EXHIBIT 13
FINANCIAL REVIEW
Transamerica Corporation is a financial services organization which engages
through its subsidiaries in life insurance, consumer lending, commercial
lending, leasing and real estate services.
____________________________________________________________________________
CONSOLIDATED RESULTS
Transamerica's income from continuing operations for 1995 increased $42.6
million (10%), compared to 1994. Income from continuing operations for 1995
included net after tax gains from investment transactions aggregating $34.4
million compared to $15 million in 1994. Operating income from continuing
operations, which excludes investment transactions, for 1995 includes a $30
million tax benefit from the satisfactory resolution of prior years' tax
matters, a $12.2 million after tax benefit from the reversal of a valuation
allowance no longer needed due to the favorable terms on disposition of assets
held for sale and a $2.9 million after tax benefit from the settlement of a
class action lawsuit involving an investment in fixed maturity securities
issued by Franklin Savings Association. These items were offset in part by a
$21.5 million after tax provision for an expected loss on the Transamerica
Center in downtown Los Angeles in anticipation of a planned sale and leaseback
transaction that is subject to regulatory approval, a charge of $12 million
after tax due to actions taken to consolidate and accelerate foreclosure
activity and dispose of certain repossessed real estate properties in
California and charges totaling $9.7 million after tax primarily for the
restructuring of the real estate services operations. Excluding these items
from the 1995 results, operating income from continuing operations for 1995
increased $21.3 million (5%) due primarily to increases in the operating
results of life insurance, leasing, commercial lending and consumer lending
(principally due to the ITT portfolio acquisition described later). Partially
offsetting these improvements were declines in real estate services operating
results and higher unallocated expenses.
Transamerica's income from continuing operations for 1994 decreased $19.6
million (4%) compared to 1993. Income from continuing operations for 1994
included net after tax gains from investment transactions aggregating $15
million compared to $25.3 million in 1993. In 1994 operating income from
continuing operations decreased $9.3 million (2%) from 1993 due primarily to
decreases in real estate services and consumer lending operating results and
higher unallocated expenses. Partially offsetting these declines were
improvements in commercial lending, life insurance and leasing operating
results. Operating income from continuing operations for 1993 included a $36
million after tax writedown of repossessed rent-to-own rental stores in
commercial lending, charges totaling $24.7 million after tax primarily for the
restructuring of the commercial lending and real estate services operations
and for the realignment of certain corporate-wide administrative functions and
an $8.4 million additional tax provision from the revaluation of the January
1, 1993 deferred tax liability for the effect of the federal income tax rate
increase. These items were more than offset by a $94.2 million tax benefit
from the satisfactory resolution of prior years' tax matters. Excluding these
1993 items, operating income from continuing operations for 1994 increased
$15.8 million (4%).
Gains on investment transactions in 1995 included after tax gains of $55.7
million realized on the sale of investments, less $6 million after tax
accelerated amortization of deferred policy acquisition costs associated with
interest-sensitive products and loss provisions of $15.3 million after tax for
the impairment in value of investments. Gains on investment transactions in
1995 included an after tax gain of
44 Transamerica Corporation and Subsidiaries
$15.3 million from the settlement of a class action lawsuit involving an
investment in fixed maturity securities issued by Franklin Savings
Association.
Gains on investment transactions in 1994 included after tax gains of $32.6
million realized on the sale of investments, less $4.1 million after tax
accelerated amortization of deferred policy acquisition costs associated with
interest-sensitive products and loss provisions of $13.5 million after tax for
the impairment in value of investments.
OPERATING INCOME BY BUSINESS SEGMENT
The following table summarizes Transamerica's operating results by business
segment. Additional business segment information is provided in footnote G of
the notes to financial statements.
____________________________________________________________________________
(Amounts in millions except for per share data) 1995 1994 1993
LIFE INSURANCE $290.8 $250.2 $215.7
FINANCE
Consumer lending 80.5 90.4 93.1
Commercial lending 75.2 53.7 (4.0)
Leasing 75.1 63.6 53.6
Amortization of goodwill (13.0) (13.0) (13.0)
______ ______ ______
Total finance 217.8 194.7 129.7
REAL ESTATE SERVICES 26.8 64.2 84.6
Amortization of goodwill (0.4) (1.8) (1.7)
______ ______ ______
Total real estate services 26.4 62.4 82.9
Unallocated interest and other expenses (98.9) (94.4) (6.1)
______ ______ ______
Operating income from continuing operations 436.1 412.9 422.2
Gain on investment transactions 34.4 15.0 25.3
______ ______ ______
Income from continuing operations 470.5 427.9 447.5
Loss from discontinued operations (0.7) (47.0)
Extraordinary loss on early extinguishment of debt (23.1)
______ ______ ______
Net income $470.5 $427.2 $377.4
====== ====== ======
EARNINGS PER SHARE OF COMMON STOCK
Income from continuing operations:
Operating income from continuing operations $ 6.08 $ 5.25 $ 5.08
Gain on investment transactions 0.50 0.21 0.32
______ ______ ______
Income from continuing operations 6.58 5.46 5.40
Loss from discontinued operations (0.01) (0.60)
Extraordinary loss on early extinguishment of debt (0.29)
______ ______ ______
Net income $ 6.58 $ 5.45 $ 4.51
====== ====== ======
Average shares outstanding 68.8 72.6 78.5
====== ====== ======
Transamerica Corporation and Subsidiaries 45
LIFE INSURANCE
Transamerica's life insurance operation engages in the underwriting,
distribution and reinsurance of traditional and investment based life
insurance products.
Net income increased $46.2 million (17%) in 1995 and $19 million (8%) in 1994.
Net income included net after tax gains from investment transactions totaling
$19.3 million in 1995, $13.7 million in 1994, and $29.2 million in 1993.
Income before investment transactions increased $40.6 million (16%) in 1995
and $34.5 million (16%) in 1994. Income before investment transactions in 1995
included a $4.4 million tax benefit related to the favorable settlement of a
prior year tax matter and a $2.9 million after tax benefit related to the
settlement of a class action lawsuit concerning an investment in fixed
maturity securities, offset in part by a $900,000 after tax restructuring
charge. The individual life insurance, structured settlements, living
benefits, group pension and Canadian lines all experienced increases in income
before investment transactions in 1995 primarily as a result of relatively
stable interest spreads on a growing asset base. The individual life insurance
line continued to benefit from higher policy related income resulting from a
larger base of interest-sensitive policies. In 1995, the reinsurance line
benefited from higher revenues which increased at a faster rate relative to
total benefits and expenses.
The individual life insurance, structured settlements, living benefits, group
pension, reinsurance and Canadian lines all experienced increases in income in
1994, excluding net after tax gains from investment transactions, resulting
primarily from maintained interest spreads on a larger asset base, increased
charges on a larger base of interest-sensitive policies and controlled
operating expenses. Income before investment transactions for 1993 also
included a $3.6 million charge for the effect of the one percent increase in
the federal income tax rate on the deferred tax liability.
Investment transactions for 1995 included after tax gains of $40.6 million
realized on the sale of investments compared to $27.6 million for 1994 and
$106.1 million for 1993. Investment transactions for 1995 included an after
tax gain of $15.3 million from the settlement of a class action lawsuit
involving an investment in fixed maturity securities issued by Franklin
Savings Association. A portion of the investment gains is related to
interest-sensitive products. Adjustment to the amortization of deferred policy
acquisition costs related to interest sensitive products reduced these after
tax gains by $6 million in 1995, $4.1 million in 1994 and $40.8 million in
1993. Investment transactions in 1995 also reflected downward adjustments of
$15.3 million after tax compared to $9.8 million in 1994 and $36.1 million in
1993, primarily for impairment in the value of certain below investment grade
fixed maturity investments.
Premiums and other income increased $367.6 million (25%) in 1995 and $239.5
million (19%) in 1994 primarily due to higher sales of annuity products, an
increase in reinsurance assumed and an increase in charges on
interest-sensitive policies.
In November 1994, the life insurance operation sold its interest in Osborn
Laboratories, a business providing medical testing for life insurance
companies, for gross proceeds of $23.3 million. The transaction resulted in an
after tax gain of $8.6 million which is included in income before investment
transactions. Offsetting this gain were after tax charges of $9.9 million
($15.2 million pretax) primarily attributable to anticipated guaranty fund
assessments and a loss related to the 1991 sale of a business unit.
Net investment income increased $200.8 million (11%) in 1995 and $47.6
million (3%) in 1994 due primarily to a higher level of invested assets.
Life insurance benefits and expenses increased $521.7 million (18%) in 1995
and $240.7 million (9%) in 1994 principally due to increases in policy
reserves and benefits paid or provided attributable to the larger base of life
insurance and annuities in force and higher commission expense, and higher
amortization of deferred policy acquisition costs (exclusive of accelerated
amortization related to investment gains). Other expenses included charges of
$8.7 million in 1995, $15.2 million in 1994 and $19.8 million in 1993 related
to anticipated guaranty fund assessments, expenses for the realignment and
relocation of certain operations and in 1994 and 1993 additional losses on the
1991 sale of a business unit.
Cash provided by operations for 1995 was $543.8 million which was $45.8
million (9%) above the 1994
46 Transamerica Corporation and Subsidiaries
amount primarily as a result of growth in the underlying assets and
liabilities of the business.The life insurance operation continues to maintain
a sufficiently liquid portfolio to cover its operating requirements, with
remaining funds being invested in longer term securities.
LIFE INSURANCE
____________________________________________________________________________
(Amounts in millions) 1995 1994 1993
ASSETS
Investments $27,703.2 $22,329.1 $20,890.6
Deferred policy acquisition costs 1,974.2 2,480.5 1,929.3
Other assets 5,422.4 4,157.5 3,289.1
_________ _________ _________
$35,099.8 $28,967.1 $26,109.0
========= ========= =========
LIABILITIES AND EQUITY
Policy reserves and related items $27,893.4 $24,731.7 $21,951.8
Other liabilities 3,746.5 2,330.7 2,090.8
Equity* 3,459.9 1,904.7 2,066.4
_________ _________ _________
$35,099.8 $28,967.1 $26,109.0
========= ========= =========
REVENUES
Premiums and other income $ 1,862.8 $ 1,495.2 $ 1,255.7
Investment income, net of expenses 1,974.1 1,773.3 1,725.7
Gain on investment transactions 29.6 21.1 44.9
_________ _________ _________
3,866.5 3,289.6 3,026.3
EXPENSES
Policyholder benefits 2,858.7 2,356.4 2,145.9
Commissions and other expenses 549.4 530.0 499.8
Income taxes 148.3 139.3 135.7
_________ _________ _________
3,556.4 3,025.7 2,781.4
_________ _________ _________
Net income $ 310.1 $ 263.9 $ 244.9
========= ========= =========
SOURCE OF CASH
Cash provided by operations $ 543.8 $ 498.0 $ 604.3
Net receipts from interest-sensitive
policies 1,527.4 2,014.8 1,853.1
_________ _________ _________
$ 2,071.2 $ 2,512.8 $ 2,457.4
========= ========= =========
APPLICATION OF CASH
Net purchases of investments $ 1,986.1 $ 2,442.3 $ 2,434.3
Equity transactions 40.0 30.0 18.7
Other 45.1 40.5 4.4
_________ _________ _________
$ 2,071.2 $ 2,512.8 $ 2,457.4
========= ========= =========
*On January 1, 1994, Transamerica adopted Statement of Financial Accounting
Standards No. 115. Equity includes net unrealized gains (losses) from marking
investments to fair value of $946 million in 1995, $(321.2) million in 1994
and $67.1 million in 1993. See footnote E of the notes to the financial
statements for consolidated components of unrealized gains (losses).
Transamerica Corporation and Subsidiaries 47
TRANSAMERICA FINANCE CORPORATION
Transamerica Finance Corporation includes Transamerica's consumer lending,
commercial lending (excluding insurance premium finance) and leasing
operations and provides funding for these operations. The principal assets of
Transamerica Finance Corporation comprise finance receivables and equipment
held for lease totaling $10.4 billion at December 31, 1995 and $9.3 billion at
December 31, 1994. Transamerica Finance Corporation's total notes and loans
payable were $9.7 billion at December 31, 1995 and $8.7 billion at December
31, 1994. Variable rate debt was $4.8 billion at December 31, 1995 compared to
$4.3 billion at the end of 1994. The ratio of debt to tangible equity was 7:1
at December 31, 1995 and 7.1:1 at December 31, 1994.
