EXHIBIT (C)(3)
Presentation to
Financial Analysis of Alfa Corporation
Goldman, Sachs & Co.
16-Jul-2007
Highly Confidential
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DRAFT
-For Discussion Only-
General Disclaimer
Goldman, Sachs & Co. (“Goldman Sachs”) does not provide accounting, tax or legal advice. In addition, we mutually
agree that, subject to applicable law, you (and your employees, representatives and other agents) may disclose any
aspects of any potential transaction or structure described herein that are necessary to support any U.S. federal
income tax benefits, and all materials of any kind (including tax opinions and other tax analyses) related to those
benefits, with no limitations imposed by Goldman Sachs.
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-For Discussion Only-
Selected Key Questions to Address / Consider
How has Alfa Corp. performed, including relative to peers?
What have returns to shareholders been?
How does Alfa Corp.’s stock price trade relative to its peers?
What factors drive current trading levels of Alfa Corp.’s stock?
What would be the basis for an offer price?
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-For Discussion Only-
Historical and Projected Financial Performance – Alfa Corp.
2002A-2008E
($ in millions)
At or For
For the year ended December 31, CAGR (%) 12 Mo. Ended
2002 2003 2004 2005 2006 2002—2006 3/31/2007 2007E 2008E
Income Statement
Net Premiums Written—P&C $ 439.5 $ 467.1 $ 498.2 $ 588.4 $ 622.0 9.1 % $ 641.3 $ 682.0
NPW Growth—P&C 6.3 % 6.7 % 18.1 % 5.7 % 3.1 % 6.3 %
Net Premiums Earned—P&C $ 428.1 $ 454.5 $ 485.5 $ 556.4 $ 604.2 9.0 % $ 612.2 $ 627.9 $ 669.3
Net Premiums Earned—Life 63.0 66.2 71.2 76.6 82.8 7.1 83.7
Net Investment Income 88.1 83.1 89.4 94.9 93.3 1.4 96.7
Realized Gains 5.2 6.3 7.0 6.1 3.4 (9.9) 4.5
Other Revenue 4.0 9.8 8.1 22.9 28.4 63.5 27.1
Total Revenue $ 588.3 $ 619.8 $ 661.3 $ 756.9 $ 812.1 8.4 % $ 824.3
P&C Losses and LAE $ 287.7 $ 301.5 $ 318.2 $ 358.5 $ 380.3 7.2 %
Life Benefits 58.8 63.1 71.9 73.2 78.5 7.5
DAC 79.8 86.5 90.5 108.7 130.0 13.0 135.3
Other Operating Expenses 62.8 62.1 60.1 78.6 84.3 7.6 86.8
Total Expenses $ 489.0 $ 513.2 $ 540.7 $ 619.0 $ 673.1 8.3 % $ 695.5
Income Before Taxes $ 99.3 $ 106.6 $ 120.6 $ 137.9 $ 139.0 8.8 % $ 128.8
Tax Expense 27.6 28.1 31.2 38.8 33.1 4.6 30.8
Net Income¹ $ 71.7 $ 78.5 $ 89.4 $ 99.0 $ 105.9 10.2 % $ 98.0 $ 111.0 $ 118.4
Net Operating Income¹ 68.4 74.4 84.9 95.1 103.7 11.0 101.0 108.4 115.8
Net Operating EPS¹ $ 0.86 $ 0.93 $ 1.05 $ 1.18 $ 1.28 10.4 $ 1.24 $ 1.33 $ 1.42
Net Operating EPS Growth % 4.7 % 7.7 % 13.9 % 11.8 % 8.4 % 4.5 % 6.8 %
Selected Balance Sheet Items
Total Investments $ 1,663.7 $ 1,760.2 $ 1,854.2 $ 2,001.4 $ 2,127.1 6.3 % $ 2,195.2
Total Assets 1,884.1 2,031.0 2,222.7 2,383.2 2,534.2 7.7 2,608.1
Debt² 112.5 107.1 85.9 91.0 97.5 (3.5) 94.5
Total Equity (ex-AOCI) 527.9 592.8 652.0 734.3 812.8 11.4 822.2 882.4 956.7
BVPS (ex-AOCI) $ 6.64 $ 7.37 $ 8.10 $ 9.10 $ 10.01 10.8 $ 10.11 $ 10.86 $ 11.77
Selected Metrics 5yr Avg
GAAP Loss and LAE Ratio 67.2 % 66.4 % 65.5 % 64.4 % 62.9 % 65.3 % 64.2 % 61.9 % 62.2 %
GAAP Expense Ratio 25.2 25.9 24.1 25.5 27.8 25.7 28.3 28.1 27.8
GAAP Combined Ratio 92.4 % 92.3 % 89.6 % 89.9 % 90.7 % 91.0 % 92.5 % 90.0 % 90.0 %
Operating ROACE (ex-AOCI) 13.6 % 13.3 % 13.6 % 13.7 % 13.4 % 13.5 % 12.3 % 12.8 % 12.6 %
Contribution to Growth in Earned Premiums
AVIC $ 20.8
Virginia Mutual 21.4
Source: SEC filings and Alfa management for 2007E and 2008E
1 Includes impact of pre-tax catastrophe losses of $7.5 million, $7.9 million, $9.2 million, $11.6 million, and $13.8 million in the years 2002-06, respectively.
