,185,229)     21,542,880    (11,634,504)
                                                                           --------------------------------------------
Net Increase in Cash                                                             127,812       1,396,474      3,097,838
Cash - Beginning of Period                                                     5,820,597       4,424,123      1,326,285
                                                                           --------------------------------------------
Cash - End of Period                                                       $   5,948,409   $   5,820,597  $   4,424,123
                                                                           ============================================ 
Supplemental Disclosures of Cash Flow Information:                       
Cash Paid During the Year for:                                           
  Interest                                                                 $   4,539,523   $   4,978,901  $   4,976,921
  Income Taxes                                                             $  22,397,000   $  24,642,566  $  10,536,000
</TABLE> 

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

                                       16
<PAGE>
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  The accompanying consolidated financial statements are prepared on the basis
of generally accepted accounting principles. Such principles differ from
statutory reporting practices prescribed by the National Association of
Insurance Commissioners (NAIC) and state regulatory authorities.

  The accompanying consolidated financial statements include, after intercompany
eliminations, Alfa Corporation and its wholly-owned subsidiaries, Alfa Life
Insurance Corporation (Life), Alfa Insurance Corporation, Alfa General Insurance
Corporation, Alfa Financial Corporation (Financial), Alfa Investment
Corporation, Alfa Builders, Inc. (Builders), Alfa Realty, Inc. (Realty) and Alfa
Agency Mississippi, Inc.  The Company's primary market area is Alabama, Georgia
and Mississippi.

Nature of Operations

  Alfa Corporation operates predominantly in the insurance industry.  Its
insurance subsidiaries write life insurance in Alabama, Georgia and Mississippi
and property and casualty insurance in Georgia and Mississippi.  The Company's
noninsurance subsidiaries are engaged in consumer financing, leasing, real
estate investments, residential and commercial construction, and real estate
sales.  As more fully discussed in Note 2, its property and casualty insurance
business is pooled with that of the Alfa Mutual Insurance Companies which write
property and casualty business in Alabama.  The Company's business is
concentrated geographically in Alabama, Georgia and Mississippi.  Approximately
$354 million of premiums and policy charges representing 90% of such amounts in
1998 were from policies written in Alabama.  Accordingly, unusually severe
storms or other disasters in this state might have a more significant effect on
the Company than on a more geographically diversified insurance company and
could have an adverse impact on the Company's financial condition and operating
results.   Increasing public interest in the availability and affordability of
insurance has prompted legislative, regulatory and judicial activity in several
states. This  includes efforts to contain insurance prices, restrict
underwriting practices and risk classifications, mandate rate reductions and
refunds, eliminate or reduce exemptions from antitrust laws and generally expand
regulation.  Because of Alabama's low automobile rates as compared to rates in
most other states, the Company does not expect the type of punitive legislation
and initiatives found in some states to be a factor in its primary market in the
immediate future.

Revenues, Benefits, Claims and Expenses

  Traditional Life Insurance Products:  Traditional life insurance products
include those products with fixed and guaranteed premiums and benefits and
consist principally of whole life insurance policies, term life insurance
policies, and certain annuities with life contingencies.  Premiums are
recognized over the premium-paying period of the policy.  The liability for
future policy benefits are computed using a net level method including
assumptions as to investment yields, mortality, withdrawals, and other
assumptions based on the Company's experience, modified as necessary, to reflect
anticipated trends and to include provisions for possible unfavorable
deviations.  Policy benefit claims are charged to expense in the period that the
claims are incurred.

  Universal Life Products:  Universal life products include universal life
insurance and other interest-sensitive life insurance policies. Universal life
revenues, which are considered operating cash flows, consist of policy charges
for the cost of insurance, policy administration, and surrender charges that
have been assessed against policy account balances during the period.  Benefit
reserves for universal life represent policy account balances before applicable
surrender charges.  Benefit claims incurred in the period in excess of related
policy account balances and interest credited to policy account balances are
charged to expense.

  Property and Casualty Products:  Property and casualty premiums are earned
ratably over the term of the policies.  The liability for unearned premiums
represents the portion of premiums written which is applicable to the unexpired
term of the policies.

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

Policy Acquisition Costs

  Commissions and other costs of acquiring insurance that vary with and are
primarily related to the production of new and renewal business have been
deferred.  Traditional life insurance acquisition costs are being amortized over
the premium- payment period of the related policies using assumptions consistent
with those used in computing policy benefit reserves.  Acquisition costs for
universal life type policies are being amortized over the lives of the policies
in relation to the present value of estimated gross profits which are determined
based upon surrender charges and investment, mortality, and expense margins.
Acquisition costs for property and casualty insurance are amortized over the
period in which the related premiums are earned. Investment income is
considered, if necessary, in the determination of the recoverability of deferred
policy acquisition costs.

Investments

  Fixed maturities held to maturity include investments which the Company has
both the ability and positive intent to hold until maturity; such securities are
reported at amortized cost. Securities available for sale include investments
which the Company may elect to sell prior to maturity and are reported at their
current market value. The unrealized gains or losses on these securities are
recorded as a component of stockholders' equity, net of taxes.

                                       17
<PAGE>
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Note 1. continued)

Furthermore, deferred acquisition costs are adjusted to reflect the effect that
would have been recognized had the unrealized holding gains and losses been
realized. This adjustment to deferred acquisition costs results in a
corresponding adjustment to stockholders' equity. Investment income on mortgage-
backed securities includes amortization and accretion of premiums and discounts
using a method that approximates a level yield, taking into consideration
assumed prepayment patterns.

  Equity securities (common and non-redeemable preferred stocks) are carried at
market value, real estate is carried at cost less accumulated depreciation and
mortgage loans and policy loans are carried at unpaid principal balances.  Long
term investments include installment loans, carried at unpaid principal balance,
leased assets, carried at cost less accumulated depreciation and partnerships,
accounted for on the equity method.

  Declines in market values of fixed maturities and equity securities deemed to
be other than temporary are recognized in the determination of net income.
Realized gains and losses on sales of investments are recognized in net income
using the specific identification method. Depreciation on real estate is
calculated using the straight-line method over the estimated useful lives of the
assets.

  The Company has a put option and a covered call option writing program.
Premiums received from options written are carried at market value as a
liability with net unrealized gains or losses reflected as accumulated other
comprehensive income within stockholders' equity.  Realized gains and losses on
call options written are recognized in net income upon settlement of the option
contract.  The put option contract premium, if exercised, lowers the purchase
price of the stock, however, if the contract is not exercised a realized gain is
recognized in net income upon expiration.  The option program is used only in
certain circumstances to hedge against volatility in equity securities.  The
Company had  $1,067,313 in options outstanding at December 31, 1998.

  Realized investment gains and losses are reported on a pre-tax basis as a
component of revenues.  Income taxes applicable to net realized investment gains
and losses are included in the provision for income tax.

Income Taxes

  The Company's method of accounting for income taxes is the liability method.
Under the liability method, deferred tax assets and liabilities are adjusted to
reflect changes in statutory tax rates resulting in income adjustments in the
period such changes are enacted.

  Reinsurance amounts recoverable from property and casualty reinsurers are
estimated in a manner consistent with the claim liability associated with the
reinsured policy.  Amounts paid for reinsurance contracts are expensed over the
contract period during which insured events are covered by the reinsurance
contracts.

Use of Estimates in the Preparation of the Financial Statements

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

Earnings Per Share

  Basic EPS is computed by dividing net income by the weighted average number of
shares outstanding.  Diluted EPS is computed similarly except that the shares
outstanding is increased to give effect to all potentially dilutive shares that
would have been outstanding if such shares had been issued.  The weighted
average diluted shares outstanding include potentially diluted shares which
total 314,206 in 1998,  143,847 shares in 1997 and  56,897 shares in 1996, all
of which are employee stock options outstanding during each period presented.
(See Note 14.)

Cash

  Cash consists of demand deposits at banks.  Short-term investments with
maturities of three months or less are considered to be investments and are not
considered to be cash or cash equivalents for the purposes of the statements of
cash flows.

Other

  Certain reclassifications have been made to 1997 and 1996 amounts in order to
conform to 1998 classifications and descriptions.