Transamerica Finance Corporation offers publicly, from time to time, senior or
subordinated debt securities. Public debt issued totaled $832 million in 1995,
$1,516 million in 1994, and $407 million in 1993. Under a shelf registration
statement filed in April 1995 with the Securities and Exchange Commission, the
company may offer up to $3 billion of senior or subordinated debt securities
(which may include medium-term notes) with varying terms, of which $2.6
billion had not been issued at December 31, 1995.
Liquidity is a characteristic of these operations since the majority of the
assets consist of finance receivables. Principal cash collections of finance
receivables totaled $17.4 billion during 1995, $14.8 billion during 1994, and
$11.5 billion during 1993.
48 Transamerica Corporation and Subsidiaries
TRANSAMERICA FINANCE CORPORATION
____________________________________________________________________________
(Amounts in millions) 1995 1994 1993
ASSETS
Finance receivables less unearned fees
and allowance for losses:
Consumer $ 4,772.2 $ 4,024.8 $ 3,547.2
Commercial 2,798.5 2,686.0 2,524.3
_________ _________ _________
7,570.7 6,710.8 6,071.5
Equipment held for lease 2,862.0 2,606.6 1,306.5
Goodwill 339.9 351.6 372.4
Assets held for sale 99.1 157.7 226.8
Other assets 1,234.5 1,128.1 1,054.2
_________ _________ _________
$12,106.2 $10,954.8 $ 9,031.4
========= ========= =========
LIABILITIES AND EQUITY
Notes and loans payable $ 9,689.9 $ 8,724.3 $ 7,031.5
Other liabilities 701.8 648.2 550.3
Equity 1,714.5 1,582.3 1,449.6
_________ _________ _________
$12,106.2 $10,954.8 $ 9,031.4
========= ========= =========
REVENUES
Finance and leasing revenues $ 1,915.1 $ 1,677.8 $ 1,392.1
EXPENSES
Operating expenses 828.2 767.6 603.4
Interest 625.3 485.6 414.6
Provision for losses on receivables
and assets held for sale 91.8 99.1 144.1
Income taxes 145.5 125.6 95.4
_________ _________ _________
1,690.8 1,477.9 1,257.5
_________ _________ _________
Income from operations 224.3 199.9 134.6
Amortization of goodwill (11.7) (11.7) (11.7)
Extraordinary loss on early
extinguishment of debt (23.1)
_________ _________ _________
Net income $ 212.6 $ 188.2 $ 99.8
========= ========= =========
SOURCE OF CASH
Cash provided by operations $ 743.4 $ 639.4 $ 468.7
Finance receivables collected 17,444.6 14,807.5 11,535.7
Proceeds from debt financing 8,281.5 7,189.4 5,500.6
Other 76.8 39.9 (135.0)
_________ _________ _________
$26,546.3 $22,676.2 $17,370.0
========= ========= =========
APPLICATION OF CASH
Additions to equipment held for lease $ 573.3 $ 440.1 $ 405.4
Finance receivables originated 17,510.7 15,594.8 11,756.5
Payments of notes and loans 7,333.6 5,528.1 5,112.1
Purchase of finance receivables and
other assets from ITT Consumer
Financial Corporation 1,027.3
Purchase of Tiphook container assets 1,061.4
Equity transactions 101.4 51.8 96.0
_________ _________ _________
$26,546.3 $22,676.2 $17,370.0
========= ========= =========
Transamerica Corporation and Subsidiaries 49
CONSUMER LENDING
On March 31, 1995, the consumer lending operation purchased for $1,027.3
million in cash substantially all the assets and assumed certain liabilities
of the home equity business of ITT Consumer Financial Corporation (ITT). The
purchase price was allocated as follows: consumer finance receivables of
$966.4 million, which were all real estate secured, of which 14% was located
in California; allowance for losses of $52.7 million; assets held for sale of
$26.8 million; customer renewal rights of $97.8 million; and assumed
liabilities of $11 million. The consumer lending operation did not assume any
borrowings, tax liabilities or contingent liabilities of ITT.
Consumer lending income from operations for 1995 decreased $9.9 million (11%)
from 1994. The decrease resulted from higher operating and interest expenses
and an increased provision for losses on receivables that more than offset
increased revenues. Additionally, the 1995 decrease includes a fourth quarter
charge of $12 million after tax which resulted from consolidating and
accelerating California branch foreclosure activity and disposing of certain
repossessed real estate in California.
Consumer lending income from operations in 1994 decreased $2.7 million (3%)
from 1993. Excluding a $5.3 million benefit ($3.1 million after tax) recorded
in 1993 from the reversal of reserves related to a 1990 securitization and
sale of real estate secured receivables, income for 1994 increased $400,000
(less than 1%). The increase resulted from higher revenues, offset in part by
increased operating and interest expenses and an increased provision for
losses on receivables.
Revenues increased $91.9 million (13%) in 1995 and $36.3 million (6%) in
1994. The 1995 increase was mainly due to higher interest income resulting
from the effects of the ITT acquisition, which more than offset the effects of
lower fee income. The 1994 increase was mainly due to increased finance
charges resulting from higher average finance receivables outstanding and
higher fee income. In 1994, in response to increased competition, principally
in California, the company introduced lower interest rates which were not
continued into 1995. The lower rates produced a higher level of customer
renewals and related fee income in 1994 over 1995 and 1993 but a lower level
of interest income in 1995.
Interest expense increased $67.1 million (27%) in 1995 and $8.5 million (3%)
in 1994 primarily as a result of the higher levels of finance receivables
outstanding, and an increase in short-term interest rates.
The provision for losses on receivables increased $15.6 million (19%) in 1995
and $18.3 million (29%) in 1994 due to increases in credit losses and, in
1994, increased growth in net finance receivables over 1993. Credit losses,
net of recoveries, as a percentage of average net finance receivables
outstanding were 2.15% for 1995 compared to 1.93% for 1994 and 1.68% for 1993.
The 1995 and 1994 increases resulted from the effects of higher credit losses.
Credit losses (net of recoveries) increased $28.5 million (38%) in 1995 and
$10.8 million (17%) in 1994. Growth in the non real estate portfolio, which
tends to have a higher ratio of net credit losses than the real estate secured
portfolio, as well as continued sluggishness in the California economy and a
continued weak California real estate market contributed to increased credit
losses in both 1995 and 1994. The consolidation and acceleration of California
branch foreclosure activity also contributed to the 1995 increase in net
credit losses as did the recognition of credit losses anticipated in
connection with the ITT acquisition. Because future credit losses may be
impacted by factors such as economic conditions and the state of the real
estate market, particularly in California, the extent and timing of any change
in the recent trend remains uncertain.
Operating expenses increased $23.3 million (11%) in 1995 primarily due to
amortization of customer renewal rights associated with the ITT acquisition
and an increase in losses on disposition of repossessed real property in
California. Operating expenses for 1994 increased $20 million (11%).
Excluding the $5.3 million reserve reversal recorded in 1993, operating
expenses in 1994 increased $14.7 million (8%). The increase was mainly due to
the higher level of finance receivables outstanding, an increase in the
average number of branches during 1994, and costs of developing new loan
information systems to handle additional loan products.
Consumer lending receivables grew 19% in 1995 due to the portfolio purchased
from ITT. Excluding the loans acquired from ITT, receivables declined by $16
million (less than 1%) in 1995. During 1994
50 Transamerica Corporation and Subsidiaries
and 1993 the company acquired $124.9 million and $22.7 million of receivables
in bulk purchase transactions. Including these acquisitions, the portfolio
increased $414.2 million (11%) in 1994 and $66.2 million (2%) in 1993.
Net consumer finance receivables at December 31, 1995 and 1994 included $4
billion and $3.3 billion of real estate secured loans, principally first and
second mortgages secured by residential properties, of which approximately
37% and 45% were located in California. Real estate loans originated in 1995
were $1.1 billion compared to $1.7 billion in 1994, due to a decline in
renewal volume (which was caused in part by a return to higher rates in early
1995) and increased competition. The non real estate loan portfolio has grown
13% since December 31, 1994, reflecting management's strategy to pursue
growth in that area.
Delinquent finance receivables, which are defined as receivables
contractually past due 60 days or more, were $143.6 million (2.79% of finance
receivables outstanding) at December 31, 1995 compared to $90.2 million (2.08%
of finance receivables outstanding) at December 31, 1994. Approximately
two-thirds of the $53.4 million increase in delinquency during 1995 was
attributable to real estate secured receivables, of which approximately
one-half was due to the ITT portfolio acquisition which included the purchase
of delinquent receivables at a discount, with the remainder relating to non
real estate products which tend to have higher delinquency ratios than real
estate secured receivables. Management has established an allowance for
losses equal to 3.32% of net consumer finance receivables outstanding at
December 31, 1995 compared to 2.83% at December 31, 1994; the increase in the
percentage is due to the acquisition of the ITT portfolio which had a higher
ratio of allowance for losses to net consumer finance receivables outstanding.
When foreclosure proceedings begin on an account secured with real estate, the
account is moved from finance receivables to other assets and is written down
to the estimated realizable value of the collateral if less than the account
balance. After foreclosure, repossessed assets are carried at the lower of
cost or fair value less estimated selling costs. Accounts in foreclosure and
repossessed assets held for sale totaled $207.3 million at December 31, 1995,
of which 69% pertained to California, compared to $226.1 million at December
31, 1994, of which 79% pertained to California. Because future improvements
may be impacted by factors such as economic conditions and the state of the
real estate market, particularly in California, the extent and timing of any
change in the trend of foreclosures and repossessed assets remains uncertain.
CONSUMER LENDING
____________________________________________________________________________
(Amounts in millions) 1995 1994 1993
REVENUES
Finance charges and related income $782.5 $690.6 $654.3
EXPENSES
Interest 317.9 250.8 242.3
Operating expenses 232.7 209.4 189.4
Provision for losses on receivables 97.8 82.2 63.9
Income taxes 53.6 57.8 65.6
______ ______ ______
702.0 600.2 561.2
______ ______ ______
Income from operations 80.5 90.4 93.1
Amortization of goodwill (0.1) (0.1) (0.1)
______ ______ ______
Net income $ 80.4 $ 90.3 $ 93.0
====== ====== ======
Transamerica Corporation and Subsidiaries 51
COMMERCIAL LENDING
Income from operations increased $21.5 million (40%) in 1995 and $57.7 million
in 1994. Operating results for 1995 included a $12.2 million after tax benefit
from the reversal of a valuation allowance no longer required following the
sale of assets held for sale (principally in Puerto Rico), and a $4.8 million
after tax gain from the sale of a portfolio of consumer rediscount loans.
Results for 1994 included a $5.5 million after tax charge for the relocation
of the corporate home office, and a $4 million after tax gain from the sale of
the repossessed rent-to-own stores. Results for 1993 included: (i) a $36
million after tax provision to reduce the net carrying value of repossessed
rent-to-own stores to their estimated realizable value; (ii) an $8.8 million
after tax charge for the restructuring of the commercial lending unit's
infrastructure; (iii) a $4.2 million after tax provision for anticipated legal
and other costs associated with the runoff of the liquidating portfolio; (iv)
a $4.2 million tax benefit from the resolution of prior years' tax matters;
and (v) a tax benefit of $1.4 million from the revaluation of the January 1,
1993 deferred tax liability for the effect of the one percent federal tax
increase.
Excluding the items discussed above, commercial lending income from operations
increased $3 million (6%) in 1995 and $15.8 million (40%) in 1994. The
increases resulted from increased margins, reduced operating expenses and a
lower provision for losses. Margins improved as a result of a greater spread
between the indices at which the commercial lending operation loaned to
customers and the indices at which funds were borrowed.
Revenues in 1995 increased $39.4 million (10%) due to a higher average
portfolio yield attributable to higher interest rates. Revenues in 1994
increased $13.6 million (4%) as a result of increased average net receivables
in the core businesses and a higher average portfolio yield attributable to
rising interest rates.
Interest expense increased $29.7 million (25%) in 1995 and $9.6 million (9%)
in 1994 due to a higher average interest rate on borrowings.