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Excluding commercial paper facility of $206.9 million as of 31-Dec-2006. |
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-For Discussion Only-
Growth and Profitability of Selected P&C Companies
($ in millions)
NPW Growth (%) GAAP Loss Ratio (%) GAAP Comb. Ratio (%) Surplus Growth (%) BVPS² EPS Growth
Q1’07 / 04-06 3 Year 3 Year NPW / Q1’07 / 04-06 01-06 2007E / 2007E
Q1’06 CAGR 1Q2007 Average 1Q2007 Average Surplus Q1’06 CAGR CAGR 2006A ROACE
Alfa Corp¹ 5.5 % 4.2 % 71.9 % 64.3 % 101.8 % 90.2 % 1.0 x 12.1 % 10.8 % 10.7 % (3.9)% 11.7 %
Alfa Peers
Allstate (1.7)% 1.9 % 60.5 % 68.5 % 84.6 % 93.0 % 1.4 x 20.1 % 7.0 % 8.8 % (9.7)% 19.0 %
Mercury General 1.5 7.3 67.5 65.2 94.5 92.2 1.9 6.7 7.7 9.3 14.3 13.5
Hanover 6.6 1.6 60.4 68.5 93.8 100.9 1.4 16.5 (0.3) (2.6) 14.4 10.2
Commerce Group 3.3 3.2 65.8 62.0 92.8 89.3 1.2 3.8 9.1 12.8 (3.8) 14.2
State Auto (0.6) 0.1 56.8 59.1 91.3 91.1 1.2 NA 16.7 15.8 (3.2) 12.4
FBL Financial 17.1 3.5 69.3 68.7 92.5 91.6 2.0 (13.1) (1.4) 8.4 (12.4) 10.0
Harleysville (0.9) (0.1) 63.9 68.0 98.0 102.2 1.2 19.2 16.1 3.9 9.4 12.4
Infinity P&C 17.1 3.5 69.3 68.7 92.5 91.6 2.0 (13.1) (1.4) 4.3 (12.4) 10.2
Horace Mann 1.4 (1.5) 65.0 71.3 89.5 94.6 1.7 NA 10.3 6.7 (5.0) 12.3
Safety Insurance 0.3 0.2 60.3 63.4 86.8 88.1 1.4 25.9 28.2 9.4 (21.8) 16.4
Donegal 7.8 5.5 59.2 69.6 89.2 99.0 1.0 25.9 17.7 11.1 (5.1) 10.0
Peer Median 1.5 % 1.7 % 64.5 % 68.3 % 92.5 % 91.9 % 1.4 x 11.6 % 8.4 % 8.6 % (4.4)% 12.4 %
Other Personal Lines
Travelers Company 7.8 % 5.5 % 59.2 % 69.6 % 89.2 % 99.0 % 1.0 x 14.5 % 17.7 % 21.7 % (5.1)% 14.6 %
Chubb (2.0) (0.3)% 53.0 60.9 83.4 89.6 1.1 23.8 20.3 12.1 0.0 15.9
Progressive (0.8) 2.8 % 68.7 66.5 89.5 86.6 2.8 4.3 3.1 18.7 (14.5) 19.8
Safeco (2.0) (0.3)% 62.0 61.5 89.8 90.0 1.4 4.0 6.7 9.0 (6.7) 17.6
United Fire & Casualty (0.4) 1.9 % 41.6 66.0 71.3 94.8 0.9 52.8 22.5 13.6 9.6 14.5
Other Personal Lines Med. (0.8)% 1.9 % 59.2 % 66.0 % 89.2 % 90.0 % 1.1 x 14.5 % 17.7 % 13.6 % (5.1)% 15.9 %
Median—All Peers 0.9 % 1.9 % 61.3 % 67.3 % 89.7 % 91.9 % 1.4 x 15.5 % 9.7 % 9.4 % (5.0)% 13.9 %
Source: Company filings and SNL Financial
1 Includes catastrophe losses of $13.9 million, $13.8 million, $11.6 million, and $9.2 million in the period 1Q 2007, and the years 2006, 2005, and 2004 respectively; represents annualized loss ratio impact
of 8.9%, 2.3%, 2.1%, and 1.9%. EPS growth and ROACE based on IBES estimates.
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Excluding accumulated other comprehensive income. |
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DRAFT
-For Discussion Only-
Summary of Alfa Corp.’s Trading Metrics
Source: Bloomberg, IBES, Factset
Note: Market data as of 13-Jul-2007.
High (Commerce Group): 14.5%
Allstate: 6.8%
Median: 8.0%
Alfa: 10.1%
10 Yr Total Return
Low (Horace Mann): 0.5%
Alfa 1-Year Trading Range
High: $19.85
Current: $15.38
Low: $15.10
High (Progressive): 2.6x (19.6% ‘07 ROE)
Low (Donegal): 1.2x (10.0% ‘07 ROE)
Alfa: 1.5x (11.6% ‘07 ROE)
Median: 1.4x
Price to Book Ratio
Price / 2007E Earnings Ratio
High (Infinity): 13.5x
Median: 11.5x
Low (Safety Ins.): 7.1x
Allstate: 8.7x
Alfa—IBES: 12.6x
High (Hanover): 99.0%
Low (Safety Insurance): 69.0%
Alfa: 77.5%
Median: 92.6%
Percent of 52 Week High
Allstate: 92.6%
Allstate: 1.7x (19.0% ‘07 ROE)
Alfa—Mgmt: 11.6x
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DRAFT
-For Discussion Only-
Overview of Selected Methodologies
Historical Trading Analysis: Historical performance of Alfa Corp.’s shares
Common Stock Comparables: Alfa Corp.’s current stock price
relative to peers (P/E, P/B, P/B vs. ROE, etc.)
