Page 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended September 30, 1996
Commission File Number 1-2964
__________________
TRANSAMERICA CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-0932740
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
600 Montgomery Street
San Francisco, California 94111
(Address of principal executive offices)
(Zip Code)
(4l5) 983-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Number of shares of Common Stock, $1 par value, outstanding as of close
of business on October 31, 1996: 66,246,908 shares, after deducting 15,062,703
shares in treasury.
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TRANSAMERICA CORPORATION
FORM 10-Q
Part I. Financial Information
Item 1. Financial Statements.
The following unaudited consolidated financial statements of
Transamerica Corporation and Subsidiaries, for the periods ended September 30,
1996 and 1995, and the balance sheet as of December 31, 1995 do not include
complete financial information and should be read in conjunction with the
Consolidated Financial Statements filed with the Commission in Transamerica's
Annual Report on Form 10-K for the year ended December 31, 1995. The
financial information presented in the financial statements included in this
report reflects all adjustments, consisting only of normal recurring accruals,
which are, in the opinion of management, necessary for a fair statement of
results for the interim periods presented. Results for the interim periods are
not necessarily indicative of the results for the entire year for most of the
Corporation's businesses.
* * * * *
The consolidated ratios of earnings to fixed charges were computed by
dividing income before fixed charges and income taxes by the fixed charges.
Fixed charges consist of interest and debt expense and one-third of rent
expense, which approximates the interest factor.
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TRANSAMERICA CORPORATION AND SUBSIDIARIES
_____________
CONSOLIDATED BALANCE SHEET
Assets
September 30, December 31,
1996 1995
Investments, principally of life
insurance subsidiaries:
Fixed maturities $26,509.0 $26,076.1
Equity securities 909.6 703.2
Mortgage loans and real estate 730.8 594.5
Loans to life insurance policyholders 434.4 426.4
Short-term investments 79.9 226.5
_________ _________
28,663.7 28,026.7
Finance receivables 8,197.9 8,287.8
Less unearned fees ($265.1 in 1996
and $289.7 in 1995) and allowance for
losses 635.9 529.7
_________ _________
7,562.0 7,758.1
Cash and cash equivalents 97.1 67.6
Trade and other accounts receivable 2,145.7 3,130.1
Property and equipment, less accumulated
depreciation of $1,254.3 in 1996 and
$1,140.6 in 1995:
Land, buildings and equipment 430.6 411.5
Equipment held for lease 2,893.4 2,862.0
Deferred policy acquisition costs 2,200.1 1,974.2
Separate account assets 3,349.4 2,533.4
Goodwill, less accumulated amortization of
$140.7 in 1996 and $130.8 in 1995 392.6 402.4
Other assets 773.6 778.5
_________ _________
$48,508.2 $47,944.5
========= =========
(Amounts in millions)
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TRANSAMERICA CORPORATION AND SUBSIDIARIES
_________________
CONSOLIDATED BALANCE SHEET (Continued)
Liabilities and Stockholders' Equity
September 30, December 31,
1996 1995
Life insurance policy liabilities $28,426.8 $27,893.4
Notes and loans payable, principally of
finance subsidiaries, of which $1,793.7
in 1996 and $996.3 in 1995 matures
within one year 10,542.1 10,337.8
Accounts payable and other liabilities 1,651.2 1,672.4
Income taxes 669.4 1,007.6
Separate account liabilities 3,349.4 2,533.4
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, cumulative
Outstanding--Dutch Auction Rate Trans-
ferable Securities, 2,250 shares, at
liquidation preference of $100,000
per share, weighted average dividend
rate of 4.00% in 1996 and 4.66% in 1995 225.0 225.0
Outstanding--Series D, 180,091 shares, at
liquidation preference of $500 per share,
cumulative dividend rate of 8.5% 90.0 90.0
Preference Stock (without par value)--
5,000,000 shares authorized; none
outstanding
Common Stock ($1 par value):
Authorized--150,000,000 shares
Outstanding--64,702,304 shares in 1996
and 67,989,508 shares in 1995, after
deducting 15,036,158 shares and
11,748,954 shares in treasury 64.7 68.0
Retained earnings 2,836.2 2,866.0
Net unrealized gain on investments marked
to fair value 484.5 1,079.9
Foreign currency translation adjustments (31.1) (29.0)
_________ _________
3,669.3 4,299.9
_________ _________
$48,508.2 $47,944.5
========= =========
(Amounts in millions except for share data)
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TRANSAMERICA CORPORATION AND SUBSIDIARIES
_______________
CONSOLIDATED STATEMENT OF INCOME
Nine months ended Three months ended
September 30, September 30,
1996 1995 1996 1995
REVENUES
Investment income $1,566.9 $1,476.3 $ 530.3 $ 501.1
Life insurance premiums and related
income 1,350.8 1,424.7 508.2 494.1
Finance charges and other fees 873.2 867.5 286.1 296.0
Leasing revenues 526.6 520.5 178.9 177.5
Real estate and tax service revenues 191.0 134.7 71.5 49.8
Gain (loss) on investment transactions 28.0 51.3 (1.6) 38.0