Operating expenses declined $7.8 million (5%) in 1995 and $21.3 million (11%)
in 1994. Expenses in 1994 included a $9 million ($5.5 million after tax)
charge for the relocation of the corporate home office, partially offset by
the $5.3 million ($4 million after tax) gain on the sale of the repossessed
rent-to-own stores. Operating expenses in 1993 include the previously
described restructuring charge and provision for anticipated legal and other
costs associated with the runoff of the liquidating portfolios aggregating
$21.5 million ($13 million after tax). Excluding these items in both years,
operating expenses decreased $4.1 million (3%) in 1995 and $3.5 million (2%)
in 1994 mainly as a result of reduced expenses incurred in the management of
the liquidating receivables portfolio and receivables included in assets held
for sale which were disposed of in 1995.
The provision for losses on receivables declined $2.2 million (12%) in 1995
principally due to charges in 1994 related to the consumer rediscount loan
portfolio which was sold in 1995 and lower losses during 1995 in the
liquidating portfolio offset in part by an increased provision in the
insurance premium finance business. The provision for losses on receivables in
1994 was $14.8 million (45%) less than in 1993 due to lower credit losses and
lower delinquent and nonearning receivables. Credit losses, net of recoveries,
as a percentage of average commercial finance receivables outstanding, net of
unearned finance charges, were 0.34% in 1995, 0.29% in 1994 and 1.49% in 1993.
Net commercial finance receivables outstanding at December 31, 1995 increased
$26.8 million (1%) from December 31, 1994. The higher net receivables reflect
receivables growth in inventory finance and equipment finance and leasing
operations. The equipment finance and leasing operation began operations
during 1995 and provides collateralized equipment lending. These increases
were offset in part by the 1995 sale of the consumer rediscount loan portfolio
comprising $118 million of net outstanding receivables, the securitization of
an additional $100 million of insurance premium finance receivables which
increased the eligible pool from $375 million to $475 million for a three year
term, and the liquidation and sale of $51.3 million in net receivables
outstanding resulting from the decision to exit the operations in Puerto Rico.
Management has established an allowance for losses equal to 2.51% of net
commercial finance receivables outstanding as of December 31, 1995 compared to
2.96% at December 31, 1994. This decrease is primarily the result of selling
the Puerto Rico receivables, which had a larger reserve requirement.
52 Transamerica Corporation and Subsidiaries
Delinquent receivables, which are defined as the instalment balance for
inventory finance and asset based lending receivables and the receivable
balance for all other receivables over 60 days past due, were $11.1 million
(0.35% of receivables outstanding) at December 31, 1995 compared to $19.1
million (0.62% of receivables outstanding) at December 31, 1994.
Nonearning receivables, which are defined as balances from borrowers that are
over 90 days delinquent or at such earlier time as full collectibility becomes
doubtful, were $18 million (0.57% of receivables outstanding) at December 31,
1995 compared to $23.3 million (0.75% of receivables outstanding) at December
31, 1994. The decline in both delinquent and nonearning receivables was
primarily due to the sale of the Puerto Rico receivables.
Assets held for sale as of December 31, 1995 totaled $4.5 million, net of a $6
million valuation allowance, and consisted of rent-to-own receivables of $5.6
million and other assets of $4.9 million. In 1995, the commercial lending
operation sold substantially all of its rent-to-own receivables. Assets held
for sale at December 31, 1994 totaled $10.9 million, net of a $65.1 million
valuation allowance, and consisted of rent-to-own finance receivables of $72.4
million and other assets of $3.6 million. Of the finance receivables held for
sale at December 31, 1995, none was classified as delinquent or nonearning
compared to $24.5 million classified as both delinquent and nonearning at
December 31, 1994.
During 1995, the commercial lending insurance premium finance operation
entered into a three year arrangement in which it securitized a $475 million
participation interest in a pool of its receivables. This agreement replaced a
1990 securitization of $375 million which expired in 1995. Proceeds from this
transaction were used primarily to reduce debt. At December 31, 1995, $475
million of securitized insurance premium finance receivables remained
outstanding. The commercial lending operation continues to service this
portfolio and remains partially at risk through limited recourse provisions.
COMMERCIAL LENDING
____________________________________________________________________________
(Amounts in millions) 1995 1994 1993
REVENUES
Finance charges and related income $423.7 $384.3 $370.7
EXPENSES
Interest 148.7 119.0 109.4
Operating expenses 156.3 164.1 185.4
Provision for losses on receivables 16.1 18.3 33.1
Provision (benefit) for losses on assets
held for sale (20.1) 50.0
Income taxes (benefit) 47.5 29.2 (3.2)
______ ______ ______
348.5 330.6 374.7
______ ______ ______
Income (loss) from operations 75.2 53.7 (4.0)
Amortization of goodwill (10.9) (10.9) (10.9)
Extraordinary loss from early extinguishment
of debt (23.1)
______ ______ ______
Net income (loss) $ 64.3 $ 42.8 $(38.0)
====== ====== ======
Transamerica Corporation and Subsidiaries 53
LEASING
The leasing operation has grown substantially since 1993 largely due to the
March 1994 acquisition of substantially all the operating assets of the
Container Operations of Tiphook plc ("Tiphook"), a London-based transportation
equipment rental company, including certain dry cargo containers, tank
containers, tank chassis, operating leases and other assets for $1,061.4
million in cash. The acquired fleet of standard containers and tank
containers totaled 363,000 units which by December 31, 1994 were integrated
into the leasing operation. The transaction has been accounted for as a
purchase and the revenues and expenses associated with operating the assets
acquired have been included in the results of the leasing operation from the
date of acquisition. This acquisition is the primary reason revenues and
expenses increased by more than 50% in 1994.
Leasing income from operations for 1995 increased $11.5 million (18%) mainly
due to higher utilization and increased fleet size in the standard,
refrigerated and tank container fleet lines, as well as an increase in the
European trailer fleet. A 1995 increase in sales of used equipment resulted in
additional gains of $7.2 million after tax. Earnings in 1995 also benefited
from a $2.2 million after tax favorable depreciation adjustment resulting from
the final settlement of the Tiphook purchase price and a $1.8 million
resolution of an outstanding state tax issue. Partially offsetting these
increases were lower earnings in the rail trailer business which experienced a
downturn in utilization resulting from decreased U.S. intermodal loadings.
Leasing income from operations for 1994 increased $10 million (18%). Included
in the 1993 results was a $4.3 million additional tax provision
LEASING
____________________________________________________________________________
(Amounts in millions) 1995 1994 1993
REVENUES
Total leasing revenues $733.9 $637.9 $407.8
EXPENSES
Operating expenses 126.5 126.3 81.9
Depreciation on equipment held for lease 236.6 197.3 102.5
Selling and administrative expenses 95.1 94.6 65.5
Interest 154.0 115.7 64.4
Income taxes 46.6 40.4 39.9
______ ______ ______
658.8 574.3 354.2
______ ______ ______
Income from operations 75.1 63.6 53.6
Amortization of goodwill (2.0) (2.0) (2.0)
______ ______ ______
Net income $ 73.1 $ 61.6 $ 51.6
====== ====== ======
54 Transamerica Corporation and Subsidiaries
from the revaluation of the January 1, 1993 deferred tax liability. Excluding
the effect of this adjustment, leasing income increased $5.7 million (10%) in
1994. The increase was primarily due to a larger fleet size, more on-hire rail
trailer and chassis units and an increased finance lease portfolio, partially
offset by lower utilization and rates in the standard container line.
Revenues for 1995 increased $96 million (15%). The increase was due to
additional on-hire standard, tank and refrigerated containers, chassis and
European trailers. Revenues also increased due to a larger standard and tank
container fleet, resulting from the acquisition of the container division
assets of Tiphook. Partially offsetting these increases were lower revenues in
the rail trailer business resulting from fewer units on-hire.
Revenues for 1994 increased $230.1 million (56%). The increase was due
primarily to the acquisition of the container division assets of Tiphook.
Revenue increases were also generated by a larger fleet of new standard and
refrigerated containers, more on-hire rail trailer and chassis units and a
larger finance lease portfolio.
Expenses increased $78.3 million (15%) in 1995 mainly due to higher
depreciation expense, interest expense and operating costs associated with
larger standard, tank and refrigerated container, chassis and European trailer
fleets.
Expenses increased $219.6 million (70%) in 1994 mainly due to higher
depreciation expense, interest expense and operating costs related to the
acquisition of the container division assets of Tiphook.
The combined utilization of standard containers, refrigerated containers,
domestic containers, tank containers and chassis averaged 85% in 1995, 81% in
1994, and 83% in 1993. Rail trailer utilization was 77% in 1995, 92% in 1994,
and 91% in 1993. European trailer utilization was 95% in 1995, 96% in 1994,
and 89% in 1993. Utilization of the company's fleet is dependent upon
worldwide economic conditions, market pressures and industry fleet size.
The company's standard container, refrigerated container, domestic container,
tank container and chassis fleet of 708,400 units increased by 23,000 units
(3%) in 1995, and 369,400 units (117%) in 1994. The 1994 increase was largely
due to the acquisition of the container division assets of Tiphook. The rail
trailer fleet of 36,900 units decreased by 2,400 units (6%) in 1995 after a
2,800 unit (8%) increase in 1994. The European over-the-road trailer fleet of
7,700 units increased by 2,000 units (35%) in 1995 and 1,900 units (50%) in
1994.
Transamerica Corporation and Subsidiaries 55
REAL ESTATE SERVICES
Real estate services comprise Transamerica's real estate tax, real estate
investments, property management, and other services. This segment also
includes Transamerica's asset management operation which was sold in 1995. For
purposes of this discussion asset management's results have been segregated.
The real estate services' income from operations for 1995 decreased $35.6
million (64%). The 1995 decrease includes an $8.8 million after tax
restructuring charge principally in connection with the relocation and
consolidation of the real estate tax service business. Excluding the effect of
the restructuring charge, real estate services income from operations for 1995
and 1994 decreased $26.8 million (48%) and $28.4 million (34%), primarily due
to a significant decline in real estate tax service revenues caused by lower
mortgage refinancings.
Revenues decreased $37 million (13%) in 1995 and $32.2 million (10%) in 1994
as a result of decreased business at the real estate tax service operation.
Funds required for capital expenditures and working capital are generated by
operations. Cash, cash equivalents and accounts receivable, which totaled
$107.5 million at December 31, 1995 and $74.1 million at December 31, 1994,
are the real estate services' operations principal sources of liquidity.
Asset management in 1995 comprised Criterion Investment Management Company
(CIMC), which on May 2, 1995 sold substantially all of its assets for gross
proceeds of $60 million, and in 1994, Transamerica Fund Management Company
which was sold on December 21, 1994 for gross proceeds of $100 million. The
CIMC transaction resulted in a $4.8 million after tax gain. Asset management's
net income for 1995 was $6.2 million compared to $6.6 million for 1994 and a
net loss of $1.3 million for 1993. Operating results for 1995, 1994 and 1993
were income of $6.5 million, $8.3 million and $300,000. The 1994 improvement
was due primarily to a $4.9 million gain on sale of Transamerica Fund
Management Company and lower operating expenses within the mutual fund
business.
56 Transamerica Corporation and Subsidiaries
REAL ESTATE SERVICES*
____________________________________________________________________________
(Amounts in millions) 1995 1994 1993
ASSETS
Cash, cash equivalents and accounts receivable $107.5 $ 74.1 $115.6
Investments 152.5 127.2 64.3
Land and buildings 168.4 149.2 166.4
Other assets 120.2 119.0 102.8
______ ______ ______
$548.6 $469.5 $449.1
====== ====== ======
LIABILITIES AND EQUITY
Loss and future service reserves $156.6 $137.9 $104.7
Notes and loans payable 149.2 109.2 96.9
Other liabilities 55.7 56.1 63.2
Equity 187.1 166.3 184.3
______ ______ ______
$548.6 $469.5 $449.1
====== ====== ======
REVENUES
Real estate services revenues $254.4 $291.4 $323.6
EXPENSES
Salaries and other operating expenses 223.6 199.6 187.2
Income taxes 10.5 35.9 52.1
______ ______ ______
234.1 235.5 239.3
______ ______ ______
Income from operations 20.3 55.9 84.3
Amortization of goodwill (0.1) (0.1) (0.1)
______ ______ ______
Net income $ 20.2 $ 55.8 $ 84.2
====== ====== ======
SOURCE OF CASH
Cash provided by operations $ 33.5 $133.6 $ 67.9
Proceeds from debt financing 22.6 11.5 12.8
______ ______ ______
$ 56.1 $145.1 $ 80.7
====== ====== ======
APPLICATION OF CASH
Equity transactions $ 15.1 $ 76.0 $ 55.2
Net purchases of investments 12.9 61.9 0.4
Payments of notes and loans 10.0 0.9 2.4
Other 18.1 6.3 22.7
______ ______ ______
$ 56.1 $145.1 $ 80.7
====== ====== ======
*Excludes Asset Management financial data.
