Page 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended March 31, 1998
Commission File Number 1-2964
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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)
(415) 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 April 30, 1998: 62,937,470 shares.
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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 March 31, 1998
and 1997, and the balance sheet as of December 31, 1997 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, 1997. 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.
* * * * * * *
Earnings per share is calculated by dividing income available to common
stockholders by the average number of common, and for diluted earnings per share
common stock equivalent, shares outstanding. Basic earnings per share is based
upon the weighted average number of common shares outstanding during the period
of 63,050,000 and 66,170,000 at March 31, 1998 and 1997. Diluted earnings per
share is based upon the weighted average number of common shares outstanding
during the period plus the effect of common stock options outstanding, using the
treasury stock method, of 65,568,000 and 68,063,000 at March 31, 1998 and 1997.
The computations for 1997 are based on income after deduction of preferred
dividends of $2.6 million and the premium on redemption of preferred stock of
$3.8 million.
Effective January 1, 1998, Transamerica adopted the provisions of
American Institute of Certified Public Accountants Statement of Position No.
98-1 which requires, among other things, that payroll costs incurred in the
development of computer software systems be capitalized. The effect of adoption
was to increase first quarter consolidated income by $1.8 million ($0.03 diluted
earnings per share).
The consolidated ratios of earnings to fixed charges were computed by
dividing income from continuing operations 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
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CONSOLIDATED BALANCE SHEET
Assets
March 31, December 31,
1998 1997
Investments, principally of life insurance subsidiaries:
Fixed maturities $ 29,416.8 $ 29,210.8
Equity securities 1,667.0 1,607.5
Mortgage loans and real estate 764.2 750.2
Loans to life insurance policyholders 450.2 451.0
Short-term investments 291.9 336.0
----------- -----------
32,590.1 32,355.5
Finance receivables 5,217.2 4,333.4
Less unearned fees ($378.8 in 1998 and
$340.8 in 1997) and allowance for losses 489.7 430.1
----------- -----------
4,727.5 3,903.3
Cash and cash equivalents 112.6 132.9
Trade and other accounts receivable 2,459.9 2,165.8
Net assets of discontinued operations 50.4 40.1
Property and equipment, less accumulated
depreciation of $1,437.3 in 1998 and
$1,465.9 in 1997:
Land, buildings and equipment 405.3 395.4
Equipment held for lease 2,977.5 2,996.5
Deferred policy acquisition costs 2,152.8 2,102.6
Separate account assets 7,038.8 5,494.7
Goodwill, less accumulated amortization of
$159.6 in 1998 and $156.2 in 1997 386.9 423.0
Assets held for sale 75.5 377.8
Other assets 655.6 785.3
----------- -----------
$ 53,632.9 $ 51,172.9
=========== ===========
(Amounts in millions)
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TRANSAMERICA CORPORATION AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEET (Continued)
Liabilities and Stockholders' Equity
March 31, December 31,
1998 1997
Life insurance policy liabilities $ 30,511.1 $ 30,141.9
Notes and loans payable, principally of
finance subsidiaries, of which $858.1
in 1998 and $998.6 in 1997 matures
within one year 6,619.7 6,235.3
Accounts payable and other liabilities 1,981.1 2,096.9
Income taxes 1,683.4 1,607.8
Separate account liabilities 7,038.8 5,494.7
Minority interest in preferred securities
of affiliates 715.0 715.0
Stockholders' equity:
Preferred Stock ($100 par value):
Preference Stock (without par value)--
5,000,000 shares authorized; none
outstanding
Common Stock ($1 par value):
Authorized--150,000,000 shares
Outstanding -- 63,165,194 shares in 1998
and 62,904,108 shares in 1997,
after deducting 16,573,268 shares
and 16,834,354 shares in treasury 63.2 62.9
Retained earnings 3,423.2 3,330.8
Components of other cumulative
comprehensive income:
Net unrealized gain from investments
marked to fair value 1,644.3 1,533.6
Foreign currency translation adjustments (46.9) (46.0)
----------- -----------
5,083.8 4,881.3
----------- -----------
$ 53,632.9 $ 51,172.9
=========== ===========
(Amounts in millions except for share data)
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TRANSAMERICA CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENT OF INCOME
Three months ended
March 31,
1998 1997
REVENUES