Other 64.5 107.7 18.9 24.7
________ ________ ________ ________
4,601.0 4,582.7 1,592.3 1,581.2
EXPENSES
Life insurance benefits 2,076.1 2,169.4 751.1 754.3
Life insurance underwriting, acquisition
and other expenses 473.3 407.8 157.0 128.0
Interest and debt expense 527.2 535.4 174.7 181.3
Leasing operating and maintenance costs 275.5 269.3 92.5 90.0
Provision for losses on receivables 249.6 77.4 148.1 26.0
Other, including administrative and general
expenses 597.6 593.1 203.1 221.3
________ ________ ________ ________
4,199.3 4,052.4 1,526.5 1,400.9
________ ________ ________ ________
401.7 530.3 65.8 180.3
Income taxes (benefit) 66.6 169.2 (48.1) 33.3
________ ________ ________ ________
Net income $ 335.1 $ 361.1 $ 113.9 $ 147.0
======== ======== ======== ========
Earnings per share of common stock (based
on weighted average number of shares
outstanding for the nine months ended
September 30, 1996 and 1995 of 66,802,000
and 68,949,000 after deduction of
preferred dividends):
Income before gain on investment
transactions $4.55 $4.56 $1.68 $1.72
Gain (loss) on investment transactions 0.27 0.48 (0.01) 0.36
_____ _____ _____ _____
Net income $4.82 $5.04 $1.67 $2.08
===== ===== ===== =====
Dividends per share of common stock $1.50 $1.50 $0.50 $0.50
===== ===== ===== =====
Ratio of earnings to fixed charges 1.74 1.96
<FN>
(Dollar amounts in millions except for share data)
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TRANSAMERICA CORPORATION AND SUBSIDIARIES
____________
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
Nine months ended
September 30,
1996 1995
Balance at beginning of year $ 2,866.0 $ 2,557.4
Net income 335.1 361.1
Dividends on common stock (99.2) (103.1)
Dividends on preferred stock (12.8) (13.6)
Treasury stock purchased (252.9)
_________ _________
Balance at end of period $ 2,836.2 $ 2,801.8
========= =========
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine months ended
September 30,
1996 1995
OPERATING ACTIVITIES
Net income $ 335.1 $ 361.1
Adjustments to reconcile net income
to net cash provided by operating
activities:
Increase in life insurance policy
liabilities, excluding policyholder
balances on interest-sensitive policies 764.9 803.0
Amortization of policy acquisition costs 180.3 152.0
Policy acquisition costs deferred (278.5) (289.9)
Depreciation and amortization 237.2 223.8
Other 12.7 (254.9)
_________ _________
Net cash provided by operations 1,251.7 995.1
INVESTING ACTIVITIES
Finance receivables originated (13,656.7) (13,982.9)
Finance receivables collected 13,490.3 14,056.8
Purchase of investments (6,218.9) (4,365.1)
Sales and maturities of investments 4,431.7 2,568.8
Purchase of finance receivables and other
assets from ITT Consumer Financial
Corporation (1,027.3)
Other (225.6) (382.8)
_________ _________
Net cash used by investing activities (2,179.2) (3,132.5)
FINANCING ACTIVITIES
Proceeds from debt financing 4,588.7 6,510.1
Payment of notes and loans (4,397.2) (5,525.4)
Receipts from interest-sensitive policies
credited to policyholder account balances 5,183.6 4,003.8
Return of policyholder balances on
interest-sensitive policies (4,049.9) (2,629.9)
Treasury stock purchased (290.9) (119.7)
Other common stock transactions 34.7 36.3
Redemption of preferred stock (0.8)
Dividends (112.0) (116.7)
_________ _________
Net cash provided by financing activities 957.0 2,157.7
_________ _________
Increase in cash and cash equivalents 29.5 20.3
Cash and cash equivalents at beginning
of year 67.6 64.3
_________ _________
Cash and cash equivalents at end of period $ 97.1 $ 84.6
========= =========
(Amounts in millions)
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Consolidated Results
Transamerica's net income for the first nine months of 1996 decreased $26
million (7%), compared to the first nine months of 1995. Net income for the
first nine months of 1996 included net after tax gains from investment
transactions aggregating $18.2 million compared to $33.4 million in the first
nine months of 1995. In the first nine months of 1996 Transamerica's income
before gain on investment transactions decreased $10.8 million (3%). Income
before investment transactions for the 1996 period included $63.8 million in
benefits from the resolution of prior years' tax matters and $9.1 million from
the elimination of contingencies associated with the 1995 sale of assets in
Puerto Rico by the commercial lending operation and contingencies associated
with previously discontinued businesses. Offsetting these benefits was a $72
million after tax charge at the consumer lending operation primarily for
increased loss reserves. Income before investment transactions for the 1995
period included a $30 million tax benefit from the satisfactory resolution of
prior years' tax matters 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. Excluding these items in both years income before
investment transactions for the first nine months of 1996 decreased $300,000
(-%) due primarily to declines in consumer lending operating results and
higher unallocated interest and expenses, offset in part by improvements in
life insurance, real estate services, leasing and commercial lending operating
results.