Transamerica Corporation and Subsidiaries 57
UNALLOCATED INTEREST AND OTHER EXPENSES
Unallocated costs, after related income taxes, are summarized as follows:
____________________________________________________________________________
(Amounts in millions) 1995 1994 1993
Interest expense $ 52.8 $ 50.2 $ 54.1
Other expenses
(income) 46.1 44.2 (48.0)
______ ______ ______
$ 98.9 $ 94.4 $ 6.1
====== ====== ======
Interest expense, after related income taxes, increased $2.6 million (5%) in
1995 and decreased $3.9 million (7%) in 1994. The 1995 increase was due to
higher outstanding debt. The 1994 decrease was due to a lower level of
borrowings and lower average interest rates. The lower borrowing level in 1994
was primarily due to the repayment of debt with proceeds from the 1993 sale of
the discontinued property and casualty insurance operation and the sale of
Transamerica's investment in Sedgwick Group plc in April 1994.
Other expenses, after related income taxes, for 1995 included a $25.6 million
benefit from the satisfactory resolution of prior years' tax matters. This
benefit was partially offset by a $21.5 million after tax provision for an
expected loss on the Transamerica Center in downtown Los Angeles in
anticipation of a planned sale and leaseback transaction that is subject to
regulatory approval.
Excluding the items discussed above, other expenses increased $6 million in
1995 primarily due to the continuing centralization of certain administrative
functions which resulted in overall cost savings. These functions were
previously performed at the individual business units.
Other expenses, after related income taxes, in 1993 included a tax benefit of
$90 million for the reversal of certain tax reserves, offset in part by a $4
million after tax provision for restructuring corporate-wide administrative
functions, a $3 million additional after tax provision to increase the
supplemental (nonqualified) pension liability and an additional tax provision
of $3.8 million from the revaluation of the January 1, 1993 deferred tax
liability. Excluding these items, other expenses increased $13 million (41%)
in 1994. The 1994 increase was primarily due to higher costs, principally
salary and benefits, as a result of centralizing certain administrative
functions.
58 Transamerica Corporation and Subsidiaries
CORPORATE LIQUIDITY
Transamerica Corporation receives funds from its subsidiaries in the form of
dividends, income taxes and interest on loans. The Corporation uses these
funds to pay dividends to its stockholders or purchase shares, reinvest in the
operations of its subsidiaries and pay corporate interest, expenses and taxes.
Reinvested funds are allocated among subsidiaries on the basis of expected
returns and creation of shareholder value. Reinvestment may be accomplished by
allowing a subsidiary to retain all or a portion of its earnings, or by making
capital contributions or loans.
The Corporation also borrows funds to finance acquisitions or to lend to
certain of its subsidiaries to finance their working capital needs.
Subsidiaries are required to maintain prudent financial ratios consistent with
other companies in their respective industries and retain the capacity through
committed credit lines to repay working capital loans from the Corporation. At
December 31, 1995, Transamerica and its subsidiaries had short-term
borrowings, principally commercial paper, totaling $4.8 billion, supported by
credit agreements with 62 banks. It is the policy of the Corporation to
maintain credit line coverage at least equal to 100% of short-term borrowings.
Availability under such lines at December 31, 1995, amounted to $5.2 billion
or 110% of these borrowings; credit support equal to 82% of the borrowings was
with banks rated AAA/AA or the equivalent by one or more of the major credit
rating agencies.
The Corporation has established a program to offer publicly, from time to
time, $200 million of its Medium-Term Notes, Series B. The notes will be
issued pursuant to a shelf registration filed with the Securities and Exchange
Commission that enables the Corporation to offer publicly up to $500 million
of debt securities with varying terms. None of these debt securities has been
issued. The securities may be senior or subordinated and, if subordinated, may
be convertible into common stock. The proceeds from the sale of the debt
securities, including the notes, may be used for general corporate purposes.
The Corporation's commercial paper, senior debt and preferred stock are rated
by independent rating agencies. The Corporation continues to maintain debt to
capital ratios consistent with its current ratings.
Additionally, Transamerica Finance Corporation, a wholly owned subsidiary of
Transamerica and also an SEC registrant, issues public debt to fund the
consumer lending, commercial lending and leasing operations.
In May 1995, Transamerica sold the assets of its investment management
subsidiary, Criterion Investment Management Company. Proceeds from the sale
were $60 million and were used by Transamerica to reduce debt.
As previously discussed, in March 1995 Transamerica acquired a portfolio of
approximately 40,000 home equity loans from ITT for $1,027.3 million in cash.
The purchase was funded primarily with long-term debt with the remainder
funded by short-term bank financing. For a discussion of this transaction see
"Consumer Lending."
In December 1994, Transamerica sold its former mutual fund subsidiary,
Transamerica Fund Management Company. Proceeds from the sale were $100 million
and were used by Transamerica to reduce debt.
In October 1994, Transamerica Delaware, LP, an affiliate of Transamerica,
issued $200 million of 9.125% cumulative Monthly Income Preferred Securities
(MIPS). Proceeds from the issuance were invested by the affiliate in Series A
Subordinated Debentures issued by Transamerica, bearing interest at 9.125% and
maturing October 25, 2024. Proceeds to Transamerica were used for general
corporate purposes, including the repayment or redemption of other of its
securities. The MIPS obligation outstanding is shown as minority interest in
the consolidated balance sheet of Transamerica and its subsidiaries.
In April 1994, Transamerica sold its remaining 21% ownership interest in
Sedgwick Group plc. Proceeds from the sale were $326.4 million and were used
by Transamerica to purchase 4.5 million shares of its common stock and reduce
debt.
In March 1994, Transamerica acquired substantially all the operating assets of
the container operations of Tiphook plc, a London-based transportation
equipment rental company, for $1,061.4 million in cash. The initial financing
of the acquisition was provided through short-term bank loans which have been
repaid and refinanced with long-term debt.
Transamerica Corporation and Subsidiaries 59
CORPORATE LIQUIDITY (continued)
In 1993, the Corporation sold its former property and casualty insurance
subsidiary, Transamerica Insurance Group, through an initial public offering
in April 1993 and a secondary offering in December 1993. Proceeds from the
sales of stock, after underwriting discounts and issuance costs, totaled $1
billion. The proceeds were used to reduce indebtedness, including $409.3
million incurred to fund cash transactions with the property and casualty
insurance operation in connection with the initial public offering, and to
commence a common stock purchase program.
In December 1993, the commercial lending operation redeemed $125 million of
deep discount, long-term debt with a book value of $90.7 million, which
resulted in a $23.1 million after tax extra-ordinary loss.
Stockholders' Equity
In June 1995, Transamerica announced that its board of directors had
authorized additional purchases of up to 2 million shares of the company's
common stock of which 1,445,000 had been purchased as of December 31, 1995. As
a result of this, and other previously announced share purchase programs,
during 1995 Transamerica purchased 2,386,200 shares for $148.1 million (an
average price of $62.06 per share).
In June 1994, Transamerica completed a "Dutch Auction" tender offer to
purchase 4.5 million shares of its common stock, at a price of $54.75 per
share. Transamerica used a portion of the net proceeds from the sale of its
remaining 21% ownership interest in Sedgwick Group plc to purchase these
shares.
As a result of the June 1995 program and Dutch Auction tender discussed above,
and the purchase of 7.2 million shares under three previously announced share
purchase programs beginning in 1993, the number of common shares outstanding
at December 31, 1995 was 68 million compared to 69.4 million at December 31,
1994 and 76.4 million at December 31, 1993.
In November 1994, Transamerica completed a tender offer to redeem for cash 4.4
million depositary shares of its 8.5% Series D Preferred Stock at a price of
$26 per depositary share. As a result of the tender offer, $6.7 million of
premium and expenses related to the transaction was charged directly to
stockholders' equity and resulted in a 9 cent reduction in 1994 earnings per
share.
60 Transamerica Corporation and Subsidiaries
INVESTMENT PORTFOLIO
Transamerica, principally through its life insurance subsidiaries, maintains
an investment portfolio aggregating $28 billion at December 31, 1995, of which
$26.1 billion was invested in fixed maturities. At December 31, 1995, 96% of
the fixed maturities was rated as "investment grade," with an additional 3% in
the BB category or its equivalent. "Investment grade" is generally defined as
any issue rated above the Ba category by Moody's Investors Service or above
the BB category by Standard & Poor's Corporation. The amortized cost of fixed
maturities was $24.1 billion resulting in a net unrealized gain position,
before the effects of income taxes, of $2 billion at December 31, 1995. Fixed
maturity investments are used primarily to support insurance reserves. The
amortized cost of delinquent below investment grade securities before
provision for impairment in value was $6.9 million at December 31, 1995
compared to $12.4 million at December 31, 1994. Provision for impairment in
value has been made to reduce certain fixed maturity investments by $71.4
million at December 31, 1995 and $92.1 million at December 31, 1994.
The net unrealized gain/loss from investments marked to fair value, after
related taxes and deferred policy acquisition cost and policyholder liability
adjustments, which is included in stockholders' equity was a gain of $1.1
billion at December 31, 1995 compared to a loss of $265.1 million at December
31, 1994.
In 1994, Transamerica adopted Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities."
Accordingly, changes in stockholders' equity caused by changes in the fair
value of the investment portfolio in 1995 and 1994 are not comparable to 1993
because in 1993 investments in fixed maturities were carried at amortized
cost.
In addition to the investments in fixed maturities, $594.5 million (2% of the
investment portfolio) was invested in mortgage loans and real estate including
$544.9 million in commercial mortgage loans, $78.1 million in real estate
investments, $20 million in foreclosed real estate and $300,000 in residential
mortgage loans. Problem loans, defined as restructured loans yielding less
than 8% and delinquent loans, totaled $3.9 million at December 31, 1995 and
$7.7 million at December 31, 1994. Allowances for possible losses of $48.8
million at December 31, 1995 and $49.7 million at December 31, 1994 have been
established to cover the possible losses from mortgage loans and real estate
investments.
