The Transamerica Center in Los Angeles, California consists of a 32-story building, an 11-story building and a 10-story building. Transamerica Center is the home office of certain divisions of the Transamerica Life Companies and certain other subsidiaries of Transamerica. Approximately 57% of the 1,358,000 square feet of rentable space is occupied by Transamerica subsidiaries.
Transamerica's income from continuing operations in 1998 grew $175 million (33%) from 1997 to $707 million. Transamerica's income from continuing operations before investment transactions in 1998 declined $16.7 million (3%) from 1997 to $472 million. Results in 1997 included a $90 million benefit mainly from the resolution of prior years' tax matters and a $25.8 million after tax provision for fleet downsizing and organizational realignment in the leasing operation.
after tax gain from the sale of the branch-based consumer lending business. Net income in 1997 was a $337.5 million (74%) improvement over 1996.
In 1997, income from continuing operations before investment transactions increased $12.7 million (3%) from 1996. The 1996 amount included $68.4 million in benefits primarily from the resolution of prior years' tax matters, and a $4.5 million after tax benefit from the elimination of various contingencies related to the 1995 sale of assets by the commercial lending operation. Excluding the items discussed above for both years, income from continuing operations before investment transactions for 1997 rose to $424.5 million from $403.1 million, an increase of $21.4 million (5%). The increase was due primarily to higher operating results at the real estate services and commercial lending businesses and lower unallocated interest and other expenses. Lower results at the leasing and life insurance businesses in 1997 partially offset those increases.
At the annuities division, 1998 income before investment transactions increased $4.2 million (8%) because interest rate spreads improved and fee income was higher on our larger variable annuity base.
Income before investment transactions from our Canadian operations in 1998 was slightly higher when denominated in Canadian dollars but decreased $300,000 (1%) when denominated in U.S. dollars because of unfavorable foreign exchange rates.
In the corporate line, income before investment transactions declined $1.5 million (4%) in 1998 primarily due to lower rental income and increased technology expenses.
In the annuities division, income before investment transactions grew in 1997. Interest rate spreads were favorable, fee income was higher because our variable annuity asset base was larger and our operating costs were lower.
The asset management group had slightly higher income before investment transactions in 1997. Interest rate spreads were favorable and fee income was higher because we were managing more assets. The group's results were reduced by the decision late in 1996 to reduce the scale of the capital-intensive structured settlements business.
Income before investment transactions was slightly lower at the reinsurance division in 1997 due to increased claim costs partially offset by growth in policy revenue.
In the corporate line, income before investment transactions declined in 1997 primarily because increased general operating expenses more than offset higher investment income.
After tax gains on investment transactions by the life insurance operations comprised:
Premiums and other income for the life insurance companies increased $29 million (2%) in 1998 after increasing $126 million (7%) in 1997. Income increased in 1998 largely because of the growth in traditional life products and higher fees from interest sensitive policies. These factors were partially offset by a decline in premiums from reinsurance and single premium annuities. The reinsurance line's lower premium revenue in 1998 was primarily the result of our decision to reduce our exposure to certain accident and health reinsurance contracts by retroceding premiums to another company.
Cash provided by the operations of the life insurance companies was $1,303.3 million in 1998, an increase of $314.5 million (32%) from 1997. The increase was primarily due to the timing of the settlement of certain receivables and payables. We continue to maintain a sufficiently liquid investment portfolio at the life insurance companies to cover operating requirements. The balance of our funds are invested in long-term securities.
Life Insurance 1998 1997 1996 (Amounts in millions) Assets Investments $ 32,580.3 $ 31,693.7 $ 28,935.4 Deferred policy acquisition costs 2,094.7 2,102.6 2,138.2 Separate accounts 9,101.0 5,494.7 3,527.9 Other assets 2,409.9 2,096.3 1,880.5 ----------- ----------- ----------- $ 46,185.9 $ 41,387.3 $ 36,482.0 =========== =========== =========== Liabilities and Equity Policy reserves and related items $ 30,336.3 $ 30,141.9 $ 28,542.8 Separate accounts 9,101.0 5,494.7 3,527.9 Other liabilities 1,932.1 1,443.0 1,038.8 Equity (1) 4,816.5 4,307.7 3,372.5 ----------- ----------- ----------- $ 46,185.9 $ 41,387.3 $ 36,482.0 =========== =========== =========== Revenues Investment income, net of expenses $ 2,245.5 $ 2,169.4 $ 2,079.7 Premiums and other income 1,847.0 1,818.0 1,692.0 Gain on investment transactions 275.0 42.0 21.9 ----------- ----------- ----------- 4,367.5 4,029.4 3,793.6 Expenses Policyholder benefits 2,878.0 2,810.9 2,649.7 Commissions and other expenses 720.8 734.9 638.8 Income taxes 254.7 149.9 165.5 ----------- ----------- ----------- 3,853.5 3,695.7 3,454.0 ----------- ----------- ----------- Net income $ 514.0 $ 333.7 $ 339.6 =========== =========== ===========
Source of Cash Cash provided by operations $ 1,303.3 $ 988.8 $ 913.9 Receipts from interest-sensitive policies 9,597.9 6,851.6 6,202.7 ----------- ----------- ----------- $ 10,901.2 $ 7,840.4 $ 7,116.6 =========== =========== =========== Application of Cash Returns on interest-sensitive policies $ 10,477.6 $ 6,411.2 $ 5,211.0 Net purchases of investments 249.7 1,315.4 1,862.4 Equity transactions 79.9 56.2 40.0 Other 94.0 57.6 3.2 ----------- ----------- ----------- $ 10,901.2 $ 7,840.4 $ 7,116.6 =========== =========== ===========
- --------- (1) Equity includes the effect of marking investments to fair value comprising net gains of $1,280.9 million in 1998, $1,190.6 million in 1997, and $549.8 million in 1996. See note B of the notes to the financial statements for consolidated components of unrealized gains.