Transamerica's net income for the third quarter of 1996 decreased $33.1
million (23%) compared to the third quarter of 1995. Net income for the third
quarter of 1996 included net after tax losses from investment transactions
aggregating $1 million compared to net after tax gains of $24.8 million in the
third quarter of 1995. In the third quarter of 1996 Transamerica's income
before investment transactions decreased $7.3 million (6%). Income before
investment transactions for the third quarter of 1996 and 1995 included each
of the items discussed in the preceding paragraph. Excluding these items,
income before investment transactions for the third quarter of 1996 increased
$3.2 million (3%) due primarily to increases in life insurance, real estate
services and commercial lending operating results, offset in part by a decline
in consumer lending operating results and higher unallocated interest and
expenses.
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Gain (loss) on investment transactions, pretax, included in consolidated
revenues, comprised (amounts in millions):
Nine months ended Three months ended
September 30, September 30,
1996 1995 1996 1995
Net gain on sale of investments $34.0 $74.5 $ 6.5 $51.9
Adjustment for impairment in value (5.5) (17.0) (4.4) (10.3)
Adjustment to amortization of
deferred policy acquisition
costs for realized investment
transactions (0.5) (6.2) (3.7) (3.6)
_____ _____ _____ _____
$28.0 $51.3 $(1.6) $38.0
===== ===== ===== =====
The amortization of deferred policy acquisition costs is adjusted due to
losses or gains realized on the sale of certain investments. The adjustment
to the amortization of deferred policy acquisition costs is included in
investment transactions as an offset to the related gains or losses.
Investment transactions also reflected downward adjustments primarily for
impairment in the value of certain nonperforming fixed maturity investments,
mortgage loans, real estate investments and real estate acquired through
foreclosure in the life insurance portfolio.
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REVENUES AND INCOME BY LINE OF BUSINESS
Nine months ended September 30, Third quarter
Revenues Income (Loss) Income (Loss)
1996 1995 1996 1995 1996 1995
(Amounts in millions)
Life insurance $2,901.8 $2,889.6 $236.4 $213.7 $ 84.1 $ 78.6
Gain (loss) on invest-
ment transactions 21.7 31.5 14.1 20.5 (2.4) 19.5
________ ________ ______ ______ ______ ______
Total life insurance 2,923.5 2,921.1 250.5 234.2 81.7 98.1
Consumer lending 579.2 578.1 (52.6) 64.8 (65.7) 24.2
Commercial lending 319.7 322.8 54.5 47.5 21.8 14.5
Leasing 548.6 543.2 59.7 55.8 22.0 20.7
Amortization of goodwill (9.8) (9.8) (3.3) (3.3)
________ ________ ______ ______ ______ ______
Total finance 1,447.5 1,444.1 51.8 158.3 (25.2) 56.1
Real estate services 238.9 159.2 36.5 15.5 15.2 6.8
Gain on investment
transactions 20.2 19.8 13.2 12.9 1.4 5.3
Amortization of goodwill (0.1) (0.1)
________ ________ ______ ______ ______ ______
Total real estate
services* 259.1 179.0 49.6 28.3 16.6 12.1
Unallocated interest
and other expenses* 19.3 56.1 (7.7) (59.7) 40.8 (19.3)
Consolidation elimina-
tions (48.4) (17.6) (9.1)
________ ________ ______ ______ ______ ______
Total revenues and
net income $4,601.0 $4,582.7 $335.1 $361.1 $113.9 $147.0
======== ======== ====== ====== ====== ======
<FN>
*Certain 1995 amounts have been reclassified between real estate services and unallocated
interest and other expenses to conform to the 1996 presentation.
Life Insurance
Net income from life insurance operations for the first nine months and
third quarter of 1996 increased $16.3 million (7%) and decreased $16.4 million
(17%) in comparison with the corresponding periods of 1995. Income before
investment transactions increased $22.7 million (11%) and $5.5 million (7%) in
the first nine months and third quarter of 1996 over the corresponding periods
of 1995.