Dividend Discount Analysis: Illustrative indicative value of shares based on discounted
future dividends derived from Management’s estimates
Comparable Transactions: Premiums paid over current stock price to
minority shareholders in similar transactions
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DRAFT
-For Discussion Only-
Alfa Corp.’s Stock Price History
10-Year Share Price History 1-Year Share Price History
$6
$8
$10
$12
$14
$16
$18
$20
Jul-1997 Jul-1999 Jul-2001 Jul-2003 Jul-2005
Daily from 11-Jul-1997 to 13-Jul-2007
Closing Price (USD)
0
500
1,000
1,500
2,000
2,500
Volume (000)
Volume Alfa Corporation
CAGR: 7.2%
$15
$16
$17
$18
$19
$20
$21
Jul-2006 Sep-2006 Dec-2006 Feb-2007 May-2007 Jul-2007
Daily from 14-Jul-2006 to 13-Jul-2007
Closing Price (USD)
0
100
200
300
400
500
600
700
Volume (000)
Volume Alfa Corporation
02-Jan-07: Conversion and
acquisition of Virginia Mutual
completed
12-Sep-06: Virginia
Mutual acquisition
announced
20-Jul-06: Earnings
release delayed
20-Oct-2006: 3Q EPS
of $0.33 per share
23-Feb-2007: FY
2006 results of $1.28
per share
02-May-2007: 1Q EPS
of $0.17 per share
04-Aug-2006:
2Q EPS of $0.30
per share
11-May-07:
S&P Pool
rating lowered
to ‘A+’
16-Mar-2007: Storm loss
estimates of $30-40
million for Feb-Mar 2007
12-Jul-07: Preannouncement
Source: Company filings, FactSet
Note: Market data as of 13-Jul-2007.
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DRAFT
-For Discussion Only-
Stock Price Reaction to Management Earnings
Pre-Announcement
Closing Price
Company 7/12/2007 7/13/2007 % Change
Alfa Corp $ 15.31 $ 15.38 0.5 %
Alfa Peers
Allstate $ 61.43 $ 61.05 (0.6)%
Mercury General 55.61 54.94 (1.2)
Hanover 49.26 49.76 1.0
Commerce Group 34.94 34.80 (0.4)
State Auto 30.19 30.10 (0.3)
FBL Financial 39.39 38.84 (1.4)
Harleysville 33.76 33.25 (1.5)
Horace Mann 50.94 49.46 (2.9)
Infinity P&C 21.89 21.78 (0.5)
Safety insurance 39.13 38.68 (1.2)
Donegal 15.09 15.09 0.0
Median—Alfa Peers (0.6)%
Other Personal Lines
Travelers Company $ 54.01 $ 53.58 (0.8)%
Chubb 53.96 53.81 (0.3)
Progressive 22.69 22.39 (1.3)
Safeco 61.92 61.55 (0.6)
United Fire & Casualty 35.27 35.50 0.7
Median—Other Personal Lines (0.6)%
S&P 500 1,547.70 1,552.50 0.3 %
Source: Bloomberg, IBES, Factset
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DRAFT
-For Discussion Only-
Annual Total Return Analysis
Alfa Corp. versus Alfa Peers
10 Year 5 Year 3 Year 1 Year 2007 YTD
Alfa 10.1 % 7.8 % 6.6 % 1.6 % (17.2)%
Allstate 6.8 % 14.2 % 11.8 % 13.9 % (5.0)%
Mercury General 7.2 7.5 7.3 5.7 6.2
Hanover 2.3 6.2 13.6 7.2 2.0
Commerce Group 14.5 17.3 15.1 22.8 19.2
State Auto 11.9 15.3 1.3 (3.3) (12.7)
FBL Financial 9.5 15.3 13.9 24.2 0.0
Harleysville 8.7 9.3 24.0 8.0 3.4
Horace Mann 0.5 7.9 11.0 34.3 8.9
Infinity P&C—- 17.2 24.8 2.6
Safety Insurance—- 26.3 (17.9) (22.8)
Donegal—24.6 12.1 (14.3) (22.5)
Median 8.0 % 14.2 % 13.6 % 8.0 % 2.0 %
High 14.5 24.6 26.3 34.3 19.2
Low 0.5 6.2 1.3 (17.9) (22.8)
Source: Factset, data as of 13-Jul-2007
11
DRAFT
-For Discussion Only-
Shares Traded at Various Prices – Alfa Corp.
3-month 6-month
0
300
600
900
1,200
1,500
1,800
2,100
2,400
2,700
3,000
$15.10 –
$15.79
$15.80 –
$16.49
$16.50 –
$17.18
$17.19 –
$17.88
$17.89 –
$18.58
$18.59 –
$19.29
Daily from 13-Apr-2007 to 13-Jul-2007
Volume (000)
Weighted Average Price: $16.90
Total Shares Traded as Percent of Shares
Outstanding: 8.03%
$15.38
ADTV: 101.063
0
500
1,000
1,500
2,000
2,500
3,000
3,500
$15.10 –
$15.79
$15.80 –
$16.49
$16.50 –
$17.18
$17.19 –
$17.88
$17.89 –
$18.58
$18.59 –
$19.29
Daily from 12-Jan-2007 to 13-Jul-2007
Volume (000)
Weighted Average Price: $17.59
Total Shares Traded as Percent of
Shares Outstanding: 14.16%
$15.38
ADTV: 90.517
1-year 3-year
0
1,000
2,000
3,000
4,000
5,000
6,000
$15.10 –
$15.88
$15.89 –
$16.67
$16.68 –
$17.47
$17.48 –
$18.26
$18.27 –
$19.05
$19.06 –
$19.85
Daily from 13-Jul-2006 to 13-Jul-2007
Volume (000)
Weighted Average Price: $17.72
Total Shares Traded as Percent of
Shares Outstanding: 24.98%
$15.38
ADTV: 79.827
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
$12.82 –
$13.98
$13.99 –
$15.15
$15.16 –
$16.32
$16.33 –
$17.50
$17.51 –
$18.67
$18.68 –
$18.67
Daily from 13-Jul-2004 to 13-Jul-2007
Volume (000)
Weighted Average Price:
$16.38
Total Shares Traded as
Percent of Shares
Outstanding: 59.67%
$15.38
ADTV: 63.466
Source: Factset, market data as of 13-Jul-2007
12
DRAFT
-For Discussion Only-
Overview of Selected Methodologies
Historical Trading Analysis: Historical performance of Alfa Corp.’s shares
Common Stock Comparables: Alfa Corp.’s current stock price
relative to peers (P/E, P/B, P/B vs. ROE, etc.)