Investment income $ 564.5 $ 533.0
Life insurance premiums and related income 456.9 442.1
Finance charges and other fees 167.1 123.3
Leasing revenues 185.7 188.9
Real estate and tax service revenues 74.6 56.2
Gain on investment transactions 84.3 8.2
Other 25.8 20.3
----------- -----------
1,558.9 1,372.0
EXPENSES
Life insurance benefits 724.4 680.3
Life insurance underwriting, acquisition
and other expenses 178.0 199.8
Interest and debt expense 104.9 101.4
Leasing operating and maintenance costs 111.9 114.0
Provision for losses on receivables 13.6 3.6
Other, including administrative and general
expenses 197.2 155.8
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1,330.0 1,254.9
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228.9 117.1
Income taxes 75.2 36.1
----------- -----------
Income from continuing operations
and net income $ 153.7 $ 81.0
=========== ===========
Basic earnings per share of common stock:
Income before gain on investment
transactions $ 1.57 $ 1.05
Gain on investment transactions 0.87 0.08
------------ ------------
Income from continuing operations
and net income $ 2.44 $ 1.13
============ ============
Diluted earnings per share of common stock:
Income before gain on investment
transactions $ 1.51 $ 1.02
Gain on investment transactions 0.83 0.08
------------ ------------
Income from continuing operations
and net income $ 2.34 $ 1.10
============ ============
Dividends per share of common stock $ 0.50 $ 0.50
============ ============
Ratio of earnings to fixed charges 2.79 1.97
============ ============
(Amounts in millions except for share data)
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TRANSAMERICA CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENT OF CASH FLOWS
Three months ended March 31,
1998 1997
OPERATING ACTIVITIES
Income from continuing operations $ 153.7 $ 81.0
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 449.2 126.5
Amortization of policy acquisition costs 75.6 47.4
Policy acquisition costs deferred (133.8) (102.3)
Depreciation and amortization 83.4 84.2
Other (294.3) 108.6
---------- ----------
Net cash provided by operations 333.8 345.4
INVESTING ACTIVITIES
Finance receivables originated (4,791.9) (4,234.4)
Finance receivables collected 4,582.7 3,851.7
Purchase of investments (2,119.8) (2,058.1)
Sales and maturities of investments 2,166.5 1,540.3
Proceeds from the portfolio sales of and cash
transactions with discontinued operations (7.2) 405.3
Purchase of finance receivables from
Whirlpool Financial Corporation (351.9)
Other (76.3) (86.4)
---------- ----------
Net cash used by investing activities (597.9) (581.6)
FINANCING ACTIVITIES
Proceeds from debt financing 957.1 2,415.5
Payment of notes and loans (578.2) (2,453.2)
Receipts from interest-sensitive policies
credited to policyholder account balances 1,705.7 1,505.3
Return of policyholder balances on
interest-sensitive policies (1,779.8) (1,148.0)
Treasury stock purchased (79.4) (13.2)
Redemption of preferred stock (318.9)
Proceeds from issuance of common stock 50.0 38.3
Dividends (31.6) (35.8)
---------- ----------
Net cash provided (used) by financing activities 243.8 (10.0)
---------- ----------
Decrease in cash and cash
equivalents (20.3) (246.2)
Cash and cash equivalents at beginning
of year 132.9 440.9
---------- ----------
Cash and cash equivalents at end of period $ 112.6 $ 194.7
========== ==========
(Amounts in millions)
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TRANSAMERICA CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENT OF RETAINED EARNINGS
Three months ended March 31,
1998 1997
Balance at beginning of year $ 3,330.8 $ 2,920.2
Net income 153.7 81.0
Dividends on common stock (31.6) (33.2)
Dividends on preferred stock (2.6)
Treasury stock purchased (29.7)
---------- ----------
Balance at end of period $ 3,423.2 $ 2,965.4
========== ==========
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Consolidated Results
Transamerica's net income for the first quarter of 1998 increased $72.7
million (90%), compared to the first quarter of 1997.
Net income for the first quarter of 1998 included net after tax gains
from investment transactions aggregating $54.7 million compared to $5.3 million
in the first quarter of 1997. Income before investment transactions for the
first quarter of 1997 included a $20.1 million after tax provision for a legal
settlement recorded by the life insurance business. Excluding this provision,
income before investment transactions increased $3.1 million (3%) due primarily
to increases in life insurance and real estate operating results and lower
unallocated interest and other expenses. Partially offsetting these favorable
variances were decreased commercial lending and leasing operating results.