Transamerica Finance Corporation, which is a separate Securities and Exchange Commission registrant, includes Transamerica's commercial lending and leasing operations. Transamerica Finance Corporation provides funding for these businesses. Its principal assets are finance receivables and equipment held for lease, which totaled a combined $9.3 billion at December 31, 1998 and $6.9 billion at December 31, 1997. These operations have a high level of liquidity since a significant portion of our assets are short term finance receivables. Principal cash collections of finance receivables totaled $21.2 billion in 1998, $16.9 billion in 1997 and $12.9 billion in 1996. Transamerica Finance Corporation's total notes and loans payable were $7.8 billion at December 31, 1998 and $6 billion at December 31, 1997. Its variable-rate debt totaled $4.5 billion at December 31, 1998 compared to $3.5 billion at December 31, 1997. Transamerica Finance Corporation's ratio of debt to tangible equity was 6.3:1 at December 31, 1998 compared with 6.5:1 at December 31, 1997.
Net income from our commercial lending operations was $89.1 million in 1998, an increase of $8.2 million (10%) from $80.9 million in 1997. Income before the amortization of goodwill grew $10.8 million (12%) from 1997. Operating results for 1998 included an after tax gain of $7.2 million on the sale and securitization of $800 million of floor plan and equipment lease finance receivables and a $6.5 million tax benefit from the resolution of prior year tax matters. In 1997, operating results included an after tax gain of $5.4 million on the sale and securitization of $1.5 billion of floor plan finance receivables and a $3.2 million benefit from tax matters resolved in 1997. In 1996, operating results included a $4.5 million benefit primarily from the favorable resolution of disputed issues surrounding the 1995 sale of assets in Puerto Rico.
Net commercial finance receivables outstanding at December 31, 1998 increased $2.2 billion (61%) from December 31, 1997. The increase in receivables was largely the result of the following factors: 1) continued growth in the business credit portfolio, 2) the decision not to sell the insurance premium finance operation and the reclassification of those receivables from assets held for sale to finance receivables, and 3) the acquisition during the first half of 1998 of $386.3 million of net finance receivables from Whirlpool Financial Corporation. This last transaction completed the acquisition of $1.1 billion in net receivables and other assets that made up substantially all of the inventory and retail finance businesses of Whirlpool Financial.
Interest expense increased $23.4 million (13%) from 1997 principally due to the higher average debt levels needed to support receivables growth and higher average interest rates during the first half of 1998. In 1997, interest expense increased $31.5 million (21%) from 1996 principally due to higher average debt levels.
Operating expenses rose $131.4 million (74%) in 1998 primarily because of increases in business volume and receivables outstanding and the integration of the Whirlpool Financial acquisition described above. Operating expenses rose $17 million (11%) in 1997 primarily because of higher business volume and receivables growth. The provision for losses on receivables increased $33.6 million (207%) in 1998 principally as a result of credit losses from the new retail loan portfolio acquired as part of the Whirlpool Financial acquisition and additional provisions made on the insurance premium finance portfolio. The provision for losses on receivables increased by $6 million (60%) in 1997 partially due to growth in the average net receivables outstanding.
Credit losses, net of recoveries, as a percentage of average commercial finance receivables outstanding, net of unearned finance charges, were 0.77% in 1998, 0.25% in 1997, and 0.16% in 1996.
receivables included in assets held for sale at December 31, 1997 were $14.2 million.