Dividend Discount Analysis: Illustrative indicative value of shares based on discounted
future dividends derived from Management’s estimates
Comparable Transactions: Premiums paid over current stock price to
minority shareholders in similar transactions
13
DRAFT
-For Discussion Only-
Alfa Corp.’s Historical Trading Multiples
Average P/E Multiple (NTM) Average Price/Book Multiple
13.0x
13.7x
12.7x
11.2x
11.6x
11.0x
10 Yr 3 Yr 1 Yr
1.8x
1.7x 1.7x
1.4x
1.5x
1.5x
10 Yr 3 Yr 1 Yr
Alfa Alfa Peers and other Personal Lines¹
Source: Bloomberg, Wall Street research, Factset as of 13-Jul-2007
1 Composite includes: Travelers, Chubb, Progressive, Safeco, United Fire & Casualty, Harleysville, Infinity P&C, Donegal, Horace Mann, Mercury General, Commerce Group,
State Auto, Allstate, Safety Insurance, Hanover, and FBL Financial.
14
DRAFT
-For Discussion Only-
Personal Lines Insurance Price to Book Multiples
Price-to-Book versus ROE Regression Analysis
Note: Financial data as of 31-Mar-2007. Market data as of 13-Jul-2007.
“Premium” relative to ROE
At Par relative to ROE
Premium valuation likely driven by:
Limited Catastrophe Exposure
Consistent EPS and BVPS Growth
“Discount” relative to ROE
Premium to line:
2.5%—9.3%
United F&C
Safeco
Progressive
Chubb
Travelers
Safety
Harleysville
Horace Mann Infinity P&C
State Auto
Commerce
Hanover
Mercury
Allstate
Alfa—Mgmt
Alfa—IBES
y = 0.0766x + 0.5016
R2 = 0.4484
1x
1.2x
1.4x
1.6x
1.8x
2x
2.2x
2.4x
2.6x
2.8x
3x
9% 11% 13% 15% 17% 19%
2007 ROACE (Ex-AOCI)
Price / Book
2007E
ROACE
Implied
Multiple
10.0% 1.26x
11.0 1.34
12.0 1.42
13.0 1.49
14.0 1.57
15.0 1.65
16.0 1.72
15
DRAFT
-For Discussion Only-
Common Stock Comparison of Selected P&C Insurers
($ in millions)
P/E¹
Company
Market
Cap.
% of 52-
Wk. High 2007E 2008E
| 5 |
|
Year |
Growth¹
P/B (ex-
AOCI) 2007E 2008E
Dividend
Yield
Adj. Debt /
Capital²
Alfa Corp—IBES³ $ 1,249 77.5 % 12.6 x 11.6 x NA 1.5 x 11.6 % 11.8 % 3.1 % 10.7 %
Alfa Corp—Mgmt Estimates³ 1,249 77.5 11.6 10.8 7.5 1.5 12.8 12.6 3.1 10.7
Alfa Peers
Allstate $ 37,471 92.6 % 8.7 x 8.8 x 8.0 % 1.7 x 19.0 % 16.6 % 2.5 % 17.8 %
Mercury General 3,009 95.4 12.8 12.9 NA 1.8 13.6 12.8 3.8 7.7
Hanover 2,599 99.0 11.8 12.0 12.5 1.2 10.1 9.2 0.6 20.5
Commerce Group 2,314 98.1 10.5 12.0 NA 1.5 14.2 11.6 3.4 16.6
State Auto 1,257 85.7 11.0 11.1 10.0 1.4 12.5 11.3 1.3 11.9
FBL Financial 1,192 95.1 13.2 12.3 10.0 1.4 10.0 9.9 1.2 26.6
Harleysville 1,079 86.1 11.5 10.9 10.0 1.5 12.4 12.0 2.3 13.9
Horace Mann 979 96.4 11.5 11.5 NA 1.5 12.3 11.3 1.9 23.0
Infinity P&C 970 89.9 13.5 13.1 10.0 1.4 10.2 9.8 0.7 22.7
Safety Insurance 632 69.0 7.1 8.8 15.0 1.2 16.4 12.0 2.6 0.0
Donegal 380 71.7 11.4 9.6 NA 1.2 10.0 11.1 2.4 8.8
High—Alfa Peers 99.0 % 13.5 x 13.1 x 15.0 % 1.8 x 19.0 % 16.6 % 3.8 % 26.6 %
Low—Alfa Peers 69.0 7.1 8.8 8.0 1.2 10.0 9.2 0.6 0.0
Median—Alfa Peers 92.6 11.5 11.5 10.0 1.4 12.4 11.3 2.3 16.6
Other Personal Lines
Travelers Company $ 36,091 94.4 % 9.6 x 9.5 x 9.0 % 1.5 x 14.6 % 13.4 % 2.2 % 17.5 %
Chubb 21,832 96.2 9.6 9.6 10.0 1.6 15.9 14.3 2.2 19.6
Progressive 16,672 88.9 12.5 13.5 8.7 2.6 19.6 15.6 0.0 15.8
Safeco 6,556 89.3 9.8 10.2 10.0 1.8 17.7 15.3 2.6 25.7
United Fire & Casualty 985 89.2 10.4 12.5 NA 1.6 14.5 11.0 1.5 0.0
High—Other Personal Lines 96.2 % 12.5 x 13.5 x 10.0 % 2.6 x 19.6 % 15.6 % 2.6 % 25.7 %
Low—Other Personal Lines 88.9 9.6 9.5 8.7 1.5 14.5 11.0 0.0 0.0
Median—Other Personal Lines 89.3 9.8 10.2 9.5 1.6 15.9 14.3 2.2 17.5
High—All Companies 99.0 % 13.5 x 13.5 x 15.0 % 2.6 x 19.6 % 16.6 % 3.8 % 26.6 %
Low—All Companies 69.0 7.1 8.8 8.0 1.2 10.0 9.2 0.0 0.0
Median—All Companies 91.3 11.2 11.3 10.0 1.5 13.9 11.8 2.2 17.1
ROACE
Note: Financial data as of 31-Mar-2007. Market data as of 13-Jul-2007.
| 1 |
|
All EPS estimates have been calendarized and are based on IBES median estimates. |
2 Assumes the following equity credit weightings: mandatory convertibles—75%; perpetual preferreds—50%; trust preferred stock and contingent convertibles—0%.
| 3 |
|
Alfa’s commercial paper is excluded from its Debt / Capital calculation. |
16
DRAFT
-For Discussion Only-
Overview of Selected Methodologies
Historical Trading Analysis: Historical performance of Alfa Corp.’s shares
Common Stock Comparables: Alfa Corp.’s current stock price
relative to peers (P/E, P/B, P/B vs. ROE, etc.)