Gain on investment transactions, pretax, included in consolidated
revenues, comprised (amounts in millions):
Three months ended March 31,
1998 1997
Net gain (loss) on sale of investments $ 93.0 $ (2.3)
Adjustment for impairment in value (7.9) (2.0)
Adjustment to amortization of
deferred policy acquisition
costs for realized investment
transactions (0.8) 12.5
---------- ----------
$ 84.3 $ 8.2
========== ==========
The amortization of deferred policy acquisition costs is adjusted due
to gains or losses 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.
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REVENUES AND INCOME BY LINE OF BUSINESS
Three months ended March 31
Revenues Income
1998 1997 1998 1997
(Amounts in millions)
Life insurance revenue and income
before investment transactions $ 1,014.6 $ 971.5 $ 77.9 $ 62.9
Commercial lending 164.6 117.4 18.0 21.2
Leasing 203.2 207.7 15.6 15.8
Amortization of goodwill (3.4) (3.2)
---------- ---------- --------- ---------
Total finance 367.8 325.1 30.2 33.8
Real estate services revenue and income
before investment transactions 98.7 76.7 18.4 8.1
Unallocated interest and
other expenses 18.5 15.6 (27.5) (29.1)
Consolidation eliminations (25.0) (25.1)
---------- ---------- --------- ---------
Revenues and income from continuing
operations before investment
transactions 1,474.6 1,363.8 99.0 75.7
Gains on investment transactions:
Life insurance 26.2 5.8 17.1 3.7
Real estate 58.1 2.4 37.6 1.6
---------- ---------- --------- ---------
Total investment gains 84.3 8.2 54.7 5.3
---------- ---------- --------- ---------
Total revenues and income from
continuing operations $ 1,558.9 $ 1,372.0 $ 153.7 $ 81.0
========== ========== ========= =========
Life insurance
In the first quarter of 1998 the life insurance operation reported net
income of $95 million compared to $66.6 million in the first quarter of 1997.
Net income included after tax gains from investment transactions of $17.1
million in the first quarter of 1998 compared to $3.7 million in the first
quarter of 1997. First quarter income before investment transactions for the
life insurance operation was $77.9 million, $15 million (24%) higher than the
$62.9 million income before investment transactions earned in the first quarter
of 1997. The 1997 first quarter results were unfavorably affected by a $20.1
million after tax charge for a legal settlement recorded in the life insurance
division.
The life insurance division's 1998 first quarter operating income
before investment transactions was $20.8 million compared to $0.5 million in the
first quarter of 1997. The 1997 period included the $20.1 million after tax
charge discussed above.
Annuities' income before investment transactions of $11.9 million was
$2.4 million (17%) lower than the comparable period in 1997 due to lower
interest margin and lower fee income. In addition, first quarter 1998 operating
expenses were higher than the 1997 period due to increased marketing and
distribution expenses associated with certain new product introductions in 1998.
The asset management group's (including structured settlements) first
quarter results before investment transactions were $16.4 million, $3.1 million
(23%) better than the first quarter of 1997. This was primarily due to favorable
interest spreads and increased fee income resulting from growth in the line's
asset management business.
Within the reinsurance line, higher loss claims on accident and health
business during the first quarter of 1998 resulted in $4.3 million (26%) lower
earnings before investment transactions than the first quarter of last year.
Page 9
The Canadian line's performance for the first quarter was about equal
to the comparable 1997 quarter. Although net investment income in the first
quarter of 1998 was higher than the first quarter of 1997, higher death claims
and increased reserves due to growth in inforce business offset the revenue
increase.
For the corporate line, income before investment transactions in the
first quarter of 1998 of $8.7 million was $1.6 million (15%) lower than the
comparable 1997 period due primarily to lower investment income.
Life insurance operations gains on investment transactions increased
$13.4 million for the first quarter of 1998 compared to first quarter of 1997.