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The life insurance and group pension lines experienced increases in
income before investment transactions in the first nine months and third
quarter of 1996 primarily as a result of increased policy related income due
to a larger base of interest-sensitive policies and maintained interest
spreads on a growing asset base.
Income before investment transactions for the reinsurance line increased
during the first nine months and third quarter of 1996 compared to the
corresponding 1995 periods primarily due to improved renewals and a favorable
shift in business mix.
The structured settlements line experienced an increase in income before
investment transactions in the first nine months of 1996 compared to the first
nine months of 1995 due primarily to decreased operating expenses and
increased interest margin experienced in the first six months of 1996 on a
growing asset base. For the third quarter of 1996, the structured
settlements line experienced a decrease in income before investment
transactions over the same period of 1995 as a result of decreased interest
spreads partially offset by decreased operating expenses.
The Canadian line's income before investment transactions for the first
nine months of 1996 improved from the same period of 1995 primarily due to
increased policy-related income on a larger base of interest-sensitive
policies, whereas the line's income before investment transactions for the
third quarter of 1996 was lower than for the third quarter of 1995 primarily
due to very good mortality experience in the third quarter of 1995.
The annuities line benefited from higher interest spreads and fee income
but experienced a decrease in income before investment transactions in the
first nine months and third quarter of 1996 compared to the corresponding
periods of 1995 primarily as a result of the relocation costs associated with
moving portions of the operation to Charlotte, North Carolina and Kansas City,
Missouri.
Income before investment transactions for corporate and other increased
during the first nine months of 1996 compared to the same period of 1995
primarily due to higher investment income from the amortization of discounts
on securities called. For the third quarter of 1996, income before
investment transactions for corporate and other decreased compared to the
third quarter of 1995 primarily as a result of a $4.4 million tax benefit
related to a favorable tax settlement in 1995.
Investment transactions for the first nine months and third quarter of
1996 included after tax gains of $18 million and $4.8 million realized on the
sale of investments compared to $35.6 million and $28.6 million in the first
nine months and third quarter of 1995. The $18 million after tax gain for
the first nine months of 1996 included an after tax gain of $9.1 million
resulting from a transaction with a special purpose subsidiary of Transamerica
Corporation wherein certain below investment grade bonds were exchanged for
collateralized higher rated bond obligations issued by the special purpose
subsidiary. This transaction had no effect on the consolidated financial
statements of Transamerica Corporation. Investment transactions in the first
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nine months and third quarter of 1996 reflected downward adjustments of $3.6
million after tax compared to $11.1 million and $6.8 million after tax in the
corresponding periods of 1995 primarily for impairment in the value of
certain below investment grade fixed maturity investments.
Net investment income increased $86.2 million (6%) and $27.1 million (5%)
for the first nine months and third quarter of 1996 over the first nine
months and third quarter of 1995 due to increased investments.
Premium and related income decreased $73.9 million (5%) for the first
nine months of 1996 from the corresponding 1995 period due primarily to
reduced premium income from the group pension line. Life insurance benefit
costs and expenses decreased $27.8 million (1%) for the first nine months of
1996 compared to the corresponding 1995 period principally due to a decrease
in benefit expense corresponding with the reduced premium income from the
group pension line experienced in the first six months of 1996. Premium and
related income increased $14.1 million (3%) for the third quarter of 1996 from
the third quarter of 1995 due to an increase in fees from interest-sensitive
policies. Life insurance benefit costs and expenses increased $25.6 million
(3%) for the third quarter of 1996 compared with the third quarter of 1995 due
primarily to increased amortization of deferred policy acquisition costs
attributable to the larger base of life insurance and annuities in force.
Cash provided by operations for the first nine months and third quarter
of 1996 increased $221.9 million (51%) and $104.7 million (107%) over the
first nine months and third quarter of 1995 principally due to increased
investment income from asset growth and the timing in the settlement of
certain receivables and payables, including reinsurance receivables and
payables. 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.
Consumer Lending
Consumer lending results for the first nine months of 1996 were a net
loss of $52.7 million compared to net income of $64.7 million for the first
nine months of 1995. Results for the third quarter of 1996 were a loss of
$65.8 million compared to net income of $24.2 million for the third quarter of
1995. Consumer lending results before the amortization of goodwill, for the
first nine months of 1996 were a loss of $52.6 million compared to income of
$64.8 million for the year ago period. Results before the amortization of
goodwill, for the third quarter of 1996 were a loss of $65.7 million compared
to income of $24.2 million in the third quarter of 1995. Consumer lending
results, before the amortization of goodwill, for the first nine months of
1996 decreased $117.4 million from the first nine months of 1995 due primarily
to higher provision for losses on receivables and higher operating expenses.