                                       18
<PAGE>
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. POOLING AGREEMENT

  Effective August 1, 1987, the Company entered into a property and casualty
insurance Pooling Agreement (the "Pooling Agreement") with Alfa Mutual Insurance
Company (Mutual),  and other members of the Mutual Group (See Note 3).  The
Mutual Group is a direct writer primarily of personal lines of property and
casualty insurance in Alabama.  The Company's subsidiaries similarly are direct
writers in Georgia and Mississippi.  Both the Mutual Group and the Company write
preferred risk automobile, homeowner, farmowner and mobile home insurance,  fire
and allied lines, standard risk automobile and homeowner insurance, and a
limited amount of commercial insurance, including church, and businessowner
insurance.   Under the terms of the Pooling Agreement, the Company cedes to
Mutual all of its property and casualty business.  Substantially all of the
Mutual Group's direct property and casualty business (together with the property
and casualty business ceded by the Company) is included in the pool.  Mutual
currently retrocedes 65% of the pool to the Company and retains 35% within the
Mutual Group.  On October 1, 1996, the Pooling Agreement was amended in
conjunction with the restructuring of the Alfa Insurance Group's catastrophe
protection program.  Effective November 1, 1996, the allocation of catastrophe
costs among the members of the pool was changed to better reflect the economics
of catastrophe finance.  The amendment limits Alfa Corporation's participation
in any single catastrophic event or series of storms to its pool share (65%) of
$10 million unless the loss exceeds $249 million on a 100% basis in which case
the Company's share in the loss would be based upon its amount of surplus
relative to the other members of the group.  Currently, the Company's share of
losses exceeding $249 million would be 13%.  The change allows the catastrophe
reinsurance buying decision to be made on a group basis which benefits each
member of the group and reduces the Company's earnings volatility.  Alfa Group
pooled catastrophe losses for 1998 totaled $45 million. The Company's share of
such losses totaled $6.5 million. No catastrophe losses were incurred in 1997.
Group wide catastrophe losses in 1996 were $27 million, and the Company's share
was $11.4 million. The Company's participation in the Pooling Agreement may be
changed or terminated without the consent or approval of the Company's
shareholders, and the Pooling Agreement may be terminated by any party thereto
upon 90 days notice.

  As a result of the Pooling Agreement, the Company had a payable of $318,113
and a receivable of $1,255,157 from the Mutual Group at December 31, 1998 and
December 31, 1997, respectively, for cash transactions originating in December
and settled the following month. Approximately 83.5% of the Company's property
and casualty premium income and 73.7% of its total premium income for 1998 was
derived from the Company's participation in the Pooling Agreement.

3. RELATED PARTY TRANSACTIONS

  Mutual owns 39.61% and Alfa Mutual Fire (Fire) owns 11.05% of the Company's
common stock.  The Board of Directors of the Company consists of eleven members,
six of whom serve as Directors of Mutual, Fire and Alfa Mutual General (General)
(collectively, the Mutual Group) and two of whom at December 31, 1998 were
executive officers of the Company.  Two of the Company's directors and most of
the Company's executive officers, including the Company's President, also hold
the same positions with Mutual, Fire and General.  The Company paid stockholder
dividends to Mutual and Fire totaling $9,058,798 in 1998, $8,234,938 in 1997 and
$8,027,769 in 1996.

  In 1998 the Company repurchased 11,000 shares of its common stock at a cost of
$209,917 from Mutual under its stock repurchase program. (See Note 10.)

  The Mutual Group and the Company's insurance subsidiaries are considered an
insurance company holding system with Mutual being the controlling party under
the Alabama Insurance Holding Company Systems Regulatory Act and their
activities and transactions are subject to reporting, examination and regulation
thereunder.

  Under a Management and Operating Agreement, Mutual provides substantially all
facilities, management and other operational services to the Company and its
subsidiaries and to other companies associated with Mutual.  Most of the
personnel providing management services to the Company are full-time employees
of, and are directly compensated by Mutual.  The Company's business is
substantially integrated with that of Mutual, Fire and General.  Mutual
periodically conducts time usage and other special expense allocation studies.
Mutual charges the Company for both its allocated and direct salaries, employee
benefits and other expenses, including those for the use of office facilities.
The amounts paid by the Company to Mutual under the Management and Operating
Agreement were approximately $32.1 million in 1998, $27.7 million in 1997 and
$27.1 million in 1996.  In Alabama, the Company's life insurance agents are
career employees of Mutual.  The Company reimburses Mutual for the full amount
of all its agents' commissions paid by Mutual for the sale of the Company's
insurance products.

  Until January 31, 1997, Mutual's employees were covered by a group life
insurance plan provided by Life.  Group life insurance premium paid to Life was
approximately $1.7 million in 1996.  On February 1, 1997, Mutual began covering
its employees with a Corporate Owned Life Insurance (COLI) plan utilizing Life's
universal life product.  Premiums paid to Life totaled approximately $13.9
million in 1998 and $13.2 million in 1997.  Policy charges recorded from such
premiums totaled approximately $2.1 million in 1998 and $1.9 million in 1997.
Policy reserves and insurance in force on the COLI plan at December 31, 1998
were approximately $24.2 million and $344.3 million, respectively.  In 1997,
Life refunded the remaining experience reserve on the group plan of
approximately $2.1 million to Mutual.  Certain of Mutual's employees and those
of the affiliated Alabama Farmers Federation not covered by the COLI plan are
covered by group life insurance provided by Life.  Group life insurance premiums
paid to Life totaled $364,125 in 1998 and $345,434 in 1997.  Policy reserves and
insurance in force on this plan at December 31, 1998 were approximately $57,000
and $37.7 million, respectively.

  Certain of the Company's subsidiaries purchase property insurance and general
liability insurance protection from Mutual and Fire.  The annual premium paid
for such policies totaled approximately $71,000 in 1998, $62,000 in 1997 and
$62,000 in 1996.

                                       19
<PAGE>
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Note 3. continued)

  The Company's consumer finance and leasing subsidiary (Financial) leases
equipment, automobiles, furniture and other property to the Mutual Group.  The
Mutual Group paid $1,799,823 in 1998, $2,010,969 in 1997 and $2,138,167 in 1996
under these leases.  The Mutual Group invests in automobile and other
installment loans issued and serviced by Financial.  The amount invested by the
Mutual Group in such loans was $438,129 and $932,188 at December 31, 1998 and
1997 respectively.  Interest paid by Financial to the Mutual Group was $44,365
in 1998, $109,576 in 1997 and $206,117 in 1996.  The Mutual Group's sponsoring
organization, the Alabama Farmers Federation (Federation), and Alfa Services,
Inc., a Federation subsidiary, invest in short-term lines of credit with the
Company and Financial.  The balance outstanding on these lines of credit
included in notes payable to affiliates was $9,000,000 and $9,200,000 at
December 31, 1998 and 1997, respectively.   Interest paid by the Company and
Financial to the Federation and its subsidiary was $516,610 in 1998, $489,125 in
1997 and $521,938 in 1996.  The Mutual Group is a partner in a real estate
partnership, which in 1996 established a revolving line of credit with Financial
of $1.0 million at a rate of interest equal to the Company's commercial paper
rate plus 1.0%.  At December 31, 1998 and 1997, the amount loaned to the
partnership under the line of credit was $345,000 and $425,000, respectively.
Interest paid to Financial was $27,560 in 1998 and $27,853 in 1997.  Interest
accrued in 1996 by Financial from such loan was $1,919, which was paid in
January 1997.  In 1997, Mutual established a revolving line of credit with
Financial of $20 million at a rate of interest equal to the one month London
Interbank Offered Rate (LIBOR) plus .75%.  In February 1998 Mutual repaid the
$20 million loan balance that was outstanding as of December 31, 1997.  Interest
paid in 1998 to Financial was $237,984.  Interest accrued in 1997 by Financial
from such loan was $47,860.

  The Company's real estate construction subsidiary (Builders) contracts with
the Mutual Group for the construction of certain commercial facilities. The
Mutual Group paid $934,687 in 1998, $1,943,560 in 1997 and $5,273,906 in 1996 to
Builders under such contracts. The Company's commercial real estate sales
subsidiary (Realty) receives commissions for sales and leasing of certain of the
Mutual Group's commercial facilities. The Mutual Group paid $128,878 in 1998,
$185,029 in 1997 and $98,780 in 1996 for such sales services.

  The Company periodically has investment transactions with the Mutual Group. In
1997, the Company purchased securities totaling $7,796,291 from the Mutual Group
at market value. In 1996, the Company sold a security totaling $919,375 to the
Mutual Group at market value, for a loss of $30,718. No such transactions
occurred in 1998. The Company has also entered into an investment partnership
with the Mutual Group. The amount invested in the partnership was $15.4 million
and $9 million at December 31, 1998 and 1997, respectively. The Company had
committed to fund up to $8.2 million additional investment in the partnership at
December 31, 1998. The Company's life subsidiary is the general partner in two
investment partnerships with a Charitable Remainder Unit Trust created by
Mutual. The amount invested in the partnerships was $660,482 and $638,059 at
December 31, 1998 and 1997, respectively.