The $17.1 million after tax gain for the first quarter included a $22.8 million
gain on disposition of investments compared to a loss of $3 million in the first
quarter of 1997. In the 1998 and 1997 first quarters, downward adjustments of
$5.2 million and $1.3 million were made for impairment in the value of fixed
maturity investments. An adjustment to the amortization of policy acquisition
costs of $500,000 after tax further reduced the net investment gain for the
first quarter of 1998 compared to a favorable adjustment of $8.1 million in the
same period in 1997.
Total life insurance net investment income of $557.6 million increased
$28.2 million (5%) for the first quarter of 1998 over the first quarter of 1997
primarily due to the increased level of invested assets.
Premiums and related income for the life insurance operation increased
$14.9 million (3%) for the first quarter of 1998 over the first quarter of 1997.
The growth was primarily due to increases in traditional life premiums, fees
from interest-sensitive policies and increased fee income from group pension and
annuities. The life insurance operations benefits paid or provided increased
$27.8 million (4%) primarily due to increased interest credited on
interest-sensitive policies and the larger base of life insurance in force.
Cash provided by life insurance operations for the first quarter of 1998
decreased $53.1 million (20%) compared with the same period of 1997 primarily
due to the timing of 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 operational
requirements, with remaining funds being invested in longer term securities.
Commercial Lending
Commercial lending net income for the first quarter of 1998 was $15.1
million compared to $18.5 million for the first quarter of 1997. Income, before
the amortization of goodwill, for the first quarter of 1998 was $18 million, a
decrease of $3.2 million (15%) from the first quarter of 1997. Operating results
for the 1998 period included a $3.2 million operating loss from the retail
businesses (which consist of the credit card portfolio acquired from Whirlpool
Financial Corporation in 1998 and the retained residential mortgage lending
businesses), a $2.1 million after tax charge for losses and the restructuring of
the insurance premium finance business, and a $2.1 million after tax gain on the
sale and securitization of $300 million of floorplan receivables. The first
quarter of 1997 operating results included a $3.2 million tax benefit from the
resolution of prior years' tax matters. A higher net margin due to higher
average receivables owned and serviced in the first quarter of 1998 and a $3
million tax benefit from the resolution of prior year tax matters were offset in
part by higher operating expenses and a higher provision for losses on
receivables.
Revenues in the first quarter of 1998 increased $47.2 million (40%)
over the first quarter of 1997 principally as a result of growth in average net
receivables outstanding owned and serviced.
Interest expense increased $7.5 million (18%) in the first quarter of 1998
due to a higher average interest rate on borrowings and to higher average
outstanding debt as a result of growth in average net receivables. Operating
expenses rose $34.7 million (80%) in the first quarter of 1998 compared to the
first quarter of 1997 mainly as a result of costs related to the integration of
the Whirlpool Financial operations and higher business volume. The provision for
losses on receivables increased $10 million due primarily to higher credit
losses relating to the retail portfolio and additional provisions for the
insurance premium finance portfolio. Credit losses, net of recoveries, on an
annualized basis as a percentage of average net receivables outstanding were
0.57% for the first quarter of 1998 compared to 0.17% for the first quarter of
1997.
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Net commercial finance receivables outstanding at March 31, 1998
increased $858.6 million (24%) from December 31, 1997. The increase in
receivables was largely a result of a decision not to sell the insurance premium
finance operation and the reclassification of those receivables from assets held
for sale to finance receivables, and the acquisitions during the first quarter
of 1998 of the retail finance business and most of the remaining international
assets from Whirlpool Financial Corporation which amounted to $352 million in
net receivables. This completed the acquisition of $1.1 billion in net
receivables and other assets representing substantially all of the inventory and
retail finance business from Whirlpool Financial Corporation. The total purchase
price was $1.3 billion in cash subject to post closing adjustments. During the
first quarter of 1998 the distribution finance operation also securitized $300
million of floorplan finance receivables.
Management has established an allowance for losses equal to 2.37% of
net commercial finance receivables outstanding as of March 31, 1998 compared to
2.35% at December 31, 1997.
Delinquent receivables, which are defined as instalments for inventory
finance and asset based lending receivables more than 60 days past due and the
outstanding loan balance for all other receivables more than 60 days past due,
were $39.1 million (0.84% of receivables outstanding) at March 31, 1998 compared
to $18 million (0.48% of receivables outstanding) at December 31, 1997.
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 $41.8 million (0.90% of receivables outstanding) at March
31, 1998 compared to $26.4 million (0.71% of receivables outstanding) at
December 31, 1997.