Dividend Discount Analysis: Illustrative indicative value of shares based on discounted
future dividends derived from Management’s estimates
Comparable Transactions: Premiums paid over current stock price to
minority shareholders in similar transactions
17
DRAFT
-For Discussion Only-
Dividend Discount Analysis – Alfa Corp.
Management Assumptions
($ in millions)
Alfa Corp. dividends based on management estimates from 2007 to 2011
Management has indicated a high degree of confidence in 2007-08 estimates based on implementation of rate increases
in Homeowners, current competitive environment in Auto and current investment environment
Year 2009-11 projections are based on momentum plan assuming current market conditions which may change
significantly over this period
Illustrative value calculated on a present value basis as of 6/30/2007
Ongoing dividends/cash flows from P&C operations calculated based on targeted NPW/surplus ratio; dividends are limited to
“greater than test” of the larger of (1) previous year’s statutory net income or (2) 10% of prior year’s statutory surplus
P&C Terminal Value calculated based on an assumed perpetuity growth rate and discount rate
Discount rate based on CAPM assuming 10-year Treasury yield of 5.2%, equity risk premium of 4.9% (based on
Morningstar analysis from 1970-2005) and Alfa’s equity Beta based on either a 3 year historical Beta of 1.15 or a Barra
projected Beta of 0.73
Discount rate could range between 9-11%
Life Value based on 1.0x P/B terminal multiple in 2011E
Risks to management projections:
(1) Current soft cycle in Auto industry becomes much more competitive leading to larger rate declines, falling premiums and
increased combined ratios due to increased competition from large national and other players
| (2) |
|
Recent Homeowners rate increases by Alfa Corp. reverse in future years due to benign Catastrophe environment |
(3) Significant increase in required technology infrastructure leading to significant increases in investments in technology
(4) Potential for continued meaningful investments in independent network as the Company looks to expand outside Alabama
| (5) |
|
Interest rate and credit environment could deteriorate |
Source: Management estimates
18
DRAFT
-For Discussion Only-
Dividend Discount Analysis – Alfa Corp.
Sensitivity Analysis
Illustrative Share Price Implied Terminal Value Multiple
Discount Rate
9.0 % 10.0 % 11.0 %
2.5 % $ 19.49 $ 17.28 $ 15.57
3.0 20.46 17.98 16.09
3.5 21.62 18.78 16.67
4.0 23.00 19.72 17.34
Perpetuity
Growth
Discount Rate
9.0 % 10.0 % 11.0 %
2.5 % 11.7 x 10.2 x 9.0 x
3.0 12.7 10.9 9.5
3.5 13.9 11.7 10.2
4.0 15.2 12.7 10.9
Perpetuity
Growth
Illustrative Share Price Illustrative Share Price
Discount Rate
9.0 % 10.0 % 11.0 %
1.50 x $ 22.28 $ 19.39 $ 17.23
1.40 21.62 18.78 16.67
1.30 20.90 18.14 16.08
1.20 20.08 17.38 15.38
NPW /
Surplus
Discount Rate
9.0 % 10.0 % 11.0 %
0.0 % $ 21.62 $ 18.78 $ 16.67
2.5 19.09 16.68 14.87
5.0 16.57 14.57 13.08
7.5 14.04 12.47 11.24
Change in
Combined
Ratio
Source: Management estimates
Note: Market data as of 13-Jul-2007. Shaded figures reflect stock prices greater than current market price of $15.38.
19
DRAFT
-For Discussion Only-
Overview of Selected Methodologies
Historical Trading Analysis: Historical performance of Alfa Corp.’s shares
Common Stock Comparables: Alfa Corp.’s current stock price
relative to peers (P/E, P/B, P/B vs. ROE, etc.)