For the third quarter of 1996 income before the amortization of goodwill
decreased by $89.9 million from the third quarter of 1995 due primarily to
higher provision for losses on receivables, higher operating expenses and
lower revenues.
The company previously announced that management intends to accelerate
its efforts to reduce exposure to the non real estate loan segment of the
portfolio by further curtailing production in that segment, liquidating
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selected portions of that segment and intensifying collection efforts. During
the third quarter of 1996, the company adopted a plan to implement its
previously announced intent and expanded the plan to include certain real
estate secured portfolios. The plan covers $1.1 billion in receivables.
Management intends to pursue the collection and liquidation of these
receivables through a centralized collection unit that was established during
the third quarter of 1996. In addition, arrangements have been made through
existing relationships with outside third parties to assist in the
accelerated collection effort.
Revenues and average net receivables for the first nine months of 1996
were essentially unchanged from the comparable period of 1995. Revenue and
average receivables in the first quarter of 1996, which were higher than the
first quarter of 1995 due to the March 31, 1995 ITT acquisition, offset
declines in revenues and average receivables in the second and third quarters
of 1996. For the third quarter of 1996, revenues decreased $15.5 million (8%)
from the third quarter of 1995 reflecting a decrease in average net
receivables outstanding. The continuing runoff of the ITT portfolio, which
included delinquent accounts purchased at a discount, contributed to the
decrease in average net receivables along with the sales of two small non real
estate loan portfolios, and runoff in other portfolios which exceeded
originations.
Interest expense for the first nine months and third quarter of 1996
decreased $11.5 million (5%) and $9.3 million (11%) from the comparable year
ago periods reflecting reduced borrowing rates and, in the third quarter of
1996, a reduced level of borrowings. Other operating expenses for the first
nine months and third quarter of 1996 increased $32.1 million (19%) and $18.2
million (32%) over the same periods a year ago reflecting increased expenses
on disposition of repossessed assets; increased advertising costs; higher
contract service fees pertaining to customer service, collections and
consolidating processing functions into a centralized environment; and a $6.4
million write down of the company's computer delivery system.
The provision for losses on receivables for the first nine months and
third quarter of 1996 increased $176.8 million and $125.6 million compared to
the same periods a year ago primarily due to recent increased delinquencies
and increased credit losses as well as the adoption of the plan discussed
above. Net credit losses for the first nine months and third quarter of 1996
increased $46.1 million (73%) and $14.5 million (64%) over the comparable
periods of 1995. Losses on non real estate loans represented $16.1 million
and $1.7 million of the increase in the first nine months and third quarter of
1996 over the comparable periods of 1995 primarily reflecting increasing
levels of consumer bankruptcies. Increased losses from the ITT portfolio
represented $13.4 million and $2.1 million of the increases for the first nine
months and third quarter of 1996 compared to the same periods of 1995.
Excluding ITT, real estate losses represented $16.6 million and $10.7 million
of the increases in the first nine months and third quarter of 1996 over the
same periods of 1995 reflecting increased California foreclosure activity.
Net credit losses as a percentage of average net outstandings were 3.06% and
3.19% for the first nine months and third quarter of 1996 compared to 1.77%
and 1.78% for the same periods of 1995. In addition to higher credit losses,
the increase in the percentage for the third quarter of 1996 was affected by
lower outstanding receivables.
Page 13
Net consumer finance receivables at September 30, 1996 and December 31,
1995 were $4.6 billion and $4.9 billion of which $3.8 billion and $4 billion
were real estate secured loans, principally first and second mortgages secured
by residential properties. Approximately 35% of the real estate secured loans
were located in California. The decrease in net receivables was primarily
due to the continuing liquidation of the ITT portfolio, the sale of two small
non real estate portfolios and runoff in other portfolios which exceeded
originations.
Delinquent finance receivables, which are defined as receivables
contractually past due 60 days or more, were $176.3 million (3.72% of finance
receivables outstanding) at September 30, 1996 compared to $143.6 million
(2.79% of finance receivables outstanding) at December 31, 1995.
Approximately one third of the increase in the delinquency percentage was due
to the effects of lower outstanding receivables at September 30, 1996 with the
remainder caused by an increase in delinquencies of $32.7 million. Real
estate loan delinquency increased by $20.4 million and non real estate loan
delinquency increased by $12.3 million.
Total delinquent finance receivables were 3.72% of receivables
outstanding at September 30, 1996. At September 30, 1996 delinquencies on the
$1.1 billion of other receivables segregated for liquidation (discussed
above) were 7.39% of receivables outstanding while delinquencies in the
remaining core portfolio were 2.55% of receivables outstanding. Total
delinquencies were 2.79% of receivables outstanding at December 31, 1995.