The increase in both nonearning and delinquent receivables at March 31,
1998 was due to the inclusion of the insurance premium finance receivables which
were reported as assets held for sale at December 31,1997, and the receivables
of the new retail lending operation. Delinquent and nonearning insurance premium
finance receivables at December 31, 1997 were $14.2 million and $7.5 million.
Leasing
In the first quarter of 1998, the leasing operation reported net income
of $15.1 million compared to $15.3 million in the first quarter of 1997. Leasing
income, before the amortization of goodwill, was $15.6 million in the first
quarter of 1998 compared to $15.8 million in the first quarter of 1997. Earnings
for 1998 were lower as a result of a smaller fleet size and fewer units on hire
in the rail trailer business and lower earnings from the structured finance
business due to tightening interest rate spreads. Offsetting some of these
decreases in earnings were favorable results from standard containers due to
lower ownership and operating costs resulting from a smaller fleet.
Revenue for the first quarter of 1998 decreased $4.5 million (2%) as
compared to the first quarter of 1997. Revenue decreased in the standard
container and rail trailer businesses due to lower per diem rates and to fewer
units on hire resulting from smaller fleets. Partially offsetting these
decreases were higher revenues from European trailer due to a larger fleet size.
Expenses for the first quarter of 1998 decreased $4.2 million (2%)
mainly due to lower ownership and operating costs associated with a smaller
fleet of standard containers and rail trailers.
The combined utilization of standard containers, refrigerated
containers, domestic containers, tank containers and chassis averaged 79% for
the first quarter of 1998 compared to 78% in the first quarter of 1997. Rail
trailer utilization was 79% for the first quarter of 1998 compared to 83% in the
first quarter of 1997. European trailer utilization was 90% for the first
quarter of 1998 compared to 91% in the first quarter of 1997.
Real Estate Services
This segment includes Transamerica's real estate information businesses
as well as certain real estate and other investments.
Net income for the first quarter of 1998 increased $46.3 million (477%)
over the first quarter of 1997. Net income included net after tax gains from
investment transactions of $37.6 million and $1.6 million in the first quarters
of 1998 and 1997. Income before investment transactions in the first quarter of
1998 increased $10.3 million (127%) from the first quarter of 1997 primarily due
to higher operating income at the real estate tax service due to increased new
contract volume caused by higher mortgage refinancings in the first quarter of
1998.
Revenues for the first quarter of 1998 increased $77.7 million (98%)
over the first quarter of 1997 as a result of increased gains from investment
transactions and increased volume at the real estate tax service business.
Page 11
Unallocated Interest and Expenses
Unallocated interest and other expenses, after related income taxes,
for the first three months of 1998 decreased $1.6 million (5%). The decrease was
primarily due to the inclusion in the 1997 period of expenses associated with
the vesting of certain performance stock options issued under the 1995
Performance Stock Option Plan.
Discontinued Operations
In the first quarter of 1998 and 1997 results from discontinued
operations were break even.
Comprehensive Income
In accordance with Financial Accounting Standard No. 130, Reporting
Comprehensive Income, comprehensive income for the three months ended
March 31, 1998 and 1997 comprised:
1998 1997
Net income $ 153.7 $ 81.0
Other comprehensive income, net of tax:
Unrealized gains (losses) from
investments marked to fair value:
Unrealized holding gains (losses)
arising during period:
Equity securities 131.9 2.0
Fixed maturities 33.5 (311.1)
Less: reclassification adjustment
for gains included in net income (54.7) (5.3)
--------- ---------
110.7 (314.4)
Foreign currency
translation adjustments (0.9) (7.2)
--------- ---------
Comprehensive income (loss) $ 263.5 $ (240.6)
========= =========
Transamerica is required to mark its equity securities and fixed maturities
portfolios to fair value. These investments support liabilities that are not
marked to fair value.
Transamerica manages its exposure to interest rate fluctuations by managing
the characteristics of the assets and liabilities so that changes are offset.
Transamerica's objectives for asset liability management are to provide maximum
levels of finance and investment income and minimize funding costs while
maintaining acceptable levels of interest rate and liquidity risk and
facilitating the funding needs of the company.
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.