Nonearning receivables are defined as balances from borrowers that are over 90 days delinquent for non credit card receivables or at such earlier time as full collectibility becomes doubtful. Nonearning receivables on revolving credit card accounts included in retail are defined as balances from borrowers in bankruptcy and accounts for which full collectibility is doubtful. Accrual of finance charges is suspended on nonearning receivables until such time as past due amounts are collected. Nonearning receivables were $65.7 million (1.09% of receivables outstanding) at December 31, 1998 compared to $26.4 million (0.71% of receivables outstanding) at December 31, 1997. Nonearning receivables increased primarily due to the inclusion of the receivables of our new retail lending operation and the inclusion of the insurance premium finance receivables that were reported as assets held for sale at December 31, 1997. At December 31, 1997, nonearning insurance premium finance receivables totaled $7.5 million.
Net income in 1998 increased 60% to $61.8 million. However, earnings in 1997 were reduced by a $25.8 million after tax provision for fleet downsizing and organizational realignment primarily in the standard container fleet. Income before the amortization of goodwill was $63.8 million in 1998 versus $40.6 million in 1997 (or $66.4 million excluding the provision).
Earnings in 1998 were reduced by lower standard and refrigerated container per diem rates and on-hires and lower European trailer short term rental utilization. Partially offsetting these factors were $6.7 million in net tax benefits realized from a tax efficient structured equipment financing. Earnings from the chassis line were higher due to increased on-hire units and per diem rates associated with rail traffic congestion caused by railroad merger inefficiencies.
Revenue increased in 1998 by $18.7 million (2%) because of the unfavorable impact of the fleet downsizing provisions' effect on 1997's revenues. Excluding the fleet provision, revenue declined $12.2 million (2%) due to lower container per diem rates and lower container on-hires associated with a continuing oversupply of equipment and low prices for new equipment. Lower rail trailer on-hires also reduced revenues. Larger fleets and more on-hire units for tank containers, chassis, domestic containers and European trailers partially offset these declines.
Revenue increased in 1997 by $32.2 million (4%) primarily because the October 1996 acquisition of Trans Ocean Ltd. increased the standard, refrigerated and tank container and chassis fleets by approximately 25%. Revenue
also grew due to a larger portfolio of finance leases and more on-hire European trailers. Offsetting these increases were the fleet provision noted above, lower revenues from decreased per diem and utilization rates for standard and refrigerated containers resulting from an industry wide oversupply of equipment and low new equipment prices. In addition, rail trailer revenues were lower because the fleet was smaller.
Expenses increased $89.3 million (14%) in 1997 due to the realignment provision, higher ownership and operating costs associated with the Trans Ocean Ltd. acquisition and larger fleets of standard and refrigerated containers, chassis and European trailers.
Transamerica's tax service operation recognizes revenue as new contracts are received and defers a portion of that revenue sufficient to cover the future service liability over the average life of the loan portfolio serviced. The average life of the portfolio is determined using historical data on the payment of loans serviced. Effective January 1, 1999 Transamerica plans to adopt prospectively a new policy of recognizing revenue. Although the exact method has not yet been determined, we anticipate that the change will result in a reduction of revenue recorded in the year a contract is executed, the effect of which will be offset by increased recognition of deferred revenue in future years.
Unallocated interest and expenses, after related income taxes, for the last three years were:
Transamerica Corporation receives funds from its subsidiaries in the form of dividends, income taxes and interest on loans. We use these funds to pay dividends to our stockholders, purchase shares of our common stock, invest in the operations of our subsidiaries and pay corporate interest, expenses and taxes. We invest funds in our subsidiaries based on expected returns, the potential for creating shareholder value added, and the capital needs of these operations. We may invest in a subsidiary by allowing it to retain all or a portion of its earnings, or by making capital contributions or loans.
In 1991, Transamerica filed a registration statement with the Securities and Exchange Commission under which up to $500 million of debt securities with varying terms may be sold. These securities may be senior or subordinated and, if subordinated, may be convertible into common stock. In November 1996, Transamerica sold $200 million of senior notes bearing interest at 6.75% due in November 2006. Of the remaining $300 million of debt securities available to be sold under the registration statement, $200 million has been designated as medium term notes, none of which have been sold.
Transamerica Finance Corporation, a wholly owned subsidiary of Transamerica, also issues debt publicly and privately to fund the commercial lending and leasing operations. During 1998, Transamerica Finance Corporation issued $1.9 billion of public debt. In September 1998, it issued $100 million of medium term notes at a variable interest rate due in September 2001, $150 million of senior notes at a floating rate due in September 2001 and $30 million of medium term notes bearing interest at 5.74% due in September 2003. In October 1998, it issued $735 million of floating rate medium term notes due in the fourth quarter of 1999 and $10 million of floating rate medium term notes due in October 2001. In November 1998, it issued $625 million of senior notes bearing interest at 6.13% due in November 2001 and $250 million of senior notes bearing interest at 7.10% due in 2028 and callable in 2003.