Dividend Discount Analysis: Illustrative indicative value of shares based on discounted
future dividends derived from Management’s estimates
Comparable Transactions: Premiums paid over current stock price to minority shareholders in similar transactions
20
DRAFT
-For Discussion Only-
Comparison of Selected Buyouts by Significant Existing
Shareholders – (Deal Size greater than $500mm)
($ in millions, except per share data)
Stock 52-Week Initial Initial Inside
Aggregate Price One High Premium Over Premium Percent Ownership
Effective Acquiring Company/ Consideration Day Prior Prior to 1-Week Avg. Over 52- Initial Final Increase Before the
Date Acquired Company (mm) to Ann. Ann. Prior to Ann. Week High Premium Premium in Offer¹ Transaction
May-07 AIG $ 931 $ 16.34 $ 17.95 19.8% 10.0 % 20.9% 34.6% 13.8% 61.9%
21st Century Insurance Co
Apr-07 Toronto-Dominion Bank $ 3,232 $ 30.35 $ 32.18 5.9% 0.7 % 6.5% 6.5% 0.0% 54.6%
TD Banknorth Inc
Nov-05 IYG Holding Co $ 1,301 $ 28.34 $ 35.20 10.9% (7.7)% 14.7% 32.3% 17.6% 61.2%
7-Eleven Inc
Jul-05 Novartis AG $ 933 $ 27.92 $ 45.25 8.7% (31.5)% 11.0% 11.0% 0.0% 66.4%
Eon Labs Inc
Jun-05 Liberty Media Intl Inc $ 3,576 $ 9.64 $10.60 1.0% (9.6)% (0.6)% (0.6)% 0.0% 52.2%
UnitedGlobalCom Inc
Mar-05 News Corp Inc $ 7,184 $ 31.22 $ 34.60 5.8% (3.1)% 7.4% 13.1% 5.7% 76.6%
Fox Entertainment Group Inc
Dec-04 Cox Enterprises Inc $ 8,390 $ 27.58 $ 36.95 10.5% (13.4)% 16.0% 26.0% 10.0% 61.4%
Cox Communications Inc
Jun-03 USA Interactive $ 1,237 $ 53.30 $ 75.00 7.8% (19.7)% 13.0% 13.0% 0.0% 62.3%
Hotels.com
Jun-02 Xcel Energy Inc $ 673 $ 10.00 $ 37.70 13.7% (69.5)% 15.0% 28.6% 13.6% 73.0%
NRG Energy Inc
Mar-02 Limited Inc $ 1,645 $ 17.90 $ 19.00 10.0% 1.6 % 7.8% 10.2% 2.3% 81.8%
Intimate Brands Inc(Limited)
Dec-01 Liberty Mutual Insurance Co $ 536 $ 27.00 $ 47.45 1.4% (29.0)% 24.8% 24.8% 0.0% 65.6%
Liberty Financial Cos Inc
Sep-01 Westfield America Trust $ 1,051 $ 14.45 $ 16.50 10.6% (1.5)% 12.5% 12.5% 0.0% 55.9%
Westfield America Inc
Jan-01 AXA SA $ 11,189 $ 52.25 $ 52.31 5.8% 2.3 % 2.4% 4.6% 2.2% 60.0%
AXA Financial Inc
Jun-00 Hartford Fin Svcs Group Inc $ 1,325 $ 42.56 $ 55.00 26.1 % (20.0)% 3.4% 18.6% 15.3% 80.4%
Hartford Life(ITT Hartford)
Median¹ 8.7 % (7.7)% 11.0 % 13.0 % 11.8 % 61.9 %
Source: SEC filings, Thomson One, and SDC Financial
Note: Reflects deals > $500mm since 2000.
| 1 |
|
Median calculation for percent increase in offer excludes cases where percent increase in offer equals 0%. |
21
DRAFT
-For Discussion Only-
Comparison of Selected Buyouts by Significant Existing
Shareholders – Financial Institutions
($ in millions, except per share data)
Stock 52-Week Initial Initial Inside
Aggregate Price One High Premium Over Premium Percent Ownership
Effective Acquiring Company/ Consideration Day Prior Prior to 1-Week Avg Over 52- Initial Final Increase Before the
Date Acquired Company (mm) to Ann. Ann. Prior to Ann. Week High Premium Premium in Offer¹ Transaction
May-07 American Financial Group Inc $ 245 $ 21.64 $ 23.96 9.4 % (1.9)% 8.6% 13.2% 4.6% 81.0%
Great American Finl Res Inc
May-07 AIG $ 931 $ 16.34 $ 17.95 19.8 % 10.0 % 20.9% 34.6% 13.8% 61.9%
21st Century Insurance Co
Apr-07 Toronto-Dominion Bank $ 3,232 $ 30.35 $ 32.18 5.9 % 0.7 % 6.5% 6.5% 0.0% 54.6%
TD Banknorth Inc
May-06 Erie Indemnity Co $ 75 $ 30.00 $ 32.19 12.3 % (0.6)% 6.7% 6.7% 0.0% 75.1%
Erie Family Life Insurance Co
Nov-01 Toronto-Dominion Bank $ 403 $ 6.20 $ 17.94 35.2 % (49.8)% 45.2% 53.2% 8.1% 88.8%
TD Waterhouse Group Inc
Dec-01 Liberty Mutual Insurance Co $ 536 $ 27.00 $ 47.45 1.4 % (29.0)% 24.8% 24.8% 0.0% 65.6%
Liberty Financial Cos Inc
Aug-01 CSFB $ 110 $ 2.50 $ 15.56 35.7 % (75.0)% 60.0% 140.0% 80.0% 82.0%
CSFBdirect
Jan-01 AXA SA $ 11,189 $ 52.25 $ 52.31 5.8 % 2.3 % 2.4% 4.6% 2.2% 60.0%
AXA Financial Inc
Jun-00 Hartford Fin Svcs Group Inc $ 1,325 $ 42.56 $ 55.00 9.3 % (20.0)% 3.4% 18.6% 15.3% 80.4%
Hartford Life(ITT Hartford)
Apr-00 Citigroup $ 2,449 $ 33.68 $ 41.31 21.7 % 0.5 % 23.2% 24.6% 1.3% 85.0%
Travelers Prop. Casualty Corp
Dec-98 Allmerica Financial Corp $ 212 $ 27.56 $ 34.62 1.7 % (16.2)% 5.2% 17.0% 11.8% 82.0%
Citizens Corp
Median¹ 9.4 % (1.9)% 8.6% 18.6% 9.9% 80.4%
Source: SEC filings, Thomson One, and SDC Financial
| 1 |
|
Median calculation for percent increase in offer excludes cases where percent increase in offer equals 0%. |
22
DRAFT
-For Discussion Only-
Analysis of Transaction at Various Pricing Levels
($ in millions)
Alfa
Current Purchase Price Per Share
Price Per Share $ 15.38 $ 16.00 $ 16.50 $ 17.00 $ 17.50 $ 18.00 $ 18.50 $ 19.00 $ 19.50 $ 20.00