                                       20
<PAGE>
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. INVESTMENTS

Net investment income is summarized as follows:
<TABLE>
<CAPTION>
                                                       1998          1997          1996
                                                    --------------------------------------
<S>                                                <C>          <C>           <C>
Fixed maturities:
   Held for investment                             $   158,978   $   223,979   $   317,070
   Available for sale                               53,200,860    48,732,496    43,886,976
                                                   ---------------------------------------
      Total fixed maturities                        53,359,838    48,956,475    44,204,046
Equity securities                                    2,053,964     2,393,257     2,849,287
Mortgage loans on real estate                           41,061        62,814        79,693
Investment real estate                                 306,690       401,937       429,386
Policy loans                                         2,690,979     2,594,516     2,246,242
Other long-term investments                         13,206,934    13,073,001    15,044,988
Short-term investments                               1,971,630     1,501,606     1,388,853
                                                   ---------------------------------------
Total investment income                             73,631,096    68,983,606    66,242,495
Investment expenses, including interest expense     11,119,438    11,454,937    12,048,161
                                                   ---------------------------------------
Net investment income                              $62,511,658   $57,528,669   $54,194,334
                                                   ======================================= 
</TABLE>

Net realized investment gains (losses) are summarized as follows:

<TABLE>
<CAPTION>
                                                      1998           1997           1996
                                                  -----------------------------------------
<S>                                              <C>             <C>            <C>
Fixed maturities:                                                             
   Held for investment                            $   (5,247)     $      418    $     2,190
   Available for sale                               (305,896)        935,666     (4,132,690)
                                                  -----------------------------------------
     Total fixed maturities                         (311,143)        936,084     (4,130,500)
Equity securities                                  3,195,243       1,294,462      6,388,549
Other investments                                  1,513,433       1,125,685        549,539
                                                  -----------------------------------------
Net realized investment gains                     $4,397,533      $3,356,231    $ 2,807,588
                                                  ========================================= 
</TABLE>

Changes in net unrealized investment gains and losses on fixed maturities and
equity securities are as follows:

<TABLE>
<CAPTION>
                                                              Increase (Decrease)
                                                --------------------------------------------
                                                   1998            1997            1996
                                                --------------------------------------------
<S>                                             <C>            <C>              <C>
Fixed maturities:                                                             
   Held for investment                          $ (53,682)     $   (37,252)     $   (88,525)
                                                ===========================================
   Available for sale, net of tax               $(178,934)     $ 7,961,902      $(7,738,814)
                                                ===========================================
Equity securities, net of tax                   $ 826,170      $15,041,317      $ 6,044,698
                                                ===========================================
</TABLE>

                                       21
<PAGE>
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


  Unrealized investment gains and losses are based on market values which
were determined using nationally recognized pricing services, broker/dealers
securities firms and market makers.

  At December 31, 1998 and 1997, gross unrealized gains for equity securities
amounted to $64,367,603 and $61,415,534, respectively, while gross unrealized
losses amounted to $2,607,950 and $1,140,159, respectively, and applicable
deferred income taxes aggregated $21,425,412 and $20,767,304, respectively.

  The Company's fixed maturity portfolio is predominantly comprised of
investment grade securities. At December 31, 1998, approximately $7.3 million in
fixed maturities (1.0% of the total fixed maturity portfolio) are considered
below investment grade. The Company considers bonds with a quality rating of BB+
and below, based on Standard & Poor's rating scale, to be below investment
grade.

  The amortized cost and estimated market value of investments in fixed
maturity securities are as follows:
<TABLE>
<CAPTION>

                                                                        December 31, 1998
                                                    ------------------------------------------------------------
                                                                        GROSS            GROSS         ESTIMATED
                                                      AMORTIZED       UNREALIZED       UNREALIZED        MARKET
                                                        COST            GAINS            LOSSES          VALUE
                                                    ------------------------------------------------------------
<S>                                                <C>              <C>             <C>              <C>
Held for investment:                                                                             
Mortgage-backed securities                          $  1,471,113    $    89,790               -     $  1,560,903
                                                    ============================================================
Available for sale:                                                                              
U.S. Treasury securities & obligations of U.S.                                                   
  Government  corporations and agencies             $ 50,171,484    $ 6,186,501               -     $ 56,357,985
Obligations of states & political subdivisions       163,555,285      8,476,382     $  (240,829)     171,790,838
Corporate securities                                 232,999,121     14,549,263      (6,093,844)     241,454,540
Mortgage-backed securities                           291,358,058     10,412,497        (736,308)     301,034,247
Other debt securities                                  3,500,000        208,750               -        3,708,750
                                                    ------------------------------------------------------------
  Totals                                            $741,583,948    $39,833,393     $(7,070,981)    $774,346,360
                                                    ============================================================
  
                                                                        December 31, 1997
                                                    ------------------------------------------------------------
                                                                        GROSS            GROSS        ESTIMATED
                                                      AMORTIZED       UNREALIZED       UNREALIZED       MARKET
                                                        COST            GAINS            LOSSES         VALUE
                                                    ------------------------------------------------------------
Held for investment:
Mortgage-backed securities                          $  2,011,449    $   143,472              -      $  2,154,921
                                                    ============================================================
Available for sale:                                                                             
U.S. Treasury securities & obligations                                                          
  of U.S. Government corporations and agencies      $ 67,833,619    $ 4,575,294     $   (21,094)    $ 72,387,819
Obligations of states & political subdivisions       141,088,695      6,878,248        (137,202)     147,829,741
Corporate securities                                 188,091,988     13,161,147      (1,827,187)     199,425,948
Mortgage-backed securities                           297,916,629     10,802,185      (1,077,816)     307,640,998
Other debt securities                                  4,088,034        194,470         (16,266)       4,266,238
                                                    ------------------------------------------------------------
  Totals                                            $699,018,965    $35,611,344     $(3,079,565)    $731,550,744
                                                    ============================================================
 </TABLE>

                                       22
<PAGE>
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
  The amortized cost and estimated market value of fixed maturities available
for sale at December 31, 1998 by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.

                                               December 31, 1998
                                          --------------------------
                                             ESTIMATED
                                             AMORTIZED      MARKET
                                               COST         VALUE
                                          --------------------------
Available for sale:
Due in one year or less                   $ 17,470,584  $ 17,694,081
Due after one year through five years       66,013,000    70,082,622
Due after five years through ten years     136,934,985   147,314,671
Due after ten years                        229,807,321   238,220,739
                                          --------------------------
                                           450,225,890   473,312,113
Mortgage-backed securities                 291,358,058   301,034,247
                                          --------------------------
                                          $741,583,948  $774,346,360
                                          ========================== 

  Proceeds from sales of fixed maturities available for sale were $59,787,112
in 1998, $26,157,682 in 1997 and $85,651,625 in 1996. Gross gains of $653,398 in
1998, $714,990 in 1997 and $572,686 in 1996 and gross losses of $167,174 in
1998, $61,526 in 1997 and $3,616,504 in 1996 were realized on those sales. In
addition, the Company recorded a loss of approximately $3,120,000 in 1998,
$927,000 in 1997 and $2,450,000 in 1996 for securities whose valuation was
deemed to be an other than temporary decline. At December 31, 1998 the Company's
mortgage-backed securities were comprised of CMO's and passthrough securities.
The valuation of such securities is subject to significant fluctuations due to
changes in interest rates. The Company has a history of positive cash flow and
has the ability to hold such investments to maturity. Management performs
periodic assessments of the portfolio to monitor interest rate fluctuations.

  As of December 31, 1998 and 1997, the Company's mortgage loan portfolio
totaled approximately $404,000 and $567,000, respectively, and the collateral
loan portfolio, included in "Other long-term investments", totaled $56.0 million
and $56.2 million, respectively. These portfolios consisted of mortgage and
consumer loans in the Company's primary market area of Alabama, Georgia and
Mississippi. Management evaluates the creditworthiness of customers on a case-
by-case basis and obtains collateral as deemed necessary based on this
evaluation. At December 31, 1998, the Company had charged off loans totaling
$562,173 and had an allowance of $584,178. The Company has estimated the market
value of the collateral loan portfolio to be approximately $57.2 million and
$57.4 million at December 31, 1998 and 1997, respectively. The estimated market
value was determined by discounting the estimated future cash flows from the
loan portfolio at 6.75% for 1998 and 7.25% for 1997, the current interest rates
offered for similar loans, and after allowing for estimated loan losses. The
Company had no impaired loans subject to individual valuation at or during the
year ended December 31, 1998. The Company's policy loans earn interest at rates
ranging from 5.0% to 8.0% at December 31, 1998. Because the policy loans have no
stated maturity and are often repaid by reductions to benefits and surrenders,
it is not practicable to determine the fair value of the policy loan portfolio.

  At December 31, 1998, the Company had $1,931,632 in investments on deposit
with regulatory agencies in order to meet statutory requirements.

