The executive offices of Transamerica Corporation are located in the Transamerica Pyramid in San Francisco, California, a 48-story office building. Approximately 15% of the 499,000 square feet of rentable space is occupied by Transamerica and some of its subsidiaries.
On February 18, 1999, Transamerica announced that it had signed a merger agreement with AEGON N.V. (AEGON) providing for AEGON's acquisition of all of Transamerica's outstanding common stock for a combination of cash and AEGON stock worth $9.7 billion. The merger is expected to close during the summer of 1999.
Excluding the items discussed above, 1998 income from continuing operations before investment transactions increased $47.5 million (11%) over 1997. The increase was primarily due to higher operating results at the real estate services, life insurance and commercial lending businesses. These results were offset in part by lower operating results at the leasing business and higher unallocated interest and other expenses.
Net income, as reported in the consolidated financial statements, for 1998 totaled $707 million, an $86.8 million (11%) decline from 1997, and included net after tax gains from investment transactions of $235 million compared to $43.3 million of investment gains in 1997. During 1998 we realized substantial investment gains on our equity portfolio that reflected another year of exceptional results for the nearly $8 billion of equities we own or manage for others. Net income in 1997 of $793.8 million included $261.8 million of income from discontinued operations that was primarily due to a $275 million
Net income from our life insurance operations increased by $180.3 million (54%) in 1998 after decreasing $5.9 million (2%) in 1997. Net income included net after tax gains from investment transactions totaling $178.8 million in 1998, $27.3 million in 1997 and $14.2 million in 1996. In 1997, results were affected by a $20.1 million after tax charge for a legal settlement in the life insurance products division and a $5 million after tax provision for costs associated with legal proceedings related to a reinsurance contract. Excluding investment transactions and the 1997 items discussed above, income from insurance operations rose $3.7 million (1%) in 1998 and $6.1 million (2%) in 1997.
The asset management group's income before investment transactions rose $14 million (26%) in 1998 due to favorable interest rate spreads and increased fee income from a larger asset base.
At the reinsurance division, income before investment transactions declined $2.6 million (4%) in 1998 primarily due to higher reserve increases and operating expenses. These were partially offset by higher fee income generated by an increase in annuity production.
In 1997, income before investment transactions decreased at the life insurance products division compared to 1996 primarily due to the $20.1 million after tax charge for the legal settlement related to the sale and performance of certain universal and whole life insurance policies.
Income before investment transactions from our Canadian operations grew in 1997 because of improved persistency, favorable claims experience and higher management fees from growth in the segregated funds business.
Net investment income for the life insurance companies rose $76.1 million (4%) in 1998 and $89.7 million (4%) in 1997 primarily because of our growing base of invested assets.
Life insurance benefit costs and expenses increased $53 million (1%) in 1998 after growing $257.3 million (8%) in 1997. Expenses in 1997 included the charges for the legal matters mentioned earlier. Excluding those charges, expenses rose in 1998 primarily due to increases in the interest credited on interest-sensitive policies, higher insurance claims and increases in commissions.
From time to time, Transamerica Finance Corporation publicly and privately offers senior or subordinated debt securities. It issued a total of $1.9 billion of public debt in 1998, $120 million in 1997 and $688 million in 1996. Under a shelf registration statement filed in December 1998 with the Securities and Exchange Commission, Transamerica Finance Corporation may offer up to $4 billion of senior or subordinated debt securities with varying terms, none of which had been issued at December 31, 1998.
Excluding the above items, commercial lending income from operations before the amortization of goodwill increased $5.7 million (7%) in 1998 and $14.8 million (22%) in 1997. Income increased in 1998 because we had higher average net receivables outstanding which more than offset increased operating expenses and a higher provision for losses on receivables. Increased income in 1997 was also due to receivables growth.
Commercial lending revenues rose by $197.3 million (38%) in 1998 principally due to strong receivables growth and higher servicing and other income on securitized receivables. Revenues in 1997 grew $82.7 million (19%) from 1996 as higher average net receivables outstanding more than offset a decline in yield due to increased competition in the commercial lending market. Revenues in 1998 and 1997 included the above-mentioned gains on the securitization of finance receivables.
We have established an allowance for losses equal to 1.99% of net commercial finance receivables outstanding as of December 31, 1998 compared to 2.35% at December 31, 1997.