Aggregate Valuation $ 1,249 $ 1,301 $ 1,342 $ 1,384 $ 1,426 $ 1,468 $ 1,510 $ 1,552 $ 1,594 $ 1,636
Consideration to Minority Shareholders $ 560 Alfa Peers $ 590 $ 600 $ 620 $ 640 $ 660 $ 680 $ 700 $ 720 $ 740
Premium to:
Current Price (13-Jul-2007) $ 15.38 0.0 % 4.0 % 7.3 % 10.5 % 13.8 % 17.0 % 20.3 % 23.5 % 26.8 % 30.0 %
52-Wk High (16-Nov-2006) 19.85 (22.5) (19.4) (16.9) (14.4) (11.8) (9.3) (6.8) (4.3) (1.8) 0.8
30-Day Average 16.58 (7.2) (3.5) (0.5) 2.5 5.6 8.6 11.6 14.6 17.6 20.6
90-Day Average 17.56 (12.4) (8.9) (6.0) (3.2) (0.3) 2.5 5.3 8.2 11.0 13.9
1-Year Average 17.81 (13.6) (10.2) (7.4) (4.5) (1.7) 1.1 3.9 6.7 9.5 12.3
Shareholder’s Equity
GAAP Shareholders’ Equity (3/31/2007A)¹ $ 822.2 1.52 x 1.43 x 1.58 x 1.63 x 1.68 x 1.73 x 1.79 x 1.84 x 1.89 x 1.94 x 1.99 x
GAAP Shareholders’ Equity (12/31/2007E)—Mgmt Estimates¹ 882.4 1.41 1.47 1.52 1.57 1.62 1.66 1.71 1.76 1.81 1.85
Operating EPS (IBES Estimates)
2007E $ 1.22 12.6 x 11.5 x 13.1 x 13.5 x 13.9 x 14.3 x 14.8 x 15.2 x 15.6 x 16.0 x 16.4 x
2008E 1.33 11.6 11.5 12.0 12.4 12.8 13.2 13.5 13.9 14.3 14.7 15.0
Operating EPS (Management Estimates)
2007E $ 1.33 11.6 x 11.5 x 12.0 x 12.4 x 12.8 x 13.2 x 13.5 x 13.9 x 14.3 x 14.7 x 15.0 x
2008E 1.42 10.8 11.5 11.3 11.6 12.0 12.3 12.7 13.0 13.4 13.7 14.1
This analysis provides valuation metrics at various potential illustrative acquisition prices, and is intended solely for benchmarking purposes. It
does not constitute a recommendation on a valuation range.
Note: Market data as of 13-Jul-2007.
| 1 |
|
Excludes AOCI. |
Illustrative
23
DRAFT
-For Discussion Only-
Summary Observations
What have returns to shareholders
been?
Most shareholders have enjoyed an appreciating stock value and dividends
How has Alfa Corp. performed relative
to peers?
On nearly every measure, Alfa Corp. trades at a premium relative to its peers
and the industry
What factors drive current trading
levels of Alfa Corp.’s stock?
Alfa is primarily valued on current and projected ROE, growth in book value per
share, as well as the growth and stability of its earnings and EPS over time
We believe the market is rewarding Alfa Corp. for the limited catastrophe risk in
earnings, particularly given the Company’s homeowners exposure
What would be the basis for offer
price?
Based on management estimates as well as research analyst estimates for the
earnings power in the future
Offer price dependent on the following factors, among others:
Alfa’s current trading performance relative to peers (P/E, P/B,P/B vs. ROE,
etc.)
Historical performance of Alfa’s shares
Illustrative indicative value of shares based on discounted future dividends
derived from management’s estimates
Premiums paid over current stock price to minority shareholders in similar
transactions
Since the Mutual Group is the majority shareholder, it already controls Alfa
Corp. and therefore the premium will be limited relative to similar transactions
Premium will need to be sufficient to motivate the minority shareholders to
relinquish their shares
24
DRAFT
-For Discussion Only-
Appendix A: Back-up and Other Materials
25
DRAFT
-For Discussion Only-
Comparison of Selected Life Insurance Companies
($ in millions)
P/B vs. ROE Regression Analysis Selected Life Insurance Companies
Market Dividend P/E P/BV ROACE
Company Cap Yield 2007E (ex-AOCI) 2007E 2008E
Large Cap
MetLife $ 49,655 0.9 % 11.9 x 1.6 x 12.6 % 13.0 %
Prudential 46,330 1.0 13.5 2.0 15.5 16.5
The Hartford 31,533 2.0 10.0 1.7 16.1 15.3
Lincoln National 19,266 2.3 12.7 1.7 12.5 13.7
Principal Financial 16,771 1.3 16.0 2.5 15.2 15.6
Ameriprise 15,951 0.9 17.3 2.0 11.8 12.9
Genworth 15,383 1.0 10.8 1.3 11.5 11.9
High—Large Cap 2.3 % 17.3 x 2.5 x 16.1 % 16.5 %
Low—Large Cap 0.9 10.0 1.3 11.5 11.9
Median—Large Cap 1.0 12.7 1.7 12.6 13.7
Mid / Small Cap
Unum Group $ 9,499 1.1 % 13.5 x 1.3 x 9.0 % 10.2 %
Nationwide 8,897 1.7 13.8 1.6 11.3 11.9
Torchmark 6,678 0.8 12.6 2.0 15.4 15.4
Conseco 3,809 0.0 18.9 0.8 4.9 6.1
Protective Life 3,259 1.9 11.5 1.4 11.8 11.2
Stancorp 2,790 1.3 12.6 1.9 14.7 15.5
Phoenix 1,661 1.1 13.2 0.7 5.6 5.3
High—Mid / Small Cap 1.9 % 18.9 x 2.0 x 15.4 % 15.5 %
Low—Mid / Small Cap 0.0 11.5 0.7 4.9 5.3
Median—Mid / Small Cap 1.1 13.2 1.4 11.3 11.2
Phoenix
Stancorp
Protective
Life
Torchmark
Nationwide
Unum
Group
Genworth
Ameriprise
Principal
Financial
The
Hartford
Prudential
MetLife
y = 0.1218x + 0.1504
R2 = 0.7459
0.5 x
1.0 x
1.5 x
2.0 x
2.5 x
3.0 x
5.0 % 7.0 % 9.0 % 11.0 % 13.0 % 15.0 % 17.0 %
2007 ROACE
P/BV (ex AOCI)
Source: Company filings, IBES, A.M. Best
Note: Market data as of July 13, 2007.