5.  FAIR VALUE OF FINANCIAL INSTRUMENTS

  Information about specific valuation techniques and related fair value
detail is provided in Note 1 -- Summary of Significant Policies, Note 4 --
Investments and Note 8 -- Notes Payable. The cost and fair value of the
financial instruments as of December 31 are summarized as follows:

<TABLE>
<CAPTION>
 
                                                                                            December 31,
                                                                -------------------------------------------------------------
                                                                             1998                           1997
                                                                -------------------------------------------------------------
                                                                    Cost           Fair Value       Cost         Fair Value
                                                                -------------------------------------------------------------
<S>                                                             <C>               <C>            <C>              <C>             
Investments:
 Fixed maturities held for investment                           $  1,471,113     $  1,560,903   $  2,011,449     $  2,154,921
 Fixed maturities available for sale                            $741,583,948     $774,346,360   $699,018,965     $731,550,744
 Equity securities                                              $ 40,833,150     $103,055,465   $ 55,893,931     $116,133,472
 Short-term investments                                         $ 54,637,029     $ 54,637,029   $ 25,051,026     $ 25,051,026
 Mortgage and Collateral loans                                  $ 56,401,043     $ 57,596,928   $ 56,771,659     $ 57,927,394
Liabilities:
 Commercial paper                                               $ 57,259,518     $ 57,259,518   $ 89,521,729     $ 89,521,729
 Notes payable                                                  $  9,544,894     $  9,544,894   $ 12,110,212     $ 12,110,212

                                       23
<PAGE>
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


6.  FUTURE POLICY BENEFITS, LOSSES AND LOSS EXPENSES

  The composition of the liability for future policy benefits, losses and loss
adjustment expenses and the more significant assumptions used in its calculation
are as follows:
  

</TABLE>
<TABLE> 
<CAPTION> 
<S>                     <C>             <C>              <C>            <C>         <C>         <C>                     <C>
                                                                                                  BASIS OF ASSUMPTION
                                                  LIABILITY                        -------------------------------------------------
                         INSURANCE      -----------------------------   YEARS      INTEREST   MORTALITY                 WITH-
                         IN FORCE          12/31/98        12/31/97    OF ISSUE    RATE       AND MORBIDITY             DRAWALS
                     ---------------------------------------------------------------------------------------------------------------
Ordinary             $ 4,893,967,153    $116,061,999     $110,509,770   1955        5%        1955-60 Basic Select      Company
life                                                                    to                    and Ultimate Mortality    experience
                                                                        1978                  Tables                  
                                                                                                                      
                                                                        1979        7%        Modified 1965-70 Basic    Company
                                                                        and         graded    Select and Ultimate       experience
                                                                        1980        to 5%     Mortality Tables        
                                                                                                                      
                                                                        1981        9%        Modified 1965-70 Basic    Company
                                                                        to          graded    Select and Ultimate       experience
                                                                        1993        to 7%     Mortality Tables                  
                                                                                                                      
                                                                        1994        6%        Modified 1965-70 Basic    Company
                                                                        to                    Select and Ultimate       experience
                                                                        1998                  Mortality Tables

Interest               2,005,157,621    159,815,209      145,702,965    1984        6.25% to  Modified 1965-70 Basic    Company
sensitive                                                               to          6.5%*     Select and Ultimate       experience
life                                                                    1998                  Mortality Tables
                                                                                            
Universal              4,056,221,952    118,870,406       94,840,006    1987        5.5% to   Modified 1965-70 Basic    Company
life                                                                    to          6.5%*     Select and Ultimate       experience
                                                                        1998                  Mortality Tables
                                                                                            
Annuities w/o                            12,271,943       12,376,502    1974        5.25% to  --                        --
life contingencies                                                      to          6%*       
                                                                        1998                                     
                                                                                            
Group credit               6,990,205        212,555          262,993    1992        3.0%      1958 CET                  --
life                                                                    to                   
                                                                        1998                 
                                                                                            
Group life                37,711,907         56,806           55,689    1998        4.5%      1960CSG                   --
                     ----------------------------------------------- 
                     $11,000,048,838   $407,288,918     $363,747,925
                     ===============
                    
Accident &                                  296,480         310,144                 5%        1972 intercompany         200% N&W III
health                                                                                        reports
                    
Losses and loss                         140,843,010     134,329,249
 adjustment expenses                   ----------------------------
                                       $548,428,408    $498,387,318
                                       ============================    
</TABLE>

  *Rates are adjustable annually on policyholders' anniversary dates.

                                       24
<PAGE>
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


  Participating policies represent approximately 3% of the ordinary life
insurance in force and 5% of life insurance premium income. The amount of
dividends paid to policyholders is fixed by the Board of Directors and allocated
to participating policyholders. Activity in the liability for unpaid losses and
loss adjustment expenses, prepared in accordance with generally accepted
accounting principles, is summarized as follows:

<TABLE>
<CAPTION>
 
                                                    1998                        1997                      1996
                                      -----------------------------------------------------------------------------------
                                       Property and                  Property and                 Property and
                                         Casualty         Life         Casualty        Life         Casualty        Life
                                      ------------------------------------------------------------------------------------
<S>                                   <C>            <C>            <C>            <C>           <C>            <C>
Balance at January 1,                 $132,086,208    $ 2,243,041   $117,672,492   $ 3,095,914   $108,303,253   $2,065,462
   Less Reinsurance recoverables
        on unpaid losses                  (960,376)      (123,474)      (745,156)     (801,496)    (2,293,048)    (717,018)
                                      ------------------------------------------------------------------------------------
Net balance at January 1,              131,125,832      2,119,567    116,927,336     2,294,418    106,010,205    1,348,444
                                      ------------------------------------------------------------------------------------ 
Incurred related to:
   Current year                        253,369,653     15,160,885    240,327,428    11,600,573    241,879,860    8,717,628
   Prior years                         (18,725,403)       (17,517)    (8,928,409)      ( 7,995)    (4,702,409)     151,950
                                      ------------------------------------------------------------------------------------
     Total incurred                    234,644,250     15,143,368    231,399,019    11,592,578    237,177,451    8,869,578
                                      ------------------------------------------------------------------------------------
Paid related to:
   Current year                        175,544,000     14,010,044    164,640,000    10,605,018    172,087,000    7,363,636
   Prior years                          52,955,344        793,382     52,560,523     1,162,411     54,173,320      559,968
                                      ------------------------------------------------------------------------------------
     Total paid                        228,499,344     14,803,426    217,200,523    11,767,429    226,260,320    7,923,604
                                      ------------------------------------------------------------------------------------
 
Net balance at December 31,            137,270,738      2,459,509    131,125,832     2,119,567    116,927,336    2,294,418
     Plus reinsurance recoverables
        on unpaid losses                   759,568        353,195        960,376       123,474        745,156      801,496
                                      ------------------------------------------------------------------------------------
Balance at December 31,               $138,030,306    $ 2,812,704   $132,086,208   $ 2,243,041   $117,672,492   $3,095,914
                                      ====================================================================================
</TABLE>

  The liability for estimated unpaid losses and loss adjustment expenses is
based on a detail evaluation of reported losses and of estimates of incurred but
not reported losses. Adjustments to the liability based on subsequent
developments are included in current operations. Because the Company is
primarily an insurer of private passenger motor vehicles and of single family
homes, it has limited exposure for environmental, product and general liability
claims. The Company does not believe that any such claims will have a material
impact on the Company's liquidity, results of operations, cash flows or
financial condition.

                                       25
<PAGE>
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. INCOME TAXES

  Below is a comparative analysis of the provisions for income tax appearing in
the statements of income:

<TABLE>
<CAPTION>
                                                 1998         1997        1996
                                             ------------------------------------- 
<S>                                           <C>          <C>          <C>  
Current                                      $23,309,076  $22,594,645  $11,805,587
Deferred                                       3,240,151    1,411,344    1,859,058
                                             -------------------------------------
    Total                                    $26,549,227  $24,005,989  $13,664,645
                                             =====================================
</TABLE>
  Reconciliations of the differences between income taxes computed at Federal
statutory tax rates and provisions for income taxes are as follows:
<TABLE>
<CAPTION>
                                                 1998         1997        1996
                                             ------------------------------------- 
<S>                                           <C>          <C>          <C>
Income taxes computed                        
 at Federal statutory tax rate               $29,142,721  $26,879,868  $16,048,851
Dividends received deduction 
 and tax exempt interest                      (2,663,414)  (2,011,505)  (2,237,859)
Other, net                                        69,920     (862,374)    (146,347)
                                             -------------------------------------
    Total                                    $26,549,227  $24,005,989  $13,664,645
                                             =====================================
</TABLE>

  Income taxes are recorded in the Statements of Income and also directly in
certain stockholders' equity accounts.  Income tax expense (benefit) for the
years ended December 31 was recorded in the financial statements as follows:
<TABLE>
<CAPTION>
 