Delinquent receivables are defined as the instalment balance for inventory finance and business credit asset based lending receivables more than 60 days past due and the receivable balance for all other receivables 60 days past due. At December 31, 1998, delinquent receivables were $98.6 million (1.63% of receivables outstanding) compared to $18 million (0.48% of receivables outstanding) at December 31, 1997. The increase was primarily due to increased delinquency in the equipment leasing portfolio of the business credit operation, the inclusion of the insurance premium finance receivables that were reported as assets held for sale at December 31, 1997, and the inclusion of the receivables of the new retail lending operation. Delinquent insurance premium finance
Commercial Lending 1998 1997 1996 (Amounts in millions) Revenues Finance charges and related income $ 712.8 $ 515.5 $ 432.8 Expenses Interest 203.3 179.9 148.4 Operating expenses 308.3 176.9 159.9 Provision for losses on receivables 49.8 16.2 10.2 Income taxes 48.5 50.4 41.1 -------- -------- -------- 609.9 423.4 359.6 -------- -------- -------- Income from operations 102.9 92.1 73.2 Amortization of goodwill (13.8) (11.2) (10.6) -------- -------- -------- Net income $ 89.1 $ 80.9 $ 62.6 ======== ======== ========
Net income in 1997 declined 51% to $38.6 million. Income before the amortization of goodwill was $40.6 million compared to $80.8 million in 1996. Earnings in 1997 were reduced by the provision for fleet downsizing and organizational realignment noted above, by reduced per diem rates and a decline in utilization for standard and refrigerated containers, and by decreased gains on the sale of used standard containers. Improved earnings from tank and domestic containers and European trailers partially offset these declines. Income from rail trailers was also higher due to favorable utilization and per diem rates.
Expenses declined $8.9 million (1%) in 1998 primarily due to the effect of the realignment provision on 1997's expenses. Higher depreciation from the larger fleets of tank container, chassis, domestic container and European trailers was offset by favorable interest expenses and lower selling and administrative expenses.
The combined utilization rate for containers and chassis was 79% in both 1998 and 1997. Trade imbalances between Asia, the U.S. and Europe negatively affected container utilization in 1998 while the strong U.S. economy aided chassis utilization levels. Rail trailer utilization declined to 83% in 1998 from 85% in 1997 reflecting the continued decline in demand for this equipment type in favor of double-stack domestic containers. European trailer utilization declined to 88% in 1998 from 92% in 1997 as we increased the size of our rental fleet. Rental on-hires were negatively affected by the Russian financial crisis and its impact on trade with Western Europe.
Leasing 1998 1997 1996 (Amounts in millions) Revenues Total leasing revenues $ 816.5 $ 797.8 $ 765.6 Expenses Operating expenses 175.3 174.1 129.2 Depreciation on equipment held for lease 281.5 275.8 255.1 Selling and administrative expenses 113.3 116.7 95.5 Interest 153.7 166.1 163.6 Income taxes 28.9 24.5 41.4 -------- -------- -------- 752.7 757.2 684.8 -------- -------- -------- Income from operations 63.8 40.6 80.8 Amortization of goodwill (2.0) (2.0) (2.0) -------- -------- -------- Net income $ 61.8 $ 38.6 $ 78.8 ======== ======== ========
Net income from the real estate services segment increased $69.4 million (77%) in 1998 and $25.2 million (39%) in 1997. Net income included net after tax gains from investment transactions of $56.2 million in 1998, $16 million in 1997, and $20.4 million in 1996. Income before investment transactions increased $29.2 million (39%) in 1998 primarily because higher levels of mortgage refinancings and home sales increased income at the tax service business. In 1997, income before investment transactions increased $29.6 million (67%) driven by $27.4 million of after tax gains on the sale of six real estate properties and higher earnings at the real estate information companies.
Revenues in 1998 increased $134.7 million (32%) primarily because of increased business at the tax service resulting from higher levels of mortgage originations and refinancings and higher gains on investment transactions. In 1997, revenues increased $59.1 million (17%) because of the gains on real estate sales noted above and increased business at the tax service business.
These businesses generate the funds they need for capital expenditures and working capital from their operations. Cash, cash equivalents and accounts receivable are the real estate services' principal sources of liquidity.
1998 1997 1996 (Amounts in millions) Interest expense $ 33.7 $ 39.5 $ 46.5 Other expenses (income) 83.5 (28.4) (11.4) -------- ------- ------- $ 117.2 $ 11.1 $ 35.1 ======== ======= =======
In the aggregate, unallocated interest and other expenses increased $106.1 million (956%) in 1998 from 1997. Results in 1997 included $90 million primarily of benefits from the resolution of prior years' tax matters. Excluding this benefit in 1997, unallocated interest and expenses rose $16.1 million (16%) in
In the fourth quarter of 1997, we discontinued the remainder of our consumer lending business following the sale of our branch-based lending operations. In 1997, income from these operations was $261.8 million including a $275 million after tax gain on the sale of the branch-based consumer lending operations. This gain was offset in part by an operating loss of $13.2 million.
Transamerica also borrows funds to finance acquisitions or to lend to subsidiaries to finance working capital needs. Our subsidiaries are required to maintain prudent financial ratios consistent with other companies in their industries, and to retain the capacity through committed credit lines or liquid assets to repay working capital loans from the Corporation.
At December 31, 1998, Transamerica and its subsidiaries had short-term borrowings, principally commercial paper, totaling $2.8 billion supported by a credit agreement with 43 banks. It is our policy to maintain credit line coverage equal to at least 100% of short-term borrowings. At December 31, 1998, we had credit available under this line equal to $3.5 billion, or 125% of these borrowings; credit support equal to 95% of the borrowings was with banks rated AAA/AA or the equivalent by one or more of the major credit rating agencies.
Transamerica's commercial paper and senior debt are rated by independent rating agencies. We continue to maintain debt to capital ratios consistent with our current ratings.