Transamerica Corporation and Subsidiaries 61
CONSOLIDATED BALANCE SHEET
____________________________________________________________________________
December 31 1995 1994
ASSETS
Investments, principally of life insurance
subsidiaries:
Fixed maturities $26,076.1 $21,037.0
Equity securities 703.2 427.2
Mortgage loans and real estate 594.5 455.5
Loans to life insurance policyholders 426.4 412.9
Short-term investments 226.5 163.7
_________ _________
28,026.7 22,496.3
Finance receivables, of which $3,821.1 in
1995 and $3,460.1 in 1994 matures within
one year 8,287.8 7,426.1
Less unearned fees ($289.7 in 1995 and $248.2
in 1994) and allowance for losses 529.7 455.2
_________ _________
7,758.1 6,970.9
Cash and cash equivalents 67.6 64.3
Trade and other accounts receivable 3,130.1 2,610.3
Property and equipment, less accumulated
depreciation of $1,140.6 in 1995 and
$974.9 in 1994:
Land, buildings and equipment 411.5 360.7
Equipment held for lease 2,862.0 2,606.6
Deferred policy acquisition costs 1,974.2 2,480.5
Separate accounts administered by life
insurance subsidiaries 2,533.4 1,666.5
Goodwill, less accumulated amortization of
$130.8 in 1995 and $123.2 in 1994 402.4 443.7
Other assets 778.5 694.0
_________ _________
$47,944.5 $40,393.8
========= =========
(Amounts in millions except for share data)
See notes to financial statements
62 Transamerica Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEET (continued)
____________________________________________________________________________
December 31 1995 1994
LIABILITIES AND STOCKHOLDERS' EQUITY
Life insurance policy liabilities $27,893.4 $24,731.7
Notes and loans payable, principally of
finance subsidiaries, of which $996.3 in
1995 and $1,684 in 1994 matures within
one year 10,337.8 9,173.1
Accounts payable and other liabilities 1,672.4 1,627.5
Income taxes, of which $891.5 in 1995
and $6.6 in 1994 is deferred 1,007.6 259.2
Separate account liabilities 2,533.4 1,666.5
Minority interest in preferred securities
of affiliate 200.0 200.0
Stockholders' equity:
Preferred stock ($100 par value):
Authorized--1,200,000 shares; issuable
in series
Outstanding--Dutch Auction Rate Transferable
Securities, 2,250 shares, at liquidation
preference of $100,000 per share 225.0 225.0
Outstanding--Series D, 180,091 shares in
1995 and 181,642 shares in 1994 at
liquidation preference of $500 per share 90.0 90.8
Common stock ($1 par value):
Authorized--150,000,000 shares
Outstanding--67,989,508 shares in 1995 and
69,395,099 shares in 1994, after deducting
11,748,954 and 10,343,363 shares in treasury
in 1995 and 1994 68.0 69.4
Additional paid-in capital 96.5
Retained earnings 2,866.0 2,557.4
Net unrealized gain (loss) from investments
marked to fair value 1,079.9 (265.1)
Foreign currency translation adjustments (29.0) (38.2)
_________ _________
4,299.9 2,735.8
_________ _________
$47,944.5 $40,393.8
========= =========
Transamerica Corporation and Subsidiaries 63
CONSOLIDATED STATEMENT OF INCOME
____________________________________________________________________________
Year ended December 31 1995 1994 1993
REVENUES
Life insurance premiums and related
income $1,862.8 $1,495.2 $1,255.7
Investment income 1,990.3 1,782.6 1,749.9
Finance charges and other fees 1,165.4 1,041.6 990.1
Leasing revenues 703.1 620.7 388.3
Real estate and tax service revenues 212.8 256.0 293.3
Gain on investment transactions 52.9 23.1 39.0
Other 113.8 135.3 97.0
________ ________ ________
6,101.1 5,354.5 4,813.3
EXPENSES
Life insurance benefits 2,858.7 2,356.4 2,145.9
Life insurance underwriting, acquisition
and other expenses 549.4 530.0 499.8
Leasing operating and maintenance costs 363.1 323.6 184.4
Interest and debt expense 716.7 573.7 511.6
Provision for losses on receivables
and assets held for sale 93.8 100.6 147.0
Other, including administrative and
general expenses 814.4 779.9 736.5
________ ________ ________
5,396.1 4,664.2 4,225.2
________ ________ ________
705.0 690.3 588.1
Income taxes 234.5 262.4 140.6
________ ________ ________
Income from continuing operations 470.5 427.9 447.5
Loss from discontinued operations (0.7) (47.0)
Extraordinary loss on early extinguishment
of debt (23.1)
________ ________ ________
Net income $ 470.5 $ 427.2 $ 377.4
======== ======== ========
EARNINGS PER SHARE OF COMMON STOCK
Income from continuing operations $ 6.58 $ 5.46 $ 5.40
Loss from discontinued operations (0.01) (0.60)
Extraordinary loss on early extinguishment
of debt (0.29)
________ ________ ________
Net income $ 6.58 $ 5.45 $ 4.51
======== ======== ========
(Amounts in millions except for share data)
See notes to financial statements
64 Transamerica Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
____________________________________________________________________________
Year ended December 31 1995 1994 1993
OPERATING ACTIVITIES
Income from continuing operations $ 470.5 $ 427.9 $ 447.5
Adjustments to reconcile income from
continuing operations to net cash
provided by operating activities:
Increase in life insurance policy
liabilities, excluding policyholder
balances on interest-sensitive
policies 1,272.8 813.8 927.3
Amortization of policy acquisition
costs 191.3 182.3 232.7
Policy acquisition costs deferred (381.8) (394.9) (350.0)
Depreciation and amortization 306.5 263.2 159.8
Other (626.3) 81.6 (327.8)
_________ _________ _________
Net cash provided by continuing
operations 1,233.0 1,373.9 1,089.5
INVESTING ACTIVITIES
Finance receivables originated (19,247.3) (17,277.1) (13,664.0)
Finance receivables collected 19,251.2 16,639.5 13,375.2
Purchase of investments (6,256.3) (9,656.4) (12,102.5)
Sales and maturities of investments 4,204.9 7,151.4 9,647.5
Purchase of the container division
assets of Tiphook plc (1,061.4)
Purchase of finance receivables and
other assets from ITT Consumer
Financial Corporation (1,027.3)
Proceeds from sale of discontinued
operations 326.4 1,031.8
Cash transactions with discontinued
operations 5.4 (399.3)
Other (568.2) (506.3) (475.5)
_________ _________ _________
Net cash used by investing
activities (3,643.0) (4,378.5) (2,586.8)
FINANCING ACTIVITIES
Proceeds from debt financing 8,476.9 7,197.6 5,308.2
Payments of notes and loans (7,330.4) (5,766.2) (5,239.5)
Receipts from interest-sensitive
policies credited to policyholder
account balances 5,151.4 4,434.7 4,166.3
Return of policyholder balances on
interest-sensitive policies (3,624.0) (2,419.9) (2,313.2)
Proceeds from sale of preferred
securities of affiliate 192.6
Redemption of preferred stock (0.8) (115.9)
Treasury stock purchases (155.4) (387.0) (207.6)
Other common stock transactions 51.0 8.0 33.5
Dividends (155.4) (167.7) (179.7)
_________ _________ _________
Net cash provided by financing
activities 2,413.3 2,976.2 1,568.0
_________ _________ _________
Increase (decrease) in cash and
cash equivalents 3.3 (28.4) 70.7
Cash and cash equivalents at beginning
of year 64.3 92.7 22.0
_________ _________ _________
Cash and cash equivalents at end
of year $ 67.6 $ 64.3 $ 92.7
========= ========= =========
(Amounts in millions)
See notes to financial statements
Transamerica Corporation and Subsidiaries 65
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
____________________________________________________________________________________________________________
Net Unrealized
Gain (Loss) from Foreign
Additional Investments Currency
Preferred Common Paid-in Retained Marked Translation
Stock Stock Capital Earnings to Fair Value Adjustments
BALANCE AT DECEMBER 31, 1992 $425.0 $79.2 $646.5 $2,100.2 $ 83.5 $(34.3)
Net income 377.4
Dividends declared:
On common stock (156.1)
On preferred stock (23.6)
Common stock issued 0.9 32.6
Treasury stock purchased (3.7) (203.9)
Other changes 40.6 (0.8)
______ _____ ______ ________ ________ ______
BALANCE AT DECEMBER 31, 1993 425.0 76.4 475.2 2,297.9 124.1 (35.1)
Effect of adopting Statement
of Financial Accounting
Standards No. 115 804.5
Net income 427.2
Dividends declared:
On common stock (142.8)
On preferred stock (24.9)
Common stock issued 0.2 7.8
Treasury stock purchased (7.2) (379.8)
Redemption of preferred stock (109.2) (6.7)
Other changes (1,193.7) (3.1)
______ _____ ______ ________ ________ ______
BALANCE AT DECEMBER 31, 1994 315.8 69.4 96.5 2,557.4 (265.1) (38.2)
Net income 470.5
Dividends declared:
On common stock (137.4)
On preferred stock (18.0)
Common stock issued 1.1 49.9
Treasury stock purchased (2.5) (146.4) (6.5)
Redemption of preferred stock (0.8)
Other changes 1,345.0 9.2
______ _____ ______ ________ ________ ______
BALANCE AT DECEMBER 31, 1995 $315.0 $68.0 $ $2,866.0 $1,079.9 $(29.0)
====== ===== ====== ======== ======== ======
<FN>
(Amounts in millions)
See notes to financial statements
66 Transamerica Corporation and Subsidiaries
NOTES TO FINANCIAL STATEMENTS December 31, 1995
____________________________________________________________________________
A SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Transamerica Corporation is a financial services organization which engages
through its subsidiaries in life insurance, consumer lending, commercial
lending, leasing and real estate services. The United States represents the
primary market for the services offered by most of Transamerica's subsidiaries
except for the leasing business which operates in the container shipping
business worldwide.
CONSOLIDATION
The consolidated financial statements include the accounts of Transamerica
Corporation and its subsidiaries. Certain amounts reported in the consolidated
financial statements are based on management estimates. The ultimate
resolution of these items may differ from those estimates.
INVESTMENTS
Investments in fixed maturities, comprising bonds, notes and redeemable
preferred stocks, are carried at fair value. Fair value for actively traded
securities is based on quoted market prices. For fixed maturity securities not
actively traded, including private placements, fair value is estimated using
information obtained from independent pricing services. Investments in equity
securities, comprising corporate common and nonredeemable preferred stocks,
are carried at fair value based on quoted market prices. Changes to the
carrying amount of fixed maturity and equity securities are included in
stockholders' equity. Realized gains and losses on investment transactions are
determined generally on a specific identification basis and reflected in
earnings on the trade date.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include money market funds and marketable
securities with original maturities of three months or less except for such
securities held by the life insurance operation which are included in
short-term investments.
DEPRECIATION AND AMORTIZATION
Property and equipment, which are stated on the basis of cost, are depreciated
by use of the straight-line method over their estimated useful lives. Other
intangible assets, principally renewal, referral and other rights incident to
businesses acquired, are amortized over estimated future benefit periods
ranging from five to 25 years in proportion to acquired gross profits.
Goodwill is amortized over periods up to 40 years.
INCOME TAXES
Transamerica provides deferred taxes based on enacted tax rates in effect on
the dates temporary differences between the book and tax bases of assets and
liabilities reverse.
FINANCE
Finance charges are generally recognized as earned on an effective yield
method, except that accrual of finance charges is suspended on accounts that
become past due contractually in excess of 29 days for consumer loans or 90
days for commercial loans.
Leasing revenues are recognized in the period earned.
REAL ESTATE
Tax service revenues are recognized as income generally when contracts are
executed with a portion of the revenues amortized over the estimated lives of
the contracts.
LIFE INSURANCE
The accounts of the life insurance operation have been included in the
consolidated financial statements on the basis of generally accepted
accounting principles which differ in some respects from those followed in
reports to regulatory authorities.
Life insurance premiums are generally recognized as earned over the premium
paying periods, with reserves for future benefits established from such
premiums on a net-level premium method based upon estimated investment
yields, withdrawals, mortality and other assumptions which were appropriate at
the time the policies were issued. Premiums and deposits for universal life
and other interest-sensitive life insurance products that do not involve
significant mortality or morbidity risk are recorded as liabilities. Costs of
acquiring new life insurance business, principally commissions and certain
variable underwriting and field office expenses, all of which vary with and
are primarily related to the production of new business, are deferred.
Deferred policy acquisition costs for universal life and other
Transamerica Corporation and Subsidiaries 67
A SIGNIFICANT ACCOUNTING POLICIES (continued)
interest-sensitive life insurance products are amortized in proportion to the
present value of gross profit. Deferred policy acquisition costs for
traditional life insurance products are amortized over the premium-paying
period of the related policies in proportion to premium revenue recognized.
Although realization of the benefits associated with deferred policy
acquisition costs is not assured, management believes it is more likely than
not that such amounts will be realized. Adequate provision is made for
reported and unreported claims and related expenses.
DERIVATIVES
Transamerica uses derivative financial instruments to hedge some of its
interest rate risk. The cost of each derivative contract is amortized over the
life of the contract. The amortization is classified with the results of the
underlying hedged item. Certain contracts are designated as hedges of specific
assets within the investment portfolio and to the extent those investments are
marked to market, the hedge contracts are also marked to market and included
as an adjustment to the underlying asset value. Other contracts are designated
and accounted for as hedges of certain of Transamerica's liabilities and
outstanding indebtedness and are not marked to market. Gains or losses on
terminated hedges are deferred and amortized over the remaining life of the
hedged item.
STOCK BASED COMPENSATION
Transamerica accounts for stock based compensation under the provisions of
Accounting Principles Board Opinion No. 25 and intends to continue to do so.