Page 12
In May 1997, Transamerica announced that its board of directors had
authorized additional purchases of up to 6 million shares of the company's
common stock. At March 31, 1998, there were 1,706,500 shares remaining to be
purchased under this authorization. During the first quarter of 1998,
Transamerica purchased 211,000 shares for a total cost of $25.6 million and
recorded a market price adjustment of $29 million in connection with the
accelerated stock purchase program in the second quarter of 1997.
Investment Portfolio
Transamerica, principally through its life insurance subsidiaries,
maintains an investment portfolio aggregating $32.6 billion at March 31, 1998,
of which $29.4 billion was invested in fixed maturities. At March 31, 1998,
94.5% of the fixed maturities was rated as "investment grade" with an additional
3.6% in the BB category or its equivalent. The amortized cost of fixed
maturities was $27.2 billion resulting in a net unrealized gain position, before
the effect of income taxes and adjustments to deferred acquisition costs and
policy liabilities, of $2.2 billion at March 31, 1998. The amortized cost of
delinquent below investment grade securities, before provision for impairment in
value, was $2 million at March 31, 1998 and December 31, 1997. Adjustment for
impairment in value has been made to reduce the amortized cost of certain fixed
maturity investments by $78.7 million at March 31, 1998 and $72.9 million at
December 31, 1997.
In addition to the investments in fixed maturities, $764.2 million (2%
of the investment portfolio), net of allowance for losses of $30.7 million, was
invested in mortgage loans and real estate including $696.3 million in
commercial mortgage loans, $67.4 million in real estate investments, $400,000 in
foreclosed real estate and $30.8 million in residential mortgage loans. Problem
loans, defined as restructured loans yielding less than 8% and delinquent loans,
totaled $3 million at March 31, 1998 and $2.3 million at December 31, 1997.
Allowances for possible losses of $1.4 million at March 31, 1998 and $1.5
million at December 31, 1997 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, and options to
enter into interest rate swap agreements (swaptions).
Derivative financial instruments with a notional amount of $9.9 billion
at March 31, 1998 and $10 billion at December 31, 1997 and designated as hedges
of portions of Transamerica's investment portfolio were outstanding. In
addition, derivative financial instruments with a notional amount of $6.1
billion at March 31, 1998 and $4 billion at December 31, 1997 and designated as
hedges of Transamerica's liabilities were outstanding.
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 March 31, 1998, 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 March 31, 1998 and December
31, 1997 was a net benefit of $199.6 million and $212.7 million comprising
agreements with aggregate gross benefits of $225 million and $238 million and
agreements with aggregate gross obligations of $25.4 million and $25.3 million.
Year 2000 Issue
Transamerica has developed a plan to modify its information systems
technology to recognize the year 2000 and has begun converting its critical data
processing systems. The project is currently on schedule. Most of the systems
are currently being remediated, will be tested during the second half of 1998
and are expected to be year 2000 ready by the end of 1998. The remainder of the
systems are expected to be year 2000 ready by mid-1999.
The Corporation currently expects the project to cost between $25
million and $35 million, which is being expensed as incurred. This estimate
includes internal costs, but excludes the costs to upgrade and replace systems
in the normal course of business. It is currently expected that the project will
not have a significant effect on Transamerica's results of operations.
Page 13
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.1 Form of $125 Nonqualified Stock Option Agreement under
the Registrant's 1995 Performance Stock Option Plan
10.2 Form of $150 Nonqualified Stock Option Agreement granted
with Tandem Limited Stock Appreciation Right under the
Registrant's 1995 Performance Stock Option Plan
10.3 Form of Tandem Limited Stock Appreciation Right (Tandem
to $150 Options) under the Registrant's 1995 Performance
Stock Option Plan
10.4 Form of $125 Nonqualified Stock Option Agreement under
the Registrant's 1996 Stock Option and Award Plan
10.5 Form of $150 Nonqualified Stock Option Agreement granted
with Tandem Limited Stock Appreciation Right under the
Registrant's 1996 Stock Option and Award Plan
10.6 Form of Tandem Limited Stock Appreciation Right (tandem
to $150 Options) under the Registrant's 1996 Stock
Option and Award Plan.
12 Computation of Ratio of Earnings from continuing
operations to Fixed Charges.
27 Financial Data Schedule.
(b) Reports on Form 8K - 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: May 12, 1998