                                                 1998         1997         1996
                                             -------------------------------------
<S>                                           <C>          <C>          <C>
Statement of Income                          $ 26,549,227 $ 24,005,989  $13,664,645
                                             --------------------------------------
Statements of Comprehensive Income:
   Unrealized holding gains (losses)
   arising during the year                        348,512   12,386,349     (912,216)
                                             --------------------------------------
Statements of Stockholders' Equity
   Capital in excess of par value:
      Exercise of stock options                  (315,677)         --           --
                                             --------------------------------------
      Total income taxes                     $ 26,582,062 $ 36,392,338  $12,752,429
                                             ======================================

The net deferred tax liabilities consist of the following:

                                                  1998        1997
                                             -------------------------
<S>                                           <C>             <C>
Deferred Tax Assets:                         
   Reserve computational method              
    differences                              $ 19,613,782 $ 20,282,436
   Unearned premium reserve                     7,382,514    6,836,849
   Other                                        2,638,791    2,945,886
                                             -------------------------
   Total deferred tax asset                  $ 29,635,087 $ 30,065,171
                                             =========================
                                             
Deferred Tax Liabilities:                    
   Unrealized gains                         $ 32,246,758  $ 32,447,809
   Deferred acquisition costs                 37,413,238    34,949,539
   Other                                       1,763,806     1,480,665
                                            --------------------------
   Total deferred tax liability             $ 71,423,802  $ 68,878,013
                                            --------------------------
Net deferred tax liability                  $(41,788,715) $(38,812,842)
                                            ==========================
</TABLE>                                              
                                                     
  The Company did not establish a valuation allowance related to the deferred
tax assets due to the existence of sufficient taxable income related to future
reversals of existing taxable temporary differences.
                                                      
                                       26             
                                                      
                                                      
                                                     
                                                     
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
<PAGE>
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. NOTES PAYABLE AND COMMERCIAL PAPER

  Short term debt at December 31, 1998 was $66.8 million. Of this amount, the
Company had approximately $57.3 million in commercial paper at a rate of 5.95%
with maturities ranging from January 4, 1999 to January 5, 1999.  The Company
intends to continue to use the commercial paper program to fund its short term
needs, however, backup lines of credit are in place up to $80 million.  The
backup lines agreements contain usual and customary covenants requiring the
Company to meet certain operating levels.  The Company has maintained full
compliance with all such covenants. The commercial paper is guaranteed by Alfa
Mutual Insurance Company, an affiliate.  In addition, the Company had $9.4
million in short-term debt outstanding to affiliates with interest equal to
commercial paper rates payable monthly and $106,765 outstanding in other short-
term debt at a rate of 7.0%. Due to the short term nature of the Company's
borrowings, their fair values approximate their carrying values.

9. CONTINGENT LIABILITIES

  The property and casualty subsidiaries participate in a reinsurance pooling
agreement with Mutual and its affiliates.  Should any member of the affiliated
group be unable to meet its obligation on a claim for a policy written by the
Company's property and casualty subsidiaries, the obligation to pay the claim
would remain with the Company's subsidiaries.

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

  Year 2000 is a critical data management issue which could have substantial
consequences for companies worldwide  because of the use of only two digits in
the date field that may cause many computer applications to fail completely or
create erroneous results by the year 2000 unless corrective measures are taken.
Over the past five years, the Company has devoted a significant amount of time
and resources to the issue of year 2000 as it relates to the Company's operating
systems and information technology applications as well as its non-operations
applications.  The Company has identified its mission critical systems and many
other year 2000 issues. At December 31, 1998, the Company believes it has
substantially completed the identification and programming remediation steps
required to make its mission critical systems and other systems year 2000
compliant.  In addition, the Company estimates it is approximately 90% complete
with actual application and scenario remediation and believes it will be 100%
complete with all year 2000 remediation efforts during the second quarter of
1999.  To date the Company has incurred total costs of $1.7 million related to
year 2000 efforts, of which $900,000 was incurred during 1998.  To the extent
the year 2000 issues are not corrected timely and successfully, the Company's
ability to process its business and pay its claims timely could be impacted.
Such an event could have material adverse consequences on future financial
conditions and results of operations.  The Company has begun the process of
developing a contingency plan should an adverse year 2000 issue occur.  As part
of the contingency plan, the Company expects to address its ability to conduct
business in environments experiencing both limited and extensive adverse
conditions resulting from the year 2000 issue.  It expects to have such a plan
in place by the end of the third quarter of 1999.

  Certain legal proceedings involving policyholders and agents are in process
at December 31, 1998.  Costs for these and similar legal proceedings including
accruals for outstanding cases were $5.2 million in 1998, $3.6 million in 1997
and $2.7 million in 1996.  These proceedings involve alleged breaches of
contract, torts, including bad faith and fraud claims based on alleged wrongful
or fraudulent acts of agents and miscellaneous other causes of action.  Many of
these lawsuits involve claims for punitive damages.  The likelihood or extent of
a punitive damage award in any one of these  cases is not possible to predict.
Approximately 80 legal proceedings against Alfa Life Insurance Corporation
involving policyholders and agents are in process at December 31, 1998.  Of the
80 proceedings, 50 were filed in 1998, 13 were filed 1997, 12 were filed in
1996, and 5 were filed in 1995.  Of the 50 legal proceedings filed in 1998, two
plaintiff law firms accounted for 47 of the filings.  Currently, three of the
proceedings against Alfa Life Insurance Corporation have gone to trial. In two
of the proceedings, the jury awarded the plaintiffs compensatory and punitive
damages against Alfa Life Insurance Corporation. The first jury verdict has been
appealed and the second verdict will be appealed to the Alabama Supreme Court.
In the third proceeding, the jury returned a verdict for Alfa Life Insurance
Corporation.  Based upon information presently available, applicable law and
defenses available to the Company, management does not consider material losses
which might arise from a particular lawsuit beyond amounts accrued in the
financial statements to be probable of occurrence .  Management's opinion is
based upon the Company's experience in dealing with such claims and the
historical results of such claims against the Company. However, it should be
noted that in Alabama, where the Company has substantial business, the frequency
and severity of large punitive damage awards by juries, bearing little or no
relation to actual damages, continues to exist, creating the potential for
unpredictable material adverse judgements in any given suit.

                                       27
<PAGE>
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10.  STOCKHOLDERS' EQUITY

  In October 1989, the Company's Board of Directors approved a stock repurchase
program authorizing the repurchase of up to 2,000,000 shares  of its outstanding
common stock in the open market or in negotiated transactions in such quantities
and at such times and prices as management may decide.  At December 31, 1998,
the Company had repurchased a total of 1,119,600 shares at a cost of $5,050,241
and due to the exercise of stock options had reissued 115,999 shares at a cost
of $579,745 under this program, which decreased the total number of shares
outstanding to 40,879,911 shares.

  The amounts of statutory stockholders' equity and net income for the Company's
life and property casualty insurance subsidiaries are as follows:
<TABLE>
<CAPTION>
 
                                             1998          1997          1996
                                         ----------------------------------------
<S>                                      <C>           <C>           <C>
Statutory net income:
   Life insurance subsidiary             $  5,932,027  $  7,650,641  $ 11,857,726
                                         ========================================
 
   Property and casualty subsidiaries    $ 40,275,880  $ 37,062,691  $ 11,534,172
                                         ========================================
 
Statutory stockholders' equity:
   Life insurance subsidiary             $129,364,457  $126,716,550  $110,983,883
                                         ========================================
 
   Property and casualty subsidiaries    $195,111,399  $171,727,913  $137,543,765
                                         ========================================
 </TABLE>

  Alfa Corporation is a holding company with no operations and, accordingly, any
cash available for dividends or other distributions must be obtained by it from
borrowings or in the form of distributions from its operating subsidiaries.
Distributions to the Company from its insurance subsidiaries are subject to
regulatory restrictions.  Under applicable regulatory requirements the Company's
insurance subsidiaries can distribute to the Company an aggregate of
approximately $53.2 million without prior regulatory approval in 1999 based on
December 31, 1998 financial condition and results of operations.

  At December 31, 1998 the life subsidiary's Adjusted Capital calculated in
accordance with NAIC Risk-Based Capital guidelines was $149.1 million compared
to the Authorized Control Level amount of $18.0 million and the  property and
casualty subsidiaries' Adjusted Capital was $195.1 million compared to the
Authorized Control Level amount of $18.9 million.  The Risk-Based Capital
analysis serves as the benchmark for the regulation of insurance enterprises'
solvency by state insurance regulators.