NEW ACCOUNTING STANDARDS
In 1995, Transamerica adopted the Financial Accounting Standards Board's new
standard on accounting for impairment of loans. The new standard requires that
impaired loans be measured based on either the fair value of the loan, if
discernible, the present value of expected cash flows discounted at the loan's
effective interest rate, or the fair value of the collateral if the loan is
collateral dependent. The new standard did not have a material effect on the
consolidated financial statements of Transamerica.
In March 1995, the Financial Accounting Standards Board issued a new standard
on accounting for the impairment of long lived assets and for long lived
assets to be disposed of. Transamerica will adopt this new standard in the
first quarter of 1996. The new standard requires that Transamerica assess
whether the carrying amount of an asset is recoverable whenever events or
changes in circumstances indicate that a significant change in the value of
the asset may have occurred. At adoption this new standard will not have a
material effect on the consolidated financial statements of Transamerica.
In May 1995, the Financial Accounting Standards Board issued a new standard on
accounting for mortgage servicing rights. Transamerica will adopt this new
standard in the first quarter of 1996. The new standard requires that mortgage
servicing rights be capitalized when acquired either through the purchase or
origination of mortgage loans that are subsequently sold or securitized with
the servicing rights retained and when the relative fair values of the loans
and the related mortgage servicing rights can be estimated. At adoption this
new standard will not have a material effect on the consolidated financial
statements of Transamerica.
In 1994, Transamerica adopted the Financial Accounting Standards Board's new
standard on accounting for certain investments in debt and equity securities.
Beginning in 1994 with the adoption of this standard, all of Transamerica's
investments in debt securities have been classified as available for sale and
reported at fair value. To the extent the securities marked to fair value
relate to interest-sensitive products, an adjustment to deferred policy
acquisition costs is also made. In addition, the reserves for future benefits
are evaluated as if the unrealized gains on debt securities were realized, and
adjusted for any resultant premium deficiencies. The effect of these
adjustments, net of federal income taxes, is recorded in a separate component
of stockholders' equity. There is no effect on the income statement. Prior to
1994 investments in debt securities were carried at amortized cost.
EARNINGS PER SHARE OF COMMON STOCK
Earnings per share of common stock are based on the weighted average number of
shares outstanding (68,758,000 in 1995, 72,592,000 in 1994, and 78,495,000 in
1993) after deduction of preferred dividends and, in 1994, premium and
expenses of $6.7 million on the redemption of the Series D preferred stock.
68 Transamerica Corporation and Subsidiaries
B MINORITY INTEREST
In October 1994, Transamerica Delaware, LP, an affiliate of Transamerica,
issued $200 million of 9.125% cumulative Monthly Income Preferred Securities
(MIPS) payable October 25, 2024. The affiliate may redeem the outstanding
MIPS, in whole or in part, on or after October 25, 1999. Transamerica has
agreed to guarantee to pay in full any accrued and unpaid dividends declared,
or the redemption price including accrued and unpaid dividends, if the
securities are redeemed by the affiliate. Interest on the outstanding MIPS is
cumulative and payable monthly in arrears. The fair value of this obligation
at December 31, 1995, and 1994 was $220 million and $199 million.
C STOCK OPTION PLANS
At December 31, 1995, under Transamerica's stock option plans, 15,389,110
shares of common stock (11,457,178 shares at December 31, 1994) were reserved
principally for sale to key employees of the Corporation and subsidiaries at
market value or higher on the option grant date. During 1995, options for
7,070,300 shares were granted, including options granted under the 1995
Performance Stock Option Plan discussed below, and options for 1,064,798
shares were cancelled due to forfeiture. Options were exercised for 1,068,068
shares in 1995, 194,823 shares in 1994 and 1,019,081 shares in 1993, at
aggregate option prices of $41.1 million, $7 million and $36 million. Of the
options for 11,615,958 shares outstanding at December 31, 1995 (6,678,524
shares at December 31, 1994) at an aggregate option price of $739.6 million,
options for 3,532,683 shares were exercisable. In February 1996, options for
1,406,900 shares were granted at an option price equal to market value on the
date granted.
In April 1995, the stockholders approved the 1995 Performance Stock Option
Plan and, under the terms of the Plan, Transamerica made three separate
one-time grants of nonqualified stock options totaling 5 million shares.
Options for 1,025,000 shares were granted at an exercise price of $60 per
share, which vest ratably on the third, fourth and fifth anniversaries of the
date of grant. Options for 1,325,000 shares were granted with an exercise
price of $82 per share, all of which will be forfeited if the Corporation's
common stock does not reach $82 within five years from the date of grant.
Options for 2,650,000 shares were granted with an exercise price of $100, all
of which will be forfeited if the Corporation's common stock does not reach
$100 within seven years from the date of grant.
D CAPITAL STOCK
Transamerica has outstanding 2,250 shares of Dutch Auction Rate Transferable
Securities Preferred Stock (DARTS) ($100 par value, $100,000 liquidation
value) in Series A-1, B-1 and C-1 of 750 shares each. Dividends, which are
cumulative and are based on par value, are normally determined every 49 days
through auction procedures. The dividend rates for Series A-1, B-1 and C-1
shares were 4.49%, 5.10% and 4.40% at December 31, 1995 and 5.00%, 4.69% and
4.59% at December 31, 1994.
Transamerica also has outstanding 3,601,827 depositary shares at December 31,
1995 (3,632,827 shares at December 31, 1994) each representing a 1/20 interest
in a share of its Series D Preferred Stock ($100 par value, $500 liquidation
preference). Dividends, which are cumulative, are at the rate of 8.5% of the
liquidation preference per annum.
One preference stock purchase right accompanies each share of common stock
outstanding. Each right will entitle the holder to buy from Transamerica a
unit consisting of 1/100 of a share of Series A Participating Preference Stock
at an exercise price of $135 per unit. The rights become exercisable ten days
after a public announcement that a person or group has acquired 20% or more of
Transamerica's common stock or has commenced a tender offer for 30% or more of
the common stock. The rights may be redeemed prior to becoming exercisable by
action of the Board of Directors at a redemption price of $0.05 per right. If
Transamerica is acquired by any person after the rights become exercisable,
each right will entitle its holder to purchase stock of the acquiring company
having a market value of twice the exercise price of each right. The rights
expire on August 8, 1996.
At December 31, 1995, 5,000,000 shares of preference stock (without par value)
were authorized but unissued.
Transamerica Corporation and Subsidiaries 69
E FINANCIAL INSTRUMENTS
INVESTMENTS
The cost and fair value of fixed maturities and equity securities at December
31, 1995 and 1994 were as follows:
______________________________________________________________________________________________________
(Amounts in millions) Gross Gross
Unrealized Unrealized
Cost Gains Losses Fair Value
DECEMBER 31, 1995
U.S. Treasury securities and obligations of
U.S. government authorities and agencies $ 98.9 $ 7.5 $ 106.4
Obligations of states and political subdivisions 355.0 18.0 $ 0.6 372.4
Foreign governments 110.2 9.2 119.4
Corporate securities 11,803.4 1,133.2 8.6 12,928.0
Mortgage-backed securities 7,300.5 487.2 37.1 7,750.6
Public utilities 4,381.7 393.4 2.9 4,772.2
Redeemable preferred stock 23.7 3.9 0.5 27.1
_________ ________ ________ _________
Total fixed maturities $24,073.4 $2,052.4 $ 49.7 $26,076.1
========= ======== ======== =========
Equity securities $ 349.9 $ 360.3 $ 7.0 $ 703.2
========= ======== ======== =========
DECEMBER 31, 1994
U.S. Treasury securities and obligations of
U.S. government authorities and agencies $ 224.1 $ 0.7 $ 20.2 $ 204.6
Obligations of states and political subdivisions 341.9 3.6 10.0 335.5
Foreign governments 211.4 1.6 6.4 206.6
Corporate securities 9,384.4 134.1 398.9 9,119.6
Mortgage-backed securities 7,792.5 105.2 530.3 7,367.4
Public utilities 3,990.1 48.6 238.5 3,800.2
Redeemable preferred stock 3.6 0.5 3.1
_________ ________ ________ _________
Total fixed maturities $21,948.0 $ 293.8 $1,204.8 $21,037.0
========= ======== ======== =========
Equity securities $ 275.4 $ 167.2 $ 15.4 $ 427.2
========= ======== ======== =========
The cost and fair value of fixed maturities at December 31, 1995 by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
____________________________________________________________________________
(Amounts in millions) Cost Fair Value
Due in one year or less $ 594.5 $ 608.0
Due after one year through five years 2,988.3 3,115.0
Due after five years through ten years 3,778.1 4,031.6
Due after ten years 9,412.0 10,570.9
_________ _________
16,772.9 18,325.5
Mortgage-backed securities 7,300.5 7,750.6
_________ _________
$24,073.4 $26,076.1
========= =========
70 Transamerica Corporation and Subsidiaries
The carrying values and estimated fair values of investments in mortgage loans
on real estate and loans to life insurance policyholders at December 31, 1995
and 1994 were as follows:
____________________________________________________________________________
(Amounts in millions) Carrying Estimated
Value Fair Value
DECEMBER 31, 1995
Mortgage loans on real estate $523.7 $630.4
====== ======
Loans to life insurance policyholders $426.4 $408.1
====== ======
DECEMBER 31, 1994
Mortgage loans on real estate $354.1 $369.0
====== ======
Loans to life insurance policyholders $412.9 $383.5
====== ======
The fair values for mortgage loans on real estate and policyholder loans are
estimated using discounted cash flow calculations, based on interest rates
currently being offered for similar loans to borrowers with similar credit
ratings. Loans with similar characteristics are aggregated for calculation
purposes.
Gain on investment transactions, included in consolidated revenues, comprises:
____________________________________________________________________________
(Amounts in millions) 1995 1994 1993
Net gain on sale of investments $ 85.7 $ 50.1 $157.3
Provision for impairment in value (23.6) (20.7) (55.5)
Accelerated amortization of deferred policy
acquisition costs (9.2) (6.3) (62.8)
______ ______ ______
$ 52.9 $ 23.1 $ 39.0
====== ====== ======
Proceeds from sales of fixed maturities and equity securities were $4 billion
in 1995, $2.7 billion in 1994 and $5.2 billion in 1993. Gross gains of $95
million in 1995, $107.5 million in 1994 and $325.3 million in 1993, and gross
losses of $11.7 million in 1995, $67.5 million in 1994 and $163.6 million in
1993 were realized on those sales.
Transamerica and its subsidiaries use interest rate exchange and other
agreements to hedge the interest rate sensitivity of a small portion of its
fixed maturity investments.
The net unrealized gain (loss) included in stockholders' equity as a result of
marking the fixed maturities and equity securities to fair value at December
31, 1995 and 1994 were as follows:
____________________________________________________________________________
(Amounts in millions) 1995 1994
Net unrealized gain on equity securities $ 353.3 $ 151.8
Net unrealized gain (loss) on investments
in fixed maturities 1,990.3 (899.7)
Net unrealized gain (loss) on derivative
instruments which hedge a portion of
investments in fixed maturities 12.4 (11.3)
Adjustment to deferred policy acquisition costs (355.6) 351.3
Adjustment to life insurance policy liabilities (339.0)
Deferred income taxes (581.5) 142.8
________ _______
$1,079.9 $(265.1)
======== =======
Transamerica Corporation and Subsidiaries 71
E FINANCIAL INSTRUMENTS (continued)
NOTES AND LOANS PAYABLE
____________________________________________________________________________
(Amounts in millions) 1995 1994
TRANSAMERICA FINANCE CORPORATION:
Short-term bank loans, commercial paper and
currentportion of long-term debt $ 743.3 $1,387.1
Long-term debt due subsequent to one year:
Notes and debentures; interest at 5.24% to
9.41%; maturing through 2010 3,603.7 2,477.3
Notes and debentures; interest at 13.8% to
13.88%; maturity value of $582.8 million;
maturing through 2012 162.0 154.2
Commercial paper and other notes at various
interest rates and terms supported by credit
agreements expiring through 2000 4,334.6 3,672.5
Subordinated notes and debentures; interest
at 5.57% to 9.95%; maturing through 2003 784.6 841.2
Loans due to parent company and other subsidiaries 61.7 192.0
_________ ________
9,689.9 8,724.3
PARENT COMPANY AND OTHER SUBSIDIARIES:
Short-term bank loans, commercial paper and
current portion of long-term debt 253.0 296.9
Long-term debt due subsequent to one year:
Notes and debentures; interest at 6.5% to 9.88%;
maturing through 2016 223.1 252.8
Commercial paper and other notes at various
interest rates and terms supported by credit
agreements expiring through 1998 211.3
Notes at variable interest rates; maturing
through 1998 22.2 91.1
Less loans to Transamerica Finance Corporation (61.7) (192.0)
_________ ________
647.9 448.8
_________ ________
$10,337.8 $9,173.1
========= ========
The weighted average interest rate on short-term borrowings at December 31,
1995 and 1994 was 5.80% and 5.81%.