Management has established an allowance for losses equal to 6.29% of net
consumer finance receivables outstanding at September 30, 1996 compared to
3.32% at December 31, 1995. This increase is in response to recent increased
delinquencies as well as the adoption of the plan to implement management's
previously announced intent to accelerate its efforts to reduce its exposure
to the non real estate loan segment discussed above. The September 30, 1996
allowance comprises 4.69% of real estate secured and other finance
receivables, and 11.3% of receivables segregated for liquidation.
Accrual of interest and other finance charges is suspended on accounts
that become contractually past due more than 29 days. At September 30, 1996
and December 31, 1995 such nonearning net receivables amounted to $357.9
million and $308 million. Payments received on accounts while in nonaccrual
status are applied to principal and interest income according to the terms of
the loan.
When foreclosure proceedings begin on an account secured by real estate,
the account is moved from finance receivables to other assets and is written
down to the lower of the account balance or the fair value of the collateral
less estimated selling costs. Accounts in foreclosure and repossessed assets
held for sale totaled $209.8 million at September 30, 1996 of which 58%
pertained to California. Accounts in foreclosure and repossessed assets held
for sale totaled $207.3 million at December 31, 1995, of which 69% pertained
to California.
Since any change in the trends in the level of receivables, credit
losses, delinquencies, accounts in foreclosure, repossessed assets and results
Page 14
of operations may be impacted by factors such as economic conditions,
competition, and for accounts secured by real estate, the state of the real
estate market, particularly in California, the extent and timing of any change
in these trends is uncertain.
Commercial Lending
Commercial lending net income for the first nine months and third quarter
of 1996 was $46.3 million and $19.1 million compared to $39.3 million and
$11.7 million for the corresponding periods of 1995. Commercial lending
income, before the amortization of goodwill, was $54.5 million and $21.8
million in the first nine months and third quarter of 1996 compared to $47.5
million and $14.5 million in the same periods of 1995.
Commercial lending income, before the amortization of goodwill, for the
first nine months and third quarter of 1996 increased $7 million (15%) and
$7.3 million (51%) from 1995's first nine months and third quarter. Third
quarter 1996 operating results included a $4.5 million benefit resulting
primarily from the resolution of previously disputed issues relating to the
1995 sale of Puerto Rican assets. Results for the first nine months of 1995
included a $4.8 million after tax gain on the sale of a portfolio of consumer
rediscount loans in the first quarter, $2 million of which was included in
third quarter operating income when certain seller contingencies expired.
Excluding the items discussed above, commercial lending income before the
amortization of goodwill, for the first nine months and third quarter of 1996
increased $7.3 million (17%) and $4.8 million (39%) primarily due to increased
margins. Margins were enhanced during the first nine months and third quarter
of 1996 due to the higher spread between the indices at which the commercial
lending operation loaned to customers versus the indices at which funds were
borrowed and higher average receivables outstanding due to growth in each of
the core businesses.
Revenues in the first nine months of 1996 decreased $3.1 million (1%) and
increased $3 million (3%) for the third quarter versus the corresponding 1995
periods. The decrease for the nine month period was primarily attributable to
the gain on sale of the rediscount loan portfolio in 1995. Higher average net
receivables outstanding contributed to increased revenues particularly in the
third quarter.
Interest expense decreased $5.7 million (5%) and $200,000 (1%) in the
first nine months and third quarter of 1996 from the comparable 1995 periods
due to a lower average interest rate on borrowings offset in part by higher
average debt. Operating expenses for the first nine months and third quarter
of 1996 decreased $1.7 million (1%) and $3.5 million (8%) from the comparable
1995 periods. The decrease was primarily a result of the third quarter 1996
reversal of reserves related to the resolution of previously disputed issues
associated with the 1995 sale of the Puerto Rican assets. The provision for
losses on receivables decreased $4.5 million (36%) and $3.5 million (93%) from
the first nine months and third quarter of 1995. The decreases were mainly
the result of the reversal of reserves no longer required due to the
collection of previously reserved receivables in the liquidating portfolio.
Credit losses, net of recoveries, on an annualized basis as a percentage of
average commercial finance receivables outstanding, net of unearned finance
charges, were 0.07% and 0.03% for the first nine months and third quarter of
1996 compared to 0.28% and 0.17% for the comparable periods of 1995. The
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decline for the nine month period was primarily due to the relatively higher
level of credit losses in 1995 related to the consumer rediscount portfolio
which was sold during the first quarter of 1995.