11. OPERATING LEASES

  The Company leases certain property and equipment to Mutual and its affiliates
(Note 3) and to third parties under operating leases.  Total rental income for
the years ended December 31, 1998, 1997 and 1996 was approximately $2,371,000,
$2,694,000 and $2,961,000,  respectively.  The cost and net book value of major
classes of leased property at December 31, 1998 was:
<TABLE>
<CAPTION>
                                                 NET BOOK
                                COST               VALUE
----------------------------------------------------------
<S>                         <C>          <C>
Transportation equipment    $ 8,484,600        $ 6,001,162
Furniture and equipment      21,523,491          4,612,591
Buildings                     3,016,998          1,429,364
----------------------------------------------------------
   Total                    $33,025,089        $12,043,117
==========================================================
 </TABLE>

  At December 31, 1998, the aggregate minimum rental payments to be received
under leases having initial or remaining lease terms in excess of one year are
approximately $1,029,508 in 1999, $514,221 in 2000, $337,904 in 2001, $67,072 in
2002, $25,709 in 2003 and $113,548 thereafter.

                                       28
<PAGE>
 
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
 
12. REINSURANCE

  Life reinsures portions of its risks with other insurers.  While the amount
retained on an individual life will vary depending upon age and mortality
prospects of the risk, Life generally will not retain more than $350,000
individual life insurance on a single risk.  Life has reinsured approximately
$1,296,693,235 of its life insurance in force with other insurance companies and
has taken reserve credits for approximately $3,834,275 on account of such
reinsurance at December 31, 1998.  Amounts paid or deemed to have been paid for
Life's reinsurance contracts are recorded as reinsurance receivables.  The cost
of reinsurance related to long-duration contracts is accounted for over the life
of the underlying reinsured policies using assumptions consistent with those
used to account for the underlying policies.

  The Company's property and casualty insurance subsidiaries together with
Mutual and its affiliates, participate in catastrophe and other reinsurance
ceded arrangements to protect them from abnormal losses. The Company's
subsidiaries and Mutual and its affiliates are also required to participate in
certain assigned risk pools and associations by the states in which they
operate.

  The following table summarizes the effects of reinsurance on premiums and
losses for the three years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
 
                                                 Year Ended December 31,
                                      -------------------------------------------
                                           1998           1997           1996
                                      -------------------------------------------
<S>                                   <C>             <C>             <C>           
Direct premiums earned                $106,777,901    $ 97,856,550   $ 89,273,157
Premiums ceded to nonaffiliates         (3,498,933)     (3,472,978)   (10,705,073)
Premiums ceded to pooling agreement    (57,270,806)    (53,789,256)   (47,904,965)
Premiums assumed from pooling 
  agreement                            345,740,009     330,325,696    306,461,981
Premiums assumed from nonaffiliates         90,111          45,034         61,318
                                      -------------------------------------------
   Net premiums earned                $391,838,282    $370,965,046   $337,186,418
                                      ===========================================
 
 
Direct losses                         $ 60,651,925    $ 51,875,909   $ 46,804,925
Losses ceded to nonaffiliates           (3,585,157)     (1,693,990)    (4,355,459)
Losses ceded to pooling             
 agreement                             (43,112,799)    (38,051,264)   (37,521,843)
Losses assumed from                 
 pooling agreement                     218,297,442     214,317,668    224,835,694
Losses assumed from                 
 nonaffiliates                             349,500          45,086         63,805
Loss adjustment expenses, net           17,186,707      16,498,188     16,219,907
                                      -------------------------------------------    
   Net losses incurred                 249,787,618     242,991,597    246,047,029
                                      -------------------------------------------
 
Surrender, maturities, interest 
  and other benefits and
  settlement expenses                   28,113,018      23,086,359     21,264,297
                                      ------------------------------------------- 
Total benefits and
 settlement expenses                  $277,900,636    $266,077,956   $267,311,326
                                      =========================================== 
</TABLE>

  Reinsurance contracts do not relieve the Company from its obligations to
policyholders.  Failure of reinsurers to honor their obligations could result in
losses to the Company; therefore allowances are established if amounts are
determined to be uncollectible.  The Company evaluates the financial condition
of its reinsurers and monitors concentration of credit risk arising from similar
geographic regions, activities, or economic characteristics of the reinsurance
to minimize exposure to significant losses from reinsurer insolvencies.  At
December 31, 1998, the Company does not believe there to be a significant
concentration of credit risk related to its reinsurance program.

                                       29
<PAGE>
 
13. SEGMENT INFORMATION

  The Company reports operating segments based on the Company's legal entities,
which are organized by line of business, with property and casualty insurance as
one segment, life insurance as one segment, non-insurance businesses composed of
consumer financing, leasing, residential and commercial construction and real
estate sales as one segment, and corporate operations as one segment.  All
investing activities are allocated to the segments based on the actual assets,
investments and cash flows of each segment.

  Segment profit or loss for the property and casualty operating segment is
measured by underwriting profits and losses as well as by total net profit.
Segment profit or loss for the life insurance segment, the non-insurance segment
and the corporate segment  is measured by total net profit.  Segment expenses
are borne by the segment which directly incurred such expense or are allocated
based on the Management and Operating Agreement discussed in Note 3.

  The following is a summary of segment profit (loss):

<TABLE>
<CAPTION>
                                                                        Year-Ended December 31, 1998
                                              -------------------------------------------------------------------------------------
                                               Property &
                                                Casualty        Life           Non
                                               Insurance     Insurance      Insurance     Corporate      Eliminations      Total
                                              --------------------------------------------------------------------------------------

<S>                                           <C>            <C>            <C>          <C>              <C>           <C>
Premiums                                      $345,739,616  $ 21,857,061                                                $367,596,677
Policy charges                                                24,241,605                                                  24,241,605
Segment expenses                               260,756,365    52,979,602                                $   (497,076)    313,238,891
Amortization of deferred                                                                                
   acquisition expense                          51,800,042     6,021,001                                                  57,821,043
                                              --------------------------------------------------------------------------------------
Underwriting profit (loss)                      33,183,209   (12,901,937)                                    497,076      20,778,348
Net investment income (interest expense)        25,992,335    34,890,182    $3,904,579   $ (1,803,906)      (471,532)     62,511,658
Other income                                       156,142                   2,107,498                       (25,544)      2,238,096
Other expense                                      175,544                   2,622,871      3,862,302                      6,660,717
                                              --------------------------------------------------------------------------------------
Segment operating profit (loss) before tax      59,156,142    21,988,245     3,389,206     (5,666,208)             -      78,867,385
Income tax provision (benefit)                  17,574,545     6,343,610     1,197,531       (105,595)                    25,010,090
                                              --------------------------------------------------------------------------------------
Segment operating profit (loss)                 41,581,597    15,644,635     2,191,675     (5,560,613)             -      53,857,295
Net realized gains after tax                     1,642,812     1,215,585                                                   2,858,396
                                              --------------------------------------------------------------------------------------
Segment net profit (loss)                     $ 43,224,409  $ 16,860,220   $ 2,191,675   $ (5,560,613)             -  $   56,715,691
                                              ======================================================================================
Segment Assets                                $500,092,351  $668,475,611   $83,330,509   $490,617,615  $(495,856,949) $1,246,659,137
                                              ======================================================================================
 
                                                                        Year-Ended December 31, 1997
                                              -------------------------------------------------------------------------------------
                                               Property &
                                                Casualty        Life           Non
                                               Insurance     Insurance      Insurance      Corporate     Eliminations    Total
                                              -------------------------------------------------------------------------------------

Premiums                                      $330,305,948  $ 18,199,289                                              $  348,505,237
Policy charges                                                22,459,809                                                  22,459,809
Segment expenses                               252,761,183    45,041,130                               $    (591,328)    297,210,985
Amortization of deferred acquisition                                     
 expense                                        49,483,552     6,514,175                                                  55,997,727
                                              --------------------------------------------------------------------------------------
Underwriting profit (loss)                      28,061,213   (10,896,207)                                    591,328      17,756,334
Net investment income (interest                                          
 expense)                                       23,935,303    31,646,118  $  4,348,658   $ (1,818,921)      (582,489)     57,528,669
Other income                                       155,333                   2,013,189                        (8,839)      2,159,683
Other expense                                      196,945                   2,387,448      1,416,902                      4,001,295
                                              --------------------------------------------------------------------------------------
Segment operating profit (loss)                                          
 before tax                                     51,954,904    20,749,911     3,974,399     (3,235,823)             -      73,443,391
Income tax provision (benefit)                  15,383,538     6,170,000     1,346,390        (68,620)                    22,831,308
                                              --------------------------------------------------------------------------------------
Segment operating profit (loss)                 36,571,366    14,579,911     2,628,009     (3,167,203)             -      50,612,083
Net realized gains after tax                     1,584,437       597,113                                                   2,181,550
                                              --------------------------------------------------------------------------------------
Segment net profit (loss)                     $ 38,155,803  $ 15,177,024  $  2,628,009  $  (3,167,203)             -  $   52,793,633
                                              ======================================================================================
Segment Assets                                $463,170,593  $607,265,984 $112,565,246   $ 479,732,936  $(492,668,957) $1,170,065,802
                                              ======================================================================================