Assets with a net book value of $423.4 million at December 31, 1995,
consisting primarily of land, buildings and equipment, are collateral for
certain of the above debt.
The aggregate annual maturities for the four years subsequent to December 31,
1996 are $2 billion in 1997, $2.5 billion in 1998, $1.6 billion in 1999 and
$2.1 billion in 2000.
Under credit agreements with various banks, Transamerica and its subsidiaries
had the ability to borrow up to $5.2 billion with interest at variable rates
at December 31, 1995. There were no borrowings outstanding under these credit
lines at that date. These credit agreements, which expire through 2000,
require a fee on the commitment.
Transamerica and its subsidiaries use interest rate exchange agreements to
hedge the interest rate sensitivity of a portion of outstanding indebtedness.
Interest payments, net of amounts received from interest rate exchange
agreements, totaled $696 million in 1995, $661.8 million in 1994 and $623.4
million in 1993.
The estimated fair value of notes and loans payable, using rates currently
available for debt with similar terms and maturities, was $10,800 million at
December 31, 1995 and $9,108 million at December 31, 1994.
72 Transamerica Corporation and Subsidiaries
CONCENTRATION OF RISK AND FAIR VALUE OF RECEIVABLES
Transamerica's consumer and commercial lending operations engage in the
extension of credit to homeowners, electronics and appliance dealers, retail
recreational products dealers, computer stores and others. The risk associated
with that credit is subject to economic, competitive and other influences.
While a substantial portion of the risk is diversified, certain operations are
concentrated in one industry or geographic area.
Transamerica's finance receivables include $4 billion, net of unearned finance
charges and insurance premiums, of real estate secured loans, principally
first and second mortgages secured by residential properties of which
approximately 37% were located in California. The commercial finance
receivables portfolio represents lending arrangements with approximately
100,000 customers. At December 31, 1995, the portfolio included 15 customers
with individual balances in excess of $15 million. These accounts represented
11% of total commercial net finance receivables outstanding at December 31,
1995.
The estimated fair values of consumer finance receivables, substantially all
of which are fixed rate instalment loans collateralized by residential real
estate, and the fixed rate commercial finance loans are based on the
discounted value of the future cash flows expected to be received using
available secondary market prices for securities backed by similar loans after
adjustment for differences in loan characteristics. In the absence of readily
available market prices, the expected future cash flows are discounted at
effective rates currently offered by Transamerica for similar loans. For
variable rate commercial loans, which comprise the majority of the commercial
loan portfolio, the carrying amount represents a reasonable estimate of fair
value.
The carrying amounts and estimated fair values of the finance receivable
portfolio at December 31, 1995 and 1994 were as follows:
____________________________________________________________________________
(Amounts in millions) Carrying Estimated
Value Fair Value
DECEMBER 31, 1995
Fixed rate receivables -
Consumer $4,772.2 $5,409.0
Commercial 344.7 355.4
Variable rate receivables -
Commercial 2,641.2 2,641.2
________ ________
$7,758.1 $8,405.6
======== ========
DECEMBER 31, 1994
Fixed rate receivables -
Consumer $4,024.8 $4,500.1
Commercial 386.0 395.7
Variable rate receivables -
Commercial 2,560.1 2,560.1
________ ________
$6,970.9 $7,455.9
======== ========
Transamerica Corporation and Subsidiaries 73
E FINANCIAL INSTRUMENTS (continued)
FAIR VALUE OF INVESTMENT CONTRACTS
Investment-type contracts are included in life insurance policy liabilities.
Fair value of investment-type contracts is estimated using discounted cash
flow calculations, based on interest rates currently being offered for similar
contracts. The carrying amounts and estimated fair values of the liabilities
for investment-type contracts at December 31, 1995 and 1994 were as follows:
____________________________________________________________________________
(Amounts in millions) Carrying Estimated
Value Value Fair
DECEMBER 31, 1995
Single and flexible premium deferred annuities $ 8,080.1 $ 7,518.2
Single premium immediate annuities 4,124.0 4,677.7
Guaranteed investment contracts 2,958.9 2,998.0
Other deposit contracts 2,785.7 2,848.3
_________ _________
$17,948.7 $18,042.2
========= =========
DECEMBER 31, 1994
Single and flexible premium deferred annuities $ 7,425.8 $ 6,898.5
Single premium immediate annuities 3,735.7 3,510.8
Guaranteed investment contracts 2,382.2 2,336.7
Other deposit contracts 2,319.3 2,244.0
_________ _________
$15,863.0 $14,990.0
========= =========
DERIVATIVES
The operations of Transamerica are subject to risk of interest rate
fluctuations to the extent that there is a difference between the cash flows
from Transamerica's interest-earning assets and the cash flows related to its
liabilities that mature or are repriced in specified periods. In the normal
course of its operations, Transamerica hedges some of its interest rate risk
with derivative financial instruments. These derivatives comprise primarily
interest rate swap agreements, interest rate floor agreements, interest rate
cap agreements and options to enter into interest rate swap agreements
(swaptions). Transamerica does not use derivative financial instruments for
trading or speculative purposes, nor is Transamerica a party to any leveraged
derivative contracts. While Transamerica is exposed to credit risk in the
event of nonperformance by the other party, nonperformance is not anticipated
due to the credit rating of the counterparties. At December 31, 1995 and 1994,
all Transamerica's derivative financial instruments were with financial
institutions rated A or better by one or more of the major credit rating
agencies.
Asset and Liability Hedges
Interest rate floor agreements purchased by Transamerica provide for the
receipt of payments in the event interest rates fall below specified levels.
Interest rate floors are intended to mitigate Transamerica's risk of
reinvesting the cash flow it receives from calls and redemptions on its
investment portfolio at lower interest rates. Interest rate swap agreements
are intended to help Transamerica to more closely match the cash flow received
from its assets to the payments on its liabilities. Transamerica's interest
rate swap agreements generally provide that one party pays interest at a
floating rate in relation to movements in an underlying index and the other
party pays interest at a fixed rate.
At December 31, 1995 and 1994, the unamortized cost of the instruments that
hedge assets was $15.9 million and $18 million, and the fair value of these
asset hedges comprised gross obligations to counterparties of $9.7 million and
$5.4 million and gross benefits from counterparties of $38 million and $12.1
million. The net unrealized gain (loss) on derivative contracts that hedge
assets is included in stockholders' equity to offset the effect of changes to
the fair value of the underlying hedged asset. At December 31, 1995 and 1994
the net after tax unrealized gain (loss) included in stockholders' equity from
marking asset hedges to fair value was $8.1 million and $(7.3) million.
The unamortized cost of the liability hedges ($18.9 million at December 31,
1995 and $2.9 million at December 31, 1994) is amortized over the remaining
lives of the contracts, which range up to ten years. Transamerica's interest
rate cap agreements limit the amount of interest paid in the event interest
rates rise above specified levels. Transamerica pur-
74 Transamerica Corporation and Subsidiaries
chases swaptions, which help manage the risk of interest rate fluctuations by
providing an option to enter into an interest rate swap in the event of
unfavorable interest rate movements.
The net present value of the liability hedges offsets changes in the fair
value of the hedged liabilities, which are also carried at amortized cost. The
fair value of the liability hedges at December 31, 1995 and 1994 were gross
obligations of $32.9 million and $31.8 million and gross benefits of $84.5
million and $22.2 million resulting in a net benefit from counterparties of
$51.6 million at December 31, 1995 and a net obligation to counterparties of
$9.6 million at December 31, 1994.
At December 31, 1995 and 1994 asset hedges comprise:
_______________________________________________________________________________________________________________
(Dollar amounts in millions) Weighted Weighted
Notional Average Fixed Average Floating
Amount Interest Rate Interest Rate
1995
Interest rate swap agreements - Transamerica receives:
Floating rate interest income, pays fixed rate
interest expense $ 235.2 8.0% 6.3%
======== ==== ====
Fixed rate interest income, pays floating rate interest
expense $ 140.0 5.7% 5.9%
======== ==== ====
Floating rate interest income based on one index (6.3%)
and pays floating rate interest expense based on another
index (5.0%) $ 65.0
========
Interest rate floor agreements $ 560.5 6.5%
======== =====
1994
Interest rate swap agreements - Transamerica receives:
Floating rate interest income, pays fixed rate interest
expense $ 178.8 7.2% 6.7%
======== ==== ====
Fixed rate interest income, pays floating rate interest
expense $ 96.0 5.0% 6.2%
======== ==== ====
Interest rate floor agreements $ 560.5 6.5%
======== ====
At December 31, 1995 and 1994 liability hedges comprise:
_______________________________________________________________________________________________________________
(Dollar amounts in millions) Weighted Weighted
Notional Average Fixed Average Floating
Amount Interest Rate Interest Rate
1995
Interest rate swap agreements - Transamerica pays:
Floating rate interest expense, receives fixed rate
interest income $1,029.7 6.4% 5.9%
======== ==== ====
Fixed rate interest expense, receives floating rate
interest income $ 793.9 7.1% 5.8%
======== ==== ====
Floating rate interest expense based on one index (5.9%)
and receives floating rate interest income based on
another index (5.9%) $ 253.0
========
Swaptions $1,267.1 5.3%
======== ====
Interest rate cap agreements $ 250.0 6.5%
======== ====
Cross currency swaps and foreign interest rate swaps $ 144.5
========
1994
Interest rate swap agreements - Transamerica pays:
Floating rate interest expense, receives fixed rate
interest income $ 569.5 6.4% 6.2%
======== ==== ====
Fixed rate interest expense, receives floating rate
interest income $ 810.1 7.1% 5.9%
======== ==== ====
Floating rate interest expense based on one index (6.1%)
and receives floating rate interest income based on
another index (5.0%) $ 221.0
========
Swaptions $ 100.0 7.0%
======== ====
Interest rate cap agreements $ 100.0 5.0%
======== ====
Transamerica Corporation and Subsidiaries 75
F INCOME TAXES
The provision for income taxes on income from continuing operations
comprises:
____________________________________________________________________________
(Amounts in millions) 1995 1994 1993
Federal current $ 69.9 $215.4 $213.0
Federal deferred tax provision (benefit) 128.8 12.1 (110.7)
State 19.1 22.6 27.1
Foreign 16.7 12.3 11.2
______ ______ ______
$234.5 $262.4 $140.6
====== ====== ======
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the deferred tax assets and liabilities as of December 31, 1995 and 1994
are as follows:
____________________________________________________________________________
(Amounts in millions) 1995 1994
Deferred tax assets:
Allowance for losses $ 75.7 $ 106.9
Impairment of investments 57.3 49.6
Life insurance policy liabilities 585.3 584.6
Unrealized loss on marking investments to fair value 142.8
Loss and tax credits carryforward 24.4 19.0
Other 212.5 191.5
________ ________
955.2 1,094.4
Deferred tax liabilities:
Deferred policy acquisition costs 696.8 650.3
Accelerated depreciation 446.4 320.7
Unrealized gain on marking investments to fair value 581.5
Discount amortization on notes and loans payable 68.7 66.2
Other 53.3 63.8
________ ________
1,846.7 1,101.0
________ ________
Net deferred tax liability $ 891.5 $ 6.6
======== ========
The difference between federal income taxes on income from continuing
operations computed at the statutory rate and the provision for income taxes
is:
____________________________________________________________________________
(Amounts in millions) 1995 1994 1993
Federal income taxes at statutory rate $246.8 $241.6 $205.8
State income taxes 12.4 14.7 17.6
Prior year items (30.0) (94.2)
Effect of tax rate change on deferred tax
liability 8.4
Other 5.3 6.1 3.0
______ ______ ______
$234.5 $262.4 $140.6
====== ====== ======
Income tax payments totaled $148.3 million in 1995, $71.9 million in 1994 and
$135.5 million in 1993. The loss from discontinued operations includes an
income tax provision of $200,000 in 1994 and a tax benefit of $13 million in
1993.