Net commercial finance receivables outstanding increased $291.2 million
(10%) from December 31, 1995. Receivables growth was experienced in each of
the core businesses. The core businesses comprise business credit, inventory
finance and insurance premium finance. Business credit receivables grew $177
million primarily due to growth in the equipment finance and leasing
operation. Inventory finance experienced an increase of $90 million primarily
due to increased penetration of existing markets through joint venture
alliances and other activities. The insurance premium finance unit grew $26
million due to international expansion in Europe. Management has established
an allowance for losses equal to 2.47% of net commercial finance receivables
outstanding as of September 30, 1996 compared to 2.51% at December 31, 1995.
Delinquent receivables are defined as the instalment balance for
inventory finance and asset based lending receivables and the outstanding loan
balance for all other receivables over 60 days past due. Delinquent
receivables were $17.6 million (0.51% of receivables outstanding) at September
30, 1996 compared to $11.1 million (0.35% of receivables outstanding) at
December 31, 1995.
Nonearning receivables are defined as balances from borrowers that are
over 90 days delinquent or at such earlier time as full collectibility becomes
doubtful. Accrual of finance charges is suspended on nonearning receivables
until such time as past due accounts are collected. Nonearning receivables
were $23.6 million (0.68% of receivables outstanding) at September 30, 1996
compared to $18 million (0.57% of receivables outstanding) at December 31,
1995. The increase in delinquent and nonearning receivables was primarily
attributable to a single account in the insurance premium finance portfolio.
Leasing
Leasing net income for the first nine months and third quarter of 1996
was $58.1 million and $21.5 million compared to $54.2 million and $20.2
million for the first nine months and third quarter of 1995. Leasing income,
before the amortization of goodwill, was $59.7 million and $22 million in the
first nine months and third quarter of 1996 compared to $55.8 million and
$20.7 million in the corresponding periods of 1995.
Leasing income, before the amortization of goodwill, for the first nine
months and third quarter of 1996 increased $3.9 million (7%) and $1.3 million
(7%) over the first nine months and third quarter of 1995. These increases
were primarily due to a larger portfolio of finance leases, and lower
ownership and operating costs for the rail trailer business, partially offset
by lower chassis earnings resulting from lower rental and utilization rates.
Revenue for the first nine months of 1996 increased $5.4 million (1%)
over the corresponding 1995 period, primarily due to a larger on-hire fleet of
refrigerated and tank containers, and European trailers and a larger portfolio
of finance leases. Partially offsetting these revenue increases were lower
revenues in standard container resulting from lower utilization and rental
rates. Rail trailers also reported lower revenues due to lower gains on the
sale of equipment.
Page 16
Revenue for the third quarter of 1996 decreased $600,000 (-%) from the
1995 third quarter due to lower utilization and rental rates in standard
containers, partially offset by increased revenue from a larger on-hire fleet
of refrigerated containers and European trailers and a larger finance lease
portfolio.
Expenses for the first nine months of 1996 increased $6.9 million (2%)
over the corresponding 1995 period. Expenses for the third quarter of 1996
decreased $300,000 from the third quarter of 1995. The nine month increase
was mainly due to larger refrigerated container, chassis and European trailer
fleets, partially offset by a smaller rail trailer fleet.
The combined utilization of standard containers, refrigerated containers,
domestic containers, tank containers and chassis averaged 81% for both the
first nine months and third quarter of 1996 compared to 86% and 85% for the
first nine months and third quarter of 1995. Rail trailer utilization was 80%
and 81% for the first nine months and third quarter of 1996 compared to 75%
and 74% for the first nine months and third quarter of 1995. European
trailer utilization was 92% for the first nine months and third quarter of
1996 compared to 95% and 94% for the first nine months and third quarter of
1995.
Real Estate Services
Real estate services comprise Transamerica's real estate tax, investment
management and other related services.
Net income for the first nine months and third quarter of 1996 increased
$21.3 million (75%) and $4.5 million (36%) over the comparable periods of
1995. Net income before investment transactions for the first nine months
and third quarter of 1996 increased $21 million (135%) and $8.4 million
(119%) over the comparable periods of 1995 primarily due to an increase in
real estate tax service revenues caused by higher mortgage refinancings and
home sales and gains totaling $5.3 million on the sales of three real estate
investment properties.
Revenues for the first nine months and third quarter of 1996 increased
$80.1 million (45%) and $26.9 million (41%) over the comparable periods of
1995 as a result of increased business at the real estate tax service
operation and higher investment income.