In November 1998, to better manage the duration of its debt and improve tax efficiency, Transamerica Finance Corporation exchanged $146.8 million of outstanding senior notes bearing interest at 6.5% due in 2011 for a like amount of senior debt bearing interest at 6.4% due in 2008.
In November 1997, Transamerica Capital III, an affiliate of Transamerica, issued $190 million of noncallable Capital Trust Pass-Through Securities maturing November 15, 2037 with a coupon of 7.625%. Proceeds from the issuance of these securities were invested by the affiliate in subordinated debentures issued by Transamerica, bearing interest at 7.625% and maturing on November 15, 2037. Proceeds to Transamerica were used to repay debt and for other corporate purposes. These and the other Capital Trust Pass-Through Securities issued in 1996 are shown as guaranteed preferred beneficial interest in Transamerica's junior subordinated debentures on Transamerica's consolidated balance sheet.
In December 1996, a subsidiary of Transamerica closed a $307 million leveraged lease transaction involving the sale and leaseback of 69,000 intermodal shipping containers.
In November 1996, Transamerica Finance Corporation issued $200 million of senior notes bearing interest at 6.375% due in November 2001.
During 1998, we continued to return excess equity capital to stockholders by purchasing the company's common stock. Stock purchases during 1998 totaled 2,941,800 shares at a cost of $170.4 million (an average price of $57.93 per share). Since we began our share purchase program in May 1993, a total of 45.9 million shares have been acquired through December 31, 1998 at an aggregate purchase price of $1.6 billion. At December 31, 1998, there were outstanding authorizations from the board of directors for the purchase of 893,200 additional shares.
Transamerica's total invested assets were $33.7 billion at December 31, 1998, most of them held by our life insurance companies. Transamerica Investment Services, a wholly owned subsidiary of Transamerica, manages all of
Transamerica's securities portfolios. At the end of 1998, total invested assets represented 73% of our insurance assets and 58% of Transamerica's total assets. In 1998 our investment income was $2.3 billion and represented 35% of Transamerica's total revenues.
The average yield of the fixed maturity portfolio was 7.7% at December 31, 1998 and 7.8% at December 31, 1997 and 1996.
At December 31, 1998, our fixed maturity portfolio had a total market value of $29 billion and an amortized cost of $26.6 billion, resulting in a net unrealized gain of $2.4 billion. An adjustment for impairment in value reduced the amortized cost of certain fixed maturity investments by $78.9 million at December 31, 1998 and $72.9 million at December 31, 1997.
We also have a portfolio of equity securities with an aggregate market value of $2.2 billion at December 31, 1998, $1.6 billion in excess of its cost. Our philosophy is to invest in the equities of a very select group of high quality companies after conducting our own research. Our research is focused on anticipating and understanding long-term changes.
The project has four phases: (1) problem determination, (2) planning and resource acquisition, (3) remediation and (4) testing and acceptance. During phase one, Transamerica determined the size and scope of the problem and prepared an inventory of the hardware, software, interfaces and other items that may be affected. In addition, software code was scanned and third parties were contacted to determine the status of their efforts. During phase two, Transamerica assessed the risks and decided whether to fix, replace, discard, or test the items identified in the inventory, prepared a project plan and allocated appropriate resources as necessary. Phase three covers remediation where date occurrences in internally maintained systems are analyzed and corrected and software and hardware are replaced where necessary. In addition, operating systems that interface with outside parties are examined in more detail and modified if required. Phase four includes testing and acceptance of
The most significant categories of outside parties to Transamerica are agents and brokers, financial institutions, software vendors, governmental agencies, third party service providers and utility providers (gas, electric and telecommunications). Transamerica's assessment of its key business partners continues. Surveys have been mailed, follow up contacts are underway and strategies are being developed to address issues as they are identified. This effort is expected to continue well into 1999.
The life insurance operation had completed a significant portion of the remediation phase as of December 31, 1998, and is expected to be substantially complete by March 1999. As of December 31, 1998, testing was well underway and is expected to be substantially complete by June 1999.
The commercial lending operation had completed a significant portion of the remediation phase as of December 31, 1998 and is expected to be substantially complete by March 1999. As of December 31, 1998, testing had commenced and is expected to be substantially finished by June 1999. The commercial lending operating systems in Europe, which affect a small percentage of the business, are being remediated and tested in 1999.
The major business in the real estate segment, Transamerica Real Estate Tax Service, and most of the other businesses in this segment had substantially completed the remediation phase as of December 31, 1998. At December 31, 1998, testing had commenced and the testing phase, including testing with numerous governmental agencies, is expected to be substantially complete by September 1999.
Transamerica believes it will achieve Year 2000 readiness; however, the size and complexity of our systems and the need for them to interface with other systems internally and with those of customers, vendors, partners, governmental agencies and other outside parties, creates the possibility that some of our systems may experience Year 2000 problems. Specific factors that give rise to this concern include a possible loss of qualified resources, failure to identify and remediate all affected systems, noncompliance by third parties whose systems and operations interface with Transamerica's systems and other similar uncertainties. Transamerica is developing contingency plans to minimize any possible disruptions.