</TABLE> 
 

                                       30
<PAGE>
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE> 
<CAPTION> 
                                                                        Year-Ended December 31, 1996
                                         ------------------------------------------------------------------------------------------
                                          Property &
                                           Casualty         Life           Non
                                          Insurance       Insurance      Insurance      Corporate     Eliminations        Total
                                        -------------------------------------------------------------------------------------------
<S>                                           <C>       <C>              <C>            <C>           <C>            <C>
Premiums                                $298,938,818    $ 19,583,718                                                 $  318,522,536
Policy charges                                            18,663,882                                                     18,663,882
Segment expenses                         256,123,101      39,609,791                                  $    (671,861)    295,061,031
Amortization of deferred acquisition                                                                                
 expense                                  45,050,788       6,061,063                                                     51,111,851
                                        -------------------------------------------------------------------------------------------
Underwriting profit (loss)                (2,235,071)     (7,423,254)                                       671,861      (8,986,464)

Net investment income (interest                                                                                     
 expense)                                 22,250,871      29,253,591   $  5,160,206   $  (1,805,528)       (664,806)     54,194,334
Other income                                  69,095             (17)     2,085,665                          (7,055)      2,147,688
Other expense                                499,554                      2,442,310       1,367,422                       4,309,286
                                        -------------------------------------------------------------------------------------------
Segment operating profit (loss)                                                                                     
 before tax                               19,585,341      21,830,320      4,803,561      (3,172,950)              -      43,046,272
Income tax provision (benefit)             4,396,648       6,877,901      1,464,697         (57,256)                     12,681,989
                                        -------------------------------------------------------------------------------------------
Segment operating profit (loss)           15,188,693      14,952,419      3,338,864      (3,115,694)              -      30,364,283
Net realized gains after tax                  16,151       1,808,782                                                      1,824,932
                                        -------------------------------------------------------------------------------------------
Segment net profit  (loss)              $ 15,204,844    $ 16,761,201   $  3,338,864   $  (3,115,694)              -  $   32,189,215
                                        ===========================================================================================
Segment Assets                          $396,053,628    $533,435,384   $ 98,379,435   $ 404,408,916   $(412,947,208) $1,019,330,155
                                        ===========================================================================================
</TABLE> 

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

<TABLE>
<CAPTION>
 
                                                         For the years ended December 31,
                                                 ------------------------------------------------
                                                        1998           1997              1996
                                                 ------------------------------------------------
<S>                                              <C>              <C>              <C>
Revenues:
   Premiums - Property & Casualty Insurance      $  345,739,616   $  330,305,948   $  298,938,818
   Premiums & policy charges - Life Insurance        46,098,666       40,659,098       38,247,600
   Net investment income                             62,511,658       57,528,669       54,194,334
   Net realized investment gains                      4,397,533        3,356,231        2,807,588
   Other income                                       2,238,096        2,159,683        2,147,688
                                                 ------------------------------------------------
      Total revenues                             $  460,985,569   $  434,009,629   $  396,336,028
                                                 ================================================
 
Income before income taxes:
  Underwriting profit (loss)                     $   20,778,348   $   17,756,334   $   (8,986,464)
  Other income                                        2,238,096        2,159,683        2,147,688
  Other expense                                      (6,660,717)      (4,001,295)      (4,309,286)
  Net investment income                              62,511,658       57,528,669       54,194,334
  Net realized investment gains                       4,397,533        3,356,231        2,807,588
                                                 ------------------------------------------------
      Income before income taxes                 $   83,264,918   $   76,799,622   $   45,853,860
                                                 ================================================
 
Income taxes:
  Allocated to segments                          $   25,010,090   $   22,831,308   $   12,681,989
  Allocated to realized gains                         1,539,137        1,174,681          982,656
                                                 ------------------------------------------------
    Total income tax                             $   26,549,227   $   24,005,989   $   13,664,645
                                                 ================================================
 
Assets:
  Allocated to segments                          $1,742,516,086   $1,662,734,759   $1,432,277,363
  Eliminations                                     (495,856,949)    (492,668,957)    (412,947,208)
                                                 ------------------------------------------------
    Total assets                                 $1,246,659,137   $1,170,065,802   $1,019,330,155
                                                 ================================================
</TABLE>

                                       31
<PAGE>
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14.  ACCOUNTING FOR STOCK-BASED COMPENSATION

  Consistent with the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" (FAS123), the Company uses the intrinsic value based method to
account for its stock options and provides pro forma disclosures as if the fair
value based method had been applied.   On October 25, 1993, the Company
established a Stock Incentive Plan, pursuant to which a maximum aggregate of
2,000,000 shares of common stock have been reserved for grant to key personnel.
The plan expires on October 24, 2003. Under the plan, options ratably become
exercisable annually over three years, and may not be exercised after ten years
after the date of the award.  The following tables and information summarize the
stock option activity of the Company's plan and provides the proforma
disclosures of net income and earnings per share under the fair value based
method of accounting.

<TABLE>
<CAPTION>
                                         Historical Summary of Option Grants
---------------------------------------------------------------------------------------------------------------------
                                                         Market          Cumulative through December 31, 1998
                                                        Value at    -------------------------------------------------
                                            Exercise    Date of       Options            Options           Options
                                             Price       Grant       Cancelled          Exercised         Exercisable
                                            -------------------------------------------------------------------------
<S>                             <C>        <C>        <C>               <C>                 <C>      <C>
Options Authorized              2,000,000
                                ---------
Options Granted During
           October 1993           565,400    $ 11.75    $  11.75      57,800             100,500            407,100
           October 1993           218,000    $  9.40    $  11.75                           8,000            210,000     
             March 1994            80,000    $ 11.50    $  11.50                           2,500             77,500     
             March 1995            80,000    $ 11.50    $  11.50                           2,500             77,500     
             April 1996            80,000    $ 12.25    $  12.25         834               1,666             51,661
          February 1997            75,000    $ 12.00    $  12.00       1,667                 833             24,162
             March 1998           309,500    $ 17.75    $  17.75       5,200                        
             March 1998           143,000    $ 14.20    $  17.75      
                                ---------                             --------------------------------------------- 
Less: Total Options Issued      1,550,900                             65,501             115,999            847,923
 Add: Options Cancelled            65,501                             =============================================
                                ---------
Available for Grant under
   Plan at December 31, 1998      514,601
                                =========
</TABLE>

To determine the fair value of the options granted during 1998, 1997 and 1996
the Company has used the Black- Scholes model for valuations.  The significant
assumptions used to estimate the total and per share fair value of such options
at the date of grant are as follows:

<TABLE>
<CAPTION>
                                             452,500             75,000              80,000
                                         Options Granted    Options  Granted    Options Granted
                                         March 23, 1998     February 18, 1997   April 18, 1996
                                         ------------------------------------------------------
<S>                                       <C>          <C>                 <C>    
Risk-free interest rate                         5.57%               6.27%                6.58%
Expected life (in years)                          10                  10                   10
Expected volatility                             0.51                0.49                 0.47
Expected future dividend yield                   2.3%                3.3%                 2.9%
Weighted average option exercise price    $    16.63            $  12.00             $  12.25
                                          ===================================================  
Fair value at date of grant               $4,325,035            $405,534             $486,898
                                          ===================================================   
Fair value per share                      $     9.56            $   5.41             $   6.09
                                          ===================================================   
</TABLE>

                                       32
<PAGE>
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The proforma net income and earnings per share, as if compensation expense had
been recorded for the fair value at the date of grant, is as follows:

<TABLE>
<CAPTION>
                                                        December 31,
                                           -------------------------------------- 
                                                 1998       1997         1996
                                           -------------------------------------- 
<S>                                        <C>          <C>          <C>
Net income, as reported                    $56,715,691  $52,793,633   $32,189,215
                                           ====================================== 
Earnings per share, as reported - Basic    $      1.39  $      1.29   $      0.79
                                           ======================================  
                                - Diluted  $      1.38  $      1.29   $      0.79
                                           ======================================  
 
Proforma net income                        $55,886,063  $52,502,188   $32,005,055
                                           ======================================  
Proforma earnings per share  - Basic       $      1.37  $      1.29   $      0.78
                                           ======================================  
                             - Diluted     $      1.36  $      1.29   $      0.78
                                           ======================================  
Dilution                     - Basic       $      0.02            -   $      0.01
                                           ====================================== 
                             - Diluted     $      0.02            -   $      0.01
                                           ====================================== 
</TABLE> 

  The information shown below reflects activity for options outstanding at
December 31, 1998, 1997 and 1996:

<TABLE>
<CAPTION>
 
                                                                   December 31,
                                  ------------------------------------------------------------------------ 
                                            1998                      1997                     1996
                                  ------------------------------------------------------------------------ 
                                                 Weighted-                Weighted-                Weighted-
                                                 average                  average                  average
                                    Number      Exercise      Number      Exercise      Number     Exercise
                                  of Options      Price     of Options      Price     of Options     Price
                                  ------------------------------------------------------------------------ 
<S>                              <C>          <C>          <C>          <C>          <C>         <C>
Outstanding
   Beginning of year              1,039,200     $  11.28      975,000     $  11.23     911,200   $  11.14
      Add (deduct):
         Granted                    452,500     $  16.63       75,000     $  12.00      80,000   $  12.25
         Exercised                 (112,199)     ($11.58)      (3,000)     ($11.75)       (800)   ($11.75)
         Cancelled                  (10,101)     ($14.92)      (7,800)     ($11.75)    (15,400)   ($11.75)
                                  ----------------------------------------------------------------------- 
   End of Period                  1,369,400     $  12.99    1,039,200     $  11.28     975,000   $  11.23
                                  ======================================================================= 
   Exercisable, end of period       847,923     $  11.16      884,188     $  11.15     814,988   $  11.10
                                  =======================================================================  

Range of exercise prices               $9.40 to $  17.75         $9.40 to $  12.25      $9.40 to $  12.25
                                  =======================================================================  
Weighted average remaining
    contractual life                           6.7 years                 6.4 years              7.2 years
                                  =======================================================================  
Compensation cost  recognized
    during period                               $306,408                  $103,680               $237,398
                                  =======================================================================  
</TABLE>

                                       33
<PAGE>
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15.  FINANCIAL ACCOUNTING DEVELOPMENTS

  The Financial Accounting Standards Board (FASB) issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities in June 1998. This
Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in investment
securities and other contracts, and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. The accounting for changes in
the fair value of a derivative will be included in either earnings or other
comprehensive income depending on the intended use of the derivative instrument.
The Company is currently evaluating this standard, which is effective January 1,
2000.

  The Accounting Standards Executive Committee issued Statement of Position
(SOP) 97-3, Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments, in December 1997. This SOP provides guidance for determining when
an entity should recognize a liability for guaranty fund and other insurance-
related assessments. It also provides guidance on how to measure the liability.
This SOP is effective for 1999. The Company's accounting method for guaranty
fund and other insurance related assessments substantially conforms to the
requirements of this SOP.

  In March 1998, SOP 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use was issued.  This SOP provides guidance
for determining whether costs of software developed or obtained for internal use
should be capitalized or expensed as incurred.  In the past, the Company has
expensed all such costs when incurred.  This SOP is effective beginning in 1999.
The Company is currently involved in certain technology projects, the costs of
which will be impacted by this SOP.  The Company is currently evaluating the
impact and will provide disclosure about such capitalized and/or expensed costs
in the first quarter of 1999.

                                       34
<PAGE>
 
                         INDEPENDENT AUDITORS' REPORT

To the Stockholders and Board of Directors
Alfa Corporation
Montgomery, Alabama

  We have audited the accompanying consolidated balance sheets of Alfa
Corporation and subsidiaries (the Company) as of December 31, 1998 and 1997, and
the related consolidated statements of income, comprehensive income,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

  We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis for our
opinion.

  In our opinion, the 1998 and 1997 consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
Alfa Corporation and its subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
 
                                        KPMG PEAT MARWICK LLP

Birmingham, Alabama
February 9, 1999

<TABLE> 
<CAPTION> 
                                                  QUARTERLY FINANCIAL INFORMATION -- UNAUDITED

                                                                          Quarter Ended
                             -------------------------------------------------------------------------------------------------------
                                     March 31                    June 30               September 30               December 31
                             -------------------------------------------------------------------------------------------------------
                                 1998         1997         1998         1997         1998         1997         1998         1997
                             -------------------------------------------------------------------------------------------------------
<S>                          <C>           <C>          <C>          <C>          <C>          <C>          <C>          <C> 
Premiums and
   Policy Charges            $97,036,509   $90,484,238  $97,049,291  $92,240,084  $98,732,729  $93,919,207  $99,019,753  $94,321,517
Net Investment Income        $15,518,593   $13,999,062  $15,307,378  $13,917,544  $16,243,369  $14,515,423  $15,442,318  $15,096,640
Net Income                   $16,060,242   $13,054,247  $11,881,575  $13,692,673  $15,124,058  $13,653,270  $13,649,816  $12,393,443
 Average Shares Outstanding
   - Basic                    40,796,961    40,786,712   40,830,127   40,786,712   40,852,332   40,786,712   40,822,140   40,788,042
   - Diluted                  41,054,230    40,841,571   41,149,299   40,866,226   41,209,050   40,958,386   41,187,366   41,021,963
Net Income Per Share*
   - Basic and Diluted             $0.39         $0.32        $0.29        $0.34        $0.37        $0.33        $0.33  $      0.30
</TABLE>

*The sum of the quarters may not equal the annual earnings per share due to the
 rounding effects on a quarterly basis.

                                       35
<PAGE>
 
                            STOCKHOLDER INFORMATION



Executive Offices
2108 East South Boulevard 
Montgomery, Alabama 36116-2015
Telephone: (334)288-3900
FAX: (334)288-0905 or (334)613-4709
Website: www.alfains.com


Form 10-K
The Company's Form 10-K, as filed with the Securities and Exchange Commission,
may be obtained by writing: Al Scott, Secretary and General Counsel Alfa
Corporation P.O. Box 11000 Montgomery, Alabama 36191-0001

Common Stock
  The common stock of Alfa Corporation is traded on the NASDAQ National Market 
System under the symbol ALFA. Alfa Corporation has approximately 3,100
stockholders of record. Newspaper listings of NASDAQ stocks list Alfa 
Corporation as AlfaCp.

Stock Price and Dividend Information
------------------------------------------------------------------------------
1998                    High                    Low             Dividends
                                                                Per Share
------------------------------------------------------------------------------
First Quarter           $18 1/2                 $16             $.10
Second Quarter           21 1/2                  16 3/4          .1125
Third Quarter            23                      18              .1125
Fourth Quarter           24 3/8                  17 1/2          .1125
------------------------------------------------------------------------------
1997                    High                    Low             Dividends
                                                                Per Share
------------------------------------------------------------------------------
First Quarter           $13 1/4                 $11 1/2         $.0975
Second Quarter           14 1/2                  11 1/4          .10
Third Quarter            16 1/4                  13 1/4          .10
Fourth Quarter           18 1/8                  15 3/8          .10


  The Company has paid cash dividends annually since 1974 and quarterly since 
September 1977. There are no restrictions on the Company's present or future 
ability to pay dividends other than the usual statutory restrictions. There is a
present expectation that dividends will continue to be paid in the future, 
provided that operations of the Company continue to be profitable. 

NASDAQ Registered Market Makers
Fox-Pitt, Kelton, Inc.
Goldman, Sachs & Co.
Herzog, Heine, Geduld, Inc.
J.C. Bradford & Co.
Knight Securities L.P.
Mayer & Schweitzer, Inc.
The Robinson-Humphrey Company, Inc.
Sandler O'Neil & Partners
Sherwood Securities Corporation
Spear, Leads & Kellogg
Sterne, Agee & Leach, Inc.

Stock Transfer Agent
The Bank of New York  (800)524-4458
Shareholder Services Department
P.O. Box 11258
Church Street Station
New York, New York 10286-1258
---------------------------------------
E-mail: shareowner-servs@email.bony.com
Website: http://stock.bankofny.com

Stockholders should also use the following addresses:

To transfer stock ownership-
 The Bank of New York
 Receive and Deliver Department
 P.O. Box 11002
 Church Street Station
 New York, New York 10286-1002

To replace lost certificates-
 The Bank of New York 
 Lost Securities Department
 P.O. Box 11281 
 Church Street Station
 New York, New York 10286-1281

Dividend Reinvestment Plan
  Alfa Corporation stockholders can reinvest their dividends in additional 
shares of stock and also may purchase additional shares with optional cash 
payments. Alfa Corporation pays all costs and brokerage fees related to the 
purchases under the plan. For more information contact Investor Relations at the
Company's Executive Office address or contact The Bank of New York, Dividend 
Reinvestment Department, P.O. Box 1958, Newark, New Jersey 07101-9774.

Debt Ratings

                        Standard                Moody's
                        & Poor's           Investors Service
                  --------------------------------------------
Alfa Corporation--
  Commercial Paper       A-1+                   P-1


Independent Accountants
KPMG PEAT MARWICK LLP
Financial Center
Suite 1200
Birmingham, Alabama 35203

For Financial Information Please Contact:
Donald Price
Senior Vice President, Finance 
and Chief Financial Officer

Additional Information Please Contact:
John D. Holley
Vice President, Finance

Annual Meeting  
The Annual Meeting of Alfa Corporation stockholders will be held at 10:00 a.m., 
Thursday, April 22, 1999, in the auditorium of the Company's executive offices 
in Montgomery.


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