26
DRAFT
-For Discussion Only-
Sum-of-Parts Valuation Analysis
Based on Management Estimates
($ in millions)
Life 2006 1Q2007 2007 2008 Market Data
Beginning Equity (ex. AOCI) $ 335.0 $ 335.0 $ 356.2 Market Cap
Earnings 5.4 21.2 22.4 Total Alfa Corp. $ 1,248.6
Dividends 0.0 0.0 0.0 Life² (331.2)
Ending Equity (ex-AOCI) $ 335.0 $ 340.4 $ 356.2 $ 378.6 P&C $ 917.4
Levered Equity¹ 268.0 272.3 284.9 302.9
1Q2007 Equity
Net Unlevered Operating Income $ 23.9 $ 5.4 $ 21.2 $ 22.4 Total Alfa Corp. $ 822.2
Net Levered Operating Income¹ 4.7 18.2 19.2 Life (340.4)
P&C $ 481.7
Unlevered ROAE 6.1 % 6.1 %
Levered ROAE¹ 6.6 6.5 Current P/B
Total Alfa Corp. 1.52 x
YoY Unlevered Operating Income Growth 5.0 % 5.0 % Life 0.97
P&C 1.90
P&C 2006 1Q2007 2007 2008
2007 ROAE
Beginning Equity (ex. AOCI) $ 477.7 $ 477.7 $ 526.1 Total Alfa Corp. 12.8 %
Earnings 10.8 87.3 93.4 Life 6.6
Dividends (8.9) (38.9) (41.4) P&C 17.4
Other Adjustments 2.1
Ending Equity (ex-AOCI) $ 477.7 $ 481.7 $ 526.1 $ 578.1 Implied P/B
Total Alfa Corp. 1.48 x
Net Operating Income $ 87.3 $ 93.4 Life 0.97
P&C 1.83
ROAE 17.4 % 16.9 %
Premium (Discount) to Implied P/B
Dividends 2006 1Q2007 2007 2008 Total Alfa Corp. 2.8 %
Life³ 0.0
Dividend Payout Ratio 61.9 % 35.0 % 35.0 % P&C 4.0
Dividends Paid $ 8.9 $ 38.9 $ 41.4
Life 0.0 % 0.0 % 0.0 %
P&C 100.0 100.0 100.0
Source: SEC filings, Management estimates, Factset
Note: Market data as of July 13, 2007.
| 1 |
|
Assumes 20% debt/total capitalization and a 6.5% pre-tax cost of debt. |
2 Life valuation based on implied P/B from life insurance P/B vs. ROE regression using Life’s levered ROE. Implied P/B multiplied by levered equity. Difference between unlevered equity and levered
equity added to valuation at 1.0x P/B.
3 0% discount results from levered equity being valued in line with P/B vs. ROE regression and excess debt capacity being valued at 1.0x P/B.
27
DRAFT
-For Discussion Only-
Research Analyst Recommendations and EPS History
Research Analyst Recommendations
Alfa1 Peers2
Hold 67%
Underperform 33%
Strong Buy 16%
Buy 16%
Hold 64%
Underperform 3%
Sell 1%
Alfa EPS History
$1.00
$1.15
$1.30
$1.45
$1.60
Jul-2004 Jan-2005 Jul-2005 Jan-2006 Jul-2006 Jan-2007 Jul-2007
EPS Estimate
2004 2005 2006 2007 2008
2004A
$1.06
2005A
$1.18
2006A
$1.28
2007E
$1.22
2008E
$1.33
Source: Company filings, IBES, A.M. Best
Note: Company filings, IBES, A.M. Best
1 Recommendations include Daniel Baransky of Fox-Pitt, Kelton, AS Herrera of Casa de Bolsa Banorte, and David Lewis of SunTrust Robinson Humphrey, who terminated coverage on June 25, 2007.
2 Composite includes: Allstate, Mercury General, Hanover, Commerce Group, State Auto, Infinity P&C, Horace Mann, Harleysville, and Safety Insurance.
28
DRAFT
-For Discussion Only-
Summary Common Stock Ownership – Alfa Corp.
Shareholder Overview
Top Institutional Holders Shares %
Dimensional Fund Advisors, Inc. 1,961,743 2.44
Barclays Global Investors, N.A. 1,242,998 1.54
Vanguard Group, Inc. 954,838 1.19
Brandywine Global Investment Management, LLC 917,228 1.14
Atlanta Capital Management Company L.L.C. 874,542 1.09
State Street Global Advisors (US) 728,886 0.91
Paradigm Capital Management (New York) 587,600 0.73
Tyndall Management, L.L.C. 291,142 0.36
Northern Trust Investments, N.A. 232,909 0.29
College Retirement Equities Fund 232,094 0.29
Victory Capital Management Inc. 222,350 0.28
LSV Asset Management 219,918 0.27
Northern Trust Global Investments 208,809 0.26
JPMorgan Investment Advisors Inc. 164,500 0.2
Mellon Private Wealth Management 162,204 0.2
California Public Employees’ Retirement System 126,100 0.16
Charles Schwab Investment Management, Inc. 122,311 0.15
Morgan Asset Management, Inc. 121,854 0.15
Deutsche Investment Management Americas, Inc. 76,000 0.09
BlackRock Investment Management, LLC 74,102 0.09
Total Top 20 Holders 9,522,128 11.8 %
Total Institutional Holders 10,595,993 13.2
Alfa Mutual 44,115,883 54.8 %
Other Insider Holdings 5,890,200 7.3
Implied Retail Holdings 19,916,924 24.7
Total Shares Outstanding 80,519,000 100.0 %
Ownership Summary
Alfa 55%
Retail 25%
Institution 13%
Other Insiders 7%
Institutional Ownership Style
Value
44%
Income
0%
Index
37%
Specialty
2%
Growth
12%
GARP
5%
Source:Thompson One