76 Transamerica Corporation and Subsidiaries
G BUSINESS SEGMENT INFORMATION
____________________________________________________________________________
(Amounts in millions) 1995 1994 1993
REVENUES
Life insurance $ 3,866.5 $ 3,289.6 $ 3,026.3
Consumer lending 782.5 690.6 654.3
Commercial lending 423.7 384.3 370.7
Leasing 733.9 637.9 407.8
Real estate services** 285.8 367.5 363.6
Other* 8.7 (15.4) (9.4)
_________ _________ _________
$ 6,101.1 $ 5,354.5 $ 4,813.3
========= ========= =========
OPERATING PROFIT AS DEFINED BY
FINANCIAL ACCOUNTING STANDARD NO. 14****
Life insurance $ 458.4 $ 403.2 $ 380.6
Consumer lending 134.0 148.1 158.6
Commercial lending 111.8 72.0 (18.1)
Leasing 119.7 101.9 91.5
Real estate services** 78.5 137.5 151.5
_________ _________ _________
902.4 862.7 764.1
Unallocated interest, expenses and
investment transactions (176.4) (156.5) (160.4)
Interest expense for real estate services (21.0) (15.9) (15.6)
Income tax expense (234.5) (262.4) (140.6)
_________ _________ _________
Income from continuing operations $ 470.5 $ 427.9 $ 447.5
========= ========= =========
ASSETS
Life insurance $35,099.8 $28,967.1 $26,109.0
Consumer lending 5,308.3 4,475.4 3,946.1
Commercial lending 3,423.4 3,363.9 3,508.5
Leasing 3,477.8 3,184.2 1,697.0
Real estate services** 548.6 524.0 557.2
Other*** 86.6 (120.8) 232.7
_________ _________ _________
$47,944.5 $40,393.8 $36,050.5
========= ========= =========
ADDITIONS, AT COST, TO PROPERTY AND EQUIPMENT
Leasing $ 573.3 $ 1,525.3 $ 411.0
Other 80.9 70.2 64.4
_________ _________ _________
$ 654.2 $ 1,595.5 $ 475.4
========= ========= =========
DEPRECIATION
Leasing $ 236.6 $ 201.7 $ 105.9
Other 53.9 46.7 39.2
_________ _________ _________
$ 290.5 $ 248.4 $ 145.1
========= ========= =========
*Includes intercompany eliminations.
**In 1995 Transamerica completed the sale of its asset management
operations. At December 31, 1995, 1994 and 1993 and for the years then
ended, revenues of the asset management operations were $31.4 million,
$76.1 million and $40 million, operating profit was $26.8 million, $30.9
million and $0.4 million and assets were $0, $54.5 million and $108.1
million.
***Includes intercompany eliminations and in 1993 net assets of discontinued
operations.
****For income by segment as used for management purposes, see table included
on page 45 of the financial review.
Transamerica Corporation and Subsidiaries 77
H PENSION PLANS
Transamerica Corporation and its subsidiaries have a number of
noncontributory defined benefit pension plans covering substantially all
employees. Plans covering salaried employees provide pension benefits that are
based on the employee's compensation during the highest paid 60 consecutive
months during the 120 months before retirement. Transamerica's funding policy
is to make contributions as necessary to provide assets sufficient to meet its
obligation to plan members in accordance with the requirements of the Employee
Retirement Income Security Act of 1974.
A summary of the components of net periodic pension cost follows:
____________________________________________________________________________
(Amounts in millions) 1995 1994 1993
Service cost - benefits earned during the period $ 12.3 $ 15.4 $ 15.6
Interest cost on projected benefit obligation 50.9 46.4 43.6
Actual return (gain) loss on plan assets (259.2) 19.3 (145.7)
Deferral of current gains (losses) varying from
expected return 199.2 (71.7) 97.7
Amortization of prior service costs 3.4 5.7 5.0
______ ______ ______
Total pension cost $ 6.6 $ 15.1 $ 16.2
====== ====== ======
The following table sets forth the amounts recognized in the consolidated
statement of financial position for the pension plans:
____________________________________________________________________________
(Amounts in millions) 1995 1994
Actuarial present value of benefit obligations:
Vested benefit obligation* $687.1 $586.1
====== ======
Accumulated benefit obligation $695.4 $593.2
====== ======
Projected benefit obligation, including effects of
future salary increases $732.2 $650.1
Plan assets at fair value 991.5 746.8
______ ______
Excess of plan assets over projected benefit obligation $259.3 $ 96.7
====== ======
The excess of plan assets over projected benefit
obligation comprises:
Net pension liability $ (5.6) $ (3.6)
Unrecognized net gain arising since January 1, 1986 278.1 119.3
Unrecognized prior service cost (16.2) (21.8)
Unrecognized net obligation at January 1, 1986
net of amortization (6.0) (7.1)
Adjustment required to recognize minimum liability 9.0 9.9
______ ______
$259.3 $ 96.7
====== ======
*A portion of the vested benefit obligation is unconditionally guaranteed by
Transamerica Occidental Life Insurance Company, a wholly owned subsidiary of
Transamerica.
The projected benefit obligation was determined using a weighted average
discount rate of 7% (8% in 1994) and an assumed rate of compensation increase
of 5.50%. The expected long-term rate of return on plan assets was 8.25%
(8.75% in 1994 and 8% in 1993).
78 Transamerica Corporation and Subsidiaries
I RETAINED EARNINGS RESTRICTIONS
Under certain circumstances, the provisions of loan agreements and statutory
requirements place limitations on the amount of funds which can be remitted to
Transamerica by its consolidated subsidiaries. Of the net assets of
Transamerica's consolidated subsidiaries, as adjusted for intercompany account
balances, at December 31, 1995 approximately $4.8 billion is so restricted,
and $0.4 billion is free for remittance to Transamerica subject to investment
and operating requirements.
J DISCONTINUED OPERATIONS
In April 1994, Transamerica sold its remaining 21% ownership interest in
Sedgwick Group plc. Proceeds from the sale were $326.4 million and resulted in
no gain or loss. Transamerica's investment in Sedgwick and its share of
Sedgwick's operating results and related goodwill amortization have been
separated from those of Transamerica's continuing operations and are
classified as discontinued operations. Amounts included in loss from
discontinued operations related to the Sedgwick investment were a loss of
$700,000 in 1994 representing results through the date of sale and income of
$3 million in 1993.
In 1993, Transamerica sold its former property and casualty insurance
subsidiary, Transamerica Insurance Group. The net proceeds totaled $1 billion
in cash, resulting in a $125 million after tax loss on the sale of which $75
million was recorded in 1992 on an estimated basis and $50 million in 1993
upon completion of the final public offering.
K COMMITMENTS AND CONTINGENCIES
In connection with the sale of Transamerica Insurance Group, discussed in Note
J, a subsidiary of Transamerica assumed responsibility by means of a
reinsurance agreement for certain assumed treaty reinsurance business written
prior to 1986 for which it received assets which are expected to be sufficient
to fund the liquidation of the business. Transamerica has collateralized the
estimated ultimate obligation of approximately $380 million at December 31,
1995 by providing letters of credit aggregating $160 million and by placing
$224 million of its assets in a trust. Additionally Transamerica agreed to pay
up to $89.3 million in adverse loss development on certain paid environmental
losses and has provided for these losses.
Substantially all leases of Transamerica and its subsidiaries are operating
leases principally for the rental of real estate. Total rental expense
amounted to $82.7 million in 1995, $99.9 million in 1994 and $88.1 million in
1993.
Contingent liabilities arising from litigation, income taxes and other matters
are not expected to have a material effect on the consolidated financial
position or results of operations of Transamerica and its subsidiaries.
Transamerica Corporation and Subsidiaries 79
SUPPLEMENTARY FINANCIAL INFORMATION
__________________________________________________________________________________________________________________
SELECTED QUARTERLY FINANCIAL DATA
1995 March 31 June 30 September 30 December 31 1995 Total
Revenues $1,420.5 $1,581.0 $1,581.2 $1,518.4 $6,101.1
======== ======== ======== ======== ========
Income from continuing
operations:
Operating income before
investment transactions $94.3 $111.2 $122.3 $108.3 $436.1
Gain on investment
transactions 2.0 6.6 24.7 1.1 34.4
_____ ______ ______ ______ ______
Net income $96.3 $117.8 $147.0 $109.4 $470.5
===== ====== ====== ====== ======
Earnings per share of common
stock:
Income from continuing operations:
Operating income before
investment transactions $1.30 $1.54 $1.72 $1.52 $6.08
Gain on investment
transactions 0.03 0.09 0.36 0.02 0.50
_____ _____ _____ _____ _____
Net income $1.33 $1.63 $2.08 $1.54 $6.58
===== ===== ===== ===== =====
High and low sales prices
for common shares $ 59-49 1/2 $61 1/8-55 3/4 $ 71 1/2-58 $77 1/2-65 3/4 $77 1/2-49 1/2
__________________________________________________________________________________________________________________
1994 March 31 June 30 September 30 December 31 1994 Total
Revenues $1,235.4 $1,363.0 $1,371.3 $1,384.8 $5,354.5
======== ======== ======== ======== ========
Income from continuing
operations:
Operating income before
investment transactions $102.0 $102.6 $ 98.9 $109.4 $412.9
Gain on investment
transactions 1.7 3.1 6.0 4.2 15.0
______ ______ ______ ______ ______
Income from continuing
operations 103.7 105.7 104.9 113.6 427.9
Loss from discontinued
operations (0.7) (0.7)
______ ______ ______ ______ ______
Net income $103.0 $105.7 $104.9 $113.6 $427.2
====== ====== ====== ====== ======
Earnings per share of common
stock:
Income from continuing
operations:
Operating income before
investment transactions $1.27 $1.30 $1.31 $1.37 $5.25
Gain on investment
transactions 0.02 0.04 0.09 0.06 0.21
_____ _____ _____ _____ _____
Income from continuing
operations 1.29 1.34 1.40 1.43 5.46
Loss from discontinued
operations (0.01) (0.01)
_____ _____ _____ _____ _____
Net income $1.28 $1.34 $1.40 $1.43 $5.45
===== ===== ===== ===== =====
High and low sales prices
for common shares $57 5/8-49 1/4 $54 5/8-48 7/8 $53 5/8-49 1/2 $51 1/4-46 3/8 $57 5/8-46 3/8
<FN>
(Dollar amounts in millions except for share data)
Note A. On February 29, 1996 the closing sales price for Transamerica common
shares was $75 3/8 and there were 49,400 common stockholders of record.
Transamerica Corporation and Subsidiaries 81
SELECTED ELEVEN-YEAR FINANCIAL DATA
______________________________________________________________________________________________________
(Dollar amounts in millions
except for share data) 1995 1994 1993 1992 1991
Revenues $ 6,101.1 $ 5,354.5 $ 4,813.3 $ 4,550.9 $ 4,175.2
Income from continuing operations $ 470.5 $ 427.9 $ 447.5 $ 334.0 $ 5.6
Earnings per share of common
stock (Note A):
Income (loss) from continuing
operations $ 6.58 $ 5.46 $ 5.40 $ 4.00 $(0.08)
FINANCIAL POSITION
Total assets $47,944.5 $40,393.8 $36,050.5 $33,290.9 $31,133.6
Notes and loans payable:
Long-term debt $ 9,341.5 $ 7,489.1 $ 5,681.0 $ 6,510.5 $ 6,975.6
OTHER DATA
Per share of common stock:
Dividends declared (Note E) $ 2.00 $ 2.00 $ 2.00 $ 2.00 $ 1.98
<FN>
Note A. Earnings per share of common stock are based on the weighted average number of shares
outstanding in each year after deduction of preferred dividends and in 1994, premium and expenses
on the redemption of the Series D preferred stock.
Note E. Quarterly dividends per share were 50 cents in 1995 and 1994.
82 Transamerica Corporation and Subsidiaries
COMMON STOCK LISTED AND TRADED
Transamerica's common stock (symbol: TA) is listed and traded in the U.S. on
the New York and Pacific Stock Exchanges and outside the U.S. on the following
exchanges: Amsterdam, Basel, Frankfurt, Geneva, London, Paris, and Zurich.
88 Transamerica Corporation and Subsidiaries