A subsidiary of Transamerica securitized $800 million of commercial lending loans in 1998 and $1.5 billion in 1997.
In November 1996, Transamerica Capital I and II, affiliates of Transamerica, issued $325 million of Capital Trust Pass-Through Securities. These included $100 million of 30-year securities maturing December 1, 2026 redeemable beginning in 2006 with a coupon of 7.80% issued by Transamerica Capital I, and $225 million of 30-year, non-callable securities maturing December 1, 2026 with a coupon of 7.65% issued by Transamerica Capital II. The proceeds were invested by the affiliates in subordinated debentures issued by Transamerica, bearing interest at 7.65% and 7.80% and maturing on December 1, 2026. The proceeds to Transamerica were used for general corporate purposes.
In January 1998, we completed the acquisition of $1.1 billion of net receivables and other assets of Whirlpool Financial Corporation's inventory finance, retail finance and international factoring businesses for $1.3 billion in cash. The acquisition of the retail finance business closed in January 1998. We funded the purchase primarily with short term debt.
In June 1997, we sold our branch-based consumer lending operation for $3.9 billion, or $1.1 billion after repayment of associated debt.
In October 1996, we acquired Trans Ocean Ltd., a closely held container leasing company, in exchange for approximately 3.2 million shares ($112.7 million) of Transamerica common stock.
Transamerica's capital structure includes debt, common stock, and the Monthly Income Preferred Securities and Capital Trust Pass-Through Securities that are classified as guaranteed preferred beneficial interest in Transamerica's junior subordinated debentures. We continuously strive to minimize our cost of capital while maintaining investment-grade credit ratings. Ratings are very important to our life insurance customers. Our ratings also enable us to borrow at attractive rates, which improves the spreads at our finance businesses.
In February 1997, we completed the redemption of our outstanding Series D Preferred Stock and our outstanding Dutch Auction Rate Transferable Securities(TM) Preferred Stock.
The majority of our invested assets are in fixed maturity securities. We generally make long-term investments primarily in investment-grade corporate bonds and government securities to fund the payment of our life insurance liabilities. We use fundamental research and active management, and seek to achieve a balanced bond portfolio that meets our goals for income, security of principal and diversification. At the end of 1998, 93.9% of our fixed maturity investments were rated as "investment grade," and an additional 3.8% were rated in the BB category or its equivalent. An "investment grade" security is generally defined as any issue rated above Ba by Moody's Investors Service or above BB by Standard & Poor's Corporation.
In addition to our fixed maturity and equity investments, at December 31, 1998 we had $790.7 million invested in mortgage loans and real estate. This amount represented 2.3% of our total investments and 1.4% of our total assets. These additional investments included $699.2 million in commercial mortgage loans, $76.9 million in real estate investments, $1.4 million in foreclosed real estate and $44 million in residential mortgage loans. Problem loans, defined as restructured loans yielding less than 8% and delinquent loans, totaled $3.5 million at December 31, 1998 and $2.3 million at December 31, 1997. We have established allowances to cover possible losses from our mortgage loans and real estate investments. These allowances totaled $30.8 million at December 31, 1998 and $36.2 million at December 31, 1997. Transamerica also owns land, buildings and equipment used in its operations, including the Transamerica Pyramid, our corporate headquarters in San Francisco.
Transamerica has developed a plan to modify its information systems to ensure the readiness of our business applications, operating systems and hardware on mainframes, servers and personal computers, and wide and local area networks to recognize the Year 2000. The plan also addresses non-information technology embedded software and equipment, the readiness of key business partners, and updating business continuity plans.
all software, hardware, third party interfaces and related items to ensure they will work in a number of different Year 2000 scenarios.
Following is the status of Transamerica's Year 2000 compliance efforts for critical systems at each of its business segments.
The leasing operation had completed the remediation phase as of December 31, 1998. Testing was substantially completed by December 31, 1998. In addition to the systems being remediated, the customer service, fleet management and equipment repair and maintenance system is scheduled for replacement in 1999.
Transamerica conducts business in a number of the European countries that converted to a common currency, the "Euro," as of January 1, 1999. Transamerica has evaluated the potential impact of the Euro conversion on our operations including possible effects on our competitive position, potential information technology and currency risks, our derivative and financial instrument exposure, the continuity of contracts and changes in taxation. As a result of this evaluation, we are in the process of upgrading those information systems necessary to support transactions denominated in the Euro. Transamerica derived revenues from the group of eleven countries converting to the Euro of $63.9 million and $41.2 million in the years ended December 31, 1998 and 1997, and had total assets in these countries of $574.7 million at December 31, 1998.
Transamerica does not anticipate that the Euro conversion will have a material impact on its financial condition or results of operations.