Unallocated Interest and Expenses
Unallocated investment transactions, interest and expenses, after related
income taxes, for the first nine months and third quarter of 1996 included a
$63.8 million benefit from the satisfactory resolution of prior year tax
issues and a $4.6 million benefit from the resolution of issues associated
with previously discontinued operations. In the first nine months and third
quarter of 1995 unallocated investment transactions, interest and expenses
included a $25.6 million benefit from the satisfactory resolution of prior
years' tax matters and 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 and, for the nine month period, $6.6
million of after tax income from Criterion Investment Management Company which
Page 17
was sold on May 2, 1995. Excluding these items, unallocated interest and
expenses increased $5.6 million (8%) and $4.2 million (18%) in the first nine
months and third quarter of 1996 over the comparable 1995 periods primarily
due to increased interest expense as a result of higher outstanding debt and a
lower tax benefit as a result of the Corporation's normal method of allocating
income taxes to the subsidiaries.
Corporate Liquidity and Capital Requirements
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, purchase shares of its
common stock, 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, creation of shareholder value
and capital needs. 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.
On October 16, 1996 Transamerica announced that it had completed the
acquisition of Trans Ocean Ltd., a closely held container leasing company, in
exchange for 1,571,000 shares ($112.7 million) of Transamerica common stock
of which 337,000 shares ($24.2 million) remains in escrow pending resolution
of certain items.
On July 25, 1996, Transamerica announced that its board of directors had
authorized additional purchases of up to 2 million shares of the company's
common stock. As a result of this and previously announced share purchase
programs, during the first nine months and third quarter of 1996 Transamerica
purchased 3,830,400 shares and 1,733,000 shares for $284.2 million and $121.1
million. At September 30, 1996, there were 724,600 shares of the company's
common stock remaining to be purchased under the share purchase program
announced in July.
Investment Portfolio
Transamerica, principally through its life insurance subsidiaries,
maintains an investment portfolio aggregating $28.7 billion at September 30,
1996, of which $26.5 billion was invested in fixed maturities. At September
30, 1996, 95.8% of the fixed maturities was rated as "investment grade" with
an additional 3% in the BB category or its equivalent. The amortized cost of
fixed maturities was $25.8 billion resulting in a net unrealized gain
position, before the effect of income taxes and adjustments to deferred
acquisition costs and policy liabilities, of $666 million at September 30,
1996. Fixed maturity investments are generally held for long-term investment
and used primarily to support life insurance policy liabilities. The
amortized cost of delinquent below investment grade securities, before
provision for impairment in value, was $2.1 million at September 30, 1996
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compared to $6.9 million at December 31, 1995. Adjustment for impairment in
value has been made to reduce the amortized cost of certain fixed maturity
investments by $66.4 million at September 30, 1996 and $71.4 million at
December 31, 1995.
In addition to the investments in fixed maturities, $730.8 million (2.5%
of the investment portfolio), net of allowance for losses of $46.5 million,
was invested in mortgage loans and real estate including $673 million in
commercial mortgage loans, $79.8 million in real estate investments,
$9.9 million in foreclosed real estate and $14.7 million in residential
mortgage loans. Problem loans, defined as restructured loans yielding less
than 8% and delinquent loans, totaled $9.4 million at September 30, 1996 and
$3.9 million at December 31, 1995. Allowances for possible losses of
$46.5 million at September 30, 1995 and $48.8 million at December 31, 1995
have been established to cover possible losses from mortgage loans and real
estate investments.
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, warrants and options to enter into interest rate swap
agreements (swaptions).
Derivative financial instruments with a notional amount of $9,677 million
at September 30, 1996 and $1,000.7 million at December 31, 1995 and
designated as hedges of Transamerica's investment portfolio were outstanding.
In addition, derivative financial instruments with a notional amount of
$3,349 million at September 30, 1996 and $3,738.2 million at December 31,
1995 and designated as hedges of Transamerica's liabilities were outstanding.
The change in the notional amount outstanding of both asset and liability
hedges reflects additional derivative contracts entered into and redesignation
of certain of Transamerica's outstanding derivative contracts from liability
hedges to asset hedges to better reflect for accounting purposes the match of
the derivative and the underlying hedged risk.
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 September 30, 1996, the
derivative financial instruments discussed above were issued by financial
institutions rated A or better by one or more of the major credit rating
agencies. The fair value of Transamerica's derivative financial instruments
at September 30, 1996 and December 31, 1995 was a net benefit of $78.2 million
and $79.9 million comprising agreements with aggregate gross benefits of
$128.1 million and $122.5 million and agreements with aggregate gross
obligations of $49.9 million and $42.6 million.
Page 19
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
11 Statement Re: Computation of Per Share Earnings.
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule.
(b) Reports on Form 8-K. None.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRANSAMERICA CORPORATION
(Registrant)
Burton E. Broome
Vice President and Controller
(Chief Accounting Officer)
Date: November 8, 1996